How To Make Money In Stocks by J. O’Neil – Book Summary

‘How To Make Money In Stocks’ is a how-to guide for people who want to earn from stocks.

William O’Neil is another legendary investor belonging to leagues of Warren Buffet, Peter Lynch, and the likes. However, his investment philosophy differs from other investors.

He is a proponent of growth investing and does not mind paying a premium for the fast growth that business is experiencing to ride the wave.

He emphasizes establishing explicit rules backed by proper principles to determine when and how to invest in the market. It is an excellent guide for a retail investor.

You will learn in this summary:

1. The ingredients of the CANSLIM method
2. The fundamental principle of defense in the stock market.
3. Why diversification and day trading are futile.
4. The right perspective before investing in mutual funds.
5. The importance of technical analysis
6. The common investing mistakes one should avoid

 

1- A System-Based Approach Gets You Money From Stocks

Growth investing differs from value investing because it asks you to ride on the tiger when it is already on the move. In that sense, it is a slightly risky strategy because one has to pay a premium valuation for investing in fast-growing stocks. Therefore the much-revered margin of safety is absent from our purchase. However, markets are also momentum-based. And therefore, if you catch the upswing, the chances of making significant returns are far higher. And all that is necessary to make money in stocks.

While the concept sounds simple, it is not easy to implement because there are just too many stocks and too many data points to follow. Both the stock and the timing of the purchase, have to be right; otherwise, we may end up buying at the top. Since the risk is higher, one needs to develop a system that can help in the proper identification of the stocks. This system has to adhere to principles of fundamental analysis as well as also respect the market realities.

 

William O’ Neil’s System Of Making Money In Stocks

An excellent system developed by William O’ Neil is the CANSLIM system which can help you discover leading stocks in the market before they make substantial price movements. This system comprises a comprehensive set of filters that can help identify good quality growth stocks. It has elements of fundamental as well as technical analysis.

The markets are full of examples of stocks that gain 2-10x over 2 to 5 years. These stocks are equally accessible by retail and institutional investors. Still, most people miss out on these stocks and learn about them only when the prices have risen significantly. Unless we have some of these stocks in our portfolio, we can’t create sizeable wealth. But to do this, we would require discipline and a system-oriented approach.

 

2- The CAN-SLIM Strategy

To identify the right stock one should develop a system that comprises both fundamental analysis and market-based realities that are peculiar to the stock. Without a consistent system, it is difficult to repeat the process successfully and make significant money in stocks. One system that has worked well for many market participants is CANSLIM.

The CAN-SLIM is a mnemonic that stands for:

C – Current Quarterly Earnings:

The increase in the latest quarter should be >25% and should be increasing in the past four quarters.

A – Annual Earnings:

The increase should have been positive in the last three years with over 25% increase in earnings per share in the latest year

N – New Products, New Management:

If there is a brilliant new product or competent management coming, then that stock price will increase.

S – Supply And Demand:

If there is a lot of supply, the prices will decrease, and if there is a lot of demand, then prices will increase.

L – Leader Or Laggard:

Stocks are of those companies which belong to a particular sector of the industry. If it is a leader, the stock price will increase and if it is a laggard then the stock price will decrease.

I – Institutional Sponsorship:

If all the successful firms are buying a stock, it is a good philosophy to follow them.

M – Market Direction:

The general market direction will affect the prices of stocks. In a bull market, the prices of all the shares will increase. In the bear market, even the top-quality stocks will face losses.

By using these filters, one can develop a good screen for choosing stocks worth investing in.

 

3- A Good Defence Plan Is The Key To Make Money In Stocks

Everyone makes mistakes, and there is no shame in that. However, sticking with errors for long can be disastrous and may even destroy your life savings. If one has purchased a wrong stock that is running into a loss, it is best to sell it as early as possible to cut losses. Your wishes have no bearing on stock prices, and the earlier they are let go of, the lesser the damages. 

To hold on to hopes that prices will turn around and give huge profits is foolhardy. Of course, the stock should not be sold as soon as the price dips below your buying price, but a threshold of loss should be maintained. If losses exceed by a certain percentage, it is time to let go of the stock, regardless of your beliefs. If it is a worthwhile one, then it will eventually regain its price and you can re-buy it to adjust your profit, but lose it now nonetheless. Similarly, for increasing profits, it is important to select good performers in your portfolio regularly.

Buy additional stocks of the ones which are increasing in price, and sell the poor performers. However, note that the stock prices do not climb overnight, and thus, patience for a few weeks could be required to see necessary changes.

 

Having A Cap On The Profit

Just like losses, having a cap on the profit would be a great idea. For example, 10% of profits means selling x % of shares. This method is useful because it helps to achieve profit in steps rather than waiting for the highest price point to come and selling for maximum profit. One can never predict the maximum price point in advance, and it will most certainly pass and start falling if you keep waiting. It is best to have profits spread over a large number of transactions, instead of a hefty profit in a single transaction.

 

4- Few Well-Studied High-Performing Stocks Benefit More As Compared With Many Average Ones

Stocks are not chips with random numbers attached to them. They represent the value of the company which issues them. To make a profit, it is wise to invest in companies belonging to an industry that you know and understand. This rule should reasonably cut the number of companies owned by you.

Diversification is a distraction! In the stock market, fewer companies are more profitable. It is hard work to track the specifics of many companies ranging over a broad spectrum of industries. You will not go to a doctor who is also a part-time mechanic, and part-time travel agent.

Similarly, it is important to not put your eggs in a basket you know nothing about. It is quite likely that these baskets may have an empty bottom and you may lose your investment entirely. By investing in companies, you know and understand, you will make an objective decision and not fall into traps of rumors and false leads. And this way you will be making money in stocks in significant numbers.

Another good strategy is to not trade daily. The price changes are nothing more than a noise. It is best to pay no heed to them, as they play with your nerves while providing no useful information at all. Instead, check your portfolio regularly on a weekly or biweekly basis and optimize it accordingly. If some stocks have improved in price by 2-4 %, then buy more of them, and sell off the poorly performing ones. The philosophy is still the same: cut losses, and increase profits.

 

5- Keep Patience To Let The Mutual Funds Make Money In Stocks For You

Mutual funds are not for the impatient. Mutual funds are less risky than stocks and are a “safe” game. However, the return of mutual funds is marginal as compared to yields on stocks.

To gain fruitful returns, it is apt to wait for at least 10-15 years, thus requiring commendable foresight in investing.

You should sit tight during bad times and not sell during depressed markets.
A good strategy is to ensure your investment with an investment firm that has excellent management, backed by a strong track record. Even if the management fee is high, still consider relying on these firms with your investment, because selecting good stocks requires skill and patience, which most amateur investors lack. After all, the price of earning money is money itself.

 

6- Support Your Fundamental Analysis With Technical Analysis

One of the best tools to cross-check your stock filters is to read charts displaying price movements. The price patterns from successful stocks in the past few years give a great template to select stocks that are probable to be successful in the future. All successful shares have charts with underlying similarities. One should search for a cup-with-a-handle pattern in price charts in the duration of 7 to 65 weeks. The bottom part of the cup should be “U” shaped and not narrow “V” shaped. This indicator means that there would be fewer weak spells before the price catches onto its proper uptrend. 

Other essential price patterns are a saucer with a spot, double bottom price pattern, flat base price structure, a three-point situation, and base on top of a base. Almost all the patterns will imply the effect of drying up the supply of stock in the market, for the bottom of the pattern. If you observe tightness in the stock price, using this you should be able to determine which stocks are performing relatively stronger than the general market and invest in them.

Chart reading is a skill that many investors are too lazy to learn and often invoke “busyness” or “technical complexities.” However, learning it will improve your odds in the market, though you must approach studying these patterns cautiously. The price patterns in real-life scenarios will rarely mimic the ones given in the book, but they will show some resemblance. Be aware of false positives by checking if price and volume patterns are phony, faulty, and unsound. With careful computation, you can beat the market in predicting the best stocks of the future before everyone else.

 

7- Use Financial News And Chart Readings Wisely

Financial news, as well as chart reading, can offer valuable insights at astonishing speed. However, they are plagued by rumors and differing perspectives. It is the job of the investor to separate facts from these. Knowledge is one thing in the market and knowing it quickly is another. A careful examination of these sources can give investors small but useful information. This information can give them massive leverage in beating the market. 

By knowing it before everyone else, you can make huge profits in the market. One should look for weakest industry groups, former leading groups, weakest sector indexes, track weakening stocks, monitor quarterly earnings reports to pick poor performers, etc., in these reports. Use these to make a list of stocks that meet your fundamental selection criteria.

After listing stocks in the manner explained above, keep track of them till you identify their buy point and the selling point. Another critical point to take note of is to check for all the essential criteria defining a great stock, and not just picking the information you learned from a cursory glance. News can be paradoxical and confusing, so, giving in to impulse can cost you more. Always assess the information you have, make sure it is both reliable as well as complete. Incomplete information often does more harm than pure randomness!

 

8- Identify & Remove Common Mistakes From Your ‘Make Money In Stocks’ Practices

Many of the mistakes in the market are repeated time and again. The first and foremost is not to use proper selection criteria to judge stocks. Then, it is buying and selling daily based on daily market fluctuations.
Another classic mistake is to buy a stock that is on its way down, believing that it will be a cheap buy, and profits will be massive when it bumps back in price. However, very often such stocks never recover, and the companies issuing them go bankrupt.

Too many amateurs also lack the patience required to make money in the market. They want to make a kill as early as possible without doing the necessary preparation. Eventually, they buy the wrong stocks to regret later. One perfect recipe for failure is to buy tips, rumors, advice, and recommendations from so-called experts on TV and Newspaper. This information is mostly wrong. Even if they were correct, then you have no selective advantage over other investors who might have heard the same thing. The market will correct itself, and this “hot” stock will lose its value very quickly.

Making money through investment requires skill and discipline which comes with practice. You should develop the habits of a successful investor. Read more books by great investors, listen to their investment philosophy, and invest with intelligence. You should try to systematically remove your weaknesses until they can be changed and built into your strong points.

 

Conclusion Of How To Make Money In Stocks

This book is a literal “how-to guide” in the stock market. The CAN-SLIM strategy which looks into the market observables of current quarter earnings, annual earnings, new products, supply and demand of stock, leader vs. laggard in industry, faith by large institutions, and rise of new management can describe in which direction the price of stocks will move, and when to buy and sell them.

Like all investment books, it emphasizes knowing the stock and understanding the underlying business to make well-informed objective decisions. To make it big in the market, one needs to have much patience; in the case of mutual funds, the wait can be for years.

No matter what, never day trade, as daily fluctuations depict nothing but random noise. The winning principle in the marketplace is only one: “Cut losses and increase profits.” For this, be proactive with your portfolio and optimize it with continuously well-performing stocks and remove the under-performers.

To be able to objectively assess the mood of the market rely on facts and not on opinions. Facts can be ascertained by charts depicting historical information like price and value trends. Learn how to study them and make their maximum use. However, don’t just rely on any theory given in this book as the market is dynamic and has many subtle variations. Use the power of observation to differentiate them and act wisely. In the end, always and always aim to eliminate all your previous mistakes in the stock market.