Whenever anybody asks me for advice on learning about the stock market I immediately ask if they’ve read How to Make Money in Stocks by William O’Neil. In my opinion, if you read only one book on investing it should be this one. I credit this book with changing my whole approach to investing. Before I read it I had no idea how to use stock charts or even what to look for in a company’s fundamentals. O’Neil teaches that and much more in the book.
The book begins with an explanation of O’Neil’s CANSLIM methodology. (You can get details on CANSLIM at that link) In short CANSLIM is the result of O’Neil’s study of some of the greatest winning stocks in the history of the market. CANSLIM is an acronym, and each letter represents one of the seven characteristics that O’Neil found that those great winning stocks had in common.
In walking the reader through CANSLIM O’Neil shatters much of what’s fed to the public as sage investing advice. Probably the best example of the ‘N’ in CANSLIM, which stands for ‘new products, new management, and new highs’. It’s the ‘new high’s part that is a big shocker to most people, as it was to me. We always hear ‘buy low, sell high’, ‘buy the dips’, etc., so we’ve been brainwashed to look for ‘bargains’ in the market. Yet O’Neil’s studies shows that buying stocks just as they make new highs is a much better way to find big winners. As he puts it, buy high & sell higher. Some other advice that I believe I first heard from this book includes:
- Sell your worst performing stocks first and keep your best acting investments longer. In other words, take your losses quickly and your profits slowly.
- The concept of limiting losses to protect your capital.
- All stocks are speculative.
- Never average down, but instead average up.
- Many things to look for as warning signs of when to sell a stock.
- Guidelines on how many stocks to own depending on how much money you have to invest.
- The importance of chart patterns and volume.
- The concept of overhead supply.
- How psychology impacts the markets.
- The importance of being in the right sector/industry group.
- Some uses for moving averages.
As you can see the book covers a lt of ground. It provides an excellent foundation on which to build an investment plan. I think it’s a great primer for novice investors and even for more experienced investors who may not have been exposed to the concepts covered in the book. Whether or not you adopt CANSLIM as your investing methodology the book should be well worth reading. (The section on selling rules alone is invaluable.) Although I don’t strictly follow CANSLIM I have taken many of this book’s concepts and molded them into my own investing style.