20Feb, 2025
Summary of How To Make Money in Stocks

William J. O’Neil’s book How to Make Money in Stocks is a guide to successful stock investing based on his CAN SLIM strategy,

which combines technical and fundamental analysis to identify high-growth stocks. The book emphasizes how investors can maximize profits and minimize risks in the stock market.

Key Takeaways from the Book:

  1. The CAN SLIM Strategy

O’Neil introduces CAN SLIM, a seven-factor system for picking winning stocks:

C – Current Earnings Growth: Look for stocks with strong quarterly earnings growth (at least 25% or more).

A – Annual Earnings Growth: A company’s annual earnings should show consistent growth over the past five years.

N – New Products, Management, or Market Trends: Companies that introduce innovative products, services, or leadership changes tend to perform well.

S – Supply and Demand: Stocks with high trading volume indicate strong demand.

L – Leader or Laggard: Always invest in industry-leading stocks, not underperformers.

I – Institutional Sponsorship: Stocks with backing from big investors (mutual funds, hedge funds) tend to perform better.

M – Market Direction: Follow overall market trends using indices like the S&P 500 and Nasdaq to avoid downturns.

  1. Chart Reading and Technical Analysis

O’Neil advocates using charts to analyze price trends and patterns like cup-with-handle, breakouts, and moving averages to identify buying opportunities.

Stocks that break out from bases with high volume tend to perform well.

  1. Importance of Selling at the Right Time

Cut Losses Quickly: If a stock drops more than 7-8% below your purchase price, sell immediately to limit losses.

Sell into Strength: If a stock rises 20-25% from its breakout point, consider taking profits.

  1. Understanding Market Cycles

The book stresses identifying bull and bear markets to adjust investing strategies accordingly.

Use technical indicators like moving averages and market indexes to recognize market trends.

  1. Avoiding Common Mistakes

Don’t follow the crowd blindly. Research before investing.

Avoid cheap stocks and penny stocks. Growth stocks with strong fundamentals are better investments.

Don’t ignore market signals. Pay attention to market trends to avoid downturns.

IMPORTANT RULES AND GUIDELINES TO REMEMBER

  1. Don’t buy cheap stocks. Buy mainly Nasdaq stocks selling at between $15 and $300 a share and NYSE stocks selling from $20 to $300 a share.The majority of super stocks emerge from sound strong chart bases of $30 and up. Avoid the junk pile below $10.
  2. Buy growth stocks where each of the last three years’ annual earnings per share have been up at least 25% and the next year’s consensus earnings estimate is up 25% or more. Many growth stocks will also have annual cash flow of 20% or more above EPS.
  3. Make sure the last two or three quarters’ earnings per share are up a huge amount. Look for a minimum of 25% to 30%. In bull markets, look for EPS up 40% to 500%. (The higher, the better.)
  4. See that each of the last three quarters’ sales are accelerating in their percentage increases or the last quarter’s sales are up at least 25%.
  5. Buy stocks with a return on equity of 17% or more. The outstanding companies will show a return on equity of 25% to 50%.
  6. Make sure the recent quarterly after-tax profit margins are improving and are near the stock’s peak after-tax margins in prior quarters.
  7. Most stocks should be in the top six or more broad industry sectors in IBD’s daily “New Price Highs” list or in the top 10% of IBD’s “197 Industry Sub-Group Rankings.”
  8. Don’t buy a stock because of its dividend or its P/E ratio. Buy it because it’s the number one company in its particular field in terms of earnings and sales growth, ROE, profit margins, and product superiority.
  9. In bull markets, buy stocks with a Relative Price Strength rating of 85 or higher in Investor’s Business Daily’s Smart Select ratings.Any size capitalization will do, but the majority of your stocks should trade an average daily volume of several hundred thousand shares or more.
  10. Learn to read charts and recognize proper bases and exact buy points. Use daily and weekly charts to materially improve your stock selection and timing. Long-term monthly charts can help, too. Buy stocks when they initially break out of sound and proper bases with volume for the day 50% or more above normal trading volume.
  11. Carefully average up, not down, and cut every single loss when it is 7% or 8% below your purchase price, with absolutely no exceptions.
  12. Write out your sell rules that determine when you will sell and nail down a worthwhile profit in your stock on the way up.
  13. Make sure that one or two better-performing mutual funds have bought your stock in the last reporting period. You also want your stocks to have increasing institutional sponsorship over the last several quarters.
  14. The company should have an excellent, new, superior product or service that is selling well. It should also have a big market for its product and the opportunity for repeat sales.
  15. The general market should be in an uptrend and be favoring either small-or big-cap companies. (If you don’t know how to interpret the general market indexes, read IBD’s “The Big Picture” column every day.)
  16. Don’t mess around with options, stocks trading only in foreign markets, bonds, preferred stocks, or commodities. It doesn’t pay to be a “jack-of-all-trades” or overdiversify or have too much asset allocation. Either avoid options outright or restrict them to 5% or 10% of your portfolio.
  17. The stock should have ownership by top management.
  18. Look mainly for “new America” entrepreneurial companies those with a new issue within the last eight or even up to 15 years) rather than too many laggard, “old America” companies.
  19. Forget your pride and your ego; the market doesn’t care what you think or want. No matter how smart you think you are, the market is always smarter. A high IQ and a master’s degree are no guarantee of market success. Your ego could cost you a lot of money. Don’t argue with the market. Never try to prove you’re right and the market is wrong.
  20. Read Investor’s Corner and “The Big Picture” in IBD daily. Learn how to recognize general market tops and bottoms. Read up on any company you own or plan to buy; learn and understand its story.
  21. Watch for companies that have recently announced they are buying back 5% to 10% or more of their common stock. Find out if there is new management in the company and where it came from.
  22. Don’t try to buy a stock at the bottom or on the way down in price, and don’t average down. (If you buy the stock at $40, don’t buy more if i goes down to $35 or $30.)

Key Reasons People Miss Buying Great Winning Stocks

  1. Disbelief, fear, and lack of knowledge. Most big winners are newer companies with IPOs in the last eight or 15 years). Everyone knows Sears and General Motors, but most people are simply unaware of or unfamiliar with the hundreds of new names that come into the market every year. The new America names are the great growth engine of America, creating innovative new products and services plus most of the new technology. (A chart service is one easy way to at least be aware of the basics of price, volume, sales, and earnings trends of all these compelling younger entrepreneurial companies.)
  2. P/E bias. Contrary to conventional wisdom, the best stocks rarely sell at low P/Es. Just as the best ballplayers make the highest salaries, the better companies sell at better (higher) P/Es. Using P/Es as a selection criterion will prevent you from buying most of the best stocks.
  3. Not understanding that the real leaders start their big moves by selling near or at new price highs, not near new lows or off a good amount from their highs. Investors like to buy stocks that look cheap because the stocks are lower than they were a few months ago, so they buy stocks on the way down. They think they are getting bargains. They should be buying stocks that are on the way up, just making new price highs as they emerge from a proper base or price consolidation area.
  4. Selling too soon, either because they get shaken out or because they are too quick to take a profit, and psychologically having a hard time buying back a stock at a higher price if necessary. They also sell too late, letting a small loss turn into a devastating one by not cutting all their losses at 8%.

Thank You for reading , Follow me at Suratjit Bhowmik (Founder ,kinginvestment.in, NISM Certified Equity Research Analyst , Investing since 2017)

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