Regarding stock analysis, some investors prefer fundamental analysis, while some rely more on technical analysis.
So, today I will review the book, How to Make Money in Stocks by William J. O’Neill, and share some key takeaways from the book I learned.
William J. O’Neill is an American stockbroker and author. He is also the founder of the famous business newspaper Investor Business Daily.
This informative piece works as a comprehensive guide offering readers a deep understanding of the dynamics and intricacies of the stock market.
About the Book
- This book intends to educate beginners and advanced investors on how best to multiply their investments in the stock market. Using relatable examples and convincing arguments, O’Neil masterfully guides readers on the path to financial prosperity.
- O’Neil introduces CAN SLIM, his proprietary methodology for identifying profitable stocks before their significant price increases. This method is highly respected and has been recognized by the American Association of Individual Investors for consistently outperforming the market.
- O’Neil presents historical examples of real companies, breaking down their stock charts and explaining the strategies that could have been used to foresee their success.
1. Investing Success Through Learning from Historical Trends
So let’s talk about the top 5 learning in this book. The 1st learning is that if you want to learn how to pick good stocks, then the best way is to analyze companies that gave good returns in the past.
You can learn a lot by constantly studying the price patterns of compounding stocks and the factors related to the business.
This book also gives charts of 100 such stocks which have given excellent returns from 1880 to 2008. The chart’s author also explains why the stock is in stock, which has led to a big price movement.
With the help of the factors the author mentioned in the chart, you can know the factors to consider while choosing the stock.
2. Use CANSLIM Strategy
As the second learning of this book, we will talk about the CANSLIM strategy. The book has compromised a strategy called CANSLIM which is a techno-fundamental strategy.
Let these strategies help you pick good stocks. Although this strategy is huge we will understand it in short.
The CANSLIM strategy has seven characteristics. According to the author, one should invest in stocks that follow these seven features.
C in CANSLIM strategy stands for ‘Current Quarterly Earnings. The EPS of the current quarter of the stock should be at least 20% higher than the EPS of the same quarter of the previous year. One means annual earnings. That is, the annual earnings of the stock have increased by a minimum of 25%.
In CANSLIM strategy, N stands for – New Products and New Management. That is if a company is launching new products with the market’s demand, then it is a positive sign for your company.
S ka means – supply and demand. That is, if the trading volume of a stock is increasing very rapidly, then there is a strong buy signal, and the stock price can move more.
L means leader or laggard. That is, you should invest in leading stocks of the industry. During a crisis, such companies can survive and give good returns in the long term by taking over the market share of smaller companies.
I stand for Institutional Sponsorship. If institutional investors like mutual funds, insurance companies, etc., invest in a stock, it is a positive sign for the company.
Lastly, in CANSLIM strategy M stands for – Market Direction. That is, you should invest in stocks that follow the market trend.
You can watch the trend of indexes like Sensex or Nifty to find out the market trend. As per the author, the outlook of the market is always bullish in the long term, and stocks that follow market trends can perform well in the long term.
3. When to Sell Stocks
In the above section, we understood how to pick a stock, but selling it at the right time is more important than buying it.
So let’s talk about the third learning of this book, where we will teach you when to sell stocks. As per the writer, you should sell at a ratio of 3 to 1 when sharing.
If you are ready to sell a stock after getting a 20-25% return, you should sell it when it reaches 7 to 8% of its purchase price.
For example, if you have bought a stock for Rs.100 and your target is to sell it for Rs.120-125. According to the ratio of 3 to 1, when the stock comes to Rs.92-93 level, you are ideally out of stock. Must go out.
However, before taking entry in any stock, you should keep your risk profile and target in mind.
4. Cousin Stock Theory
We will understand ‘Cousin Stock Theory’ in the fourth lesson of the book.
For the author, if one industry is performing very well, and if a company supplies products to that industry, that company will also do well.
The concept is known as the cousin stock theory. The author cites examples that the airline industry did well in the mid-1960s. Lots of new Boeing jets were being built.
At the same time a company ‘Monogram Industries’ supplies chemical toilets to airline companies. The company has shown us excellent earnings at the time and given excellent returns.
So the conclusion is that when an industry is growing very fast then you should analyze well that such companies supply products to our industry.
5. 3 Important Skills to Learn
As the 5th learning of the book, we will see 3 such points that we must keep in mind while investing. As per the author,
- We should not invest in any stock by directly looking at the dividend-to-PE ratio
- We should also consider other factors like sales growth, earnings, ROE, profit margin, economic gap, etc.
- We should learn how to read charts to invest in stocks correctly.
- And lastly, while buying any stock, you should always plan your selling strategy to exit your stock at the right time.
How to Make Money in Stocks Review
In conclusion, “How to Make Money in Stocks” by William J. O’Neill is an insightful, pragmatic, and essential read for both budding and seasoned investors. The book is a treasure trove of investment wisdom, encapsulating O’Neill’s years of experience and proven business acumen.
The broad lessons on the CAN SLIM strategy offer a compelling framework for stock selection. O’Neill’s skill in breaking down complex financial nuances into digestible and straightforward segments is evident, making this volume unequivocally useful with its relevant examples and myriad case studies.
However, the book’s success lies not just in its deep dive into the stock-buying process but in the objective and invaluable lessons on the often overlooked selling side, allowing readers to understand better and manage the risks associated with investments.
One critique, perhaps, could be that parts of the book may come across as dense and a tad overwhelming for absolute beginners. Readers must revisit certain sections to grasp the concepts explained fully.
Additionally, one must remember that while the book offers profound insights, it doesn’t guarantee instant success. The strategies and tips provided need to be supplemented with rigorous market research and comprehension of one’s financial standing and risk profile.
Despite these minor criticisms, O’Neill’s encouragement for personal discipline and continuous learning stands as empowering advice, making “How to Make Money in Stocks” a must-read book in financial literature.