How to Make Money in Stocks Book Review

William J. O’Neil’s “How to Make Money in Stocks” is a foundational guide for individual investors navigating the stock market. It provides a practical, systematic approach for identifying and investing in companies with growth potential, distilling decades of market research into an actionable framework.

Book and Author Overview

William J. O’Neil was a stockbroker, entrepreneur, and founder of Investor’s Business Daily (IBD), a national business newspaper launched in 1984. He also established William O’Neil + Company in 1963, a brokerage firm that pioneered computerized studies to analyze stock success for institutional money managers. O’Neil’s extensive research into historical patterns of top-performing stocks led to his proprietary investment methodology, CAN SLIM.

“How to Make Money in Stocks,” first published in 1988, has seen multiple revised editions, reflecting its enduring popularity. The book emphasizes a data-driven approach to stock selection, combining fundamental and technical analysis to identify companies poised for price appreciation.

The CAN SLIM Framework

O’Neil’s proprietary investment methodology is the CAN SLIM acronym, representing seven distinct characteristics observed in successful growth stocks. This framework combines fundamental and technical analysis for stock selection. Understanding each component is central to applying O’Neil’s strategy.

The “C” stands for Current Quarterly Earnings Per Share (EPS). O’Neil emphasized that companies exhibiting significant year-over-year increases in recent quarterly earnings are strong candidates. Investors should look for at least a 25% growth rate, and ideally, accelerating growth over several quarters, as this signals robust business momentum.

“A” represents Annual Earnings Growth. Beyond quarterly performance, O’Neil stressed consistent, substantial annual EPS growth over the past three to five years. A sustained annual growth rate of 25% or more indicates a financially healthy company with a proven track record of profitability.

The “N” signifies New Products, New Management, or New Highs. O’Neil believed a stock needs a catalyst for a strong price advance. Catalysts often include innovative new products or services, a change in management, or the stock reaching a new price high, indicating strong market demand.

“S” denotes Supply and Demand. This component focuses on the interplay between a company’s available shares and trading volume. Stocks with a relatively small number of outstanding shares (low float) combined with high trading volume during price increases suggest strong demand outstripping supply, which can drive prices higher.

“L” stands for Leader or Laggard. O’Neil advocated investing in industry leaders, not laggards. These market leaders typically exhibit superior financial performance and stock price strength compared to competitors. A common metric is relative strength, with O’Neil seeking stocks with a rating of 85 or higher, indicating they have outperformed 85% of other stocks over the past year.

The “I” refers to Institutional Sponsorship. This factor assesses stock ownership by large institutional investors like mutual funds, pension funds, and hedge funds. While some institutional ownership is desirable, O’Neil advised caution against “over-owned” stocks. The goal is to identify stocks where institutional buying is increasing but not yet saturated, allowing individual investors to benefit from subsequent institutional accumulation.

Finally, “M” signifies Market Direction. O’Neil stressed that even fundamentally sound stocks can struggle in a declining market. He emphasized aligning investment decisions with the broader market trend. Investors should primarily buy stocks during confirmed market uptrends, as three out of four stocks tend to follow the general market direction.

Applying the CAN SLIM Strategy

Applying CAN SLIM principles involves a structured process, sometimes called “techno-fundamental” analysis. Investors screen for companies meeting the CAN SLIM fundamental criteria, focusing on strong earnings and sales growth.

Once a list of potential stocks is generated, the next step involves detailed chart analysis. O’Neil taught investors how to interpret daily and weekly stock charts to identify “bases” and pinpoint optimal “buy points.” This technical analysis helps determine when a stock is under accumulation and where the precise entry point should be, often as the stock breaks out of a consolidation pattern on above-average volume.

Understanding market indicators is crucial in applying the CAN SLIM strategy. O’Neil advocated for closely monitoring major market indices like the S&P 500, NASDAQ Composite, and Dow Jones Industrial Average to gauge overall market direction. Observing market action, such as volume trends and price movements, helps investors confirm uptrends and avoid buying into a declining market, which can significantly impact even strong individual stocks.

The strategy emphasizes that successful investing requires a blend of fundamental strength and technical timing. A company with excellent earnings may not advance in a downtrending market. Conversely, a technically appealing stock might not sustain gains without underlying fundamental strength. By integrating these approaches, investors aim to select high-potential growth stocks and time purchases effectively.

Additional Investment Principles

Beyond the CAN SLIM acronym, O’Neil’s teachings include other investment principles for managing risk and maximizing returns. A fundamental rule is cutting losses quickly. O’Neil advised setting strict stop-loss orders, typically around 7% to 8% below the purchase price, to limit potential downside and protect capital. This disciplined approach helps prevent small errors from escalating into substantial financial setbacks.

O’Neil also provided guidelines for taking profits. A common guideline suggests holding a stock that shows strong price movement for at least eight weeks if it gains 20% within the first three weeks. This allows investors to capture significant gains from market leaders. The objective is to “let profits run” while “cutting losses short,” a cornerstone of his risk management philosophy.

Effective portfolio management is another integral part of O’Neil’s strategy. He recommended diversifying investments across different sectors and industries to spread risk, focusing on concentrated positions in leading stocks rather than broad diversification. The emphasis is on owning a manageable number of high-quality stocks that meet the CAN SLIM criteria.

Understanding general market cycles plays a significant role. O’Neil stressed that identifying whether the market is in a bull or bear phase is paramount, as most stocks follow the overall market trend. His methodology is primarily designed for bull markets, where growth stocks tend to perform best. Recognizing market tops and bottoms helps investors adjust exposure and avoid significant losses during downturns.

Audience and Value

“How to Make Money in Stocks” benefits active individual investors seeking a structured, rule-based approach to stock selection. It appeals to those interested in growth investing and moving beyond speculative trading, offering a systematic methodology grounded in historical market analysis.

The book’s value lies in its comprehensive framework, combining fundamental and technical analysis into a single, actionable strategy. It provides criteria for identifying high-potential stocks and guidance on managing risk, helping readers improve stock selection and timing. For those committed to diligent research and disciplined execution, O’Neil’s book offers a system for navigating the stock market and achieving investment success.