O'Neil is the inventor of CANSLIM method, founder of investor.com. He mostly focuses in buy and hold strategies by buying at the right stocks at the right time and selling them on the top (with his top picking method) or replacing them with a better performing buy'n'hold stock. His ideas are based no analyzing the top performing stocks of the last 50 years both using technical and fundamental tools. William J. O'Neil: 24 Essential Lessons for Investment Success. William J. O'Neil: How to Make Money in Stocks.
The rules in short:
1. Buy stocks which earnings are growing consistently.
3 out of 4 winners had a growth rate above 30% for each of the past 3 years.
If it has no 3 years history, each of the 6 last quarters must show increase from the last years quarter of at least 50%.
2. Sales should be accelerating each quarter or at least up 25% from last year's same quarter.
3. Return on Equity (ROE) must be 20% or more.
MOst winning stocs display that character.
4. The company should have at least one new unique product considered exceptional.
5. For enter criteria use daily and weekly chart with volume. If price does not go up even against good news that has a reason. Buy on momentum and price must be up from last year.
Buy stocs that has a good base and are comming out from price consolidation (see technical analysis).
6. Buy only stocks with Relative Price Strength is at least 87%. The big winners all had that.
Relative Price index compares the price growth from the last year to the entire market segment. E.g. Nokia versus all telecommunication companies price growth.
7. If you diversify, e.g. under 10.000 max 2-3 stocks. And no more than 8 in a diversified portfolio. You can always trough out the under performing stock based on relative price index.
8. Earning and sales growth are the two most miportant fundamental data.
9. Make sure at least one other stock in the sector/group is showing good progress before buying this one. Investor's Business Daily lists about 100 different groups with their relative strength.
10. You want to be in the best subgroup in an industry. It will increase the performance at least 10-20%.
11. Investors Business Daily lists where mutual funds invested or sold. Yes, it is old data, yet it is very important data. Put your money only where the big mussles are!
Stocks never go up by accident!
12. Use technical anal for entry. Use the best possible time to enter the stock. E.g. cup and handle. However, make sure it is a properly formed cup and handle and not a failed one... e.g. a handle that is not well formed. Or a cup without a base, etc.
Also higher volumes where closes are higher is positive sign.
13. 98% of investors never buy stocks when their are on the highest point ever. Momentum traders do.
14. On break out days, valume should be at least 50% increase.
15. What is a short base: 1-4 week is short. It is risky.
16. Patterns must look good. Not too wide, or funny looking. A risk factor
17. Stocks that shoot up and no pull back -> it is a risk.
18. No increase in volume from break out from base -> leave alone.
19. If the stock is the last to break out in a group -> leave alone. It is a laggard.
20. Cup handles that are too wide, 20-30% down (too loose) or points on the bottom are comming upwards are all weak signals -> leave alone.
21. After a stock increased well, the 4th time it forms a base. It is too obvious to everyone -> it fails.
22. Don't buy low, sell high. But sell high and sell higher.
23. Buy at the handles pivot point. When it breaks above the handle's range. It is normally under the under side of the cup.
24. A normal bear market declines 20-25%. Some top stocks can decline even 75%. So good idea to get out before and not hold on.
25. When to get out? Follow the overal market/group. 3 out of 4 stocks will go after the market.
If there was 4-5 days of selling on the top. Meaning the price closed lower than the open and volume increased a bit. The stock is very likely to turn.
So 4 such sell days, over the last 2-3 weeks will likely to turn the market. Sometimes it last 6-7 weeks if market raises to new hight. But if you see four sale days... time to move on.
27. How to spot bottom?
Bear markets usualy come down 2-3 waves. Interrupted by rallies up that fizzle out in 1-3 weeks sometimes only after 6 weeks.
A 1% rise in a major index on a high volume day. Is a follow trough day. Confirms up move.
Best indexes are Dow, Nasdaq, S&P and the IBD published mutal fund index (telling what the funds are doing).
28. If the market leader is up 20-25% in only 1-2 weeks. It is a sign of strenght. So hold.
29. 40% of stocks pull back to the buying point for 1-2 days. Sometimes on big volume (scary).
30. Further sell rules:
- Earning per share is slowing down in growth for 2 quarters.
- If stocks breaks out from base, and no increase in volume -> stock demand is weak.
- If stocks breaks out from base, high volume but fails. Or even go under for several days the previous break-out point, it is a good idea to reduce number of shares.
- After several months of progress, after fourths time it breaks out from base.
- If a real market leader breaks down in the same group. Sell before other's follow.
- Gaps after an advance (from prior's day high), it is probably an exhaustion gap. However, a gap close to base is normal.
- Share closes down on the highest volume since the beginning of advance. It is a warning sign.
- Sell becase other is more profitable.