William O’Neil Swings For The Fences by Wade W. Slome, CFA, CFP®, Investing Caffeine
Posted May 2011
Approaches used in baseball strategy are just as varied as they are in investing. Some teams use a “small ball” approach to baseball, in which a premium is placed on methodically advancing runners around the bases with the help of bunts, bases on ball, stolen bases, sacrifice flies, and hit-and- run plays. Other teams stack their line-up with power-hitters, with the sole aim of achieving extra base hits and home runs.
Investing is no different than baseball. Some investors take a conservative, diversified value-approach and seek to earn small returns on a repeated basis. Others, like William J. O’Neil, look for the opportunities to knock an investment out of the park. O’Neil has no problem of concentrating a portfolio in four or five stocks. Warren Buffett talks about how Ted Williams patiently waited for fat pitches–O’Neil is very choosy too, when it comes to taking investment swings.
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
The Making of a Growth Guru
Born in Oklahoma and raised in Texas, William O’Neil has accomplished a lot over his 53-year professional career. After graduating from Southern Methodist University, O’Neil started his career as a stock broker in the late-1950s. Soon thereafter in 1963, at the ripe young age of 30, O’Neil purchased a seat on the New York Stock Exchange (NYX) and started his own company, William O’Neil + Co. Incorporated. Ambition has never been in short supply for O’Neil – following the creation of his firm, O’Neil the investment guru put on his computer science hat and went onto pioneer the field of computerized investment databases. He used his unique proprietary data as a foundation to unveil his next entrepreneurial baby, Investor’s Business Daily, in 1984.
William O’Neil’s Secret Sauce
The secret sauce behind O’Neil’s system is called CAN SLIM®. O’Neil isn’t a huge believer in stock diversification, so he primarily focuses on the cream of the crop stocks in upward trending markets. Here are the components of CAN SLIM® that he searches for in winning stocks:
C Current Quarterly Earnings per Share
A Annual Earnings Increases
N New Products, New Management, New Highs
S Supply and Demand
L Leader or Laggard
I Institutional Sponsorship
M Market Direction
Rebel without a Conventional Cause
In hunting for the preeminent stocks in the market, the CAN SLIM® method uses a blend of fundamental and technical factors to weed out the best of the best. I may not agree with everything O’Neil says in his book, How to Make Money in Stocks, but what I love about the O’Neil doctrine is his maverick disregard of the accepted modern finance status quo. Here is a list of O’Neil’s non-conforming quotes:
- Valuation Doesn’t Matter: “The most successful stocks from 1880 to the present show that, contrary to most investors’ beliefs, P/E ratios were not a relevant factor in price movement and have very little to do with whether a stock should be bought or sold.” (see also The Fallacy of High P/Es)
- Diversification is Bad: “Broad diversification is plainly and simply a hedge for ignorance… The best results are usually achieved through concentration, by putting your eggs in a few baskets that you know well and watching them very carefully.”
- Buy High then Buy Higher: “[Buy more] only after the stock has risen from your purchase price, not after it has fallen below it.”
- Dollar-Cost Averaging a Mistake: “If you buy a stock at $40, then buy more at $30 and average out your cost at $35, you are following up your losers and throwing good money after bad. This amateur strategy can produce serious losses and weigh down your portfolio with a few big losers.”
- Technical Analysis Matters: “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.”
- Ignore TV & So-Called Experts: “Stop listening to and being influenced by friends, associates, and the continuous array of experts’ personal opinions on daily TV shows.”
- Stay Away from Dividends: “Most people should not buy common stocks for their dividends or income, yet many people do.”
Managing Momentum Risk
Although O’Neil’s CAN SLIM® investment strategy does not rely on a full-fledged, risky style of momentum investing (see Riding the Momentum Wave), O’Neil’s investment approach utilizes very structured rules designed to limit downside risk. Since true O’Neil disciples understand they are dealing with flammable and volatile hyper-growth companies, O’Neil always keeps a safety apparatus close by – I like to call it the 8% financial fire extinguisher rule. O’Neil simply states, “Investors should definitely set firm rules limiting the loss on the initial capital they have invested in each to an absolute maximum of 7% or 8%.” If a trade is not working, O’Neil wants you to quickly cut your losses. As the “M” in CAN SLIM® indicates, downward trending markets make long position gains very challenging to come by. Raising cash and cutting margin is the default strategy for O’Neil until the next bull cycle begins.
While some components of William O’Neil’s “cup and handle” teachings (see link)are considered heresy among various traditional financial textbooks, O’Neil’s lessons and CAN SLIM® method shared in How to Make Money in Stocks provide a wealth of practical information for all investors. If you want to add a power-hitting element to your investing game and hit a few balls out of the park, it behooves you to invest some time in better familiarizing yourself with the CAN SLIM® teachings of William O’Neil.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Wade Slome, President of Sidoxia Capital Management (SCM), worked at William O’Neil + Co. Incorporated in 1993-1996. SCM and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in NYX or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.