Chapter 5
WILLIAM O’NEIL
Founder of Investor’s Business Daily (IBD)
Inventor of CAN SLIM stock investing strategy
Youngest person (at the time) to buy a seat on the New York Stock Exchange (NYSE)
UCLA’s legendary basketball coach John Wooden used to start the first practice of the season instructing his players on how to put on their shoes and socks.
William O’Neil, the famed investor and founder of Investor’s Business Daily, loves that kind of focus. “He was trying to eliminate every possible controllable item that could beat them.”
It wasn’t just the practical guidance so that players could avoid blisters or a shoe coming untied and forcing the player out of the game. O’Neil saw it as a lesson for anybody trying to succeed. “Wooden said the difference between a champion and almost a champion was paying attention to every little detail.”
Detail. While nobody can match Wooden’s record as a college basketball coach, neither can many businesspeople match William O’Neil’s investing career for creativity, performance, and impact.
Or his own attention to detail.
When he was a kid growing up in Texas, he used to go down to South Padre Island—even then an entrepreneur at heart—and sell sandwiches. He recalls, “I learned that sandwiches got soggy near seawater.”
Detail. It’s why his company, William O’Neil + Company, has amassed an enormous database of information on stocks going back to the 1880s. “We’ve learned that there’s really not that much that has changed. The chart patterns in 1910, 1930, and 1950 are the same as they are now,” he says. “The only difference is that back in those old days it was J. P. Morgan and Edward Harriman and these pools that would be running stocks up, and since the 1930s it’s been the better mutual funds that have been the dominant factor in the market in determining what these stocks will do. But the patterns are really the same.”
Detail. It is the reason that he founded the financial daily newspaper Investor’s Business Daily (originally Investor’s Daily) in 1984. “I’d be traveling around and I’d pick up the Wall Street Journal and there was nothing in it of the sort of data we needed, the things that we knew were important. They were taking the old AP [Associated Press] tables and slapping them in.”
But Bill O’Neil went further than simply collecting or publishing detail. He interpreted it.
“We now have stock winning models from 1880 through to today, and we looked at all the variables, the fundamentals—earnings, return on equity, and products—and then we looked at all the technical things. And ours is a combination of all these different variables: sponsorship, industry conditions, products. And we have a set of rules, a profile of what a leading stock looks like.
“It’s not perfect,” he allows. “We make our mistakes, but we have rules that if you make a mistake, you cut it and go on to the next thing.”
In fact, O’Neil came up with a trading strategy based on all that data, known by the acronym CAN SLIM. The strategy starts with the following information.
C: Current earnings
A: Annual earnings
N: New product or service?
S: Supply and demand (based on volume)
L: Leader or laggard?
I: Institutional ownership
M: Major market indexes and their trends
This information is then compared to the performance of thousands of successful stocks based on years of research—and O’Neil’s own trading experience.
“Our rule number one is that with every single stock you buy, when it goes down 7 or 8 percent below what you’ve paid for it, it has to go out. No exceptions. And the reason for it is maybe half the time it might turn around and go up, but the other half of the time it rolls over and can go down 70 percent. And if you sit with it, that’s how people get hurt.”
O’Neil learned something early on in his “buy low, sell high” investing career. “What was very eye-opening was that it actually was ‘buy high, sell higher’ based on research proving you had to buy quality, higher-priced stocks, rather than bargain-basement ones in the old ‘buy low, sell high’ philosophy,” he notes. Buying the stock was only half of the equation. You had to get the other part right, too, and O’Neil says:
No one has any idea when you should sell a stock.
“We’ve done studies on when outstanding stocks topped, and we’ve learned some rules that force us into saying you’ve got to do it this way. And one of our rules is that when a market leader finally tops, the average correction is 72 percent. You’re a long, long time coming back—just to break even.”
O’Neil gives workshops on applying the rules of the CAN SLIM strategy in the real world. The American Association of Individual Investors hails the approach as the number one strategy out of over 50 widely known investing methods from January 1998 through December 31, 2009.
The success of CAN SLIM is part of the reason why Investor’s Business Daily survives during an era in which newspapers are shutting down across the country. Only 20 to 25 percent of IBD’s revenue comes from advertising. The rest comes from subscribers and workshops that are given to educate CAN SLIM followers on the stock-picking strategy.
One of the more interesting aspects of talking with William O’Neil is the feeling you get that, in his eyes, picking stocks and reading Investor’s Business Daily are more than a strategy for succeeding in investing—they’re part of an organized approach to succeeding in life itself. How many other newspapers publish “Secrets to Success”?
IBD’s 10 Secrets to Success
Investor’s Business Daily has spent years analyzing leaders and successful people in all walks of life. Most have 10 traits that, when combined, can turn dreams into reality. “Each day, we highlight one,” says O’Neil.
1. HOW YOU THINK IS EVERYTHING: Always be positive. Think success, not failure. Beware of a negative environment.
2. DECIDE UPON YOUR TRUE DREAMS AND GOALS: Write down your specific goals and develop a plan to reach them.
3. TAKE ACTION: Goals are nothing without action. Don’t be afraid to get started. Just do it.
4. NEVER STOP LEARNING: Go back to school or read books. Get training and acquire skills.
5. BE PERSISTENT AND WORK HARD: Success is a marathon, not a sprint. Never give up.
6. LEARN TO ANALYZE DETAILS: Get all the facts, all the input. Learn from your mistakes.
7. FOCUS YOUR TIME AND MONEY: Don’t let other people or things distract you.
8. DON’T BE AFRAID TO INNOVATE; BE DIFFERENT: Following the herd is a sure way to mediocrity.
9. DEAL AND COMMUNICATE WITH PEOPLE EFFECTIVELY: No person is an island. Learn to understand and motivate others.
10. BE HONEST AND DEPENDABLE; TAKE RESPONSIBILITY: Otherwise, Nos. 1-9 won’t matter.
It is perhaps because of O’Neil’s focus on success in stocks
and in life that he doesn’t just dwell on the detail of data gathered from the past. He can also look forward. And he does so with hope, no matter what the market conditions are. He explains:
We had 26 stock market cycles. And every single cycle was led by innovators, entrepreneurs, and new inventions: railroads, airplane, radio, automobile, automatic elevator ...
“Today it’s the Internet and semiconductors, and there will be more exciting growth areas in the future. Technology is so strong; the freedom, the opportunity is out there all the time, no matter who’s in Washington. There’s an Apple out there somewhere.
“Each cycle brings on sectors, with technology and innovation. The Internet is still a young baby. That’s what drives the American economy.
“And the Chinese saw the Soviet Union imploding, and saw that Americans were making money, so China is copying us; they’re copying our model because they saw the communist system is not that productive.”
If you look at IBDzs “Secrets to Success, ” there’s one secret that is especially relevant to this book. It is number 6, “Learn to analyze details: Get all the facts, all the input. Learn from your mistakes.”
O’Neil applied that in a way that launched the rest of his career. He began as a stockbroker in 1958 and came up with rules to buy the right stocks at the right time. By 1961 he was pretty good at picking winners. He bought a seat on the New York Stock Exchange (at age 30) in 1963 and founded William O’Neil + Company, which developed the first computerized daily securities database, and currently tracks over 200 data items for over 10,000 companies.
But his achievements might never have reached the level they are at today without the time he made his best mistake.
William O’Neil’s Best Mistake, in His Own Words
I was starting to use charts, and I bought Brunswick and Great Western Financial and AMF.... All of these were leaders in the early 1960s. I bought them at the right time in the right way and I had some very good positions and profits.
But when the stocks topped, I held on to them too long and I gave up all that gain.
I was so upset for blowing it and having nothing to show for it because I’d been dead right in the right stocks at the right time, and here I gave it all back.
So what I did was I spent several months analyzing in detail every single stock I bought in the prior year. I had a red pen, and I marked on charts where I bought and where I sold, and I had a big accounting worksheet where I posted day by day what these stocks did all the way up—the prices, the volume changes—and really went into a lot of detail.
And it’s amazing, but it finally dawned on me, something that should have been obvious: that I had finally figured out how to buy the stocks, the real leaders, but I had no plan on when to sell.
I had never thought about it. That’s when I developed sell rules, on when to sell stocks on the way up when certain things happen. And I found out also that all these stocks topped when the market topped. So I figured out you had to have buy and sell rules on general market activity also.
And I developed those rules, finalizing a system that worked and made some sense. Before, I only had half of the ballgame. I had offense but no defense.
It’s like a tennis player who has a forehand and doesn’t know how to hit a backhand.
There was one other thing that showed up in this. One stock that I really botched up was Certainteed. It had taken off and then had a sharp correction and I was taken out with about a two-point profit, and the stock turned around and doubled or tripled. So I studied that particularly well and wrote out new rules so that if I got into a situation like that again I could handle it correctly.
And that was a rule I came up with that if you buy a stock coming out of a base, and it goes up 20 percent in only three weeks or less, then you must hold it for another five weeks and then reevaluate. That kind of action is so exceptional that no matter what’s going on you’ve got to give it more latitude and room.
That helped immensely a year later when Syntex, the first company with the oral contraceptive pill, came along. This stock takes off and runs up just like Certainteed—a specific percentage in a certain time—and I put it in this automatic rule where I have to hold it for X amount of time, and survived through a sharp correction. It became the big winner of the year. It went up to $550 from $100 in six months.
This was the first time that I put everything together right. I bought the right stock at the right time, didn’t get shaken out, held it right, and sold it right.
The key here is that I had very specific rules. If I had been doing what I was doing a couple of years earlier, I would have sold this stock much, much earlier because it went through two sharp corrections.
So fouling up like that, and being forced to sit down and see what dumb things I did that time showed a couple of glaring weaknesses I had. I had buy rules, but I had no way to handle that Certainteed situation.
[O’Neil developed his rules because he found that almost everything about investing in stocks is contrary to human nature. Even a highly educated person will do the wrong thing after buying a stock. “If he buys it at 50 and it goes to 40, he won’t sell it. The math and psychology fool most people.” Simply put, O’Neil developed rules that take the emotion out of investing.]
You’ve got to have rules rather than just going by how you feel. Because if you go by how you feel, you’re scared or hoping all the time.
About William O’Neil
Born in Oklahoma and raised in Texas, William J. (Bill) O’Neil made his first investment of only $300 in Procter & Gamble while serving in the Air Force in his 20s. Then he joined Hayden Stone as a stockbroker, and began his landmark studies of the greatest stock market winners to determine the specific traits they had in common. After a 20-fold increase in his own account in 26 months, Bill O’Neil bought a seat on the New York Stock Exchange at age 30, the youngest person at that time to do so, and formed William O’Neil + Company, one of the most highly respected securities research firms in the United States. He was the first to computerize daily stock information in the 1960s, which led him to develop a strategy for identifying those traits, called the CAN SLIM investing strategy Today, the CAN SLIM method is the leading growth strategy and outperformed the S&P 500 in good markets and bad.
1With the launch of Investor’s Business Daily (IBD) in 1984, Mr. O’Neil opened the playing field to everyday investors. IBD’s unique screening tools provide a fast track to CAN SLIM stocks, and the educational support from seminars and IBD University have helped build a rare story of investing success for many individuals, particularly in the current economic climate. Bill O’Neil is the recipient of numerous awards and the author of several best-selling books, including the classic How to Mahe Money in Stocks: A Winning System in Good Times or Bad, long considered must reading by leading market thinkers, historians, financial professionals, and economists alike. The recently updated fourth edition of the book covers the 2008—2009 bear market and includes 100 charts of winning stocks that reveal common patterns all stocks share before they make big moves up in price. His other best-selling books include The Successful Investor, 24 Essential Lessons to Investing Success, and How to Make Money Selling Stocks Short. He is the editor of numerous books, including the Leaders & Success book series.
