3. In a rare interview with TraderPlanet, stock
investing's elder statesman Bill O'Neil shared his
views on what drives stock market growth leaders
and how the underlying nature of the market
hasn't really changed. With over fifty years of
market experience and wisdom, O'Neil shares the
basics on the methodology that works for him
here.
O'Neil is widely considered to be one of the
most influential investors of our time. At the age of
30, he was the youngest person to buy a New York
Stock Exchange seat in the 1960s. O’Neil
pioneered research that identified seven
performance traits of the greatest stock market
leaders before they make their biggest price
gains. That research became the basis of his
investment growth strategy: the CAN SLIM®
Investment System. O’Neil founded Investor’s
Business Daily® (IBD®) in 1984 and later
Investors.com. He is the author of numerous
books including the classic, “How to Make Money
in Stocks: A Winning System in Good Times or
Bad."
The IBD methodology is one that any investor
or trader can utilize. Active traders with familiarity
and an understanding of charts will find the
concepts generally easy to understand. The
approach is often described as a trend following
system and could be embraced as a main strategy
or an auxiliary trading method in addition to
shorter-term plays. The bottom line is that this
method has consistently produced outsized
market returns, compared to the broader market
averages and for that reason alone is worth
studying. Let's dive into this exclusive
TraderPlanet interview.
Bill O'Neil always had an
interest in the stock market.
During college he was in ROTC
and after graduation spent time
in the Air Force for several years.
However, O'Neil was voraciously
reading about and studying the
stock market on the side.
After the Air Force, O'Neil
landed a job at a brokerage firm,
where he continued to study
and invest, with a determined
and ambitious focus. "I would
read books by people I knew
had done really well in the
markets. I would seek out those
people. You learn from who is
doing best in the field," O'Neil
said. A key early influence was
Gerald Loeb's classic "The Battle
For Investment Survival." He
sought out Loeb and met him in
person. "I always wanted to find
out who is the best in the field
and what are the methods they
used? That is what helped me a
lot," he said.
A disciplined and
motivated student of the
markets and market history,
O'Neil dug into old charts and
past fundamentals to identify
common patterns and themes
in stocks with outsized
performance gains. "I would
13 TraderPlanet Digital Journal
4. investment strategy that combines
both fundamentals and technicals. In
general, he focuses on common stocks
with new products and good earnings.
"The accumulation that is done
by professionals leaves a track and that
shows up on a chart," he said. But, he
added that fundamentals are critical as
well and a company must have an
outstanding product and rapid
earnings growth. "The charts help you
spot that some professional is buying
these stocks. It is the combination of
those two things that have helped us
dramatically." The method which O'Neil
designed: the CAN SLIM® Investment
System is an acronym for individual
factors that must be present for a stock
purchase.
study which stocks were the most
successful in the past few years. I'd study
the fundamentals, study the charts," he
said. "Those patterns are the same as 20,
50, 100 years ago. Human nature is in the
market. You can see chart patterns that
would show from a supply and demand
point of view that stocks are being
accumulated—such as a "cup and
handle," he said.
Chart Tracks
After five decades of experience, O'Neil is
now an astute investor with an
authoritative understanding on both
fundamental and technical aspects that
affect stocks. Through his years of study,
he honed and created a specific
"IN EVERY CYCLE THERE ARE NEW LEADERS BECAUSE THERE ARE
NEW INNOVATORS AND NEW COMPANIES WHO ARE GOING TO COME
ALONG. WHO EVER HEARD OF LINKEDIN 20 YEARS AGO? THEY KEEP
COMING BECAUSE OF THE FREEDOM AND OPPORTUNITY."
—BILL O'NEIL
TraderPlanet Digital Journal 14
5. Despite the massive technological
changes which have been seen in recent
decades, which include high-frequency
trading and algorithmic program
trading, O'Neil dismisses these as having
a significant impact on his methodology.
"It's still supply and demand. It's still
human nature. It is still professionals
moving stocks up. It is the big
institutions and mutual funds that will
do that, not the public. Aunt Sue buying
50 or 100 shares isn't going to affect it,"
he explained.
O'Neil points to the unique freedom
and opportunity in the American free
market system as a fertile ground for the
development and creation of new
unique companies. "The country is
innovative and creative because it is so
free," he said. And, that in turn translates
into new stock market growth leaders.
"Innovators are going to keep coming
with every cycle. In every cycle there are
new leaders because there are new
innovators and new companies who are
going to come along. Who ever heard of
LinkedIn 20 years ago? They keep
coming because of the freedom and
opportunity," O'Neil said.
The American Association of
Individual Investors' independent
"real time" study of over 50
leading strategies found IBD’s
CAN SLIM® Investment System
achieved an annualized return of
+24.7% from inception (January
1998 through December 31,
2012, AAII Stock Screen). It is the
number one long-term growth
with price momentum strategy
measured by AAII Journal.
+ 24.7%
IBD’s CAN SLIM®
Annualized Return
January 1998
through
December 31, 2012
Supply And Demand
15 TraderPlanet Digital Journal
7. Follow The System
In order to achieve success with the CAN SLIM® approach it is essential to follow the
rules. The methodology does outline specific buy criteria. There are sell rules too. "No
matter how much you know, you will make mistakes. If you buy it at $50 and it is at $46,
cut it and sell it pretty fast. The maximum loss anyone should sit with is 7-8%," O'Neil
said. "Have buy rules and sell rules.You go by the rules, not how you feel.You can't fall in
love with any stock," he added.
But, at the end of the day, it boils down to this: "we are looking for stocks in the top
2% of companies in earnings growth, sales growth and an outstanding product," O'Neil
concluded. And, after fifty years of investing that is still the recipe for superior returns in
stock market investing.
Matthew Galgani is the co-host
of the How To Make Money In
Stocks radio show and the
author of How To Make Money
In Stocks —Getting Started.
GETTING STARTED:
The Nuts And Bolts
Of The IBD System
The growth stock investing approach taught by
IBD really is a common sense approach. The
basics are easy to understand and the
performance returns are impressive, as noted by
the American Association of Individual Investors.
There's no software to buy or black box system to
follow with the IBD method, but it will take some
good old fashioned studying and hard work. This
is an approach that anyone can learn and
implement given the interest, time and
determination—no special knowledge, skills or
background needed.
17 TraderPlanet Digital Journal
8. Matthew Galgani, the co-host of
IBD's radio show offered up some
concrete tips on getting started with this
approach. These revolve around three
key points Galgani said:
"You only want to make new buys
when the market is a confirmed uptrend.
Take defensive action as the uptrend
starts to wane."
"Focus on stocks with big earnings
growth and innovative new products."
"Buy stocks that are being heavily
bought by institutional investors and
avoid the ones they are selling."
A Weekend Routine
This is a methodology that individual
investors can pursue while working
full-time at other careers. Galgani
explains a sort of "cheat sheet" approach
can be to utilize "The Big Picture"
column in the Investor's Business Daily
newspaper and the IBD 50 and Your
Weekly Review stock lists. "The Big
Picture column will tell you if the market
is in an uptrend, an uptrend under
pressure or a correction," he noted. If the
market is an uptrend—this is a time to
buy stocks. From there, the "IBD 50 and
Your Weekly Review will give you a list of
top rated stocks to keep an eye on."
Fleetcor Technologies (FLT).
A 117% gain in 10 months.
Download this pdf
for simple steps to
follow and a
buying checklist.
IBD CASE STUDY:
DOWNLOAD
PEOPLE TEND TO OVER
DIVERSIFY. FOCUS ON A FEW
STOCKS. IF YOU HAVE A
$20,000-$200,000
PORTFOLIO—BUY FOUR TO FIVE
STOCKS. PICK THEM CAREFULLY
AND WATCH THEM CAREFULLY."
—MATTHEW GALGANI
TraderPlanet Digital Journal 18
9. Entry Points
For those traders with some chart
reading knowledge already, embracing
the IBD approach wouldn't be that hard
of a switch. Once an investor has honed
in and chosen a stock to buy, the
technical picture will offer the trigger
point for an entry. "We are looking for
stocks to break out of a consolidation
pattern. The three most common are:
cup with handle, double bottom and flat
base," Galgani explained. "When it is
hitting an old point of resistance and if it
has the power to push through that
ceiling on heavy volume—that is the
ideal time to get into a stock," he said.
Taking Profits
In general, the methodology advises
that "you take most of your profits at
20-25% above the ideal entry point. It's
just history. When stocks go up 20-25%
past their prior buy point they tend to
pull back and start another base. That
can be an opportunity to take your gain,"
Galgani said.
Risk Management
There are stop-loss and 'when you are
wrong' rules. "If a stock drops 7-8%
below what you paid for it, sell it. No
questions asked. You never want to let it
go more than that," Galgani said. "It is
kind of a simple game plan. Buy in a
confirmed uptrend. Three out of four
stocks just follow the main trend. Take
most of your profits at 20-25% and if you
are wrong, cut all losses at no more than
7% - 8%."
Make A Checklist
As simple as it sounds, when emotions
and money are involved, sometimes
discipline just flies out the window.
That's why writing out an actual
checklist of your buy and sell rules can
help keep an individual investor on
track. "Make sure you have good sell
rules. Selling is the hardest and most
ignored part of investing. Don't be super
greedy. In most cases, take a 20-25%
gain," he said.
Some Numbers
What about timeframe? In general
Galgani said the 20-25% gain can often
be achieved over a three to six month
period. What about how many stocks to
own? "There is no magic number. But,
our take on it is don't own more than
you can properly handle and manage.
People tend to over diversify," he said.
"Focus on a few stocks. If you have a
$20,000-$200,000 portfolio—buy four
to five stocks. Pick them carefully and
watch them carefully," he said.
19 TraderPlanet Digital Journal
10. Markets In Correction
As of this writing in early August, the U.S.
stock market remained in the midst of a
major bull market that is over four years
old and could be getting a little long in
the tooth, according to history. Once U.S.
stocks do correct lower or even head
into a bear (generally considered to be a
20% move off the high), what does the
IBD methodology advise investor to do?
"Protect gains you made in the prior
uptrend. You never want to see your
gains disappear. The biggest thing to do
in a correction is to prepare to make
Inspiration And
Success
Amy Smith, market commentator radio
show host at Investor's Business Daily,
used to be a fitness trainer. About 17
years ago, Smith read Bill O'Neil's book
and got hooked. "I didn't go to Wharton,
I don't have an MBA. I didn't know
anything about the markets," she said.
After reading O'Neil's book she attended
a workshop led by him. "I heard him
speak and was blown away. Everything
made sense," she said.
She started investing on her own,
while still working full-time in fitness.
Amy Smith is the author of How To
Make Money In Stocks Success
Stories and market commentator
at Investor's Business Daily.
money in the next uptrend. Build your
watch list. Have routines, have checklists
and the discipline to follow them," he
said.
Sitting in cash might not be that
exciting, but it is certainly better than
watching one's profits disappear.
Bottom line? Market corrections offer
time to study more, hone your skills and
get your game plan ready for the next up
cycle, which always comes. Markets
move in cycles, history and charts show
that. The critical question for investors is
how will you handle that? The IBD
method offers specific guidelines to
follow.
TraderPlanet Digital Journal 20
11. Smith became involved with the Santa
Monica IBD Meetup group and
eventually started volunteering for
them. Smith began investing during the
1990's, which boasted one of the most
historic bull market periods in recent
history, which certainly was a plus for a
growth stock investing approach. She
remembers thinking "wow, this really
works." Then, the bear market hit in
2000. "It was kind of a wake-up call," but
Smith wasn't deterred. Instead, she said
"I had to dig in and learn more. I looked
at it as a chance to improve."
There are currently about 250 Investor's
Business Daily Meetup groups across the
country that gather regularly to discuss stocks
and investing. Generally, it is a group of
investors that share ideas and can offer
support to others just learning about growth
stock investing. Is your interest piqued?
The IBD approach has been
described by some as a trend following
system. More specifically, it is a system of
buying stocks with the best sales,
earnings, products and return on
investment. The IBD methodology
"takes advantage of the sweet spot you
usually see in the market every year.
During that time period, it is easier and it
is not a choppy environment. These big
growth names like Baidu.com (BIDU)
and Green Mountain Coffee Roasters
(GMCR) moved 1000%, much more than
the basic indexes. For people who are
willing to pay a little bit of attention to
the market the returns can far outpace
an ETF strategy," she said.
Click here to locate an IBD Meetup group near you.
21 TraderPlanet Digital Journal
12. RELATED READING
Schwager: Investors Are
Their Own Worst Enemy
By Kira Brecht
CLICK
HERE
In her book: How To Make Money In Stocks Success Stories, Smith features regular
individuals from all walks of life who adopted the IBD approach and achieved solid and
sometimes stunning market gains. If you are looking for some inspiration take a look at
these numbers. Here are a few examples from her book. Townsend Baldwin—he
bought a New York apartment with profits from Nutrisystem using IBD and CAN SLIM®
rules. Ken Chin used CAN SLIM to book a 212% gain in Baidu in 2010 over 18 months
and a 91% gain in Apple in 2011 over an 18 month period.
Proven Results
"Whether your motivation is to buy a home, generate retirement income or build a
college fund, you can learn to invest successfully. Anybody can do it. Bill started with
$500. Even with a small amount of money—just get started. It is a little bit of work, but
the more you work at it the more success you will have," Smith said.
"It is a system that has been time-tested. Bill's done research going back to 1880.
Cycle after cycle, it is the same. History does repeat itself and these types of big winners
do emerge in every market cycle," Smith concluded.
Kira Brecht is managing editor at TraderPlanet
TraderPlanet Digital Journal 22
