How to Make Money in Stocks
Sets out the CAN SLIM system; several revised editions.
Summary
William O'Neil founded Investor's Business Daily and built a database of the biggest-winning American stocks going back to the 1950s. This book sets out what he claims that database shows about the characteristics those stocks shared immediately before their largest advances. He organises the findings into the acronym CAN SLIM: current quarterly earnings up sharply, annual earnings growth over several years, new products or new management or new price highs, supply and demand visible in share count and volume, leader rather than laggard within an industry group, institutional sponsorship increasing, and market direction confirming.
The method is momentum investing built on fundamental screens. O'Neil argues against buying stocks near their lows and against averaging down, and he insists on selling any position that falls seven to eight per cent below the purchase price. He devotes substantial space to chart patterns, particularly the cup-with-handle base, and to reading volume as evidence of institutional accumulation. Later editions add material on the 2000 and 2008 declines and on distribution days as a market-timing signal.
Academic work on momentum and on earnings-announcement drift supports the general direction of O'Neil's observations, but his specific rules have never been independently validated on out-of-sample data, and his backtests were conducted by his own firm. The approach generates high turnover and produces its worst results in range-bound markets, where the stop-loss rule triggers repeatedly. The chart-pattern material is the weakest part and rests on visual classification that different readers apply differently.
Key takeaways 7
- The biggest-winning stocks showed sharply accelerating quarterly earnings before their major advances, not after them.
- Investors should buy stocks near their highs rather than near their lows, because new highs indicate the absence of overhead supply.
- Any position that falls eight per cent below the purchase price should be sold without exception or reconsideration.
- Industry group leadership matters, and the second-best company in a strong group usually underperforms the best one badly.
- Rising institutional ownership signals accumulation, while very high institutional ownership signals that the buying is finished.
- Three quarters of stocks follow the general market direction, so an investor should reduce exposure when the major indices show distribution.
- Companies buying back stock and carrying small share counts produce larger price moves on the same earnings improvement.
Who should read it
Individual investors who want a rule-based growth and momentum system with explicit sell discipline, and who accept high turnover.
About William J. O'Neil
Founder, Investor's Business Daily and William O'Neil + Co.; creator of the CAN SLIM method
How to Make Money in Stocks codified growth-momentum stock selection and remains the standard reference for it.
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Where it sits in the reference 2
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