William O'Neil

Chief Executive Officer, William O'Neil and Company, an advisory firm based in Los Angeles, California, USA.

Investment style

Growth stock trader with medium-term horizon (2-5 years).

Profile

O'Neil started out in 1958 as a stockbroker. During his three years in the job, he made a careful study of the top-performing mutual funds - the US equivalent of our unit and investment trusts. He discovered their success was entirely due to buying stocks that were setting new highs in price. In the language of chartists, they were 'breaking out' of previous holding patterns or 'consolidations'. Many of them would then go on to make advances of many tens or even hundreds of percent.

He decided to copy this method. Within a year or so, he had turned $5,000 into $200,000. In 1963, he bought a member's seat on the New York Stock Exchange and founded the firm he still runs today. He was one of the famous 'performance' fund managers of the Sixties, and a pioneer of database-driven stock selection. His company still supplies a wide variety of statistics and data to professional investors.

In 1983, he launched a financial newspaper to rival the Wall Street Journal, called Investor's Daily. Against the odds, this has become a widely-read and well-respected alternative to its venerable competitor. Part of its appeal rests on its unique data tables, which also underpin his own investment approach and his advice to clients.

Long-term returns

O'Neil's track record has had its ups and downs, particularly during and just after the 'go-go' years of the Sixties. But he is thought to have averaged an annual return of over 40% on his personal account in the ten years up to 1989.

Biggest success

One of O'Neil's earliest coups was in the drug stock Syntex. The company was the first mass manufacturer of the birth control pill at the start of the 'sexual revolution'. It had just announced quarterly earnings growth of 300% when he bought the stock in 1963. As the market woke up to the potential, the price rocketed from $100 to $550 in 6 months, making him enough money to set up his own business.

Method and guidelines

Like Jim Slater, O'Neil relies on a mixture of quantitative and qualitative criteria to pick stocks. His method has to be adapted for use in the UK, to allow for differences in accounting practice and the lesser availability of financial statistics. But his basic approach to trading is as applicable here as in the US. The key idea is to seek out only those growth stocks that have the greatest potential for swift price rises from the moment you buy them. In essence, buy the strong, sell the weak.

He suggests you remember the seven criteria listed below by the acronym C-A-N-S-L-I-M, adding that investment is like dieting: anyone can manage it with a little effort and discipline.

C = Current quarterly earnings
Look for companies that have just announced quarterly earnings increases of 40-500% (Here in the UK the equivalent is interim or annual increases).

A = Annual earnings increases
Look for companies with at least 5 years of prior growth, at a compound rate of no less than 25%. Prefer those with the most consistent growth. The P/E ratio is relatively unimportant. On average, it may range from 20 to about 45.

N = New products, new management, new highs
The best stocks have a new story behind them, such as new and exciting products or new directors. They are also breaking out to new highs. On a chart, they typically form a shape that looks like 'a cup with a handle'. Click here for an example.

S = Supply and demand
The less stock there is to buy, the more any buying will drive up the price. Look for companies with around 10-25 million shares in issue. Watch for a rise in the amount of shares traded ('volume') of at least 50% above average.

L = Leaders and laggards
Stick to the 2 or 3 stocks showing the highest relative strength in their sector. They should have outperformed 80-90% of all other stocks in the last 12 months. Stay away from those that have underperformed for more than 7 months.

I = Institutional sponsorship
Identify the 3-10 best performing institutional investors. Check out the stocks they are buying as candidates for your own portfolio. Favour companies which are 'underowned' by the professionals (i.e. 10% or less of the shares belong to institutions).

M = Market direction
Check the market daily for early signs of any major downturn. (O'Neil discusses various indicators of this in his book How to Make Money in Stocks. But it needs to be said these can be unreliable in practice). Consider trying to avoid making new purchases once a decline of 10% or more gets underway.

Source: How to Make Money in Stocks, W O'Neil, 1988.

Follow a strict stoploss policy. O'Neil suggests selling any stock that has dropped 7-8% below the price you paid. Consider looking at doing this automatically.

Consider selling stocks that have not risen 20% or more after 13 weeks. And consider holding those that have risen 20% in 4-5 weeks. These may go on to be the biggest winners of all.

In the case of stocks you have held for some time, sell after any sudden and rapid climb of 25% or more in 1-2 weeks. This generally happens when good news or rosy publicity causes investors to become too enthusiastic about the stock. Take advantage by taking your profits. (In all, O'Neil lists 35 rules for profit-taking. Most of them are variants on the basic theme: 'Sell into strength'.)

Consider looking to avoid low-priced penny shares, options and new issues. These are mostly gambling chips, with only occasional potential for really big profits.

Key sayings

"The whole secret to winning and losing in the stock market is to lose the least amount possible when you're not right."

"Always sell your worst stock first."

"What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower."

"History will repeat itself."

Further information

O'Neil's book How to Make Money in Stocks is a must-read for growth stock investors and traders. He makes some additional points in 24 Essential Lessons for Investment Success. Market Wizards by Jack Schwager contains interesting interviews both with him and with his right-hand man, David Ryan. For details of O'Neil's newspaper, visit the website Investors.com.

INTEGRATE

Born: Oklahoma City, Oklahoma, in 1933

Affiliations: •Hayden, Stone & Company

•William O'Neil & Company, Inc.
•O'Neil Data Systems, Inc.
•Investor's Business Daily

Most Famous For: Bill O'Neil is a top-performing stock broker, inventor of the growth stock investing strategy, CANSLIM, author and founder of the national financial newspaper, Investor's Business Daily, which competes with The Wall Street Journal.

Personal Profile

Bill O'Neil majored in business administration at Southern Methodist University, receiving a Bachelor of Arts degree in 1955. After military service, he started his career as a stockbroker with Hayden, Stone & Company in 1958, and developed an investment strategy (CANSLIM), which made him the highest performing broker in his firm.

His professional and financial successes lead him to form a brokerage firm, the William O'Neil & Co., Inc, in 1963. At 30 years old,he became the youngest person to buy a seat on the New York Stock Exchange.

In 1983, he founded a national financial daily newspaper called Investor's Daily, which became the Investor's Business Daily in 1991. As of 2007, he serves as CEO of William O'Neil & Co., is the chairman and publisher of the Investor's Business Daily, and lectures and writes on investment topics nationwide.

Investment Style

O'Neil blends a mixture of quantitative and qualitative strategies in his performance-oriented investing approach. In brief, his investment style is to seek out only those growth stocks that have the greatest potential for swift price rises from the moment they are purchased.

Essentially, Bill O'Neil's motto is "buy the strong, sell the weak." His criteria for identifying a stock that's about to head for the stratosphere are summarized in his well-known acronym CANSLIM:

C – Current quarterly earnings per share have increased sharply from the same quarters' earnings reported in the prior year (at least 25%).

A – Annual earnings increases at a compound rate of no less than 25% (P/E is unimportant – probably in the range of 20 to 45 with these stocks) annually over the last five years.

N – New products, new management, and new highs. Stocks with a good "story."

S – Supply and demand. The less stock available, the more buying will drive up the price. Look for stocks with 10 to 12 million shares outstanding.

L – Leaders and laggards. Stick with those stocks that outperform and shed those that underperform.

I – Institutional ownership. Favor companies that are "underowned" by the top professional investors. (For related reading, see Institutional Investors And Fundamentals: What's The Link?)

M – Market direction. Buy stocks on major downturns, but avoid purchases after a decline of 10% or more gets underway.

Publications

•" How To Make Money In Stocks" by William J. O'Neil(1988).
•"24 Essential Lessons For Investment Success" by William J. O'Neil (1999).
•"The Successful Investor" by William J. O'Neil(2003).

Quotes

"Since the market tends to go in the opposite direction of what the majority of people think, I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless … facts and markets are far more reliable."

"The whole secret to winning and losing in the stock market is to lose the least amount possible when you're not right."

"What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower."