How to Make Money in Stocks

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How to Make Money in Stocks

19A3265

How to Make Money in Stocks A Winning System in Good Times or Bad

William J. O'Neil

Second Edition

McGraw-Hill, Inc. New York San Francisco Washington, D.C. Auckland Bogota Caracas Lisbon London Madrid Mexico City Milan Montreal New Delhi San Jüan Singapore Sydney Tokyo Toronto

Library of Congress Cataloging-in-Publication Data

O'Neil, William J. How to inake money in Stocks : a winning System in good times or bad / William J. O'Neil.—2nd ed. p.

cm.

Includes index. ISBN 0-07-048059-1 (hc) 1. Investments.

HG4521.0515

2. Stocks.

—ISBN 0-07-048017-6 (pb) I. Title.

1995

332.63'22—dc20

94-28192 CIP

Copyright © 1995, 1991, 1988 by McGraw-Hill, Inc. All rights reserved. Printed in the United States of America. Except äs permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval System, without the prior written permission of the publisher.

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0

DOC/DOC DOC/DOC

909 909

7 6 5 4 (HC) 7 6 5 4 (PBK)

ISBN 0-07-048059-1 (hc) ISBN 0-07-048017-6 (pbk)

The Sponsoring editorfor this book was Philip Ruppel, the editing Supervisor was Fred Bernardi, and the production Supervisor was Suzanne Babeuf. It was set in Baskerville by McGraw-HiU's Professional Book Group composition unit. Printed and bound by R. R. Donnelley & Sons Company.

This book is printed on recycled, acid-free paper containing a minimum of 50% recycled, de-inked über.

Success in a free country is simple. Get a Job, get an education, and learn to save and invest wisely. Anyone can do it. You can do it.

Contents Preface

ix

Part l A Winning System: C-A-N S-L-I-M Introduction: Learning from the Greatest Winners 1. C = Current Quarterly Earnings Per Share: How Much Is Enough?

2 5

2. A = Annual Earnings Increases: Look for Meaningful Growth

14

3. N = New Products, New Management, New Highs: Buying at the Right Time

22

4. S = Supply and Demand: Small Capitalization Plus Big Volume Demand

29

5. L = Leader or Laggard: Which Is Your Stock?

34

6. I = Institutional Sponsorship: A Little Goes a Long Way 40 7. M = Market Direction: How to Determine It

44

Part 2 Be Smart from the Start 8. Finding a Broker, Opening an Account, and What It Costs to Buy Stocks

80

vj|j

Contents

9. When to Seil if Your Selection or Timing Might Be Wrong 10. When to Seil and Take Your Profit

85

97

11. Should You Diversify, Invest for the Long Pull, Buy on Margin, Seil Short?

109

12. Should You Buy Options, OTC Stocks, New Issues...?

115

13. How You Could Make a Million Owning Mutual Funds

131

Preface

Part 3 Invcsting likc a Professional 14. Models of the Greatest Stock Market Winners: 1953-1993

140

15. How to Read Charts like an Expert and Improve Your Stock Selection and Timing

160

16. How to Make Money Reading the Daily Financial News Pages

180

17. The Art of Tape Reading: Analyzing and Reacting to News

207

18. How to Pick the Best Industry Groups, Subgroups, and Market Sectors

218

19. Improving Management of Pension and Institutional Portfolios

230

20. 18 Common Mistakes Most Investors Make

254

Index

259

From August 1982 to August 1987, the stock market staged a phänomenal 250% increase. Employees' pension funds made a fortune. Then in one day in October 1987, the market dropped a record 24%. Sanity and reality returned. That's the stock market. During the last 50 years, we have had twelve bull (up) markets and eleveii bear (down) markets. But guess what? The bull markets averaged going up about 100% and the bear markets, on an average, declined 25% to 30%. Not only that, the typical bull market lasted 3 3/4 years and the classic bear market lingered only nine months. Viewed with perspective...that's a terrific deal. But I will go you one better. Did you know that in the last 100 years we have had more than 25 bear market slumps (natural, normal corrections of the previous bull market advance), and EVERY SINGLE TIME THE MARKET RECOVERED AND ULTIMATELYSOARED INTO NEW HIGH GROUND? That's fantastic. What causes this continued long-term growth and upward progress? It's one of the greatest success stories in the world—free people, in a free country, with strong desires and the incentives to unceasingly improve their circumstances. America just keeps growing. The stock market does not go up due to greed. It goes up because of businesses with new products, new Services, and new inventions...and there are hundreds of them every year. The innovative entrepreneurial companies with the best quality new products that serve people's needs are always the top stock market winners. So, why haven't more people taken advantage of these tremendous

Preface

Preface

XI

investment opportunities? It's that they don't understand the market,

tables and to grow and take share of market away from The Wall Steet

and when you don't understand something you are unsure, maybe even afraid. I am going to solve that problem for you. This book will explain the market to you in simple terms everyone can understand. It will show you how to select which Stocks to buy and exactly when you should buy and when you should seil. There are two entire chapters on when to seil and nail down your profits or cut short potential mistakes. You can learn how to protect yourself against the big risks in good times or bad. There are three things I feel absolutely certain about concerning the next twenty-five years. Our government will continue to tax you äs much äs it possibly can for äs long äs you live, your cost of living will go up substantially, and the stock market and economy will be much higher. You can't do a lot about the first two, but you can benefit materially from the last one if you learn how to save and invest properly. Don't be thrown off by the swarm of gloom and doomers. In the long run, they have seldom made anyone any money or provided any real happiness. I have also never met a successful pessimist. There is one overpowering, overriding reason why there should be other bull markets ahead—the enormous number of baby boomers. Marriages will be up and couples will need housing, furniture, medical care, clothing, and education for all the new children. This giant bulge in future demand will not go away. Everyone should own common stock! It's a great way to get an extra income, financial independence, and security. It's a way you can "be in business for yourself," and it can be safe and sound over the long term...if you learn to correctly apply all the basic rules for making and protecting your gains and minimizing losses. It could put your kids through school, dramatically increase your Standard of living, and give you freedom and safety in your old age. I have spent 35 years analyzing how the U.S. economy works. William O'Neil & Co., also built the first daily Computer data base on the stock market in this country and used it to construct models of what the most successful companies looked like just before they became big successes. In 1970, we moved into the institutional stock research business. We called our first service Datagraphs. Today we are regarded by some institutional investors äs the leader in automation in securities analysis and management. A daily chart service was also developed called Daily Graphs to which thousands of individual investors subscribe. In 1983, I designed and created the basic format for Investor's Daily, a national business newspaper. It was the first paper to make significant improvements in news available to public investors via daily stock price

Journal. A completely separate organization was then set up to directly challenge the sacred 100-year-old east coast-based industry giant. My prime objective in writing this book is to help everyone discover how to get ahead by saving and investing. I'm talking about ordinary people who have never owned Stocks; those deeply concerned about Inflation and their dwindliiig dollar; everyday individuals investing in a local savings account, a money market fund, or a mortgage; people who may have bought a little art, gold, or silver.

This book will also help renters who dream of one day buying a hörne or income property, and those investors who already enjoy home ownership. It is for amateur investors in the stock market, people considering an IRA (Individual Retirement Account) or a mutual fund, retired persons, teachers of Investment courses, and students attempting to learn about Investments. It should be used in schools, whether grade school, junior high, high school, or College level. Young people growing up should learn how the American economy and market really work and how they can materially benefit from it. Lastly, this book is for sophisticated professionals managing pension and mutual funds, whose difficult Job it is to produce investment results and stay ahead in a very complex and confusing game. It is also for those who seek professional advice in the supervision of state and public employee funds and educational and charitable investment portfolios, and for foreign investors who want to invest money in the U.S.A., the land of unmatched personal freedorn and opportunity. My deep appreciation and heartfelt thanks go out to those loyal hardworking souls who read, edited, worked on the graphics, criticized, typed, and retyped the endless changes made to this work. Some of

those dedicated individuals are Anne Gerhard, Carolyn Hoffman, Jeannie Kihm, Jim Lan, Stanley Liu, Diane Marin, Milton Perrin, Kathy Russell, Lindee Shadrake, Kathy Sherman, Frank Spillers, and Susan Warfei. And, of course, a great amount of valuable assistance and numerous suggestions were provided by my wife Fay and Bill Sabin and the excellent McGraw-Hill staff.

William J. O'Neu

How to Make Money in Stocks

PART l A Winning System: C-A-N S-L-I-M

Introduction

Introduction: Learning from the Greatest Wi...

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