Monday, March 16, 2009

William O'Neil: Market Wizard

Back when I started to trade, I read the IBD religiously. I'd sit there in the JP Morgan building downtown and read it from cover to cover. I even read the articles about commodities and bonds just because I was trying to absorb everything that was new.

William O'Neil started the IBD in 1982 and to understand it and the "CANSLIM" investing method that it promotes is to understand his history. Unfortunately, it's also to understand his politics... which is why I ultimately unsubscribed.

But political opinions aside, O'Neil's story is great and if you haven't already, I would suggest the following book that he published in 1988: How To Make Money In Stocks (4th edition to be published this June). In fact, a good portion of the Market Wizards interview excerpts from that book and actually, I was disappointed that no new ground was turned for me about O'Neil in the Market Wizards interview. But there were a couple of gems.

First of all, O'Neil is a plainspoken, no-frills kind of guy and I've always thought his story is great. He had $5,000 in 1962 and made 3 great back to back trades where he pyramided his profits perfectly and walked away at the end of 1963 with $200,000. With that, he purchased a seat on the exchange and started his own company. What's not to like about that?

He did loads of research which led him to discover and believe in truth-gems such as "it is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower."

This is why he promotes buying breakouts from "sound" bases. He loves charts. Even if a stock meets all of the criteria from the CANSLIM method it needs to be breaking out of a base for O'Neil to purchase it. As he explains,

You don't want to anticipate a breakout from a base because a stock may never break out. You can buy too soon as well as too late. The idea is to buy when there is the least possibility of a loss. If you buy within the base, the stock will frequently fluctuate 10 or 15 percent in normal trading action, and it is very easy to get shaken out of the position. But if I buy at exactly the right time, the stock i susually not going to go down to my maximum 7 percent stop-loss point.

Entry is the most important aspect of O'Neil's method. And if you get in a stock, make a quick 20% and get out, O'Neil says the thing to do is not bitch about the money you left on the table when you see it go even higher.

The secret to winning in the stock market does not include being right all the time. In fact, you should be able to win even if you are right only half the time. The key is to lose the least amount of money possible when you are wrong. I make it a rule never to lose more than a a maximum of 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market--no second guessing, no hesitation.

So then Schwager excerpts the 18 mistakes that investors make from O'Neil's book. I'm not going to reproduce them here, that would be boring. Instead, go buy and read O'Neil's book.

It's a book that every stock trader should definitely own.

BLOG NOTE: Because the O'Neil interview was rather short I decided to publish this today, and tomorrow or Wednesday I'll publish the David Ryan interview.


Complacent Panda said...

"Entry is the most important aspect of O'Neil's method. And if you get in a stock, make a quick 20% and get out, O'Neil says the thing to do is not bitch about the money you left on the table when you see it go even higher."

Definitely a must. If you make money, be happy. If you could have made more money, well, you will make more money if you keep making 20% trades. Take a breather. You're here to make money, not predict the future.

David said...

Sounds cool. Actually, I've been meaning to read the William O'Neal books, and I know I have one of those on my ever-expanding reading list.

I really enjoyed the Market Wizards series, read three of them last spring (when I decided that I needed to learn more!) including the interesting, but somewhat overlooked, "Stock Market Wizards" book.

P.S., Michael Steinhardt also had an interview in Hedge Hunters by Kathleen Burton.

The book is not bad, and there are some interesting things in there but I didn't find it to be anywhere near as interesting as Drobny's "Inside the House of Money" (which was kind of a Market Wizards-type profile of various hedge fund managers for those who haven't seen it).

Dinosaur Trader said...

No, I've never heard of that book, "Inside the House of Money" but it sounds interesting.

But definitely pick up How to Make Money In Stocks... it's a must-read for stock people.



David said...

Cool, thanks DT. I will bump it up on my list :)

Anonymous said...

inside house of money good book - really enjoyed it.

o'neil a republican? is that why you canceled? seems kinda silly

so much political anger contained on a surf board in s jerz

Dinosaur Trader said...

No anger... and the editorials weren't just "Republican" they were written by neo-con types. I have no patience for that shit.


Anonymous said...

ah democracy and free speech for everyone, except those that disagree w/ you

Dinosaur Trader said...

No, dick.

I'm not saying shut them down. I'm saying I refuse to subscribe. That's me putting my dollars where my mouth is... or, free speech.