William J. O'Neil
 

Is an American investor and author. He is considered by many to be one of the best investors of our time, and it is said that he had a return of 5000% over a 25 year period. Over the years he has performed great accomplishments such as; starting his own brokerage firm, helping start the financial news company "Investor's Business Daily", becoming the youngest person to buy a place on the New York Stock Exchange, and more.  

He was also the inventor of CANSLIM (explained below), which was the basis for his success in the stock market. His bestseller; "How to Make Money in Stocks", tells the exact uses of his strategies, which you can find here:

Williams Strategy - CANSLIM

But enough about the person O'Neil, what was his strategy about? As mentioned above, he created a trading system called CANSLIM, which is an acronym and stands for;

  • C - Current quarterly EPS should be up at least 25% compared to a year ago. The higher the better.

  • A - Annual earnings shall increase by a minimum of 25% annually. Ideally, there should have been a growth of at least 20% in the last 3 to 5 years

  • N - New products, new management, and new heights in share price.

  • S - Availability and demand. Companies that have little availability of free shares on the market experience greater price increases when this is combined with high demand on high volume.

  • L - Leaders and latecomers. Hold on to stocks that are going strong, and sell those that are going badly.

  • M - Market direction. Three out of four stocks follow the trend of the market. Stay away from investing when the temporary trend of the market is poor.

CANSLIM was named by the American Association of Individual Investors as the investment with the best returns from 1998 to 2009. The strategy gave a return of 2763% over 12 years.

The key to success

According to William, hard work is the key to success. One of his most controversial pieces of advice is to forget the saying;  "buy low and sell high". He says this is completely wrong and that you should stop looking for shares on "sale".

According to his studies, stocks that seem to be overpriced and risky for many investors will usually go higher. Conversely, what looks cheap and low priced will usually go lower.

Another point he has is that individual investors can and should learn to "time" the market. And that's what the M in CANSLIM is trying to explain.

His first rule for investors has nothing to do with buying stocks. He says investors need to know when to sell and take the losses (before they get too big).

In his second book; "24 Essential Lessons for Investment Success". He explains that most investors have great difficulty admitting that they were wrong when the stock starts to fall in value, but that investors MUST overcome this feeling and sell anyway before the losses become too large. A link to the book can be found here:

The letters C and A are for earnings. O'Neil believes that stocks that have historically experienced a large increase in market value have a common feature. It is that they experience about a 70% increase in earnings before the price movement happens with the stock in the market.  

The letter N  says that there should be something new in the industry - a new product, service, or management. Which can give the company and the stock a little extra wind under the wings.

The letter S  should actually have been replaced with V for volume. He believes that you should monitor the volume of a stock, to see if people buy or sell the stock. The more shares that are outstanding, the more difficult it is to get the stock to move and deliver large changes in the price.  

The letter L  is that you should choose a company that is a leader in its industry. It does not have to be in size, but in quarterly and annual growth in profit and earnings. Preferably that they own a product that captures more market shares.

The letter I  Is looking at how the stock is viewed by funds and institutional investors. His rule of thumb is that a stock should be in the portfolio of a minimum of 10 institutions, and some of these should be organizations with good returns.

The letter M  thus stands for market direction. 3/4 of shares follow the market trend, it is therefore very important that you know which way the stock market is on. In his first book, he talks about how to time the market. This by using things like daily price, and "charts" from the most important and largest market indices to access market direction.

William J. O'Neil's 10 Principles in Trading ​

  • 1 - He has a rule to never lose more than 7% on any stock. If a stock he owns goes down by more than 7%, he will automatically sell it. With no hesitation or uncertainty around this choice.

  • 2 - His secret behind winning in the stock market is to lose as little as possible when you "are not right". Cut losses if the stock price and the market do not agree with your analysis and opinion.

  • 3 - He studied an enormous amount of historical stock graphs and trading books. He believes that 90% of all investors have done too little "homework".

  • 4 - Investing in latecomers is something he never/rarely does. His focus is on market leaders in their respective industries.

  • 5 - CANSLIM trading strategy leads to big gains and small losses. He believes that ordinary investors sell shares and take profits too early, as well as keep the losers for too long, which makes the losses large.

  • 6 - In most cases, he avoids selling/shorting stocks. The exception is when he sees that the market has developed into a downwards trend/correction.

  • 7 - The fundamental tells O'Neil WHAT to buy and the graphs tell WHEN to buy. The market leaders are not the largest companies, but the ones that deliver the best earnings, ROE, margin on profit, and increase in sales. It is then the price change of the stock in the graph that determines when it is to be traded and sold.

  • 8 - He believes that many investors do not know when to buy or sell. This is because they do not have a plan, a set of principles, or rules that can help them along the way. These things are something O'Neil has always had a clear opinion about before entering a trade

  • 9 - He always traded price changes, not his own opinions. O'Neil believes that the market tends to go the opposite of what the majority thinks, he, therefore, says that personal opinions are worthless. Facts and the market give you the answers you need.

  • 10 - The best way to look at demand and supply in a stock is to look at daily trading volume. When a stock goes down in price, you will see the volume dry up. This indicates that there is not much selling pressure on the share. When the stock goes up in price, you will see that the volume increases, which shows great interest and possibly represents institutional buyers of the stock.

CANSLIM is a detailed and for many a complicated system. Like all other growth investment strategies , the model uses growth in earnings as an indicator.

Growth investors do not focus on current values and capital in companies, but rather on earnings and growth potential. William J. O'Neil's strategy has undoubtedly proved to give good returns if used correctly. If you think CANSLIM seems exciting, it is recommended that you read his books, which are referred to above. You can also try to invest/trade after his principles, explained above.

It is important to note that an investor who follows CANSLIM becomes a more active investor than typical value investors who buy shares and hold them for several years. With Williams' strategy, things can change quickly and there are several things that come into play when you hold, buy or sell a current stock.

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