Wednesday, December 20, 2006

How to make money in stocks (William O'Neil) 0 comments

The tacky front cover of this book as well as its rather mundane title are hardly appealing features to the casual book browser, but this is actually one of the investment bestsellers and probably one of the most comprehensive books on pure stock investing around.

O'Neil's investment style is definitely not classical value investing Graham cigar-butt style, but his system has worked well for him (see "Market Wizards"). Some time back there were several online forummers on the various local stock forums who swore by his CANSLIM system. A writeup on the system comprises the first of three sections in this book.

CANSLIM basically is an acronym for the seven key factors that O'Neil watches for in his stock selection and asset allocation, as listed below:
C-Current quarterly earnings per share
A-Annual (significant) earnings increases
N- New products/management/stock price highs
S-Supply & demand of shares + big volume
L-Leader/laggard (he advocates the leaders)
I-Institutional sponsorship
M-Market direction

He covers each of these as an individual chapter. The gist of his system is to focus on near-term performance as well as growth drivers, and then layered on top of that one has to consider the intangibles --- the market factors which include technicals, share demand/supply and the quality of the players in the stock (institutions/retail?). All this is wrapped up inside an acute monitoring of market direction to constitute a dynamic buy-and-sell (some may call it trading) strategy, as opposed to the buy-and-hold approach.

The next two sections focus on his views on proper investment behaviour, with one section for those just starting up and the next for more seasoned veterans. The level of difficulty doesn't vary much from one section to the next: he merely talks about different aspects of investing. For example, in the section for beginners, he ruminates on typical investor mistakes (eg. focusing on low PEs, profit-taking too early, being penny-wise pound-foolish) and chooses to focus on a few important aspects: when to sell to cut loss, when to sell to take profit (it is significant that he divides selling into the above two chapters), whether to diversify and lastly, how to read charts. The later section discusses sector investing and also explores the various alternative equities-related investment instruments such as options, IPOs, foreign stocks, mutual funds. To me, one should read selectively, as certain parts are of little interest. Recommended parts to read would be the writeups on selling, reading chart patterns and sector investing.

In particular, the chapter on chart reading is insightful. Over the years my viewpoint on charting has evolved from being purely cynical to acceptance of its use in certain areas. As I have explained in my writeup on technical analysis, the fundamental and technical analysis routes can be complementary and the issue for the investor is that he has limited time constraint and hence has to be selective. The charts provide a route to gauging the pulse and psychology behind a stock, and it is clear that O'Neil believes these are as important as the fundamentals itself (looking at his CANSLIM methodology). My chart reading is typically a simple process, amounting to no more than observation of the price-volume trends, the moving average and the relative strength levels. O'Neil is a veteran chart-reader, and technical analysis constitutes a major portion of his stock-picking techniques. For me as one with a fundamental bias, it is easier to accept his integrated fundamental-technical (combined-arms) approach than a pure technical analysis strategy. The book introduced some interesting chart patterns and more importantly, provided sound reasoning behind such pattern formation, logic which is difficult to defy. I have added the cup-and-handle chart pattern to my arsenal of stock-picking monitoring techniques now :-)




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