New Normal? For Stocks, More Like Old Normal, O'Neil Says

A lot of investors and strategists are spending a lot of time these days trying to envision what the investment landscape will look like when the economy and market settle down. But growth stock guru William O’Neil, the founder of Investor’s Business Daily, says talk of a new era of investing is off the mark.

“Actually, I think the market has reinforced almost every single thing we had in the book [his How to Make Money in Stocks, first published in 1988] years ago from the very first edition,” O’Neil tells MarketWatch’s Chuck Jaffe. “The market is driven by the law of supply and demand. That’s what makes the charts. People should learn to read stock charts. There are patterns that are exactly the same now as 20 years ago, 40 years ago, 60 years ago, 80 years ago that show when a stock is under accumulation. These patterns work, and we don’t have just a couple of cycles, we have 120 years of cycles … so to try to reinvent the wheel to say there will be some new system or some new rule, no.”

“People do not know history and they are trying to constantly come up with some secret things when the same things have been working. It’s earnings increases, new products, professional backing behind a stock, that runs it up when the product is selling. You’d like to think there is some new thing that would be created, but you have to understand what has really worked.”

O’Neil’s strategy is based largely on momentum and earnings growth. His CANSLIM methodology looks at seven criteria, Jaffe explains:

  • Current earnings (up at least 25%)
  • Annual earnings (up 25% or more in each of the past three years)
  • New products or services that should make a company a market leader
  • Supply & demand for the stock (trading volume increases as prices rise)
  • Leadership in its industry
  • Institutional ownership (mutual funds are buying)
  • Market indexes supporting the investment thesis

O’Neil says he also cuts ties with any stock when it falls 8% or more from when he buys it — something that protects against big losses, he says. Discipline, both in terms of the 8% rule and other parts of his buy and sell strategies, is key to his approach: “The honest reality is that most people don’t read books, have a hard time following rules, and find that these rules are contrary to human nature,” he says. “They would rather hang on and hope for a comeback than take a loss of 8%. The rules work, but the problem is that it’s contrary to what people want to do. … The key lesson here is that, after two terrible markets, you have to sit down and get serious about it and have sound rules that protect you.”

“There are great opportunities out there,” O’Neil adds, “but you have to understand how to take advantage of them and how to protect yourself to properly play this game. Otherwise, you’re going to get burned again and again.”

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