This is a preview of the Shortform book summary of How to Make Money in Stocks by William J. O'Neil.
Read Full Summary

1-Page Summary1-Page Book Summary of How to Make Money in Stocks

The investment strategy known as CAN SLIM

O'Neil's CAN SLIM strategy is a validated approach for pinpointing stocks with strong performance and maximizing investment gains. The method combines evaluating a company's significant earnings growth with observing strong patterns in its share value, while simultaneously aiming to minimize possible hazards.

Analyzing the patterns within stock charts to select stocks.

Before making an investment in a firm, O'Neil recommends analyzing the company's historical stock performance and fluctuations in its share price by examining its trading history. This technique assists in identifying nascent trends and determining the optimal moments for transaction decisions. Following an initial surge in value, the stock price undergoes a period of correction and stabilization, referred to as "bases." Analyzing patterns in the stock market provides clues about future movements, enabling investors to determine if the timing is right for purchasing or if the present stock price is inflated, potentially resulting in significant hazards.

Identifying the best times to enter the market by observing patterns in the charts that mimic the outline of a cup with a handle.

William J. O'Neil considers the cup-with-handle pattern to be a significant and reliable indicator for monitoring stock price trends. The pricing pattern of the stock resembles a side-view of a cup with a handle. This pattern often persists for a period spanning three to six months. The adjustment and stabilization of the stock have weeded out the less committed investors, setting the stage for a potential increase.

The most effective patterns resembling a "cup with handle" emerge following a distinct ascent of at least 30%, marked by a significant number of transactions during the uptrend and a rounded base that allows for a standard market pullback. The uppermost part of the structure typically evolves into the pattern's handle, marked by a reduction in price along with a decrease in trading volume and a downward direction. Seek out a notable surge in trading volume, which should be considerably higher than usual, when the stock advances beyond its handle's peak, signaling strong buyer interest.

Recognizing unfavorable base patterns to avert potential economic losses.

Understanding that the "cup with handle" configuration often emerges in stocks that outperform is crucial, yet not all formations carry equal significance. Distinguishing between dependable and undependable patterns is crucial to avoid costly buying mistakes. O'Neil recommends avoiding specific formations, notably those with a "wedging handle," which are identified by broad fluctuations in price and emerge following minimal trading activity.

The handle of the cup is characterized by an upward-sloping lower trendline. A stock that hasn't undergone the requisite adjustment in price is more likely to falter in its attempt to gain value. Shares that display volatile and inconsistent price behavior are more prone to failure, as such erratic patterns suggest instability in their valuation and a lack of steady trends that could signify the stock is being accumulated. Other patterns that are not reliable include formations such as triple bottoms, head-and-shoulder bottoms, and bases that have not developed sufficiently, typically those that have formed over a period shorter than seven to eight weeks. Avoid buying shares when they first surge in price, particularly during periods when the stock market is in decline.

Discerning the best times to buy by observing specific configurations in stock charts indicative of substantial buying activity from major investors.

O'Neil recommends buying shares when they begin to rise in value after a period of stable prices and the overall market trend is ascending. Investor engagement should markedly rise, typically by a substantial margin in the range of forty to fifty percent, signaling that key investors are aggressively purchasing stock. It is wise to buy stocks as they exceed previous highs, but it's important to avoid buying them if they have risen beyond 5% of the recommended buy point.

William J. O'Neil highlights the best time to buy stocks, characterizing it as the moment when a stock surpasses a significant threshold or encounters minimal opposition, an idea first put forth by a notable trader from the past. A significant change in the stock's value might emerge at this juncture, possibly triggering a major trend. Ensure you avoid buying stocks prematurely or at a price that's considerably above the planned entry level, as this could suggest that their value has increased too much and they may be more susceptible to a drop.

Grasping the essential elements that drive market leadership.

O'Neil emphasizes not only chart patterns but also the importance of fundamental factors, particularly strong earnings growth, which is the primary driver of stock price movements. Companies exhibiting a sustained high return on equity along with significant revenue growth may signal their increasing dominance in the market.

Earnings growth is the main driver behind fluctuations in stock prices.

O'Neil suggests choosing stocks that have demonstrated a considerable increase in earnings per share over the most recent two or three quarters. To make informed investment decisions in stocks, one should recognize that the most impressive surges in stock prices typically follow a phase of accelerated profit gains. Seek out businesses that have shown significant earnings expansion, particularly those with profit increases ranging from 40 to 500 percent or more, especially during strong market trends.

A steady increase in yearly profits.

To ensure that the increase in earnings is consistent and not just a one-time event, one should carefully examine the company's track record of annual sales growth. O'Neil recommends looking for businesses that have shown at least three...

Want to learn the ideas in How to Make Money in Stocks better than ever?

Unlock the full book summary of How to Make Money in Stocks by signing up for Shortform.

Shortform summaries help you learn 10x better by:

  • Being 100% clear and logical: you learn complicated ideas, explained simply
  • Adding original insights and analysis, expanding on the book
  • Interactive exercises: apply the book's ideas to your own life with our educators' guidance.
READ FULL SUMMARY OF HOW TO MAKE MONEY IN STOCKS

Here's a preview of the rest of Shortform's How to Make Money in Stocks summary:

How to Make Money in Stocks Summary Key Criteria for Identifying Successful Shares

An adept investor must possess the skill to identify and select only the most exceptional companies. Investing in a company's shares should be based on comprehensive analysis rather than solely on the affordability of the stock, the prominence of the company's brand, recommendations from friends, or favorable media reports. To maximize your chances of picking winners, you need to identify those companies with strong earnings power, consistent sales growth, and a dynamic management team that is continually innovating.

Analyzing the consistent growth in quarterly earnings.

The investment strategy formulated by O'Neil emphasizes the importance of strong earnings, especially the growth of earnings per share each quarter, which is deemed essential in choosing stocks. To properly evaluate a company's potential for expansion, one should compare the earnings of the latest quarter with the same quarter from the prior year.

The crucial importance of swift increases in profits for boosting the value of stocks.

Companies that announce significant increases in quarterly profits, often exceeding the typical benchmark of 10% to 12%, usually provide outstanding products or services...

Try Shortform for free

Read full summary of How to Make Money in Stocks

Sign up for free

How to Make Money in Stocks Summary Alternative Investment Vehicles and Their Considerations

There are many tactics available for handling and enhancing the wealth you've worked hard to accumulate. However, O'Neil astutely emphasizes his focus on specialization, suggesting that trying to become proficient in all areas seldom results in triumph.

Advantages and Disadvantages of Collective Investment Schemes

Mutual funds present a compelling choice for beginner investors as they benefit from professional management, offer a diverse range of investment opportunities, and streamline the process of investing.

The advantages include skilled managers who proficiently manage the allocation of funds and the spread of investment risks, as well as the potential for consistent growth over a period.

By investing in a mutual fund, you essentially hire a professional to oversee your portfolio of investments. O'Neil advises selecting a fund that has demonstrated exceptional performance over the last three to five years. Opt for a collective investment scheme that demonstrates steady expansion, aiming for an annual appreciation rate of 15% to 20%, and that has surpassed most of its counterparts in the United States over the previous year. He recommends plowing back your...

How to Make Money in Stocks

Additional Materials

Clarifications

  • The CAN SLIM strategy, developed by William J. O'Neil, is an investment approach that focuses on identifying stocks with strong growth potential. It combines fundamental and technical analysis to pinpoint companies with robust earnings growth and strong stock price momentum. The strategy emphasizes buying stocks as they break out to new highs and cutting losses short to protect capital. CAN SLIM also considers market trends and the behavior of institutional investors to make informed investment decisions.
  • The cup-with-handle pattern is a bullish continuation pattern in stock analysis. It consists of a cup-shaped consolidation followed by a smaller, downward price movement forming the handle. This pattern typically signals a potential upward price movement after a period of consolidation. Traders often look for increased volume as the stock breaks out above the handle's resistance level.
  • Identifying unfavorable base patterns involves recognizing stock chart formations that suggest potential risks or poor performance, such as "wedging handles" characterized by broad price fluctuations and minimal trading activity. These patterns can indicate instability in a stock's valuation...

Counterarguments

  • The CAN SLIM strategy, while popular, may not be suitable for all investors, especially those with a lower risk tolerance or those looking for long-term, passive investment strategies.
  • Analyzing stock charts and patterns can be subjective, and the interpretation of these patterns may not always accurately predict future stock movements.
  • The "cup with handle" pattern and other chart patterns may not always lead to the expected outcomes, as stock prices are influenced by a multitude of unpredictable factors.
  • The strategy's focus on buying stocks during an uptrend may lead to buying at a high price, which could increase the risk if the market reverses.
  • The emphasis on earnings growth as the main driver of stock prices may overlook other important factors such as industry trends, management decisions, and macroeconomic conditions.
  • The strategy's reliance on past...

Get access to the context and additional materials

So you can understand the full picture and form your own opinion.
Get access for free

What Our Readers Say

This is the best summary of How to Win Friends and Influence People I've ever read. The way you explained the ideas and connected them to other books was amazing.
Learn more about our summaries →