William J. O’Neil is well-known as the founder of Investors Business Daily and the author of the book called, “How to Make Money in Stocks: A Winning System in Good Times and Bad.” The book sets forth his investment methodology called CANSLIM. CANSLIM is primarily a momentum- and trend-following approach that considers both fundamentals and technical conditions.
O’Neil’s investment system was a major step in the evolution of trend following and built on the work of Jesse Livermore, who is considered by some as the greatest trader ever. Nicolas Darvis’ “box” system was outlined in his book, “How I Made $2,000,000 in the Stock Market.”
O’Neil’s methodology is one of the better approaches to the market for individual investors. It doesn’t bother with issues like the Modern Portfolio Theory or asset allocation. It is a stock-picking system that is highly reactive to overall market conditions.
I’ve incorporated a number of elements of O’Neil’s market philosophy into my own trading. The two primary concepts that I embrace are.
First, forget prediction and focus on reacting to market conditions. In the IBD market-timing system, O’Neil does not change his market outlook until there is an actual change in price action. There is no attempt at calling tops or bottoms. Tops require distribution days and other technical factors. Bottoms require strong moves on good volume and follow-through.
Second, O’Neill is not a purely technical trader. His system considers fundamentals and looks for strong revenue and earnings per share growth. But he defers to pricing action: No matter how strong a stock’s fundamentals might be, he doesn’t want to own it if the price action is weak.
Here are some quotes from O’Neil that provide further insight into his market approach, followed by my commentary:
The first thing I learned about how to get superior performance is not to buy stocks that are near their lows, but to buy stocks that are coming out of broad bases and beginning to make new highs … … It…