How to make money in stocks - good times and bad - O Neil

Ch1 'C' QoQ eps change

• 5 - 10% is not enough to fuel change, it needs to be above 25%
• Of all big gainers between 1970 and 1982
• Median was 34%
• Avg was 90%
• 76% were over 10%
• 75% showed eps increases avg 70% in the last report before the stocks began a major price advance
• Only 2% of stocks show this kind of gain.  Success is built on dreams
• Sales and Eps should be similar (so profit margins are still around the same)
• Omit 1 time gains
• Limit your search to QoQ of > 20%.  Apply this to one or 2 previous quarters
• Look for accelerating eps growth
• 2 qtrs of major eps decleration may mean trouble (ie: 50% to 15%)
• Industry should have at least 1 other stock showing good eps
• 4 weeks Before eps report, stocks participants start making trades for the eps report.  It may give you a clue

Ch2 'A' Annual Earnings Increases

• Each eps should be greater than prior years, 1 may be done as long as it quickly recovers
• Look  for 25% to 50%
• Stability of eps over the 5 years
• PE ratio mostly get depressed during bear markets, but the avg was 20+.  

Ch3 'N' New product, management, high

• 95% of big winners had a major new product / service, new management, or important change in their industry
• Buy on the breakout.  The stock should be close to or actually making a new high after undergoing a price correction and consolidation.  Consolidation can last from 7 - 8 weeks (normal) to 15 months.  As it emerges from this base, it should be bought just as it is starting to breakout.
• Avoid buying more than 5 - 10% off the base

Ch4 'S' Supply & Demand

• Low float is better than big float
• Large % ownership by top mangement
• Today's hot product will find sales slipping in 3 years, so management must be an entrepreneurial style
• Not many layers between CEO and customer
• small medium companies
• More than 95% of companies had fewer than 25M shares during their greatest period of eps improvement.  Avg was 11.8M and median was 4.6M between 1970 and 1982
• 3 to 1 and 5 to 1 stock splits after huge run ups make institutions sell (this doesn't seem relevant)
• Comapanies buying their stock in the open market
• Reducing debt to equity over last 2 to 3 years
• Small cap with less liquidity and no institutional sponsorship / ownership should be avoided.
• Trading volume should be light on corrections and increase significantly on rallies (50% to 100% more)

Ch 5 'L' Leader or Laggard

• Most people buy stocks they are familiar and comfortable with, like an old friend.  These will be the slowpokes rather than the leaders in the stock market.
• Buy the leading security in the industry you want to get in among the 2 or 3 best in a group
• Relative strength > 70 mean it outperformed 70% of the stocks in a comparison group over the last 6 - 12 months
• Avg for best performing equitites between 1953 and 1993 rated 87 before major increase began.
• Investors Business Daily has these numbers
• Look for charts in a bull flag or trading range and buy near the top of the range, but not more than 5 - 10% out of the range
• ...this doesn't seem like a good idea
• Once a general market decline is over, the stocks that bounce back to new highs first will generally be the leaders.

Ch. 6 'I' Institutional Sponsorship goes a long way

• At least 3 - 10 mutual fund sponsors, corporate pension funds, insurance companies, large investment counselors, hedge funds, bank trust dept, education institutions.  
• Certain mutual funds are better than others, so these will help define your quality of sponsorship
• Over owned by institutions may mean the largest moves are over

Ch. 7 'M' Market Direction

• Learn to interpret daily price and volume chart of general market averages.  You want to be on the correct side of the trend of the market, or 3 of your 4 positions will lose money.
• Market top
• General market tops are later than individual stock tops
• poor market rallies and rally failures in the SPX will occur
• Discount Rate
• When it is successively raised 3 times usually marks beginning of recession, when it is lowered usually signal end of bear market
• Wait for adam eve bottom
• Stages of stock market
• Economic indicators bottom AFTER the stock market, thus are a poor choice for stock market returns
• Big money is in the 1st 2 years.  After this expect occasionally 8% to 15% drops
• Railroad equipment, machinery, and other capital good industries are late moves in the business / stock market cycle
• Bull markets begin when institutional cash positions are higher than normal and end when cash positions are lower than normal

Ch. 9 When to Sell if your selection / timing is wrong

• After each qtr focus on the relative returns of each investment in your portfolio, not the price you paid for it.
• When you buy a stock if it is down 7 - 8% from your purchase price you should cut your loss.  However dont sell your winners if they are down 7 to 8% from their highs.  You must give your winners room to run.
• Don't avg down, don't worry about how many potential "turkey's" you had.  Your "red dress" has now turned into a "yellow one".  Get rid of that "yellow dress" and go find the "red dress"
• Self confidence
• holding losers makes you less confident.  If you cut your losses quickly and with discipline, you make the hardest decisions without wavering.
• There are no good stocks, they are all bad - unless they go up

Ch. 10 When to sell and take your profit

• Most good investors / hedge fund managers sell on the way up.  They dont buy at the low and sell at the top
• Jesse Livermore
• Pyramid and buy more as it goes up.  You want to make a lot of money when you're right, and cut your loss quickly when wrong
• Revised profit plan
• sell 20% profits (except with the most power of all stocks.  If it goes up 20% in < 8 weeks, then hold at least 8 weeks.  If it is still very strong, you will want to hold for 6 months)...Take your 8% loss
• buy exactly at the breakout pivot buy point, do not pyramid 5% beyond the buy point
• Selling pointers
• Buy at the right time.  This will solve half your problems
• Buy off a proper base structure, do not chase or pyramid when the price is too extended past your buy point.  You will be able to sit through most corrections
• Beware of big block selling.  The best stocks can have sharp selloffs for a few days or a week.  You shouldn't get shaken out in a normal pullback
• If the price is extended from a proper base, its price closes for a larger increase than on any previous up days, watch out! this climax is at or very close to the peak
• Ultimate top may occur on the heaviest volume day
• Big investors like to sell on big run ups when there is liquidity
• new highs on low volume means there is temporarily no demand for that level and selling may soon overcome
• after and advance, heavy volume w/o further upside price movement means distribution
• Look for clear reversal days (low at the previous days low after an up day on several days.)
• Sell if a stock breaks badly
• Consider selling  a stock if it takes off for a good advance for several weeks and then completely retraces the advance
• When qtrly eps increase slowly or decline for 2 consecutive qtrs, in most cases sell
• Consider selling if there is no confirming strength by another important member of the same group
• If a stock declines 8% from its peak, check if it is just a normal pullback.  If it declines 12% to 15%, you may want to sell
• If a stock has made an extended advance, and suddenly makes its greatest 1 day drop since the beginning of the move, consider selling if confirmed by other signals
• When you see heavy selling near the top, the next recovery will either follow through on weak volume, show poor price recovery, or last a short number of days.  Sell on the 2nd or 3rd day of the poor rally.  It will be the last good chance to sell
• Sell a stock if it closes the end of the week below major lon term uptrend line or breaks key support on overwhelming volume
• Number of up days vs down will change will change after stock starts down
• Wait for 2nd confirmation of major changes to market avgs.  Don't buy back stocks you just sold because they are cheaper
• Learn you mistakes by plotting past trades on charts
• Sell quickly before it becomes completely clear a stock should be sold.  Selling after an obvious support level break could be a poor decision.
• In a few cases you should sell a the trend channel line overshoot
• Sell when your stock makes a new high in price of it's 3rd of 4th stage
• Sell on new highs off a wide and loose erratic chart price formation
• When to be patient
• Have a line on ur chart below your buy point where you must sell if price is touched.  Raise this as the prices move below the low of the 1st normal correction.  Don't move too close because any weakness will stop you out.  If your stock increases 15% after purchase, move the sell line up to less than 5% below pivot purchase
• Objective is to buy the best stock with the best eps at exactly the right time and hold until you've been proven right or wrong.  Give 13 weeks after your first purchase before you conclude that it was a faulty selection (if not stopped out first)
• Any stock up 20% should not be allowed to drop into a loss.
• Always pay attention to the general market.  If the markets are topping, most breakouts will fail
• Major advances take time to complete.  Dont take profits during the 1st 8 weeks unless there is serious trouble or there is a rapid run up on a split.  If the stock shows 20% gain in 4 or 5 weeks, it is capable of a 100% to 200% move.  Only go for these long term moves after you are up for the year
• Try to hold through the 1st correction if you already have a profit
• Investors who can be right and sit tight are uncommon.  It takes time for a stock to make a  large gain

Ch 11 - Diversify, Invest for Long Pull, Margin, Short

• Portfolio > 3M should have 6 to 7 stocks.  Most people should have 4 to 5.
• No well run portfolio should have losses carried for more than 6 months
• Use margin after you have experience and you're young and still working.
• Margin should never be 100% all the time, you must carefully choose when to use margin
• Never add cash to meet margin call.  Sell the position
• Real Estate - buy it at the right time
• Dont buy in:
• Area that is not growing or deteriorating
• At inflated prices after several boom  years and just before a severe economic setback in the economy or geographic area where the real estate is (major industry layoffs or closing of a plant).  
• Mortgage is greater than the rent
• Frequent natural disasters

Ch 15 Patterns

• Cup and Handle
• 7 to 65 weeks, peak to low point is 12% - 33%
• Shouldn't correct more than 2.5x the general market
• Handle is 1 to 2 weeks and has a price shakeout, volume should be very low on the pullback phase of the handle
• Should consolidate above 200dMA
• Handles that don't properly shakeout (10% - 15%) are prone to failure
• Pivot Point
• Line of least resistance should be broken with volume at least 50% > normal.
• If you try to buy before this point, the stock will never get to the buy point.  If you buy 5 - 10% after you are too late
• Objective is to buy a the right time before the move, not the cheapest price
• Not necessarily the old high, could be a trendline from the old high
• Double Bottoms
• Likes when 2nd bottom is lower than 1st to get a shakeout
• Flat Base
• Usually after a run up from cup w/ handle, saucer, or double bottom.  Moves sideways for 6 - 7 weeks and does not correct more than 10% - 15%.
• Tight Flag
• Occurs after 100% move in a short period of time
• Corrects sideways w/ no more than 10% - 20% decline.
• Only occurs a couple times / year
• Overhead supply
• After a run up and significant pullback there is now overhead supply.  When the stock moves up again, you have to be able to tell where the overhead supply is using the charts

Ch. 16 - How to make money reading financial pages

• Investors Business Daily 'New America' Articles show new companies
• Find stocks in the top 80% of all performers
• Look for large volume flowing into stocks
• Review leading industries.  S&P classificiations of industries is not correct, you should use revere

Ch 18 - picking the best industry groups / subgroups / sectors

• There are many more industry sub groups that are actually related than those categorized by S&P.  You should use these sub groups to find the performance rather than the industry group.
• Only pick industries of the future
• A stock's weakness can spill over to the rest of the group, so be aware
• especially the best stock in the sector
• avoid buying stocks unless there is one other important stock in the same group that shows strength and attractiveness
• this doesn't apply to companies that are completely unique (he gives Disney as an example)
• 
  
• Follow on stocks
• If oil prices rise, oil stocks go up, but so do oil service stocks.
• When new efficient jet aircraft took off, airline stocks did well.  So did hotel stocks.
• Cousin Theory
• Suppliers of the main group will do well
• Boeing sold new jet lines, and its Monogram (sold toilets for airplanes) did well
• Fleetwood (RVs) helped Textone because it supplied vinyl clad paneling and cabinets
• Defensive stock cues
• If you see increased buying of defensive stocks after a couple years of bull market, it may indicate a near top.
• Gold, Silver, Tobacco, Foods, Grocery, Electric / Telephone Utilities
• Prolonged weakness in the Utility Average could also forecast increasing interest rates and bear market ahead
• Look at $spx, $util, $tran in stock charts
• Stocks require a wall of worry, doubt, and disbelief to climb
• Generally masses are wrong, so are investment managers
• Stock market is about 8 to 9 months ahead of economic indicators
• Fed, Tax Policy, and Interest rates are most important
• 
  

Ch 20 - Most Common Mistakes

• Most investors do not use a good selection criteria
• Miserable results will follow buying on the way down in price
• Even Worse is to avg down your buying than average up
• Low priced stocks (< $10)are low because they are inferior in the past or something wrong happened recently
• 1st time speculators want to make a killing too fast without doing the necessary study and preparation
• Don't buy on tips, rumors, stories, or advisory service recommendations.  People are willing to risk their money on what someone else says instead of knowing for sure what they are doing themselves.  
• Investors buy 2nd rate stocks because of dividends or low P/E ratios.  Dividends are not as important as EPS.  Low P/E is most likely because it is inferior
• People buy company names they are familiar with.  Many of the best stocks will be newer names you won't know well but could and should know if you do a little studying / research
• Most people don't know anything about the market, so their advice is probably worthless
• 98% of people are afraid to buy a stock that is beginning to go into new high ground, pricewise.  It just seems too high to them.
• The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable.  They could get out cheaply, but being emotionally involved and human, they keep waiting hoping until their loss gets much bigger and costs them dearly.
• Investors take profits too easily and hold their losers, they exact opposite of correct investment procedure
• Investors worry too much about taxes and commissions.  Key objective is to make a profit.
• Dont focus on short term options.  Don't sell naked options.  Focus on longer-term options
• Just use market orders, you are going for large gains not 1/8 and 1/4 of a point
• Most investors who are unable to buy or sell have no plan because they do not know what they are doing.  You need a plan, a set of principles
• Most investors cannot look at stocks objectively.  They have favorites, are always hoping, have personal opinions rather than paying attention to the opinion of the marketplace
• Investors are influenced by things that are not crucial - splits, increased dividends, news announcements, advisory recommendations

Parting Advice - Have courage, be positive, and don't even give up.  Anything is possible with hard work.  It can be done and your own determination to succeed is the most important element.

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