How to Make Money in Stocks Summary

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William J. O’Neil's How to Make Money in Stocks provides a practical, systematic approach to stock investing.

The book emphasizes identifying high-growth companies exhibiting specific characteristics and using technical analysis to time market entries and exits.

This guide aims to equip readers with the tools to navigate the stock market successfully.

Learn to invest wisely; understand how stocks behave and avoid common mistakes. Study successful companies' past performance to predict future winners.

Invest in promising companies with strong growth, new products, and high demand. Use charts; they are your friends.

Carefully examine the provided charts of successful companies. Identify recurring patterns to predict future stock market winners.

Learn to recognize buying and selling signals within these patterns. This skill, combined with fundamental analysis, will improve your investment decisions.

Sam’s Note: Inside the book are 100+ charts to examine in this chapter and others.

Use stock charts; they're like X-rays for your investments, showing you when to buy and sell. Don't invest blindly; learn to read the patterns.

Study chart patterns like "cups with handles" and "double bottoms." Recognize when a stock shows strength and when it's weakening.

Prioritize stocks showing significant earnings growth—at least 20%, ideally much more—compared to the same quarter last year. This is key to spotting future winners.

Focus on companies with accelerating earnings growth, supported by strong sales increases. Avoid companies with flat or declining earnings.

Demand consistent annual earnings growth (25% or more) over the past three years from your chosen stocks. This shows long-term potential.

Prioritize companies with substantial current quarterly earnings increases. Don't let low P/E ratios fool you; focus on earnings growth.

Identify companies launching revolutionary new products or undergoing positive management changes. These are potential market leaders.

Buy stocks breaking out from solid chart patterns, ideally at or near new highs. Avoid stocks significantly above their breakout point.

Favor stocks with fewer shares outstanding for better price performance. Consider the "floating supply" and management ownership.

Analyze daily trading volume: increased volume during price rallies and decreased volume during pullbacks are positive signs. Use charts!

Focus your investments on the top-performing stocks within strong industry groups; avoid "sympathy plays." These leaders show superior growth.

Identify market leaders using relative strength ratings (RS). Aim for stocks with ratings of 80 or higher, ideally in the 90s. Sell laggards promptly.

Seek stocks with increasing institutional ownership, especially from high-performing funds. This shows strong market interest.

Avoid stocks with excessive institutional ownership ("overowned"); these may be at risk of significant price declines.

Accurately determine market direction (bull or bear) by analyzing major market indexes' daily price and volume changes. This is crucial.

Learn to identify market tops and bottoms using volume patterns and the behavior of leading stocks. Avoid emotional decision-making.

Establish a firm rule to limit losses to 7-8% of your initial investment cost. Sell immediately when this threshold is reached.

Recognize that losses are incurred when prices drop, not only upon selling. Maintain objectivity; don't let emotions cloud judgment.

Develop a disciplined profit-taking strategy; sell winning stocks while they're strong, ideally around a 20% gain (adjust for exceptionally strong, fast movers).

Set a firm loss-cutting limit (7-8%), selling immediately when a stock drops below this threshold. Avoid averaging down.

Limit your portfolio to a manageable number of stocks (4-5 for larger portfolios, fewer for smaller ones). Focus on quality over quantity.

Avoid overly complex investments like day trading, options, futures, and warrants unless you have extensive experience. Prioritize well-researched stocks.

1. Stubbornly holding onto your losses when they are very small and reasonable.

2. Buying on the way down in price, thus ensuring miserable results.

3. Averaging down in price rather than averaging up when buying.

4. Not learning to use charts and being afraid to buy stocks that are going into new high ground off sound bases.

5. Never getting out of the starting gate properly because of poor selection criteria and not knowing exactly what to look for in a successful company.

6. Not having specific general market rules to tell when a correction in the market is beginning or when a market decline is most likely over and a new uptrend is confirmed.

7. Not following your buy and sell rules, causing you to make an increased number of mistakes.

8. Concentrating your effort on what to buy and, once the buy decision is made, not understanding when or under what conditions the stock must be sold.

9. Failing to understand the importance of buying high-quality companies with good institutional sponsorship and the importance of learning how to use charts to significantly improve selection and timing.

10. Buying more shares of low-priced stocks rather than fewer shares of higher-priced stocks.

11. Buying on tips, rumors, split announcements, and other news events; stories; advisory-service recommendations; or opinions you hear from other people or from supposed market experts on TV.

12. Selecting second-rate stocks because of dividends or low price/earnings ratios.

13. Wanting to make a quick and easy buck.

14. Buying old names you’re familiar with.

15. Not being able to recognize (and follow) good information and advice.

16. Cashing in small, easy-to-take profits while holding the losers.

17. Worrying way too much about taxes and commissions.

18. Speculating too heavily in options or futures because you see them as a way to get rich quick.

19. Rarely transacting “at the market,” preferring instead to put price limits on buy and sell orders.

20. Not being able to make up your mind when a decision needs to be made.

21. Not looking at stocks objectively.

Start small; consistent application of sound investment principles can yield substantial long-term gains, even from modest initial capital.

Study historical examples of successful investments; recognize recurring patterns to improve your stock selection and timing. Patience is key.

Identify leading industry groups; stocks within these outperform others. Focus your search on top-performing industry groups.

Use industry group relative strength ratings to identify strong sectors. Monitor new highs lists and mutual fund performance for additional insights.

Utilize Investor's Business Daily (IBD) tools to identify strong stocks: focus on high EPS, RS, SMR, and Accumulation/Distribution ratings.

Regularly review IBD's market analysis ("The Big Picture"), industry rankings, and stock tables to refine your investment strategy and timing.

Regularly review stock charts to assess whether stocks are forming healthy bases or are overextended. Avoid chasing stocks that have already made large gains.

Develop a disciplined approach to gathering information; avoid relying on unreliable sources like rumors or tips. Focus on proven data and your own analysis.

Invest in a top-performing domestic growth-stock mutual fund for the long term (10-15 years or more), reinvesting all distributions.

Regularly review your fund's performance relative to others and consider adding to your position during significant market downturns.

Evaluate institutional money managers based on their long-term performance (3-5 years or more), considering both up and down markets. Diversify among managers with differing strategies.

Avoid common institutional pitfalls: over-reliance on analysts' opinions, outdated investment philosophies (like "value" investing focused solely on low P/E ratios), and excessive diversification.

Prioritize stocks meeting specific criteria: strong earnings growth (past three years and recent quarters), high ROE, accelerating sales, and superior ratings (EPS, RS, SMR).

Utilize charts to identify ideal buy points and follow disciplined loss-cutting (7-8%) and profit-taking strategies. Avoid emotional decisions.

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