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William O'Neil Interview: How to Buy Winning Stocks

William O'Neil trading quote stocks stock market paradox

Investor's Business Daily founder and veteran stock trader, William O'Neil shared his trading methods and insights on buying winning stocks in an in-depth IBD radio interview.

Here are some highlights from William O'Neil's interview with IBD:

William O'Neil's interest in the stock market began when he started working as a young adult. 

"I say many times that I didn't get that much out of college. I didn't have much interest in the stock market until I graduated from college. When I got married, I had to look out into the future and get more serious. The investment world had some appeal and that's when I started studying it. I became a stock broker after I got out of the Air Force."  

He moved to Los Angeles and started work in a stock broker's office with twenty other guys. When their phone leads from ads didn't pan out, O'Neil would take the leads and drive down to visit the prospective customers in person.

"I'd get in the car and drive down... it might be to San Clemente. Well what else did I have to do at the very beginning? I'd say, 'I'm so and so with such and such' and I saw that you requested this information. Well, I happened to be in the area and thought I'd stop by. They'd so 'oh, fine' and invite me in... that's how I got started."

Bill name checks legendary speculators Gerald Loeb and Jesse Livermore as his greatest influences.

"Gerald Loeb had written the Battle For Investment Survival. He made several million dollars trading and pyramiding stocks as a young man in San Francisco. I actually met him in New York and he came down to L.A. one time and we met [here]. I always tried to meet with the ones I was impressed with.
The person who had an enormous reputation over the years, though it took some time for everybody to understand that, was Jesse Livermore. He was a really unique trader made and lost millions and his stories are great..."

"The one thing I learned is that there are only about 5 or 6 great [trading] books worth reading. Every professor in the country has written a book... and a bunch of other people. You want to find a book from someone that you know has really done well in the market, and read them!"

On the common threads between great traders and Jack Dreyfus.

"I think there's a certain amount of humility with top traders. You have to make enough mistakes and learn to overcome them. They [top traders] are market oriented and not steeped in theory. " 

"I noticed Jack Dreyfus [due to] the performance of the Dreyfus Fund. They were performing better than any of the other funds. I tried to figure out, "what is this guy doing that makes him outperform everyone?". I went back to New York and visited their office. He was a chartist. He was solely market oriented."

"That's when I realized charts are important. It started by knowing that Dreyfus was performing better and I wanted to find out how. I got 2 or 3 of his quarterly reports and I plotted out charts on all these things he owned. They all had chart patterns and he only bought things going to new high ground."

Obviously, O'Neil's study of Dreyfus' methods greatly influenced his trading and the creation of the CANSLIM system, especially as it came to finding stocks building technical bases and moving to new highs

William O'Neil IBD 1960s Stocks
William O'Neil and Co. in the 1960s via

Another key feature of William O'Neil's method is finding the winning stocks that are really growing their earnings and introducing innovative new products. How does he zero in on the very best stocks?

"Your objective is to find the strongest stock that could potentially triple in price. Charts are an easy way to look through hundreds of stocks. When I see a chart pattern that shows the stock is under accumulation, I look for big earnings and sales growth. I want to buy something where the earnings are up 40-50 per cent or 100 per cent..."

"It's not charts that make the stock go up. It's the big earnings and the new product."

What O'Neil looks for in winning stocks

"I want a base pattern, and it's not just the chart. I want the earnings and sales to be up. I want to understand the product. You've got all that to start with..." 

Now the market will tell you. This stock goes up 5 per cent while that one goes up 10 per cent. Well, the one that went up 10 per cent is the bigger leader. The market tells you this is the best stock."

How do you sit tight on the stocks that have the potential to be truly big winners?

"This is an important question. Go back on the last 5 or 10 years and see where you made the most money in stocks. I do not hold a lot of stocks for a long time. I've always like retail stocks and drug stocks, because I could understand them."

"The stocks that I'm sitting with are the ones I know and understand. You can go in any retail store and see if they have something unique and if there are a lot of cars in the parking lot [gives examples of Pic N' Save, Price Club, Home Depot]. And if it's working, they can expand in all these new cities."

What makes a trader successful? O'Neil answers from his experience with portfolio managers and traders he has known or worked with.

"I think you have to love the area that you're in and you have to be fascinated with the stock market. You're going to read all the books and devour all the info on the market and do your studying and get it down."

"If you've been in the market for a year or two, you begin to realize that you have to be a realist. It isn't what you think or feel or what you believe. When you make a mistake, fix it as soon as you can. The average loss should be 3 - 7 per cent. Then you go on to the next thing."

"It's not their opinion or their brilliance. You could take the brightest lawyer in town and he could lose his shirt in the stock market. You have to learn the elements of trading and execute them. If you've been in the stock market for any time, you will acquire some humility!"

On the importance of post-analysis in trading and learning from your mistakes.

"You've got to study what you did that worked and what didn't. I remember when I first devised my method and bought a bunch of stocks that went up. It never dawned on me that there was something missing. Well, I found out the hard way that you not only have to have buy rules, you also need to have sell rules."

"Everything is going to top at some point, so you have to [learn when] it's topping and get out. So I had to start all over again and figure out the sell rules. Trial and error is how I learned." 

"The biggest profit I made, back when I started and had nothing, was in Syntex. It went up four-fold in six months. It had The Pill, which was a very interesting, game changing new product. The three stocks I bought before, I had lost money on. If I had gotten discouraged and said, oh my gosh maybe I better slow down and not do this, I would have never had Syntex."

"You've got to keep on. You're gonna make mistakes, you're gonna have problems, but never quit."

If you'd like to check out more from William O'Neil, try his condensed book, The Successful Investor or his widely read (and more comprehensive) book, How to Make Money in Stocks (4th edition). 

Check out our related posts below on the trading methods of Jesse Livermore (cited by O'Neil as a prime influence). You'll also find some trading wisdom from growth stock trader and Market Wizard, Mark Minervini. Plus, a few thoughts on the importance of persistence in trading and in life.

Related posts:

1. Jesse Livermore: How to Trade in Stocks, 1940 ed. (pdf ebook)

2. Maximize Your Trading Gains, Not Wins: William Eckhardt Interview

3. Mark Minervini Interview: Why Traders Fail
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