How to Make Money in Stocks by William O Neil
This Month in Book club read we had this one old classic that discuss technical and fundamental analysis of stock investment with some great US stock examples. It gives a straight-forward methodology that you can implement on your own to recognize multi-bagger stocks especially growth stocks. Book talks mostly on Positional trading using CAN-SLIM methodology for selection of stocks coined by Author.
Below notes may include Indian stock name as an example. I personally loved the book as for satellite portfolio this will add value and help us to identify some growth stock which can become core stocks too.
9.5/10
- Stock chart must be checked if stock if stock is in a proper base or it’s extended
- Chart patterns are best to get the winners
- Cup and Handle Pattern
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Key Characteristics
-7- 65-week duration +
-Must have clear uptrend at least 30%
-Base should look more of U shape than V shape
-Some leaders can correct for 40-50% in a bull market. More than 50% have high failure chances
Handle characteristics
-Duration 2-7 weeks. Less week, has high failure rate
-Falling wedge. Rising or not falling wedge may fail as chances are weak hands hasn’t exited yet
-Volume dries up and High relative strength
-Forming above 10-week ema
-With no handle, stock has high prob of failing
-Handle should be in upper half of cup -
Finding Pivot Point
-Top of the cup
-Daily volume should start increasing
-Buy point within the range of 5-10% -
Double Bottom
Key Characteristics
-Match With W
-Continuous pattern and hence Must have clear uptrend at least 30%
-2nd Bottom of W match the price level of first bottom or undercut to create shakeout for weaker hands else prone to fail
-Pivot point is top of the middle peak of the W
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Flat Base or Square Box
-2nd stage base that occur after stock has advanced at least 20% or more from CPH, DB pattern
-Flat base must be at least 5-6 weeks within the range 10-15% tight bound
-If initial buy missed then, keep an eye here for entry point
-
High Tight Flags
-Rare
-Starts with 100-120% move in few weeks – 3-8 weeks
-And then sideways within range of 10-25% - 3-5 weeks
-Each earlier pattern works for each later pattern
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Some Erratic Behavior
-Handle shouldn’t cross more than 18% or below
-Wedges forming up
-If dept of the cup is too much
-Beware of buying stocks in prolonged bear market
-Keep an eye on volume dry up while handle is formed
-Reliable base is anything above 6 weeks
-Don’t buy if most of the weeks are in lower half of the base
-Bad relative strength even if the stock is breaking out -
C= Current Q EPS growth and Sales Growth
-Yearly QoQ EPS growth >25% or more, Greater than 50% is better
-Never compare with Previous quarter in same year due to seasonality the result could be distorted
-Strong Sales growth must also be there. 25%>
Examples below - Rajratan, Tata Elxsi -
A -Annual Earnings growth
-Higher EPS growth in last at least 3 years > 25% to 50%
-ROE >17%, Higher the better
-Best portfolio can be created during down market (Esp Core)
-Many growths leader in one market don’t repeat on next market
-PE ratio is end effect of accelerating earnings. PE is not the cause of super performance
-Never sell just because PE is high and never buy because PE is just less
Eg: Bigbloc, Deepak Fertilizer, Rajratan, Apl Apollo etc
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N- Newer Companies, Highs, Products, Management
-New Product or Services (Apl APollo)
-New Management CG Power
-New Industry Condition- Supply shortage, Price increase or new technology (Tata Elxsi, Shivalik bimetal or Rajratan)
-New Highs 52 or 26 week high, coming out of proper base (Many) -
S- Supply and Demand
-Price determined by Law of supply and demand
-Less the float better the chances of stock to perform
-Look for stocks where Promoter holding is high
-Look out for Stock Dilution or splits, frequency of that. 2:1 is better than 5:1
-Buybacks are good along with CANSLIM. Higher %age better
-Look for less Debt-to-equity stocks. Leverage is bad. Look for company reducing the debt
ATGL, Honeywell Automation, Whirlpool, NGL finechem
Risk – operator Driven possibility but use chart/technical to tread this
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L- Leader or Laggard
-Buy top 1,2 or 3 stocks in strong industry group
-It’s not necessary the Largest but best
-If in Portfolio, worst performers to be sold and winners keep adding
-Can be used by applying Relative strength
-Look for RS rating 80 and above
-Sell the laggard with 7-8%
Eg: De Nora, DHP, Rajratan, Elecon in May june 2022 -
I - Institutional Sponsorship
-Biggest source of demand are the institutions, MFs, MPS etc
-If Institutions are increasing participation in the near past
-Look for the quality of the funds along with increasing number of institutional ownerships
-Recent new position is more important instead old existing one
-Avoid over ownership too, as it can cause huge selling too
Eg: ASAHIINDIA, Deepak Fertilizer -
M- Market Direction
-All the parameters are right but this one is wrong then you are gone
-Analyse Market in three ways – Bull vs Bear, Which Stage it is in , early or late or Intermediary and Strength of the market
-Identify Key General Market, NIFTY 50, BSE Small cap and SENSEX
-To be analyzed on Daily chart
-Bear market usually end while business still in a downtrend. Market is leading indicator as it discounts all the possible economic upturn
-Most of the stocks fall during bear market but not all of them recover
-When market does bad, at least have 25% cash raised
-Big Money is made in first 2 year of bull market
-Follow-through day concept to identify an important change in general market direction
-Check your ego- Never fight Market. Market is always right
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Sell- When to sell and cut loss
-Strike rate of 4/10 is still good if cutting losses small
-It takes courage and discipline
-Lose small and win big is holy grail of investing
-Always look for 3:1 ratio. 25%: 8% and in bear market 10%:3%
-If you cut loss quick then, you will have enough cash for next bull market
-Do not sell the stock because it has fallen from the top 7-8% -
When to sell and take your Profit
-Objective in the market was not right but to make big money when you are right
-Never Average down but average up
-If year in corrective phase, look for 2-3 25% wins and you are sorted
-Have a rule or strategy which will force you out
-2 Key points for selling – but near to base and don’t get shaken out so go to weekly to buy that—STOP CHASING EXTENDED STOCKS
-Some Sell signals recommended in the books
-Stock being extended from the base or moving average or when biggest price action happened post extension from the base
-Sell the stock if stock runs up 25% -50% for one or two weeks of stock split
-If stock extended from 200 days – around 70-100% -
Money Management
-Have concentrated satellite portfolio, may be not more than 5 stocks
-If any new attractive idea occurred, then discipline should be selling the least attractive one
-If You are confident on your strategy then, real wealth can be created via concentrated portfolio in bull market
-In terms of adding tranches, don’t do aggressive if stock has given good move in initial weeks else your average cost will go up.
-Always have STRICT RULE REG NUMBE ROF STOCKS YOU WONA ND STICK TO IT
-Day trade not recommended. If you are in hurry to make money, then you are in hurry to go bankrupt
-Use of Margin – New Investors no. Experienced investor with proper strategy may be. Age factor important
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