Page 947 - How to Make Money in Stocks Trilogy

196 Appendix A

the lights on in this business; this past decade saw many mergers, while
other firms just disappeared.
So how is it that our firm, William O’Neil + Company, has survived for
five decades with its portfolio intact and growing? How has our firm not
only kept its lights on but expanded to cover global markets, with offices in
Los Angeles, New York, Boston, and London? Because, since 1964, our
time-tested methodology has guided us profitably in our portfolios and
proven applicable to markets around the world.
I want to be clear: we do not think that we are smarter than anyone else
in the business. But what we do better than most is observe the market’s
action and react according to a set of well-defined, historically proven rules.
Those market rules—based on a half-century of studying the characteristics
and behavior of rising and falling individual stocks and stock markets—
encompass market directional analysis, stock picking, and portfolio manage-
ment. For long-term success, you have to be good at all three—and not be
satisfied with exceling at only one or two.
Many of our rules sound contrarian to investors who do not use stock
charts and thus do not treat the market as the pure supply and demand
mechanism that it is. For example, our research shows that many stocks will
top while their quarterly earnings are still increasing. Therefore, you can’t
rely on fundamentals to determine when to sell. You must consult a chart
and monitor the technicals, as a stock’s breakdown in price usually precedes
the breakdown of fundamentals.
Another cornerstone of our method is keeping losses to 7 to 8%. What
would have happened if most investors had cut their losses at 7% in
2000–2001, as the market was imploding? Or, even better, if they had used
some of our stock-selling rules that would have locked in gains during the
first three months of 2000? A few years later, dark clouds were again gath-
ering on the horizon, and I remember closing all of my long positions in
November 2007—well ahead of the devastating 2008 break. In fact, all of
our portfolio managers saw the mounting institutional selling (distribution)
on the major indexes and quickly exited the market. We sat on the sidelines
in cash as the S&P 500 fell more than 50%.
Operating in the stock market, for most people, is an exercise in
extremes. When it’s good—it’s great—when it’s bad—it’s terrible. Our
method helps keep us from getting caught up in the extremes that eventu-
ally may bring down individual investors and cause even the best institu-