Smith: Your investment philosophy flies directly in the face of everything we've been told about the way to safely invest, the Warren Buffet-Peter Lynch method. That says you should buy a stock when the price is low relative to other companies with similar levels of earnings in the same market, then hold it until it goes up, even though that may take years. You say that we should forget about looking for bargains.
O'Neil: I've met only one highly successful "value" investor over the years, but have met thousands of successful growth-stock investors. Most people do not have the immense resources necessary to investigate a company from top to bottom to ensure they have all the information necessary to do a thorough job in terms of the value equation. The best stocks don't sell at the cheapest prices. This is contrary to how people purchase just about everything they own. People feel comfortable with the best deal, the cheapest price. They don't realize that the stock market is an auction marketplace dominated by professionals and that stocks sell for what they are worth at the time. As a matter of fact, investors only looking to invest in stocks with "reasonable" P/E ratios would have missed every major stock market winner dating back to 1953. Those were quality stocks with good institutional spon-sorship that are now leaders in their particular industries.
Smith: Aside from false bargain-hunting, what are the most common mistakes investors make?
O'Neil: Investors fail to cut their losses short, so sooner or later they can be hurt without a plan for protection. Losses should be cut when a stock falls 8 percent below its purchase price.
Also, new investors want too much too soon. They look for easy ways to make money fast, and most often lose, become discouraged and leave the market thinking the stock market is a poor investment. If you're willing to spend some time learning the traits of winning stocks, use a rule-based investment strategy and be disciplined about cutting losses, you can achieve progress. It takes the average investor a few years to develop skill.
And don't follow tips except for this one: Rumors and tips aren't generally based on facts. Performance figures on a company are your ally and will arm you with information that will take you further than the latest rumor.
Smith:How should one pick a mutual fund?
O'Neil: Mutual funds should be a part of your portfolio because you are investing in the benefits of experienced, professional managers and teams of analysts and researchers dedicated to identifying stocks with the greatest potential. In the paper, we rate each fund with a letter grade. Look for an A+ rating: You'll be investing in the top 5 percent of funds based on [their performance in] the past three years.
Additionally, I would only buy domestic growth-stock funds. With all the innovations occurring every year in America, it isn't necessary to overly diversify in foreign markets and bond markets, which simply do not have the same potential. The big secret is, don't ever sell them! The compounding effect over years of reinvesting returns can be extremely profitable.
Smith:On a final note, what about asset allocation theory, which advises putting money into enough different types of holdings so that no matter what happens to the economy, most of your cash won't be lost?
O'Neil: I believe in putting your money into the best common stocks and the rest into money market funds when the market is weak. Too much diversification will weaken your focus and only serve to guarantee a mediocre result. Concentrate on a few quality stocks, and you'll get further.
- Investor's Business Daily, (800) 480-3399, www.investors.com