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You might have done well in the stock market during the recent boom. You might even have financed your start-up or expanded your company with the profits. Or perhaps your cousin Jack's incredible return on an Internet stock got you so excited that you jumped right in-just before it dropped like a rock, taking your nest egg and entrepreneurial dreams with it.
Whatever the case, it's probably because of luck, says 67-year-old investment guru William J. O'Neil. He's the author of several books that feature a research-based approach to why and when stocks move up or down, including the bestseller How to Make Money in Stocks (McGraw-Hill) and, most recently, 24 Essential Lessons for Investment Success (McGraw-Hill).
O'Neil knows what it's like to invest your money in your own business. He has started several companies, the most notable being Investor's Business Daily (IBD), which he funded entirely out of his own pocket-unheard of in the publishing industry. According to the Audit Bureau of Circulations, IBD is the fastest-growing major newspaper, with more than 839,000 readers.
We asked O'Neil to share his legendary-and often contrarian-insights into being successful, both as an investor and a businessman.
Scott S. Smith writes about business issues for a variety of publications, including United Airlines' Hemispheres, as well as for Office.com.
Reaching A New Market
Scott S. Smith:You started out as a stockbroker and learned what really worked in picking stocks. That led you to start firms that provided information useful to investors. But it's an audacious leap to go from that to challenging the near-monopoly of The Wall Street Journal. What made you think you could succeed?
William J. O'Neil: Because we knew from our 25 years' experience building models of all successful companies and providing research to institutional investors that The Wall Street Journal tables and stats could not help anyone make money in the market; all they provided were quotes, dividends and P/Es [price-to-earnings ratios]. Our research proved P/Es were overrated and misunderstood, and dividends really weren't relevant. Our models discovered seven variables were key, none of which the Journal carried in their Associated Press Tables. The seven variables are:
A-Annual earnings per share should increase materially for each of the past three years.
N-The company has a New product or service and is about to hit a new price high as it emerges from a broad basing (price consolidation) area.
S-Supply and demand: number of shares outstanding in the floating supply and big volume demand
L-Leader in market with relative price strength in top 20 percent of all stocks
I-Stock possesses good Institutional sponsorship and is part of a leader sector group in the market.
M-Market, knowing when you're in an up trend or major down trend in the general market by interpreting the general market averages.
Dating back to 1953, we've studied the most successful companies each year-the ones that not only doubled or tripled in price but also went up tenfold and more-and we continue to find these same seven common characteristics among winning stocks. That provides investors important guidelines in their search for top stocks.
Smith:But people are so resistant to telemarketers and junk mail. How have you been able to reach potential subscribers with your message?
O'Neil: Our marketing efforts resonate with a specific audience. We've targeted people who are self-starters and early adopters of techniques and information. There's a population of these independent thinkers that's attracted to an investment tool that's based on research rather than opinion and that allows them to make informed decisions.
Smith:You went into publishing without a background in that field. What have been the surprises in trying to succeed in a new market?
O'Neil: We were surprised that it cost twice what we thought to build and grow the paper-but we've been able to handle that. My advice to those going into business: Make sure you've got plenty of reserves, and double what you think your expenses will be.
Another surprise was that ad agencies are not very interested in obtaining good leads or product sales for their clients but settle for older-line publications with wide reach, which in many cases are very expensive, less efficient, and never really measured in terms of sales results. We got Dell Computer advertising five years ago because they measure everything and found out that we out-pulled most major newspapers.
Smith:You tout 10 secrets to success in IBD. What are they?
O'Neil: Most leaders have 10 rules that, when combined, can turn dreams into reality:
000 Decide on your true dreams and goals.
3. Take action (get started).
4. Never stop learning.
5. Be persistent and work hard.
6. Learn to analyze details.
7. Focus your time and money.
8. Don't be afraid to innovate; be different.
9. Deal and communicate with people effectively (people skills).
10. Be honest and dependable; take responsibility.
Smith:What management strategies have you employed to help IBD succeed?
O'Neil: Over time, we've learned more about training-with formalized programs throughout the organization-and communication, via company forums and regular managers' meetings, that have strengthened corporate clarity and defined goals, systems and procedures. We work in teams of five to seven people so we have many different viewpoints.
Because I've researched so many successful firms, I've learned about the "lengthening shadow" of a company's culture. It's often difficult to sustain original core philosophies as businesses grow. We've found that training programs which perpetuate key corporate foundations while maintaining the original, entrepreneurial focus are imperative to an expanding organization. We've learned how significant those messages can be if you are to withstand the growing pains that come with the passage of time.
Part of that training involves guiding people to "think right." Not everyone is brought up to think positively or deal well with adversity. We encourage innovative thinking and appreciate ideas from throughout the organization. An open door creates open minds and helps us retain an innovative edge in the marketplace.
Safe Investing Tips
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