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The key points of 'How to Make Money in Stocks (Fourth Edition): A Winning System in Good Times and Bad' by William J. O'Neil

In 'How to Make Money in Stocks (Fourth Edition): A Winning System in Good Times and Bad' by William J. O'Neil, readers are introduced to key concepts, stock selection criteria, and trading strategies essential for successful stock market investing. This book provides valuable insights into investing in growth stocks, market timing strategies, risk management, earnings growth, sales growth, price performance, cutting losses short, letting profits run, and position sizing. Let's explore the key takeaways from this informative guide.

Key Takeaways

  • Investing in growth stocks is crucial for long-term success in the stock market.

  • Market timing strategies can help investors capitalize on market trends and maximize profits.

  • Effective risk management is essential to protect investments and minimize losses.

  • Earnings growth, sales growth, and price performance are key criteria for selecting winning stocks.

  • Implementing trading strategies like cutting losses short, letting profits run, and proper position sizing can lead to consistent gains in the stock market.

Key Concepts

Investing in Growth Stocks

Investing in growth stocks is a cornerstone of William J. O'Neil's investment strategy. Growth stocks are those of companies expected to grow sales and earnings at a faster rate than the average business in their industry or the market as a whole. These stocks offer the potential for higher returns, but also come with higher risk.

Quality is a key factor when selecting growth stocks. O'Neil emphasizes the importance of investing in companies with strong fundamentals, including robust earnings growth, solid sales increases, and effective management. The idea is to identify companies that are not only growing but are also well-positioned to continue their upward trajectory.

A common mistake is to focus solely on the fastest-growing companies without regard to price. O'Neil advises against this, suggesting that investors look for reasonably priced growth stocks to avoid overpaying. A balance between growth potential and value is essential for long-term success in the stock market.

Market Timing Strategies

Understanding market timing strategies is crucial for investors looking to maximize their returns. The essence of market timing is to make investment decisions based on market trends rather than individual stock performance. This approach can help investors avoid losses during downturns and capitalize on gains during market upswings.

  • Identify market trends through technical analysis.

  • Monitor economic indicators and news events.

  • Adjust investment positions accordingly.

While market timing can be profitable, it's important to recognize that no strategy is foolproof. Investors should combine market timing with other strategies, such as diversification and fundamental analysis, to build a resilient investment portfolio.

Risk Management

Effective risk management is crucial for success in the stock market. Diversification is one key strategy, ensuring that a portfolio isn't overly reliant on any single investment. By spreading capital across various sectors and asset classes, investors can mitigate the impact of a single stock's downturn.

Another vital aspect of risk management is setting stop-loss orders. These orders automatically sell a stock when it reaches a certain price, limiting potential losses. For instance, a common rule is to set a stop-loss at 7-8% below the purchase price, which helps to preserve capital.

Understanding the risk-reward ratio of each investment is also important. This involves analyzing the potential upside compared to the potential downside, which can guide decision-making and position sizing.

Stock Selection Criteria

Earnings Growth

One of the cornerstone principles in William J. O'Neil's investment strategy is the focus on earnings growth. Companies that consistently show a rise in earnings are often indicative of sound management and strong market demand for their products or services. O'Neil suggests that investors look for stocks with a significant percentage increase in earnings per share (EPS) over the last few quarters.

Earnings are a direct reflection of a company's profitability and its potential for future growth. A table comparing the EPS growth of different companies can provide a clear picture of which stocks might be poised for success:

It's essential to understand that earnings growth should be sustainable and not just a result of one-time events. Investors should perform a thorough analysis to ensure that the growth is backed by solid fundamentals rather than temporary factors.

Sales Growth

In the realm of stock selection, sales growth is a critical indicator of a company's potential for long-term success. Companies that consistently demonstrate strong sales growth are often those that are expanding their market share, innovating, and improving their products or services.

Investors should look for companies with a sustained increase in sales over multiple quarters or years. This trend is a positive sign that the company is growing organically and is not solely reliant on acquisitions or cost-cutting measures to boost its top line.

While evaluating sales growth, it's important to compare a company's performance with its industry peers. Here's a simple table to illustrate how a company's sales growth stacks up against its competitors:

The table clearly shows Gamma LLC outperforming the industry average, which may make it an attractive option for investors seeking growth opportunities.

Price Performance

In the realm of stock investing, price performance is a critical indicator of a stock's potential success. It reflects the stock's historical price movements and can signal its future trajectory. Investors should look for stocks that have outperformed the market, as this often suggests strong investor confidence and a robust business model.

Price performance should be evaluated in the context of the stock's relative strength compared to its peers. A stock that consistently leads its industry in price gains is more likely to continue that trend, barring any significant changes in market conditions or company fundamentals.

When analyzing price performance, consider the following factors:

  • The stock's 52-week high and low

  • Performance during market corrections

  • Historical volatility

  • Comparative performance to industry benchmarks

Trading Strategies

Cutting Losses Short

One of the most critical aspects of trading is the ability to cut losses short. This principle ensures that investors can survive in the market to trade another day. By setting a maximum loss threshold, typically around 7-8%, traders can prevent a small loss from becoming a devastating one.

Discipline is key when it comes to cutting losses. It's not just about knowing when to sell, but also having the resolve to execute the sell order without hesitation. This can be emotionally challenging, but it's essential for preserving capital.

Here's a simple list to remember when implementing this strategy:

  • Determine the maximum loss percentage before entering the trade.

  • Stick to the predetermined exit point, regardless of market noise.

  • Review each trade to learn and improve future decision-making.

Letting Profits Run

One of the cardinal rules in stock trading is to let your profits run. This principle is crucial for achieving significant gains in the stock market. It's about resisting the urge to sell a stock when it has made a modest gain and instead holding on for potentially larger gains.

Patience is key when it comes to letting profits run. Investors often fall into the trap of selling too early, driven by the fear of losing the existing profit. However, William J. O'Neil suggests that holding onto winning stocks can lead to exponential growth in your portfolio.

Here are some tips to effectively let profits run:

  • Establish a target selling price based on technical and fundamental analysis.

  • Monitor the stock's performance and adjust your targets as necessary.

  • Avoid emotional decision-making by setting and following clear rules.

Position Sizing

Position sizing is a critical aspect of trading strategies that can significantly impact the overall performance of an investment portfolio. Proper position sizing ensures that the risk taken on each trade is aligned with the investor's risk tolerance and investment goals. It's about finding the right balance between being too aggressive, which can lead to substantial losses, and being too conservative, which might limit potential gains.

One common method for determining position size is the percentage risk model, which involves risking a set percentage of the total portfolio on each trade. This approach helps in maintaining consistency and managing risk effectively. Below is an example of how position sizing might be structured using this model:

Creating a culture of accountability and responsibility is essential in position sizing. Setting clear expectations for each trade, involving team members in the decision-making process, and establishing feedback systems can lead to continuous improvement in trade execution and portfolio management.


In conclusion, 'How to Make Money in Stocks (Fourth Edition): A Winning System in Good Times and Bad' by William J. O'Neil provides valuable insights and strategies for successful stock market investing. The key points discussed in the article highlight the importance of thorough research, disciplined trading, and the use of technical analysis to make informed investment decisions. By following O'Neil's proven system, investors can increase their chances of achieving financial success in both favorable and challenging market conditions. This book serves as a comprehensive guide for beginners and experienced investors alike, offering practical advice and actionable steps to navigate the complexities of the stock market with confidence.

Frequently Asked Questions

What is the importance of investing in growth stocks?

Investing in growth stocks allows investors to capitalize on companies with strong potential for future growth and profitability. These stocks have the potential to deliver high returns over time.

Why are market timing strategies important in stock investing?

Market timing strategies help investors make informed decisions on when to buy or sell stocks based on market trends and conditions. By timing the market effectively, investors can maximize their profits and minimize losses.

How does risk management play a crucial role in stock market investing?

Risk management is essential in stock market investing to protect capital and minimize potential losses. By implementing risk management strategies, investors can safeguard their investments against market volatility and unforeseen events.

What is the significance of earnings growth in stock selection criteria?

Earnings growth is a key factor in stock selection criteria as it reflects the company's profitability and potential for future success. Companies with consistent earnings growth are often considered strong investment opportunities.

Why is sales growth considered a crucial metric for selecting stocks?

Sales growth is an important indicator of a company's performance and market demand for its products or services. Companies with strong sales growth demonstrate their ability to generate revenue and expand their market share.

How does price performance impact stock selection decisions?

Price performance reflects the historical movement of a stock's price and can indicate its potential future performance. Investors often consider price performance when evaluating the attractiveness of a stock for investment.

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