How to Make Money in Stocks by William J. O’Neil — Excellent for growth investing + technical setups

1. Introduction: Why Traditional Investing Fails & Why Growth Investing Works

O’Neil begins by explaining the core problem: most investors buy wrong stocks, at wrong times, for wrong reasons. They look at low P/E, high dividends, cheap valuations, or “bargains.” The book argues:

Value traps destroy more portfolios than crashes.
High-quality stocks almost never look cheap.
Market rewards earnings growth + institutional demand, not “cheapness.”

O’Neil analyzed over 1,000 multi-bagger stocks from 1880–present. His conclusion:

The biggest winning stocks were growth stocks with powerful earnings + sales acceleration, bought near new highs, not lows.

He stresses that learning chart reading, supply-demand, and price-volume action is like a doctor learning X-rays. You wouldn’t let a doctor operate without tools — similarly, an investor must never trade without charts.

2. The CAN SLIM Strategy — Foundation of the Book

CAN SLIM is the world’s most proven growth investing formula. Each letter represents a factor found in every great stock before it became a multi-bagger.

C — Current Earnings

The most important factor.

Rules

EPS growth must be +25% to +50% or more (YoY).
Quarterly sales growth should be 20%–25% or higher.
Accelerating earnings (big plus).

Why it matters?

Great stocks move because their profits explode.
Strong earnings attract mutual funds, pensions, institutions, causing price rallies.

Red flags:

Falling EPS
Weak margins
One-time profits

A — Annual Earnings Growth

Evaluate long-term strength.

Requirements:

Annual EPS growth ≥ 25% for last 3 years
High ROE (≥ 17%)
Stable margins
New products or catalysts

Why important?

Long-term consistent winners like Apple, Tesla, Microsoft all had:

multi-year growth streak
innovation
strong management

N — New Product, New Management, New Highs

All major winners had something NEW:

New technology
New business model
New CEO or management
New product cycle
Stock hitting a new price high (breakout)

New Highs = Institutional buying. Buying near highs is safer than buying cheap, because highs indicate strength.

Famous examples:

iPhone launch → Apple multi-bagger
Amazon Prime → rally
Nvidia GPUs → exponential growth

S — Supply & Demand (Shares Outstanding + Volume)

This is the heart of price movement.

Key points:

Stocks with low float rise the fastest.
Big winners typically have fewer shares (≤ 25–50 million).
Volume surges indicate institutional accumulation.

Watch for:

High-volume breakout = buy
Low-volume pullback = healthy
Distribution days (heavy selling) = warning

L — Leader vs Laggard

Only buy leaders, NOT laggards.

Use the Relative Strength (RS) Rating:

Must be 80–90+
True superstars are 95–99 RS

Leaders dominate their industry, like:

Tesla in EV
Nvidia in AI
Google in search
Netflix in streaming

Buy the best in a strong sector — not the cheap one.

I — Institutional Sponsorship

Mutual funds drive markets. Every big winner had:

increasing institutional ownership
strong buying volume
support from top-rated funds

But too many funds mean the move is already mature.

M — Market Direction

The most important factor.

Even the best stocks fail during a market downtrend.

O’Neil teaches the “Market Pulse” method:

Track distribution days (4–6 in few weeks = downtrend).
Watch the follow-through day to confirm new uptrend.
Always trade in sync with major indexes.

3. Chart Reading: The Core Skill of Successful Investors

O’Neil insists:

“Charts are your investment roadmap.”

He provides 100+ chart examples showing how mega-stocks behave before exploding.

Why Charts Matter

They reveal institutional accumulation.
They show patterns repeated for 100+ years.
They help avoid catastrophic losses.

Charts represent the law of supply & demand, which never changes.

Key Chart Patterns

1. Cup with Handle (most powerful)

Characteristics:

U-shaped base
Depth: 12%–33%
Handle: 1–2 weeks
Breakout with volume 40%–150% above average

Most winning stocks form this.

2. Double Bottom

Looks like a “W”
Second bottom undercuts first
Buy point: peak between bottoms

3. Flat Base

Tight consolidation
Only 10–15% deep
Shows strong institutional support

4. Ascending Base

Three higher pullbacks
Very bullish pattern

5. High Tight Flag

Rare but extremely powerful
Stock moves 100%+ in 4–8 weeks, then tight flag
Breakouts lead to 200–300% moves

6. Breakout Signals

Volume surge
RS line at new high
Index uptrend

7. Sell Signals from Charts

Climax top
Heavy-volume reversal
Break of 50-day MA
Multiple distribution days
Failed breakout
Late-stage failed bases

These patterns help detect market tops early.

4. Buying Rules: How to Enter Correctly

Rule 1 — Buy at Exact Breakout Point

Never buy early. Never buy late. Buy only when price breaks the pivot WITH VOLUME.

Pivot rules:

Usually at new 52-week high
Volume must explode
RS line should make high

Rule 2 — Buy Strength, Not Weakness

Buy stocks near highs, not lows
Cheap stocks stay cheap
Great stocks always look expensive

Rule 3 — Add to Winners, Never Losers

Pyramid method:

Buy initial position at breakout
Add 20%–30% more only if stock rises 2%–3%
Never average down

Rule 4 — Focus on Top 3–5 Stocks Only

Concentration increases returns. Diversification dilutes performance.

5. Selling Rules: Where Investors Actually Fail

O’Neil says this is 80% of success.

Rule 1 — Cut All Losses at 7%–8%

No exceptions.

This is the difference between long-term success and disaster. Small losses are the cost of doing business.

Rule 2 — Sell on Major Weakness

Sell immediately if:

Heavy-volume drop
Breakdown of 50-day MA
Multiple distribution days
Stock violates key support

Rule 3 — Take Profits at 20%–25%

Most winning stocks correct after +20–25%.

Exceptions:

Super-performers with explosive earnings
Stocks in early bull market stages
Stocks breaking out of long bases

Rule 4 — Watch for Climax Tops

Signs:

Parabolic move
Largest up-week in months
Huge volume spike
Air pocket decline

Lock in gains.

6. Psychology of Successful Investors

O’Neil emphasizes that investing is 80% emotional discipline.

Investor Psychology Mistakes:

Averaging down
Holding losers hoping they come back
Selling winners too early
Buying bottoms
Fear of buying new highs
Overtrading
Revenge trading

The core message:

The market punishes emotional decisions but rewards systematic discipline.

7. Historical Study of Market Winners

O’Neil studied the biggest winning stocks over 125 years.

Examples:

Apple
Google
Tesla
Home Depot (20x in 2 years)
Amazon
Netflix
Nvidia

All followed CAN SLIM principles.

Common traits he found:

Strong earnings acceleration
New product/technology
Strong industry group
Tight chart patterns
Explosive breakout volume
Increasing institutional demand

8. Why Most Investors Lose Money

O’Neil explains common pitfalls:

1. Buying cheap/low P/E stocks

These often have fundamental problems.

2. Following tips/news

News is already priced in before it’s public.

3. Trading without a plan

Emotions take over.

4. Not using charts

Equivalent to driving blind.

5. Not cutting losses

A −50% loss requires +100% to recover.

6. Over-diversifying

Reduces return potential.

7. Lack of patience

Multi-bagger stocks require months/years.

9. Industry Group Analysis

One of the strongest concepts.

Half of a stock’s movement is due to its industry group.
Always buy from the top 20% strongest sectors.
Avoid weak sectors.

Examples of strong groups historically:

Semiconductors
Software
Retail leaders
Medical/biotech innovation
Consumer tech

10. Market Timing Rules

O’Neil rejects the idea of buy-and-hold through all conditions.

Market Stages

Uptrend (confirmed)
Distribution (top forming)
Correction/Bear market
Follow-through day (new uptrend begins)

He emphasizes:

Bear markets are where portfolios are destroyed.
Cash is a position.
You only need 2–3 big winners a year to make fortunes.

11. Example Case Studies from the Book

Home Depot

IPO (1981)
Grew 20x in <2 years
Cup-with-handle breakout
Strong earnings, huge volume

Apple (iPod + iPhone era)

New product cycle
Massive earnings growth
RS 98–99
Explosive breakout

Google

IPO base
Heavy institutional support
Right leadership characteristics
Multi-year growth

These case studies reinforce real-world application.

12. Practical Portfolio Management

Position Sizing

Start with 8–10% positions
Add only when stock proves itself
Never exceed 25% in one stock

Portfolio Construction

3–5 leaders
20–25% cash for opportunities
Avoid overtrading

Cash Management

Raise cash during market weakness
Be fully invested only during confirmed uptrends

13. Investor Checklists (from O’Neil)

Checklist to Buy

EPS +25%
Sales +25%
ROE ≥ 17%
RS ≥ 90
Volume ↑ on breakout
Industry group in top 20%
New product/catalyst
Breakout above pivot
Price above 50 & 200 MA
Market in uptrend

Checklist to Sell

7–8% loss
Heavy distribution
Break of 50-day MA
Climactic volume
Failed breakout
Peaking RS
Market correction

14. What Makes CAN SLIM So Successful

O’Neil’s system works because:

1. It focuses on fundamentals (earnings growth)

Only strong companies qualify.

2. It uses technical analysis (chart patterns + volume)

Ensures perfect timing.

3. It incorporates market direction

Prevents fighting the trend.

4. It prioritizes psychology and discipline

Removes emotional bias.

5. It uses historically proven patterns

125 years of data support it.

15. Key Lessons O’Neil Wants Every Investor to Remember

1. Buy strength, not weakness.

Winners break out to new highs.

2. Sell losers fast.

Protect capital at all costs.

3. Leaders outperform laggards.

Always pick #1–2 stocks in strongest industries.

4. Markets move in cycles.

Recognize tops and bottoms early.

5. Chart patterns never change.

Human behavior + supply-demand → timeless.

6. Opportunities come rarely.

When the market enters a true bull phase, concentrate and push hard.

7. Study historical winners.

Patterns repeat every decade.

8. Always follow rules, never emotions.

The system works only with discipline.

16. Final Summary in 10 Bullet Points

CAN SLIM is the most successful growth strategy ever built.
Buy stocks with explosive earnings & sales growth.
Look for a new product/technology driving momentum.
Buy leaders with RS 90–99; avoid laggards.
Use chart patterns like cup-with-handle for perfect timing.
Buy at breakouts with huge volume.
Cut losses always at 7–8%.
Take profits at 20–25%, unless super-stock.
Align your trades with market direction (M-factor).
Stay disciplined — rules > emotions.