Got my 20pts on YHOO, so sold 70% of Jan 360 calls.
Interesting article, I think the idea goes along well with the Gorillia game.
cbs.marketwatch.com
24 Essential Lessons for Investment Success'
O'Neil's advice worth accumulating
By Thom Calandra, CBS MarketWatch
Last Update: 2:11 PM ET Jan 19, 2000
FTMarketWatch.com
Thom's biography
SAN FRANCISCO (CBS.MW) -- William J. O'Neil, the stock chartist
and financial newspaper publisher, has a new book.
In it O'Neil, best known as founder of Investor's
Business Daily, sticks with a system of sticking with
winning companies. For individuals, "24 Essential
Lessons for Investment Success"
{McGraw-Hill) is a gem, one of those how-to
books
Now, just so you know: this isn't a book review.
Instead, it's a quick summary of some of O'Neil's
main points -- for individual investors out there who
want to understand a little of the science behind the
art of picking winning stocks -- before those stocks
enjoy their strongest moves to higher ground.
O'Neil is a big believer in technical indicators, things
like accumulation and follow-through days and (to
some) bizarre chart formations, like the vaunted
cup-with-handle formation. He defines technical
analysis as "the study of market movement, mainly
with the use of charts." For that, O'Neil is regarded
as among this age's strictest, and most successful,
investors.
Plus, O'Neil favors growth stocks to value stocks. That means he's
looking for the stocks that have enjoyed year after year (or quarter after
quarter) of strong, steady earnings growth and rising share prices. In that
regard, O'Neil is enjoying the best of times. Growth stocks -- or what
some unfairly call momentum stocks -- are the market leaders. Stocks
whose price-to-earnings multiples dwarf the market averages --
companies such as Microsoft (MSFT: news, msgs) and, before it
tumbled, software maker PeopleSoft (PSFT: news, msgs) -- are the best
examples of the triple-digit gains that O'Neil expects from winning
companies' shares.
O'Neil, who has been investing for more than 40 years, says in the book
that he is a big believer in company fundamentals such as earnings and
sales growth. He's a stickler for his principles. "This means buying only
stocks that show consistent earnings improvement, have increased sales
and have preferably both strong profit margins and a high return on
equity," O'Neil writes in the new book. (The italics are his, folks, not
mine.)
Golden rules for golden times
His golden rule is defensive: "You must always protect your investment
account," he writes. He advises investors to bail on a stock if it falls 8
percent below their purchase price. That probably is not the best advice
for the past 10 years, a period during which "buy on the dips" has
become kind of mantra for investors in American securities.
Still, O'Neil's bread-and-butter principles are the same ones he discussed
in his best-seller, "How to Make Money in Stocks." The new book, a
paperback, is more streamlined than the original.
"Always pick stocks from the leading industry groups or sectors," he
advises. He says that, since 1953, the majority of U.S. stocks that earned
the label market leaders were also part and parcel of a leading industry.
"When Microsoft was an outstanding winner, so was PeopleSoft; when
Dell was outperforming, so was Compaq," he writes.
O'Neil mastered the science of picking stocks when it looks like they are
selling at their most expensive price. "Why not buy earlier at a cheaper
price in order to get a better deal?" he asks in the book. "Why wait until it
is up a few points higher before I buy?"
That's where the cup-and-handle comes in. The formation resembles the
outline of a coffee cup. When a stock chart displays that java-cup kind of
look, O'Neil says it is possible to identify an optimal buying point. Stocks
purchased at these correct pivot points, he writes, have "the greatest
chance of moving substantially higher." If you snag a stock at the right
pivot point, you will enjoy what day traders these days call "a breakout" in
the stock price, he says.
The train, it won't stop going
Once again, what sets O'Neil apart from momentum investors who jump
onto a locomotive only because it's a locomotive is this: he looks for what
he calls true market leaders, the companies that regularly trash their
competition.
His key questions before buying -- or selling -- a stock include: Are the
company's quarterly earnings per share up 25 percent or more (from the
previous year). Does the company have six to 12 quarters of strong sales
growth? Is the annual pretax profit margin 18 percent or more? (Less for
retailers, he says.) Does the company's management own the stock? And
on and on.
O'Neil, by the way, doesn't talk about pure Internet stocks in the book. If
he did, by most of these criteria, he likely would have to stick to
companies that are making money -- the market leaders such as America
Online (AOL: news, msgs) and Yahoo (YHOO: news, msgs). (But I can't
speak to that, and if I get a chance, I'll ask O'Neil about how to gauge
money-losing Internet companies.) One of O'Neil's Internet-related
favorites is Cisco Systems (CSCO: news, msgs).
O'Neil's rules are not for the haphazard investor. In my view, he's like the
U.S. Marine drill sergeant of the investment world. "Wide diversification
and asset allocation are not necessary," he says. "Concentrate your eggs
in fewer baskets."
More about "24 Essential Lessons for Investment Success" can be found
at www.books.mcgraw-hill.com. The book costs $10.95.
Real Internet holding companies: I'm always on the prowl for
companies with real businesses that also have active investment arms.
Investors in such companies -- like aggressive Comdisco Inc. (CDO:
news, msgs), for instance -- get a double bang for their buck: earnings
growth and asset growth in the way of venture-capital stakes in exciting
new companies. Comdisco's earnings per share could approach $2 this
year, but the sizzle in the stock comes from the company's Internet-related
stakes, which could get turned into a tracking stock.
David Baker, a money manager and analyst for Web site The Worldly
Investor, points to Bell Canada (BCE: news, msgs), now known in a
world of acronyms as BCE Inc. Baker, who's at Rivendell Capital
Management, notes that BCE owns almost 40 percent of Nortel
Networks (NT: news, msgs), a vast networking and fiber-optics
developer. That's just the beginning, says Baker. See the article.
"Bell Canada International, or BCI, is one of the most undervalued
properties under the BCE umbrella. The company holds a portfolio of
international wireless and telecommunications assets consisting of eight
Asian and Latin American wireless firms," Baker says in his piece. BCE
shares Wednesday rose 4 percent to 93 or so on the New York Stock
Exchange. Baker says the shares are worth at least $125.
Folks, in this space, I will take a moment from time to time to point
investors toward real companies that engage in Internet commerce or
venture investing. Baker's article is a good example of independent
analysis of a telecommunications company and the sum of its parts. |
