The Successful Investor Summary

The Successful Investor

What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses
by William J. O'Neil • 2003 • 183 pages
3.9
306 ratings
Finance Business
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Key Takeaways

1. Master market direction to safeguard your investments

The market doesn't care who we as individuals are, what we think, or how we feel.

Follow the market's lead. Understanding market direction is crucial for protecting your investments. Learn to recognize signs of market tops and bottoms by studying historical patterns and monitoring key indicators such as:

  • Distribution days: When major market indexes close lower on higher volume
  • Follow-through days: Confirming a potential market bottom with a strong up day on higher volume
  • Price and volume action of leading stocks

By mastering these concepts, you can better time your entries and exits, potentially avoiding significant losses during market downturns and positioning yourself for gains during uptrends.

2. Implement a 3-to-1 profit-and-loss strategy for consistent gains

You should consider selling a few of your stocks when they are up 20 to 25 percent from your purchase price and cutting every single loss at no more than 7 or 8 percent.

Balance risk and reward. This strategy allows you to be right on only 30% of your stock purchases and still maintain your capital. Here's how it works:

  • Sell winners when they're up 20-25%
  • Cut losses at 7-8%
  • Exception: Hold stocks that gain 20% within 1-3 weeks for at least 8 weeks

This approach helps protect your capital while allowing for potential big winners. It also encourages disciplined decision-making and removes emotional attachment to stocks.

3. Identify and invest in the best stocks using the CAN SLIM criteria

The only law it obeys is the law of supply and demand.

Focus on proven performers. The CAN SLIM system helps identify stocks with the highest potential for significant gains:

  • C: Current quarterly earnings up 25% or more
  • A: Annual earnings increases
  • N: New products, management, or industry conditions
  • S: Supply and demand
  • L: Leader in its industry
  • I: Institutional sponsorship
  • M: Market direction

By focusing on these criteria, you increase your chances of investing in companies with strong fundamentals and market momentum. Pay particular attention to earnings growth, as it's often the primary driver of stock price appreciation.

4. Recognize when to sell stocks to maximize profits and minimize losses

Make no mistake, though: managing a more concentrated portfolio of common stocks takes discipline and skill.

Develop a disciplined selling strategy. Knowing when to sell is just as important as knowing when to buy. Key selling signals include:

  • Climax runs: Rapid price increases and wider price spreads
  • Late-stage bases: Fourth-stage bases are more likely to fail
  • Relative strength breakdown: When a stock's RS line fails to make new highs
  • Excessive stock splits: Often a sign of a top

Additionally, always adhere to your predetermined loss-cutting rules. By consistently following these guidelines, you can protect your gains and limit your losses, ultimately improving your overall investment performance.

5. Manage your portfolio effectively to optimize results

Managing a portfolio of stocks is like tending a garden.

Cultivate your investments. Effective portfolio management involves:

  • Concentration: Focus on a limited number of high-quality stocks
  • Diversification in time: Add to positions gradually
  • Force-feeding: Shift funds from weaker to stronger performers
  • Regular review: Evaluate your holdings weekly, monthly, and quarterly

Avoid common pitfalls such as over-diversification, averaging down on losing positions, and holding onto underperformers. Instead, concentrate on your best ideas and be willing to cut ties with stocks that aren't meeting your expectations.

6. Understand the psychology of investing and avoid common pitfalls

You hope when you should fear, and fear when you should hope.

Master your emotions. Successful investing requires overcoming psychological barriers:

  • Avoid confirmation bias: Don't seek information that only supports your existing views
  • Resist the urge to average down: Adding to losing positions often leads to larger losses
  • Don't fall in love with stocks: Be willing to sell when the fundamentals change
  • Ignore the crowd: The majority is often wrong at crucial market turning points

By understanding and controlling these psychological factors, you can make more rational, data-driven decisions and avoid costly mistakes that plague many investors.

7. Continuously educate yourself and adapt to market changes

It'll always be the extra work and effort you put into any endeavor that pays off.

Never stop learning. The market is constantly evolving, and successful investors must adapt:

  • Study market history: Analyze past winners and losers to identify patterns
  • Keep detailed records: Track your trades and learn from both successes and failures
  • Stay informed: Follow financial news, but focus on facts rather than opinions
  • Develop your skills: Practice chart reading, fundamental analysis, and risk management

By committing to ongoing education and improvement, you'll be better equipped to navigate changing market conditions and capitalize on new opportunities as they arise.

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