Preface

As a successful investor, William J. O'Neil has touched the lives of individual and institutional investors around the globe whom he has taught to make money in stocks. How many we cannot know for sure, but rest assured that it is likely in the hundreds of thousands, if not far more. His methods and the investment tools he and his firm have developed for individual and institutional investors alike have empowered many to find financial freedom in their lives. We are two of those investors, and we can vouch for the fact that Bill O'Neil is responsible for helping to create many new millionaires in this world. As former internal portfolio managers at William O'Neil + Company, Inc. we met many individual and institutional investors who benefitted from O'Neil's strategies and expertise, so we know this from first-hand experience. We've also made lots of money in the markets, thanks to learning and executing O'Neil's methodologies.

This book is our attempt to articulate what we learned from Bill O'Neil, working directly with him under fire in real-time while trading the markets. But first a disclaimer: this book is not sanctioned by or approved by Bill O'Neil or William O'Neil + Co., Inc. Our interpretation and views may not be those of Bill or the company. This book explains how we trade based on our learning experience as proprietary traders at William O'Neil + Co., Inc. This book is also not about the CAN SLIM® methodology. Readers are encouraged to read Bill's seminal work (and all his other books), How to Make Money in Stocks, and to refer to Investor's Business Daily and investors.com. Between Bill's excellent books, the reporting in the paper, and the web site, there is a plethora of tutorials and educational materials that detail O'Neil's methods. We encourage you to make good use of these books and tools.

Trade Like an O'Neil Disciple is our unique experience with this man who we feel is likely the world's greatest investor. In this book we provide insights into O'Neil's genius as we saw it. We track the markets of the late 1990s and early 2000s with real-time excerpts from our trading diaries that bear witness to O'Neil's incredible investment genius. In real-time, O'Neil embodies the Latin term speculari, which means "to spy out or examine" as he perceives subtle shifts in the market, almost by osmosis. In this book we hope to provide insight into some of his thought processes, as we saw them unfold, using real-time market examples. The O'Neil methodologies primarily represent a dynamic approach to the stock market, and this dynamism is entirely correct and appropriate since the stock market is itself a dynamic beast. The brutal bear markets of 2000—2002, and 2008 have proven that "static" buy-and-hold strategies are a fantastic way to lose a lot of money. The markets are dynamic and O'Neil's methods are likewise dynamic, yet we are still human beings with our foibles and quirks. O'Neil advises making up "little rules" along the way as you observe your own trading and recognize these little "quirks" in yourself. These little rules may be sub-systems or rules that establish boundaries for containing weaknesses or are put in place to capitalize on strengths. We ourselves, as long-term, experienced practitioners of O'Neil methodologies, have come up with many over the years. It's not as if we are turning the system upside down, or using it in piecemeal fashion as we pick and choose what rules we choose to use. Instead, what we have done over time is to use the market as an effective feedback system with respect to our own trading to come up with small rules and sub-systems that enhance our own approach to O'Neil's methods. One of our "quirks" is that we like to buy stocks earlier in bases, and not just when they stage an obvious new-high base-breakout. Another "quirk" of ours is that we like to buy gap-ups, particularly in a strong leader as it is breaking the "line of least resistance" to the upside and potentially embarking on a sharp price run. In this book we share with you trading rules that have worked well for us, and how we buy stocks and short stocks using refined "sub-methods" that we have tested both statistically and in practice, and have found to be effective enhancements to our investing.

We've also made a lot of mistakes, and in this book we discuss those mistakes in order to help prevent you from making the same mistakes, hopefully saving you time, money, and misery in the process.

Trading for us has been as much a spiritual journey as it has been an investing journey, and in the process has provided each of us with a microcosm of life itself. The return of +18,241.2 percent works out to +110.5 percent on an annualized basis over the seven-year period from January 1996 to December 2002. But to achieve such a result, a couple of sizeable drawdowns did occur including one that was nearly −50% during the second and third quarter of 1999. As well, we would point out that the returns we discuss in Chapters 2 and 3 were achieved in our personal accounts, and not in the accounts we managed for William O'Neil + Company, Inc.

While the dollars in our trading accounts and the returns are the way we track our success and performance, trading is ultimately not so much about making money as it is about understanding what Eckhard Tolle referred to as "The Power of Now." Like athletes and thrill-seekers who engage in activities that seem extremely dangerous, almost to the point of the unthinkable to those who live more normal lives, we as traders seek the "rush" that comes not from a successful trade, but from the experience of being entirely in the present as we operate "in the zone" and a certain fluidity and calmness pervades our actions as we engage the markets in real-time. Ocean wave surfers experience this as the intensity of riding a powerful wave-form that forces them to focus on the matter at hand as a matter of sheer survival. Focusing on the matter at hand forces one to operate entirely in the present—there is no worrying about yesterday's problems, or tomorrow's challenges, there is only the "now." If you cannot understand why someone would seek to ride a 50-foot-high "death wall" of ocean water then you likely have never ridden one. Riding such a wave is the rush—what we call being "in the zone"—and it applies to trading as much as it applies to surfing, hang-gliding, rock-climbing or any other dangerous yet exhilarating endeavor that humans are drawn to like moths to a porch light. As traders we both share an appreciation for the spiritual aspects of this phenomenon, which is really nothing more than the simple, spiritual act of "becoming one" with the present moment; nothing more, nothing less. This is the essence of successful trading.

Gil Morales

Dr. Chris Kacher

June 2, 2010