8.1. MISCONCEPTIONS
As well, there are many misconceptions and myths about O'Neil and his organization that we find preposterous, particularly those that are promulgated for the sole purpose of bringing the man and his methods down. A lot of it is born of envy, but most of it is just plain and deliberate ignorance of who and what O'Neil is. For example, in the midst of the grimness of the 2000–2002 dot-com bubble-bursting bear market, a professional portfolio manager was asked on financial cable TV when he thought the brutal bear market would finally come to an end. His response was immediate and contemptuous, "This bear market will be over when that momentum investor's newspaper, Investor's Business Daily, goes out of business!"
In most cases ignorance is bliss, but in this case ignorance was little more than ignorance, as such a statement reflects a profound misunderstanding of Bill O'Neil and the O'Neil organization, which includes not only Investor's Business Daily, but also the institutional investment advisory and research firm of William J. O'Neil + Company, Inc., a nationally recognized and ranked publications firm called O'Neil Data Systems that prints much more than just chart books, and several other, smaller and not-so-smaller sister companies.
If you were a portfolio manager at William O'Neil + Company, Inc., as we were at that time, you knew that the last thing that would ever happen during the bear market of 2000–2002 would be IBD going belly up. The O'Neil organization consists of many different businesses, some of which, like the nationally top-ranked printing firm of O'Neil Data Systems, were strong cash cows, and so if any of the other organizations had a lean year, there were plenty of well-run enterprises elsewhere in the organization to pick up the slack. We can also tell you that the internal portfolio management group, which was essentially responsible for managing the organization's capital, also did very well. Bill O'Neil himself attests to this by writing in his book, The Successful Investor, that "Our internal money management group operating from our Data Analysis holding company produced a 1356 percent net return in the five-year period ending June 2003." It is clear that unless you can beat Bill O'Neil in the market, you cannot beat him in business, and where others may be forced to fold up their operations when profitability goes on vacation, O'Neil has the wherewithal and mix of complementary businesses to outlast the difficulties of down economic and market cycles as well as the financial challenges of taking on start-up ventures such as IBD was at one time.
When we hear someone use the term "momentum investor" to describe Bill O'Neil, the investment firm of William J. O'Neil + Company, Inc., or Investor's Business Daily it is always meant in a pejorative sense, almost as a convenient shorthand for dismissing, discounting, and diminishing O'Neil and his methods. By using this pejorative sense, O'Neil's detractors imply that he advocates the mindless buying of high-octane stocks as they streak ever higher. In our view, nothing could be further from the truth, and we offer the following example as proof, one of the countless numbers of examples going back more than 25 market cycles, nearly 100 years.
Figure 8.1. Qualcomm, Inc. (QCOM), weekly chart, 1998–1999.: Chart courtesy of eSignal, Copyright 2010
In 1999 one of the biggest winning stocks of that market cycle was Qualcomm, Inc. (QCOM), shown in Figure 8.1. After a 14-month period of sideways consolidation as highlighted in Figure 8.1, QCOM broke out of a cup-with-handle formation and launched on a tremendous price run. At the time of purchase, QCOM is not exhibiting any real "momentum" per se as it is only just starting to emerge from a long-term consolidation. At this point the company is also showing huge earnings and sales growth, strong profitability, compelling products, and materially significant institutional sponsorship. When all the ducks are lined up, both fundamentally and technically, the stock is purchased. While there are prescribed add points on the way up, there is certainly no mindless "momentum investing" going on, as if how fast the stock is going up is the only criteria for purchasing the stock in the first place. If momentum investing means buying strong fundamental stocks with a large institutional following as they emerge from a proper consolidation or sideways range and then capitalizing on the ensuing huge upside price move, then so be it. Otherwise, as Bill O'Neil would say, the portfolio manager who referred to IBD as "that momentum investor's newspaper" is all wet.