William J. O'Neil is the author of How to Make Money in Stocks, a book widely regarded as one of the most influential books on growth investing ever written. As a young stock broker, he decided to make an examination of the greatest growth companies in history to see if there was anything that they held in common. Looking at companies like IBM, Polaroid, Xerox, Texas Instruments and Cisco Systems back in their heydays. He came up with a system for buying stocks that he abbreviated as CANSLIM, for the first letter of each of his desired characteristics.

C stands for current earnings

A stands for annual earnings

N stands for news, this is new products, new management and new price highs.

S stands for supply and demand.

L stands for leaders

I stands for institutional sponsorship

M stands for market direction

CANSLIM is a system for stock buying, which has developed quite a following and is the subject of many web sites, but his book goes into when to sell as well.

His book is definitely worth reading, as well as CANSLIM he gives a list of 36 selling pointers and 8 reasons to be patient and hold a stock. A lot of the book is highly original research and will be sure to give you a few ideas.

It probably isn't difficult to see why O'Neil has attained such popularity, he is featured in Jack D. Schwager's widely read book Market Wizards where in the introduction Schwager points out that his system has returned better than 40% a year throughout the 80s (don't ask me how he has gone since then, I don't know, Schwager's book was written in 1989 and he refers to O'Neil's success in the "last decade"). O'Neil runs William O'Neil and Co, one of the most widely used and respected securities analysis firms on Wall Street, and publishes Investor's Daily, which he set up in direct competition to the Wall Street Journal. On the Internet O'Neil is almost as big as Warren Buffett.

The first and most important thing that O'Neil recommends about selling is that you should get rid of losing stocks as soon as possible and buy more of your winners. As such, O'Neil is a momentum investor. In O'Neil's method, you don't average down your cost by buying your falling stocks, thus reducing the cost of your purchase, you average up.

Limit your losses, O'Neil never lets a trade cost him more than 7 or 8%, he always sells out before the price has a chance to fall further. Some of O'Neil's biggest wins have come from stocks that have already marched up a hundred percent or more. Don't forget, this is a growth approach, the types of stocks O'Neil targets are supposed to go up 10 times or more, so even if it is already up 500% this is no reason not to buy using this approach. You can see though why O'Neil is so strict about selling falling stocks, such an approach will get you in on all sorts of semi-speculative hot stocks, you need to be extremely careful not to ride them all the way back down to zero.

O'Neil modifies his "stop-loss" sell point by sending it up chasing the actual price. He is very strict about limiting losses at first purchase but his trailing stop-loss does leave a fair amount of room as it departs from the buy price.

The approach has a low probability of success, but works extremely well if combined with money management techniques. In Market Wizards O'Neil says that roughly two thirds of his trades close at a profit, but the majority of his success has come from a very small number of purchases, only 10 or 20% of his stocks are what he would describe as truly outstanding.

His selling criteria for risk management are fairly simple, trailing stop loss points starting at 7% below purchase price and then moving up behind the price. He does this with his winners and his losers, refusing to sell a stock just because it has gone up a lot, only selling when it falls. He doesn't decide to sell a stock just because it is up 100% on his purchase price. It is only by extracting the maximum profit from winning trades that he can afford to make mistakes with his losers. In this respect O'Neil comes across as more of a trader than an investor, so it isn't surprising that he made it to Market Wizards which is a book mainly about traders.

He has a general disdain for value methods, O'Neil sees nothing wrong with buying something with a PER of 50 or more, the really top growth stocks that he targets are often on such ratios even at the beginning of their major moves upwards. Although a buy and hold investor could never get away with such tactics, O'Neil's aggressive trading to limit downside risk allow him to profit from taking positions in such stocks because genuinely overpriced speculative stocks are quickly weeded out from his portfolio as soon as they start to fall, leaving only the genuine super stocks to continue their hundredfold increases.

O'Neil also doesn't think much of dividend yields, growth stocks like the ones he chases usually retain earnings to finance their expansion. As such they rarely pay much at all in dividends.

His views on diversification are perhaps similar to Warren Buffett's. He is definitely a focus investor, using almost identical language to Buffett and Munger when he says that diversification is a hedge against ignorance only. He is very selective about his purchases and watches them like a hawk. As such there is no need to diversify extensively, and he wouldn't have a hope of finding 100 stocks that meet his criteria anyway, let alone being able to trade them effectively.

Rarely does O'Neil ever own more than 5 to 7 stocks, though I am sure he keeps an eye on a number of stocks which find their way into his portfolio when an existing favoured stock is dropped.