William O'Neil, founder of Investors Business Daily, is probably the most followed investment guru today. He developed his set of trading rules based on his examination of past events and his experience.
He thoroughly covers his philosophy in his most popular book: How to Make Money in Stocks: a winning system in good times or bad, 3rd Edition, 2002.
He stresses earnings momentum, strong technical action and institutional sponsorship.
He also emphasizes the importance of selling. Most importantly he stresses a firm rule to sell any stock that falls 7-8% from your purchase price. His strategy is to cut your losses while they are small and to let your winners run. While this is not exactly a new idea most investors have trouble actually selling losses quickly. Page 90:
Remember, 7% to 8% is your absolute loss limit. You must sell without hesitation - no waiting a few days to see what might happen or hoping the stock rallies back; no need to wait for the day's market close.
Once you're ahead...do not sell a stock just because it is off 7% to 8% from its peak price.
Another of his points is more surprising to many investors. He doesn't advise buying stocks that are "cheap." Buying near the lows or stocks with low Price to Earning ratios is a mistake, in his opinion, instead he suggests buying when stocks are "strong," which is often near their highs with high PESO.
CAN SLIM is an acronym to help select the most successful stocks:
"The vast majority of superior stocks will rank 80 or higher on both EPS and RS Ratings before their major moves" (page 169). EPS and RS ratings are calculated by and printed in IBD.
"To invest well, it's important to stay tuned to everything from currencies to corn and understand what's leading and lagging" (page 183). This statement illustrates one of the weaknesses with the approach laid out in the book. It is unlikely even a fraction of 1% of those who read this book have any realistic chance of following this "important" advice (and this is one of many such important items to understand and track). In an attempt to provide useful tools for investors the book provides a huge number of indicators and rules, which must all be followed. While neo-O'Neilian methods appear to be the most widely followed by avid individual traders the number who actually follow all the rules is questionable. Nevertheless many of his ideas and tools he recommends are quite valuable. Those insights along with the volume of those using ideas similar to those he exposes makes this book a must read for any serious trader, speculator or investor.