An excerpt from an interview in The Market Wizards by Jack Schwager:

Q. Where did you first develop your trading ideas?
A. I went through the same process that most people do. I subscribed to a few investment letters and most of them didn’t do too well. I found that theories like buying low-priced stocks or stocks with low price/earnings (P/E) ratios were not very sound. Back in 1959, I did a study of the people that were doing very well in the market. I got copies of their prospectus and quarterly reports and plotted on charts precisely where they had purchased each of their stocks. There were over 100 of these securities and when I laid them out on a table, I made my first real discovery: Not some, not most, but every single stock had been bought when it went to a new high price. So the first thing I learned about how to get superior performance is not to buy stocks that are near their lows, but to buy stocks that are coming out of broad bases and beginning to make new highs relative to the preceding price base.

Born in Oklahoma and raised in Texas, William O’Neil began his career as a stockbroker with Hayden, Stone & Company where he started to formulate his comprehensive investment strategies. His fascination with the securities market led him to develop his own computerized study of what makes a stock successful. This study was adapted and published as The Model of the Greatest Stock Market Winners.

The 1959 Study That Changed Everything

The research O’Neil describes in the Market Wizards interview is a model of how to build a trading system from evidence rather than theory. He did not start with a hypothesis about why stocks move. He started with outcomes: stocks that had already performed well. He gathered the actual purchase records of the people making those returns, charted them, and looked for the pattern. What he found was unambiguous. Every successful stock was bought at a new high price.

That finding ran counter to the conventional wisdom of 1959 and continues to run counter to the instincts of most retail investors today. The dominant retail impulse is to buy cheap: low P/E ratios, low absolute price, stocks near their lows. O’Neil’s data said the opposite. The stocks that went on to produce the greatest returns were not cheap at the time of purchase. They were at new highs, emerging from consolidation bases, at the point of maximum institutional interest and minimum short-term reversal risk within the trend.

This is the same observation that runs through the systematic trend following world. The TurtleTrader rules buy breakouts to new highs and sell breakouts to new lows. John W. Henry described his system as one that follows price rather than tries to predict it. O’Neil arrived at the same structural conclusion from the equity markets that Dennis and Eckhardt arrived at from commodity futures: price at new highs is a signal, not a warning.

From Hayden Stone to Investor’s Business Daily

O’Neil began his career as a stockbroker at Hayden Stone and Company in the early 1960s. He built his research methods while working at the firm and used the returns from his first successful trade to fund the purchase of a seat on the New York Stock Exchange in 1963, making him one of the youngest members of the exchange at that time.

He founded William O’Neil and Company in 1963, a data services firm that sold research to institutional investors. The computerised database of stock market information he built became one of the most comprehensive in the industry. In 1984 he founded Investor’s Business Daily as a data-driven alternative to the Wall Street Journal, built around the same principles he had developed in his trading research: charts, breakouts, relative strength, and new highs rather than value metrics.

The CANSLIM methodology he developed distils the key characteristics of the best-performing stocks before their major moves: earnings growth, new products or leadership, supply and demand, leading industry, institutional sponsorship, and market direction. The system is price-driven at its final trigger: it waits for a stock to break out of a base to a new high before entry. The fundamental analysis identifies candidates; the price action determines the entry.

O’Neil and the Trend Following Connection

O’Neil is a stock trader, not a futures trader, and his methodology integrates fundamental analysis in a way that systematic commodity trend following does not. But the structural core of the approach connects to the same underlying principle. Markets trend. The way to participate in a trend is to buy when price signals that the trend is beginning, not to anticipate where the trend might start from. And the instinct to buy cheap, to look for stocks near their lows or at discounted valuations, is the instinct that causes most retail investors to miss the moves that generate the largest returns.

O’Neil’s 1959 research established that empirically for equities fifty years before the academic literature on momentum investing caught up with it. The same evidence base exists for commodity and currency markets across decades of systematic trend following returns. Price momentum works. New highs are not a reason to avoid a position. In the right context, they are the entry signal.

Frequently Asked Questions About William O’Neil

Who is William O’Neil?

William O’Neil is a stock trader, investor, and entrepreneur profiled in Market Wizards by Jack Schwager. He founded William O’Neil and Company in 1963, created the CANSLIM stock selection methodology, and founded Investor’s Business Daily in 1984. He began his career as a stockbroker at Hayden Stone and Company and built his trading approach from a 1959 study of over 100 top-performing stocks.

What did O’Neil discover in his 1959 study?

He discovered that every single stock in his sample of top performers had been purchased at a new high price. None were bought near their lows. This finding contradicted the conventional value investing instinct to buy cheap stocks and became the foundation for his CANSLIM system and his career as a trader and researcher.

What is CANSLIM?

CANSLIM is O’Neil’s stock selection methodology based on his research into the characteristics of the best-performing stocks before their major moves. The acronym covers: Current earnings growth, Annual earnings growth, New products or leadership, Supply and demand, Leading industry, Institutional sponsorship, and Market direction. The system uses fundamental analysis to identify candidates and price action, a breakout from a base to a new high, as the entry trigger.

How does O’Neil connect to trend following?

The structural core of O’Neil’s approach shares the foundational principle of systematic trend following: buy at new highs, not at lows. The TurtleTrader rules enter on breakouts to new highs across commodity and currency markets. O’Neil enters on breakouts from bases in stocks. The instruments differ; the underlying logic is the same. Price momentum is a durable market phenomenon, and the instinct to buy cheap is the instinct that loses.

Trend Following Systems

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