The Profiting Prophet of Playa del Rey

Thomas M. Kostigen is the author of "What Money Really Means."

Is that a cup and handle? Do I see a "W" pattern on the chart in front of me?

I am sitting in my den in Venice, staring at a computer screen, trying to discern these things. The charts I am scrutinizing are of stock prices, and I am trying to find the right one, the one that's behaving like a stock whose price is about to soar.

Finally, I think I've found it, a ladle-looking image that marks the rise, fall and rise again of a company's worth in the market. This particular company, EZCorp Inc., operates pawnshops and payday loan stores. It's based in Austin, Texas, and has about 2,500 employees. But it doesn't really matter what it does or who works there or where it's located. Those things aren't considered important by the system of stock trading I am following, CAN SLIM.

This system, I've been promised, works wonders. The name may sound more like a diet technique than a way to get rich, but it will supposedly teach me "the secrets to building stock market wealth."

A lot of people are believers. In fact, there's a huge investment subculture that follows the seven-step process buried within that acronym and devised by a financial guru from Playa del Rey. I am about to push a button and become one of his disciples.

I had vaguely heard of William J. O'Neil. I had even written a few stories for the newspaper he owns, Investor's Business Daily. But beyond O'Neil's connection to the paper, I knew practically nothing about him, despite my 15-plus years in financial journalism.

Which is kind of strange if you think about it.

In his own orbit, I would come to find, O'Neil is lauded as a genius, a maverick who invented a system of stock trading that unfailingly achieves what the no-nonsense title of his national bestseller says: "How to Make Money in Stocks . . . in Good Times or Bad."

He is said to be the first person to computerize market data, and he owned a seat on the New York Stock Exchange when he was only 30. Besides publishing Investor's Business Daily, which claims a readership of 800,000, he runs William O'Neil & Co., which provides statistics and analysis to hundreds of Wall Street's largest institutions.

He has given seminars and workshops across the globe. And thousands of people have joined investment clubs to follow his system of stock trading. Closer to home, he owns a printing company that publishes the Blue Cross guide and parts manuals for Nissan and Toyota, as well as other utilitarian publications such as flight schedules for Federal Express and rival DHL.

And yet, for all that, O'Neil remains largely below the radar. A showcase of "the world's greatest investors" by SmartMoney magazine, published last August, doesn't mention him, even though the investment gain trumpeted by O'Neil--860% from 1998 through 2005--suggests that he walloped the entire roster of All-Stars.

Indeed, the performance O'Neil touts is about eight times better than that of Warren Buffett, considered by many the world's greatest investor. The Oracle of Omaha, it would seem, has nothing on the Prophet of Playa del Rey.

But if that's true, if Bill O'Neil's stock-picking system is so extraordinary, why do the pundits, polemicists and popular observers of business and finance largely ignore him? Do they know something about O'Neil's methodology that gives them pause? Is it possible that CAN SLIM isn't all it's cracked up to be as a money-making vehicle? Or is it simply that most financial publications don't want to offer up the insights of a competitor, the man behind Investor's Business Daily?

O'Neil is nothing if not self-assured. He maintains that he predicted the market crash of October 1987 and the devastating bear market that began in March 2000. He even says that he would have called Black Tuesday, the infamous crash of '29, had his system been around back then.

However, CAN SLIM doesn't have a formally audited track record to verify O'Neil's investing prowess. So I called my friend Jeffrey Bronchick to see what he thought. Bronchick is the chief investment officer for Reed Conner & Birdwell, a Los Angeles firm that manages nearly $4 billion for its well-heeled clients. His blunt take on CAN SLIM: "Nothing like that has ever been proven--except wrong." Red flag No. 1.

But I also know Bronchick's tendency for hyperbole. And so I asked James J. Cramer, the most omnipresent financial commentator in the media today--as television host of CNBC's "Mad Money," radio host of "RealMoney" and co-founder of TheStreet.com--for his impressions. Given what Bronchick had said, Cramer's response surprised me. He described how he uses Investor's Business Daily for some of his research and, when it comes to CAN SLIM, Cramer said simply: "I can't knock the system."

Now I was truly confused. I decided I'd have to dig deeper myself, sifting through O'Neil's past and into CAN SLIM and the rest of his businesses to determine whether his claims were true.

Like a lot of good stories, this one begins at childhood.

William O'Neil says his father "wasn't in the picture" and that his mother traveled a lot, so it was his grandmother and an aunt who mostly looked after him.

Growing up during the Depression in Oklahoma and Texas, O'Neil said he started working in the third grade. He sold newspapers, took odd jobs. But it doesn't take a degree in psychology to grasp what he then told me: "I read an enormous amount of autobiographies of everybody . . . Richard Sears and Henry Ford and different ones that had been highly successful." In other words, great male figures.

College came next, then a stint in the Air Force. After that, he went out to seek his fortune. "And then I moved to Los Angeles because I thought the future was here," he said.

In quick strokes, I learned that O'Neil began working at a brokerage firm, where he began formulating the investing system that would become CAN SLIM. He eventually struck out on his own, and in 1984 he launched Investor's Business Daily to espouse CAN SLIM's virtues and aggressively market it through seminars. Later, well after the Internet took hold, he began investors.com, widening his reach via the Web.

O'Neil's core belief--the thing he tries to get across above all else--is that you can make money on your own without relying on Wall Street research or professionals. "Anybody can do well in the market," O'Neil said, "if they are willing to sit down and do a little bit of studying, a little bit of homework so they understand what they are dealing with."

Of course, getting to study with the master doesn't come cheap. A CAN SLIM workshop can cost from $179 to $6,995.

And still, there are no guarantees of success. Playing stocks is inherently risky. "There will always be a Home Depot and there will always be professional plumbers," said Bronchick. "If you are doing it yourself, you had better damn well know what you are doing--or you are going to be up to your neck in water."

Over lunch at the Ritz-Carlton in Marina del Rey, I asked O'Neil about this, about risk and the responsibility he has to people who follow his system and take his advice.

First, he said, people need to know that CAN SLIM isn't his system--at least not in one sense. "It wasn't based on what I thought or what I believed or how I thought the market worked," he explained. "What we did is, we said, 'Let's approach it in a scientific way--the way they do scientific medical research.'

"We'll look at every single stock each year--and we went back for quite a number of years--that went up the most. These are stocks that went up 100% to 1,000%. And we looked at what were the characteristics at the beginning point before they went up 100% to 1,000%."

The result was CAN SLIM, which stands for the seven traits that winning stocks have in common. Under O'Neil's rules:

* A company's Current quarterly earnings per share should be up at least 18% year over year.

* Annual earnings should also be up 25% or more for each of the last five years.

* New products and services--not cost cuts--should be fueling earnings growth.

* Supply and demand should reflect smart money coming into a stock, with above-average trading volume while the share price is increasing.

* Only the Leading stock in a leading industry should be bought.

* Institutional ownership, especially from mutual funds with strong performance records, is important.

* Market indexes (the Dow, S&P; 500 and Nasdaq) should be enjoying a sustained rise, given that three out of four stocks follow the market's overall direction.

The system goes on to set certain sub-rules and restrictions, and to decipher trading patterns. It talks of "pivot points," when a stock is getting ready to rise. And it employs rules about when to pull the trigger and sell. It is, at its root, a trading philosophy antithetical to that of value investors like Buffett. They believe in gobbling up underpriced stocks--identifying diamonds in the rough, buying them low and selling high. O'Neil, however, believes in buying high and selling higher, a version of an old Wall Street trading strategy known as "momentum investing."

As we chatted about the virtues of CAN SLIM, O'Neil munched on a sandwich. The Ritz is fancy, but neither he nor the two staffers who joined him were. (The extent of O'Neil's personal wealth is a matter of mystery. His colleagues like to speculate about how much he's worth, but O'Neil himself demurs.)

He wore an open-collared blue shirt, chinos and casual shoes. At 72, he is wiry and has wispy white hair. His blue eyes are piercing, and his cragged face denotes a life of intensity. Still, he doesn't come across as a power broker. He is so soft-spoken, it can be difficult to hear him.

His offices, just a few miles away, are low-key, too. Across the country, in New York City, another financial media baron, Michael Bloomberg, has a Lexington Avenue headquarters designed by architect Cesar Pelli. O'Neil's empire is located in an industrial park by a Home Depot. There's no downtown high-rise, no ocean-view executive suite. Windows look on to tar--parking lots, a dead-end street.

About 350 people work there behind locked gates alongside a printing plant and computer center. O'Neil's office is sparse, with right-out-of-Staples furniture, five framed front pages of Investor's Business Daily on the walls and a color photo of him shaking hands with President Reagan.

At lunch, I picked up on something that one of O'Neil's staffers said about Sam Walton, the billionaire founder of Wal-Mart who famously drove around visiting his stores in an old pickup truck. "He uses him as an example," said Kathleen Sherman, who handles public relations for O'Neil. As she made the link, my mind flashed once more on O'Neil's childhood search for male role models.

O'Neil himself drives an older Toyota Landcruiser. It appears out of place behind the gates of his flagstone ranch house, which sits in a tony part of Santa Monica overlooking a golf course. But O'Neil doesn't play. Associates say that he prefers to keep his mind focused on one thing: business.

I hit the button and wait for the e-mail confirmation to arrive. Almost immediately, it's there. I've just purchased 10 shares of EZCorp--EZPW--at $16.49 each.

Now I sit--and watch. If the price goes down 8%, I'm supposed to sell, cutting my losses quickly. The basic rule for selling after a stock goes up is even simpler: Don't.

Later that day, EZCorp, which was rising steadily, begins to fall quickly. I grow anxious. I don't want to have to sell and get out right away with a loss. I try to remember all the CAN SLIM rules: "Be patient." "About 40% of stocks you buy will pull back." But one rule in particular keeps popping into my thoughts: Take the emotion out of it.

That's not quite so easy, though. I think of a book called "Mean Markets and Lizard Brains," by Terry Burnham. It argues that man's yearning to profit is inextricably entwined with the same senses he once used to hunt and gather in prehistoric times.

The way O'Neil sees the world, however, I am supposed to be more evolved, less driven by my gut, less emotional--more like a computer.

In the beginning, in the early 1960s, O'Neil started keystroking data on winning stocks into giant mainframes, and then used the resulting analysis to produce charts--lots and lots of charts.

The charts made it easier to pick out stocks poised to zoom upward (including those whose trading patterns resemble a ladle or a "W"). The process was cumbersome, but large Wall Street institutions such as Dreyfus and Fidelity ate up O'Neil's offerings--his raw facts and figures, and his analysis too.

This is still the business of William O'Neil & Co. today. "I like the massive amounts of fundamental and technical data at my fingertips," said Scott Johnston, who manages stock funds for Sterling Johnston Capital Management in San Francisco.

The computer housing all the historical information is called WONDA, for William O'Neil Direct Access. It is the brains of his business, the command center from which all else flows--data, analysis, charts, graphs and even story ideas for his newspaper, known to many as IBD.

Inside O'Neil's fluorescent-lighted offices last summer, Chris Gessel, IBD's executive editor, pointed to a chart and took me through the process of how a stock pattern leads to a story. He was excited, very excited: "It's a stock . . . that's up . . . 400% . . . over the past two years!"

Admittedly, my reaction was different. Surrounded by this jumble of statistics, I put my pen aside so that I wouldn't stab myself to death out of boredom. Then, suddenly, I blurted out: "Is this really journalism?" Gessel blanched. My words had clearly struck him.

"Absolutely," he answered after a pause. "In some ways it's the purest journalism because it's not reflective of what you think of a stock or a market. Ultimately, this is based on years of research, on what makes the stock market work.

"Unlike my previous experience," added Gessel, a veteran of the Los Angeles Daily News, "what we're doing each day is looking at the market dispassionately."

An ex-colleague described Gessel as an affable guy, a "true believer" in the CAN SLIM system. And from his presentation you can tell that he really thinks this is the best way to cover the world of finance--from the outside in, following the numbers. The 41-year-old is credited with writing "The Big Picture" column in 2000 that called the top of the market and advised people to move into cash.

That's just the kind of prescience that O'Neil was looking for when he started IBD. He says he got into the newspaper business because he was fed up with the media's coverage of the financial markets, and thought he could do better.

At the beginning, critics questioned whether IBD was likely to last very long. "I wouldn't give it a year," William Garrison, a well-respected investment advisor, said in 1984. Today, he concedes, "I've got to eat my words," and he praises the publication for its ubiquitous charts and graphs. He finds the stories less compelling, though, saying that they're "for the birds."

O'Neil makes no apologies for the fact that IBD was hatched to spread the love of CAN SLIM. But Steve Fox, IBD's editor when it hit the newsstands 22 years ago, said that's only part of the equation. It's true, he told me, that O'Neil wanted to market the system. But he also explained that his former boss has "a political point of view and created a vehicle to express that point of view."

O'Neil, a GOP supporter who claims influence with the Bush White House on economic policy, stresses that he doesn't involve himself in editorial affairs. There is no question, however, that IBD serves a decidedly conservative agenda. The newspaper's op-ed page regularly calls for tax cuts and supports racial profiling as a means to combat terrorism.

O'Neil himself expresses strong conservative views in private and even, on occasion, publicly: An open letter from O'Neil that appeared in the New York Times right after 9/11 called on the government to reduce the capital gains tax, lower corporate income taxes, lower interest rates, open up the deep interior of Alaska to oil drilling, and begin funding a missile defense system.

One former employee told me he left IBD when Jesus Christ was featured in the newspaper's "Leaders & Success" column.

Fifteen days have passed since I invested in EZCorp, and the stock is flagging. At one point as I watch, it's off 50 cents a share from the price at which I purchased it. Suddenly, it's down 60 cents.

I really don't want to lose money, even though this is something of an experiment. My investment is a token, but it's still my money. And besides, following EZCorp this closely makes me feel bad and good about myself. Bad when the stock price falls. Good when it goes up. So much for taking the emotion out of it.

I think of other words of advice from O'Neil: "Write it down." He says you're less likely to act out of hope and fear, the two things that drive most investors, if you jot down your own set of rules and what you are doing to abide by them.

I take out a pen and scribble: "Ugh!"

Last summer, I began attending gatherings of O'Neil devotees, eager to see whether any of them had attained the CAN SLIM self-control that I was finding so elusive.

I had already talked to plenty of people who swear by these sessions, known as IBD Meetups. In all, there are 161 of them, with more than 20,000 members in six countries.

My maiden Meetup was held, as it is each month, in a small branch library in Santa Monica. When I walked in around 7 p.m., I was gripped by that first-day-of-school feeling. I had no idea what to expect. Would this be a tight clique? Would I be intruding? What if the discussion became esoteric and highly technical? Would I feel stupid?

I've spent time on the floor of the New York Stock Exchange and nosed around corporate boardrooms. I've sat on trading desks the size of football fields. But this was the proverbial financial Main Street, and that's a whole different thing.

Four long folding tables were arranged in a square in a back room. A blackboard and an audiovisual screen were on hand. As I arrived, some people were yapping about stocks. "I still like Google," said one. "At the right price," chimed in another.

I put my backpack down at the end of the table as Norman Langhout, the meeting's organizer, beckoned everyone to sign in and sit down. "Helloo," he said, trying to get people to pay attention. "Helloo. . . ."

About 30 people had now gathered. Langhout took a show of hands for first-timers; there were four of us. "This style," he said immediately, "is not suitable for everybody. You have to have the right type of temperament." The statement came across as a disclaimer, like one of those warnings in a pharmaceutical ad.

Next, Langhout asked, "How many people subscribe to IBD?" All but one person raised a hand. "It's difficult to participate," Langhout said, "without subscribing."

He looked at his watch and told us that IBD had prepared a call. From the speakerphone in the middle of the table, a deep male voice welcomed us, a little like the Wizard of Oz.

It was Chris Gessel, who proceeded to dispense advice on volatility, trading volume and which stocks looked like they were going to start "breaking out." At the same time, charts depicting these potential winners were displayed on-screen. Gessel then tossed out a few more company names before ending on a bit of a down note: The market, he said, wasn't "showing enough strength or weakness to make money."

After the call ended, Langhout picked up the discussion. He bantered about which stocks were leading the Nasdaq, the Dow, the S&P; indexes. Someone asked about Intel, and the man working the audiovisual display pulled up the computer-chip maker's chart.

"Look at that chart. It's going straight up!" said one attendee. "It's beautiful," said another. "How do you play that?" asked a newcomer.

By now I was comfortable enough with the meeting's dynamic to feel a little drowsy. But things soon picked up again when Langhout read off people's stock picks and we all looked at the charts and voted whether to put the candidate on our group's "watch list."

This bred some camaraderie. Even I began to feel chummy with those with whom I agreed. Others razzed the stock picks they didn't care for. It was like "American Idol" for investors. In the end, only three stocks out of 15 made the list.

The meeting broke at 8:55, and Langhout shooed us out with a final "helloo!"

Over the next several months, I faithfully attended the Meetups in Santa Monica.

I got to know doctors, engineers, mortgage brokers and tech executives. Most of the people were in their 50s, suburban middle-management types. More than one clipped his pen to the front pocket of his shirt.

One night, Peter Umbrich, then a day trader who was also selling subscriptions to IBD on the side, called me over. He was eager to tell me how the CAN SLIM system really works. It's great, he said. But it isn't easy to make money.

He noted that CAN SLIM calls for patience and for investors to buy only at the most opportune moment. In the real world, though, "human nature tends to get in the way," Umbrich said.

O'Neil has written a book, "The Successful Investor," to lay down more rules and provide "realistic" help in today's stock market. Put another way: He wants to help take more of the emotion out of stock trading. "All these mistakes with the system is just human nature on parade," he said. "Don't deal in personal opinion. Stick with the system."

But Sia Shahsavari, another Meetup attendee, has his doubts. CAN SLIM now has "so many rules," he said, "I don't think any human can follow it."

Or, as Tom Lydon, an investment professional in Huntington Beach, asserted: "O'Neil's system over time does a tremendous job, if only because of the amount of research." But what percentage of CAN SLIM users are equipped to follow the discipline O'Neil demands? How many people can really take all that time out of their busy lives--when they've got to get to work, drive the kids to soccer, make dinner--to perch themselves in front of the screen and pore over stock charts?

Not enough. "That," Lydon said, "is where people fall short."

I am sitting again in front of the computer, rooting for my stock as if it's a racehorse. It's no use: EZCorp continues to flag, and I feel lousy. Dejected.

A few days later, though, EZCorp begins to turn up. And up.

And that's when it hits me: CAN SLIM can be a gold mine--as long as you can steadfastly follow the rules. A computer can do it. WONDA can. Humans, however, are emotional.

I keep repeating the O'Neil mantra: Remove the emotion from decisions. Remove the ego from your behavior. Be successful.

There's nothing wrong with any of those things. They're even admirable traits. But they are difficult to live up to--like a father's expectations.

Some do.

I can't. I don't.

Finally, after about six weeks, I dump my shares of EZCorp at $15.87. I wind up recovering most of my investment given the recent uptick in the stock, but still I come out behind. Overall, my loss amounts to $6.20; thank God I didn't buy more shares.

I was supposed to have sold earlier, violating O'Neil's rule of "stop loss." But I was away from my computer, being human. I also could have gotten back in and lapped up more shares, catching that tricky "double bottom" chart pattern. Yet I didn't want to continue to somnolently stare at my computer all day, every day.

In the end, CAN SLIM proved just too rigorous to stick with over time. In that way, it is like a diet technique after all.

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