Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

1.2. BUY EXPENSIVE—NOT CHEAP—STOCKS

Like Livermore, O'Neil despises a lazy approach to the market because it results in one trying to take what is perceived as the easy route to stock market riches. Nowhere else is this more embodied than in the idea of buying stocks that are "cheap." This age-old trap is easy to fall into, since most novice investors approach the market with an incorrigibly ingrained consumer mentality that views anything selling today at a lower price than it was yesterday as a "bargain." This is perhaps because the individual investor views herself as a consumer endpoint, when in fact the investor should act like a business that purchases raw or finished goods and intends to turn around and sell them at a higher price. Hence, O'Neil's story about red dresses and yellow dresses, where the slower-selling yellow dresses are marked down by the store owner to get them out of the "portfolio," otherwise known as the store inventory, so that more of the hotter-selling red dresses can be purchased and resold at higher prices.

O'Neil advocates buying stocks that are "red dresses" selling "like hotcakes" at all-time high prices. The reason for this is simple: "... real leaders start their big moves by selling at new price highs, not near new lows or off a good amount from their highs" (How to Make Money in Stocks, 4th ed. [New York: McGraw-Hill, 2009], 426). In a contrarian sense, this is what makes the concept of buying stocks at new highs so effective. It is simply ...