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

1.6. POSITION CONCENTRATION

A big part of handling a winning stock correctly is properly scaling one's position size. If you only want to make average market returns, then scale your positions to a very small size, and your portfolio will act very much like a market index. Having scores of positions is nothing more than "closet indexing." Most mutual fund managers take positions that make up 1 to 2 percent of their portfolio equity or less, and they may have 100 to 200 positions or more. To O'Neil, this is anathema. If you want to make big returns, then you absolutely must concentrate your capital in a strongly-trending stock, and position sizes of 1 to 2 percent of one's total portfolio equity are, to put it bluntly, quite wimpy from an O'Neil perspective. The O'Neil method of pyramiding into strongly acting positions while weeding out weaker ones generally gets an investor concentrated in the right stocks during a bull market cycle. At times, your authors have been fully invested in as few as two stocks, using full, 200 percent margin, so that each position represents 100 percent of the account's gross equity. This is how you make big money in the market, and it is the essence of handling one's stocks properly to achieve maximum effect.

For this reason, O'Neil eschews "diversification" and cites the wisdom of Gerald Loeb, who declared that diversification was a "hedge for ignorance." O'Neil's solution was to be very specific about what stocks one owned in any bull market cycle, ...