The Big Stock Principle

[The following is from page 80 of Trade Like and O'Neil Disciple by Gil Morales and Chris Kacher.]

My experience with Lumisys served as the genesis for what eventually became my Big Stock Principle, a basic underlying principle of O’Neil methodologies that slowly dawned on me over the next couple of years. The essence of the Big Stock Principle is that in any economic and market cycle certain companies appear on the scene that represent the leading edge of what is happening in the economy with respect to the new industries, new economic developments, and other themes that serve as essential drivers for the economy at any given point in time. In turn, because of their status as key companies representing the niches of growth, whether broad or narrow, in any given economic cycle, institutions have no choice but to own these stocks, and once they do they tend to be a staple of institutional portfolios through many market cycles, even when they aren’t bona fide leaders. In the 1970s these were stocks like Pic N Save and Tandy Corp., in the 1980s they were stocks like Intel Corp. (INTC) and Microsoft (MSFT), in the 1990s America Online (AOL) and Cisco Systems (CSCO), in the 2000s names like Amazon.com (AMZN), Apple, Inc. (AAPL), Google, Inc. (GOOG), Baidu.com (BIDU), and Research in Motion (RIMM), to name just a few from each cycle out of many, many more. These are the stocks to own in any bull market cycle as they represent the areas to which institutional research will direct money flows, and in the process create huge upside price moves. As well, because of the broad, committed institutional sponsorship in these stocks you have a sort of insurance policy when these stocks sell off since there are usually logical pullback areas where institutions will naturally come in to support their positions.

One of the key characteristics of “big stocks” is that they don’t trade 120,000 shares a day on average, they trade several million. Unless there is a cartel of grandmothers out there who instead of buying two shares each of Microsoft and AT&T are buying large blocks of leading stocks, it is institutional money that drives the market, and it is in this river of money flow where you want to set yourself right into the middle. And the only way you can do that is by striving to own the “big stocks” in any market cycle. My horrendous experience in Lumisys ledme on the path to discovering for myself this “big stock” principle as I realized thinly-traded stocks cannot possibly be big stocks. [...]

I also found that the Big Stock Principle is also at work in short-selling, since the best short-sale targets in a bear market are precisely those stocks that were the big leaders in the immediately preceding bull market phase. Institutions that have loaded up on big leaders will in turn create a wave of selling that continues to wash over the stock in a sustained downtrend during a bear market, and we will have more to say about short-selling when we get to Chapter 8.