Nicolas Darvas

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Nicolas Darvas (1920–1977) was a dancer, self-taught investor and author. He is best known for his book, "How I Made $2,000,000 in the Stock Market."

Career[edit]

Dancer[edit]

Hungarian by birth, Darvas trained as an economist at the University of Budapest. Reluctant to remain in Hungary until either the Nazis or the Soviet Union took over, he fled in June 1943 at the age of 23 with a forged exit visa and fifty pounds sterling to Istanbul, Turkey. Sometime later, he met up with his half-sister Julia. who became his partner in a dancing team in Europe and the United States.[1]

In April 1953 the two appeared with Judy Garland and Bob Hope.[citation needed] By 1956, they were touring.[2][3]

How Nicolas Darvas Made $ 2 Million From The Stock Market?[edit]

When Nicolas Darvas initially started trading in the market, he struggled a lot and made losses too. Later, after gaining experience he discovered his ‘Box Theory.’ He believed that the shares which move up and down the chart, move in a specific box pattern. Till the time the share is moving in a limited range, it is known as a box. When the share moves out of that limited range i.e. moves out of that box and increases along with increased volume then Nicholas added fundamentals to this technique and traded in such shares and he also made million dollars.

After making half a million dollars from the share market, Nicolas Darvas’s self-confidence was on Cloud-nine. He thought he had got hold of the share market. He felt as if his sixth sense had been activated. After traveling to various countries, by working just a few hours for analyzing and investing in the market, he made millions. So, now Nicolas thought he should put in extra effort in the share market to make more money and hence, he allotted his full-time in the market for trading, unlike earlier. Thus, he started focusing on day-trading.

By trading in the shares of E.L.Bruce company, he had earned around $ 1, 60,000 which he now decided to use it for day-trading. Here, we can learn one thing from this incident that is ‘Learn to re-invest your profits.’

Now, Nicolas had indulged himself completely in to day-trading. He simultaneously bought and sold shares within fractions of minutes. Nicolas carried on day-trading in the shares of various companies such as Rome Cables, American Motors, American Cables, Sharon Steel, Richards Chemicals, etc. and he suffered a huge loss of around $ 1, 00,000 in these trades.

Nicolas then thought to himself, how can a person like me who made millions from the market, suffer such a huge loss of $ 1, 00,000? So, when he analyzed the reason behind his loss, he found out that it was his ‘ears’ that were at fault, yes you read that right! Nicolas used to listen and react to every news that fell on his ears and simultaneously trade following such news. Hence, made such losses.

Earlier, while he used to travel various countries for performing dance shows and trade in the share market by being away from the market, he was still able to analyze the trend of the shares in the market successfully and so he’d earn good returns from the market as well.

Nicolas had now understood that ‘Trading only when there is an opportunity in the market will help him earn good returns, trading frequently will only lead to losses.’

While Nicolas was suffering losses because of day-trading, the only thing happening right for him at that time was, his earlier investments which he had made in Thiokol Chemical and Universal Control which were on delivery basis. Here, delivery-trading refers to holding a share until you get the right value for it.

Nicolas Darvas invested in the shares of Thiokol Chemical and Universal Control based upon his box theory when the shares indicated that they are moving out of the box i.e. moving out of the limited range. At that time, he traded in those shares by following the stop-loss and hence, made good returns. Despite the fact that he only analyzed these shares in the time apart from the time he was traveling across countries and performing, he was still able to make good profits. On the other hand, in day-trading where he allotted most of his time, he still had to face huge losses. So, from this scenario, we learn that ‘Too much analysis will lead to paralysis.’

There is too much volatility in day-trading. Thus, Nicolas understood that carrying out day-trading by analyzing the trend is too difficult a task. Where-as, in delivery-trading, by following his box technique, it was feasible for him to invest in shares here. So he now decided that he would not indulge in day-trading again. From this, we learn that ‘Making a mistake is acceptable, but repeating the same mistake is a blunder. So don’t repeat the same mistake, by mistake.’

Consider, if someone meets an accident and gets his hand fractured then for him to recover and get back to normal takes some time. Similarly, Nicolas Darvas took some time to recover from the mind-set of day-trading where he suffered huge losses.

If we are scared to get in the flight for the first time, we should make sure to take the next flight soon so that our self-confidence remains intact. This was well understood by Nicolas and so he decided to get back to delivery-trading by following his box theory.

By this time Nicolas had understood that day-trading isn’t his cup of tea and neither there are too many chances of being successful in day-trading. So, he once again made up his mind to get back to delivery-trading and hence, started reading market quotations after the market closed daily.

Now to regain his confidence in delivery-trading, Nicolas started making small-small trades in the market based upon his box theory. Here too, he earned some and he lost some. But because he followed the stop-loss, his loss was limited and the trades where he made a profit, he earned a good profit there.

Talking about Thiokol Chemical and Universal Control where his investments reaped good profits, he says, ‘When a share is in an uptrend, we should hold on to the share and not hurry to sell it off. If the share is in an uptrend, then we have a chance to make a good profit there. On the other hand, when the share indicates or gives a signal of moving in the downtrend, then we should sell it off early.’

Further, when the share Universal Control gave an indication of moving in the downtrend then there Nicolas booked his profit and sold off the share. He then re-invested this profit in the share of Texas Instruments which indicated moving out of the box i.e. moving out of the limited range according to his box theory. Similarly, when the share Thiokol Chemical gave an indication of moving in the downtrend then there Nicolas booked a profit of around $ 8 lakhs and sold the shares.

Now it was a risky affair to invest this huge profit in just a single share. Nicolas Darvas wanted to invest this profit in an up-trending share so as to increase his profit.

How did he do this? Do pay attention as we are revealing a very important secret here. So, Nicolas Darvas identified ‘four’ such shares who were earlier moving in a limited range, moving in a specific box. They had recently given a signal of an uptrend. Those four shares were namely, Zenith Radio, Beckman Instruments, Fairchild Camera and Litton Industries.

Nicolas Darvas didn’t invest the entire $ 8 lakhs in these shares. He just bought a few quantities of these shares. He divided around 23% of that $ 8 lakhs profit proportionately in these four shares respectively. Also, he maintained a stop-loss of 10% for each of these trades. Amongst these shares which would be the ones who would mostly be in an uptrend, only the shares would know. Later on Litton Instruments and Beckman Instruments both hit the set stop-loss.

As Nicolas had only bought a few shares and had set a stop-loss as well, so even though he went wrong in these trades, he did not incur too many losses. And the other two trades that proved right, Nicolas increased his investment in those two shares. It means he invested more in the trades where he was successful and cut his losses short in trades where he went wrong. The two trades Zenith Radio and Fairchild Camera where he was successful, he increased his investments there and thus made huge profits here.

So out of the four trades, Nicolas was successful in two trades and was unsuccessful in the other two trades, which means 50% of the times he was right and the rest 50% of the times he was wrong. Despite being right only 50% of the time, Nicolas still earned huge profits. This was possible because, wherever his trades went wrong he had maintained stop-losses and whenever his trades worked in his favor, he increased his investments there. In this way, Nicolas Darvas was able to increase his profits and cut short his losses.


Investor[edit]

During his off hours as a dancer, he had read some 200 books on the market and on speculators, sometimes reading up to eight hours a day.[4] He began his studies by reading the following:[5]

  • ABC of Investing, by R. C. Effinger
  • The Stock Market, by Dice & Eiteman
  • The Securities Market: And How It Works, by B. E. Schultz
  • Your Investments, by Leo Barnes
  • Profits In The Stock Market, by H. M. Gartley
  • Consistent Profits In The Stock Market, by Curtis Dahl
  • You Can Make Money on the Stock Market, by E. J. Mann

The two books which he read almost every week were The Battle for Investment Survival, by Gerald M. Loeb, published in 1935, and Tape Reading and Market Tactics, by Humphrey Bancroft Neill, published in 1931.[6]

Darvas invested in a couple of stocks for which the share price had risen. The stocks continued to rise and he subsequently sold them at a profit. He subsequently came up with an approach and plan for trading stocks from which he received $2,450,000.00 in 18 months, during the 1957-58 bull market,seven years since his first trade.[7]

From the week ending 12/16/1957 through the week ending 7/27/1959, the S&P 500 rose over 53%. Market moves of that size have only happened seven times since 1950, according to Yahoo Finance weekly S&P 500 prices.[citation needed]

His main source of stock selection was from Barron's.[4] The magazine was usually a week-old edition, since he was traveling in his performing dance troupe. He would use cables and telegrams to send his buy and sell stop orders to his broker in New York City. From now on Darvas would select a stock when it made a good advance on strong volume, with favourable fundamental company research.[4]

Darvas claimed his method often revealed the signs of insider trading before a company's release of favourable news to the public.

His stock selection method was called "BOX theory". He considered a stock price wave as a series of boxes. When the stock price was confined in a box, he waited. He bought when the price rose out of the box. He simultaneously set a stop-loss just under this trade price.

At the age of 39, after accumulating his fortune and also being exposed in Time magazine,[6] Darvas documented his actions in the book, How I Made 2,000,000 in the Stock Market. The book describes his "Box System", which he used to buy and sell stocks.

1960 criminal investigation[edit]

Time magazine subsequently reported that the New York Attorney General had "thrown the book" at Darvas, charging that his story was "unqualifiedly false" and that it could find "ascertainable" profits of only $216,000.[8] The action was the first to be taken under a broadened state law that banned fraud or misrepresentation in giving investment advice.

In a follow up, dated 13 January 1961, Time reported that the probe was blocked by the court, which ruled that the investigation by Attorney General Louis J. Lefkowitz was an "unwarranted invasion of the free press". Time also reported that state investigators admitted that they had not been able to track down all of the dancer's brokerage accounts.[citation needed]

Darvas called the charges false, a "cynically irresponsible action, book burning by publicity".[9] He stated, "I keep out in a bear market and leave such exceptional stocks to those who don't mind risking their money against the market trend".[10]

Darvas claimed to have never sold short. He said in 1977, "I have never done it myself because psychologically I am not cut out for short selling. But I think markets have now changed their character so much that all experienced investors should seriously consider it. It is not for the proverbial widows and orphans, though." [11]

The Anatomy of Success[edit]

In his third book, he wrote "Later, I went on to explore and become successful in other fields, the fashion industry, theatrical producing, real estate are just a few". Here he claims "the formula for success remains essentially the same". In the book he set out what he called "the rules to be followed".[12] "But one must know the correct route".[13] In his last book, You Can Still Make It In the Market,.[14] Darvas gives the rules for a method called "Dar-Card".

Death[edit]

Darvas died in 1977.[15]

Books[edit]

  • How I Made 2,000,000 in the Stock Market. Published in 1960 (hardcover). Available in French (softcover)[16]
  • Wall Street: The Other Las Vegas. Published in 1964 (hardcover).
  • The Anatomy of Success. Published in 1965 (hardcover).
  • The Darvas System for Over-The-Counter Profits. Published in 1971 (hardcover).
  • You Can Still Make It in the Market. Published in 1977 (hardcover) Republished on August 20, 2008; ISBN 0-9820556-7-6, ISBN 978-0-9820556-7-0

Books referencing Darvas[edit]

  • How I Made Money Using the Nicolas Darvas System, by Steve Burns (August 17, 2010)
  • Lessons from the Greatest Stock Traders of All Time, by John Boik (May 21, 2004)
  • How Legendary Traders Made Millions, by John Boik (March 23, 2006)
  • Mastering the Trade by John F. Carter (Dec 7, 2005)
  • New York City Vaudeville (NY) (Images of America), by Anthony Slide (Jul 26, 2006)
  • How to Make the Stock Market Make Money for You, by Ted Warren (Dec 1994)
  • The Best: TradingMarkets.com Conversations With Top Traders, by Kevin N Marder (Sep 15, 2000)
  • The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance, by Joel Seligman (Jun 26, 2003)
  • Protecting Your Wealth in Good Times and Bad, by Richard A. Ferri (April 18, 2003)
  • Sixties Going on Seventies (Perspectives on the Sixties), by Nora Sayre (May 1996)
  • Trend Trading: A Seven-step Approach to Success (Guppy Trading), by Daryl Guppy (May 28, 2004)
  • The Astute Investor (Second Edition), by Eric L. Prentis (Mar 27, 2006)
  • The Perfect Speculator, by Brad Koteshwar (Jun 30, 2005)
  • Swing Trading for Dummies, by Omar Bassal (2008)

See also[edit]

References[edit]

  1. ^ The Darvas System for Over-The-Counter Profits. 1971. back cover.
  2. ^ [1] Archived September 14, 2009, at the Wayback Machine
  3. ^ [2] Archived September 30, 2009, at the Wayback Machine
  4. ^ a b c Time magazine. May 25, 1959. p. 85.
  5. ^ How I Made $2,000,000 in the Stock Market. 1960. chapter 2, p. 26.
  6. ^ a b Time magazine. May 25, 1959. pp. 84–85.
  7. ^ Wall Street: The Other Las Vegas. 1971. Chapter 1.
  8. ^ Time magazine. December 19, 1960. p. 79.
  9. ^ "WALL STREET: $216,000 or $2,000,000?". TIME.com. 19 December 1960.
  10. ^ You Can Still Make It in the Market. 1977. p. 126.
  11. ^ You Can Still Make It in the Market. 1977. p. 89.
  12. ^ The Anatomy of Success. 1965. pp. xiv–xv.
  13. ^ The Anatomy of Success. 1965. p. xxvii.
  14. ^ You Can Still Make It In the Market. 1977. p. 11.
  15. ^ You Can Still Make it in The Market(softcover). 1978. About the author.
  16. ^ Comment j'ai gagné 2.000.000$ en Bourse"

External links[edit]