How I Made $2,000,000 in the Stock Market Book Review
A bit of background on Nicolas Darvas.
Before emigrating to America, Darvas studied economics at the University of Budapest.
Arriving in the US in 1951, Darvas trained with his half-sister, Julia, to be a ballroom dancer, becoming extremely succesful and touring the world by 1956.
He discovered investing in 1952, when a Toronto nightclub, unable to pay him in cash, instead paid him with shares.
It was on a two-year tour of the world that he initially developed his ‘Darvas Box’ method of screening stocks – a method of picking stocks based on the stock’s price and volume – and later went on to refine this to remove any human element from his trading to susbtantial success.
Nicolas Darvas is regarded as one of the best traders in the history of the market and his method, whilst complicated and difficult to master, has been rigorously tested and has been found to be one of the best trading systems yet developed.
Amazon.com
Darvas is said to have read more than 200 of the best books on the market by the great speculators. His unique approach and plan for trading stocks made him $2,450,000 fortune in just 18 months.
The book reads like a thriller with all the human elements and emotions thrown in. Must read for all who dabble in stock investing and trading.
How I Made $2,000,000 in the Stock Market Book Summary
Note: This summary is made up of my notes, thoughts and highlights of important passages while reading the book. I keep updating the summary when I revisit it, and occasionally may edit it to reduce summary length. Don’t be surprised if it has changed between visits. The author’s words are in normal font, while my interpretations are in italics.
Chapter 1 Canadian Period
It took me years to realize that when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.
Chapter 2 Entering Wall Street
They were:
- I should not follow advisory services. They are not infallible, either in Canada or on Wall Street.
- I should be cautious with brokers’ advice. They can be wrong.
- I should ignore Wall Street sayings, no matter how ancient and revered.
- I should not trade “over the counter”—only in listed stocks where there is always a buyer when I want to sell.
- I should not listen to rumors, no matter how well founded they may appear.
- The fundamental approach worked better for me than gambling. I should study it.
- I should rather hold on to one rising stock for a longer period than juggle with a dozen stocks for a short period at a time.
When things looked perfect on paper, when balance sheets seemed right, the prospects bright, the stock market never acted accordingly.
Chapter 3 My First Crisis
Stocks —like herds, indeed—form groups according to the industry they represent and that stocks belonging to the same industry have the tendency to move together in the market, either up or down.
Find through fundamental analysis:
a) The strongest industry group;
b) The strongest company within that industry group.
Then I should buy the stock of that company and hold on to it, for such an ideal stock must rise.
Whenever a stock started to behave better than the market generally I immediately looked at the behavior of its brothers— stocks of the same industry group. If I found that its brothers also behaved well, I looked for the head of the family—the stock that was acting best, the leader. I figured if I could not make money with the leader, I would certainly not make money with the others.
What, I asked myself, was the value of examining company reports, studying the industry outlook, the ratings, the price-earnings ratios? The stock that saved me from disaster was one about which I knew nothing. I picked it for one reason only— it seemed to be rising.
Chapter 4 Developing the Box Theory
Although there is an element of chance in every field in life, I could not base my operations on luck. I could be lucky once, maybe twice—but not constantly.
Could I win at bridge without knowing the rules? Or in a chess game without knowing how to answer my opponent’s moves? In the same way, how could I expect to succeed in the market without learning how to trade?
I had bought TEXAS GULF PRODUCING, purely on the basis of its action in the market. I knew nothing about it nor could I find out very much. Yet I assumed from its continuing rise and high volume that some people knew a lot more about it than I did.
My buying, based purely on the stock’s behavior, enabled me to profit from a proposed merger without knowing anything about it. I was an insider without actually being one.
If I studied price action and volume, discarding all other factors, I could get positive results.
I decided that if a usually inactive stock suddenly became active I would consider this unusual, and if it also advanced in price I would buy it. I would assume that somewhere behind the out-of-the-ordinary movement there was a group who had some good information. By buying the stock I would become their silent partner.
There is no sure thing in the market – I was bound to be wrong half of the time. I must accept this fact and readjust myself accordingly – my pride and ego would have to be subdued.
I cannot merely take chances. First, I have to reduce my risks as far as humanly possible.
I decided to give “on-stop” orders to buy at a certain figure with an automatic “stop-loss” order on them in case the stock went down. This way, I figured, I would never sleep with a loss.
I knew that being right half of the time was not the answer to success. I began to understand how I could break even and still go broke.
My most difficult problem was to discipline myself not to sell a rising stock too quickly.
Hold on to a rising stock but, at the same time, keep raising my stop-loss order parallel with its rise. I would keep it at such a distance that a meaningless swing in the price would not touch it off.
I realized that I would not be able to sell at the top. Anyone who claims he can consistently do this is lying.
When to sell then? Why, when the boxes started to go into reverse! When the pyramids started to tumble downwards, that was the time to close the show and sell out. My trailing stop-loss, which I moved up behind the rising price of the stock, should take care of this automatically.
Having made these decisions, I then sat back and re-defined my objectives in the stock market:
- Right stocks
- Right timing
- Small losses
- Big profits
I examined my weapons:
- Price and volume
- Box theory
- Automatic buy-order
- Stop-loss sell-order
I knew that I had to adopt a cold, unemotional attitude toward stocks; that I must not fall in love with them when they rose and I must not get angry when they fell; that there are no such animals as good or bad stocks. There are only rising and falling stocks—and I should hold the rising ones and sell those that fall.
Chapter 5 Cables Round the World
With no money involved I could easily control my feelings, but as soon as I put dollars into a stock my emotions came floating quickly up to the surface.
I could not apply mechanical standards to the relationship between the Average and individual stocks. Judging this relationship was much more like an art.
Stocks have characters just like people. This is not so illogical, because they faithfully reflect the character of the people who buy and sell them.
As I flew around the world and operated in Wall Street by cables, I slowly came to see that though I was becoming a diagnostician I could not be a prophet.
When I examined a stock and found it strong, all I could say was: It is healthy now, today, at this hour. I could not guarantee it would not catch a cold tomorrow.
The word “value” cannot be used in relation to stocks. The value of a stock is its quoted price. This in turn is entirely dependent on supply and demand.
The advice to get out of the market was not available when one needed it.
It was impossible for me to assess great historical turning points in the market when they began to happen. What fascinated me, as Wall Street prices continued to fall, was the gradual realization that my system of ducking out quickly with my stop-losses made such an assessment unnecessary.
I could, of course, have bought these stocks and “put them away.’ This is a classic solution among people who call themselves conservative investors. But by now I regarded them as pure gamblers. How can they be non-gamblers when they stay with a stock even if it continues to drop?
A non-gambler must get out when his stocks fall. They stay in with the gambler’s eternal hope of the turn of a lucky card.
When I went into the accounts more closely I found I had the unenviable distinction of coming out of the greatest bull market in history with a lot of experience, a great amount of knowledge, much more confidence—and a net loss of $889.
Chapter 6 During the Baby-Bear Market
The bull market I saw as a sunny summer camp filled with powerful athletes. But I had to remember that some stocks were stronger than others. The bear market? The summer camp had changed to a hospital. The great majority of stocks were sick— but some were more sick than others.
I would select stocks on their technical action in the market, but I would only buy them when I could give improving earning power as my fundamental reason for doing so.
On the general theory of the buoyant future, stocks, which promise dynamic future development, should behave better than others. A sound stock, which is in tune with the jet age, might be worth 20 times as much in 20 years.
In this kind of stock there were definite fashions just as there are in women’s clothes, and if I wanted to be successful it was important to search for fashionable stocks.
While the fashion persists, the forward-looking investors get in and stay in. Then slowly the fashion fades and they are out.
All a company report and balance sheet can tell you is the past and the present. They cannot tell the future.
I looked for stocks that I thought could make new highs and I decided to give them my full attention when they had climbed on to the launching pad and were preparing to rocket up. Now these stocks would be more expensive than ever before and so they would look too dear to the uninitiated. But they could become dearer.
Buy high and sell higher.
The battle of Waterloo. At this famous battle Rothschild had an agent who, as soon as victory was certain, set off for London and informed Rothschild. Rothschild started buying every British government share he could before anyone else heard the news. When they did, of course, the shares rocketed and Rothschild sold at a huge profit.
Communications are much quicker but the ancient art remains the same – to get in faster than the other fellow.
The leaders in the previous market would probably not lead again.
Chapter 7 The Theory Starts to Work
I did not for one moment consider abandoning my chief defensive weapon—the stop-loss order. No matter how well built your house is, you would not think of forgetting to insure it against fire.
Chapter 9 My Second Crisis
The truth was that as my pocket had strengthened, my head had weakened. I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market. It was not long before I received the bitter lesson the market always hands out to those who think they can carelessly master
As I followed the crowd I also started to act like this. Instead of being a lone wolf, I became a confused, excited lamb milling around with others, waiting to be clipped. It was impossible for me to say “no” when everybody around me was saying “yes”. I got scared when they got scared. I became hopeful when they were hopeful.
Read More Like This
- Reminiscences of a Stock Operator by Edwin Lefèvre
- How to Day Trade for a Living by Andrew Aziz
- Coffee Can Investing by Saurabh Mukherjea
Recent Articles
I am a stock picker and trade for myself while reading Gary Smiths book, he talks about Nicholas Darvas, and so I am going to try and get his book also. This should be interesting.