How I Made $2,000,000 In The Stock Market (Nicolas Darvas) 0 comments

With such a title, how can one not be interested?! Self-explanatory, and it captures the imagination of every stock market trader everywhere.

This book was written by Nicolas Darvas, a retail investor, more than 40 years ago, in 1960. It documents how he came up with his stock trading approach that was to see him achieve more than US$2M trading profits in just 18 months, during the 1957-58 bull market. The book was an instant hit when it was published then, selling nearly 200,000 copies in eight weeks. Before that, Darvas had been interviewed by Times magazine as his trading record spread by word of mouth among broking circles.

The book is quite lightweight, at less than 150 pages. I finished it in about 2 hours or so, skipping many of the trading records where he documented his trades (wasn't really interested in them, more interested in his techniques and market philosophies).

The interesting thing is that Darvas came from a completely alien background. He was a professional dancer, who happened to chance onto stocks when a client offered him shares as payment in kind for his dancing services. He got interested when the stock made him money, and went on to find out more on what drove stock prices and ultimately he developed his own approach, surviving several bumps along the way (as we all do).

Most technical analysts will be able to identify with Darvas' approach; he called himself a techno-fundamentalist but as you read you will find that with regard to fundamentals, he was not too concerned other than that the stock was associated with a theme that would excite the market (eg. electronics, credit cards in the 1950s). His efforts were mainly focused on reading price-volume movements of various stocks and acting on interesting patterns; his source of charts was Barrons, whose circulation doubled after the publication of Darvas' book!

Darvas' method would be what we now know today as buying on breakouts; he called it box theory. It was based on the observation that stocks typically stay within a trading band (the "box" within which the price bounces) but when it broke upwards out of the "box" with high volume it was a buy signal. Another aspect of his technique was to control his downside by always using trailing stops; apparently his methods forced at least one American exchange to modify its rules on stop-loss orders.

It is also interesting to read about the effect that more "knowledge" had on his market consciousness. According to Darvas, he acquired a feel for the "behaviour" of a stock by reading and interpreting its price/volume movements on Barrons and via telegram communications with his broker (he was on a travelling tour in different countries; there was no Internet back then) and he prospered during this period, but then he experienced a crisis of sorts when he decided to establish closer contacts with the market by operating in his broker's office; there, he was buffeted by such a constant array of information and opinions/rumours (he called it "noise") that he lost his "sixth sense" on stocks, his self-control and ultimately his money. It was lucky for him that he extricated himself in time and went back to the old telegram routine, where he soon regained his feel.

To me, there are no new ideas in the book, but what would surely entrance the reader the most is that it is possible to make so much profits on the market by utilising simple ideas and maintaining a certain discipline and self-control (aided by a bull market as backdrop, of course). Darvas' use of metaphors to describe various market philosophies is also very useful, once again proof that an outsider can sometimes see things from different and illuminating angles. For example, he compared trading to driving a car: the driver can be taught how to use the various controls, but he still has to develop his own feeling for driving; this has to be learnt only through experience. He likened breakout trading to humans exhibiting out-of-stereotype behaviour: the wild girl would be expected to jump onto a bar table and start dancing, but if the prim and proper matron were to do that .... then it was time to take notice. Such metaphors abound within the book, and I think many would find them both apt and insightful.

Darvas died in 1977 (see Wikipedia writeup on Darvas); nonetheless I think he would be a source of inspiration to retail traders today. His ideas were very common-sensical, and he turned the apparent disadvantage of being an outsider into an advantage. The book cannot be obtained easily as it appears to be out-of-print; it can however be borrowed at the libraries.