| book review: How I Made $2,000,000 in the Stock Market |
the greatest
stock investor
of all time--
Jesus. Why?
Because he is
the only one
who knows
what is going
to happen
tomorrow.
stock investor
of all time--
Jesus. Why?
Because he is
the only one
who knows
what is going
to happen
tomorrow.
| It was at an investment group meeting with a guest speaker—a hedge fund type—and he was analyzing a chart using something called the Darvas Box Trading System. The system occurs in a book—How I Made $2,000,000 in the Stock Market by Nicolas Darvas. In 10 years of messing with the market and the reading of—lets say—300 books on the subject—this book was not known to me. But I was sufficiently interested to go online the next day and order a copy from Amazon. The book arrived and I began to read. The first thing I notice, according to a blurb on the cover is: the writer is a dancer. A dancer who made $2,000,000 in the stock market? That is correct. Its a short book, 126 pages and I finished in one sitting and when I did—my head was spinning. Of all the books I have read, in my life, for the sheer riveting of attention upon the page, not to mention equal parts of amazement, shock and laughing (Ill get to the laughing) How I Made $2,000,000 in the Stock Market goes right to the top of the list or nearly. Let me tell you why. Its 1952. Nicolas Darvas, 25 years old, one half the ballroom dancing team of Nicolas and Julia, and he is on the phone with Toronto. On the other end of the line is Harry Smith, owner of a nightclub and he wants to book the act. Now he says to Darvas: What would you think if, instead of a fee, I give you 300 shares of stock in my company—Canadian Copper? Nic thinks it over. He knows nothing about the stock market, or maybe less than nothing—but he says: why not? 6 months later. Darvas is in Hong Kong—on tour. Hes eating breakfast in the hotel and someone has left behind a copy of Barrons Magazine and now he remembers something--the 300 hundred shares of Canadian Copper he owns that has disappeared from his mind. I leave it for you to tell me what happens next. That is correct. He checks out the stock in Barrons and discovers that it has doubled in price from $19 to $40. He perks right up. The tour over he returns to the states and his first priority, biz-wise, is to check this thing out—the stock market. Hes told the services of a broker are required to begin trading. So this he does, to open an account, on the Canadian exchange because this is where he made his killing and now for his first buy. To the broker he says (this is where the laughing starts): What looks good? The brokers says: Eastern Malarctic. Fine. He buys 1000 shares at $2.90 A week later its at $2.60 and the week following that—$2.40 He sells off. Next: Old Smoky Gas and Oil. To buy at $19 and sell at $10 On to KayRand Mining that he buys at $12 and sells at $8. Whats going on? Its aggravating. He doesnt expect every stock to be a winner—only most of them. Time passes. He continues to trade. The results are mixed. A winner followed by a loser followed by two winners followed by three losers. He is discouraged but its too late for that—to bail. Hes been seduced by the market and with every trade the addiction grows. If its a bad trade he will even things up by winning on the next one and if its a winning trade the next one will win bigger. Its called: optimism. Time passes. Its on to New York where he has a booking but he is more excited about being at the center of the action—Wall Street. He decides to switch brokers and exchanges—from theCanadian to the NYSE. He needs a fresh start and this is the place to do it. To his new broker—his new hotshot Wall Street broker—he says: What looks good? The broker says: Columbia Pictures He buys 200 Columbia at 20 1/4. the stock goes up and he sells at 23 1/2. Next: 200 North American Aviation bought and sold for a profit of $405.63 Next: Kimberly-Clark and another winner: $570.20 This was more like it. Three winners in a row in a period of weeks for a profit of $1607.54 and he sums up the action with these words: It was a feeling, nothing more, but something that was there from the beginning and now it re-inforced itself: that I was a natural on Wall Street. (Im laughing) What failed to register at the time was: this entry of his into the wonderful world of finance coincided with the emergence of a roaring bull market and for every 5000 stocks out there 4000 were going through the roof. As someone has said: if you cant make money in a bull market you need your head examined. Time passes. He continues to trade. He trades, trades trades. What began as a minor pastime has become something else: an obsession: I traded constantly. I telephoned my broker 12 times a day-or more. If I failed to make at least one trade a day I considered it a wasted day. I wanted to own every stock. Stocks for me were like toys for a child. He would often sell a stock that had gone up by half a point. On one trade he made 75 cents. In those days there was no such thing as the discount broker and the commissions could eat you alive. Also you paid a premium depending on the size of the buy. This was a small trade with a small profit of $300.75, the commission was $150 times 2, one occurring on each end, leaving him a net of $.75 immediately deposited to his account. Meanwhile he has dived into the literature of the market, to read some of the classics—Reminiscinces of a Stock Speculator by Lefebre, The Battle for Stock Market Survival by Loeb, Security Analysis by Graham, etc--and some of the not so classic— Grandma Made a Million, Confessions of a Stock Market Hit Man, Bonds Are For Suckers ,etc. Also Barrons , The Wall Street Journal, The Economist, etc—also newsletters—the “advisory” services. Lets not forget the occasional hot tip. Is there any other kind? Hes a dancer, his life is spent in nightclubs in the company of business people and athletes and movie stars—also--waitresses, bartenders, busboys— and all these people—including the busboy--seem plugged into the market with a hot tip on a stock about to blast its way into outer space. On with the trading. He buys and sells: Magma copper (-$1,016) General Refractories (-$59.41) Virginia Railway (+$11.19) Doman Helicopter (+$908.67) Win Lima Hamilton (-$1,266.34) And so forth. Time passes—a year. He decides to review his trading records and in spite of landing with both feet smack in the middle of a roaring bull market his profit for the year is $800. Meanwhile some of the real pros are up 500%, 1000%, 2000%. Its phenomenal. He plugs along. The market continues to climb with Darvas aboard for the ride. He has his share of losers that he blames on the broker. The winners he ascribes to his own brilliant instincts and natural market smarts. But now it happens to him as it happens to us all—the recognition of a profound truth: that the market is designed in a particular way, subtle and non-obvious, and there is an intention--to profit the few at the cost of the many. Hes operating on blind luck, like some chump who enters a casino in Las Vegas and to place a bet on the red instead of the black and why not the black instead of the read he cant tell you. He is forced to admit the market is a mystery and he has 2 choices: to solve the mystery or let the mystery solve him. You could put it this way: He needed a system. Rayonier A series of turning points begins. The first occurs with Rayonier--insurance. There is a Wall Street proverb: you cant go broke taking a profit. With this one in mind he buys and sells Rayonier 3 times: In at 53 1/3 and out at 58 7/8 for a profit of $439.46 In at 63 2/3 and out at 71 1/2 for a profit of $687.22 In at 72 5/8 and out at 74 3/4 equals $111.40 for a total profit on the 3 trades of $1,238.64 Now he buys another stock—Manati sugar—1000 shares at 8 1/4. The stock immediately takes a dive and he sells out for a loss of $1043.75. Hes left with a profit from the combined action on both stocks of $195.88. Meanwhile Rayonier has gone to 80. He says: Why did I do this? Why did I jump in and out of Rayonier 3 times instead of going in one time and staying there to watch the stock hit 80? I dont know Nic. Because you cant go broke taking a profit. Now he writes it down--rule #1: dont sell a rising stock. He is serious and gets more serious. On with the books and the reading, on with the trading and, most important, on with the losing of money on the trades because nothing will sharpen your instincts faster than that. The first crisis. That is what he called it: the first crisis. By this time he had been in the market for 3 years and taken his share of hits but so far nothing disastrous. That was about to change. The market assembles itself according to sectors— food, banks, drugs, cars, housing, etc and at any given moment some particular sector or sectors is in favor and others are out of favor and with this in mind you go about narrowing the possibilities. He came across a company—Jones Laughlin Steel. The steel stocks were trending up nicely and with a book called The Encyclopedia of Accounting and Investment at his elbow he dives into the balance sheets and annual reports of a handful of steel companies and decides the company with the strongest fundamentals belong to Jones Laughlin. By now with 3 years of trading under his belt the time had arrived to cash in on all this savvy. His confidence was high. This was the stock—Jones Laughlin—that was going to make his fortune. He decided to buy and to buy big. He owned some property in Las Vegas and took out a mortgage. Then he bought on margin—to borrow money from the broker. He bought 1000 shares of J-L at 52 ¼ for $52,652. It was sept 23, 1956. On sept 26 the stock began to slide. It slid and continued to slide. Darvas says: I saw the stock fall and I refused to face reality. I couldnt sell. Based on my exhaustive studies this stock was worth $75 a share—minimum. I loved that line about the “exhaustive” studies. Darvas was highly disciplined. He never allowed himself to take a big hit. That was rule #2—to cut your losses. Any stock that dropped more than 6 per cent below the price paid must be sold—no exceptions. But now with Jones Laughlin he makes the exception. He was no longer in control of his emotions—rule #3. The stock continued to tank. It went to 50, to 48, to 46. It went to 44. At 44 he awoke from the coma. The paralysis lifted. He sold off for a $9,080 loss. (I remind you this is 1954) He was crushed. He was on margin and now he fears the loss of his property in Vegas. What happens next is something called: praying to Jesus. He briefly considered throwing in the towel, market- wise, to leave investing to the investors--and return tosomething he knows: dancing. But he couldnt give up. The thought of giving up was a horror to him. Confidence is confidence, in the market as in anything else and his confidence was at low ebb. But so be it. Back to the stock tables—looking for salvation—to snatch victory from the jaws of defeat. His eye fell upon a stock—Texas Gulf Producing. He knew nothing about the company--unlike Jones- Laughlin Steel that he knew everything about and lost $9,000. But Texas Gulf was rising nicely, day after day. He jumped in—1000 shares at 37 3/8. The stock continued to climb. He says: I watched this stock the way a parent watches a new born child. I phoned my broker every hour—sometimes every 15 minutes. (the broker must have loved this) He held the stock 5 weeks. It went to 43 ¼ at which point he could no longer bear the strain and sold off for a profit of $6,000. he was back in business. The disastrous hit he had taken on the Jones Laughlin Steel trade had shaken him severely and now he sat down to type out in capital letters his Five Rules for Stock Market Success: 1: ALL LOSSES MUST BE CUT AT 6%--NO EXCEPTIONS! REMEMBER THAT HALF YOUR TRADES WILL BE LOSERS. ACCEPT THIS. 2: DON’T SELL A RISING STOCK 3: NEITHER GIVE NOR SOLICIT NOR ACT UPON A TIP. TIPS ARE FOR SUCKERS. 4: STORIES ABOUT A STOCK OR ANY NEWS ABOUT STOCKS OR THE MARKET IN GENERAL ARE WORTHLESS OR NEARLY SO. THE ONLY TRUTH THAT IS 100% THE TRUTH 100% OF THE TIME IS THE TAPE. 5: MASTER YOUR EMOTIONS. THIS MEANS: NEVER TO FALL IN LOVE WITH A STOCK OR ALLOW ANY TYPE OF SENTIMENT OR SLOPPY THINKING TO CLOUD YOUR JUDGEMENT. YOU MUST THINK OF STOCKS AS A BEAUTIFUL WOMAN WHO WILL ONE DAY BETRAY YOU. Amen. The bear market of 1957 The market operates in cycles as we know—the bull and the bear—to follow each other as certain as night follows day or the ebb and flow of the tide. And now in the fall of 1957 it was time for the bear to stir and emerge from hibernation and sniff around for something to eat. But Darvas was spared the carnage. He had a system and the cardinal rule was--to cut your losses and now, one by one, every trade gets stopped out. He has zero winners. All of them fail. There he is on the sidelines—out of the market—watching as one after the other his stocks tank. Down into the toilet they go, down, down, down—by 30, 50, 90%. Now that you no longer own them--its a cool feeling. He says: I had one loser after another and it was disheartening. I thought it was me. But it was the market. The market was tanking and I had anticipated it. I didnt know I anticipated it but I anticipated it nevertheless. The theory He had learned something from the Jones Laughlin/ Texas Gulf trades–a powerful lesson. A stock with strong fundamentals was always a plus. But more of a plus was— momentum. That was the breakthrough- when he began to tinker with the system that made his fortune. Darvas was an artist—the intuitive type. But there was this other part of his brain—the stock market part—dormant for all these many years that has sprung back to life--with a vengeance. He conceived the notion—to visualize the chart of a rising stock as a series of ascending boxes, stacked up one above the other like a pyramid. Hes looking for something—a rhythm. Stocks behaved according to a rhythm. The trick was to identify this rhythm— not so easy. But if you could identify it you could then visualize something—this image of a rising stock as pyramid of ascending boxes. He proposes a metaphor—-the dancer preparing to execute a leap. To make the leap she must first gather herself and to store up energy—to assume a crouch. A stock does the same thing—as Darvas see it. The stock bounces around inside the box, up and down, up and down, preparing to make the leap— into the box above. Then it makes the leap—on high volume. Volume was the key. Volume told you that something was going on—heavy buying. Its when the stock penetrates the upper boundary of the box it is in to establish the lower boundary of the next ascending box that is your buy point. Now all that remained was to establish the parameters of the box—the upper and lower boundaries. I wont describe how this was done because it gets technical. Also its non-objective. Chart reading is an art and If five analysts analyze the same chart you will get five different interpretations. But it looks something like this: Time passed. The bear market bottomed out and a few stocks began to perk up and find their bearings. He devises a watch list of candidates to test the theory—stocks rising on heavy volume and one by one he ventures some small buys and one by one they seem to work. He has a loser here and there but even the losers—as he sees it--seem reluctant to contradict the theory. He does some tweaking—as must be done on any new system or concept of profound vision. He tweaks, tweaks, tweaks. Lorillard Lorillard was tobacco. Lorillard pioneered the filter tip cigarette and now the Surgeon General issued a lung cancer alert and the filter tip cigarette market was about to explode. Darvas, on tour in Saigon, had heard something about the lung cancer report but a story was just a story, that everyone else in the world had also read. That was rule #4: DONT READ STORIES. He was interested in one thing: the tape. The tape was looking good. He kept an eye on Lorillard and at some point decided a box could be established with a range of 23- 27. It bounced around within this range for several weeks on average volume but slowly creeping higher. Something was cooking. He wired his broker to buy 200 shares when the stock penetrated the upper limit of the box—27. And this it did—on huge volume--to establish a new box—27/32. Then another box on top of that box— with more volume. December became January. The stock was at 37. He was tempted to sell and take a quick profit. But he recalled the Rayonier/Manati sugar debacle and rule #1: DONT SELL A RISING STOCK. Meanwhile the SEC decided to make a change in the margin requirements--to lower the requirement from 70 to 50. He could buy 20% more stock on credit. He loaded up on Lorillard. He says: I had no fear of buying on margin. I had confidence in the system. The stock was acting as though it was the stock I had designed my system around. He bought 400 shares between 28 5/8 and 32 1/4 and another 400 AT 36 7/8. He owned 1000 shares equals $35,827.50 Meanwhile he still had some cash in the account because he was doing all this buying on margin and now another stock caught his eye—Diners Club—the first company to spring a splendid new toy on the shopping public: the credit card. He began snapping up Diners Club, getting in at 22 1/4. He bought 500 shares. He bought another 500 at 26 1/2. Lorillard began to cool off and he sold out at 58. his profit on an investment of 35,827 was $22,640. Diners Club went to 38 and began to slide and he sold off at 36 3/4. His profit on Diners Club was $10,328. In two months on an investment of $57,200 he scored for $32,670. That was the breakthrough—the Lorillard/Diners Club trades. Now he had a stash of $60,00 that combined with the new lowered margin requirements meant he could buy $120,000 worth of stock at a pop. There is one last story: EB Bruce. It was the small fortune on the EB Bruce trade that anticipated the larger fortune to come. EB Bruce was an OTC stock--Over The Counter—a non regulated exchange and a risky move because you could never be sure, when you decided to sell, of getting your price. But there was something about this stock—the way it was moving. It was like Lorillard—as if his system had been designed around this particular stock. The stock had been trading at low volume, 5000 shares but now the volume jumped, to 40,000 to 60,000 to 90,000 shares. The price went to 50, then down to 43. Darvas says: I could not be sure but this reaction seemed temporary—a refueling. But the volume was there, the price action, the rhythm of the advance. I felt this stock in my bones--that it would continue to advance. As someone has said: God bless the investor who feels a stock in his bones. He was on the road in India and cabled his broker to buy the stock at 50 ¾--500 shares. The stock continued its climb and each time it bumped up a point or 2 he bought 500 shares. He winds up with 2500 shares of stock—$131,000. (The man had balls!) The stock continues to climb. In 3 weeks its gone from 50 to 77. Now hes a wreck. Something is going on with this stock—the OTC stock. He is tempted to call his broker but before he can call the broker the broker calls him. The broker says: they suspended trading on the stock Pause. What does this mean? He fears the worst. He says: Ive lost all my money. The broker says: you havent lost your money. On the contrary the stock is up 25 points. Its at 100. You’ve got all these short sellers out there who, unlike yourself, decided the stock was overpriced and they all went short. Now they are trying to get out. Its a panic. Darvas says: What should I do? A broker will never tell you what to do. And the reason is—he doesnt know what you should do. That isnt his job. His job is to “advise”. Theres a difference. He says to Darvas: I advise you to sell. Darvas: Ill call you back. Is the element of luck underrated—or overrated? I dont know. But it was Branch Rickey, baseball general manager, who said: luck is the residue of design. And there is another saying—same thing--luck favors the prepared mind. What Darvas—and his broker--did not know about the stock was this: a businessman in New York, Edward Gilbert, was trying to take over the company. The stock was going through the roof because Gilbert was snapping up all the shares. Also, as the broker mentioned, you had all these short sellers trying to cover their positions at any price. But there were no shares to buy. Gilbert and Darvas owned them all. The result was a panic and the exchange shut down. Darvas was in agony. He says: As I listened to my broker I had a strong desire to sell. But then I made a momentous decision—not to sell. Why? Because I had no reason to sell. The stock was still rising. I recalled something Jesse Livermore said in one of his books—that he made most of his money waiting. Patience was the key. So he hangs on to the stock that continues to go through the roof and when he does sell off it averages out to $171 a share and he collects a profit on the trade of: $295,400. And there you have it—the Nicolas Darvas story—one half the ballroom dancing team of Nicolas and Julia. But the best part of the story is this: no one believed the story. That someone like Darvas—via his own natural intelligence and creativity and superb imagination and sheer persistent stubborn hammering drive—could devise a system to penetrate the mysteries of this devious beast—the market. No-- it could not be done. It was either blind luck or-- he got a tip. Thats what they said: you got a tip! Thats the best part. |
darvas
