Nicolas Darvas: How I Made 2,000,000.00 in the Stock Market

[nickola.pazderic]

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.

The solution was whispering to me but at first I could not credit it. It was so surprising, so simple and yet so extraordinary that I could hardly believe it. It was: My ears were my enemy.

Nicolas Darvas wrote these lines in his investment classic: How I Made 2,000,000 in the Stock Market. With a politically strong minority playing, as the Mad Hedge Fund Trader puts it, with "matches in a firecracker factory" and with my equity accounts stopped out in their worst month yet because of this danger, I thought it worthwhile to reconsider Darvas' classic book. I'm glad I did, and I'd like to share some insights with the Effective Volume community.

Darvas recounts honestly the circumstances and discoveries that began with an unexpected windfall profit close to 8,000 USD on a stock that came to him in his professional services as a dancer. Published in 1960, much of what Darvas discovered on his own over five years of trial and error will be very well known to all members of this community. He first discovered a pattern which he called boxes. We know them today as Darvas boxes. Prices will set up within a framework of highs and lows that can be conceived as a box. When a stock breaks out of a box, it has a very good chance of remaining in the new box and even moving higher. While my ToS software has an indicator called "Darvas Box"; many people today refer to them on multiple time frames as consolidation patterns. Darvas also discloses how he learned to use trailing stop losses to protect him from big losses, how earnings and new industries proved to be most reliable fundamental indicators, and how he could grow his portfolio substantially by simply avoiding bear markets. While Darvas developed his approach independent of his brokers, it appears that others, notably William J. O'Neil, were also coming to similar conclusions. To read How to Make Money in Stocks by O'Neil and How I made 2,000,000 in the Stock Market is to read meditations on the same themes: stocks can be bought at high prices with the expectation that they can go higher from their bases or boxes; the market will determine the fate of most stocks; and money management is key to success in the business. To anyone who has not read these books, I think there is universal agreement in the investment community that one probably should.

Darvas’ thought and experience has profound relevance for me as an individual investor. Nearly 11 months have gone by since I started in late August 2010. A huge leg of a bull market began, and I certainly had no idea what to do. My most profitable trades were made under the direction of Gil Morales and Dr. Kacher—two O’Neil protégés. Despite my successes with their methods (including +40%) in one account, my year-end numbers in total are not so nearly exciting. In recent weeks the markets have taken their cuts, and I write this with a lot more experience and a lot more knowledge but not terribly more money than in September 2010. Darvas took five years to develop his methods; I’m fortunate to find excellent helpers, who have probably cut down my learning curve substantially.

And this brings me to the last and probably most neglected discovery of Darvas: he could invest and prosper much more effectively without paying attention to the daily chatter of Wall Street and the investing community. Today, the internet swamps us with every form of information (including, to be sure, this book review!). But I’m not certain that it helps all that much. My biggest plays of the year were made in a Vanguard account with no margin. For this reason I could not move in and out of positions frequently without triggering threats to freeze my account. As a result, I took fewer chances, considered thoroughly my choices, and held positions with more temerity. In fact, my most profitable holding by absolute gain was a mere 75 shares in AGQ.

Billy tells me that his technical analysis is also built upon the work of Darvas. All subscribers to the Robots can find Billy’s unique and expertly drawn boxes of price support in his morning bulletins. Personally, I am hoping that I can take a Darvas-like stance toward the robot and make my choices without emotion. I plan to buy only the strong and very strong signals and leave it at that. To be honest, I have more important things to do with my life than monitor the global market place 24/7. I’m 47 and I don’t hear the ring of the celestial spheres in stock patterns but I do in other pursuits.

This brings me to final point. Nicolas Darvas developed his approach through careful study of price patterns in top stocks. When I read the book, I can see at work the professionally trained eye of a dancer who breaks complex movements into a series of steps or, yes, boxes. When I study the routines of, Paul Duncan and Jeffrey Scott, for example, I can perceive a nearly baroque attention to detail and pattern. I admire this ability. I think I can train myself to sort and compare similarly. But the robot puts this effort into question. Does one need to go to great lengths when a robot can inform me of a pattern’s historical success rate and likely outcome? Perhaps not.

I wonder what others conclude.