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No, I did not make two million dollars in the stock market. But I just read a book about a man who did ;) I finished reading “How I made $2,000,000 in the stock market”.
This book tells the story of Nicolas Darvas who made two million dollars in the stock market, in less than two years. Nicolas Darvas is not a professional investor, but a dancer. He is touring around the world, going from one show to another. The book tells his story from his beginnings with many mistakes to the successful. I thought it was a very interesting story. You can learn many things from his mistakes and from his successes. Even though the book is quite old, I think it is still mostly relevant to today. You
How I made $2,000,000 in the stock market
This book relates the story of Nicolas Darvas, a dancer. The story focuses entirely on its dealings with the stock market. The book tells the story of Nicolas Darvas, from his point of view. Contrary to most investing books, it is told as an entire story. You can learn from the experience learned by the author as he goes through his investing story.
His story begins when he obtains 3000 shares of RILUND from show managers. After he got the shares, he actually forgot about it and let them grow. By chance, he saw the prices in the newspaper one day and realized he made a 8000 dollars profit. He directly sold. And at this point, he made up his mind about going into the stock market. At this point, he did not even know there was stock market in New York and only knew about the Canadian one.
In his first phase of investing, he tried to get advice from rich people. He asked many rich people what was their advice in stocks and simply bought what was advised. He also developed some emotional attachment to some stocks. At this point, he did not care about taxes and broker fees. He was very happy to make some quick profit and often overlooked the losses that he made. Soon, he realized that his technique was not working at all.
After getting advice from rich people who did not know what they were talking about, he turned to advisory services to find which stocks to buy. He directly followed their advice and invested in various stocks. He soon realized that this strategy was not better than the first one. Many advisory services were contradicting themselves. And often after following advice, you are getting too late into the market. The advisors already made some money on the stock and are often already selling when most people start to invest in it.
In this period, he lost about 50% of the gains he made by chance in its first operation. But he learned some important lessons about not listening to advisors about individual stocks. He realized that he needed to change its technique to make some money.
After his Canadian adventures, he set out to New York. He was thinking it would be easier to make more gains in a bigger stock market. However, this turned out very wrong. Instead of following advice from advisors, he started to follow advice from his broker. He simply bought what his broker advised without thinking more about it. After that, he also started following advisory advice as well as his broker. But soon, he realized that advisors are not better in Wall Street than they are in Canada.
He also started following rumors from Wall Street. He was thinking that because these people are working on Wall Street, they should know everything. This turned out to be the contrary. Rumors are just rumors. Rumors have no value on the stock market. It is the same everywhere.
He even tried to trade stocks in the secondary market. But he soon realized that this was not a better way. He already learned a lot. But the most important thing he learned is this: “I should rather hold on to one rising stock for a longer period of time rather than juggle with a dozen stocks with a short period of time”.
He started to build his strategy based on this. The idea was to look at fundamentals of the stocks to find a good candidate and invest and hold onto it to make some profit. He spent a lot of time researching the fundamentals of many stocks. And finally invested in the most interesting ones. This is a sound technique on paper. But he ended up losing about 9000 dollars. Finally, he ended up making good money on a stock he did not know anything about. So he realized that his technique was not reliable.
The box theory
His experiences led him to the basics of the theory that made him two millions in the stock market. He called this strategy the box theory. The idea relies only on price, price action and volume of trading. He represented each stock as moving from one price box (for instance 40-45) to another price box. Some stocks can be stagnating into a price or moving down, but some stocks are crossing boxes to set up themselves in the next box. These are interesting stocks. The condition for buying was to get stocks that thrust themselves into the next box.
After some experiences, he realized a few more important. There is no sure thing in the market. You should expect to be wrong about half the time. It is the roll of a dice. So you need to hedge yourself again the risks when you are wrong. The way to hedge yourself against big losses is actually quite easy. He was using a stop-loss order. In case the stocks went down to the lower box, the stop-loss order was triggered, selling its stocks. He made a loss but not a big one.
But he soon realized that this stop-loss technique had another advantage. If you trail your stop-loss as the price increase, you also have a good way to sell when you make profits. That means you need to constantly adjust the price of the stop-loss order as your stocks are going up. This removes the emotions out of selling. That way you will not sell too early or too late. You may not sell at the highest points, but since there is no way of knowing when you are at the highest point, you should better take some nice profits and not taking the risks.
Something else was very important. Even when you are watching a few stocks, you also need to watch the entire market as well. This will tell you if the moves in your stock are only coming from the stock or from the general market moves.
While he was traveling around the world for his dance show, he only communicated with his broker by telegrams. He began to see the benefits of his strategy. He was able to make half a million dollars profits from his investments. This quite the achievement in my opinion for someone who started with very little money to invest.
Moving to New York
He decided to move to New York to play the big game. He thought that by being in New York he could make even more money. But he was blinded by his first achievement of half a million dollar. He was over-confident. This is never helping in the stock market. You need to detach yourself from your emotions.
When he was traveling the world, he was immune to stock market rumors. But once in New York, he started to follow the crowd once again. This was a big mistake. As he started following the crowd and getting information about rumors once again, he started to lose a lot of money. He also started getting emotional. His entire strategy was falling apart. He decided to leave New York for some time.
He decided to never meet with a broker ever again. And he also did something very important. He only checked the prices of the stocks while the stock market was closed. He never checked movements during the day. I think this is a great thing to do. He got back to this strategy and was shielded from rumors and advice. Following only his strategy and staying emotionless, he managed to make two million dollars from his stocks. And all this in less than 18 months.
My thoughts on the book
Even though I may not agree with everything done by Nicolas Darvas, this book was a very interesting one to read. It was really informative to read about the whole story. Nicolas was not afraid to share its entire story, including all the mistakes and the time he almost lost everything. The book is very well written. And the story is interesting. Since it is written as a story, it is actually easier to read than many other investing books. I would advise any people interested in the stock market to read that book. You may not want to follow all the advice, but many lessons are important.
There are some very important lessons that we can learn in that book. The most important lesson that you can get from this book is to isolate yourself from financial news. This is getting more difficult now with the internet. But if you know that most advice about individual stocks is not worth following, you can shield yourself from them. Most of the time, financial news, advisors, and trends will not help you invest. It is actually the contrary. When you listen to someone advising you to invest in something where he made a fortune on, it is likely too late for you to make a fortune on this one.
I think that the strategy adopted by Nicolas Darvas is quite sound. The fact that he uses a stop-loss order to sell at the right time is actually a good idea. Even though he may not sell at the top of the market, he still manages to keep his losses down. Moreover, relying on the stop-loss technique to sell lets you not be emotional and not sell too early. However, I think that the book makes it sound too easy. The most dangerous thing that the book is advising is to invest with margin. This means that you are investing some money that you do not have. If the investment goes well, that is great, you can make a lot of profits. However, if the investment does not go well, you can lose a lot of money. Be very careful when using leveraged products.
And do not forget that this book is quite old. Although most of these messages will still apply today, there are some outdated things. I am sure you will not be able to use telegrams to communicate to your broker ;) It is more difficult today to isolate yourself from the financial rumors and news. He is also talking about a very different. I am guessing that it is possible to replicate this technique today. But you may have to adapt it. There are many more people investing in the market today than there were 50 years ago.
As the last thing, you should be aware that investing in individual stocks is much riskier than investing in index funds. You should be careful about it. It could be interesting to do with a small part of your money. But you should probably not go all in with your entire savings. A lot of people were not as successful as Nicolas Darvas. Always stick to your Investor Policy Statement.
To learn more about this book, you can also watch this nice video summary:
Did you read that book? What did you think of it? Are you using this strategy to invest?