How I Made $2 Million in the Stock Market

The Darvas system for stock market profits

Nicolas Darvas

• Publisher: Harriman House
• Year: 2011
• Print ISBN: 9781897597996
• eBook ISBN: 9780857191410
• Topic: Business
• Subtopic: Stocks
• Index: Business

How I Made $2 million in the Stock Market is an extraordinary book. It tells one of the most unusual success stories in the history of the stock market.Darvas was not a stock market professional trading on inside information. He was one half of the highest paid dance team in show business, an expert cryptic crossword compiler, and a championship ping pong player. Yet he was able to make himself a millionaire several times over by his unique investment approach. Unlike other so-called systems, it worked regardless of whether the market rose or fell.When news of Darvas's fantastic profits and methods leaked out, he was featured in Time magazine. He then was persuaded to write a book which became an instant hit, selling nearly 200, 000 copies in eight weeks.Many of the companies talked about in this book no longer exist. Many of the stocks are no longer traded. Nevertheless, the basic principles are as sound as ever.

The Techno-Fundamentalist

Chapter six: During the Baby-Bear Market

After a few weeks of being without a single share I decided to take a closer clinical look at the situation. To understand it clearly I made a comparison between the two markets.

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.

When the break came almost all of the stocks had been hurt or fractured. It was now a question of estimating how sick the stocks were and how long their sickness would last. I reasoned that if a stock has fallen from 100 to 40, it will almost certainly not climb up to the same high again for a long, long time. It was like an athlete with a badly injured leg who would need a long period of recuperation before he could run and jump again as before. There was no doubt in my mind now that I could not make money by buying a stock and then trying to cheer it on. JONES & LAUGHLIN had convinced me of that. I could remember how I almost felt myself willing and pushing that stock upwards. It was a very human feeling, but it had no effect upon its market any more than spectators have on a horse race. If one horse is going to win, it will win, even if thousands of onlookers are cheering for another one.

It was the same now. I knew that if I bought a stock and turned out to be wrong, all the cheering and pushing in the world would not alter the price half a point. And there was no telling how far the market might fall. I did not like the trend, but I knew it was no use trying to fight it.

The situation reminded me of George Bernard Shaw’s remark at the opening night of one of his plays. After the curtain fell everyone cheered and clapped except one man who booed. G.B.S. went up to him and said: “Don’t you like my play?”

The man replied, “No, I don’t.” Whereupon Shaw said: “Neither do I, but what can the two of us do against all that crowd?’‘

So I accepted everything for what it was – not what I wanted it to be. I just stayed on the sidelines and waited for better times to come.

I firmly refused to trade – so emphatically that my broker wrote to me and asked the reason. I tried to explain it by making a joke: “This is a market for the birds. I see no reason why I should be in a bird-market.”

The period that followed I spent like a runner limbering up for the race. Week after week, while I did not have my stock and the market was in a steady downtrend, I followed the quotations in Barron’s. I tried to detect those stocks that resisted the decline. I reasoned that if they could swim against the stream, they were the ones that would advance most rapidly when the current changed.

After a while, when the first initial break in the market wore off my opportunity came. Certain stocks began to resist the downward trend. They still fell, but while the majority dropped easily, following the mood of the general market, these stocks gave ground grudgingly. I could almost feel their reluctance.

On closer examination, I found the majority of these were companies whose earning trends pointed sharply upward. The conclusion was obvious: capital was flowing into these stocks, even in a bad market. This capital was following earning improvements as a dog follows a scent. This discovery opened my eyes to a completely new perspective.

I saw that it is true that stocks are the slaves of earning power. Consequently, I decided that while there may be many reasons behind any stock movement, I would look only for one: improving earning power or anticipation of it. To do that, I would marry my technical approach to the fundamental one. 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.

This was how I arrived at my techno-fundamentalist theory, which I am still using today.

As to the practical application, I decided to take a 20-year view. That did not mean I wanted to hold a stock for 20 years. Nothing was more contrary to my intentions. But I looked out for those stocks which were tied up with the future and where I could expect that revolutionary new products would sharply improve the company’s earnings.

Certain industries were obvious at once, like electronics, missiles, rocket fuels. They were rapidly-expanding, infant industries and, unless something unforeseen happened, their expansion should soon be reflected in the market. From my research into the history of the stock market, I knew that the basic principles governing stocks-of-the-future have always held good in Wall Street. In the years before automobiles, the smart operators went into railroads because they knew these would supersede the covered wagon and the stage coach. A generation or so later, the shrewd investors moved out of railroads into automobiles. Forward-looking, expanding companies like GENERAL MOTORS and CHRYSLER were comparatively small firms then. But they represented the future. People who bought into them at that time and stayed with them during their expansion period made a lot of money. Now these are well-established stocks. They are not for the forward-looking speculator.

It is the same today, I reasoned. 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.

I knew that 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.

Women’s fashions alter, and so do fashions in stocks. Women will raise or lower their hemlines one or two inches roughly every two or three years.

The same with stocks. While the fashion persists, the forward- looking investors get in and stay in. Then slowly the fashion fades and they are out. They are putting their money into a new-style stock. I knew I must watch eagerly for these fashion changes, or I might be left still holding a long-skirt stock when the new stocks were showing their knees. I might also miss, unless I was very alert, something sensationally new like the big-bosom era.

This is not so fanciful as it may seem. Take a mythical product like an automobile which can also fly. Everybody is rushing for that company’s stock. Yet in a converted stable in Oregon two men are working on an invention which will far outclass the flying car.

Once that is ready for the market, and a company has been formed to handle it, the original flying car will be superseded. Its stock will start to slide. It will become old-fashioned.

This is an over-simplification and does not solve the problem: How to buy into this year’s fashion? I could only do it by carefully watching the market for signs. If the fashion seemed to be moving away from the long skirt, there must be some other about-to-be-fashionable stock ready to take its place. What I had to do was to find stocks that would be hoisted up because they stirred people’s imagination for the future.

On the basis of this thinking, I carefully watched stock market quotations in this general bracket of expanding stocks in tune with the jet age. I was not interested in the company’s individual products, whether it was metals for rockets, solid fuel, or advanced electronic equipment. In fact, I did not want to know what they made – that information might only inhibit me. I did not care what the company’s products were, any more than I was influenced by the fact that the board chairman had a beautiful wife. But I did want to know whether the company belonged to a new vigorous infant industry and whether it behaved in the market according to my requirements.

This, of course, was directly against the advice of many financial writers with conservative backgrounds who have been pounding into investors for generations that they must study company reports and balance sheets, find out all they can about a stock’s background, in order to make a wise investment.

I decided that was not for me. All a company report and balance sheet can tell you is the past and the present. They cannot tell the future. And it was for this I had to project my plans. I also humbly realized that that was only my attitude. I was looking for capital gain. A widow looking for dividend income had to think otherwise.

As I flew around the world, I was constantly searching for stocks that would climb into the stratosphere because of the vision of their future. This attitude was a preparation for what I suppose you could call high-territory trading. 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. I made up my mind to buy high and sell higher.

Using my hard-bought training, I diligently attempted to find these expensive-but-cheap, high-velocity stocks. I searched constantly for them because I felt sure that they would move up at the first sign of a better market.

I carefully watched a dozen stocks which seemed to be in this category, checking their quotations every week, analyzing their behavior for any sign of a hardening.

I closely observed their price action, and I was on the alert for any unusual activity as well. I had not forgotten the importance of volume.

I also prepared myself to operate in higher-priced stocks. This was because of the brokerage commissions. When I examined the rates I discovered that it was cheaper to invest $10,000 in a $100 stock than in a $10 stock. Here is why:

Let us suppose I wanted to invest my $10,000 in one stock. I could do it in several ways. For instance I could buy:

• 1000 shares of $10 stock or
• 500 shares of $20 stock or
• 100 shares of $100 ...

Table of contents

• Cover
• Publishing Details
• Foreword
• Author’s Introduction
• The Gambler
• The Fundamentalist
• The Technician
• The Techno-Fundamentalist