Nicolas Darvas - Market Master
Reminiscences of a Stock Operator by Edwin Le Fevre is a trading and investment classic. The book, which is a thinly disguised biography of the legendary trader Jesse Livermore, contains profound market truths from cover to cover.
Le Fevre’s book is one of the most popular and most quoted trading books of all time. Its popularity is almost certainly due to its market wisdom and the fact that it is presented in the form of a very interesting story.
A lesser-known book that uses this same formula for success is How I Made $2,000,000 in the Stock Market by Nicolas Darvas. Darvas’s book, like Le Fevre’s, is compelling reading. It tells the story of a highly successful dancer, and this dancer’s spectacular success as a trader after a less than spectacular start. Indeed, Darvas was successful in almost everything he did, including playing championship table tennis and creating crossword puzzles.
Darvas the Dancer
Nicolas Darvas studied economics at the University of Budapest. He fled Hungary to go to Turkey in World War II, training eight hours per day to become a dancer. He migrated to the United States in 1951.
Darvas and his half sister Julia, an attractive redhead, became the highest paid dance team in the United States. In April 1953 Darvas and Julia appeared with Judy Garland and Bob Hope. By 1956, they were touring the world. At the time few people realised that the highly-talented broad shouldered, slim dancer in the white tie and tails was one of Wall Street’s most successful speculators.
Darvas the Speculator
Darvas first became interested in the stock market in 1952 when he received some mining stock in exchange for performing in a Toronto nightclub. The stock trebled, with Darvas selling near the top. He learned a valuable lesson when the stock subsequently crashed.
Davas realised that knowledge and experience were the keys to success. He read more than 200 books about successful speculators and about the market. At one time he studied for some eight hours per day. When he was at his peak, he read Tape Reading and Market Tactics by Humphrey Neill, and the classic The Battle for Investment Survival by Gerald Loeb, almost every week.
Between 1956 and 1958 Darvas turned $25,000 into $2.25 million. He would scan newspapers for a few minutes late at night or early in the morning and select the stocks that met his requirements.
As he travelled he would obtain a copy of the Wall Street Journal and Barrons from the local United States Embassy. He ignored everything he read but the stock prices.
Darvas was a true market master, often stating that it was not so much his trading profits which pleased him, but rather the peace of mind he achieved by following the system he developed which best fitted his personality.
The inevitable cynics at the time stated that Darvis was simply lucky, making his money in a very strong bull market. It is true that the market was very strong, however Darvas’s method has been shown to be effective in all market conditions. Strong bull markets can, of course, produce faster profits.
The Darvas ‘Box’ System
Darvas was essentially a technical analyst who used mental charts. He watched price action and reaction and volume on a weekly basis, and also used a nightly telegram from his broker giving him the high, low and close prices of the stocks he was following.
Darvas looked for stocks making a big advance on high volume. He bought when he believed that informed buyers were entering the market. When he was dancing in Calcutta, for example, he noticed in Barron’s stock tables that the stock E. L. Bruce was advancing. It moved from a price of 16 to 50 on a volume of 35,000 shares. He bought some at 51 and sold them at 171 some six weeks later.
Essentially his system involved noting a stock making a large volume expansion, which indicated a large increase in demand. If the stock then rose in price, indicating that buyers were in control, he would place an order and set his stop-loss order.
Darvas would establish a so-called ‘box’, or trading range. If the stock broke below it, his stop-loss order would be hit and he would take a small loss. If the stock broke out on the upside, he would buy more, especially if the breakout was accompanied by large volume. After a breakout Darvis would use a trailing stop loss to ensure that he locked in most of his profit, while giving the market sufficient room to make normal retracements without the stop being triggered.
Chart One – Amity Oil
Darvas developed his methodology by observing previous market behaviour. Such observations taught him to pick stocks that showed the most promising patterns. It also gave him experience at choosing the best support and resistance levels (box size) for the market in question. This taught him that the more volatile a stock, the deeper the box must be.
The author first read How I Made $2,000,000 in the Stock Market as a teenager, some 30 years ago. The book was one of an investment library given to him by Mr. Tom Landy, a former Brisbane stockbroker and one of Australia’s most astute and successful investors.
One of the most valuable lessons the author learned from Tom was to always be on the lookout for companies that were at the forefront of significant new breakthroughs. Tom made a fortune by identifying that tin was a metal that was going to be in great demand and subsequently building a large position in the Tasmanian tin producer, Renison. At one point he was in the top ten shareholders.
It is interesting to note that some of the stocks Nicolas Darvas bought. These included:
Kent cigarettes, which perfected the menthol filter;
Diners Club, which had just developed the photo credit card;
Thiokol Chemicals and Raytheon, engineering companies which positioned themselves to profit greatly from the space race and the arms race;
Texas Instruments, which developed the first electronic calculator.
Darvas was able to time his purchases into these breakthrough stocks using his ‘box’ system. It should be noted that Darvas also had luck on his side. He positioned E. L. Bruce on a 100% margin – if the trade had failed, his account would have been decimated!
Time Magazine
Darvas was content to focus on the two aspects of his life that he enjoyed most – dancing and speculating. This was all to change when news of his huge profits spread.
The May 25, 1959 edition of Time ran an article that showed a picture of Darvas and Julia dancing, and discussed his extraordinary success as a trader. The article contained some well-chosen statements made by Davas that demonstrated a great deal of trading wisdom. These include:
In my dancing I know how to judge an audience. It is instinctive. The same way with the stock market. You have to find out what the public wants and go along with it. You can’t fight the tape, or the public.
I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast… If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn’t you call that good odds?
I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride.
I am only in infant industries where earnings could double or treble. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality.
(Time, May 25, 1959, page 85.)
Darvas avoided blue chip stocks, which generally have less opportunity for rapid growth, and limited the stocks he held to five or six at a time. He clearly understood that returns start to fall when too many stocks are held, because it results in traders owning stocks that do not show the greatest potential.
The Time magazine article focussed even more attention on Darvas, resulting in him writing his first book How I Made $2,000,000 in the Stock Market. The book instantly became a best seller, selling about 200,000 copies in just eight weeks. The chapter headings of this classic book are:
THE GAMBLER
Chapter 1. Canadian Period
THE FUNDAMENTALIST
Chapter 2. Entering Wall Street
Chapter 3. My First Crisis
THE TECHNICIAN
Chapter 4. Developing the Box Theory
Chapter 5. Cables Round the World
THE TECHNO-FUNDAMENTALIST
Chapter 6. During the Baby-Bear Market
Chapter 7. The Theory Starts to Work
Chapter 8. My First Half-Million
Chapter 9. My Second Crisis
Chapter 10. Two Million Dollars
How I Made $2,000,000 in the Stock Market does not take very long to read yet it contains a wealth of market wisdom. It should be in every trader’s library.
Darvas subsequently wrote Wall Street The Other Las Vegas and You Can Still Make It In the Stock Market.
Conclusion
Nicolas Darvas’s story shows that one does not have to have sophisticated software or an array of technical indicators to make a large sum of money trading the stock market. Darvas made much of his fortune using out-of-date weekly data while travelling the world. He did not have as much as a basic bar chart to display his data. What he did have was a desire to learn, the determination to succeed and sufficient time and motivation to thoroughly research his approach. Nicolas Darvas was, without a doubt, a market master.
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(This article was first published in the ATAA Journal, November/December, 2003. Reprinted with permission.)
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