Nicolas Darvas - Recommended Reading

Here's a couple that are very rarely mentioned anywhere, and yet which are IMO by far the most readable, entertaining and illuminating books on trading that I have ever read:

HOW I MADE $2 MILLION IN THE STOCK MARKET (check our financial directory for a free copy of this book)



Both were written by Nicolas Darvas in the early 1960s. He was a world-renowned ballet dancer who basically stumbled in to trading by a happy accident, and was highly successful at it.

His system was essentially what nowadays is called "momentum investing", i.e. buying shares that are going up, and selling them when they go down (sounds simple doesn't it ;-)). It is very similar to my method of trading, except that Darvas only ever traded shares that were trading at new one-year highs, which I find an unnecessary restriction.

The first book is the better-known one, and is consequently probably easier to get hold of. The second book doesn't add an awful lot to the first, containing as it does a lot of rehashed material from the first. But either is worth reading.

Not to be recommended if you are a slavish follower of Warren Buffett, who never buys a share that he doesn't understand. Darvas, cheerfully boasts that he knows diddly-squat about most of the companies he invests in. The price trend is in his opinion far more important than anything else.

There's a lovely quote in the second book that encapsulates Darvas's philosophy very neatly:

"The only sound reason for buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering."

He may have been "bloody lucky" trading in bull market conditions, don't forget that everyone else at the time was also trading in that same bull market, and not many of them made $2 million! Also, it is important to remember that, as he points out, his system ensured (or so he believed) that when the bull market ended, he was already - to coin a phrase - in cash.

OK, he may indeed have been one hell of a gambler, but I suspect that that is the case for most people who make such a startling sum of money (bearing in mind that $2 million in the 1960s would be worth several times' that in today's money) from such a modest start.

Having said this, I don't use his box system. I am not at all sure that it would work now, in any case, even in the US. So many things have changed in how markets move in the past four or five decades. Electronic trading has undoubtedly made trading easier in many ways, but by the same token has contributed to volatility that would, I guess, make Darvas's very tight stops unworkable - I suspect that he would have got stopped-out all the time in present conditions.

But I do agree with many of the broad underlying principles of his system: regarding price action as the most important single factor in stock selection; aiming for large profits/small losses; and recognizing the importance of stop losses.

It's a pity Darvas is not around any more (he died in 1979) to develop a modified version of his system, which would take account of the changes in markets over the past few decades. But then, maybe those changes would make even a modified version.

Nonetheless, his book is still well worth reading IMO, particularly for traders who do not pay enough attention to price action in shares, snatch at small profits too readily, and who regard stop losses as being for wimps ;-