One of the greatest traders of our time:Nicholas Darvas.
A history lesson about a stock trading idea-for the newbies and not only!
Nicholas Darvas was a brilliant investor, and one of the first traders to use technical analysis. At the height of his fortune, he made $2.2 million. If Darvas had invested today, that $2.2 million would be $20 million!
Before Darvas came to America he studied economics at the University of Budapest. In 1951, he immigrated to the United States, where he trained with his half-sister, Julia, to be a ballroom dancer. And he was a very good dancer, touring the world by 1956.
He started investing in 1952, a ballroom dancer who had never invested in the stock market. But a Toronto nightclub couldn`t pay him in cash, so they paid him with three thousand shares of a Canadian mining company called Brilund. Two months later, the stock tripled and Darvas made a tidy profit. An investor was born.
Like anyone beginning to trade on the stock market, Darvas made his mistakes. When he started out, many of his trades were gambles. He would pick companies that were the next big thing, or that came recommended by other traders. Many of his first large trades resulted in a huge losses. But cheered on by whatever small profits he did make, Darvas began asking questions about why stocks behaved the way they did.
Realizing that even experts couldn`t predict the market, Darvas decided that he needed to acquire his own understanding. He began devouring newsletters, books, tip sheets, "hot tips", and so-called insider information, in his quest to understand the market.
Yet, despite his arsenal of knowledge, Darvas continued to lose money. In 1955, he purchased over fifty thousand dollars worth of a company called Jones and Laughlin. Jones and Laughlin had an excellent price to earnings ratio, high dividends, and was in a strong industry group. He was so confident in his analysis, that he bought most of this stock on margin. Then Jones and Laughlin began to fall.
Jones and Laughlin`s price fell far enough to account for a $9,000 loss. In a desperate attempt to recoup his losses Darvas bought a stock he knew virtually nothing about. Soon it had risen to a point where he regained about half of his losses.
At this point in his career, Darvas was frustrated with his attempts at analyzing stocks. With Jones and Laughlin, he had put a value on the stock and expected the price of the stock to behave as he expected. When the stock price fell instead of climbing as expected, Darvas finally accepted that his method wasn`t working. He decided there wasn`t much worth in analyzing stocks by trying to assess their value. Annoyed with information from tip sheets, friends, so called experts, and even Wall Street maxims, he decided to shun most of these common sources.
In 1956 Darvas embarked on a two-year tour of the world to showcase his ballroom dancing. During this time he developed his famed Darvas Box method of screening stocks. Wanting to keep up on his holdings in stock he already owned and always on the lookout for new stocks, Darvas looked for ways to get American stock quotes while he traveled. This was a daunting task, but arrangements were made to obtain a copy of Barron`s or the Wall Street Journal through United States Embassies, and Brokers wired time sensitive information when needed.
Without brokers, friends, or other investors to influence him, Darvas developed a method of picking stocks based solely on the stock`s price and volume. By the time he returned to New York in 1959 he had made about $500,000. After Darvas returned to New York, people who were amazed with his success began to give him "hot tips" and stock advice again. Darvas listened to them, and took huge losses on the fortune he had made.
Realizing that it was the human element in stock trading that was his downfall, Darvas sequestered himself in Paris in February of 1959. He made arrangements with his brokers to make all his trades via wire and get the day`s highs, lows and closing prices. Using very little data, and a lot of intelligence and discipline, Darvas refined his Box method of picking stocks. Within six months, he had turned a profit of two million dollars.
Nicholas Darvas is regarded as one of the best traders in the history of the market. Darvas Boxes are used today and are the subject of analysis for financial researchers. Many software firms are developing programs that make the exact same observations and decisions that Darvas made as he watched stock prices and volume. His method is complicated and difficult to master, but it has been rigorously tested by those in the business and has been found to be one of the best methods out there.
Although our Stock Trading System does not use his method in selecting stocks, we recommend studying his method as a pure technical strategy.