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   I’d wanted to read this stock market classic for a long time but it is notoriously hard to find. Finally I bought it through a reseller on Amazon.com. The seller was in England and the book arrived in my mailbox a couple of weeks later. It was worth the wait!

   What adds to the book’s appeal is that, unlike Jesse Livermore, Darvas was not a professional investor. He was a professional dancer. He and his dance partner Julia entertained at nightclubs around the world. And because he was not a professional, he got his chops in the school of hard knocks. He learned by doing. And he chronicles his progress, all the mistakes he made along the way, where his thinking went wrong, and how he eventually developed his own theory which made him $2 million in 18 months, starting with a stake of less than $25,000.

   Darvas got involved in the stock market quite by accident. In 1952 he was offered a dancing gig in Toronto. The twin brothers who owned the club, Al and Harry Smith, made Darvas an unusual offer. They wanted to pay him in shares of a Canadian junior mining company called Brilund. It was trading at 50 cents a share – 6000 shares worth $3000 for his appearance. Darvas was a bit skeptical as he knew stocks went up and down in price. The Smiths agreed to make up the difference in cash if the stock dropped below 50 cents for the six months following the deal. Darvas agreed.

   As it turns out, Darvas could not keep his playdate and felt badly about letting the brothers down. So he offered to buy the 6000 shares for $3000. He got the shares and forgot about them until he noticed two months later that the stock was up to $1.90. He sold and made an $8000 profit. His appetite, as they say, was whetted.

   Then began the education. He thought Canadian penny mining stocks were the cat’s meow. “I jumped in and out of the market like a grasshopper,” he writes. He became enamored of some, calling them his “pets”. And he started losing money. So he quit the Canadian market and opened an account with a broker on Wall Street.

   His education continued. He followed broker tips. He subscribed to newsletters. He read books. He tried fundamental analysis. And he over-traded like crazy. When Rayonier went from $50 to $100, he was in and out three times picking up $5 here, $8 there and $2 in his last trade. He made $13 a share on Rayonier instead of $50.

   When he found out about industry groups, he decided buying the strongest stock in the strongest industry was a good idea. He was so convinced he was on to a sure thing he mortgaged some property he owned in Las Vegas, borrowed on an insurance policy and plunked down $50,000 on steel company Jones & McLaughlin using margin. Three days later “lightning struck. Jones & McLaughlin began to drop.” He was stunned. He held on believing it to be a temporary setback. He became afraid. “I trembled when I telephoned my broker,” he writes. “I was scared when I opened the newspaper. I literally lived with my stock. I was watching it the way an anxious parent watches over his new-born child.”

   As you can tell, Darvas is a compelling writer. He grabs the reader’s attention. We’ve all been there, done that. We know what he’s talking about!

   But Darvas didn’t give up. And he went on to develop his own method of investing, a largely technical approach. He calls it the box theory and it works like this. He noticed that stocks fluctuate and stocks in an upwards trend will often pause and take a breather, fluctuating within a range. A box he called it. And he noticed that when the stock broke out of this box to the upside, it tended to go up further. And if it broke out to the downside, the trend was often broken.

   For example, if a stock was fluctuating between 45 and 50 dollars – a 45/50 box, if it broke through to 51, it would likely go higher. If it broke through to 44, it would likely go lower. So he would buy at 51 and set a stop loss for the top of the last box or 50. Darvas used very tight stops on his initial purchases. He reasoned that the stock had broken out of the box and it had no business going back in the box. If it did, then he made a mistake and wanted to get out as quickly as possible with as little damage as possible. He also looked to increased volume as a positive indicator.

   He was not averse to playing the same stock several times. For example, he played steel company Cooper-Bessemer three times between November 1956 and April 1957. Bought at 46, stopped out at 45 1/8; bought at 55 3/8, stopped out at 54; bought at 57 and sold for a hefty profit at 70 ¾. Two losses and a victory for an overall gain of over $1500. In the fall of 1957, a bear market developed but he had been stopped out of all his positions well ahead of it. His system had put him in cash when the market went south.

   Darvas was fascinated that he didn’t have to have theories or predictions about where the market in general was headed. The individual stocks told him the story by their behavior. And he learned you can’t get emotional about the market. “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.”

   It was during this mini-bear that he made an important discovery. He read the stock reports daily. He noticed some stocks gave ground grudgingly, fighting the down trend. Checking these stocks further, he discovered they were growing earnings. “Capital was flowing into these stocks, even in a bad market. This capital was following earning improvements as a dog follows a scent.”

   And so he married this fundamental idea to his technical box theory. “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.”

   And he decided to focus on “those stocks that were tied up with the future and where I could expect revolutionary new products would sharply improve the company’s earnings.” Yes, he became a tech stock investor…way back in the 1950s. “They were rapidly-expanding, infant industries and, unless something unforeseen happened, their expansion should soon be reflected in the market.”

   You may notice some striking similarities to Jesse Livermore’s approach. Others were the idea of probing the market, that is buying a bit now, a bit more on confirmation and still more after that. In fact, like Livermore, Darvas was a plunger. He bought few stocks. After he made a million, he re-invested the proceeds in just two stocks!

   Darvas’s book is a fascinating read. It’s almost as valuable for the discussion of the mistakes he made as for his successes. And it reads like an adventure story, a compelling page turner. Get it! You won’t be disappointed.

   Marco den Ouden

How I Made $2,000,000
in the Stock Market

Nicolas Darvas

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