I was just rereading Nicolas Darvas’ How I Made $2,000,000 in the Stock Market and came across this interesting summary of his trading method and risk management approach in the author’s intro. I’d like to share it with you.
“I built a fortune with serenity by avoiding premature selling yet making an exodus from most of my stocks with the use of a single tool: the trailing stop-loss.
I have discovered no loss-free Nirvana. But I have been able to limit my losses to less than 10 percent wherever possible. My stop loss method had two effects. It got me out of the wrong stock and into the right one.”
Full passage in the image below:
Sounds a bit like William O’Neil’s philosophy on taking losses, doesn’t it? Well, as O’Neil points out, his trading style and risk management philosophy was influenced by (among others) Nicolas Darvas and famed speculator and author, Gerald Loeb. Loeb advised speculators to cut all losses at 10% and he aimed to exit his own losing positions before they reached that mark.
You will have losses at some point in your trading career. That is certain. This holds true for those saving and investing their own money in stocks and mutual funds/ETFs. Losses are an inevitable part of speculation. How you handle those losses (do you cut them quickly or let them run?) will make all the difference in your results.
We’ll have more on controlling trading losses in a future post. In the meantime, check out Darvas’ and O’Neil’s books on trading. They will give you some serious food for thought on stock selection and risk management. If you take the time to read and apply their lessons, you may see some improvement in your trading (or “investing”) results.