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NICOLAS DARVAS AND HIS $2,000,000

icolas Darvas viewed Wall Street as nothing more than a gambling casino; therefore, he set out to learn how to gamble.

I would like us to take a look at Mr. Darvas’ understanding of the stock market, as outlined in his best selling book How I Made $2,000,000 In The Stock Market, originally penned in 1960, as we recognize that what was true over 50 years ago still holds true today.  In other words, trading the market today is THE SAME AS IT EVER WAS.

Mr. Darvas experienced an “important turning point” in his stock market career when he learned that “there is no such thing as cannot in the market.  Any stock can do anything.”  With this in mind Darvas developed his “box theory” based on the following realizations:

1.  There is no sure thing in the market.  I was bound to be wrong half the time. Darvas adopted what he called the “quick-loss weapon”.  He already knew he would be wrong quite often (half the time); therefore, he decided to accept his mistakes realistically and get out of a losing trade with a small loss.  “This way, I figured, I would never sleep with a loss.  If any of my stocks went below the price I thought they should, I would not own them when I went to bed that night.  I knew that many times I would be stopped out for the sake of a point just to see my stock climb up immediately after.  But I realized that this was not so important as stopping the big losses.  Besides, I could always buy back the stock by paying a higher price.”

2.  My pride and my ego would have to be subdued.  Darvas surmised that with a win ratio of 50% his profits had to be bigger than his losses.  Breaking even was not a sustainable option.  For that to happen he would have to take many losses while letting the winners run.  Egotistical pride would have to give way to humble reality.  “As if stocks were made to conform to my new attitude, I handled this quite successfully for quite a while.  I bought with bold confidence when I thought I was right and coldly, without a hurt ego, I took my limited losses when I thought I was proven wrong.”

3.  I must become an impartial diagnostician. Instead of trying to force his will upon market direction, Darvas allowed the market to direct him by becoming intimate with a few stocks at a time and by not listening to others.  “To try to fit the market into a rigid pattern was a mistake.  As I only handled five to eight stocks at a time, I automatically separated them from the confusing, jungle-like movement of the hundreds of stocks surrounding them.  I was influenced by nothing but the price of my stocks.  I could not hear what people said, but I could see what they did.  It was like a poker game in which I could not hear the betting, but I could see all the cards.  Of course, the poker players would try to mislead me with words, and they would not show me their cards.  But if I did not listen to their words, and constantly watched their cards, I could guess what they were doing.”

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The simple case for buying everything right now

Suspend your disbelief and embrace the free-money future

Suspend your disbelief and embrace the free-money future
The enthusiasm in markets at the moment is bordering on euphoria. Retail money is pouring into the flavour-of-the-day and now FOMO is taking over more broadly.
You have to decide if you’re in or out. We all know the risks around the virus and the current economic data and it takes a huge leap of faith to pile in here but betting on humanity has been the best bet in world history.

1) We’re in the post pandemic world

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Nicholas Darvas: Trend Trader

From a Time Magazine article in 1959:

Darvas places his buy orders for levels that he considers breakout points on the upside. At the same time, he places a stop-loss sell order just below his buy order, so that if the stock does not move straight up after he buys, he will be sold out and his loss cut. “I have no ego in the stock market,” he says. “If I make a mistake I admit it immediately and get out fast.” Darvas thinks his system is the height of conservatism. Says he: “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?” If he has a big profit in a stock, he puts the stop-loss order just below the level at which a sliding stock should meet support. He bought Universal Controls at 18, sold it at 83 on the way down after it had hit 102. “I never bought a stock at the low or sold one at the high in my life,” says Darvas. “I am satisfied to be along for most of the ride.”

Nicolas Darvas

Great links with Nicolas Darvas interviews

“Since he has to do trading from wherever he is dancing he ignores tips, financial stories and brokers’ letters, and has never been in a broker’s office. Basically, his approach is that of a chartist: he watches price and volume … When a stock makes a good advance on strong volume, he begins watching it, buys when he feels that informed buyers are getting in. For example, when he was playing in Calcutta, he noticed E. L. Bruce moving up in the stock tables. Suddenly, on 35,000 shares it moved from 16 to 50. He bought in at 51, though he knew nothing about the company, and ‘I didn’t care what they made.’ (They make hardwood flooring.) He sold out at 171 six weeks later.

Darvas places his buy orders for levels that he considers breakout points on the upside. At the same time, he places a stop-loss sell order just below his buy order, so that if the stock does not move straight up after he buys, he will be sold out and his loss cut. ‘I have no ego in the stock market,’ he says. ‘If I make a mistake I admit it immediately and get out fast.’ Darvas thinks his system is the height of conservatism … If he has a big profit in a stock, he puts the stop-loss order just below the level at which a sliding stock should meet support. He bought Universal Controls at 18, sold it at 83 on the way down after it had hit 102.

Darvas trained for the market just as methodically as he had studied his dancing, read some 200 books on the market and the great speculators, spent eight hours a day until saturated. Two of the books he rereads almost every week: Humphrey Neill’s Tape Reading and Market Tactics and G. M. Loeb’s The Battle for Investment Survival. He still spends about two hours a day on his stock tables.”

That line, “[He] buys when he feels that informed buyers are getting in,” made me chuckle. It should read “He buys when he suspects that uninformed fools are piling in.”

An Interview With Nicolas Darvas in 1974:

Don’t forget I too went through a period of learning from 1953 to 1958 where I lost a substantial amount of capital before I worked out what worked and then was lucky enough to time it in the 1958-1960 bull market.”


11 Biases That Affect Traders

Overconfidence
As the name suggested, it is the irrational faith in one’s skills, methodology or beliefs. For example, you see a certain chart pattern and make a maximum leveraged trade, even though you understand that any chart pattern cannot predict market with certainty. Trading excessively after a winning streak also shows overconfidence.
Cognitive Dissonance
It means finding excuses for something which makes you ‘uncomfortable’. For example, jumping from one indicator to another when you face losing trades; or continuing to trade in stock even your trading methodology does not gives you a positive expectancy. 
Availability Bias
It means being biased to information which is readily and easily available. For example, people begin to trade using RSI without understanding the internal relative strength; that is, RSI is most talked about on forums so start using them without rationally researching it. Being affected from attractive advertisement or intelligent sounding articles (including this one!) without due diligence also signifies availability bias.
Self-Attribution Bias
It means giving yourself unwarranted praise for outcomes which may just be an outcome of chance. For example, people make money in a bull market through buy and hold and start begin to believe on their trading acumen rather than the market regime which favors their trading style. (more…)

The 7-Trading Rules

Here are the rules – they are not unique or new. They are time tested and successful investor approved. Like Mom’s chicken soup for a cold – the rules are the rules. If you follow them you succeed – if you don’t, you don’t.

1) Sell Losers Short: Let Winners Run:

It seems like a simple thing to do but when it comes down to it the average investor sells their winners and keeps their losers hoping they will come back to even.

2) Buy Cheap And Sell Expensive:

You haggle, negotiate and shop extensively for the best deals on cars and flat screen televisions. However, you will pay any price for a stock because someone on television told you too. Insist on making investments when you are getting a “good deal” on it. If it isn’t – it isn’t, don’t try and come up with an excuse to justify overpaying for an investment. In the long run – overpaying will end in misery.

3) This Time Is Never Different:

As much as our emotions and psychological makeup want to always hope and pray for the best – this time is never different than the past. History may not repeat exactly but it surely rhymes awfully well.

4) Be Patient:

As with item number 2; there is never a rush to make an investment and there is NOTHING WRONG with sitting on cash until a good deal, a real bargain, comes along. Being patient is not only a virtue – it is a good way to keep yourself out of trouble.

5) Turn Off The Television:

Any good investment is NEVER dictated by day to day movements of the market which is merely nothing more than noise. If you have done your homework, made a good investment at a good price and have confirmed your analysis to correct – then the day to day market actions will have little, if any, bearing on the longer-term success of your investment. The only thing you achieve by watching the television from one minute to the next is increasing your blood pressure.

6) Risk Is Not Equal To Your Return:

Taking RISK in an investment or strategy is not equivalent to how much money you will make. It only relates to the permanent loss of capital that will be incurred when you are wrong. Invest conservatively and grow your money over time with the LEAST amount of risk possible.

7) Go Against The Herd:

The populous is generally right in the middle of a move up in the markets but they are seldom right at major turning points. When everyone agrees on the direction of the market due to any given set of reasons – generally something else happens. However, this also cedes to points 2) and 4); in order to buy something cheap or sell something at the best price – you are generally buying when everyone is selling and selling when everyone else is buying.

These are the rules. They are simple and impossible to follow for most. However, if you can incorporate them you will succeed in your investment goals in the long run. You most likely WILL NOT outperform the markets on the way up but you will not lose as much on the way down. This is important because it is much easier to replace a lost opportunity in investing – it is impossible to replace lost capital.

As an investor, it is simply your job to step away from your “emotions” for a moment and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question, but how you manage the inherent risk.

 
 

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham