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Trading Lessons From Nicolas Darvas

  • There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
  • “You can never go broke taking a profit” is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
  • There is a “follow-the-leader” style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
  • The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
  • It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. “You have to find out what the public wants and go along with it. You can’t fight the tape, or the public.”
  • One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
  • Losses are tuition on Wall Street. Learn from them.
  • You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. “I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. 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?”
  • Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
  • The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
  • The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
  • Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
  • It is difficult to be profitable on the short side of the market versus the long side – trading in rising or bull markets will give you the best chance for success
  • Most, if not all stocks, will follow the general trend of the market
  • To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
  • Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
  • Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is “no other reason worth considering.”
  • Darvas used his “box theory” to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box).
  • For new trades, Darvas used “pilot buys” which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
  • He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. “I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality.”
  • Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. “I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride.”
  • Trade only when the environment is in your favor. Darvas’ strategy kept him out of poor and bear markets because he wouldn’t trade stocks that didn’t fit his requirements which were only found in raging bull markets
  • Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
  • While his trading approach was very technical, after studying the market’s winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important
  • Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb’s books & approach served as key inspiration
  • No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away

Wise quotes from Bernard M. Baruch

263-1Wise quotes from Bernard M. Baruch:
Bernard Baruch was a stock market speculator who became a millionaire by age 30 in the early 1900’s and eventually a statesman and advisor to multiple Presidents during WWI and WWII.

  • -A speculator is a man who observes the future, and acts before it occurs.
  • -If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.
  • -During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think.
  • -Age is only a number, a cipher for the records. A man can’t retire his experience. He must use it. Experience achieves more with less energy and time.
  • Do not blame anybody for your mistakes and failures.
  • Every man has a right to his opinion, but no man has a right to be wrong in his facts.
  • I made my money by selling too soon.
    I never lost money by turning a profit.
  • Most of the successful people I’ve known are the ones who do more listening than talking.
  • Never pay the slightest attention to what a company president ever says about his stock.
  • Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in private and public life have been the consequence of action without thought.

Market Wisdom from Bernard Baruch

You don’t read a lot about Bernard Baruchanymore, but his teachings about the market are useful today as they always have been. There are several good books about him including his own“Baruch: My Own Story” which I recommend highly especially for those of you looking for a book to take with you on your summer vacations.

Although I’ve provided several quotes from Bernard Baruch through the years, here are some notes that I’ve taken from reading about him and his market wisdom. Enjoy!

  • Baruch started out as most traders do – i.e. losing lots of money because he lacked the knowledge, experience, & discipline. “You have to lose money in order to better yourself.”
  • Real success in the market takes time and money. Unfortunately “most people view the market as the place where the miracle of great and quick riches can be performed with little effort.”
  • Overtrading and holding too many positions in his early years caused Baruch to go broke many times before he developed the discipline to succeed.
  • A successful speculation is “a man who observes the future and acts before it occurs.” Acting swiftly in the market is important.
  • After losing money from the recommendation of others, Baruch focused himself on the facts. “One must search through a maze of complex and contradictory details to get to the significant facts…..Then he must be able to operate coldly, clearly, and skillfully on the basis of those facts.” The challenge for the successful speculator is “how to disentangle the cold hard facts from the rather warm feelings of the people dealing with the facts.” Moreover, “if you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.” (more…)