Mastering Darvas "How I Made $2,000,000 in The Stock Market"

COURSE NOTES: Mastering Darvas "How I Made $2,000,000 in The

Stock Market"
Dr. Scott Brown mentors you through the classic book by Nicolas Darvas; the only to
document every momentum transaction.

Goals:
At the end of this course, students will be able to… [Start with a Verb]

1. Find the fastest and most consistently rising stocks in the market will be a snap with this complete
system.

2. Derive guidance from volume and price as your most powerful compass through the dark forest of
Wall Street.

3. Discover your inner wisdom to quickly recognize the quality of financial information.

Who should (or should not) take this course?

This course is appropriate for all investors wishing to learn about single stock investing.

What will students need to know or do before starting this course?

Basic arithmetic.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

WELCOME
Dr. Scott Brown Explains the Importance of the Nicolas Darvas Stock Records.

I started my path in financial stewardship as the broke son of a wealthy optometrist. I thought getting a
prestigious MBA in international finance would help me regain the financial stature of my family that
was lost when my father died of cancer at the age of 48.

I was 19 years old.

My grandmother was ripped off by an account churning crook posing as a licensed stock broker for
Dean, Whitter, Reynolds. Don’t believe any of that crap in the Will Smith movie in “Pursuit of
Happyness” about having your interests at heart.

I learned that lesson through my family in my teens that unbeknownst to me Nicolas had learned a few
decades before: don’t deal with brokers as anything but order takers. Best yet do anything possible to
avoid talking with a broker.

Do it yourself!

My stock investing results were very marginal using anything related to the Capital Asset Pricing Model
(CAPM). Clearly indexing in any form was a very slow route no matter now much my finance professors
loved the concept.

Then I published a popular stock investing course through the Oxford Club.

They have the most highly regarded investment newsletters in the industry. I was still not extracting
returns above the indexes following any of their editor ideas. These newsletters proved utterly
worthless.

De-worse-ification

Over time I realized that holding a portfolio of 20 stock recommendations, no matter how well touted, I
would never beat the indexes.

I had spent thousands of hours getting a Ph.D. in finance from a highly accredited state university,
poured over tens if not hundreds of thousands of price charts, applied nearly every tactic in the
textbooks. But, to little avail.

Nicolas Darvas

Then I read the 1950s investing best seller by Nicolas Darvas entitled “How I made $2,000,000 in the
Stocks Market.”

I had spent so much of my life dedicated to finance that the hair on my arms stood on end as I read the
book. What I was reading was not only documented by Time Magazine but also dovetailed perfectly into
major anomalies documented in modern research from financial economics from schools like Harvard
and Oxford.

Stunning Returns

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I extracted returns over sixty percent two years in a row in 2013 and 2014 with calls the same way
Darvas used rights. I don’t just teach this stuff … I TRADE IT!

Nicolas Darvas is the only highly successful stock investor with the discipline and training to document
and describe his entire sequence of trades that grew US ~$36,000 into $2.5 million in about six and a
half years in the 1950s.

Charlatans …

Knuckleheads in the financial media immediately decried his results.

Yet recent research from the very top of financial economics has proven each of the rules that Nicolas
Darvas used to become a multi-millionaire in the stock market from a small wad of cash.

Make sure you order his bestselling book, “How I Made $2,000,000 in the Stock Market” on Amazon
right now. This essential reading will help you better understand this course.

I won’t stop in explaining why what Darvas did is so brilliant. You will discover modern research at the
pinnacle of academic financial economics. I will also share important practical insights from two other
extremely important traders.

The first is W.D. Gann who retired as the wealthiest single investor of the last century. He followed a
stock trading system that was very like that of Darvas. “The W. D. Gann Master Commodities Course” is
highly recommended, available on Amazon, and lays bare his technical methodology. You will see the
striking similarities with the system Nicolas Darvas used.

The second famous trader I will map to Darvas is the opposite of W.D. Gann. He did many things right in
concentrating his positions and holding out for long periods.

But, Jesse Livermore refused to use stop orders.

This wiped him out multiple times. The same brokerage W.D. Gann used was wiped out in one of Jesse
Livermore’s bankruptcies.

Reckless trader Livermore eventually ended his life in suicide with a gun blast to the head. Risk
controlled W.D. Gann lived through two happy marriages. He was widowed from his first.

Livermore died broke while Gann died as one of the richest men in the world.

Jesse Livermore and his methods are outlined in “How to Trade in Stocks” and “Reminiscences of a Stock
Operator.” These can be ordered on Amazon.

You will be way ahead of the game after reading these 4 new books on your stock trading essentials
bookshelf.

Get the Most Out of this Course on Nicolas Darvas!

The most important task ahead of you is to master the core knowledge of this essential course on stock
investing. General questions are best posted in the discussion area.

This helps other students in our community.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

If you have a question of a personal nature contact me directly. -Doc Brown

[email protected]

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

CHAPTER 1: CANADIAN PERIOD

Brilund Mining Yields Darvas CDN$8,000 From $3,000 on the Toronto Stock Exchange

How it all started ….

In November 1952 Nicolas Darvas is paid CDN $3,000 to dance. He is given 6,000 shares BRILUND
[Brilund Mining] stock worth 50¢ Canadian per share on the Toronto Stock Exchange (TSE). Two months
pass. Nicolas discovers BRILUND stock is trading at CDN$1.90. He sells it for CDN$8,000.

This yields a fast CDN$5,000 profit.

Nicolas Darvas writes “I decided I had been missing a good thing all my life. I made up my mind to go
into the stock market. I have never gone back on this decision.”

Nicolas knew absolutely nothing about the stock market. He made his first stock market profit out of
sheer luck. He realizes that his big problem is “how to start?” He has no idea how to know what to
buy? Darvas decides he must find more information.

He decides as his first potential solution that rich people must know about stocks!

Lake Wobegon Hot Stock Tips

He had a people problem…

He asked wealthy people at the clubs at which he danced about stocks. Everybody did seem to know
one – a good stock. Everybody had the secret. He bought stock in companies he could not pronounce.

What they did and where they came from, he had no idea. Asking people, “Do you know a good stock?”
is a solution that NEVER works Nicolas Darvas decides.

And he had a broker problem …

Do you know a good reliable broker?” Nicolas is directed by a show person in New York to a financial
dawdler with a broker license. The “statistically minded” Canadian broker recommends EASTERN
MALARTIC. He explains how the dividend stock is paying 4 times more than the cost.

But he fails to mention that this is because he has held it for an eternity. He reckons they have gold
mines capable of double present production.

Therefore, the $2.90 stock would soon be worth $10. Nicolas eagerly buys 1,000 shares at $2.90.

The stock drops. He sells within weeks at $2.41 This is a $490 loss.

Nicolas concludes that brokers do not have the answer to making a fortune in the stock market. His
new problem is compulsive gambling: Darvas goes on following any tip but seldom makes money.

Ignorance Problem

Nicolas Did Not Understand Broker’s Commissions and Taxes!

He buys 10,000 KAYRAND for 10¢. The next day KAYRAND went to 11¢ a share. Nicolas reckons that he
has garnered a $100 fast profit in 24 hours.

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Toronto Stock Exchange

His Canadian broker explains that he has incurred a loss due to a $50 commission per half turn = $100 in
and out. And additional transfer taxes applied.

He jumped in and out of the market like a grasshopper…delighted to make just 2 points. zr

Nicolas often owned 25 to 30 stocks at a time all in small parcels during this period. He is
too spread out.

Emotional Problem

He develops an emotional problem. For some of his stocks he acquired a special liking. Other times it
was because he started out making money with them.

He had started to keep “pets.” He praised their virtues day and night. He talked about them as one
talks about his children.

His pet stocks were causing him the heaviest losses. He was holding a lot of stock which
was slumped well below the price he had paid for it and looked like it was staying there.

Hunches and Wild Guessing

 His Search for Rising Stock Unravels into Hunches and Wild Guessing

Nicolas Darvas does not try to understand the stock trades he is making. He does not consider technical
or fundamental factors during his Canadian period. He follows wild “hunches” entirely out of the blue.

He follows stocks based on circumstantial meetings, rumors of rare earth, tales of the oil patch, or
anything at all related to the stock market anybody happens to tell him.

And just like chimpanzees who hit the food button more when payouts are random an occasional profit
gave him false hope. The stock gain is the carrot. Lost opportunity was the stick. And, he was the
donkey. He loses three thousand on bad stocks.

He does not know what he is doing. But he feels ahead because he has his original $3K.

Seeking Professional Assistance

Obsessed by His Carrot-before-the-nose Gains — He Had Not Noticed He was Losing!

This gambling problem presents Darvas with his first stock market dilemma. He is confused and has no
idea how to move ahead. He decides that there must be a guru somewhere who can help him.

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Nicolas Darvas pondered in frustration.

He looks for professional assistance. Darvas subscribes to investment newsletters. These give stock
tips.

He decides that he needs to follow the advice of an expert rather than a novice. He is convinced that
investment newsletters will help him succeed.

Investment Newsletter Services

Investment advice subscription services made stock market investing sound so easy … like 1-2-3. These
services made such proclamations as,

 “Buy this stock now!”

 “Buy as much as you can!”
 “If your broker says no, fire your broker!”
 “Expect 100% or more from this stock!”
Such important sounding information sounded true. In fact, it sounded red-hot!

This had to be more reliable than talking with people in a hotel diner.

The newsletter editors could read his mind. They knew how he felt and his condition.

 “A momentous moment for Canadian investments that Joe the Plumber will finally be
allowed in from the start.” And, “The fat cats on the New York Stock Exchange have
been trying to buy us out. But in thumbing our noses at them we are opening the door
to the little guy. Folks like you…”

This pulled Darvas in! Nicolas was “the little guy who needed help….” He should have been helped by a
shrink for his naiveté.

The Stock Each Investment Newsletter Recommended Invariably Slumped!

Darvas would urgently dash to his (land-line) phone to buy a recommended stock. It would drop.

He was not worried. Nicolas was convinced that the investment newsletter editor knew what he was
talking about.

The guru was his friend and trusted, after all. The next recommended stock must rise.

Stock recommendations seldom did.

Over time he figured out that when investment newsletters recommended stocks, professionals who
bought in lower sold. Money that entered the market on newsletter tips was from suckers.

The newsletter editor made his subscriber feel like the fastest with the most. But in reality they were
the last with the least.

Retail investor money is too tiny to hold up stock prices once the pros begin selling out on a stock tip
from a newsletter.

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But Darvas had no idea at the time. He just thought that it was bad luck that investment-newsletter-
recommended stocks tanked after he bought them.

Rethinking His Plan

Nicolas Darvas is Forced to Rethink His Stock Market Trading Plan; From Scratch!

A year passes. He finds himself at the end of 1953.

His $11K was down to $5.8K. Head waiter stock rumors flopped. Wealthy business folk tips tanked.
Investment newsletter recommendations proved worthless.

Darvas reads Barron’s, the New York Times, and the New York Herald Tribune. He also reads the Wall
Street Journal. He ponders mysterious jargon such as “over the counter.”

He decides that the largest stock market on earth in New York is right for him. He sells everything. The
only Canadian stock he holds is OLD SMOKY GAS & OILS.

His 19 cent stock sells for 10. He sustains a painful 47% loss.

A theater manager directs him to a New York Broker. He gives him the fictitious name of Lou Keller in
the book.

Poor Returns

Stock Bought Sold Loss Return

Old Smoky Gas & Oils $19 $10 ($9) -47%
Kayrand Mines $12 $8 ($4) -33%
Rexspar $130 $110 ($20) -15%
Quebec Smelting & Refining $22 $14 ($8) -36%

Yale Finance Professor Andrew Metrick Proves Poor Investment Newsletter Returns!

In October of 1999 professor Andrew Metrick of the New York University Stern School of Business
published an important article in the #1 ranked Journal of Finance. This paper showed that the
investment newsletters compiled in the Mark Hulbert Financial Digest exhibit lackluster returns.

See …

Andrew Metrick. 1999. Performance Evaluation with Transactions Data: The Stock Selection of
Investment Newsletters. Journal of Finance 54(5). 1743-1775.

The negative alpha professor Metrick documented was directly experienced by Nicolas Darvas.

The desire to follow a newsletter came from Darvas’ initial lack of confidence. As he grew into an
intelligent investor he learned to think for himself.

And that is the primary mission of this course. To get you to think for yourself when it comes to your
investments.

CFA Institute: More Proof of Poor Investment Newsletter Returns!

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In 2013 Georgetown University CFA Claire Emory wrote a summary of our article in the CFA Digest. Her
work condenses Brown, Cao, and Powers “Do Investment Newsletters Move Markets” published in
Financial Management in 2013.

We find that newsletter recommendations send a lightning bolt of volume into the market for the
recommended stock.

This drives the share price upward with the greatest strength in the first day. Volume and price impact
dissipate for another two weeks of trading.

But most of the impact is felt in the first two days.

The stock gives up a lot of its initial gains over time. Jensen’s Alpha is slightly negative for the
newsletter we study despite short term advances in returns.

Claire felt our study is important for the investing community and concludes, “On the one hand,
investment professionals interested in identifying short-term excess returns might find such opportunities
intriguing. On the other hand, advisers and retail investors interested primarily in focusing on long-term
returns and keeping costs low would likely view the authors’ research as confirmation of their belief that
simplicity trumps complexity for the average individual investor.”

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CHAPTER 2 -ENTERING WALL STREET

Nicolas Darvas tires of the complications of investing across the smaller exchange in Canada. He realizes
that larger stocks on the United States exchanges offer more safety. Nicolas sends in account open
papers.

Lou Keller

Opening an account in New York makes Nicolas feel like he is moving up on the financial front. He was
engaging in something respectable. He decides to shun the kind of gambling he did in Canada.
Humility to Jubilee
He decides to move more slowly, study more carefully and be less impulsive in his interactions with the
stock market. He counts his stake. He began with eleven thousand that included $3,000 invested in
Brilund and profits of $8,000.

Nicolas Darvas Moves His Momentum Stock Investment to New York in United States!

Over 14 months in Canada his $11,000 had eroded to just $5,200. Nicolas saves up $4,800 from show
business activities to round his stock investing bank roll to $10,000.
Darvas casually asks his new broker Lou Keller “what was good.”

BRILUND Investment $3,000

Profit $8,000
Start $11,000
Loss $5,800
Remaining Equity $5,200
Savings $4,800
Total Capital $10,000

Lou recommends several fundamentally “safe stocks” because of share splits, increases in dividends, or
higher earnings. His broker only “suggests.” Giving orders to his broker makes Nicolas feels in command
and important.

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3 Typical Trades
Stock Shares Bought Sold Gain Return Gross Fees Net
Columbia Pictures $200 $20.00 $22.88 $2.88 14% $575.00 $111.58 $463.42
No. Amer. Aviation $200 $24.25 $26.88 $2.63 11% $525.00 $119.37 $405.63
Kimberly-Clark 100 $54 $59.00 $5.50 10% $550.00 $85.67 $464.33
Total: $500 $14,200 $15,850 $1,650.00 12% $1,650.00 $316.62 $1,333.38
Net Return: 9%

Profits, profits, profits.

1954 April - May Bought Sold Gain Return

National Container $11 $12.38 $1.38 13%
Tri-Continental Warrants $5 $6.00 $0.88 17%
Allis-Chalmers $50.75 $55 $4.13 8%
Bucyrus-Erie $25 $27 $2 8%
General Dynamics $44 $47.25 $3.75 9%
Mesta Machine $32 $34.00 $2.00 6%
Universal Pictures $19.63 $22.75 $3.13 16%

Very Small Returns

Stock Shares Bought Sold Bought Sold Net $ Net % Gross %

ABC-Paramount $100 $16.88 $17.88 $1,709.38 $1,761.53 $52.15 3.05% 5.85%
ABC-Paramount $100 $17.50 $17.88 $1,772.50 $1,761.53 ($10.97) -0.62% 2.12%
New York Central $100.00 $22 $22.50 $2,175.75 $2,213.70 $37.95 1.74% 4.60%
General Refractories $100 $25 $25 $2,502.38 $2,442.97 ($59.41) -2.37% 0.00%
American Airlines $100 $14.75 $15.00 $1,494.75 $1,476.92 ($17.83) -1.19% 2%
Total: $500 $9,654.76 $9,656.65 $1.89 0.02% 2.75%
Drag: -2.73%

Don't Confuse Brains with a Bull Market

Nicolas Darvas has no idea that he is smack dab in the middle of the biggest bull market the world had
seen. This had grown over time after the great crash a few decades before. He notes that it is very easy
to profit because of the bullishness.

Movements in the market index explain a third to half of the return in any given stock per the Carhart 4
Factor Capital Asset Pricing (CAPM) model. You can see this by looking at the adjusted r-squared
values in the model that range between 0.30 and 0.50 for the market index factor.

Paying attention

He makes profits on three deals in a row making him feel like a “natural in Wall Street” in 1954.

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A fast $1,333.38 in a few short weeks in the 1st quarter of 1954 makes him feel like a superstar. Smooth
and simple they gave him the illusion of control. This masked the fact that his new approach was no
better. After all, a broker’s advice is professional information and not a tip.

The information he was receiving he views as pure economics and no fluff.

Impulsiveness Almost Destroys Chances of Stock Market Success
He was making profits everywhere and had high confidence. Unlike Canada he felt like Midas on Wall
Street.

He builds a portfolio worth $14,600 from his ten grand. A bump in the road now and then did not
bother him.

He patted himself on the back when he made money. Darvas blamed his broker when he lost.

He traded continuously. He pestered his broker up to twenty times a day.

He bought stocks the way a toddler reaches toward the store shelf from inside mom’s shopping cart.

Financial Vocabulary Gives Darvas Lay of the Game

He clears a buck eighty-nine after all this busy activity without accounting for his phone bill. And this is
not the only thing nagging him. Nicolas Darvas doesn’t understand the financial vocabulary spoken by
his stock broker.

This puts the dancer back to the books. He studies concepts of capitalization, dividends, earnings, per-
share earnings. Assets, yields, bonds, stocks, and profits are analyzed conceptually.

The vast written knowledge inspires Nicolas.

He starts to discern data quality with care. He continues his quest chronicling, “After all, somewhere
there must be a big, sound Wall Street stock that could do as well for me as what I now considered a
‘little penny stock.’”

He subscribes to Standard & Poor’s, Moody’s, and Fitch’s rating services: He understood little except
that they were highly respectable sounding but did not tell him which stock would actually rise.

Darvas begins reviewing other sources of stock market information off of newspapers, newsletters, and
book jackets. He subscribed to every service he could find or could find him by mailing list.

Even today financial newsletter marketers such as those in the Oxford Club maintain these lists. He was
astonished to discover that services were highly contradictory.

One service wrote “sell” while another wrote “buy. These were done in the most arm’s length wording
designed to protect the editor or publisher rather than Nicolas Darvas.

These writers expressed themselves in vague language such as “Should be bought on dips.” Or “Buy on
reactions.” Not one service explained exactly what a dip or reaction was.

But he was hooked to what was in reality diatribe to his account balance. He ignored the signs in his
haste to find stocks that only rose.

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Mailing Lists Send Sexy Stock Sales Booklets

Nicolas Darvas is on the mailing list of the biggest advisory services on Wall Street. These publish glossy
and expensive booklets on a stock 5 or 6 times a year. Darvas did not understand the contents.

But he was deeply impressed by Emerson which one report explained should be — but was not —
worth between thirty and thirty-five a share.

The stock was going for just twelve bucks at the time. Nicolas buys in at twelve and a half.

His sure fire glossy play begins to drop. This perplexes him and he sells.

By the end of nineteen fifty-six the stock hits five and three quarters with no bottom in sight.

He still believes that whomever created the glossy report held nothing but goodwill for his readers. Over
time he learns that stocks recommended by advisory services tend to drop. In his studies he reads the
Wall Street saying, “You cannot go broke taking a profit.”

Net Loss of $461.21

He buys shares of Kaiser Aluminum. It is 1955 in February.

He jumps to Boeing. The stock drops.

He hops to Magma Copper.

This chain of trades generates a net loss of $461.21. But Kaiser Aluminum rises all along.

Stock Shares Buy Sell Return % Return

KAISER ALUMINUM 100 $6,378.84 $7,453.29 $1,074.45 16.84%
BOEING 100 $8,343.30 $7,940.05 ($403.25) -4.83%
MAGMA COPPER 100 $9,019 $8,002.18 ($1,016.80) -11.27%
KAISER ALUMINUM 100 $8,243 $8,128 ($115.61) -1.40%
Net Loss: ($461.21)

Darvas gave up $1,748.75 that he would have made sitting put in Kaiser Aluminum doing nothing.

Rayonier does the same into March 1955 from November before.

Stock Enter Exit Shares Bought Sold Net $ Net %

Rayonier Nov-54 Dec-54 100 $5,340.30 $5,779.99 $439.69 8.23%
Rayonier Feb-55 Mar-55 100 $6,428.89 $7,116.13 $687.24 10.69%
Rayonier Mar-55 Mar-55 100 $7,242.20 $7,353.39 $111.19 1.54%
Manati Sugar Apr-55 Apr-55 1,000 $8,508.80 $7,465.70 ($1,043.10) -12.26%
Total: 1,300 $27,520.19 $27,715.21 $195.02 0.71%

Fidgeting for Action churns account

Nicolas dances in and out of stocks. Rayonier soars from fifty to a hundred a share in 8 months.

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This would have landed him profits of $2,612.48. Rather he nets $195.02 from $2,417.46.

Buy Low and Sell High!

“Buy low and sell high” sounded a lot better than “You cannot go broke taking a profit.”

But he had no idea where to find cheap stocks. Then he stumbles on the Over-the-Counter (OTC)
market.

These are not well regulated. They are not listed.

Not many people recognize these companies.

He subscribes to Over-the-Counter Securities Review monthly.

Nicolas purchases shares of Pacific Airmotive. It was unknown even at the time. Another obscure OTC
start-up was Collins Radio.

Gulf Sulphur was some strange chemical company. Another unlisted fly by night was Doman Helicopter.

Kennametal was a resource company that nobody knew of except Darvas. Then there was Tekoil
Corporation that never rose above ground.

And he buys other even lesser known stocks. Darvas has a hard time selling these stocks.

These stocks are hard to sell even at his entry price. This is because the bid and the ask are at very
different levels.

He may try to sell for $42 but can only get somebody else to buy at $38.

Investing in stocks over-the-counter is only for those specialized to do so. He decides that OTC trading
is not profitable for him.

He eventually attributes the lack of profitability to a lack of specialists to ensure a fair and orderly
market. Notice that it is the same OTC market that fraudster Jordon Belfort used to become the Wolf of
Wall Street as portrayed by Leo DiCaprio.

Darvas returns to highly liquid listed stocks.

Nicolas learns the hard way to avoid Wall Street’s rumors. He hears of an atomic train under
construction by Bald-Win-Lima-Hamilton.

Shares soar from twelve dollars to over $20.

Darvas enters at the apogee for twenty-four and a quarter. Two weeks later he bails out at nineteen and
a quarter.

The dud falls after that to twelve and a half. He realizes that despite this rumor something is wrong.

5 Core Rules

Lou Keller calls, “STERLING PRECISION will go to $40 before the end of the year.” It was trading for $8.

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He says “The company is buying up many smaller prosperous companies and will grow into a giant in no
time.”

The broker needed to say no more to pull Nicolas in for a thousand shares at seven and seven eighths
for $8,023.10. It drops.

Something is clearly off.

He gets out at seven and an eighth for six thousand nine hundred and sixty-seven dollars and forty-
five cents. Listening to gossip costs Nicolas $1,055.65 in less than a week.

He decides that if gossip doesn’t help that maybe actual transactions of insiders will through the SEC
Insider Transactions Report. This fails for Darvis as well.

Too much time has passed when he learns of their trades for insider stocks that rise. Otherwise most of
the insiders made bad trades. He decides that managers are paid to know about their business and
industry rather than the activity of speculation in the company stock.

He lays out five core rules:

 FIRST RULE: Don’t follow investment newsletters.

 SECOND RULE: Shun broker advice.
 THIRD RULE: Disregard Wall Street lore.
 FOURTH RULE: Do not trade across OTC.
 FIFTH RULE: Ignore gossip.

Our research on the Insider Alert Newsletter covered in “Do Investment Newsletters Move Markets?”
that was published in Financial Management shows that insiders are incapable of forecasting stock
movements in the firms they manage just as Darvas discovered years before.

The Virginian

Is the Virginian the clue for cracking Brilund Mining?

Nicolas Darvas picks up a hundred shares of Virginian Railway stock at twenty-nine and three quarters
for three thousand four dollars and eighty-eight cents. This is in August of nineteen fifty-four.

The dancer ignores it.

The stock pays a good dividend and has high earnings making him one thousand three hundred three
dollars and sixty-eight cents after selling out for four thousand three hundred and fifty-six cents.

From this success he develops …

SIXTH RULE: Study earnings and dividends.

SEVENTH RULE: Buy one hot rising stock rather than frantically follow a dozen.

From that idea Nicolas Darvas starts to discern earnings quality writing, “I thought that if I really studied
the company reports I could find out all about a stock and decide whether it was a good investment.”

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

Fundamental concepts from the balance sheet, cash flow, and income statements become the norm in
his stock conversations.

Spirit Quest

Nicolas ups his analysis a notch or three. Darvas goes on a spirit quest for the perpetually rising stock.
He uses the Value-Line lists to filter by quality, analyst view, cash position, and dividend payment. But,
no matter how right everything seemed the stock dropped. Lou Keller recommended that Nicolas
Darvas subscribe to a service that gave data on a couple of thousand issues as to business model,
decades of historical prices, capital structure, EPS, and a service unique rating for value and safety
where AAA was safest.

This made everything easy. There was no reason to comb through income statements or balance
sheets.

The path was clear. A > B > C. He felt cool headed like James Bond organizing his data into tables for
hours on end.

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CHAPTER 3 – FIRST CRISIS

Do You Follow the Herd?

Nicolas was starting to notice certain facts about the stock market. First is that industries move up and
down to some degree independently of the stock market averages.

Prices herd within industry groups.

If the average price for the group moves up, so does the individual stock price. He filtered his stock
selections by identifying the strongest rising industry groups.

Be careful about reading too much into this.

Industry rotation is not a valid approach to momentum investing. You are far better off to simply
identify the most powerful stocks in the broad market of 6,731 firms currently listed on the NYSE,
AMEX, and NASDAQ exchanges.

I select the 50 strongest from a group of 2,995 core stocks across these three exchanges every quarter. I
put all these eggs in one basket and I watch them.

I test the strongest. I may go up to a year without making a single test.

I trade very infrequently.

Stocks have Personalities

These were invariably rising because earnings were strong in that industry. Then once he identified the
strongest earning industry he would drill down to identify the strongest rising stock in that industry.

Darvas decided that individual stocks had personalities within their industry just like different children in
a human family. If Nicolas was studying market data for General Motors he would automatically extend
his analysis to the industry.

Studebaker

In the 1950s the automotive industry to which General Motors belonged was composed of

 Chrysler
 Studebaker
 American Motors
Alcoa Aluminum

Tin foil is used in nearly every kitchen in America. Kaiser Aluminum was a big industry player in the
1950s. But Kaiser had competitors in its industry,

 Alcoa
 Reynold’s Metals

Fundamental Analysis of Stocks

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

Moving forward with a methodology made him feel grand. Nicolas knew that he was finally going
beyond hypothetical thinking. He knew that was going to make a lot of money.

Darvas looked hard at average earnings in an industry. This allowed him to compare industries by
profitability.

Darvas Falls in Love with Steel

The steel industry stood out as the most profitable. This was during the post-WW-II, Korean war era.

He found that his top rating was so exclusive that it excessively limited his stocks. He lowered the rating
to second tier of ‘B’ that he was willing to consult.

This dramatically increased the amount of possible stock investments. By combining industry
profitability and rating he was able to identify Jones & Laughlin.

The company paid a fat 5% dividend of 1.25% quarterly. The price-to-earnings ratios were lowest (best)
as well.
Nicolas Darvas Fundamental Table Earnings Per Share EOY Estimated

Company Rating Price* P/E 195200.00% $1,953.00 $1,954.00 Earnings Dividends

Bethlehem Steel BB 142-3/8 $7.90 880.00% $13.30 $13.18 18 7.25
Inland Steel BB 79-3/8 $8.30 485.00% $6.90 $7.92 9.5 4.25
U.S. Steel BB 54-3/8 $8.40 227.00% $3.78 $3.23 6.5 2.15
Jones & Laughlin B 41-1/2 $5.40 291.00% $4.77 $3.80 7.75 2.25
Republic Steel B 47-1/4 8.5 $3.61 $4.63 $3.55 5.5 2.5
*End of June 1955.

Analysis Excited Him…

It filled him with confidence that the stock share price would rise. It would make him rich he believed.

He was convinced that the stock would jump twenty or thirty dollars in a heartbeat. He felt that this was
a better bet than Brilund. There was just one concern. He had to buy a lot of it as fast as he could before
anybody else discovered the stock, or at least so he felt.

Nicolas Darvas was a worldwide entertainer. He was also an act in Nevada.

Over the years he had acquired a home in Las Vegas. He took out a second mortgage on the home. He
also had a whole life insurance policy against which he took a loan. Then he got an advance on a long
term contract to dance.

This dangerous dash for cash was fueled by the over-confidence of Nicolas Darvas.

As a professor of finance I do not recommend that you do this. You are far better off to save at least
15% of your salary for retirement every month.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

And that is easy to do if you are a salaried employee. Overconfident investors have been shown to ride
losing positions in favor of winners by U.C. Berkley Research here:
http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00072/abstract

Shows Before the Strip

Darvas was an entertainer. That meant that he worked from contract to contract.

And he felt very confident about his analysis. He did not hesitate in finding seed capital for his stock
investing.

Then on September twenty third of nineteen fifty-five Nicolas Darvas bought a thousand shares of
common stock in Jones and Laughlin. He bought at fifty-two and a quarter on 70% margin.

Stock price drops

This allowed Darvas to own fifty-two thousand, six hundred and fifty-two dollars and thirty cents of
stock for thirty-six thousand eight hundred and fifty six dollars and sixty one cents from the money he
raised all the wrong ways. But he was capitalized.

He sat back to watch it rise. But the stock dropped.

I want to emphasize at this point that I have experienced this phenomenon so much that I am very slow
to test stocks. As time passes I have grown more experienced and I have become much more selective
as did Darvas.

Deer in the headlights

This crisis shocks Nicolas Darvas as much as it did the first time it happened to me.

As Jones & Laughlin collapsed he froze like a deer in the headlights. He would not embrace the
evidence that his prior hypothesis of strength was wrong.

He firmly believed that the stock that had been in the fifties was truly worth seventy-five dollars a share.
He held and held until the stock hit 44 on a downslide into the tenth of October of nineteen fifty-five.

Every dollar drop in share price was costing him a thousand dollars. He sold in terror. His account
balance now stood at forty-three thousand, five hundred, eighty-three dollars and twelve cents.

He lost nine thousand and sixty-nine dollars and eighteen cents while he stalled. Here is the math …

$52,652.30

- $9,069.18

$43,583.12

Ego

This was a crushing blow to his ego. His confidence in his method was shaken.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

This type of psychological pain was impossible for anybody to understand who has never placed a
significant percentage of their wealth on the line. This was not an indexed investment with high
diversification.

Nicolas Darvas had put all of his wealth on one big bet on just one stock. But he did not feel like a
gambler.

Darvas had invested significant effort into stock analysis. But he was down nine thousand dollars
despite his hard work.

This is consistent with fact. Benjamin Graham is the Columbia finance professor who taught Warren
Buffett value investing. He explained in a 1976 conference covered in the Financial Analyst Journal Vol.
32, No. 5 (Sep.-Oct.,1976), pp. 20-30: “I am no longer an advocate of elaborate techniques of security
analysis in order to find superior value opportunities. This was a rewarding activity, say, forty years ago,
when our textbook “Graham and Dodd” was first published; but the situation has changed a good deal
since then. In the old days any well-trained security analyst could do a good professional job of selecting
under-valued issues through detailed studies; but in the light of the enormous amount of research now
being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior
selections to justify their cost. To that very limited extent I’m on the ‘efficient market’ school of thought
now generally accepted by the professors.”

Prison

Depression hit when he fully understood that he could lose his home in sunny Las Vegas. He felt like an
inmate trapped by his own futile results as if he was reaching out from a jail cell.

He was desperate to find a rising stock that could break him out of his own self-made debtor prison.

Nicolas spotted a company called Texas Gulf Producing. The stock price was higher the day Darvas
spotted it than months before. The share price had been rising.

No News

He could not find any rumors about the company. He did not know the profitability.

The only thing he knew was that it was posting share price gains week after week. He bought the stock
in desperation. His order for a thousand shares was filled between thirty-seven and an eighth and
thirty-seven and a half.

The total investment was thirty-seven thousand, five hundred eighty-six dollars and twenty-six cents.

But this time he was not so sure that the stock would rise. He held his breath.

Now he was gun-shy from his recent loss. This caused another problem. After the stock had risen two
and half dollars he became anxious to sell out at forty dollars per share.

Flipping

He held the position with determination to earn back his nine-thousand-dollar loss. He worried
intensely about the position for fear that he was wrong again.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

But this time he resisted his temptation to earn fast cash by flipping the stock. His nervousness created
another problem.

He pecked at his broker constantly calling hourly or even more frequently. He babied the stock like a
child.

He strapped himself to the mast and held shares for a full five weeks. He was tense each day.

Nicolas finally sold out at forty-three and a quarter. His account balance stood at forty-two thousand
eight hundred forty dollars and forty-three cents.

Lion’s share

Darvas did not recover his nine-thousand-dollar loss, but he recovered the lion’s share of five thousand
two hundred and fifty-four dollars and seventeen cents.

The Texas Gulf Producing trade drained him like a disease. He had to rest and recover. Nicolas was now
concluding the same even as Columbia professor Benjamin Graham questioned the worth of detailed
financial study in the form of reports, outlooks, ratings and ratios.

The one stock that saved his investing account was the company he knew the least. The only thing
Nicolas Darvas knew about this stock was simply that it was rising.

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CHAPTER 4: DEVELOPING THE BOX THEORY

Nicolas sees how JONES & LAUGHLIN produced a frightening experience. A more fortunate experience
was TEXAS GULF PRODUCING. Scared and beaten he realizes that he cannot base his operations on luck.

JONES & LAUGHLIN…

Produced a frightening experience. A more fortunate experience was TEXAS GULF PRODUCING.

Scared and beaten he realizes that he cannot base his operations on luck.

He must rely on knowledge. Could he win at bridge without knowing the rules?

Or in a chess game without knowing how to answer his opponents moves?

He was playing for money. And, the game was against the keenest experts.

A clear path: Technical Analysis

And so, he started. First he examined his past experiences.

On one hand, using the fundamental approach, he was wrong. On the other hand, using the technical
approach, he was right.

Obviously, the best method was to try to repeat the successful approach he had used with TEXAS GULF

It was not easy…

He sat with his stock tables every evening, trying to find another stock like it. Then one day he noticed a
stock called M&M WOODWORKING.

It was a stock he had never heard of. It appeared to be RISING.

He knew nothing about its fundamentals and had heard no rumors about it.

None of the financial services could tell him much about it. His broker had never heard of it.

Yet its daily action reminded him of TEXAS GULF PRODUCING. He started to watch M&M Woodworking
carefully.

In December 1955…

M&M WOODWORKING rose from about $15 to $23-5/8 at the year end.

After a five-week lull, its TRADING VOLUME INCREASED and the PRICE RESUMED ITS ADVANCE.

He decided to buy 500 shares at $26-5/8.

It continued to rise and he held on.

Its volume of trading was consistently high. When it reached 33-1/4 he sold it and took a profit of
$2,866.62.

He Was Happy & Excited….

Just as he bought TEXAS GULF PRODUCING…

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

he bought M&M Woodworking purely on the “basis of its action in the market.”

He knew nothing about it nor could he find very much. He assumed from its continuing rise and high
volume that some people knew a lot more than he did.

The Steady Rise…

Was due to a merger, which was secretly negotiated. Another company planned to take over M&M
WOODWORKING for $35 a share. The offer was accepted.

Nicolas was in complete ignorance yet he sold out 2 points ($2) under the high. His buying, based on
the stock’s behavior, enabled him to profit from a proposed merger without knowing anything about it.

This is known as risk arbitrage.

Dr. Yakov Amihud is the Ira Rennert Professor of Entrepreneurial Finance at the New York University
Stern School of Business. At the turn of this century he conclusively confirmed that changes in volume
foreshadow changes in price.

This is termed price impact.

Nicolas Darvas explains that price impact is the source of his remarkable stock market returns when he
writes, “The experience did more than anything to convince me that the purely technical approach is
sound. It meant that if I studied price action and volume, discarding all other factors, I could get positive
results.”

Warren Buffett writes in “The Essays of Warren Buffett” that, “Some offbeat opportunities occasionally
arise in the arbitrage field. I participated in one of these when I was 24 and working in New York for
Graham-Newman Corp. The profits were good and my only expense was subway tokens. To evaluate
arbitrage situations, you must answer four questions: (1) How likely is it that the promised event will
indeed occur? (2) How long will your money be tied up? (3) What chance is there that something still
better will transpire — a competing takeover bid, for example? And (4) What will happen if the event
does not take place because of anti-trust action, financing glitches, etc.? Most practitioners buy into a
great many deals — perhaps 50 or more per year. With that many irons in the fire, they must spend most
of their time monitoring both the progress of deals and the market movements of the related stocks.”

Technical Approach…

To the market is proven sound.

MAJOR BREAKTHROUGH: This meant that if he studied PRICE ACTION and VOLUME alone, he could
get positive results!

He now began to try to work from this point-of-view.

He concentrated on a close study of price and volume. He tried to ignore all rumors, tips or fundamental
information.

He Blocked Out All the B.S.!

He decided not to concern himself with the reasons behind a rise.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

He figured that “if some fundamental change for the better takes place in the life of a company, this
soon shows up in the rising price and volume of its stock, because many people are anxious to buy it.”

If he could train his eyes to spot this upward change in its early stages, as in the case of M&M
WOODWORKING, he could participate in the stock’s rise without knowing the reason for it.

BUT HOW?!!!

Compare Stocks with People…

This is how he began to work it out:

If a tempestuous beauty were to jump on a table and do a wild dance, no one would be particularly
astonished. People expect that.

But if a dignified matron were suddenly to do the same…people would say, “There is something strange
here – something has happened.”

Volume and Price

He decided that if a usually inactive stock became active [VOLUME] he would consider this unusual. If it
advanced in [PRICE] he would buy it.

He would assume that somewhere behind the out-of-the-ordinary movement there was a group who
had some good information. Buying the stock would make him their silent partner.

May 1956

Nicolas has hit and miss results, “Sometimes I was successful, sometimes I was not.” What he did not
realize was that his eyes were not sufficiently trained yet.

He was in for a rude awakening. He notices PITTSBURGH METALLURGICAL trading at $67.

He thought it would continue to rise.

He buys 200 shares for $13,483.40. The stock tanks.

10 Days Later

Something was obviously wrong. The move was there but in the wrong direction. He bought at the top.

PITTSBURGH METALLURGICAL drops to 57-3/4. Nicolas sells for a $2,023.32 loss.

This is a 15% LOSS. It rises as soon as he sells.

He does not yet understand that the market has a rhythmic pattern of surge and reversal.

An Explanation…

He discovers that he buys at the top of an $18 [point] rise. He bought at the wrong time.

PROBLEM: How to judge a movement at the time it happens? He knew that book [accounting] systems
did not help.

Balance sheets were useless. Accounting information was suspect as wrong.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

On a Whim…

He studies individual stock movements. How do they act? What are the characteristics of their
behavior? Is there any pattern to their fluctuations?

He reads books.

He examines stock tables. He inspects hundreds of charts. A pattern emerges…

Defined upward or downward trends, once established, tend to continue in consolidation patterns
where prices channel into “BOXES.”

A Series of Frames…

…in which the share price fairly consistently oscillates between a low and a high area.

Nicolas Darvas describes this area, which enclosed this up-and-down movement, as a BOX. Thus
emerges “The Box Theory.” This would lead to his fortune!

This is a chart of Facebook (FB) displaying The Box Theory. This shows that stocks behave the same way
today as in the 1950s when Darvas was alive.

The Pyramid Redefined…

He started to watch stock when the price was in the highest box. The boxes of the stock had to stack up
on top of each other like a pyramid on increasing volume.

It could bounce all it wanted to between the high and the low of the box and he would do nothing. If it
did not bounce up and down inside its box he was worried.

Notice how nobody wants Galectin (GALT) stock!

No Bouncing Is Bad…

No bouncing, no movement, meant it was not a lively stock. He is not interested in non-lively stocks.

This meant that it would probably not rise dynamically. Nicolas defines his boxes with a special
nomenclature he calls “frame figures.”

A 45/50 box has a low of $45 and a high of $50.

It could bounce between this low and high often and he would still consider buying it. If it fell to $44-1/2
he eliminated it as a possibility.

WHY? ANYTHING BELOW $45 MEANT A LOWER BOX!

He only wants a stock moving into a HIGHER BOX. A stock sometimes stayed for weeks in one box.

He didn’t care…

How long the price action stayed inside the box; if it did, and did not fall below the lower frame figure.

He gives the example of a 45/50 box…

45 – 47 – 49 – 50 – 45 – 47

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

The stock can only react to $45 upon reaching $50. It could touch $50 but must stay above.

He constantly watched for a thrust above $50. Then he bought it!

No Fixed Rule…

He has no fixed rule. He just had to be sure to see it and act. Some volatile, eager stocks moved into
another box within hours.

Others took days. Pushing from its 45/50 box into another, upper box, he says could look like this…

48 – 52 – 50 – 55 – 50 – 53 – 52

Look for the high and low and you can see that it has formed a new 48/55 box.

The Range of the Box

… is what he had to decide.

PROBLEM: This varied with different stocks.

Some stocks had a small frame of 10% each way. Other wide-swinging stocks moved between 15 – 20%.

 SOLUTION PART 1: Define the frame exactly.

 SOLUTION PART 2: Sell stock on a drop below the lower edge of its box.
Reactions Are Normal…

As long as the price action stays within its box.

 REACTION DEFINITION: If in a 50/45 box the price rises to $50 and then plummets to
$45.

A drop in an uptrend (a rise in a downtrend) is a REACTION. Notice that the Nicolas Darvas definition of
a reaction is a precise technical support level.

This allows him to precisely define his risk before entry. If it did not penetrate $45 the reaction did not
mean that the price was going to fall.

He considers this equivalent to a dancer crouching, ready for the spring-up – stocks rarely shoot from
$50 to $70 in a day.

Uncle Paul Samuelson…

Said that stock market crashes were no different than Darwinian forces that culls weak animals. Darvas
notices that a reaction to 45 in a 45/50 box has a benefit.

It shakes out the weak and frightened shareholders who mistake this reaction for a drop. This enables
the stock to advance rapidly.

Hence reactions are sometimes referred to as “shake-outs.”

Feeling of Proportion…

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

About a stock that was on a definite upward trend. Rising from say $50 to $70 but occasionally
dropping back was all part of the right rhythm:

50 – 52 – 57 – 58 – 60 – 55 – 52 – 56

This is a 52/60 box. On an upward swing, it might have gone:

58 – 61 – 66 – 70 – 66 – 63 – 66

This put it well inside a 63/70 box.

MAJOR PROBLEM: What was the right time to buy? Logically, when the share price entered a new
higher box.

Modern science has shown that simply buying a stock because it is rising offers the highest expected
return in stocks.

LOUISIANA LAND & EXPLORATION.

The share price formed its pyramiding boxes for weeks. He felt that he had it assessed it correctly as on
the rise when the share priced pierced the upper frame of its last box at $59-1/2.

He orders his broker to call when it hits $61, the level he considered to be the door of its new box.

When the broker calls, it is at $63. He felt deprived of a great opportunity.

Up it went: 63-1/2 – 64-1/2 – 65.

He was right but had missed it. He buys 100 shares at $65 at the top of the new box.

The Buy Stop Order…

Nicolas was a baby at trade management. His broker explains that he should have put in an automatic
“ON STOP” BUY ORDER.

This is more commonly called a BUY STOP ORDER. The stock would have been bought when it rose to
$61. Nicolas decides to put in a Buy Stop Order for entry above the top of the box.

A Glimpse Behind the Door…

He uses this concept three times consecutively for $2,442.36 in profit.

 ALLEGHENY LUDLUM STEEL appears to enter a 45/50 box. He buys 200 at 45-3/4 and
sells at 51 in just three weeks for an 11.5% return.
 DRESSER INDUSTRIES seems to enter an 84/92 box. He buys 300 at 84, but it falters in
the box. He sells at $86.5 for a 3% return.
 COOPER-BESSEMER is bought at the bottom edge of a 40/45 box. He bought at 40-3/4
and sold at 45-1/2.
A Slap in The Face…

He buys 500 NORTH AMERICAN AVIATION at $94-3/4 anticipating a new box over $100. It falls. He loses
all the profit from the last three trades.

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THIS IS THE TURNING POINT! He realizes he will be wrong 50% of the time. He must become impartial
as a diagnostician in identifying with a theory or a stock. He must reduce his risks to a minimum.

His Quick-Loss Weapon…

He knew he was wrong half the time. Why not sell at a small loss? If he bought at $25 why not at the
same time order the stock to be sold if it returned below $24?

He places Buy Stop Orders at a certain figure with an initial stop-loss order in case the stock price
dropped. He knew that many times he would be “stopped out” then watch helplessly as the share price
climbed.

This is not as important as stopping big loss. He can always buy the stock back at a higher price.

Coin Flip Odds Won’t Work

PROBLEM: If he invested $10,000 in a medium-priced stock it would cost him $125 on each purchase
and sale or $250 a “round-turn.” In 40 trades breaking even before commissions his $10,000 would be
gone.

SOLUTION: His profits had to be bigger than his losses. He uses a TRAILING STOP LOSS he adjusts on
each rise into a new higher box.

Objectives and Weapons…

 Objectives
o Right stocks
o Right timing
 Small losses
 Big Profits
 Weapons
o Price and volume
o Box theory
 Automatic buy stop order
 Stop loss sell order
Basic Strategy…

He will always just jog along an upward trend, trailing his stop-loss insurance behind him. As the trend
continues he will buy more.

When the trend reverses he will run like a thief. There was bound to be a lot of guesswork. Being right
50% of the time was probably optimistic.

Basic Strategy Continued…

He saw his problem more clearly than ever. He must adopt a cold, unemotional attitude toward stocks.

He must not fall in love with them when they rise.

He must not get angry when they fall. There are no good or bad stocks. There are only rising and falling
stocks. He must hold the rising ones and sell those that fall.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

The Greatest Challenge…

He knew that he had to achieve something much more difficult than before. He had to bring his
emotions – fear, hope and greed – under complete control. He had no doubt that this would require a
great amount of self-discipline. Darvas felt like a man who knew a room could be lit up and was
fumbling for the switches.

I recommend that all traders study an anger management course that helps investors control urges,
become less impulsive money managers and thus more disciplined stewards of family wealth.

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CHAPTER 5: CABLES ROUND THE WORLD

The career that Nicolas Darvas has chosen leads to an international lifestyle at a time when long
distance communication was prohibitively expensive. This forces Darvas to zero in on just those factors
that are critical to fining and trading just the right stock.

A Two-Year World Tour…

His dancing act goes international.

PROBLEM: How can he trade overseas?

SOLUTION: He will communicate with his broker via telegram (cable).

He decides on the weekly publication BARRON’S to IDENTIFY ANY STOCKS which might be MOVING UP.
The daily telegram contains the CLOSING PRICES of his stocks.

A Special Code…

String of letters and numbers.

Letter denotes the company name. Number denotes the closing price.

B 32-1/2 L 57 U 89-1/2 A 120-1/4 F 132-1/4

He could not follow his stock with this telegram! He adds the HIGH and LOW for the day.

B 32-1/2 (34-1/2-32-3/8) L 57 (58-5/8-57) U 89-1/2 (91-1/2-89) A 120-1/4 (121-1/2-120-1/4) F 132-1/4

(134-7/8-132-1/4)

Too many figures might overcrowd his DAILY cables.

No Volume Quotes…

He did not ask for volume quotes, as he feared too many figures might overcrowd his [daily] cables.

He writes, “My selections were high-volume stocks anyway and I thought that if the volume contracted, I
would notice it in Barron’s a few days later.”

Nicolas has a ROUTINE:

1. He checks the stocks he owns DAILY.

2. He uses Barron’s WEEKLY to find HIGH-VOLUME STOCKS.

Four Days Behind…

When he sees a high-volume stock in Barron’s he is already 4 days behind because of his world travels.

He brings himself up to date with this week’s range and close:

“CABLE THIS WEEK’S RANGE AND CLOSE CHRYSLER.”

If the stock was behaving well in the 60/65 box, he would wait to see if the four day quotations from
New York showed this. If so, he would decide to watch the stock.

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Pressing Higher…

The stock is “pressing toward a higher box.”

If satisfied that it is rising he cabled to New York, his on stop buy order (buy stop order) as GOOD-TILL-
CANCELLED unless otherwise specified. This was ALWAYS coupled with an automatic STOP-LOSS order
in case the stock dropped after he bought it.

A typical cable looked like this:

“BUY 200 CHRYSLER 67 ON STOP 65 STOPLOSS.”

67 BUYSTOP 65 STOPLOSS.

If on the other hand, his broker’s cable showed that it moved out of the 60/65 box during the 4 day lag
he forgot about it.

It was too late to act. He had to wait for another opportunity.

He was forced to narrow down his operation to a few stocks due to the cost of his telegrams.

BIG ADVANTAGE: No phone calls, no confusion, no contradictory rumors. This gave him a DETACHED
VIEW!

HE ONLY HANDLED 5 TO 8 STOCKS AT A TIME!

He was influenced by NOTHING BUT THE PRICE of his stocks.

He Could Not Hear…

What people said. But he could see what they did.

It was like a poker game in which he could not hear the betting, but he could see all the cards.

This was invaluable. Poker players would try to mislead with words. They would not show him their
cards.

If he did not listen to their words, and constantly watched their cards, he could guess what they were
doing.

He first tries paper-trading but it didn’t work. He had to put money on the line.

Easy on Paper…

As soon as he invested $10,000 in a stock the picture became quite different. With no money involved
he could control his feelings.

But as soon as he put dollars into a stock his emotions came floating quickly to the surface. He slowly
became accustomed to this new type of operation and started to feel more confident.

Inexplicable Moves…

Only one particular fact bothered him.

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Sometimes some of his stocks made inexplicable moves, which had no relation to their previous
behavior. This baffled him. It was while he was looking for an explanation that he made a momentous
discovery.

HE REALIZED HE WAS ON HIS OWN!

He could learn nothing more from books. No guru could guide him.

He was completely alone with his daily telegrams and his weekly issues of Barron’s. If he wanted an
explanation he could only turn to them.

Some Violent Move…

He plunged into Barron’s until he discovered: “The inexplicable moves in his stocks usually coincided with
some violent move in the general market.” He was completely disregarding the possible influence of the
general market.

This was no better than trying to direct a battle by looking at one section of the battlefield. He adds the
closing price of the DOW-JONES INDUSTRIAL AVERAGE.

The General Market…

He thought that this would give him a clear enough picture of how the general market behaved. His
telegrams now read like this:

“B 32-1/2 (34-1/2-32-3/8) L 57 (58-5/8-57) U 89-1/2 (91-1/2-89) A 120-1/4 (121-1/2-120-1/4) F 132-

1/4 (134-7/8-132-1/4) 482.31”

He reasoned like a child that if the average was going up, so would his stocks. This was not true.

Each stock behaved differently. He cannot apply mechanical standards to the relationship between the
index and individual stocks.

Market Cycles…

He decides to ONLY use an INDEX to determine if he was in a STRONG or a WEAK MARKET. He realizes
that the general market cycle influences almost every stock.

The main cycles like a bear or a bull market usually creep into most them. This was a FINISHING TOUCH
to his theory.

His Routine…

Nicolas Darvas follows this routine:

1. He first compares the prices of his stocks with each other.

2. Then he compares them with the Dow-Jones Average.
3. After that he weighs their trading range, he evaluates whether to buy, sell, or hold.
He does this automatically without further analysis.

He Begins Documenting…

Simultaneously, he tries to train his emotions. He worked it this way.

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Whenever he bought a stock, he wrote down his reason for doing so. He did the same when he sold.

Whenever a trade ended with a loss, he wrote down the reason he thought caused it. Then he tried to
avoid making the same mistake.

These CAUSE-OF-ERROR TABLES helped him immensely. As he drew them up one after the other he
was learning something from each trade.

Cause-of-Error Table

Stock Bought Sold Cause of Error

ISLAND CREEK COAL $46.00 43-1/2 Bought too late
JOY MANUFACTURING $62.00 60-5/8 Stop-loss too close
EASTERN GAS & FUEL 27-3/4 25-1/8 Overlooked weak general market
ALCOA $118.00 116-1/2 Bought on decline
COOPER-BESSEMER 55-3/8 $54.00 Wrong timing

Stocks Have Characters…

“Just like people” writes Nicolas “They faithfully reflect the character of the people who buy and sell
them.”

Some are calm. Some are slow. Some are conservative.

Others are jumpy, nervous, and tense.

The experience gained through his cause-of-error tables became one of the most important of all his
qualifications. Some stocks Nicolas finds easy to predict, consistent in their moves, and logical in
behavior.

And some he could not handle, each time he buys they cause him injury. He begins to take the view that
if a stock slapped him twice he would refuse to touch it any more.

Like Driving a Car…

The driver can be taught how to use the accelerator, the steering wheel and the brakes, but he still has
to develop his own feeling for driving. No one can tell him how to judge whether he is too close to the
car in front of him or when he should slow down.

This he can only learn from experience.

Mistakes Are No Problem…

He could not guarantee that a stock would not catch a cold tomorrow. But this did not upset him as
before.

Even his mistakes did not make him unhappy.

If he was right, so much the better. If he was wrong – he was sold out.

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This happened automatically as something apart from him.

He was no longer proud if a stock went up, nor did he feel wounded if it fell. He realizes that stocks
have no “value” other than the price quoted.

The Tax Problem

Many people hold stocks for many months to obtain long term capital gains. This he considers
dangerous.

He might lose money by holding a falling stock just for tax reasons. He decided he would trade in the
market by doing the right thing first – follow what a stock’s behavior commands and care about taxes
later.

The best way to legally avoid taxes is to first open a Roth IRA. If you have a side business outside your
salaried job that files federal taxes under an Employer Identification Number (EIN) you can further
reduce stock trading taxes by opening a Roth 401(k) and a Solo 401(k) for both you and your spouse.

COOPER-BESSEMER

This stock was one of the most successful trades Nicolas Darvas made. He bought three times.

Each time for 200 shares. Two operations ended with a loss.

The third made him a sizable gain.

Here are the details. Notice how he “fished” the stock for 3 months.

COOPER-BESSEMER

Date Action Share Size

Nov-56 Bought 200 at $46.00 $9,276.00
Nov-56 Sold at $45.50 $8,941.09
Return ($) ($0.50) ($334.91)
Return (%) -1.09% -3.61%
Dec-56 Bought 200 at $55.38 $11,156.08
Dec-56 Sold at $54.00 $10,710.38
Return ($) ($1.38) ($445.70)
Return (%) -2.48% -4.00%
Jan-57 Bought 200 at $57.00 $11,481.40
Apr-57 Sold at $70.75 $14,056.95
Return ($) $13.75 $2,575.55
Return (%) 24.12% 22.43%

A Staggering Series of Events…

A Few Other Stocks,

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like DRESSER INDUSTRIES and REYNOLDS METALS behaved equally well and gave him satisfactory
profits.

He buys BALTIMORE & OHIO RAILROAD at $56-1/4. He thought it was in a 56/61 box and would
advance.

But it started reaching down. He sold it at $55 for a 2.2% loss. Then he tried DOBECKMUN.

He judged it was in a 44/49 box, so he bought it at $45. It began to sag and he sold it at $41 for an 8.9%
loss.

A Staggering Series of Events…

He bought DAYSTROM at $44 because he thought it was rising into a 45/50 box.

He sold out at $42-1/4 for a 4% loss. He bought FOSTER WHEELER at $61-3/4.

He thought it was in the 60/80 box.

When it turned slowly against him, he sold out just below the $60 frame at $59-1/2 for a 3.6% loss.
AEROQUIP was the last one.

He had bought it at prices ranging from $23-1/4 to $27-5/8. He watched it climb toward $30 and waited
for the 31/35 box to evolve.

He was stopped out at $27-1/2 for a ½% loss.

Sold Out!

On Friday August 26, 1957 he finds himself without a single stock. His automatic stop-loss had sold him
out of everything.

In two months every one of his stocks had slowly turned around.

One by one each had sagged through the bottom of their boxes. And one by one, even if it was only a
question of half a point, they were sold.

He Fidgets…

No opportunity seems to appear. He did not know that the great bull market was at the end of one
phase.

It was several months before the financial media declared a bear market.

All analysts agreed that prices collapsed. All these opinions were expressed in hindsight – when it was
too late.

His System Saves Him…

He realizes that it was impossible for him to time great historical turning points in the market. His
system of ducking out quickly with his stop-losses made such an assessment unnecessary as Wall Street
prices continued to fall.

He made the joyful discovery that his method had worked much better than he had dreamed.

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They Slid Very Low Indeed…

1957 Stop 1958 Low Low Loss 1958 High High Loss
BALTIMORE & OHIO $55.00 $22.63 -58.86% $45.25 -17.73%
DAYSTROM $42.25 $30.00 -28.99% $39.75 -5.92%
FOSTER WHEELER $59.50 $25.13 -57.77% $39.13 -34.24%
AEROQUIP $27.50 $16.88 -38.64% $25.75 -6.36%
ALLIED CONTROL $48.25 $33.50 -30.57% $46.50 -3.63%
DRESSER INDUSTRIES $54.50 $33.00 -39.45% $46.63 -14.45%
JOY MANUFACTURING $68.00 $38.00 -44.12% $54.25 -20.22%
ALLEGHENY LUDLUM $56.50 $30.13 -46.68% $49.13 -13.05%

Half Would Have Been Lost…

When he looked at the table, he thought this: “If his stop-losses had not taken him out of the market he
could have lost 50% of his investment.” He would have been like a man in a cage, locked in with his
holdings and missing his opportunity to make a fortune.

The only way he could have escaped would have been by smashing out, taking a 50% loss, possibly
ruining himself, and gravely impairing his confidence for future deals.

Buy & Hold…

He could, of course, have bought these stocks and “put them away.” This was a classic buy-and-hold
solution among people who called themselves conservative investors.

Nicolas regarded them as pure gamblers.

How can they be non-gamblers when they stay with a stock even if it continues to drop? A non-gambler
must get out when his stocks fall.

They hold losses with the gambler’s eternal hope of the turn of the lucky card when they should cut &
run.

They Would Be Indignant…

He thought of the people who paid $250 for NEW YORK CENTRAL in 1929.

It was worth about $27 if they were still holding it today. Yet these railroaded investors would be
indignant if he called them gamblers!

The Greatest Bull Market…

He finds in his statement of the first week of September 1957 that he has made up the money he lost on
JONES & LAUGHLIN and his original capital of $37,000 was almost intact. Many of his operations had
been moderately successful, but COMMISSIONS AND TAXES had taken a great deal.

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When he went into the accounts more closely he found he had the unenviable distinction of coming out
of the greatest bull market in history with a lot of experience, a great amount of knowledge, much more
confidence – and a net loss of $889!

Nicolas Darvas had now traded 5 years.

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CHAPTER 6: DURING THE BABY-BEAR MARKET

When the Break Came…

Almost all stocks had been hurt or fractured. He reasons that if a stock has fallen from 100 to 40 it will
almost certainly not climb up to the same high for a long, long time.

Without A Single Share…

For weeks he takes a closer clinical look. The sunny summer camp of the bull market was filled with
powerful athletes.

But some were stronger than others.

The bear market turned the sunny summer camp into a hospital. The great majority of stocks were sick.
Some more so than others.

When the Break Came…

Almost all stocks had been hurt or fractured. He reasons that if a stock has fallen from 100 to 40 it will
almost certainly not climb up to the same high for a long, long time.

It was like an athlete with a badly injured leg who would need a long period of recuperation. He could
not make money buying a stock and cheering it on.

If One Horse Is Going to Win…

It will win, even if thousands of onlookers are cheering for another one. JONES & LAUGHLIN had
convinced him of that. He could remember himself pushing the stock upwards with his mind to no avail.

He just STAYS ON THE SIDELINES and waits for better times to come. HE FIRMLY REFUSES TO TRADE!

Quotations in Barron’s…

He uses Barron’s to detect those stocks that resist the decline.

He reasoned that if they could swim against the stream, they were the ones that would advance most
rapidly when the current changed. Certain stocks began to resist the downward trend.

Earnings Quality…

On closer examination, he found that the majority of these were companies whose EARNINGS TRENDS
pointed sharply upward.

Capital was flowing into these stocks, even in a bad market.

The capital was following earnings improvements as a dog follows a scent.

Slaves to Earnings Power…

He realizes that stocks are slaves of earnings power.

He decides that while there may be many [fundamental] reasons behind any stock movement, he would
look only for one [fundamental reason]: Improving earnings power or anticipation of it.

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To do that, he would marry his technical approach to the fundamental one.

Techno-Fundamentalist Theory

He would select stocks based on their TECHNICAL ACTION in the market. But he would only buy them
when he could give IMPROVING EARNING POWER as his fundamental reason for doing so.

He decides to take a 20-year view.

He looked out for those stocks, which were tied up with the future and where he could expect that
REVOLUTIONARY NEW PRODUCTS would sharply improve the company’s earnings. Certain industries …
were rapidly expanding and, unless something unforeseen happened, their expansion should soon be
reflected in the market.

Stocks-Of-The-Future

In the years before automobiles the smart operators went into railroads. They knew these would
supersede the covered wagon and the stage coach.

A generation or so later, the shrewd investors moved out of railroads into automobiles.

Forward-looking, expanding companies like GENERAL MOTORS and CHRYSLER were comparatively small
firms then. But they represented the future!

Fashionable Stocks

People who bought [GENERAL MOTORS and CHRYSLER] at the time and stayed with them during early
expansion made a lot of money. These are WELL-ESTABLISHED stocks by the 1950s.

They were not for the forward-looking speculator. Stocks which promise future development … might
be worth 20 times as much in 20 years.

Women’s Fashions Alter…

Women will raise or lower their hemlines one or two inches roughly every two or three years. The same
with stocks.

While the fashion persists, the forward-looking investors get in and stay in.

Then slowly the fashion fades and they are out. They are putting their money into a new-style stock …
like an automobile, which can also fly.

How to…

Buy into this year’s fashion? He could only do it by carefully watching the market for signs.

What he had to do was to find stocks that would be hoisted up because they stirred people’s
imagination for the future.

He carefully watched this general bracket of expanding stocks in [NEW INDUSTRIES] in tune with the jet
age. He was not interested in the company’s individual products.

New Vigorous Infant Industry

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In fact, he did not want to know what they made – that information might only inhibit him.

He did not care what the company’s products were, any more than he was influenced by the fact that
the board chairman had a beautiful wife.

But he did want to know whether the company belonged to a new vigorous INFANT INDUSTRY and
whether it behaved in the market according to his requirements.

Directly Against Advice…

Of many financial writers with conservative backgrounds who have been pounding into investors for
generations that they must study company reports and balance sheets, find out all they can about a
stock’s background, to make a wise investment.

High Territory Trading

He made up his mind to buy high and sell higher. Using his hard-bought training, he attempted to find
these expensive-but-cheap, high velocity stocks.

He searched constantly for them because he felt sure that they would move up on the first sign of a
better market. He carefully watched a dozen stocks which seemed to be in this category, checking their
quotations every week, analyzing their behavior for any sign of hardening.

The Importance of Volume

He closely observed their price action, and he was on the alert for any sign of unusual activity as well. He
had not forgotten the importance of volume.

He prepared to operate in higher priced stocks because of brokerage commissions. It was cheaper to
invest $10,000 in a $100 stock than in a $10 stock.

Low flat fees of discount brokerages have solved this problem today.

$10,000 In One Stock

Could buy:

1,000 shares of a $10 stock ($300 commission)

or

500 shares of a $20 stock ($250 commission)

or

100 shares of a $100 stock ($90 commission)

W.D. Gann made the same point. But, in reverse. Gann made a lot of money in beaten down stocks
breaking upward from extended downtrends on high volume. This is another worthwhile phase of the
low/ high volume winner/ loser positive/ negative price impact cycle.

The Correct Buying Point

If his buying point was correct, the broker’s commission was not important. It came off of his profit.

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But, if his timing was wrong and he was stopped out – that was another matter.

Then the two commissions, one for buying and one for selling, had to be added to his loss. His mistakes
would be less costly if he bought higher-priced stocks.

It Could Not Sink Forever…

As he watched the market continually sinking, he knew that it could not sink forever. Sooner or later
stocks would begin to move upwards.

They always had. Bear markets were always followed by bull markets.

The educated art was to watch for the first signs, be sure they were real, and buy before everyone else
noticed and the prices began to rise too high.

His Waterloo…

His mind went back to the battle of Waterloo in 1815. A recent loss at Quatre Bras had generated an
overwhelmingly pessimistic investor sentiment.

If England was indeed lost to Napoleon any securities issued by the government would become
immediately worthless.

At this famous battle Nathan Rothschild had an agent who, as soon as victory was certain, set off for
London as informant.

After first depressing prices by short selling, Nathan Rothschild started buying every British government
share he could before anyone else heard the news of English victory.

This British government share is a consolidated annuity (consol).

When they did, of course, the consol market price rocketed and Rothschild sold at a huge gain. The
principal remains the same – to get in faster than the other fellow.

Five Years He Had Trained…

He knew he had learned an enormous amount. His Canadian period taught him not to gamble.

His fundamentalist period taught him about industry groups and earnings trends.

His technical period taught him how to interpret price action and the technical position of stocks. And,
now he reinforced himself connecting everything.

A Jigsaw Puzzle…

Where finally all the pieces fell beautifully into place. He was certain this method would prove
successful in the future. He felt calm and confident waiting for the market-tide to turn.

It Began to Happen…

Reading Barron’s, he noticed that, while the averages were still showing a decline as they had for
several months, a few stocks were beginning to peep up, almost as unnoticeable as primrose buds on a
winter day.

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It was still a question whether these tender shoots would survive or be killed by frost.

He began to sense the end of this baby-bear market.

He Was Sure…

That the leaders in the previous market would probably not lead again.

He had to find new ones.

Later this proved right because hidden away in the market quotes during this period were some stocks
which were apparently of not much interest to anybody – certainly not to him.

He had hardly heard of them.

November 1957…

These stocks were not dead.

One day they were destined to wake up.

 UNIVERSAL PRODUCTS @ $20

 THIOKOL CHEMICALS @ $64
 TEXAS INSTRUMENTS @ $23
 ZENITH RADIO @ $116
 FAIRCHILD CAMERA @ $19
They would leap into a new leadership of the market. They were going to make him $2,000,000.

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CHAPTER 7: THE THEORY STARTS TO WORK

He noticed an unknown stock while reading Barron’s weekly called LORILLARD. Lorillard began to
emerge from the swamp of stinking stocks like a beacon. Despite the bad market it rose from 17 into
October.

From The Arc En Ciel In Saigon

He noticed an unknown stock while reading Barron’s weekly called LORILLARD. Lorillard began to
emerge from the swamp of sinking stocks like a beacon.

Despite the bad market it rose from 17 into the first week of October.

The stock established itself in a narrow 24/27 box. Share volume for that week was 126,700 shares
which contrasted with 10,000 shares earlier in the year during normal trading.

Nice Price Action…

The steady rise in price and the high volume indicated to him that there was tremendous interest in this
stock.

As for fundamentals, “I was satisfied as soon as I found out about the wide acceptance of their ‘Kent’
and ‘Old Gold’ cigarettes.” He decided that if it showed signs of going above 27 he would buy it.

Daily Cables…

He asked his broker to cable him daily quotes. It soon became clear from these quotes that certain
knowledgeable people were trying to get into the stock in spite of the general state of the market.

Few people at the time had the faintest indication that LORRILARD was to make Wall Street history.
That it was to shoot up to a most astounding high in a relatively short time, watched by the amazed and
gasping financial community.

By Mid-November 1957

LORILLARD became even more independent. It began to push upward toward what he estimated to be a
27/32 box. This isolated strength in the face of general weakness was very impressive to him.

He felt he had sufficient proof of its strength. He decided to become a bull in a bear market.

“BUY 200 LORILLARD 27-1/2 ON STOP WITH 26 STOPLOSS”

The Stop-Loss Order

Darvas writes “As you see, although I felt quite secure in my judgment with my merged technical and
fundamental viewpoints, I did not for one moment consider abandoning my chief defensive weapon – the
stop loss order. No matter how well built your house is, you should not think of forgetting to insure it for
fire.”

Bought 200 @ $27-1/2

With a 5.5% initial stop-loss. He was well satisfied with his purchase.

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He braced himself for a big rise.

This came, but not in the way he had assessed it. His first experience was disheartening.

On Tuesday, November 26, the stock dropped exactly back to his stop-loss of $26. He was sold out. To
add insult to injury, seconds after he was stopped out, it started to rise. The share price closed at $26-
3/4.

A Short Reaction

However, the reaction was so short and the rise that followed so firm, that he decided to go back into it.
That same week he bought back his shares at $28-3/4.

Again he fixed his stop-loss at $26.

Now his stop-loss is wider at 9.6%. But this time LORILLARD’S behavior was perfect.

The quotations never came close to his stop-loss. This was a firm indication that he was on the right
track, and that his theory applied to this stock.

December 1957

LORILLARD rose over $30 and made a new 31/35 box. His experiences with similar stock movements in
the past told him that it was being ACCUMULATED.

He felt he had the right stock. Now it was a question of getting into it with more money at the right
time.

The Right Moment

He carefully watched his daily quotes. He looked for the right moment as a fighter looks for an opening
to land his blow.

The big surge he had been expecting occurred after a false move towards the end of January.
LORILLARD started to move decisively out of its box.

Everything Was Encouraging

This seemed to be the ideal moment. Everything was encouraging – the technical action, the
fundamentals, the pattern.

Also, the New York Stock Exchange had just lowered its MARGIN REQUIREMENTS from 70% to 50%.
This meant that his limited capital had much more purchasing power now.

Every $1,000 could buy $2,000 worth of stock.

This was important to him, because he needed his funds for another stock he was watching at the time.
He added another 400 shares at $35 and $36-1/2.

Dancing About in Its Box

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While he was travelling around the world dancing, LORILLARD was steadily dancing about in its box. It
would do this for a short time and then, with an impeccable, almost predictable thrust, move into the
box above.

LORILLARD boxes began piling on top of each other like a beautifully constructed pyramid.

The Trail

On February 17, 1958, LORILLARD bounced up to $44-3/8. The stock acts badly.

In one single day his stock dropped to a low of $36-3/4 and closed at $37-3/4.

He raises his stop-loss to $36. This was less than 2 points below the closing price ($1-3/4). This $36 stop
loss was trailed 18.9% below– $44-3/8.

The setback was very short and the stop was not touched. He buys 400 more shares at $38-5/8.

He Was Very Happy

Almost immediately it left this price behind. The quotes came in: 39-3/4 – 40-1/4 – 42.

Everything looked as if he had planned it.

His broker sends him three weeks’ issues of a well-known advisory service.

Week after week this service strongly urged its subscribers to sell LORILLARD short. The third
recommendation reads “Lorillard was obviously under distribution around 44 last week after we told you
to start it on the short side.”

This Amazed Him

But he had long ago become so disillusioned with advisory services that he did not pay attention to it.
Instead he started to recommend LORILLARD to any American tourist who mentioned the stock market
to him.

March 1958

In the third week, LORILLARD entered on an even more definite upward-thrust.

It jumped 4-1/8 points (dollars) in one week. Its volume increased to an astounding 316,600 shares.

It established itself decisively in the 50/54 box. In the second week of April LORILLARD left its new box.
It pushed through to a new high of $55-1/4 then IMMEDIATELY DROPPED into its former 50/54 box.

He Raises His Stop

To $49. This is $1 below the bottom of the 50/54 box.

He wavered for a moment, on the verge of selling, but he decided against it.

By now he had trained himself to BE PATIENT and, although he could have taken an easy $20 per share
profit on his earliest purchase, he sat back determined not to take too quick a profit.

His LORILLARD Cost Figures

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Purchase Shares Position Size Margin Share Price Cost

First 200 20% 0% $28.75 $5,808.76
Second 200 20% 50% $35.00 $7,065.00
Third 200 20% 50% $36.50 $7,366.50
Fourth 400 40% 50% $38.33 $15,587.24
1000 100% $35,827.50

50% Margin

He carries the last three purchases on 50% margin.

This enables him to keep the rest of his capital for a further investment, which turned out to be a stock
called DINERS’ CLUB.

He first became interested in this stock while he stilled battled with LORILLARD at the turn of the year.

DINER’S CLUB

Had just SPLIT 2-FOR-1, and in the last week of January 1958 its WEEKLY VOLUME SWELLED to 23,400.

He considered this unusually high for this stock. As this INCREASE IN VOLUME was accompanied by an
ADVANCE IN PRICE.

He decided to check the stock’s fundamentals. The company was a NEAR MONOPOLY IN AN
EXPANDING FIELD. Darvas writes “The credit-card system, of which it was one of the early pioneers, was
firmly entrenched.”

The company’s earnings were in a definite uptrend. He bought 500 shares at $24-1/2.

His stop-loss was $21-5/8. That’s 11.7% behind his entry price.

His First LORILLARD Purchase

Had already yielded a profit. If it came to the worst he would lose it on DINER’S CLUB.

A few days after his purchase the stock advances.

He immediately bought another 500 shares at $26-1/8. The pattern evolved perfectly – first at 28/30,
then a 32/36 box.

The last penetration was accompanied by a volume of 52,600 shares for the week. This was higher than
any other week’s volume in the newly split stock’s history.

Stop-Loss Insurance

As he saw his profits piling up, he did not for a moment forget to trail his stop-loss insurance behind the
rise. On the first 28/30 box, he increased his stop to $27. A buck below the lower limit.

On the second 32/36 box he raised his stop to $31. On the fourth week of March the stock penetrated a
new 36-½/40 box.

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DINER’S CLUB

Purchase Shares Position Size Margin Share Price Fees Cost

First 500 50% 0% $24.50 $103.15 $12,353.15
Second 500 50% 50% $26.13 $105.15 $13,167.65
1000 100% $208.30 $25,520.80

He Already Had

A profit of over $10,000. Still, according to his theory, he had to hold on.

The stock behaved as if it would go even higher.

Every indication pointed to that. Suddenly his cables began to read differently.

The stock unexpectedly seems to have lost its will to rise.

It looked as though its LAST PYRAMID WOULD HESITATE on the brink of going in reverse. He raised his
stop-loss to $36-3/8.

This is just a third of a percent… 0.34%! He is stopped out with a …

$10,000 Profit

This completely confirmed the technical side of his approach. American Express had decided to launch
a rival credit card.

This had been the reason for the hesitation of the stock near the $36 mark.

Some people had known this before the announcement and were selling out. Without knowing it he
was their partner.

The technical side of his system based on the price action had warned him to get out.

E.L. BRUCE

During all that time he spent with LORILLARD and DINER’S CLUB, he never neglected to follow the
quotations of other stocks in BARRON’S. Great interest was springing up in a stock called E.L. BRUCE, a
small Memphis firm.

The company made hardwood flooring.

This DID NOT fit his fundamental requirements of a new expanding infant industry. But the technical
pattern was so compelling he could not take his eyes off of it.

E.L. BRUCE’S Street Movement

What amazed him was the movement of E. L. BRUCE on Street. It usually traded below 5,000 shares a
week.

Then the stock suddenly woke up and started to move.

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In the second week of April 1958, share volume rose to an astounding 19,100 shares. From there the
WEEKLY VOLUME climbed to 41,500 – 54,200 – 76,500 shares, with the PRICE jumping 5 to 8 points [$5
to $8] WEEKLY without any sign of a downward reaction.

BRUCE…

Went from $18 in February to $50 at the beginning of May. Only then came its first reaction to $43-1/4
at the beginning of May.

He could not be sure, of course, but this reaction seemed to him only a temporary halt, a refueling. He
felt it would continue to rise.

He tried to find a fundamental reason, but he could not. Still, the volume was there, the price action
was there, the rhythm of the advance was there.

A Lot of It

Fundamentals or no fundamentals, if it went over $50, he would buy it, and he would buy a lot of it.

But he needed money. His DINER’S CLUB sale had released some of his [MARGINED] money, but that
was not enough.

He could have used his savings, but after the JONES & LAUGHLIN disaster he had decided never again to
risk more money than he could afford to lose without ruining himself. He never again added to his
market funds from his show-business income.

LORRILARD

LORRILARD’S penetrations were not decisive, its REACTIONS WERE DEEPER. He sells 1,000 shares the
second week in May for an average price of $57-3/8.

The total price on the sale was $56,880.45.

His profit on the deal was $21,052.95. This, with the $10,000 he had made from DINER’S CLUB, meant
that in five months he had nearly doubled his capital.

He felt pleased and proud and ready, like a giant-killer, to deal with a powerful and erratic stock like
BRUCE.

Two Accounts

He called New York and opened two accounts with two other brokerage firms.

He had concluded after the LORILLARD deal that his system was working so well that he did not want to
entrust it into the hands of one firm.

He felt that if anyone were to follow his operations, this might make it difficult for him through his 3
accounts in 3 brokerages.

May 1958

In the third week of May 1958, he cabled New York to buy 500 BRUCE at $50-3/4 with his automatic on-
stop buy order [buy stop order].

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

He placed a stop-loss at $48. This was 5.42% below the prevailing price of $50-3/4.

The stock acts beautifully such that he decided to take full advantage of the existing 50% margin
conditions. He makes more purchases because his stop-loss was not touched.

Each was protected by stop-losses between $47 [7.39%] and $48 [5.42%].

DINER’S CLUB Profit

He figures that, should he be stopped out, he would only lose his DINER’S CLUB profit.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

E.L. BRUCE

Purchase Shares Position Size Margin Share Price Fees Cost

First 500 20% 0% $50.75 $135.95 $25,510.95
Second 500 20% 50% $51.13 $136.40 $25,698.90
Third 500 20% 50% $51.75 $137.20 $26,012.20
Fourth 500 20% 50% $52.75 $138.45 $26,513.45
Fifth 500 20% 50% $53.63 $139.55 $26,952.05
2500 100% $272.35 $51,209.85

The Right Timing

E.L. BRUCE really began to climb as if drawn upwards like a magnet. It was spectacular. Soon his 3
brokers told him that the stock had surged over $60.

By June 13th, it had advanced to $77.

He had to fight a HARD BATTLE WITH HIMSELF not to phone New York and find out what was going on.

“No,” he said to himself whenever he felt like calling his brokers, “That will only mean rumors and you
may do something silly” he thinks.

Modern psychology teaches that refusing to engage in any form of rumor (gossip) is integral to anger
management.

It Nearly Stopped His Heartbeat

It was one of his brokers. It nearly stopped his heartbeat. The broker said: “They have suspended
trading in BRUCE on the American Stock Exchange.”

He nearly dropped his phone as he listened. He was terrified.

He had over $60,000, his entire capital, invested in it!

$100 a Share

Far from being broke, he could now sell BRUCE for $100 a share in the over-the-counter market.
Certain traders on Wall Street, forming their views on a purely fundamental approach, had decided that
BRUCE’s book value and earnings indicated that the stock’s price should not be more than $30 a share.

Therefore, they had started to SELL THE STOCK SHORT between $45 and $50, confident they would be
able to fulfill their bargains by buying it back at a price much nearer $30.

A Grave Mistake

SHORT SELLERS made a grave mistake.

A New York manufacturer named Edward Gilbert was trying to OUST the Bruce family from CONTROL of
the company. He and his associates were trying to obtain a MAJORITY of the 314,600 shares
outstanding which the Bruce family owned.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

Edward Gilbert

It was this move that had rocketed the price. The volume was terrific.

More than 275,000 BRUCE shares were traded during a period of ten weeks. The short-sellers who had
so jostled each other to push the stock to dizzy heights were squeezed by their own frantic efforts to
buy back their short positions.

They were caught with their pants down by the mysterious upward surge of the stock market. They
could not buy the shares at any price to fulfill their obligations.

No Orderly Market

Finally, as it was impossible to assure an orderly market because of the frenzied dealings, the American
Stock Exchange suspended trading. But this made no difference to the desperate short sellers.

They still had to deliver the stock. Now they were willing to pay anything over-the-counter for BRUCE.

Rumors

The broker asks if he wants to sell at $100. All of this that he had just heard from his broker would still
come under the heading of “rumors” which he had sworn to never listen to again.

Then he made one of the most momentous decisions of his life. He said, “No, I will not sell at 100.”

Later, he gradually sells out the stock on the OTC market in blocks of 100 and 200 shares for an average
price of $171.

For a $295,305.45 Gain!

Purchase Shares Buy Price Sell Price Cost Revenue Profit

First 500 $50.75 $171.00 $25,510.95 $85,500.00 $59,061.09
Second 500 $51.13 $171.00 $25,698.90 $85,500.00 $59,061.09
Third 500 $51.75 $171.00 $26,012.20 $85,500.00 $59,061.09
Fourth 500 $52.75 $171.00 $26,513.45 $85,500.00 $59,061.09
Fifth 500 $53.63 $171.00 $26,952.05 $85,500.00 $59,061.09
2500 $130,687.55 $427,500.00 $295,305.45

E.L. BRUCE

Purchase Buy Price Sell Price $ Raw Return % Raw Return

First $50.75 $171.00 $120.25 236.95%
Second $51.13 $171.00 $119.88 234.47%
Third $51.75 $171.00 $119.25 230.43%
Fourth $52.75 $171.00 $118.25 224.17%
Fifth $53.63 $171.00 $117.38 218.88%

He Was So Happy

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

He did not know which way to turn. He told his story to everyone who cared to listen. He showed
telegrams to them.

Their only reaction was “WHO GAVE YOU THE TIP?” NOBODY BELIEVED HIM.

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CHAPTER 8: MY FIRST HALF-MILLION

E.L. BRUCE Should have made him eager and less cautious. Yet, somehow it made him more cautious.
He had made over $325,000 in nine months’ investment. He was determined not to lose it by a wrong
move.

E.L. BRUCE

Should have made him eager and less cautious. Yet, somehow it made him more cautious.

He had made over $325,000 in nine months’ investment.

He was determined not to lose it by a wrong move. So many operators have made big money in nine
months and lost it in nine weeks.

He decided this would not happen to him.

Overconfidence has been detected among many professions by both psychologists and economists. This
leads to higher turnover and deeper losses.

Withdraw

The first step he took was to WITHDRAW HALF OF HIS PROFITS from the market. With his remaining
capital he EYED THE MARKET WARILY.

He watched for possible well behaved stocks. He cautiously bought 500 shares of MOLYBDENUM.

He had bought it at $27, paying $13,606.25. Almost immediately, he was stopped out at $26-1/2. He
had clawed back $13,132.78.

Remember the research by U.C. Berkeley professor Terrence O’Dean? It shows that investors lose
because they tend to cut their winners short and hang on to their losers.

Nicolas does the exact opposite. His system cuts losing positions short and hangs onto winners.

HAVEG INDUSTRIES

He bought 500 shares at $31-3/8, paying $15,860.25. It turned around and looked as if it was going to
slip under $30, so he sold out at $30-1/2 for $15,056.94. This is a 5.06% loss.

Then, as he saw nothing interesting, he ventured back to LORIL-LARD. This stock… had now become a
weary slow moving obesity.

It became his American “pet.”

This was an utterly wrong attitude but he could not seem to help it. This is how the LORILLARD
operation looked …

LORRI-LARD

Purchase Shares Buy Price Sell Price Cost Revenue $ Return

First $1,000.00 $70.50 $68 $70,960.50 $67,369.74 ($3,590.76)
Second $500.00 $69.13 $68 $34,792.05 $33,622.42 ($1,169.63)

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

Third $1,000.00 $67.75 $67 $68,207.80 $66,495.66 ($1,712.14)

$2,500.00 ($6,472.53)

That Did It

The third loss finally broke his sentimental attachment and he did not buy it again. He realized that
LORILLARD now moved at a very leisurely pace, it was obviously no longer a stock for him.

After he withdrew from LORILLARD, he sat back and assessed his overall position. It looked like this…

His Overall Position

Profit Losses
LORILLARD $21,052.95 $6,472.53
DINERS' CLUB $10,328.05
E.L. BRUCE $295,305.45
MOLYBDENUM $482.47
HAVEG INDUSTRIES $804.01
$326,686.45 $7,759.01
Overall Profit: $318,927.44

UNIVERSAL PRODUCTS

Among the stocks that caught his eye was a little, unknown company called UNIVERSAL PRODUCTS. It
was quoted around $35, running up and down between $35-7/8 and $33-1/2.

He found out it was an electronics company and therefore he felt it qualified as far as his techno-
fundamentalist theory was concerned.

July 1958

He felt he could get a better feel of the stock’s movement if he actually owned some of it. He decided
to make a pilot buy.

He sent out the following cable: “BUY 300 UNIVERSAL PRODUCTS 35-1/4 OR BETTER”

Next day, when he received advice that 300 shares of UNIVERSAL PRODUCTS had been bought for him
at $35-1/4, he wired: “ENTER STOPLOSS 32-1/2.

Now there was nothing to do but sit back, watch and wait for the next move. His side rule: Do nothing.

August 1958

He notices that UNIVERSAL PRODUCTS is beginning to firm up. He cables: “BUY 1200 UNIVERSAL
PRODUCTS 36-1/2 ON STOP 33 STOPLOSS”

This represents a 9.59% stop loss. Do you notice a pattern in the percentage width of his stop losses?

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

When he returned to the Imperial Hotel in New Delhi he received the notice: “BOUGHT 1200 U 36-1/2
(37-7/8 – 35-1/8) ETC”

This meant he had bought his stock at $36-1/2 and it closed at 36-3/4 on average.

Now the question was: “Will his stock advance or will it return to its former box?”

He Was Quite Excited

Although he had already FIXED THE LIMIT OF HIS POSSIBLE LOSS, now it was a question of whether his
judgment was right or wrong.

He could hardly wait for the next day’s cable.

When it finally arrived, it showed that UNIVERSAL PRODUCTS had closed at $38-1/8. Its range for the
day was $38-3/4 - $37-1/2. The price was clearly running upward!

He Was Right

For the time being. In the next few days the stock continued to advance, and he bought another 1,500
shares at $40. Shortly thereafter, UNIVERSAL PRODUCTS changed its name to UNIVERSAL CONTROLS
and split 2-for-1.

It continued to act well by after his last purchase

He decided that he had as much UNIVERSAL CONTROLS as he cared to carry.

Notice that Darvas works with a very small collection of stocks that is rarely more than 5. This is called a
portfolio. Some common portfolio possibilities are 500 S&P, 30 Dow, 10 stock, 5 stock, and 3 or fewer
stock portfolios.

This was his exact position (Prices Averaged) …

6,000 Shares…

Purchase Shares Buy Price Cost

First (Pilot) 300 $35.25 $10,645
Second 1,200 $36.25 $44,084
Third 1,500 $40.00 $60,585
3,000 $115,313

Skyrockets in Flight

The secretary of Nicolas Darvas did not have the courage to buy UNIVERSAL CONTROLS.

The personal secretary’s father advises his son, “what is the point of buying a stock if it might go
down?“ While his father was engrossed in carefully examination of the books [fundamental analysis]
the stock went up to $50.

THIOKOL CHEMICAL

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

In February 1958, the stock had just SPLIT 2-FOR-1 and was the object of heavy trading [VOLUME]
before it quieted down into a 39/47 box. It stayed CALM in this area for several MONTHS.

He had the feeling that it was a calm that precedes the storm. In March, he cables: “QUOTE THIOKOL”

“QUOTE THIOKOL”

The quotes duly arrived but, except for a few weeks of short-lived flurry in April, nothing noteworthy
happened. After a few weeks he cables: “STOP THIOKOL QUOTES START QUOTING AGAIN IF RISES
OVER 45”

He reasoned that if it reached again toward the upper frame of its box that would be the moment to
watch it again.

Upper Frame of Box

In the first week of August THIOKOL starts to reappear in his telegrams. [Now] above $45 it looked as
though it was flexing its muscles for an upward jump.

He decided for a PILOT BUY, and cabled.

“BUY 200 THIOKOL 47-1/4” The order was executed at this price for a cost of $9,532.26.

Three Weeks

Is how long it took for THIOKOL to find its true dynamics.

At the end of August he felt so. At the end of August he felt the moment had come.

He cables: “BUY 1300 THIOKOL 49-1/2 ON STOP”

The purchase was executed @ $49-7/8 on September 2, 1958 for $65,408.72.

52/56

With his 1,500 shares he saw the stock rapidly rising over 50 and trading in the range of 52/56. A week
later he receives notice that Thiokol had decided to issue stock rights.

These rights [WARRANTS] were given as bonuses to the holders of the stock at the rate of one right per
share. In turn, with 12 of these rights you could buy one share of THIOKOL at the special price of $42.

Rights

The stock was quoted over $50. If you wanted to exercise your stock rights [WARRANTS]. If not, you
could sell them on the American Stock Exchange where they were listed and traded for a limited period
(EXPIRATION). This was cheap indeed.

Rights = Warrants ≈ Call Options

However, there was an important feature about these rights that made them very interesting.
According to stock exchange rules, if the rights were being used to purchase the company’s stock he
could take advantage of what they called a “special subscription account.”

The broker was permitted to lend him up to 75% of the current market value of the stock.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

In addition, there was no commission charged on the purchase. He decided to plunge in with all his free
cash. Today, high leverage is obtained across the Chicago Board Options Exchange. Call options are far
superior to the rights Darvas purchased. Many levels of strikes allow you to modulate the intensity of
leverage. Nicolas did not have this luxury.

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Here Is How He Stood

Original Investment $36,000

Profits After Losses $319,000
Total Capital $355,000
Cash Withdrawn $160,000
Free for Investment $195,000

Purchases Now Held:

3,000 UNIVERSAL PRODUCTS $115,300.00
1,500 THIOKOL $75,000.00
$190,300.00

70% cash under margin rules (of $190,300) $133,000.00

Free for further investment $62,000

Special Subscription Account

He discovered that despite the regulation permitting a 75% loan – that there was wide disagreement
among brokers concerning the amount he could borrow from them in a special subscription account.

While one broker was willing to lend 75% of the purchase price of the stock, another was willing to
advance a full 75% of the market value of the stock. THIOKOL being quoted around $55 the later
proposition was extraordinarily attractive.

They will loan him $123,750. He proceeded to take advantage of it.

36,000 Rights

He buys 36,000 rights at an average price of $1-5/16 for which he paid $49,410. This entitled him to buy
3,000 THIOKOL at $42 per share.

This would have otherwise cost him $126,000 because 3,000 X $42 = $126,000. But, under the rights
subscription he only had to add another $6,000 cash.

The Buy-Back

He figured he could sell his original lot of 1,500 THIOKOL shares and buy twice as much back under the
special subscription rules.

He sold his stock at an average price of $53-1/2.

This would have otherwise gave him buying power of $60,187.5. Because ($53.5 X 1,500) X 0.75 =
$80,250 X 0.75 = $60,187.50.

The difference is due to fees.

With this he buys a second block of 36,000 rights which he converts into a second block of 3,000 shares.

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

An important article by two major state university finance professors shows that the highest expected
returns are from deep in the money calls. Second are puts.

Read Brian Boyer and Keith Vorkink. 2014. Stock Options as Lotteries. Journal of Finance 69 (4). 1485–
1527.

The difference in expected returns is huge. Deep in the money calls on momentum stocks are the best
option investments. Long calls are most like rights today. According to the research in the #1 ranked
academic journal in the field of finance the deep-in-the-money call has the least lottery like payments
and offers the most downside protection. Nonetheless, always remember that deep-in-the-money calls
are riskier than owning the stock outright.

The Operation Looked Like This

 Sold: 1,500 shares THIOKOL stock;

 Bought : 36,000 THIOKOL rights;
 Converted: 3,000 shares THIOKOL stock.

He does this in two blocks of 36,000 rights. His total value of 6,000 shares is $350,820.

In the second week of December, THIOKOL shifted from the American to the New York Stock Exchange.

It immediately moves up 8 points (dollars) and the following week was touching the 100 mark.

The broker becomes nervous and telegraphs: “YOUR THIOKOL PROFITS NOW $250,000”

Added to BRUCE

He now had over a half-a-million dollars! This was much more money in fact than he ever thought he
would have.

It would make him a rich man for life.

The realization that he had all this money came to him with startling SADNESS. Every fiber in his being
seemed to be saying, “Sell, Sell.” It was the biggest temptation in the world.

What Should He Do?

Would the stock rise still higher – or should he take his profit and get out? Perhaps it wouldn’t rise any
higher – there might be a fallback.

It was a terrible dilemma, the old one of “when to sell” was much magnified because of the large
amount of money at stake. Leverage from rights increased the possibility of total loss!

If he did the right thing here, it would change his whole life. If he made the wrong move, he would
regret it forever.

He Felt Very Alone

Nobody on Earth could give him any advice on what to do in this situation. He decided to go out and
have a few drinks by himself and consider the situation.

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Before he went out, he sat down at his dressing table and wrote on a little card, “Remember BRUCE!”

He thought this would remind him of what he had learned in the past. Every time he felt like sending a
cable to his brokers telling them to sell THIOKOL, he pulled out his card, looked at it and hesitated.

Finally, …

He decided not to sell. It was the best example of his new market technique and it was anything but
easy to do.

By the time he arrived back at his hotel he was exhausted.

He must have looked more like a man about to commit suicide than one who had just made himself a
small fortune.

But He Proved Right

THIOKOL continued to rise and by making that decision in Paris, he was able to hold on and make much
more money out of the stock. A few weeks later, in January 1959 he was holding 6,000 THIOKOL and
6,000 UNIVERSAL CONTROLS.

They were both doing very well indeed, THIOKOL was standing on the $100 mark and UNIVERSAL
CONTROLS had risen to $45.

Danger Ahead

How little did he know that he was preparing to make a complete fool of himself?

Within the next few weeks he would bring himself within whistling distance of ruin.

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CHAPTER 9: MY SECOND CRISIS

He had a very clear conception of how he had succeeded. He was also convinced he could repeat the
feat again. He could almost tell what stocks would do if after an eight-point [$8] advance a stock.

Unexplainable Instinct

He had a very clear conception of how he had done it and he was also convinced he could repeat the
feat again. He could almost tell what stocks would do.

If after an eight-point [$8] advance a stock dropped back four points [$4], he did not become alarmed.

He expected it to do just that. He slowly started to imagine he was a Napoleon of finance. After all, he
reasoned to himself rather smugly, how many people could do what he had done.

Over-Confident

The truth was that as his pocket had strengthened, his head had weakened.

He had grown over-confident. This is the most dangerous state of mind a stock investor can develop in
the stock market.

It was not long before he received a bitter lesson the market always hands out to those who think they
can carelessly master it.

Possessing

What he believed a FOOLPROOF SYSTEM; he felt that if he moved nearer to the market, nothing could
stop him from making a fortune each day. As the scene of his future triumphs, he chose the uptown
office of one of his brokers.

He was fascinated by his first visit to the office. There was an air of ACTION, BUSTLE, and NOISE.

Overboard

In a few days of trading, he threw everything he had learned over the past six years overboard. He did
everything he had trained himself not to do.

He talked to brokers. He listened to rumors. He obsessively watched the ticker.

It was as if the “GET-RICH-QUICK” demon had gotten hold of him.

He completely lost his clear perspective he had so carefully built up. Step by step he led himself along a
path where he began to lose his skill.

Decay

The first thing that deserted him was his SIXTH SENSE. He did not “feel” anything. All he could see was a
jungle of stocks running up and down without rhyme or reason.

Then his INDEPENDENCE went.

He gradually abandoned his system and adopted the attitudes of others. He was following the crowd.

His reason forsook him and emotion took over completely.

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Lamb

Instead of being the lone wolf, he became a confused, excited lamb milling around with others, waiting
to be clipped. It was impossible for him to say “no” when everybody around him was saying “yes.”

He got scared when they got scared. He became hopeful when they were hopeful.

Wrong

Nothing like this, not even in his first novice years, had ever happened to him. He lost all his skill and
control.

Everything he touched went wrong.

The careful system he had built up collapsed around him. He put in dozens of contradictory orders. He
bought stocks at $55.

They went back to $51. He hung on.

Stop-Loss?

That was the first thing he threw away.

PATIENCE? JUDGEMENT? He had none.

BOXES? He forgot about them.

He BOUGHT AT THE TOP. Soon as he bought, the stock started to drop. He became frightened and He
SOLD AT THE BOTTOM. As soon as he sold the stock started to rise. He became greedy.

He BOUGHT AT THE TOP.

Tremendous Frustration

He developed a tremendous frustration. Instead of blaming his own stupidity, he invented different
reasons for his failures.

He started to believe in “They.” “They” were selling me dear.

“They” were buying stock from me cheap. He could not, of course tell anyone who “They” were – but
that did not stop him from believing in them.

Fighting THEM

Fighting “Them” – these grey ghosts at the back of his mind – made him reckless. He became stubborn.

Even though stocks went on beating him, each time they hit him he just wiped off the blood and come
back for more.

He kept telling himself that he was more than a half-a-million dollars ahead of the market and therefore
this could not possibly be happening to him. How wrong he was!

A Lunatic’s Chronicle

It was period of complete disaster. He lost $100,000 in a few weeks.

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He could still hardly believe it.

Now he knows that it was caused by EGOTISM leading to VANITY leading to OVER-CONFIDENCE, which
in turn led to disaster. It was not the market that beat him.

It was his own unreasoning instincts and uncontrolled emotions. Ruminations have a special
relationship with anger management on controlled thought.

Day-Trading Stocks

He bought stocks and sold them a few hours later. He knew that if he bought and sold on the same day,
he was permitted to operate with as little as 25% margin in his account.

Instead of profiting from this, he succeeded in losing several thousand dollars each time.

Day trading results based on Taiwan study indicate that investors have little hope.

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Day Trading Losses [Part 1 of 2]

Company Shares Buy Sell Purchase Sale Loss % Loss

HAVEG INDUSTRIES $2,500.00 $70.00 $64 $176,150.00 $157,891.34 ($18,258.66) -10.37%

ROME CABLE $1,000.00 $37.00 $31 $37,375.00 $30,724.48 ($6,650.52) -17.79%
GENERAL TIME 100000% $47.75 $44.75 $48,178.80 $44,434.32 ($3,744.48) -7.77%
ADDRESSOGRAPH-MULTIGRAPH $500.00 $124.50 $117 $62,507.25 $58,053.90 ($4,453.35) -7.12%
REICHHOLD CHEMICALS $1,000.00 $63.50 $61.50 $63,953.50 $61,158.37 ($2,795.13) -4.37%
BRUNSWICK-BALKE-COLLENDER $1,000.00 $55.50 $53.50 $111,891.00 $106,443.46 ($5,447.54) -4.87%
RAYTHEON $2,000.00 $60.50 $57.75 $121,901.00 $114,823.69 ($7,077.31) -5.81%
NATIONAL RESEARCH $2,000.00 $24.50 $22.00 $49,625.00 $43,501.52 ($6,123.48) -12.34%
AMERICAN METALS-CLIMAX 4,000 $32.88 $31.63 $132,917.60 $125,430.47 ($7,487.13) -5.63%
AMERICAN MOTORS 3,000 $41.25 $40.00 $124,938.90 $119,094.60 ($5,844.30) -4.68%
MOLYBDENUM 2,000 $49.50 $47.50 $99,875.00 $94,352.50 ($5,522.50) -5.53%

Day Trading Losses [Part 2 of 2]

Company Shares Buy Sell Purchase Sale Loss % Loss

SHARON STEEL 2,000 $48.25 $43 $97,362.60 $85,877.27 ($11,485.33) -11.80%

WARNER LAMBERT 1,000 $98.50 $96 $98,988.50 $95,127.09 ($3,861.41) -3.90%

LUKENS STEEL 1,000 $88.00 $81.00 $88,478.00 $80,640.48 ($7,837.52) -8.86%

$1,314,142.15 ($96,588.66) -7.35%

Melancholy Table

Nicolas Darvas writes: “Do you wonder, after this melancholy table, why I shuddered whenever I looked
at stocks?” He was READING too much.

He was TRYING TO DO TO MUCH.

That is why he rapidly reached the stage where he could read the figures on the stock market quotations
but they no longer told him anything. His mind had become blurred.

This last phase really frightened him. He felt like a drunk who loses touch with reality and cannot
understand why.

Modern finance literature shows an inverse relationship between portfolio turnover and returns. This
means that the more trades you make the less you should expect to profit.

He Suddenly Realized Something

There was no easy solution to the problem. For a long time, he was baffled. Then one day, as he sat in
the Plaza Hotel AFRAID to make a telephone call, he suddenly realized something.

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When he was abroad he visited no brokerages, talked to no one, received no telephone calls, watched
no ticker.

The Solution

Was whispering to him but at first he could not credit it. It was so surprising, so simple yet so
extraordinary that he could hardly believe it.

It was: HIS EARS WERE HIS ENEMY.

When he was traveling abroad he had been able to assess the market, or rather the few stocks in which
he was interested, calmly, neutrally, without interruption or rumor, completely without emotion and
ego.

Know Not, Sin Not

He had operated on the basis of his telegram, which gave him his perspective. It showed him the way
that stocks were behaving.

There were no other influences, because he did not see or hear anything else.

In New York there were interruptions, rumors, panics, contradictory information; all flowing to his ear.

As a result of this his emotions became involved with the stocks – and the cold, clinical approach had
gone.

UNIVERSAL and THIOKOL

He reviewed the situation and got rid of every stock except for UNIVERSAL CONTROLS and THIOKOL.
These were behaving well and he left them alone.

He gave instructions to his brokers to never telephone him or give him information of any sort on any
pretext whatsoever. The only communication he wanted from them and from Wall Street was his usual
daily telegram.

He Wandered Around

Paris in a daze, his head still spinning with blurred, meaningless columns of stock market quotations.
His daily telegrams arrived – they still did not make much sense to him.

He had completely lost his touch.

He felt like a man who has had a terrible accident and feels he will never be well again. He was
thoroughly demoralized.

The Next Day’s Cable

He impatiently waited for the next day’s cable.

When he received it, there was no doubt: the figures were clearer and more familiar. As though a veil
was being lifted, once again images started to form before his eyes, giving him some view of the stock’s
future.

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Gradually, like an invalid, he began to regain his confidence.

He recovered enough courage to try to approach the market again. He decided as a permanent rule
that he would never visit a brokerage office again.

The New Rules

Rule #1: Never visit a brokerage.

Rule #2: Brokers must be prohibited from picking up a telephone and calling him.

Rule #3: He must have quotations by cable and nothing else.

Rule #4: His brokers must never quote any stock to him, except the ones he asks for.

Rule #5: They must not tell him about any new stocks as that would immediately come into the rumor
class.

These rules apply even if he is in a New York hotel. In this way he places Wall Street thousands of miles
away from him.

New Stocks

He would pick himself as he always had, by reading his weekly financial paper. When he saw one that
interested him and seemed to be preparing for a rise, he would ask for quotations.

He would only ask for one new quotation at a time.

Then as he did before, he would study it carefully before deciding if it was worth going into.

He was like a man who has survived a plane crash and knows he must fly again immediately or lose his
nerve. He knew only one way of making this method foolproof. He booked himself on a plane back to
New York.

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CHAPTER 10: TWO MILLION DOLLARS

February 1959. Back in New York from his respite in Paris… He knew now that he had to keep rigidly to
the system he had carved out for himself. He had learned that if he deviated from it EVEN ONCE....

February 1959

Back in New York from his respite in Paris he knew now that he had to keep rigidly to the system he had
carved out for himself. He had learned that if he deviated from it EVEN ONCE, he would be in trouble.

His whole financial structure was immediately in danger – it could crash like a deck of cards. His first
move in New York was to erect an IRON FENCE between himself to ensure that he did not repeat any of
his previous errors.

Six Brokers

He first decided to spread out his deals among six brokers. This way his operations would not be
followed.

To guard himself against any possible interference from them, he put up a barrier. He used this way of
protection for the rest of his life.

The Stop-Loss

He blocks his calls during the day. Working in the nightclubs he normally slept during the day.

In this way, everything happened on Wall Street while he was in bed.

He is sleeping while they are working, and they cannot reach him or worry him.

His delegate, the STOP-LOSS ORDER, represents him in case something unforeseen happens.

End-Of-Day Data Only

He asks his brokers to send out their telegrams after Wall Street closing time, so they would reach him
at 6 P.M. At 7 P.M. he starts to work studying his daily telegram using END-OF-DAY DATA.

Before he does this, he buys a copy of AN AFTERNOON PAPER that contains Wall Street closing prices.
He tears out the pages giving the day’s quotations and throws the rest of the financial section away.

He does not wish to read any financial stories or commentaries, however well informed. They might
lead him astray.

While Wall Street Sleeps

Then, with his telegram and his page out of the newspaper, he settles down to work while Wall Street
sleeps. During the two weeks [in Paris] he spent repairing his injured confidence, the two stocks he did
not sell continued to rise, UNIVERSAL CONTROLS had an almost uninterrupted advanced until it stood
around $60.

This was more than a 40% rise since his last New York visit. THIOKOL behaved equally well and now was
pushing over $110.

Successful Operations

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This was very promising indeed. He decided that he had no reason whatever to touch them. Armed by
his bitter experience and well entrenched behind his new strong fence, he began to move into the
market with cautious confidence.

Successful Operations
Company Shares Buy Sell Purchase Sale Gain % Gain

GENERAL TIRE & RUBBER $1,000.00 $56.00 $69.50 $56,446.00 $69,151.01 $12,705.01 22.51%

CENCO INSTRUMENTS $1,000.00 $19.50 $23.50 $19,775.00 $23,247.63 $3,472.63 17.56%

AMERICAN PHOTOCOPY $500.00 $71.50 $79.50 $35,980.75 $39,570.92 $3,590.17 9.98%

UNION OIL OF CALIF $1,000.00 $46.00 $50.00 $46,420.00 $49,669.00 $3,249.00 7.00%
POLAROID $500.00 $121.00 $127.00 $60,755.50 $63,299.08 $2,543.58 4.19%
BRUNSWICK-BALKE-COLLENDER $500.00 $71.25 $77.00 $35,855.65 $38,322.08 $2,466.43 6.88%
BELL & HOWELL $500.00 $93.00 $99.25 $46,741.50 $49,436.81 $2,695.31 5.77%
OVERALL: $301,974.40 $30,722.13 10.17%

This being the stock market, not all his deals were successful. Many stocks did not behave as he had
predicted.

Unsuccessful Operations
Company Shares Buy Sell Purchase Sale Loss % Loss

CENCO INDUSTRIES $1,000.00 $23.00 $22.00 $23,300.00 $21,755.76 ($1,544.24) -6.63%

REICHHOLD CHEMICALS $500.00 $65.00 $63.25 $32,727.50 $31,703.17 ($1,024.33) -3.13%
FANSTEEL $1,000.00 $63.50 $62.00 $63,953.50 $61,657.96 ($2,295.54) -3.59%
PHILADELPHIA & READING $500.00 $131.00 $129.75 $65,760.50 $64,672.79 ($1,087.71) -1.65%
OVERALL: $185,741.50 ($5,951.82) -3.20%

Larger Profits

These two tables confirm that he was successful in taking larger profits than losses in proportion to the
amounts invested. He earns a positive 10.17% - 3.20% = 6.97%.

All these operations were entirely done by telegram. Darvas was essentially one of the first screen
traders.

The big pit and floor traders fail when trading across the screen. Darvas developed a screen trading
system that works.

He heard the news when his telegrams arrived – good or bad – every day at 6 P.M. Then he began to
act.

UNIVERSAL CONTROLS

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Signs of trouble started to show up in UNIVERSAL CONTROLS. It began to lose its steady upward
marching progress.

Its activity and price advance became wild – too wild.

This spelled trouble and trouble surely came. After an advance from $66 in the first week of March, the
stock rose within three weeks to $102.

It switched MOMENTUM/VOLUME phases and began to go in the other direction. Nicolas did not like
the look of this drop at all.

It fell as if there was an air pocket and there seemed no sign of a rise.

Lee is a finance professor from Cornell and Swaminthan is a finance professor from Stanford. Their
research regarding momentum/ volume phases documents the existence of the these waves that
Nicolas Darvas noticed.

The Stop-Loss

If Darvas were not careful he might get caught in a nose-dive, so he brought up his stop-loss within two
points of the day’s closing price. He was sold out of UNIVERSAL CONTROLS the next morning at varying
prices between $86.5 and $89.5.

This was more than 12 points (dollars) from the high. There was no reason he should be unhappy.

He had a good long ride and his total selling price was $524,669.97. This gave him a gain of $409,356.48
or 354.99% using RIGHTS.

Wall Street’s Most Active Risers

He now had a very large capital to invest. He took a careful look at the market, looking as usual for an
ACTIVELY TRADED, HIGH PRICED stock.

Another problem arose at this point which made a suitable stock more difficult to find. With this
amount of money to spend he must be careful not to allow his own buying to unduly influence the
market.

TEXAS INSTRUMENTS

He bought his first 2,000 shares at an average price of $94-3/8 in the second week of April and another
1,500 at 97-7/8. As the stock continued to act well, he added to his holdings 2,000 shares.

The average price of this last purchase was $101-1/2. This, as you realize, involves big money, more
than half a million dollars in fact.

TEXAS INSTRUMENTS

Shares Price Position

2000 $94.75 $189,718.80
1500 $97.88 $147,544.35
2000 $101.88 $204,733.80

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5500 $541,996.95

THIOKOL…

were now his partners of long standing and had, like all old-time partners. A special relationship.

He had always allowed THIOKOL a greater leeway [TRAILING STOP] than other stocks – partly because
he really “felt” this stock, and because he had the great advantage afforded by the special subscription
account. Remember that RIGHTS = WARRANTS = LONG CALL OPTIONS.

A deep in the money call option will give you the same leverage Darvas used with rights.

It would have been foolish to give up such a unique credit arrangement, so he always kept his trailing
stop-loss far behind its rise. This he would do with no other stock, but in the case of THIOKOL it had
saved him twice from being sold out.

A Very Bad Reaction

The second time was when [THIOKOL] had a very bad reaction in the first week of April. This reaction
came on the heels of the announcement of a 3-for-1 split.

It was so severe that he thought they would have to part, but Darvas decided to let his stop-loss decide.

This was not touched off, and the sinking price pattern was quickly followed by a vigorous rise.
However, he was not the only investor who liked THIOKOL.

Split Volume

The newly split stock was met by a hectic public response which shot it up to $72 in the first week of
May. The response was too good.

It led to this amazing situation.

THIOKOL’s activity for the week was an incredible volume of 549,400 shares. Its advance for the week
was 13-1/4 points ($13.25 per share).

The trading volume represented an aggregate value of $40,000,000.

The VOLUME PRICE DIFFERENCE for the week was $7,000,000. It looked as if every trader on the New
York Stock Exchange had done nothing else all week but rush in and out of THIOKOL.

It Could Not Last

The governors of the New York Stock Exchange decided to suspend all stop orders. The effect of this
was that most traders left the stock alone.

They would not buy and sell a stock where they could not protect themselves.

It also meant that Nicolas Darvas was automatically out of the stock himself. They had taken his most
powerful tool away, and he could not work without it.

THIOKOL

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He sold his THIOKOL holdings at an average price of $68. This gave him over $200 for each of his original
6,000 shares under the 3-for-1 split.

He had paid a total of $350,820.

For his 18,000 split shares, he received $1,212,851.52. His profit was $862,031.52 or 245.72%.

An Enormous Problem

The prospect of putting a million dollars back into the market posed an enormous problem. He would
have to be doubly careful.

This was too much money to switch to another stock easily.

It was such a big sum it was bound to influence the market. He also had to face the fact that his STOP-
LOSS would no longer be practical, because no trader or specialist would absorb such a large order
quantity of stock in a matter of seconds.

Two Parts

There was only one thing to do: he decided to divide his funds into two parts. Once he had made up his
mind to do this, selection was comparatively easy. He had only to decide among four stocks:

 ZENITH RADIO
 LITTON INDUSTRIES
 FAIRCHILD CAMERA
 BECKMAN INSTRUMENTS

There was only one way to do this – let their strength in the market be the judge. He makes a pilot
purchase buying into all four of them on May 13, 1959.

May 13, 1959 Pilot Purchases

Shares Stock Price 10% Stop Position

500 ZENITH RADIO $104.00 $ 93.625 $52,247.00
500 BECKMAN INSTRUMENTS $66.00 $ 59.500 $33,228.00
500 FAIRCHILD CAMERA $128.00 $ 115.250 $64,259.00
500 LITTON INDUSTRIES $112.00 $ 100.875 $56,251.00
2000 $205,985.00

Mechanical Stops

On each stock, he placed a stop-loss order 10% below the buying price. He was fully aware that these
stop-losses were vague and too mechanical.

It was a deliberate, if clumsy, method. He purposely used this system because he knew that sooner or
later it would eliminate those of the four that were the weakest.

May 18th 1959

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He was stopped out of BECKMAN INSTRUMENTS at $60. And on May 19th he decided to sell LITTON
INDUSTRIES at $106-1/4. It was acting worse than the others.

Now he adjusted his stop-losses on all his remaining stocks.

His Total Purchases

ZENITH RADIO FAIRCHILD CAMERA

Shares Price Position Shares Price Position

May-01 $104.00 $52,247.00 $500 $128.00 $64,259.00
Feb-04 $99.75 $150,359.70 $1,000.00 $123.25 $123,763.30
1000 $104.00 $104,494.00 $1,000 $125.00 $125,515.00
Sep-02 $105.25 $105,745.30 $1,000.00 $126.25 $126,766.30
Feb-04 $107.50 $161,996.25 $1,000.00 $127.00 $127,517.00
5500 $574,842.25 $4,500.00 $567,820.60

Stock to Stock Switch

March-April 59

Sold UNIVERSAL CONTROLS $524,670.00

Bought TEXAS INSTRUMENTS $541,997
May-59
Sold THIOKOL CHEMICAL $1,212,850.00
Bought ZENITH RADIO $574,842.00
Bought FAIRCHILD CAMERA $567,821.00
Total Received $1,737,520.00
Margin Debt $274,600.00
Subtotal $1,462,920.00
Available Cash From Operations $70,000.00
Available For Reinvestment $1,532,920.00
Total Reinvested (at 90% Margin) $1,684,660

Do Nothing

At that time, he had six brokers. He closed his account with three of them.

Then he sat back and watched the stocks he held. There was nothing else for him to do while TEXAS
INSTRUMENTS, ZENITH RADIO, and FAIRCHILD CAMERA went to work for him.

June 1959

During June telegrams continued to flash between Wall Street and the Plaza Hotel. They were
meaningless to the Western Union operators but they were full of meaning for Nicolas.

For instance, on June 9th he received the following telegram

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“Z 122-1/2 (124 – 116-3/4) T 119-1/4 (121-1/2 – 117-1/4) F 125 (126-121)”

The following day’s telegram reads,

“Z 132-3/8 (132-1/2 -125) T 123-3/4 (123-7/8-120-3/8) F 130 (130-126-1/2)”

They were boring, meaningless hieroglyphics to the operator but they meant a lot to Nicolas. They told
him that the value of his holdings had appreciated $100,000 in that one single day!

A Strange Life

He sat in the Plaza every evening, reading his telegram and FILING it. There was nothing further he
could do.

He felt elated and restless, but POWERLESS.

He was like a scientist who, after years of work and research, had successfully launched a rocket to the
moon. And now as he tracks it climbing higher and higher he has a tremendous sense of achievement
and a STRANGE LETDOWN FEELING OF INNACTIVITY.

Note that W.D. Gann writes to never sell out of boredom.

The Sidelines

He was now on the sidelines just keeping vigil while his stocks continued to climb steadily like well-made
missiles. Then one day in early July he received an offer to appear in the “Sporting Club” in Monte Carlo.

He accepted it gladly.

SITTING STILL was beginning to hold a slight BOREDOM after all his nerve-wracking problems and panics
of the past. Before deciding to leave New York, he asked his 3 remaining brokers to meet him.

He went through his accounts with each of them. He found that if he were to sell out before flying to
Europe he could cash in his stocks for over $2,500,000.

The Same Dilemma

He was always faced with the same dilemma he had known before. Should he sell? Should he get out
altogether?

The answer this time was easy.

It was the old tried and trusted answer:

He did not have any reason to sell a rising stock. He would just continue to jog along with the trend,
trailing his stop-loss behind him.

As the trend increased, he would buy more. If the trend reversed? He would, as ever, flee like a
disturbed burglar.

New Stop-Losses

He put new stop-losses on all his stocks so that if they dropped while he was on his way to Europe he
would be sold out and his two million would remain intact.

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He felt content and assured as he rode up Fifth Avenue in a taxi after leaving his brokers.

He walked into the lobby of the Plaza Hotel, automatically bought an evening paper, tore out the Wall
Street closing prices, threw the rest of the newspaper away, picked up his 6 P.M. telegram and went up
in the elevator.

With A Happy Sigh

It was now six and a half years after he had been offered the Canadian stock called BRILUND by the
Smith brothers. In his room, he opened the telegram, spread out the sheet of newspaper, and sat back
with a happy sigh.

Not only because he had made two million dollars but because he was doing what he liked best. He was
working while Wall Street slept.

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APPENDIX: CHARTS
Nicolas Darvas relied on price charts. These allowed him to utilize momentum to his advantage. He
carefully watched prices that moved into positive or negative momentum zones by penetrating new
highs or the technical support of the channel consolidations he called boxes. Recent studies in the
Journal of Finance have shown that both momentum and volume offer positive alpha.

APPENDIX: Charts

LORILLARD

LORILLARD

Darvas asked for daily quotes on this stock after observing the sudden rise in volume at (A) when it
“began to emerge from the swamp of sinking stocks like a beacon.”

He bought his first 200 shares of LORILLARD at $27-1/2 (B) with the very narrow stop-loss of $26.

A few days later a sudden drop (C) touched off this stop-loss. He was sold out.

The immediate afterward rise convinced Darvas that his first assessment was correct that this was a
strongly rising stock. And, he bought another scale purchase of shares again at 28-3/4 (D).

LORILLARD

As the “boxes” piled up, Darvas bought another 400 shares at 35 and 36-1/2 (E). The stock rose rapidly
to a new high of 44-3/8.

A sudden drop to a new low of 36-3/4 on February 18th scared him into raising his stop-loss to 36. This
was not touched off, and the stock picked up momentum immediately, so he purchased a final lot of
400 shares at 38-5/8 (F).

LORILLARD

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As LORILLARD continued its sensational rise in price and volume, Darvas was strongly tempted to sell
for a quick profit.

But he adhered to one of the basic principles of his theory – “There is no reason to sell a rising stock” –
and trailed his stop-loss at a safe distance behind the rise.

LORILLARD

Except for the possibility that, with a very close stop-loss, he might have been sold out in June when
there was a sudden drop to 53-3/8. Darvas might easily have continued with LORILLARD on its
phenomenal rise into the 80’s at the end of the year.

However, in May he became extremely interested in the movements of another stock for which he
would need all the capital he could get.

It was for that reason that he sold 1,000 shares of LORILLARD early in May at 57-3/8 (G) for a substantial
profit of $21,000. he was now ready to invest in E. L. BRUCE.

E. L. Bruce

E. L. Bruce

He had now invested all his funds in LORILLARD and DINER’S CLUB. Nicolas suddenly noticed (A) “a great
interest springing up in a stock called E. L. BRUCE, a small Memphis firm.” While it did NOT meet his
qualifications as to FUNDAMENTALS, the technical pattern was so compelling that he could not take his
eyes off it.

Note that unusual call volume has been shown to tip the hand in pre-announcement M&A.

A phenomenal rise from $18 to $50 was followed by a reaction to $43½. But to Nicolas' trained eye this
seemed "only a temporary halt, a refueling".

Despite the lack of a fundamental reason, he determined to buy as much as he could if it went over 50.

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Fully confident that the "rhythm of the advance was there", he sold out LORILLARD to have all his funds
available for immediate investment in BRUCE.

E. L. Bruce

Within a period of three weeks at the end of March, he bought a total of 2,500 shares at an average
price of $52 (B). His timing, as the chart shows, turned out to be perfect.

BRUCE "began to climb as if drawn upwards by a magnet . . . it was spectacular."

By the time the price reached $77 "it was obvious even in faraway India that something fantastic was
happening on the American Stock Exchange."

The situation was indeed fantastic.

Short-sellers operating based on fundamental value were desperately trying to cover their positions.
Trading was suspended on the exchange, but Nicolas was offered $100 per share over-the-counter
(OTC).

Let’s discuss how erratic, yet strong the relationship between earnings and price advances are. The
relationship between positive earnings and a positive price slope is poor. The R2 in regression analysis is
very low as compared to a major index. Investor Business Daily (IBD) financial newspaper EPS ratings
are very useful indicators where high priced stocks should be above ninety. Value plays have lower EPS
ratings. E.L. Bruce was probably like a value play and did not have the strongest earnings in the market.
I would not be surprised if the EPS rating would have been below 70 if calculated then.

It was then that he made "one of the most momentous decisions of his life". He refused to sell this
"advancing stock". A few weeks later he received share prices averaging $171 for a profit of $295,000.

DINERS’ CLUB

DINERS’ CLUB

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Although this stock had shown a rising price pattern in the first half of 1957, this rise was not marked by
an accompanying increase in volume. It was only at (A), when after a 2-for-1 split that there was a
sudden sharp jump in volume, that Nicolas became seriously interested in DINERS’ CLUB. He found that
the company was a pioneer in a new field with a definite upward trend in earnings power.

DINERS’ CLUB

Satisfied on this “fundamental” point, he bought 500 shares at $24-1/2 (B). As the stock continued to
advance, he followed through with another purchase of 500 shares at $26-1/8 within a few days (C).

He watched complacently as the pattern of pyramiding “boxes” developed, accompanied by a

tremendous rise in trading volume.

As the price rose, so did his stop-loss – to $27, then to $31.

DINERS’ CLUB

After reaching a new high of $40-1/2, the stock suddenly seemed to Nicolas to have

“lost its will to rise. It looked as if its last pyramid would hesitate on the brink of going into reverse. It
almost seemed ready to tumble.”

Fearing collapse, Nicolas moved up his stop-loss to $36-5/8.

In the fourth week of April, “The event against which he had insured himself occurred.” DINERS’ CLUB
took a dive and Nicolas was sold out at (D), with profit of over $10,000.

DINERS’ CLUB

He had acted on purely technical grounds, completely unaware at the time that American Express was
about to enter the credit-card field in direct competition with DINERS’ CLUB. It was the successful
timing of this operation that fully confirmed for him the correctness of the technical side of the
approach.

UNIVERSAL CONTROLS

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UNIVERSAL CONTROLS

"A little, unknown company called UNIVERSAL PRODUCTS" caught Nicolas' eye in July 1958. The share
price was soaring after a sudden enormous spurt in volume (A) was accompanied by a rise from below
$30 into a $32-36 range.

In the beginning of August, he made a cautious pilot purchase of 300 shares at $35¼ (B).

UNIVERSAL CONTROLS

Two weeks later, as the stock began to "firm up", he purchased 1,200 shares at $36½ (C). Up it went,
and days later he acquired 1,500 more shares at $40 (D).

Shortly afterwards, the company's name was changed to UNIVERSAL CONTROLS and the stock was split
2-for-l, so that he now holds 6,000 shares.

UNIVERSAL CONTROLS

In January 1959 Nicolas landed in New York and embarked on a series of operations that came near to
ruining him. Fortunately, UNIVERSAL CONTROLS performed beautifully during this period and gave him
not a moment's concern.

But in March something began to happen to UNIVERSAL that "spelled trouble and trouble surely came".

After a wild 3-weeks rocketing from $66 to $102, "it switched its momentum and began to go in the
other direction. he did not like the look of this drop at all. It fell as if in an air-pocket and there seemed no
sign of a rise."

UNIVERSAL CONTROLS

Nicolas acted exactly as he had done with DINERS’ CLUB in a similar situation. He raised his stop-loss to
just below the last closing price and was sold out (E). His prices, ranging from $86¼ to $89¾, were more
than 12 points ($12 dollars) below the high but he was "well content with this. He was very happy. He
had had a good long ride and . . . a profit of $409,000."

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THIOKOL CHEMICAL

THIOKOL CHEMICAL

In Tokyo, early in 1958, Nicolas noticed sudden heavy trading in this stock following a 2-for-l split (A). It
remained quiet for some months afterwards, but to Nicolas this "tranquility" had the feeling of "a calm
that precedes the storm."

THIOKOL CHEMICAL

Soon after Darvas started getting daily quotes, THIOKOL "looked as though it was flexing its muscles for
an upward jump" from $45. He made a pilot buy of 200 shares at $47¼ (B). For four weeks, the stock
kept pushing toward $50, and at (C), just as Darvas felt it was ready to break through, he bought 1,300
shares at 49⅞.

THIOKOL CHEMICAL

On the heels of this purchase came THIOKOL'S issuance of stock rights. These rights are very like call
options more commonly used for the same reason today.

Back in the 1950s there was no organized stock option trading as there is today. The exchange that
does this is the Chicago Board of Options Exchange (CBOE). Rights were more common when Darvis
was trading.

These have been taken over by call options that confer the same advantages with far greater liquidity
than rights.

In an inspired series of transactions, which are fully explained in the book, Nicolas took maximum
advantage of the tremendous credit that is available when rights are exercised.

Through the purchase of 72,000 rights (and the sale of his first 1,500 shares at 53½), he acquired 6,000
shares of THIOKOL stock at a subscription price of $42 per share (when the quoted market price was in
the mid $50's). His cash outlay was only $111,000 towards the total purchase price of $350,000.

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THIOKOL CHEMICAL

Three months later (D) his broker wired him that he had a profit of $250,000 on his THIOKOL
investment.

As he walked through the streets of Paris tormented with temptation, "every fiber in my being seemed
to be saying ‘sell, sell’"—but he held on to the stock.

THIOKOL CHEMICAL

Of course, Darvas never for a moment forgot to move his stop-loss up as the stock rose. But, with
THIOKOL he allowed a greater leeway of movement so as not to risk being stopped out on a short-lived
reaction that occurred at (E).

The rise which followed, and which continued after the 3-for-l split at the beginning of May, culminated
in a high-point of $72 per share. This was accompanied by such hectic trading that the N. Y. Stock
Exchange suspended the use of all automatic on-stop and stop-loss buy and sell orders for this stock.

TEXAS INSTRUMENTS

TEXAS INSTRUMENTS

After his sale of UNIVERSAL CONTROLS, Nicolas "took a careful look at the market . . . for an actively
traded, high-priced stock" in which to invest over a half-million dollars. With such a large sum involved,
he had also to allow for the possibility that his buying might affect the market.

TEXAS INSTRUMENTS

Except for some slightly erratic behavior at the end of 1958, TEXAS INSTRUMENTS had been moving
steadily upward for over a year. The velocity of its advance had increased coincidentally with a marked
rise in volume (A) in October.

Nicolas bought 2,000 shares the second week in April (B) at an average price of $94⅜. The following
week, "as the stock continued to act well", he acquired another 1,500 shares at $97⅞ (C).

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TEXAS INSTRUMENTS

Within a few days he made a final purchase of 2,000 shares at an average price of $101⅞ (D).

On July 6th, TEXAS INSTRUMENTS closed at $149½ (E), and it is at this point that Darvas takes off for
Monte Carlo at the end of Chapter 10, with a new set of adjusted stop-losses waiting somewhere below
the closing prices of his more than $2,250,000 worth of holdings.

FAIRCHILD CAMERA

FAIRCHILD CAMERA

The sale of THIOKOL left Nicolas with an investment capital of over $1,000,000. He decided to divide this
into two parts. Then he chose four stocks that he had been watching for a long time. They were "all
suitable as far as my techno-fundamentalist theory was concerned".

One of the stocks that survived a test buy to determine the best relative market strength of the four was

FAIRCHILD had been very stable in price throughout 1957 and most of 1958 despite two periods of
tremendous increases in trading volume.

But at the end of 1958 a new jump in volume (A) was complemented by a rapid and almost continuous
rise in the price of the stock. At this point it became interesting to Nicolas.

FAIRCHILD CAMERA

He made his pilot purchase of buying 500 shares at $128 (B), when the stock had established itself in a
110/140 box.

Having removed the arbitrary 10% stop-loss (at $115- ¼), which was too close with respect to the lower
limit of the box, he was unaffected by the low of 110¼ which occurred two weeks later (13.87% below
entry).

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 Mastering Darvas "How I Made $2,000,000 in The Stock Market"

On the contrary, the stock re-established its upward momentum almost immediately, he bought 4,000
additional shares at (C) at prices ranging from $123¼ to $127.

He held 4,500 shares of FAIRCHILD CAMERA along with ZENITH RADIO and TEXAS INSTRUMENTS,

Nicolas was now able to sit and do nothing "on the sidelines just keeping vigil while my stocks continued
to climb steadily like well-made missiles".

At of the end of the book, FAIRCHILD CAMERA closes at $185 (D).

ZENITH RADIO

ZENITH RADIO

This is the second of the stocks into which Nicolas switched the capital that THIOKOL had built for him. It
is quite different from FAIRCHILD in its pattern prior to the time of this investment. Peak trading in
ZENITH at the end of September 1958 was accompanied by an explosive price advance for this already
volatile stock.

ZENITH RADIO

Darvas made his pilot purchase at $104 (A) on a "when-issued" basis just after announcement of a 3-for-
l split.

As with FAIRCHILD, he dropped the arbitrary 10% stop-loss, which he had set up to eliminate the
weakest of the four stocks, he was interested in. Had he kept it there, he would have been stopped out
the following week when ZENITH dropped to $93.

However, as the price immediately started an upward move, he scaled in as planned and bought 5,000
shares at prices ranging from $99¾ to $107½ (B).

ZENITH RADIO

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ZENITH moved along nicely after that, and it is worth noting that though its progress was unspectacular
compared to its pre-split rise, the "little" difference between his average buy price of $104 and the
closing price of $124 (C). On July 6th, when the book ends, this represents a profit for Nicolas of more
than $100,000.

ZENITH RADIO

When they were writing up these charts, the editors pointed out to Nicolas that his purchase of ZENITH
was so late in its rise that it looked anticlimactic. He agreed and said, "By hindsight it seems to have
been late in its rise—at the time it looked to me like the beginning of a new rise. After all, I ONLY EXPECT
TO BE RIGHT HALF THE TIME."

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