An ace American Politician once quoted, “An Investment in knowledge pays the best interest.” This holds true for the Hungarian dancer named Nicolas Darvas, who made around $ 2 million in 18 months by investing just $ 22,000 to $ 33,000 during the period from 1957-59 in the stock market.
We had already covered a part of this story in our previous Part I blog. There’s one more twist to this story. We’ll now learn about the other twist that we were talking about in our previous blog.
When Nicolas Darvas initially started trading in the market, he struggled a lot and made losses too. Later, after gaining experience he discovered his ‘Box Theory.’ He believed that the shares which move up and down the chart, move in a specific box pattern. Till the time the share is moving in a limited range, it is known as a box. When the share moves out of that limited range i.e. moves out of that box and increases along with increased volume then Nicholas added fundamentals to this technique and traded in such shares and he also made million dollars. We have already read about this in our previous blog.
Now let us come to the next part of the story. How did Nicolas make $ 20 lakh from $ 5 lakh? Was this journey from $ 5 lakhs to $ 20 lakh a merry-go-ride or was it filled with twists and turns? Let us seek to understand it.
After making half a million dollars from the share market, Nicolas Darvas’s self-confidence was on Cloud-nine. He thought he had got hold of the share market. He felt as if his sixth sense had been activated. After traveling to various countries, by working just a few hours for analyzing and investing in the market, he made millions. So, now Nicolas thought he should put in extra effort in the share market to make more money and hence, he allotted his full-time in the market for trading, unlike earlier. Thus, he started focusing on day-trading.
By trading in the shares of E.L.Bruce company, he had earned around $ 1, 60,000 which he now decided to use it for day-trading. Here, we can learn one thing from this incident that is ‘Learn to re-invest your profits.’
Now, Nicolas had indulged himself completely in to day-trading. He simultaneously bought and sold shares within fractions of minutes. Nicolas carried on day-trading in the shares of various companies such as Rome Cables, American Motors, American Cables, Sharon Steel, Richards Chemicals, etc. and he suffered a huge loss of around $ 1, 00,000 in these trades.
Nicolas then thought to himself, how can a person like me who made millions from the market, suffer such a huge loss of $ 1, 00,000? So, when he analyzed the reason behind his loss, he found out that it was his ‘ears’ that were at fault, yes you read that right! Nicolas used to listen and react to every news that fell on his ears and simultaneously trade following such news. Hence, made such losses.
Earlier, while he used to travel various countries for performing dance shows and trade in the share market by being away from the market, he was still able to analyze the trend of the shares in the market successfully and so he’d earn good returns from the market as well.
Nicolas had now understood that ‘Trading only when there is an opportunity in the market will help him earn good returns, trading frequently will only lead to losses.’
While Nicolas was suffering losses because of day-trading, the only thing happening right for him at that time was, his earlier investments which he had made in Thiokol Chemical and Universal Control which were on delivery basis. Here, delivery-trading refers to holding a share until you get the right value for it.
He was not able to earn good returns by carrying-out day-trading but he’d earn good returns through delivery-trading. Though it does not mean one cannot undergo losses in delivery-trading, in delivery-trading with the help of stop-losses, he was able to cut-short his losses and increase his profits. We have already covered a blog on the concept of stop-loss, if you haven’t read it yet, do give it a look (Link mentioned below).
Nicolas Darvas invested in the shares of Thiokol Chemical and Universal Control based upon his box theory when the shares indicated that they are moving out of the box i.e. moving out of the limited range. At that time, he traded in those shares by following the stop-loss and hence, made good returns. Despite the fact that he only analyzed these shares in the time apart from the time he was traveling across countries and performing, he was still able to make good profits. On the other hand, in day-trading where he allotted most of his time, he still had to face huge losses. So, from this scenario, we learn that ‘Too much analysis will lead to paralysis.’
There is too much volatility in day-trading. Thus, Nicolas understood that carrying out day-trading by analyzing the trend is too difficult a task. Where-as, in delivery-trading, by following his box technique, it was feasible for him to invest in shares here. So he now decided that he would not indulge in day-trading again. From this, we learn that ‘Making a mistake is acceptable, but repeating the same mistake is a blunder. So don’t repeat the same mistake, by mistake.’
Consider, if someone meets an accident and gets his hand fractured then for him to recover and get back to normal takes some time. Similarly, Nicolas Darvas took some time to recover from the mind-set of day-trading where he suffered huge losses.
If we are scared to get in the flight for the first time, we should make sure to take the next flight soon so that our self-confidence remains intact. This was well understood by Nicolas and so he decided to get back to delivery-trading by following his box theory.
By this time Nicolas had understood that day-trading isn’t his cup of tea and neither there are too many chances of being successful in day-trading. So, he once again made up his mind to get back to delivery-trading and hence, started reading market quotations after the market closed daily.
Now to regain his confidence in delivery-trading, Nicolas started making small-small trades in the market based upon his box theory. Here too, he earned some and he lost some. But because he followed the stop-loss, his loss was limited and the trades where he made a profit, he earned a good profit there.
Talking about Thiokol Chemical and Universal Control where his investments reaped good profits, he says, ‘When a share is in an uptrend, we should hold on to the share and not hurry to sell it off. If the share is in an uptrend, then we have a chance to make a good profit there. On the other hand, when the share indicates or gives a signal of moving in the downtrend, then we should sell it off early.’
Further, when the share Universal Control gave an indication of moving in the downtrend then there Nicolas booked his profit and sold off the share. He then re-invested this profit in the share of Texas Instruments which indicated moving out of the box i.e. moving out of the limited range according to his box theory. Similarly, when the share Thiokol Chemical gave an indication of moving in the downtrend then there Nicolas booked a profit of around $ 8 lakhs and sold the shares.
Now it was a risky affair to invest this huge profit in just a single share. Nicolas Darvas wanted to invest this profit in an up-trending share so as to increase his profit.
How did he do this? Do pay attention as we are revealing a very important secret here. So, Nicolas Darvas identified ‘four’ such shares who were earlier moving in a limited range, moving in a specific box. They had recently given a signal of an uptrend. Those four shares were namely, Zenith Radio, Beckman Instruments, Fairchild Camera and Litton Industries.
Nicolas Darvas didn’t invest the entire $ 8 lakhs in these shares. He just bought a few quantities of these shares. He divided around 23% of that $ 8 lakhs profit proportionately in these four shares respectively. Also, he maintained a stop-loss of 10% for each of these trades. Amongst these shares which would be the ones who would mostly be in an uptrend, only the shares would know. Later on Litton Instruments and Beckman Instruments both hit the set stop-loss.
As Nicolas had only bought a few shares and had set a stop-loss as well, so even though he went wrong in these trades, he did not incur too many losses. And the other two trades that proved right, Nicolas increased his investment in those two shares. It means he invested more in the trades where he was successful and cut his losses short in trades where he went wrong. The two trades Zenith Radio and Fairchild Camera where he was successful, he increased his investments there and thus made huge profits here.
So out of the four trades, Nicolas was successful in two trades and was unsuccessful in the other two trades, which means 50% of the times he was right and the rest 50% of the times he was wrong. Despite being right only 50% of the time, Nicolas still earned huge profits. This was possible because, wherever his trades went wrong he had maintained stop-losses and whenever his trades worked in his favor, he increased his investments there. In this way, Nicolas Darvas was able to increase his profits and cut short his losses.
From this, we learn, ‘Firstly we should apply the logic of divide and rule. That is to carry out sampling analysis first and if the trade proves to be successful then we should hold onto that share by increasing the investment in there.’
Further, Nicolas Darvas’s investments in Zenith Radio and Fairchild Camera multiplied consistently and as the share increased in value, Nicolas trailed the stop-loss i.e. Nicolas kept on increasing the stop-loss as well.
So one day while Nicolas was analyzing his Portfolio alongside his broker, Nicolas figured out that his portfolio had crossed the mark of $ 2 million. This news later went viral and subsequently reached the Times magazine team. So the Times magazine team analyzed Nicolas Darvas’s portfolio not once, twice, but four times. Finally, they accepted this story to be true and published an article on Nicolas Darvas in their famous magazine. It was titled, ‘How a Dancer Made $ 2 Million from The Stock Market!’
As we know, Nicolas was a dancer by profession and used to perform his dance shows across countries. So as he usually performed in the evening, he used to rest in the morning. Thus, when all the other traders used to trade in the market in the morning, Nicolas usually used to sleep at that time.
After the closing of the market, Nicolas used to analyze and try to find such a share which has just come out of the box and is giving a signal of an uptrend. Here, Nicolas used to pre-determine the level of Stoploss, for the fact that in case his prediction goes wrong, he knows where to exit the trade. He used to share all these details with his broker, so the next day when the market used to re-open, his broker knew how and when to execute his trade. Nicolas knew it is humanly impossible to track every news, every single detail, analyze it all and then trade. Also, neither such a trade would be profitable.
Nicolas Darvas believes the biggest secret behind his stock market success was that ‘When the other people used to trade in the market, he used to sleep. After the closing of the market, he used to carry out his analysis.’
Also, there’s a famous quote in Hindi which goes this way, ‘Share market me roj ayenge to rote hue jayenge, market me kam ayenge to kamate hue jayenge.’
In this manner, this story inspires us in many ways. We learn the following very important lessons from this story:
1. Learn to re-invest your profits. You this profit for further risk planning
2. Whenever you trade, apply the logic of Divide & Rule
3. Whenever you trade, always make sure to follow the stop-loss. This will help to reduce your losses. Whenever your trade succeeds, increase your investments in that trade. This will result in more profit and less loss while trading.
4. And most importantly, Share market me roj ayenge to rote hue jayenge, market me kam ayenge to kamate hue jayenge.
Until the next blog…
Happy Trading, Happy Investing!!!
To read the previous blog on Nicolas Darvas, click on the link below - https://www.aryaamoney.com/Blogs/stock-market/inspiring-story-of-a-dancer-who-made-2-million-from-the-stock-market-part-i
To read the previous blog on Stoploss, click on the link below -
https://www.aryaamoney.com/Blogs/stock-market/how-to-cut-your-losses-short
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