Nicholas Darvas was a dancer, self-taught investor and author. He's most famous for turning
$10,000 into 2 millions trading in the stock market over the course of 6.5 years.
He did this without any prior experience as a trader and later
he wrote "How I made $2,000,000 in the stock market" where he outlined his strategy for success. Today,
I will summarize the most important advice from this book.
Takeaway number 1: Kill your darlings
One of the strongest and most dangerous
biases in stock market investing is when you develop a liking for your investments. No matter if it's because a friend
recommended it, it was your virgin investment or you made a good profit from it, it's a treacherous attitude to develop.
You must become an impartial
diagnostician. Don't identify yourself with any stock. Don't fall in love with them when they rise or become angry with them (and your surroundings)
when they fall. Another tip,
which doesn't come from this book, is that when in doubt - sell!
Judging a stock which you don't own will allow your view to be much clearer
Also, you don't burn any bridges
by selling because you can always rebuy later. When I've been using this strategy myself I have never bought back the stock again. Ever.
Takeaway number 2: Buy on strong positive trends & rising volumes.
Continuing rising prices in a stock often means that some people know something that you don't. By buying into the trend you will benefit from these
fundamentals without actually knowing anything about them yourself. Look also for rising trading volumes. If a group of Swedes decides to take a few breaks
during the working day, it's nothing out of the ordinary.
They are probably just taking a fika or two. On the other hand, if you see a group of Japanese do the same thing,
it's definitely something to watch carefully! Just like a stock that used to behave in one way
but suddenly changes could be of interest. The author talks about a techno fundamentalist theory,
which is a combination of technical and fundamental assessment. Before buying a stock,
it should have the aforementioned increase in price and trading volumes.
But the buy should only occur when improved earnings power could be given as the fundamental reason for these increases.
Improved earnings power is anticipated from companies that belong to new vigorous infant industry. And sure, for this to happen
you will never buy the stock at its bottom, and that's not the point with this approach either.
The point is to buy high and sell even higher.
Takeaway number 3: Cut your losses short. Let your winners run.
There's a popular saying in Wall Street, which goes something like this: "You cannot go broke by taking a profit."
It's true that you will win that specific battle if you take a profit,
but will you win the war? To follow "you cannot go broke by taking a profit" is counterproductive in the stock market. You will
do the exact opposite of what this takeaway suggests. You will cut your winner short and let your losers run. Do you think
that it sounds like a profitable strategy to win small and loose big? No x 5. Agreed.
So how do you cut your losses short then? A great tool to maximize your chances of achieving this is by using a trailing stop-loss.
This is a technical tool that your online broker will offer which allows you to set a predefined price at which you will sell your stock.
This price will rise as the price of the stock rises and therefore it's called training.
What this forces you to do is to accept your mistakes early.
If you find yourself in hold - stop digging!
Remember to keep the trailing stop at such a distance that meaningless swings in the stock price doesn't touch your investment off.
The volatility of a stock is a great indicator for how far behind you should trail your stops.
An additional benefit of trailing stop-losses is that you will automatically be stepped out during crisis. As we've discussed earlier,
you cannot foresee crashes, but with a system like this such an assessment become unnecessary. The market might change for the worse,
but by then, you'll already be out of it.
And how do you let your winners run?When you have a profit on a stock the instinctive reaction is to sell. You don't want
to lose you gains, right?
It's a tough decision to take psychologically. If you make the decision to sell in an upward trend,
you must think that the stock has reached its peak.
But you should never try to sell at the top! Anyone who claims to be able to do this consistently
is just lying. If you sell a stock while rising
it's a pure guess, because you cannot know how far it will go.
This would be no cleverer a guess than anticipating that H&M would stop its international expansion after its hundredth open store.
You can also guess that the expansion would stop after 200 stores or 500 stores.
What would you be wrong,
if you guessed any of these figures?
Because the Persson family would be fools if they stopped the expansion at 100, 200 of 500 stores when all of them are constantly
selling out and people are crying for H&M clothes all over the world.
It is only when they start to notice increasing inventories and empty stores that they'd consider halting the expansion.
This is also the time when you're trailing stop-loss will force you to leave the investment.
Together, takeaway 2 and 3 lays the foundation for the "Box Theory",
which is the strategy that Darvas used to trade stocks successfully in the market.
He creates a box around a specific stock. For instance, a 7/11 box around this Swedish stock called Fingerprint Cards, back March 2015.
If the stock moves into a higher box,
he would buy it. In Fingerprint's case, it soon moved upwards into say an 11/15 box.
This happened in April
2015 and would have caused Darvas to buy. The stock may oscillate inside the box,
or establish a higher one, but never go back into a lower.
The lower bound of the box is therefore a point when you sell the stock.
Darvas would have kept placing boxes on top of each other until December of
2015, where he would have stepped out at around 110. This is equal to a 900% gain over 8 months.
Stocks do not move at random. They have a defined upward or downward trend which, once established, tends to continue.
Takeaway number 4: Create your own stock log book. Write down reasons for buying and reasons for selling.
There's a saying that "a mistake repeated more than once, is not a mistake,
it's a decision" A logbook will ensure that you don't take any bad decisions in the market because you will change your behavior while they
are still just mistakes.
It will make sure that you are
consistently improving and it also makes it easier to stay the course if the market is going against you. Your log book will communicate
what a normal book can never teach you. Much like a person never becomes a good driver by only reading about
accelerators, steering wheels and brakes all day. Get into the market and learn from your own mistakes.
Here's an example. Date: 16/8-2018.
Type: Buy. Stock: Ericsson. Price: $7.9.
Reason for buying: Increased volumes, strong positive trend and great expectations for 5G. Date 25/2-2020.
Type: Sell. Stock: Ericsson. Price: $17.1.
Reason for selling: Stepped out by stop-loss after a great upward trend turned downwards. Date: 16/8-2018.
Type: Buy. Stock: GM.
Price: $36.6. Reason for buying: My cab driver told me that GM is developing a new electrical car. Yippie!
Date: 1/12-2019. Type: Sell. Stock: GM. Price: $15.7.
Reason for selling: Oh my god. I should never have trusted my cab driver. I should have used stop-losses. In hindsight,
I think I should have bought Tesla instead.
Start to learn from your mistakes early as they are less costly when you are young. Better to make a mistake at twenty that costs
a few weeks of work during the summer vacation, than doing them at 50 at the cost of half of your 401k.
Takeaway number 5: Be the lone wolf - stay detached.
To be truly successful in the market, you can't be the confused excited lamb milling around with others.
You must be the lone wolf. Your ears are your enemy! They will bring interruptions, rumors, panics,
contradictory information, and more. In a situation where you were bombarded with information all the time, how are you supposed to stay calm & neutral and
avoid emotions & ego? You can't!
For the author, this was most apparent when he moved to New York after staying abroad for a couple of years.
He thought that getting closer to the action was going to bring him even more profits. WRONG.
He even abandoned his old
proven system and investment philosophy for becoming a part of the Wall Street-herd for a while. This period proved to be the least profitable
of his whole investment career.
Maybe this is the reason why Warren Buffett decides to live in Omaha instead of close to any of the major financial centers of the world.
Its summary time! The first takeaway is that you should never allow yourself to fall in love with any particular stock.
Marry personally like, not your investments.
The 2nd advice is to buy when a stock is showing signs of a positive trend and rising trading volumes at the same time as
the underlying company has potential for earnings growth. Tip number 3 is to cut your losses short and let your winners run.
Number 4 is to keep a log book of your transactions. This way, you'll learn from your mistakes quicker.
I'm recording this while on a fishing trip in the northern parts of Scandinavia. To be honest, I'm not even in Sweden anymore.
I'm visiting our Scandinavian brothers in Norway. To stay true to myself, and any viewers from our neighbors of Norway,
I will rebrand temporary. Today, I will call myself The Norwegian Investor instead.
Oh, almost forgot. The final takeaway, advice number 5, is that only dead fish follow the stream. Don't be a dead fish.
Instead be like a salmon - fighting your way through fjords and rivers. Thanks for watching!
Remember to comment if you want me to summarize a specific book within the field of personal finance or investing.
Also, if you want me to elaborate on any of the takeaways from this video,
please comment on that as well. Cheers guys and good luck fishing for your next great investments!