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 by investing just $ 25,000 to $ 33,000 during the period from 1957-59 in the stock market.
Too many times I come across people who share their experience saying that I am in the share market for around 5 years, 7 years, etc. but it’s only after spending these many years and losing all my capital, now I’ve understood how to make money from the share market. What an irony! They have all the experience now but are left with no money to invest in the share market.
With respect to this, I remember Swami Vivekananda says, “Learn from the mistakes of others. Never try to commit to making them all by yourself alone.” We should always seek to learn from the mistakes others commit and avoid committing the same.
The story of Nicolas Darvas is both inspiring and encouraging at the same time. One should experience this story to become a successful trader in the stock market.
So let’s get started, folks. Going back in time to the year 1952, when Nicolas Darvas was playing in the Latin Quarter in the city of Manhattan in New York, USA. While playing there, Smith Brothers who owned the Toronto Club gave an offer to Nicolas Darvas. At that time, Nicolas Darvas was a dancer and came down to the stock market accidentally and hence, is also known as an Accidental trader.
The offer that Smith Brothers proposed to Nicolas Darvas was such that if he presents a dance performance for them at their Toronto Club then they would pay him not by giving money but by giving him shares of Brilund Company, a Canadian Mining Firm. This sounds weird, isn’t it? Nicolas Darvas too found it weird but eventually accepted the offer.
But for some reason, Nicolas could not perform at the Club. Later, he had a feeling of guilt and thus, he proposed to buy those Brilund Companies shares from the Smith Brothers. Smith Brothers sold those shares to Nicholas for $ 3,000.
For two months Nicolas Darvas was busy with his work assignments. Then one fine day, while reading the newspaper, Nicolas bumped with joy. The shares of Brilund Company which he had purchased for 50 cents each had gone up to $ 1.90. So his total investment of $ 3,000 in Brilund Company’s shares had gone up to $ 11,000.
It meant that Nicolas has incurred a profit of $ 8,000 on his investment within 2 months. He thought all that happened was out of some sort of magic. He thought that we all work so as to get money, here how come money works for us?
If we invest in the right share and the value of the share goes up, even our investment goes up, which means that our money is working wonders for us. This actually happens! This thing caught his interest and he decided to actively invest in the share market.
In order to become a successful trader and investor in the share market, Nicolas decided to implement a strategy. The strategy was simple, he thought he is new in the market, so why not get to know people who have experience in this field and follow their advice.
So, after having conversations with quite a few such people, Nicolas noted down a few shares such as Old Smoky Gas & Oils, Kayrand Mines and Rexspar. Then he step by step invested in these shares. Later, he suffered a loss on his investments.
After analyzing his loss, Nicolas understood that just because somebody believes and invests in a particular share, does not mean that the share will perform well in the market.
Next, he figured out that he will resort to industry expert’s opinions only. So he then subscribed to newsletters as well as magazines which provide such share market tips. Once again, Nicolas Darvas followed a step by step process and invested in the shares based on the tips mentioned in there and again suffered a huge loss. I remember India’s ace investor Mr. Rakesh Jhunjhunwala quotes, “Share Market tips are hazardous to health and wealth, both.”
Coming back to the story, Nicolas Darvas understood that neither anybody’s suggestions nor share market tips work in the share market. Also, we all know tips are to be provided in restaurants, not in share markets.
Thus, Nicolas Darvas thought that this Canadian share market is constantly in a state of flux due to regular movements arising out of uranium news and gold strikes. He felt that the Canadian market is too dicey and hence, he moved to trade in Wall Street.
At that time, Wall Street was flourishing. In the midst of this, Nicolas Darvas used to make close to 20 trades a day. As a result, more amount of money was made by his broker through brokerage than Nicolas himself out of the trades he carried out.
Nicolas thus, realized that these small-small trades will generate only small amounts of money and in order to earn huge money, he’ll have to trade in something huge and for which he is required to undergo a lot of study and analysis to find such shares. So he started reading for 8-8 hours a day and read more than 200 books such as the ABC of Investing and how it works, the securities market, the stock market and many more along with various rating reports.
After all of this, Darvas found a share of a company called Jones & Laughlin. Now, he had found the share, the next task was to arrange the capital for making the investment. For this, he collected capital from his property in Las Vegas, took advances from Latin Quarter where he worked and also, clubbed it with all the money he used to receive from his dance performances. So he invested all this money in Jones & Laughlin Company’s shares and again he suffered a huge loss.
Now, Nicolas got astonished and thought to himself whether one can earn money from the market or not? If yes, who all are able to make money in the market? Because he thought neither tips help nor expert opinions and nor did analysis help. So what could be the way to make money, he sighed.
There you go, now comes a twist in the tale. Nicholas decided to apply one new technique. The technique was why not try to invest in a share which is constantly growing? He applied the logic that if the share is constantly increasing along with volume, then if I invest in such a share, my money will also increase.
Going ahead with this simple technique, Nicholas Darwas decided to invest in this strategy. While looking for a share, he found one share called Texas Gulf. He invested in this share and on this investment, he incurred a profit.
Nicholas Darvas decided to test whether this profit was just plain luck or his strategy had actually worked. So he decided to implement the same strategy again, this time by investing in a share called M&M Wood Working. Even here, Nicholas Darwas earned a good profit in this trade as well.
While Nicholas Darwas bought that share, there was no news regarding the company nor any specific reason was found as to why that share was constantly increasing. Later, after much increase in the value of the share, a piece of news came that M&M Wood Working was going to sign a big deal. So the value of the share increased first, while the news came in later.
We have now reached the most interesting part of the story. To become a successful trader, you need to know the secret behind this story. Let’s find out the secret.
How Nicholas Darwas made $ 2 Million by investing in the stock market?
The technique he applied is known as ‘Box Theory or ‘Box Technique.’ What is this Box Technique? Nicholas Darvas believes that the shares which move up and down the chart, move in a specific pattern and not like balloons in the air. These shares move in a box pattern.
What is this box? Consider a share is trading at $ 10 which rises up to $ 20, now it falls down to $ 15 and moves in a limited range from $ 15 to $ 20. Till the time the share is moving in this limited range, it is known as a box. We have to wait until the share moves out of that box. When the share moves out of that limited range, moves out of that box and crosses the $ 20 mark and increases along with increased volume then we can trade thereby keeping a stop-loss and also earn a good profit. This technique is called as Nicholas Darwas’s Box technique.
Nicholas Darvas followed this technique further while trading and also added fundamentals to this technique. It means we should find such a share which is growing and is moving out of the limited range along with good volume. Also, the company is making good profits and is planning for expansion of business, so if we invest in such a company then we can make good profits.
Using this technique, Nicholas Darwas traded in the shares of Lorillard, E L Bruce, Thiokol Chemical and Universal Products and made $ 5 lakh.
The story does not end here. There’s one more twist to this story. We’ll learn about that twist in our blog soon. Till then...
Happy Trading, Happy Investing!!!
To watch our video on Nicholas Darvas on our YouTube channel, click on this link - https://www.youtube.com/watch?v=njCUgpWXg4Q
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