December 10, 2011

Great Notes taken by @ZLucido - Nicholas Darvas: How I Made $2,000,000 in the Stock Market

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Nicholas Darvas: How I Made $2,000,000 in the Stock Market

Be cautious with brokers’ advice.
Ignore Wall St sayings, no matter how ancient and revered
Avoid over the counter, only buy in listed stocks where there is always a buyer when I want to sell
Avoid rumors, no matter how well-founded they may appear
Buy only in strongest industry groups & the best within those groups.
There is no sure thing in the market, i was bound to be wrong half the time
I must accept this fact and readjust accordingly, pride and ego subdued
Become an impartial diagnostician
Cannot merely take chance. first i must reduce my risks as far as humanly possible.
Automatic stop loss = quick loss weapon
I knew many times i would be stopped out for the sake of a pt just to see my stock climb up immediately after but i realized that the was not so important as stopping the big losses.
Besides i could always buy back the stock by paying a higher price.
My profits had to be bigger than my losses
Most difficult problem was to discipline myself a rising stock too quickly.
Hold on to a rising stock but at the same time keep raising my stop loss parallel with its rise.
Keep it at a distance that a meaningless swing in price would not touch it off.
If the stock really turned around and began to drop i would be sold out immediately.
I would not be able to sell at the top
Producer would be a fool to close the show when the theater is full every night
It is only when he starts to notice empty seats that he considers closing the show
I would be a fool to sell a stock as long as it keeps advancing
Sell when the boxes start to go in reverse, when the pyramids started to tumble downwards, my trailing stock should take care of this.
Objectives in the mkt: right stock, right time, small loss, big profit
Weapons in the market: price and volume, box theory/tech analysis/patterns, automatic buy order, automatic stop loss and trailing stop
As the trend continued i would buy more, as the trend reversed i would run like a thief.
I knew i had to adopt a col, unemotional attitude toward stocks, that i must not fall in love with them when they rose and i must not get angry when they fell
There are no such animals as good or bad stocks, there are only rising and falling stocks and i should hold the rising ones and sell those that fall.
I had to bring my emotions, fear, greed and hope under complete control.
I had no doubt that this would require a great amount of self-discipline, but i felt like a man who knew a room could be lit up and was fumbling for the switches.
I only handled 5-8 stocks at a time, i automatically separated them from the confusing, jungle-like movement of the hundreds of stocks which surrounded them.
I was influenced by nothing but the price of my stocks.
I could not hear what people said, but i could see what they did. it was like a poker game in which i could not hear the betting, but i could see all the cards.
Poker plays will constantly try to mislead me with their words but if i did not listen to their words, and constantly watched their cards, i could guess what they were doing
Disregarding the influence of the general mkt is no better than trying to direct a battle by only looking at one section of the battle field
I could not apply mechanical standards to the relationship between the average and individual stocks
Judging this relationship was more like an art, in some ways it was like painting
In the same way i found that the relationship between the average and my individual stocks were confined within certain principles, but they could not be measured exactly
Watched the averages only to determine whether i was in a strong or a weak market because general mkt cycle influences almost every stock.
They became like x rays for me. to the uninitiated x rays are meaningless. to physician it obtains all he needs.
I could absorb the page at a glance and draw rapid conclusions from it, instead of painfully putting the letters together like a child
Whenever i bought i wrote down my reason for doing so. i did the same when i sold it.
When it ended in a loss i wrote the reason i thought caused it. then i tried not to repeat the same mistake.
Started to see stocks have characters just like people. this is not so illogical, because they faithfully reflect the character of the people who buy and sell them
Like human beings, stocks behave differently. some are calm, slow conservative, others are jumpy, nervous, tense.
Some easy to predict, consistent in their moves, logical in their behavior. they were dependable like friends.
I slowly came to see that i was becoming a diagnostician i could not be a prophet.
When i found a stock strong all i can say is it is healthy now, today at this hour. i could not guarantee it would not catch a cold tomorrow.
My educated guesses, no matter how cautious, many times turned out to be wrong.
Did not upset me anymore. who was i to say what a stock should or should not do anyway?
My mistakes did not make me unhappy
If i was right so much better. if i was wrong i was sold out.
This happened automatically, separate from me
I was no longer proud when a stock went up, nor did i feel wounded if it fell
I knew now that the word value cannot be used in relation to stocks. the value of the stock is the quoted price. this is in turn entirely dependent on supply and demand
No such thing as a $50 stock. if it trades to $49 it was now a $49 stock.
I succeeded in disassociating myself emotionally from every stock i held.
I decided i would trade in the market by doing the right thing first, follow what a stocks behavior commands and care about taxes later
In the same way i realized it was impossible for me to assess great historical turning points in the market when they began to happen. Whats fascinated me as wall st prices continued to fall was the gradual
Realization that my system of ducking out quickly with my automatic trailing stop losses made such an assessment unnecessary
I had simply gotten out on the basis of the behavior of my stocks.
Buy and hold or put them away investors who consider themselves conservative investors , i now regarded as pure gamblers. a non gambler use get out when his stocks fall.
I could remember how i almost felt myself willing and pushing that stock upwards. it was a very human feeling, but it had no effect upon the mkt an more than spectators have on a horse race
I tried to detect those stocks that resisted the decline. reasoned that if they could swim against the stream, they were the ones that would advance most rapidly when the current changed.
Majority were companies whose earnings trends pointed sharply upwards
Capital was flowing into these stocks even in a bad market. the capital was following earnings improvements as a dog follows a scent.
Stocks are slaves of earning power, i would select stocks based on their technical action and then only buy them when i could give improving eps power as my fundamental reason for doing so.
Looked for stocks tied up with the future and where i could expect that revolutionary products would sharply increase earnings.
All a balance sheet can tell you is the past and present. they cannot tell you the future
Enter high territory trading: stocks on launchpad to make new highs, more expensive then ever before and would look too dear to the uninitiated.
But they could become dearer. i made up my mind to buy high and sell higher
Expensive-but-cheap high velocity stocks. closely observed their price action, i was on the alert for any unusual activity as well. i had not forgotten the importance of volume
Bear mkts always followed by bull mkts. i felt calm and confident waiting for the mkt tide to turn.
I did suspect that leaders in previous mkt would not lead again. they had fulfilled their place in history.
I had to find new ones. they war sonly sleeping the promising sleep of the unborn. one day soon they were destined to wake up.
Steady rise in price and the high volume indicated to me that there was tremendous interest.
Although i felt secure win my judgement w/ merged technical and fundamental viewpoints i did not for one moment con side abandoning my chief defensive weapon the stop loss order
No matter how well built your house is, you would not think of forgetting to insure it against fire.
The truth was that as my pockets had strengthened, my head had weakened. i became overconfident and that is the most dangerous state of mind anyone can develop in the stock market.
Now i know that it was caused by egotism leading to vanity leading to over confidence which in turn led to disaster. it was not the mkt that beat me but my own unreasoning instincts and uncontrolled emotions
My ears were my enemy, i had operated simply on my daily telegram which gave me perspective. it showed me the way my stocks were behaving. there were no other influences.
In this way everything happens in wall st while i am in bed. i am sleeping while they are working and they cannot reach nor worry me. my delegate, the stop loss order represents me in case something unforeseen happens
I settle down to work when wall st sleeps.
Let a stocks strength in the market be your guide
It began to be a strange life, i sat in th plaza every evening reading my telegram and filing it. there was nothing further i could do. i felt elated and restless, but powerless.
I did not have any reason to sell a rising stock. i would continue to jog along with the trend, trailing my stop loss behind me.
As the trend increased, i would buy more. if the trend reversed? i would, as ever, flee like a disturbed burglar.

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