Nicolas Darvas, This Dancer Knows How To Go Long!

His Life 1920 - 1977

In lieu of payment for one of his engagements Nicolas Darvas was willing to accept shares of a Canaian stock. Although he wasn’t able to perform that night, he ended up buying the 6,000 shares of a Canadian mining stock called Brilund. He paid 50 cents a share.

Darvas knew nothing about the stock market. But that all changed when he checked the price two months later. Brilund rose to $1.90 per share netting him a profit of almost $8,000. Like most of us, that’s all it took to get Darvas interested with his new partner. Hello Wall Street, may I have this dance.

Darvas became fascinated with the stock market. He read all he could about it, subscribed to Wall Street newsletters and traded on stock tips. It would take him about 6 years of losses and small wins before he found the system that would make him over $2 million dollars.

The bestseller you see below was written by Darvas and explains his Darvas Box Theory. It's a great story and I highly recommend it. I think he even gave a few tips on the Tango.

His Lessons

• Stocks are influenced by the general trend of the market. This is not a secret. We’ve all heard this before. Nicolas Darvas did not like to short stocks. He went long, and realized most stocks will increase in bull markets. If you can keep your purchases to bull markets, you’ve greatly increased the chances of making money. I wish there was a more complicated way of putting this, but there’s not.

• Forget blue chips, stick with growth stocks. "I am only in infant industries where earnings could double or treble," he says. "The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality." – Nicolas Darvas. Great line. What else causes a stock’s price to go up? Hope. Apple Computer's stock flew up the charts as the iPod release grew near. Did that mean Apple already received the revenue from sales of the iPod? No. It was the anticipation of sales that drove the price up. Do your research. Look for companies that have the “next best thing”, or established companies that plan on releasing one.

• Don’t look for Tops & Bottoms. "I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride." – Nicolas Darvas. Want to buy a stock at rock bottom prices? You’re crazy. Wait till it starts to go up. That’s your confirmation the odds may be in your favor. Sell into strength. It’ll keep your blood pressure low and those profits will be better spent elsewhere.

• Use a Stop Loss. "If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?" - Nicolas Darvas. After Darvas bought a stock, he’d place a stop loss just under his purchase point. How low should you go? About 8% below purchase price. As the stock rises, keep moving the stop loss up. This little strategy is important and keeps you out of the red.

• The Darvas Box Darvas noticed that stocks moved within ranges. Increased demand for a stock could move the price into the next range. Even though the price would go rise & fall within this range…the overall upward trend was what mattered.

On a chart, the upward slope of the stock prices would contain a series of boxes. Within each box would be the range of prices the stock would bounce arounce around. When the stock breaks out of a box to the upside on increased volume….you create a new Darvas Box. When the stock looks ready to break out of this box you do two things: Buy more shares. Take out your crayon and get ready to draw a new box.

Let’s say that over a week’s time EBAY bounces around from $30-$ 35. If it broke through the support of $30 and hit $28, Darvas would delete it from his watch list. If it broke through resistance ($35) on increased volume and hit $36, he’d buy it. The next range might be $36-$40. If it broke though $40, he’d buy it again. And of course stop orders are placed below each purchase.

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Darvas felt his Box Theory may be right about 50% of the time. All stocks have their own personalities, so what worked for one, will not work for all. To increase your odds: review the chart, get a feel for the past history and volatility. And needless to say, stick with up-trenders.

The Box Theory kept him out of bear markets. The reason being, if none of his stocks were breaking to the next level, there was nothing to buy.

• Techno-Fundamentalist Darvas wasn’t all about price and volume. As mentioned above, he felt earnings and future earning were strong drivers of a stock's price. Good fundamentals should be part of your stock picking process. (Unless you're looking to short, then look for wretched.)

These stocks must be part of strong industry groups, and the leaders of that group are the first place he’d look.

Penny Stocks! Join The Volume Before It Happens.

Let’s take a look at Baidu.com. In mid-June, Baidu breaks through the roof of the first box at about $150. Purchase. In late June Baidu to pierces the $160 ceiling of the second box. Purchase. Both break-outs were accompanied by an increase in volume. Good confirmation. Money was to be made by riding this till about mid-July.

Darvas Boxes can be used to short as well. As mentioned above, Darvas did not short the market. Nicolas Darvas felt enough money can be made with less risk in bull markets. However, money could have been made July 20th by taking a short position in box #3 and riding it down.

The action happened very fast in my example of Baidu. This sequence could’ve taken weeks to play out. More boxes could have been built…and more money could have been made.

By using only a portion of his capital for each purchase, Nicolas Darvas protects himself against suprise price drops. Each new purchase at a higher price is his confirmation to keep going.

And one last thing, this man could dance.

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