How Nicholas Darvas Made $2M In The Stock Market, A Book Review

Nicolas Darvas didn’t start out in the stock market like most other people. In fact, he didn’t start out in the stock market at all… 

At 23 years old, Darvas began his career as a dancer, touring the world light on his feet. But when Darvas wasn’t dancing, he was reading. In fact, Darvas consumed over 200 books during his down time on tour. Some say he read up to eight hours a day. He studied markets, speculation and how those before him raked millions from the market.

Darvas then ventured into Wall Street, armed with 200+ books of knowledge in his head. What resulted was a rollercoaster of wins and losses. Triumphs and defeats. A near decade’s effort that culminated in over $2M profits in an 18-month span.

His  journey from loser to winner reads like a movie with painful lessons, simple insights and dogmatic application to what worked. Luckily, the entire saga was documented in Nicolas Darvas’ book  How I Made $2,000,000 In The Stock Market.

The 3 Most Important Lessons From Nicolas Darvas’ Book 

This book review will highlight three things:

  1. Darvas’ early losses and lessons learned
  2. The Darvas Box Theory: The Strategy That Made Darvas A Multi-Millionaire
  3. Why You Should Distance Yourself From The Market

Darvas was mainly a swing trader. But the lessons in this book are useful for even the most long-term focused investor. As such, I use the words interchangeably.

Are you ready to learn how to make millions?

Darvas’ Early Days: The Antithesis of A Good Trader

Take a second and think about what makes a great trader … Got some ideas? Good. Darvas did the opposite of all those things.

He doesn’t hide it either. Within the first six pages of the book Darvas hints at two major issues with his early trading strategy:

  • Buying based on “hot tips”
  • Turning losing trades into “pet stocks”

Never Trust A Hot Tip

Buying stocks off “hot tips” from friends, neighbors or FinTwit accounts is a bad idea. It’s also not a new idea. Darvas notes on page 5:

“I listened eagerly to what they had to say and religiously followed their tips. Whatever I was told to buy, I bought. It took me a long time to discover that this is one method that never works … All I knew was what the last head-waiter in the last nightclub I had performed in had told me was good.”

Tip-based investing never works because you can’t buy a person’s conviction in an idea.  If you don’t do the work yourself you’ll never have the confidence to hold on when you’re right.

Even worse, if the stock goes down, who do you look to for confirmation? That friend.

Lesson: Do your own work. It’s okay to get a head start from a friend/someone you trust. But do your own work to develop your own conviction before buying.

Date, Don’t Marry Your Stocks

Warren Buffett’s ideal holding period is forever. Ideal is the key word. Never fall in love with a stock or a company, no matter the circumstances. Darvas learned this painful lesson early in the book. Here’s a quote from page 8 (emphasis mine):

“For some of them [stocks] I acquired a special liking. This came about for different reasons. Sometimes it was because they were given to me by a good friend of mine — other times, because I had started by making money with them. This led me to prefer these stocks more than others, and before I knew what I was doing I had started to keep ‘pets’”.

This paragraph reveals something all traders struggle with: confirmation bias. And the temptation is worse in the social media age. God forbid you write a long, detailed write-up on a recent investment only to find out you’re wrong. What do you do then? Can you cut your loss and admit defeat?

It’s tough.

Darvas continues with the pet stock analogy and shows how much damage this mentality can cause to a portfolio (emphasis mine):

“I thought of them as something belonging to me, like members of my family. I praised their virtues day and night. I talked about them as one talks about his children. It did not bother me that no one else could see any special virtue in my pet stocks to distinguish them from any other stocks. This state of mind lasted until i realized that my pet stocks were causing me my heaviest losses.”

Stocks are hard. On one hand, you need the conviction to hold an idea as it executes, despite what the general market thinks about the company. But at the same time you have to be willing to accept that you’re wrong and cut your losses.

Cut too soon and you can abandon a potential big winner. But failure to cut at the first sign of danger might blow up your entire portfolio.

This is especially true for value-oriented investors. If a stock you own falls in price, the first reaction is to buy more. After all, if you loved it at $X you’ll really love it at ($X – % decline)! You’ll conjure reasons for the decline that have nothing to do with the fundamentals of the business.

And sometimes you’re right. But other times the fundamentals have deteriorated. And now instead of cutting a loser you’re nursing a pet stock.

Lesson: You need a system to judge whether you should buy, hold or sell your stocks. Whether you’re a swing trader or long-term investor. You need a system. Preferably something quantifiable. That way there’s less room for ifs, ands or butts.

Darvas’ First System: The Seven Rules

Before Darvas’ Box Theory there were the Seven Rules. These rules shaped Darvas’ latter portions of his early trading days.

Here were his rules:

  1. You should not follow advisory services. They are not infallible, either in Canada or on Wall Street.
  2. You should be cautious with brokers’ advice. They can be wrong.
  3. You should ignore Wall Street sayings, no matter how ancient and revered.
  4. You should not trade “over the counter” — only in listed stocks where there is always a buyer when you want to sell.
  5. You should not listen to rumors, no matter how well-founded they may appear.
  6. The fundamental approach worked better than gambling. Study it.
  7. You should hold on to one rising stock for a longer period than juggle with a dozen stocks for a short period at a time.

What do all these rumors have in common? One thing: cut out the noise and focus on what matters: the stock and its fundamentals.

Darvas loved this strategy. Finally, he thought, a way to cut the Wall Street noise and focus on the business. Analyze the balance sheets, income statements and cash flows. Determine what a company should trade for, and buy it at a discount.

After all, if it’s hard numbers, the market will eventually agree with you. Or so Darvas thought.

Quantitative Metrics Aren’t Enough & Why You Should Match Style With Personality

It’s at this point in the book where we experience Darvas’ first major loss. He found Jones & Laughlin after culling through a list of “B-rated” stocks in a hot industry. To his excitement, this “no brainer” was for the taking.

What made this stock a no-brainer?

  • Strong industry
  • Strong B rating
  • 6% Dividend Yield
  • P/E was better than any stock in the group

There’s not much about the actual fundamentals of the business in the analysis above. All we know is that it pays 6% and has a lower P/E versus its peers.

Yet to a gambler in markets (like Darvas), this analysis proved unbreakable. Here’s his thoughts (emphasis mine):

“A tremendous enthusiasm came over me. This undoubtedly was the golden key. I felt fortune within my grasp like a ripe apple. This was the stock to make me wealthy. This was the gilt-edged scientific certainty, a newer and greater BRILUND. It was sure to jump 20 to 30 points any moment.”

Run the other way if you read the words “sure” or “certainty” in an investment write-up. Darvas leveraged his “sure” bet to the hills. He mortgaged his home, took a loan out on his insurance policy and got an advance on his paycheck.

He then dumped all of that into Jones & Laughlin. Darvas recounts the memory, saying, “The 23rd of September, 1955, I bought 1,000 shares of Jones & Laughlin at 52 ¼ on margin, which at that time was 70%. The cost was $52,652.30 and I had to deposit $36,856.61 in cash. To raise this amount I had put up all my possessions as a guarantee.”

You know where this is going.

Three days after Darvas’ purchase, the stock began to freefall. This is where Darvas went wrong. He bought on fundamentals but used price action to confirm/deny the validity of his investment thesis.

That’s not to say that one way is better than another. There’s countless traders that make money focusing only on price action. Just as the world’s best long-term investors (Buffett, for example) don’t pay any attention to price action.

Darvas didn’t have a strategy. He was helpless and treading water in no-man’s land. Listen to his excruciating relationship with Jones & Laughlin (emphasis mine):

“I saw it fall and yet I refused to face reality. I was paralyzed. I simply did not know what to do. Should I sell? How could I? In my projection, based on my exhaustive studies, Jones & Laughlin was worth at least $75/share. It was just a temporary setback, I said to myself. There is no reason for the drop. It is a good sound stock; it will come back. I must hold on. And I held on and I held on.”

That’s when Darvas realized he needed a strategy that matched his personality. He tried the fundamental approach and it didn’t work (emphasis mine):

What, I asked myself, was the value of examining company reports, studying the industry outlook, the ratings, the price-earnings ratios? The stock that saved me from disaster was one about which I knew nothing. I picked it for one reason only — it seemed to be rising.

It’s at this point Darvas developed his Box Theory. From pure fundamentals to pure technical analysis.

Nicolas Darvas: The Box Theory

I might lose all the value investors that have read until this point. Darvas’ success took off when he switched to pure technical analysis: price and volume.

Darvas noted in Chapter 4 (emphasis mine), “This experience did more than anything to convince me that the purely technical approach to the market was sound. It meant that if I studied price action and volume, discarding all other factors, I could get positive results.

His studies led him to the cornerstone of his trading strategy:

“Stocks did not fly like balloons in any direction. As if attracted by a magnet, they had a defined upward or downward trend which, once established, tended to continue. Within this trend stocks moved in a series of frames, or what I began to call ‘boxes’.

The boxes. That was the secret. Darvas waited for periods of compressed volatility.

In essence, that’s what a box is. A fierce war between buyers and sellers. Each burdened by the psychological effects of their previous decisions.

Then when the market tips its hand as to the direction of the next magnetic trend, you buy (or sell) in the direction of that new trend.

Here’s Darvas’ explanation of The Box Method (emphasis mine):

“This is how I applied my theory: When the boxes of a stock in which I was interested stood, like a pyramid, on top of each other, and my stock was in the highest box, I started to watch it. It could bounce between the top and the bottom of the box and I was perfectly satisfied. Once I had decided on the dimensions of the box, the stock could do what it liked, but only within that frame. In fact, if it did not bounce up and down inside that box I was worried.”

Examples of The Box Theory on Price Charts

In short, he waited for stocks to form box patterns on a price chart. Here’s a few examples of what Darvas would call a “box”:

CELH moved between its $3 and $7 box for nearly three years before breaking out of the box into new highs.

TOBII bounced between its $24-$28 box before breaking out and moving higher before forming another box at $34-$38 (disclosure: I own shares of TOBII).

Currently, HEAR is in the middle of its $16-$21 box.

These are only three examples of stocks forming boxes on daily, weekly and monthly price charts. Mr. Market presents these opportunities every single day, 365 days of the year.

How To Buy and Sell in The Box Method

Darvas’ buy and sell instructions were simple:

  • Buy when the stock broke out of its box
  • Sell for a loss when the stock moved back into its previous box

The other, more difficult decision, involved selling a stock at a profit. Darvas already knew the danger of taking quick profits. Here’s how he defined his profit-taking strategy (emphasis mine):

“I decided that since I could not train myself not to get scared every time, it was better to adopt another method. This was to hold on to a rising stock but, at the same time, keep raising my stop-loss order parallel with its rise.

I would keep it at such a distance that a meaningless swing in the price would not touch it off. If, however, the stock really turned around and began to drop, I would be sold out immediately.”

This is the hardest and least scientific part of the strategy. How do you know when your stop-loss is close enough? How can you tell if it’s too far?

Honest answer: there is no right answer. Find what works for you.

What we see by the end of Chapter 4 is a man with a defined strategy. The polar opposite approach to the beginning of the book. Let’s listen to Darvas’ newfound confidence (emphasis mine):

“I knew that I had to adopt a cold, 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; that 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.”

Power in Simplicity

Darvas’ actual trading method is very simple:

  1. Find a box pattern on a price chart
  2. Buy the stock if it breaks out above its box
  3. Sell the stock if it falls back into its previous box

But before he finished the book, Darvas added one element to his technical strategy: fundamentals.

Darvas’ Final Form: Technicals + Fundamentals

After perfecting his technical approach, Darvas added one last element to his stock selection criteria: improving earning power or anticipation of it.

Darvas became a Techno-Fundamentalist. We’re big fans of this approach at Macro Ops and employ it in our own stock selection criteria. Here’s his reason for adding fundamentals (emphasis mine):

“I would select stocks on their technical actions in the market, but I would only buy them when I could give improving earning power as my fundamental reason for doing so.”

In other words, Darvas didn’t buy a stock on the chart pattern alone. He needed a fundamental confirmation from improved earnings.

Darvas also took the long-term view when picking stocks. It sounds counter-intuitive, right? Looking out 20 years into the future for swing trades that may last weeks or months. But that’s what Darvas did (emphasis mine):

“I looked out for those stocks which were tied up with the future and where I could expect that revolutionary new products would sharply improve the company’s earnings.”

Said another way, Darvas wanted to invest in forward-looking industries. Industries with long runways and strong tailwinds behind them.

So now we can add two more rules to our simple formula above:

  1. Buy a stock with improving earnings or expected improvements
  2. Buy stocks in strong industries with long-term tailwinds

But as Jesse Livermore says, “It’s not the buying or the selling that makes you money. It’s the waiting.

The real genius in Darvas’ book is his ability to make millions touring the world as a dancer. It’s his occupation that helped Darvas make (and keep) his millions. In fact, most reviews of this book completely forget this crucial detail.

Let’s examine a few reasons why.

Darvas’ Greatest Weapon: Distance From Wall Street

“Being thousands of miles away from Wall Street, I succeeded in disassociating myself emotionally from every stock I held.”

Darvas, like Buffett or Templeton, knew the power of distance. Buffett barricaded himself in Omaha. John Templeton took frequent beach walks and moved to the Bahamas to escape Wall Street’s snare. As a dancer, Darvas spent most of his life away from Wall Street.

Yet Darvas wasn’t immune to the sweet song of New York. With his newfound trading success, Darvas set up shop at a Wall Street brokerage firm. What followed was a complete unraveling of a perfectly good trading plan (emphasis mine):

“As I began trading day to day from the board room, I gradually abandoned my detachment and started to join them. I opened my ears to the confusing combination of facts, opinions and gossip. I read the market letters. I also started to answer questions like, ‘What do you think of the market?’ or ‘What do you know that’s cheap?’ All this had a deadly effect on me.

The closer you are to the markets the higher your odds of following the herd. This makes sense. We’re social creatures. It’s how we survived. Yet following the herd is what gets you killed in financial markets. That’s the moment you start buying at the top and selling at the low. Darvas reveals first-hand the dangers of herd mentality:

“Instead of being a lone wolf, I became a confused, excited lamb milling around with others, waiting to be clipped. It was impossible for me to say ‘no’ when everybody around me was saying ‘yes’. I got scared when they got scared/ I became hopeful when they were hopeful.”

Lesson: Stay as far away from Wall Street as possible. Move to the Bahamas if you must.

The Last Word: A Life Changing Book

Darvas’ book changed my life.

It made me realize it is possible to make life-altering profits in financial markets. Moreover, Darvas took readers on a journey through the highs and lows of speculation and trading. We witnessed his early losses. Celebrated his victorious improvements. And cringed when he almost lost it all at the end.

But the most important part of Darvas’ book is that his strategy works. It worked in the 1950s and it works today. The stocks change names and the participants come and go. But business fundamentals stay true. And basic human psychology doesn’t change.

I can’t wait to read this again.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.