Nicolas Darvas is not a household name. His name should be. But it is not.
Wall Street made certain that most mom and pop, retirement saving, stock investors would never learn his secrets.
According to Warren Buffett the stock brokerage industry thrives on brainwashing investors into not thinking. The typical employer sponsored retirement plan manager does not want you to know that Nicolas Darvas beat the market. Here are his 7 most important investment rules. These allowed Nicolas Darvas to grow his portfolio from about thirty six thousand to over two million in just under six years into the late 1950s as described in his investment classic that was way ahead of its time, “How I Made $2,000,000 in the Stock Market.”
The 7 Top Momentum Secrets of Stock Market Millionaire Dancer: Nicolas Darvas
Momentum Stock Investing Secret #1: Build a High Paying Skill First
Momentum stock investor Nicolas Darvas obtained a first class education. He studied at the best university in Hungary. This included an intense education in economics.
And his classical training included dance along with his sister Julia.
They rose to prominence as an acrobatic spectacle. The act attracted attention in much the same way as Cirque de Soleil does today. Nicolas and Julia graced television screens worldwide. They were covered in Time Magazine.
This generated the seed capital Darvas needed to begin as a stock investor.
Momentum Stock Investing Secret #2: Seek Strong Markets
Darvas started trading as a stock investor in Canada. Then he switched to the over-the-counter (OTC) market in the United States. Equities on the Toronto Stock Exchange and the U.S. OTC yielded weak results as compared to stocks on the New York Stock Exchange (NYSE). Like Peter Lynch, but ahead of his time, Darvas discovered that the best investments are the big stocks just emerging onto the scene. These are in plain sight like an elephant in a living room.
Momentum Stock Investing Secret #3: Earnings Help but Don’t Guarantee
Nicolas Darvas discovered that earnings help a stock rise. But stellar earnings don’t necessarily guarantee share price gains. Nonetheless, solid earnings under a rising stock fueled the fire for his stock investor shareholder gains when combined with positive price impact. Which sets the stage for secret #4 …
Momentum Stock Investing Secret #4: Focus First on Price Impact
Darvas was the first trader to numerically document every trade. He documented momentum long before finance professors Narasimhan Jegadeesh and Sheridan Titman in their seminal stock investor study from U.T. Austin and Emory. They showed that when a stock breaks into new highs that the share price does indeed tend to continue to rise just as Darvas encountered. Nicolas Darvas also carefully tracked the price impact between share price trend and volume of orders entering the market. Price impact has been shown in recent studies by finance professor Yakov Amihud of New York University to foretell stock share price fluctuations exactly as Nicolas Darvas experienced.
Momentum Stock Investing Secret #5: Test First
Nicolas Darvas found that stocks dropped for no obvious reason even when cuing on earnings, price trend, and volume. This happened on at least half of his purchases. He quickly learned the prudence of testing with a small amount of capital first. He chopped down his initial bet to a fifth, a quarter, a third, or half of the total trading capital he was willing to dedicate to the stock.
This limited his loss to the cost of the shares of his test purchase.
Momentum Stock Investing Secret #6: Place a 5% Stop
Nicolas Darvas documented every trade in his classic book “How I Made $2,000,000 in the Stock Market”
This allows you to retroactively estimate his stop placement strategy. Darvas most frequently placed a stop about 5% below the entry price.
A tight stop combined with a fractional test of bankroll gave Nicolas Darvas supreme control over his downside risk.
Momentum Stock Investing Secret #7: Bet the Farm Intelligently
Professor Ziemba of the University of British Columbia has observed that Nicolas Darvas did something in common with Warren Bufffet, George Soros, and Mohnish Prabiah. All three men concentrated up to 40% of their investment portfolio in just one stock.
Nicolas Darvas came to understand that mindless diversification leads to lackluster returns. This fact is particularly apparent when compared with returns arising from thoughtful stock picking combined with intelligent market timing. This is the same conclusion that a younger man, Warren Buffet, was coming to see around the same time mentoring under the famous finance professor Benjamin Graham from Columbia University.
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