Invest Like a Pro!
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Invest Like a Pro!

Discover the most powerful scientifically proven single stock trading system in the world. With U.S. English captions.
4.1 (25 ratings)
Instead of using a simple lifetime average, Udemy calculates a course's star rating by considering a number of different factors such as the number of ratings, the age of ratings, and the likelihood of fraudulent ratings.
1,182 students enrolled
Created by Scott Brown
Last updated 1/2017
Current price: $10 Original price: $200 Discount: 95% off
5 hours left at this price!
30-Day Money-Back Guarantee
  • 2.5 hours on-demand video
  • 1 Article
  • 2 Supplemental Resources
  • Full lifetime access
  • Access on mobile and TV
  • Certificate of Completion
What Will I Learn?
  • Finding the fastest and most consistently rising stocks in the market will be a snap with this complete system.
  • Deriving guidance from volume and price will become your most powerful compass the dark forest of Wall Street.
  • Discovering your inner wisdom to quickly recognize the quality of financial information will become second nature to you.
View Curriculum
  • Students only need basic arithmetic for this course.

New York, New York (Time Magazine), Monday, May 25, 1959, 12:00:00 EDT

RE: A Financial Documentary of the Astounding Success of Nicolas Darvas

Dear stock investor,

It was the last early summer of the 1950s.

The Darvas brother and sister dance team were as entrenched in the media then as Circe de Soleil is today. Their graceful dances delighted television viewers in Europe and America.

The Darvas name was regarded with respect in show business circles in Las Vegas, New York, Toronto and far overseas. Nicolas Darvas had cemented his name in the public conscious as one of the best dancers worldwide.

Celebrities were shocked when a full page article in Time Magazine covered Nicolas not as a dancer but as a rich stock investor "who ignores tips, financial stories and broker’s letters." This was followed with a 1960 book entitled, “How I Made $2,000,000 In The Stock Market.” The book fell out of favor when business schools began teaching that the market could not be beaten by reasoned analysis.

And by The Way, He Made $2.5 Million in 6.5 Years.

Away from the public hidden underneath arcane math exists recent evidence from the very top of investing that Darvas was correct. See ** Moskowitz, T., Cliff Asness and Lasse Pedersen, “Value and Momentum Everywhere,” Journal of Finance (2012).

World class performance comes from world class brains. Darvas studied at the University of Budapest — the most erudite of Hungary.

He was trained not just in classical dance but also as an economist.

Economics paid less than dance. But he was a brilliant scholar with precise organization.

This allowed him to precisely document his agonies and elations on a trade-by-trade basis, “I decided I had been missing a good thing all my life. I made up my mind to go into the stock market. I have never gone back on this decision.-Nicolas Darvas

Learn What Worked from A Major State University Finance Professor!

You can read his book but will you really understand it? Not likely.

I don’t want to push your buttons. I am just pointing out that most of my adult life has been a sole minded dedication to mastering finance.

Just read my Udemy profile. I am a finance professor at a major state university — The University of Puerto Rico Graduate School of Business. We are the leading business school in the Caribbean.

Look Over My Shoulder as I Dissect Nicolas Darvas’ Secrets For You …

Thousands of MBA students grasp the deepest principles of finance in my classes. They work in diverse industries from pharmaceuticals to Wall Street.

I train these professional financial managers. And I can train you to go toe-to-toe against the wolves of Wall Street.

Level the playing field with the skills you will learn in this course. And you will improve over the years to come.

I am your ultimate financial coach. I know how to guide you through chunks of financial knowledge that are hard for all.

That’s because I have trained thousands of young adults in finance. Let me guide you through the black forest.

Here Are The 25 School of Hard Knocks Worst Challenges for Beginning Stock Investors …

Nicolas Darvas faced many of the same challenges at the start that I have. That is part of the reason that his classic book rings so true for so many stock investors in-the-know today. Here is a sample of difficulties Darvas had to overcome.

CHALLENGE #1: BLIND LUCK. The first profit in stocks Darvas landed was not from his own thought process making him naively believe investing was easy.

CHALLENGE #2: GOSSIP. Nicolas Darvas in realizing that he knew nothing about stocks seeks the wisdom of random strangers leading to a chaotic portfolio from asking “Do you know a good stock?

CHALLENGE #3: MISFEASANCE. Neither casual acquaintances in his travels nor brokers know the secret to making money in stocks.

CHALLENGE #4: COSTS. Brokerage commissions and transfer taxes decimate the initial stock market returns of Nicolas Darvas — and he realizes he must control them.

CHALLENGE #5: OVER-TRADING. Darvas fidgets for fast profits spreading his stake between upwards of thirty stocks — degrading control and tracking while ramping up account depleting fees.

CHALLENGE #5: LOSER-LOVE. Nicolas became attached to particular stocks giving him the proclivity of holding loss exploding falling shares.

CHALLENGE #6: GAMBLERS-ANNONYMOUS. On stage this trained dancer was the pinnacle of disciplined control. Chasing a fast buck over-trading stocks was quickly losing him two hundred dollars a day.

CHALLENGE #7: GURUS. Nicolas Darvas was attracted to advisory service that made speculation sound like a snap and fed his need for urgently making money fast but recommended falling stocks. Have you been spending hundreds or even thousands on investment newsletter financial advisory services? If so, you have probably asked yourself, “where are all those hundred percent returns promised in the glossy marketing?

CHALLENGE #8: DATES. The famous dancer does not know when to enter the market. This pulls eleven thousand dollars down to five thousand eight hundred.

CHALLENGE #9: TIPS. A broker offers up advice in the form of a safe stock based on fundamentals — that drops. Brokers are bad for advice as well.

CHALLENGE #10: PROJECTION. Darvas is quick to blame his broker for mistakes truncating his ability to learn.

CHALLENGE #11: IGNORANCE. Even the greatest dancer in the world is a dunce without an understanding of the jargon making it hard for Nicolas to communicate clearly with his broker — remember that this was before online trading and retail stock investors had to have a broker.

CHALLENGE #12: VISION. Nicolas Darvas quickly realizes that he cannot see the strongest trees in the forest and sets out to find the most strongly rising stocks.

CHALLENGE #13: LIQUIDITY. Darvas has a hard time reselling his small stocks in the chaotic discontinuously trading over-the-counter (OTC) market.

CHALLENGE #14: INSIDE-IDIOTS. The Hungarian trained economist gone world class classical dancer begins tracking inside trades of the largest executives. He quickly finds that insiders don’t know any more about the direction of the stocks of the firms they manage than you do! And we confirmed this “too-late-too-soon” factoid in Brown, S., Cao-Alvira, J. & Powers, E. (2013). Do Investment Newsletters Move Markets? Financial Management, Vol. XXXXII, (2), 315-338.

CHALLENGE #15: OVER-CONFIDENCE. Fundamental filtering as is done widely with Value-Line leads Nicolas into the limbo land of false-hope.

CHALLENGE #16: REGRET-AVOIDANCE. If Darvas were alive today, he would be glued to the screen for fear of a loss on his stock. He wastes massive amounts of energy over-monitoring his equity returns.

CHALLENGE #17: TOPPING-OUT. Buying into the very top of a run burns Nicolas out so he focuses on price consolidations he terms “boxes.”

CHALLENGE #18: EXHAUSTION. Chasing stocks just because they rise brings his attention too late by the time the broker calls.

CHALLENGE #19: COIN-FLIP. Making more on profitable trades than is lost on losers becomes his mantra as he realizes that he is never better at picking a winner than a simple coin toss — but that is pretty darn good!

CHALLENGE #20: DATA. Darvas realizes that he must have access to high quality data on not just price but also volume.

CHALLENGE #21: PAPER-TRADE-THIS. Nicolas eventually figures out that paper trading gets him nowhere — he has to be emotionally involved.

CHALLENGE #22: DIONYSUS. In embracing the central truth that stocks owned and watched make unexplained price collapses — and in so realizing understands that he is as knowledgeable as any guru.


Many people hold on to stocks for more than a year for a lower tax rate on capital rather than short-term gains. He decides that he has to sell even if the taxes on his gains will he higher.

CHALLENGE #24: BUY-&-CRUMBLE. Holding stocks for very long periods of time doesn’t work for Nicolas Darvas — buy-&-hold strategies he decides are for gamblers,

CHALLENGE #25: CYCLE. Nicolas notices that stocks cycle from small to large in and out of fad creating even less predictability.

Darvas was gifted enough to find his own way up and out into the light from deep within his initial darkness in Plato’s cave with secrets he willingly shared to those even unborn who could understand.

Here’s 15 Cures for The 25 Worst Challenges for Stock Investors …

CURE #1: TABLES. Tracking the relationship between volume and price allowed Darvas to identify stocks with sudden explosions of volume.

CURE #2: MOMENTUM. Simply buying stocks that are rising saves Nicolas Darvas.

CURE #3: TRADING-VOLUME. The highest money makers are stocks with fast rising prices on accelerating volume.

CURE #4: BUSINESS. Darvas treats his stock investing as a business by giving it the required attention.

CURE #5: CHANNELS. Trend consolidations map entry and exit points for Darvas.

CURE #6: BUY-STOP. Runaway stocks are captured from above by a simple limit stop buy order.

CURE #7: SELL-STOP. A simple sell limit stop-order saves Nicholas Darvas from being wrong half of the time.

CURE #8: TEST-PURCHASE. Test purchase of 4 or fewer stocks work for Nicholas Darvas like risk cutting little experimental oil wells in wildcatting.

CURE #9: GODZILLA. A slumping stock market can stomp out even the strongest stock with the same dynamic as when Bambi Meets Godzilla in 1969 — watch the classic movie on YouTube for more.

CURE #10: BOTTOM-LINE. Sharply up trending earnings foretell the strongest of the strong rising stocks on pumped up volume.

CURE #11: NEWCOMERS. Overtime the most important hunting ground for Darvas is new industries — these are more important than specific products within those sectors.

CURE #12: MARGIN. Leverage dramatically increases the portfolio beta and the gain for Nicolas Darvas — today we use deep in the money call options.

CURE #13: SAFETY. A critical rule becomes the resolute decision to never feed passive losses with active income.

CURE #14: ENTITY. Nicolas Darvas could have used a corporate structure to reduce taxes — learn more inside.

CURE #15: ISOLATION. Independent thought becomes the saving grace for Darvas he can only find through solitude as he stops all gossip and chat calls.

Once Darvas understood what worked he began to reap huge benefits…

Nab These 5 Advantages of Curing the 25 Worst Stock Investing Challenges

ADVANTAGE #1: SCHOOLED. Develop a broad financial vocabulary to condense investment data into your Holy grail to finding the fastest rising momentum stocks.

ADVANTAGE #2: CONCENTRATION. Focusing on no more than ten [10] stocks at a time kept Nicolas Darvas attentive to just his most worthwhile finds.

ADVANTAGE #3: PROFICIENCY. Mastering a compact group of essential skills gives you massive advantages as was so for our dancing economist.

ADVANTAGE #4: PEACE. Maturity as a stock investor brings the wisdom of simply reversing, and learning from, mistakes. This gives you an unexpected benefit of having your safety net in place.


And just as Akhrot becomes the richest man in Babylon so did Nicholas Darvas continue to enrich himself with the knowledge herein.

Read some of these rave words about this course and the way I teach...

I started by taking a finance refresher with Robert Schiller’s openYale course on Financial Markets. Then through a book recommendation for How I Made $2,000,000, I came across your Nicholas Darvas course which I thoroughly enjoyed. I think its your teaching style coupled with the simplistic message of volume, earnings, and making decisions as an individual that intrigue me. My finance courses in the past would teach you about equations and fundamentals, but you never encounter any real coaching on how to effectively invest.” -Gavin Ripley, MBA North Carolina; March 15, 2015

Listening to the Darvas Lecture with my 15-year-old now. He is developing an interest in the markets without me ever even talking about it. You are the perfect teacher for all ages.-Jeff

You are a great teacher, mentor and writer. I wish i could articulate my gratitude for you, but I would fail miserably. To put in the present day vernacular- YOU ROCK MAN! So PLEASE keep on rockin. Well, I'm going to go...I'm getting all misty.-T-Bone

Enroll now while this course tuition is just $19!

This is a no brainer win-win-win for you since Udemy gives you a 30 day full money back guarantee. They ask no questions. And if you like this course you get to learn from me for life!

Time Waits for Nobody!

I wish I could just plug a cord into your head and download everything to your mind directly and permanently in a few seconds. But I can’t.

This material will take you time to learn. The longer you wait to learn this the more opportunities you will have missed.

Enroll Now to Super-Charge your Investment Education!


Dr. Scott Brown, Associate Professor of Finance of the AACSB Accredited Graduate School of Business of the University of Puerto Rico

P.S. The tuition of this course will rise. Don’t wait enroll now.

P.P.S. As my community grows my time per student naturally diminishes. Get the most out of my teaching while you can!

Who is the target audience?
  • This course is appropriate for all investors wishing to learn about single stock investing.
Compare to Other Stock Trading Courses
Curriculum For This Course
15 Lectures
True Story of Personal Transformation of One of America's Leading Stage Dancers!
2 Lectures 08:35

Nicolas Darvas is the only highly successful stock investor with the discipline and training to document and describe his entire sequence of trades that grew about $36,000 into 2.5 million in about six and a half years in the 1950s.

The financial media have decried his results.

Yet recent research from the very top of financial economics proves each of the rules that Nicolas Darvas used to become a multi-millionaire in the stock market from a small wad of cash.

Preview 03:54

Dr. Scott Brown Explains the Importance of the Nicolas Darvas Stock Records.

I started my path in financial stewardship as the broke son of a wealthy optometrist.  I thought getting a prestigious MBA in international finance would help me regain the financial stature of my family that was lost when my father died of cancer at the age of 48. 

I was 19 years old. 

My grandmother was ripped off by an account churning crook posing as a licensed stock broker for Dean, Whitter, Reynolds.  Don’t believe any of that crud in the Will Smith movie in “Pursuit of Happyness” about having your interests at heart. 

I learned that lesson through my family in my teens that unbeknownst to me Nicolas had learned a few decades before: don’t deal with brokers as anything but order takers. Best yet do anything possible to avoid talking with a broker.

Do it yourself!

My stock investing results were very marginal using anything related to the Capital Asset Pricing Model (CAPM).  Clearly indexing in any form was a very slow route no matter now much my finance professors loved the concept.  

Then I published a popular stock investing course through the Oxford Club. 

They have the most highly regarded investment newsletters in the industry.  I was still not extracting returns above the indexes following any of their editor ideas.  These newsletters proved utterly worthless.


Over time I realized that holding a portfolio of 20 stock recommendations, no matter how well touted, I would never beat the indexes

I had spent thousands of hours getting a Ph.D. in finance from a highly accredited state university, poured over tens if not hundreds of thousands of price charts, applied nearly every tactic in the textbooks. But, to little avail. 

Nicolas Darvas

Then I read the 1950s investing best seller by Nicolas Darvas entitled “How I made $2,000,000 in the Stocks Market.” 

I had spent so much of my life dedicated to finance that the hair on my arms stood on end as I read the book. What I was reading was not only documented by Time Magazine but also dovetailed perfectly into major anomalies documented in modern research from financial economics from schools like Harvard and Oxford.   

Stunning Returns

I extracted returns over sixty percent two years in a row in 2013 and 2014 with calls the same way Darvas used rights.  I don’t just teach this stuff … I TRADE IT!

Nicolas Darvas is the only highly successful stock investor with the discipline and training to document and describe his entire sequence of trades that grew US ~$36,000 into $2.5 million in about six and a half years in the 1950s. 

Charlatans …

Knuckleheads in the financial media immediately decried his results. 

Yet recent research from the very top of financial economics has proven each of the rules that Nicolas Darvas used to become a multi-millionaire in the stock market from a small wad of cash.

Make sure you order his bestselling book, “How I Made $2,000,000 in the Stock Market” on Amazon right now. This essential reading will help you better understand this course.

I won’t stop in explaining why what Darvas did is so brilliant.  You will discover modern research at the pinnacle of academic financial economics.  I will also share important practical insights from two other extremely important traders. 

The first is W.D. Gann who retired as the wealthiest single investor of the last century.  He followed a stock trading system that was very like that of Darvas.  “The W. D. Gann Master Commodities Course” is highly recommended, available on Amazon, and lays bare his technical methodology.  You will see the striking similarities with the system Nicolas Darvas used. 

The second famous trader I will map to Darvas is the opposite of W.D. Gann.  He did many things right in concentrating his positions and holding out for long periods. 

But, Jesse Livermore refused to use stop orders. 

This wiped him out multiple times. The same brokerage W.D. Gann used was wiped out in one of Jesse Livermore’s bankruptcies. 

Reckless trader Livermore eventually ended his life in suicide with a gun blast to the head.  Risk controlled W.D. Gann lived through two happy marriages. He was widowed from his first.

Livermore died broke while Gann died as one of the richest men in the world.   

Jesse Livermore and his methods are outlined in “How to Trade in Stocks” and “Reminiscences of a Stock Operator.”  These can be ordered on Amazon. 

You will be way ahead of the game after reading these 4 new books on your stock trading essentials bookshelf.

Get the Most Out of this Course on Nicolas Darvas!

The most important task ahead of you is to master the core knowledge of this essential course on stock investing.  General questions are best posted in the discussion area

This helps other students in our community.

If you have a question of a personal nature contact me directly.  -Doc Brown

How to Get the Most Out of This Course
2 Lectures 10:37

Download 86 Page PDF Darvas Course Notes Right Now!

IMPORTANT: Download and Print 86 Page PDF Course Notes Right Now!

Brilund Mining Yields Darvas CDN$8,000 From $3,000 on the Toronto Stock Exchange

How it all started ….

In November 1952 Nicolas Darvas is paid CDN $3,000 to dance. He is given 6,000 shares BRILUND [Brilund Mining] stock worth 50¢ Canadian per share on the Toronto Stock Exchange (TSE). Two months pass.  Nicolas discovers BRILUND stock is trading at CDN$1.90.  He sells it for CDN$8,000.

This yields a fast CDN$5,000 profit.

Nicolas Darvas writesI decided I had been missing a good thing all my life. I made up my mind to go into the stock market.  I have never gone back on this decision.” 

Nicolas knew absolutely nothing about the stock market.  He made his first stock market profit out of sheer luck.  He realizes that his big problem is “how to start?” He has no idea how to know what to buy?  Darvas decides he must find more information

He decides as his first potential solution that rich people must know about stocks!

Lake Wobegon Hot Stock Tips

He had a people problem…

He asked wealthy people at the clubs at which he danced about stocks. Everybody did seem to know one – a good stock.  Everybody had the secret.  He bought stock in companies he could not pronounce

What they did and where they came from, he had no idea.  Asking people, “Do you know a good stock?” is a solution that NEVER works Nicolas Darvas decides. 

And he had a broker problem

Do you know a good reliable broker?” Nicolas is directed by a show person in New York to a financial dawdler with a broker license.  The “statistically mindedCanadian broker recommends EASTERN MALARTIC.  He explains how the dividend stock is paying 4 times more than the cost. 

But he fails to mention that this is because he has held it for an eternity.  He reckons they have gold mines capable of double present production. 

Therefore, the $2.90 stock would soon be worth $10.  Nicolas eagerly buys 1,000 shares at $2.90. 

The stock drops.  He sells within weeks at $2.41 This is a $490 loss

Nicolas concludes that brokers do not have the answer to making a fortune in the stock market.  His new problem is compulsive gambling:  Darvas goes on following any tip but seldom makes money. 

Ignorance Problem

Nicolas Did Not Understand Broker’s Commissions and Taxes!

He buys 10,000 KAYRAND for 10¢.  The next day KAYRAND went to 11¢ a share.  Nicolas reckons that he has garnered a $100 fast profit in 24 hours. 

Toronto Stock Exchange

His Canadian broker explains that he has incurred a loss due to a $50 commission per half turn = $100 in and out. And additional transfer taxes applied. 

He jumped in and out of the market like a grasshopper…delighted to make just 2 points. A point in stocks is $1

Nicolas often owned 25 to 30 stocks at a time all in small parcels during this period.  He is too spread out.

Emotional Problem

He develops an emotional problem.  For some of his stocks he acquired a special liking.  Other times it was because he started out making money with them. 

He had started to keep pets.”  He praised their virtues day and night.  He talked about them as one talks about his children

His pet stocks were causing him the heaviest losses.  He was holding a lot of stock which was slumped well below the price he had paid for it and looked like it was staying there.  

Hunches and Wild Guessing

à His Search for Rising Stock Unravels into Hunches and Wild Guessing

Nicolas Darvas does not try to understand the stock trades he is making.  He does not consider technical or fundamental factors during his Canadian period. He follows wild “hunches” entirely out of the blue.

He follows stocks based on circumstantial meetings, rumors of rare earth, tales of the oil patch, or anything at all related to the stock market anybody happens to tell him. 

And just like chimpanzees who hit the food button more when payouts are random an occasional profit gave him false hope.  The stock gain is the carrot. Lost opportunity was the stick. And, he was the donkey.  He loses three thousand on bad stocks. 

He does not know what he is doing.  But he feels ahead because he has his original $3K.

Seeking Professional Assistance

Obsessed by His Carrot-before-the-nose Gains — He Had Not Noticed He was Losing!

This gambling problem presents Darvas with his first stock market dilemma. He is confused and has no idea how to move ahead.  He decides that there must be a guru somewhere who can help him.

Nicolas Darvas pondered in frustration.

He looks for professional assistance.  Darvas subscribes to investment newsletters.  These give stock tips. 

He decides that he needs to follow the advice of an expert rather than a novice.  He is convinced that investment newsletters will help him succeed. 

Investment Newsletter Services

Investment advice subscription services made stock market investing sound so easy … like 1-2-3.  These services made such proclamations as,

  • Buy this stock now!”
  • Buy as much as you can!
  • If your broker says no, fire your broker!
  • Expect 100% or more from this stock!

Such important sounding information sounded true.  In fact, it sounded red-hot!

This had to be more reliable than talking with people in a hotel diner.

The newsletter editors could read his mind.  They knew how he felt and his condition.

  • A momentous moment for Canadian investments that Joe the Plumber will finally be allowed in from the start.” And, “The fat cats on the New York Stock Exchange have been trying to buy us out.  But in thumbing our noses at them we are opening the door to the little guy.  Folks like you…

 This pulled Darvas in!  Nicolas wasthe little guy who needed help….”  He should have been helped by a shrink for his naiveté

Recommendations Invariably Slumped!

The Stock Each Investment Newsletter Recommended Invariably Slumped!

Darvas would urgently dash to his (land-line) phone to buy a recommended stock.  It would drop

He was not worried.  Nicolas was convinced that the investment newsletter editor knew what he was talking about. 

The guru was his friend and trusted, after all.  The next recommended stock must rise.  

Stock recommendations seldom did. 

Over time he figured out that when investment newsletters recommended stocks, professionals who bought in lower sold.  Money that entered the market on newsletter tips was from suckers

The newsletter editor made his subscriber feel like the fastest with the most.  But in reality they were the last with the least.

Retail investor money is too tiny to hold up stock prices once the pros begin selling out on a stock tip from a newsletter.

But Darvas had no idea at the time.  He just thought that it was bad luck that investment-newsletter-recommended stocks tanked after he bought them. 

Rethinking His Plan

Nicolas Darvas is Forced to Rethink His Stock Market Trading Plan; From Scratch!

A year passes.  He finds himself at the end of 1953. 

His $11K was down to $5.8K.  Head waiter stock rumors flopped.  Wealthy business folk tips tanked. Investment newsletter recommendations proved worthless. 

Darvas reads Barron’s, the New York Times, and the New York Herald Tribune.  He also reads the Wall Street Journal.  He ponders mysterious jargon such as “over the counter.” 

He decides that the largest stock market on earth in New York is right for him.  He sells everything.  The only Canadian stock he holds is OLD SMOKY GAS & OILS.

His 19 cent stock sells for 10.  He sustains a painful 47% loss. 

A theater manager directs him to a New York Broker.  He gives him the fictitious name of Lou Keller in the book. 

Poor Returns






Old Smoky Gas & Oils





Kayrand Mines










Quebec Smelting & Refining





Yale Finance Professor Andrew Metrick Proves Poor Investment Newsletter Returns!

In October of 1999 professor Andrew Metrick of the New York University Stern School of Business published an important article in the #1 ranked Journal of Finance.  This paper showed that the investment newsletters compiled in the Mark Hulbert Financial Digest exhibit lackluster returns.


Andrew Metrick. 1999. Performance Evaluation with Transactions Data: The Stock Selection of Investment Newsletters. Journal of Finance 54(5). 1743-1775.

The negative alpha professor Metrick documented was directly experienced by Nicolas Darvas. 

The desire to follow a newsletter came from Darvas’ initial lack of confidence.  As he grew into an intelligent investor he learned to think for himself. 

And that is the primary mission of this course.  To get you to think for yourself when it comes to your investments.

CFA Institute: More Proof of Poor Investment Newsletter Returns!

In 2013 Georgetown University CFA Claire Emory wrote a summary of our article in the CFA Digest. Her work condenses Brown, Cao, and Powers “Do Investment Newsletters Move Markets” published in Financial Management in 2013.

We find that newsletter recommendations send a lightning bolt of volume into the market for the recommended stock.

This drives the share price upward with the greatest strength in the first day.  Volume and price impact dissipate for another two weeks of trading. 

But most of the impact is felt in the first two days. 

The stock gives up a lot of its initial gains over time.  Jensen’s Alpha is slightly negative for the newsletter we study despite short term advances in returns. 

Claire felt our study is important for the investing community and concludes, “On the one hand, investment professionals interested in identifying short-term excess returns might find such opportunities intriguing. On the other hand, advisers and retail investors interested primarily in focusing on long-term returns and keeping costs low would likely view the authors’ research as confirmation of their belief that simplicity trumps complexity for the average individual investor.

Training 1 - Canadian Period

The beginning was rough for Darvas. I can’t imagine the effort it took to work on stocks after a day of strenuous physical exercise.

This quiz tests your knowledge of what Darvas learned in this period.

Many stock investors fail to evolve to higher levels. Notice that Darvas became trapped in different forms of circular thinking.

Quiz 1 - Canadian Period
10 questions
1 Lecture 12:55

Lou Keller

Opening an account in New York makes Nicolas feel like he is moving up on the financial front. He was engaging in something respectable. He decides to shun the kind of gambling he did in Canada.

Humility to Jubilee

He decides to move more slowly, study more carefully and be less impulsive in his interactions with the stock market. He counts his stake. He began with eleven thousand that included $3,000 invested in Brilund and profits of $8,000.

Nicolas Darvas Moves His Momentum Stock Investment to New York in United States!

Over 14 months in Canada his $11,000 had eroded to just $5,200. Nicolas saves up $4,800 from show business activities to round his stock investing bank roll to $10,000.

Darvas casually asks his new broker Lou Keller “what was good.


BRILUND Investment








 Remaining Equity




 Total Capital


 Lou recommends several fundamentallysafe stocks” because of share splits, increases in dividends, or higher earnings. His broker only “suggests.” Giving orders to his broker makes Nicolas feels in command and important

3 Typical Trades










Columbia Pictures









No. Amer. Aviation



























Net Return:


Profits, profits, profits.

1954 April - May





National Container





Tri-Continental Warrants















General Dynamics





Mesta Machine





Universal Pictures





Very Small Returns







Net $

Net %

Gross %



















New York Central









General Refractories









American Airlines


















Don't Confuse Brains with a Bull Market

Nicolas Darvas has no idea that he is smack dab in the middle of the biggest bull market the world had seen. This had grown over time after the great crash a few decades before.  He notes that it is very easy to profit because of the bullishness

Movements in the market index explain a third to half of the return in any given stock per the Carhart 4 Factor Capital Asset Pricing (CAPM) model.  You can see this by looking at the adjusted r-squared values in the model that range between 0.30 and 0.50 for the market index factor. 

Paying attention

He makes profits on three deals in a row making him feel like a “natural in Wall Street” in 1954.

A fast $1,333.38 in a few short weeks in the 1st quarter of 1954 makes him feel like a superstar. Smooth and simple they gave him the illusion of control. This masked the fact that his new approach was no better. After all, a broker’s advice is professional information and not a tip.

The information he was receiving he views as pure economics and no fluff.

Impulsiveness Almost Destroys Chances of Stock Market Success

He was making profits everywhere and had high confidence.  Unlike Canada he felt like Midas on Wall Street. 

He builds a portfolio worth $14,600 from his ten grand.  A bump in the road now and then did not bother him. 

He patted himself on the back when he made money.  Darvas blamed his broker when he lost. 

He traded continuously.  He pestered his broker up to twenty times a day.   

He bought stocks the way a toddler reaches toward the store shelf from inside mom’s shopping cart.  

Financial Vocabulary Gives Darvas Lay of the Game

He clears a buck eighty-nine after all this busy activity without accounting for his phone bill.  And this is not the only thing nagging him.  Nicolas Darvas doesn’t understand the financial vocabulary spoken by his stock broker.   

This puts the dancer back to the books.  He studies concepts of capitalization, dividends, earnings, per-share earnings.  Assets, yields, bonds, stocks, and profits are analyzed conceptually. 

The vast written knowledge inspires Nicolas. 

He starts to discern data quality with care.  He continues his quest chronicling, “After all, somewhere there must be a big, sound Wall Street stock that could do as well for me as what I now considered a ‘little penny stock.’”

He subscribes to Standard & Poor’s, Moody’s, and Fitch’s rating services: He understood little except that they were highly respectable sounding but did not tell him which stock would actually rise.

Darvas begins reviewing other sources of stock market information off of newspapers, newsletters, and book jackets. He subscribed to every service he could find or could find him by mailing list.

Even today financial newsletter marketers such as those in the Oxford Club maintain these lists.  He was astonished to discover that services were highly contradictory

One service wrote “sell” while another wrote “buy.  These were done in the most arm’s length wording designed to protect the editor or publisher rather than Nicolas Darvas.

These writers expressed themselves in vague language such as “Should be bought on dips.” Or “Buy on reactions.” Not one service explained exactly what a dip or reaction was.

But he was hooked to what was in reality diatribe to his account balance. He ignored the signs in his haste to find stocks that only rose.   

Mailing Lists Send Sexy Stock Sales Booklets

Nicolas Darvas is on the mailing list of the biggest advisory services on Wall Street. These publish glossy and expensive booklets on a stock 5 or 6 times a year. Darvas did not understand the contents. 

But he was deeply impressed by Emerson which one report explained should be — but was not — worth between thirty and thirty-five a share.

The stock was going for just twelve bucks at the time.  Nicolas buys in at twelve and a half. 

His sure fire glossy play begins to drop.  This perplexes him and he sells. 

By the end of nineteen fifty-six the stock hits five and three quarters with no bottom in sight. 

He still believes that whomever created the glossy report held nothing but goodwill for his readers. Over time he learns that stocks recommended by advisory services tend to drop.  In his studies he reads the Wall Street saying, “You cannot go broke taking a profit.”

Net Loss of $461.21

He buys shares of Kaiser Aluminum. It is 1955 in February.   

He jumps to Boeing.  The stock drops.

He hops to Magma Copper

This chain of trades generates a net loss of $461.21.  But Kaiser Aluminum rises all along. 






% Return

























    Net Loss:


Darvas gave up $1,748.75 that he would have made sitting put in Kaiser Aluminum doing nothing. 

Rayonier does the same into March 1955 from November before. 







Net $

Net %

























Manati Sugar














Fidgeting for Action churns account

Nicolas dances in and out of stocks.  Rayonier soars from fifty to a hundred a share in 8 months. 

This would have landed him profits of $2,612.48.  Rather he nets $195.02 from $2,417.46.

Buy Low and Sell High!

Buy low and sell highsounded a lot better than “You cannot go broke taking a profit.”

But he had no idea where to find cheap stocks.  Then he stumbles on the Over-the-Counter (OTC) market.

These are not well regulated. They are not listed

Not many people recognize these companies

He subscribes to Over-the-Counter Securities Review monthly.

Nicolas purchases shares of Pacific Airmotive. It was unknown even at the time.  Another obscure OTC start-up was Collins Radio.

Gulf Sulphur was some strange chemical company. Another unlisted fly by night was Doman Helicopter.

Kennametal was a resource company that nobody knew of except Darvas. Then there was Tekoil Corporation that never rose above ground. 

And he buys other even lesser known stocks.  Darvas has a hard time selling these stocks.

These stocks are hard to sell even at his entry price.  This is because the bid and the ask are at very different levels. 

He may try to sell for $42 but can only get somebody else to buy at $38. 

Investing in stocks over-the-counter is only for those specialized to do so.  He decides that OTC trading is not profitable for him. 

He eventually attributes the lack of profitability to a lack of specialists to ensure a fair and orderly market.  Notice that it is the same OTC market that fraudster Jordon Belfort used to become the Wolf of Wall Street as portrayed by Leo DiCaprio. 

Darvas returns to highly liquid listed stocks. 

Nicolas learns the hard way to avoid Wall Street’s rumors.  He hears of an atomic train under construction by Bald-Win-Lima-Hamilton

Shares soar from twelve dollars to over $20.

Darvas enters at the apogee for twenty-four and a quarter. Two weeks later he bails out at nineteen and a quarter. 

The dud falls after that to twelve and a half.  He realizes that despite this rumor something is wrong.

5 Core Rules

Lou Keller calls, “STERLING PRECISION will go to $40 before the end of the year.” It was trading for $8. 

He saysThe company is buying up many smaller prosperous companies and will grow into a giant in no time.”

The broker needed to say no more to pull Nicolas in for a thousand shares at seven and seven eighths for $8,023.10.  It drops

Something is clearly off.  He gets out at seven and an eighth for six thousand nine hundred and sixty-seven dollars and forty-five cents.  Listening to gossip costs Nicolas $1,055.65 in less than a week. 

He decides that if gossip doesn’t help that maybe actual transactions of insiders will through the SEC Insider Transactions Report.  This fails for Darvis as well. 

Too much time has passed when he learns of their trades for insider stocks that rise.  Otherwise most of the insiders made bad trades.  He decides that managers are paid to know about their business and industry rather than the activity of speculation in the company stock.

He lays out five core rules:

FIRST RULE: Don’t follow investment newsletters.

SECOND RULE: Shun broker advice.

THIRD RULE: Disregard Wall Street lore.

FOURTH RULE: Do not trade across OTC.

FIFTH RULE: Ignore gossip. 

Our research on the Insider Alert Newsletter covered in “Do Investment Newsletters Move Markets?” that was published in Financial Management shows that insiders are incapable of forecasting stock movements in the firms they manage just as Darvas discovered years before. 

The Virginian

Is the Virginian the clue for cracking Brilund Mining?

Nicolas Darvas picks up a hundred shares of Virginian Railway stock at twenty-nine and three quarters for three thousand four dollars and eighty-eight cents. This is in August of nineteen fifty-four.

The dancer ignores it. 

The stock pays a good dividend and has high earnings making him one thousand three hundred three dollars and sixty-eight cents after selling out for four thousand three hundred and fifty-six cents.

From this success he develops

SIXTH RULE: Study earnings and dividends.

SEVENTH RULE:  Buy one hot rising stock rather than frantically follow a dozen.

From that idea Nicolas Darvas starts to discern earnings quality writing, “I thought that if I really studied the company reports I could find out all about a stock and decide whether it was a good investment.”

Fundamental concepts from the balance sheet, cash flow, and income statements become the norm in his stock conversations.

Spirit Quest

Nicolas ups his analysis a notch or three.  Darvas goes on a spirit quest for the perpetually rising stock.  He uses the Value-Line lists to filter by quality, analyst view, cash position, and dividend payment. But, no matter how right everything seemed the stock dropped. Lou Keller recommended that Nicolas Darvas subscribe to a service that gave data on a couple of thousand issues as to business model, decades of historical prices, capital structure, EPS, and a service unique rating for value and safety where AAA was safest.

This made everything easy. There was no reason to comb through income statements or balance sheets

The path was clear.  A > B > C. He felt cool headed like James Bond organizing his data into tables for hours on end.

Preview 12:55

This section of this course spells out an extremely important code to help you survive in the stock market. Make sure you take this quiz before you move on.

Quiz 2 - Wall Street
10 questions
1 Lecture 09:54

Do You Follow the Herd?

Nicolas was starting to notice certain facts about the stock market.  First is that industries move up and down to some degree independently of the stock market averages. 

Prices herd within industry groups. 

If the average price for the group moves up, so does the individual stock price.  He filtered his stock selections by identifying the strongest rising industry groups. 

Be careful about reading too much into this.

Industry rotation is not a valid approach to momentum investing.  You are far better off to simply identify the most powerful stocks in the broad market of 6,731 firms currently listed on the NYSE, AMEX, and NASDAQ exchanges. 

I select the 50 strongest from a group of 2,995 core stocks across these three exchanges every quarter. I put all these eggs in one basket and I watch them. 

I test the strongest.  I may go up to a year without making a single test

I trade very infrequently.

Stocks have Personalities

These were invariably rising because earnings were strong in that industry.  Then once he identified the strongest earning industry he would drill down to identify the strongest rising stock in that industry. 

Darvas decided that individual stocks had personalities within their industry just like different children in a human family. If Nicolas was studying market data for General Motors he would automatically extend his analysis to the industry


In the 1950s the automotive industry to which General Motors belonged was composed of

  • Chrysler
  • Studebaker
  • American Motors

Alcoa Aluminum

Tin foil is used in nearly every kitchen in America. Kaiser Aluminum was a big industry player in the 1950s.  But Kaiser had competitors in its industry,

  • Alcoa
  • Reynold’s Metals

Fundamental Analysis of Stocks

Moving forward with a methodology made him feel grand.  Nicolas knew that he was finally going beyond hypothetical thinking.  He knew that was going to make a lot of money

Darvas looked hard at average earnings in an industry.  This allowed him to compare industries by profitability

Darvas Falls in Love with Steel

The steel industry stood out as the most profitable.  This was during the post-WW-II, Korean war era. 

He found that his top rating was so exclusive that it excessively limited his stocks.  He lowered the rating to second tier of ‘B’ that he was willing to consult. 

This dramatically increased the amount of possible stock investments.  By combining industry profitability and rating he was able to identify Jones & Laughlin. 

The company paid a fat 5% dividend of 1.25% quarterly.  The price-to-earnings ratios were lowest (best) as 

Nicolas Darvas Fundamental Table

Earnings Per Share












Bethlehem Steel









Inland Steel









U.S. Steel









Jones & Laughlin









Republic Steel









*End of June 1955.








Analysis Excited Him…

It filled him with confidence that the stock share price would rise.  It would make him rich he believed

He was convinced that the stock would jump twenty or thirty dollars in a heartbeat. He felt that this was a better bet than Brilund. There was just one concern. He had to buy a lot of it as fast as he could before anybody else discovered the stock, or at least so he felt. 

Nicolas Darvas was a worldwide entertainer.  He was also an act in Nevada.

Over the years he had acquired a home in Las Vegas. He took out a second mortgage on the home.  He also had a whole life insurance policy against which he took a loan.  Then he got an advance on a long term contract to dance. 

This dangerous dash for cash was fueled by the over-confidence of Nicolas Darvas.

As a professor of finance I do not recommend that you do this.  You are far better off to save at least 15% of your salary for retirement every month.

And that is easy to do if you are a salaried employee.  Overconfident investors have been shown to ride losing positions in favor of winners by U.C. Berkley Research.

Shows Before the Strip

Darvas was an entertainer. That meant that he worked from contract to contract. 

And he felt very confident about his analysis. He did not hesitate in finding seed capital for his stock investing. 

Then on September twenty third of nineteen fifty-five Nicolas Darvas bought a thousand shares of common stock in Jones and Laughlin.  He bought at fifty-two and a quarter on 70% margin.

Stock price drops

This allowed Darvas to own fifty-two thousand, six hundred and fifty-two dollars and thirty cents of stock for thirty-six thousand eight hundred and fifty six dollars and sixty one cents from the money he raised all the wrong ways.  But he was capitalized

He sat back to watch it rise.  But the stock dropped.

I want to emphasize at this point that I have experienced this phenomenon so much that I am very slow to test stocks.  As time passes I have grown more experienced and I have become much more selective as did Darvas.

Deer in the headlights

This crisis shocks Nicolas Darvas as much as it did the first time it happened to me. 

As Jones & Laughlin collapsed he froze like a deer in the headlights.  He would not embrace the evidence that his prior hypothesis of strength was wrong. 

He firmly believed that the stock that had been in the fifties was truly worth seventy-five dollars a share.  He held and held until the stock hit 44 on a downslide into the tenth of October of nineteen fifty-five.

Every dollar drop in share price was costing him a thousand dollars.  He sold in terror.  His account balance now stood at forty-three thousand, five hundred, eighty-three dollars and twelve cents. 

He lost nine thousand and sixty-nine dollars and eighteen cents while he stalled.  Here is the math


- $9,069.18



This was a crushing blow to his ego.  His confidence in his method was shaken. 

This type of psychological pain was impossible for anybody to understand who has never placed a significant percentage of their wealth on the line. This was not an indexed investment with high diversification. 

Nicolas Darvas had put all of his wealth on one big bet on just one stock.  But he did not feel like a gambler

Darvas had invested significant effort into stock analysis.  But he was down nine thousand dollars despite his hard work. 

This is consistent with fact. Benjamin Graham is the Columbia finance professor who taught Warren Buffett value investing.  He explained in a 1976 conference covered in the Financial Analyst Journal Vol. 32, No. 5 (Sep.-Oct.,1976), pp. 20-30: “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.  This was a rewarding activity, say, forty years ago, when our textbook “Graham and Dodd” was first published; but the situation has changed a good deal since then. In the old days any well-trained security analyst could do a good professional job of selecting under-valued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost.  To that very limited extent I’m on the ‘efficient market’ school of thought now generally accepted by the professors.” 


Depression hit when he fully understood that he could lose his home in sunny Las Vegas.  He felt like an inmate trapped by his own futile results as if he was reaching out from a jail cell. 

He was desperate to find a rising stock that could break him out of his own self-made debtor prison.

Nicolas spotted a company called Texas Gulf Producing.  The stock price was higher the day Darvas spotted it than months before.  The share price had been rising.

No News

He could not find any rumors about the company.  He did not know the profitability.

The only thing he knew was that it was posting share price gains week after week.  He bought the stock in desperation.  His order for a thousand shares was filled between thirty-seven and an eighth and thirty-seven and a half.

The total investment was thirty-seven thousand, five hundred eighty-six dollars and twenty-six cents. 

But this time he was not so sure that the stock would rise.  He held his breath.

Now he was gun-shy from his recent loss.  This caused another problem.  After the stock had risen two and half dollars he became anxious to sell out at forty dollars per share. 


He held the position with determination to earn back his nine-thousand-dollar loss.  He worried intensely about the position for fear that he was wrong again. 

But this time he resisted his temptation to earn fast cash by flipping the stock.  His nervousness created another problem. 

He pecked at his broker constantly calling hourly or even more frequently.  He babied the stock like a child

He strapped himself to the mast and held shares for a full five weeks.  He was tense each day. 

Nicolas finally sold out at forty-three and a quarter.  His account balance stood at forty-two thousand eight hundred forty dollars and forty-three cents. 

Lion’s share

Darvas did not recover his nine-thousand-dollar loss, but he recovered the lion’s share of five thousand two hundred and fifty-four dollars and seventeen cents. 

The Texas Gulf Producing trade drained him like a disease.  He had to rest and recover. Nicolas was now concluding the same even as Columbia professor Benjamin Graham questioned the worth of detailed financial study in the form of reports, outlooks, ratings and ratios.

The one stock that saved his investing account was the company he knew the least. The only thing Nicolas Darvas knew about this stock was simply that it was rising.  

Training 3 - First Crisis

The quiz tests your knowledge of plugging into the original thoughts of Nicolas Darvas. 

Quiz 3 - First Crisis
10 questions
1 Lecture 16:42

Nicolas sees how JONES & LAUGHLIN produced a frightening experience.   A more fortunate experience was TEXAS GULF PRODUCING.  Scared and beaten he realizes that he cannot base his operations on luck.


Produced a frightening experience.  A more fortunate experience was TEXAS GULF PRODUCING.

Scared and beaten he realizes that he cannot base his operations on luck

He must rely on knowledge.  Could he win at bridge without knowing the rules?

Or in a chess game without knowing how to answer his opponents moves?

He was playing for money. And, the game was against the keenest experts

A clear path: Technical Analysis

And so he started. First he examined his past experiences.

On one hand, using the fundamental approach, he was wrong.  On the other hand, using the technical approach, he was right.

Obviously the best method was to try to repeat the successful approach he had used with TEXAS GULF PRODUCING

It was not easy…

He sat with his stock tables every evening, trying to find another stock like it.  Then one day he noticed a stock called M&M WOODWORKING.

It was a stock he had never heard of.  It appeared to be RISING

He knew nothing about its fundamentals and had heard no rumors about it.

None of the financial services could tell him much about it.   His broker had never heard of it

Yet its daily action reminded him of TEXAS GULF PRODUCING.  He started to watch M&M Woodworking carefully. 

In December 1955…

M&M WOODWORKING rose from about $15 to $23-5/8 at the year end. 

After a five-week lull, its TRADING VOLUME INCREASED and the PRICE RESUMED ITS ADVANCE.   

He decided to buy 500 shares at $26-5/8.

It continued to rise and he held on. 

Its volume of trading was consistently high.  When it reached 33-1/4 he sold it and took a profit of $2,866.62.

He Was Happy & Excited….

Just as he bought TEXAS GULF PRODUCING

he bought M&M Woodworking purely on the “basis of its action in the market.”

He knew nothing about it nor could he find very much.  He assumed from its continuing rise and high volume that some people knew a lot more than he did. 

The Steady Rise…

Was due to a merger, which was secretly negotiated.  Another company planned to take over M&M WOODWORKING for $35 a share.  The offer was accepted

Nicolas was in complete ignorance yet he sold out 2 points ($2) under the high.  His buying, based on the stock’s behavior, enabled him to profit from a proposed merger without knowing anything about it. 

This is known as risk arbitrage

Dr. Yakov Amihud is the Ira Rennert Professor of Entrepreneurial Finance at the New York University Stern School of Business. At the turn of this century he conclusively confirmed that changes in volume foreshadow changes in price. 

This is termed price impact.

Nicolas Darvas explains that price impact is the source of his remarkable stock market returns when he writes, “The experience did more than anything to convince me that the purely technical approach is sound.  It meant that if I studied price action and volume, discarding all other factors, I could get positive results.”

Warren Buffett writes in “The Essays of Warren Buffett” that, “Some offbeat opportunities occasionally arise in the arbitrage field.  I participated in one of these when I was 24 and working in New York for Graham-Newman Corp. The profits were good and my only expense was subway tokens. To evaluate arbitrage situations, you must answer four questions: (1) How likely is it that the promised event will indeed occur? (2) How long will your money be tied up? (3) What chance is there that something still better will transpire — a competing takeover bid, for example? And (4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.? Most practitioners buy into a great many deals — perhaps 50 or more per year. With that many irons in the fire, they must spend most of their time monitoring both the progress of deals and the market movements of the related stocks.”

Technical Approach…

To the market is proven sound.

MAJOR BREAKTHROUGH:   This meant that if he studied PRICE ACTION and VOLUME alone, he could get positive results!

He now began to try to work from this point-of-view

He concentrated on a close study of price and volume. He tried to ignore all rumors, tips or fundamental information. 

He Blocked Out All the B.S.!

He decided not to concern himself with the reasons behind a rise. 

He figured that “if some fundamental change for the better takes place in the life of a company, this soon shows up in the rising price and volume of its stock, because many people are anxious to buy it.”

If he could train his eyes to spot this upward change in its early stages, as in the case of M&M WOODWORKING, he could participate in the stock’s rise without knowing the reason for it. 


Compare Stocks with People…

This is how he began to work it out:

If a tempestuous beauty were to jump on a table and do a wild dance, no one would be particularly astonished.  People expect that.

But if a dignified matron were suddenly to do the same…people would say, “There is something strange here – something has happened.

Volume and Price

He decided that if a usually inactive stock became active [VOLUME] he would consider this unusual.  If it advanced in [PRICE] he would buy it.

He would assume that somewhere behind the out-of-the-ordinary movement there was a group who had some good information.  Buying the stock would make him their silent partner.  

May 1956

Nicolas has hit and miss results, “Sometimes I was successful, sometimes I was not.” What he did not realize was that his eyes were not sufficiently trained yet. 

He was in for a rude awakening.  He notices PITTSBURGH METALLURGICAL trading at $67.

He thought it would continue to rise. 

He buys 200 shares for $13,483.40. The stock tanks

10 Days Later

Something was obviously wrong. The move was there but in the wrong direction.  He bought at the top.

PITTSBURGH METALLURGICAL drops to 57-3/4. Nicolas sells for a $2,023.32 loss.

This is a 15% LOSS. It rises as soon as he sells. 

He does not yet understand that the market has a rhythmic pattern of surge and reversal

An Explanation…

He discovers that he buys at the top of an $18 [point] rise. He bought at the wrong time.  

PROBLEM: How to judge a movement at the time it happens? He knew that book [accounting] systems did not help.

Balance sheets were useless.  Accounting information was suspect as wrong. 

On a Whim…

He studies individual stock movements. How do they act? What are the characteristics of their behavior? Is there any pattern to their fluctuations?

He reads books.

He examines stock tables. He inspects hundreds of charts. A pattern emerges…

Defined upward or downward trends, once established, tend to continue in consolidation patterns where prices channel into “BOXES.”

A Series of Frames…

…in which the share price fairly consistently oscillates between a low and a high area. 

Nicolas Darvas describes this area, which enclosed this up-and-down movement, as a BOX. Thus emerges “The Box Theory.” This would lead to his fortune!

This is a chart of Facebook (FB) displaying The Box Theory.  This shows that stocks behave the same way today as in the 1950s when Darvas was alive.

The Pyramid Redefined…

He started to watch stock when the price was in the highest box. The boxes of the stock had to stack up on top of each other like a pyramid on increasing volume.

It could bounce all it wanted to between the high and the low of the box and he would do nothing. If it did not bounce up and down inside its box he was worried.

Notice how nobody wants Galectin (GALT) stock!

No Bouncing Is Bad…

No bouncing, no movement, meant it was not a lively stock.  He is not interested in non-lively stocks. 

This meant that it would probably not rise dynamically.  Nicolas defines his boxes with a special nomenclature he calls “frame figures.” 

A 45/50 box has a low of $45 and a high of $50. 

It could bounce between this low and high often and he would still consider buying it. If it fell to $44-1/2 he eliminated it as a possibility.


He only wants a stock moving into a HIGHER BOX.  A stock sometimes stayed for weeks in one box.

He didn’t care…

How long the price action stayed inside the box; if it did, and did not fall below the lower frame figure.

He gives the example of a 45/50 box… 

                45 – 47 – 49 – 50 – 45 – 47

The stock can only react to $45 upon reaching $50.  It could touch $50 but must stay above. 

He constantly watched for a thrust above $50.  Then he bought it! 

No Fixed Rule…

He has no fixed rule.  He just had to be sure to see it and act. Some volatile, eager stocks moved into another box within hours. 

Others took days.  Pushing from its 45/50 box into another, upper box, he says could look like this…

48 – 52 – 50 – 55 – 50 – 53 – 52

Look for the high and low and you can see that it has formed a new 48/55 box. 

The Range of the Box

… is what he had to decide.

PROBLEM:   This varied with different stocks. 

Some stocks had a small frame of 10% each way. Other wide-swinging stocks moved between 15 – 20%.

  • SOLUTION PART 1Define the frame exactly.
  • SOLUTION PART 2Sell stock on a drop below the lower edge of its box. 

Reactions Are Normal…

As long as the price action stays within its box. 

  • REACTION DEFINITION:  If in a 50/45 box the price rises to $50 and then plummets to $45. 

A drop in an uptrend (a rise in a downtrend) is a REACTION. Notice that the Nicolas Darvas definition of a reaction is a precise technical support level

This allows him to precisely define his risk before entry. If it did not penetrate $45 the reaction did not mean that the price was going to fall.  

He considers this equivalent to a dancer crouching, ready for the spring-up – stocks rarely shoot from $50 to $70 in a day. 

Uncle Paul Samuelson…

Said that stock market crashes were no different than Darwinian forces that culls weak animals. Darvas notices that a reaction to 45 in a 45/50 box has a benefit.

It shakes out the weak and frightened shareholders who mistake this reaction for a drop. This enables the stock to advance rapidly.

Hence reactions are sometimes referred to as “shake-outs.”

Feeling of Proportion…

About a stock that was on a definite upward trend.  Rising from say $50 to $70 but occasionally dropping back was all part of the right rhythm:

50 – 52 – 57 – 58 – 60 – 55 – 52 – 56

This is a 52/60 box. On an upward swing, it might have gone:

58 – 61 – 66 – 70 – 66 – 63 – 66

This put it well inside a 63/70 box

MAJOR PROBLEM:  What was the right time to buy? Logically, when the share price entered a new higher box.

Modern science has shown that simply buying a stock because it is rising offers the highest expected return in stocks.  


The share price formed its pyramiding boxes for weeks. He felt that he had it assessed it correctly as on the rise when the share priced pierced the upper frame of its last box at $59-1/2.

He orders his broker to call when it hits $61, the level he considered to be the door of its new box.

When the broker calls, it is at $63.  He felt deprived of a great opportunity. 

Up it went: 63-1/2 – 64-1/2 – 65.

He was right but had missed it.  He buys 100 shares at $65 at the top of the new box.  

The Buy Stop Order…

Nicolas was a baby at trade management. His broker explains that he should have put in an automatic “ON STOP” BUY ORDER

This is more commonly called a BUY STOP ORDER. The stock would have been bought when it rose to $61. Nicolas decides to put in a Buy Stop Order for entry above the top of the box. 

A Glimpse Behind the Door…

He uses this concept three times consecutively for $2,442.36 in profit. 

  • ALLEGHENY LUDLUM STEEL appears to enter a 45/50 box.  He buys 200 at 45-3/4 and sells at 51 in just three weeks for an 11.5% return.
  • DRESSER INDUSTRIES seems to enter an 84/92 box.  He buys 300 at 84, but it falters in the box.  He sells at $86.5 for a 3% return.
  • COOPER-BESSEMER is bought at the bottom edge of a 40/45 box. He bought at 40-3/4 and sold at 45-1/2. 

A Slap in The Face…

He buys 500 NORTH AMERICAN AVIATION at $94-3/4 anticipating a new box over $100. It falls. He loses all the profit from the last three trades

THIS IS THE TURNING POINT! He realizes he will be wrong 50% of the time. He must become impartial as a diagnostician in identifying with a theory or a stock. He has to reduce his risks to a minimum.

His Quick-Loss Weapon…

He knew he was wrong half the time. Why not sell at a small loss? If he bought at $25 why not at the same time order the stock to be sold if it returned below $24?

He places Buy Stop Orders at a certain figure with an initial stop-loss order in case the stock price dropped.  He knew that many times he would be “stopped out” then watch helplessly as the share price climbed

This is not as important as stopping big loss.  He can always buy the stock back at a higher price

Coin Flip Odds Won’t Work

PROBLEM:  If he invested $10,000 in a medium-priced stock it would cost him $125 on each purchase and sale or $250 a “round turn.” In 40 trades breaking even before commissions his $10,000 would be gone.

SOLUTION:  His profits had to be bigger than his losses. He uses a TRAILING STOP LOSS he adjusts on each rise into a new higher box. 

Objectives and Weapons…

  • Objectives
    • Right stocks
    • Right timing
      • Small losses
      • Big Profits
  • Weapons
    • Price and volume
    • Box theory
      • Automatic buy stop order
      • Stop loss sell order

Basic Strategy…

He will always just jog along an upward trend, trailing his stop-loss insurance behind him.  As the trend continues he will buy more. 

When the trend reverses he will run like a thief.  There was bound to be a lot of guesswork. Being right 50% of the time was probably optimistic

Basic Strategy Continued…

He saw his problem more clearly than ever.  He must adopt a cold, unemotional attitude toward stocks. 

He must not fall in love with them when they rise. 

He must not get angry when they fall.  There are no good or bad stocks.  There are only rising and falling stocks.  He must hold the rising ones and sell those that fall.

The Greatest Challenge…

He knew that he had to achieve something much more difficult than before.  He had to bring his emotions – fear, hope and greed – under complete control. He had no doubt that this would require a great amount of self-discipline.  Darvas felt like a man who knew a room could be lit up and was fumbling for the switches. 

I recommend that all traders study an anger management course that helps investors control urges, become less impulsive money managers and thus more disciplined stewards of family wealth. 

Training 4 - Box Theory

This quiz test your understanding of how Darvas developed his box theory. 

Quiz 4 - Box Theory
10 questions
1 Lecture 12:49

A Two-Year World Tour…

His dancing act goes international.

PROBLEM:  How can he trade overseas?

SOLUTION:  He will communicate with his broker via telegram (cable). 

He decides on the weekly publication BARRON’S to IDENTIFY ANY STOCKS which might be MOVING UP. The daily telegram contains the CLOSING PRICES of his stocks. 

A Special Code…

String of letters and numbers.

Letter denotes the company name.  Number denotes the closing price.

B 32-1/2 L 57 U 89-1/2 A 120-1/4 F 132-1/4

He could not follow his stock with this telegram!  He adds the HIGH and LOW for the day.

B 32-1/2 (34-1/2-32-3/8) L 57 (58-5/8-57) U 89-1/2  (91-1/2-89) A 120-1/4 (121-1/2-120-1/4) F 132-1/4 (134-7/8-132-1/4)

Too many figures might overcrowd his DAILY cables.

No Volume Quotes…

He did not ask for volume quotes, as he feared too many figures might overcrowd his [daily] cables.

He writes, “My selections were high-volume stocks anyway and I thought that if the volume contracted, I would notice it in Barron’s a few days later.”

Nicolas has a ROUTINE:

  • He checks the stocks he owns DAILY.
  • He uses Barron’s WEEKLY to find HIGH-VOLUME STOCKS.

Four Days Behind…

When he sees a high-volume stock in Barron’s he is already 4 days behind because of his world travels.

He brings himself up to date with this week’s range and close:


If the stock was behaving well in the 60/65 box, he would wait to see if the four day quotations from New York showed this. If so, he would decide to watch the stock.

Pressing Higher…

The stock is “pressing toward a higher box.” 

If satisfied that it is rising he cabled to New York, his on stop buy order (buy stop order) as GOOD-TILL-CANCELLED unless otherwise specified.  This was ALWAYS coupled with an automatic STOP-LOSS order in case the stock dropped after he bought it. 

A typical cable looked like this:



If on the other hand, his broker’s cable showed that it moved out of the 60/65 box during the 4 day lag he forgot about it.

It was too late to act.  He had to wait for another opportunity

He was forced to narrow down his operation to a few stocks due to the cost of his telegrams.

BIG ADVANTAGE:  No phone calls, no confusion, no contradictory rumors.  This gave him a DETACHED VIEW!


He was influenced by NOTHING BUT THE PRICE of his stocks. 

He Could Not Hear…

What people said.  But he could see what they did

It was like a poker game in which he could not hear the betting, but he could see all the cards.

This was invaluable. Poker players would try to mislead with words. They would not show him their cards. 

If he did not listen to their words, and constantly watched their cards, he could guess what they were doing. 

He first tries paper-trading but it didn’t work. He had to put money on the line. 

Easy on Paper…

As soon as he invested $10,000 in a stock the picture became quite different.  With no money involved he could control his feelings

But as soon as he put dollars into a stock his emotions came floating quickly to the surface. He slowly became accustomed to this new type of operation and started to feel more confident. 

Inexplicable Moves…

Only one particular fact bothered him. 

Sometimes some of his stocks made inexplicable moves, which had no relation to their previous behavior.  This baffled him.  It was while he was looking for an explanation that he made a momentous discovery. 


He could learn nothing more from books. No guru could guide him. 

He was completely alone with his daily telegrams and his weekly issues of Barron’s.  If he wanted an explanation he could only turn to them.

Some Violent Move…

He plunged into Barron’s until he discovered: “The inexplicable moves in his stocks usually coincided with some violent move in the general market.” He was completely disregarding the possible influence of the general market

This was no better than trying to direct a battle by looking at one section of the battlefield.   He adds the closing price of the DOW-JONES INDUSTRIAL AVERAGE

The General Market…

He thought that this would give him a clear enough picture of how the general market behaved.  His telegrams now read like this:

B 32-1/2 (34-1/2-32-3/8) L 57 (58-5/8-57)  U 89-1/2  (91-1/2-89) A 120-1/4 (121-1/2-120-1/4) F 132-1/4 (134-7/8-132-1/4) 482.31

He reasoned like a child that if the average was going up, so would his stocks.  This was not true.

Each stock behaved differently. He cannot apply mechanical standards to the relationship between the index and individual stocks.

Market Cycles…

He decides to ONLY use an INDEX to determine if he was in  abull or a WEAK MARKET.  He realizes that the general market cycle influences almost every stock. 

The main cycles like a bear or a bull market usually creep into most them.  This was a FINISHING TOUCH to his theory. 

His Routine…

Nicolas Darvas follows this routine:

He first compares the prices of his stocks with each other. Then he compares them with the Dow-Jones Average

After that he weighs their trading range, he evaluates whether to buy, sell, or hold. He does this automatically without further analysis. 

He Begins Documenting…

Simultaneously, he tries to train his emotions.  He worked it this way.

Whenever he bought a stock, he wrote down his reason for doing so.   He did the same when he sold

Whenever a trade ended with a loss, he wrote down the reason he thought caused it.  Then he tried to avoid making the same mistake.

These CAUSE-OF-ERROR TABLES helped him immensely.   As he drew them up one after the other he was learning something from each trade. 

Cause-of-Error Table




Cause of Error




Bought too late




Stop-loss too close




Overlooked weak general market




Bought on decline




Wrong timing


Stocks Have Characters…

“Just like people” writes Nicolas “They faithfully reflect the character of the people who buy and sell them.”

Some are calm. Some are slow. Some are conservative.

Others are jumpy, nervous, and tense.

The experience gained through his cause-of-error tables became one of the most important of all his qualifications.  Some stocks Nicolas finds easy to predict, consistent in their moves, and logical in behavior. 

And some he could not handle, each time he buys they cause him injury. He begins to take the view that if a stock slapped him twice he would refuse to touch it any more. 

Like Driving a Car

The driver can be taught how to use the accelerator, the steering wheel and the brakes, but he still has to develop his own feeling for driving.  No one can tell him how to judge whether he is too close to the car in front of him or when he should slow down. 

This he can only learn from experience.

Mistakes Are No Problem…

He could not guarantee that a stock would not catch a cold tomorrow. But this did not upset him as before. 

Even his mistakes did not make him unhappy

If he was right, so much the better.  If he was wrong – he was sold out. 

This happened automatically as something apart from him. 

He was no longer proud if a stock went up, nor did he feel wounded if it fell.  He realizes that stocks have no “value” other than the price quoted. 

The Tax Problem

Many people hold stocks for many months to obtain long term capital gains.  This he considers dangerous

He might lose money by holding a falling stock just for tax reasons.  He decided he would trade in the market by doing the right thing first – follow what a stock’s behavior commands and care about taxes later.

The best way to legally avoid taxes is to first open a Roth IRA.  If you have a side business outside your salaried job that files federal taxes under an Employer Identification Number (EIN) you can further reduce stock trading taxes by opening a Roth 401(k) and a Solo 401(k) for both you and your spouse. 


This stock was one of the most successful trades Nicolas Darvas made.  He bought three times.

Each time for 200 shares.  Two operations ended with a loss

The third made him a sizable gain.

Here are the details.  Notice how he “fished” the stock for 3 months







Bought 200 at




Sold at



Return ($)



Return (%)




Bought 200 at




Sold at



Return ($)



Return (%)




Bought 200 at




Sold at



Return ($)



Return (%)




A Staggering Series of Events…

A Few Other Stocks,

like DRESSER INDUSTRIES and REYNOLDS METALS behaved equally well and gave him satisfactory profits.

He buys BALTIMORE & OHIO RAILROAD at $56-1/4.  He thought it was in a 56/61 box and would advance. 

But it started reaching down. He sold it at $55 for a 2.2% loss.

Then he tried DOBECKMUN

He judged it was in a 44/49 box, so he bought it at $45.

It began to sag and he sold it at $41 for an 8.9% loss.

A Staggering Series of Events…

He bought DAYSTROM at $44 because he thought it was rising into a 45/50 box. 

He sold out at $42-1/4 for a 4% loss. He bought FOSTER WHEELER at $61-3/4. 

He thought it was in the 60/80 box

When it turned slowly against him, he sold out just below the $60 frame at $59-1/2 for a 3.6% loss. AEROQUIP was the last one. 

He had bought it at prices ranging from $23-1/4 to $27-5/8. He watched it climb toward $30 and waited for the 31/35 box to evolve. 

He was stopped out at $27-1/2 for a ½% loss.

Sold Out!

On Friday August 26, 1957 he finds himself without a single stock.  His automatic stop-loss had sold him out of everything. 

In two months every one of his stocks had slowly turned around. 

One by one each had sagged through the bottom of their boxes.  And one by one, even if it was only a question of half a point, they were sold

He Fidgets…

No opportunity seems to appear. He did not know that the great bull market was at the end of one phase. 

It was several months before the financial media declared a bear market. 

All analysts agreed that prices collapsed.  All these opinions were expressed in hindsight – when it was too late. 

His System Saves Him…

He realizes that it was impossible for him to time great historical turning points in the market. His system of ducking out quickly with his stop-losses made such an assessment unnecessary as Wall Street prices continued to fall. 

He made the joyful discovery that his method had worked much better than he had dreamed. 

They Slid Very Low Indeed…

 1957 Stop

 1958 Low

Low Loss

1958 High

High Loss


















































Half Would Have Been Lost…

When he looked at the table, he thought this: “If his stop-losses had not taken him out of the market he could have lost 50% of his investment.”  He would have been like a man in a cage, locked in with his holdings and missing his opportunity to make a fortune.

The only way he could have escaped would have been by smashing out, taking a 50% loss, possibly ruining himself, and gravely impairing his confidence for future deals. 

Buy & Hold…

He could, of course, have bought these stocks and “put them away.”  This was a classic buy-and-hold solution among people who called themselves conservative investors. 

Nicolas regarded them as pure gamblers

How can they be non-gamblers when they stay with a stock even if it continues to drop? A non-gambler must get out when his stocks fall.

They hold losses with the gambler’s eternal hope of the turn of the lucky card when they should cut & run.   

They Would Be Indignant…

He thought of the people who paid $250 for NEW YORK CENTRAL in 1929. 

It was worth about $27 if they were still holding it today.  Yet these railroaded investors would be indignant if he called them gamblers! 

The Greatest Bull Market

He finds in his statement of the first week of September 1957 that he has made up the money he lost on JONES & LAUGHLIN and his original capital of $37,000 was almost intact.  Many of his operations had been moderately successful, but COMMISSIONS AND TAXES had taken a great deal.  

When he went into the accounts more closely he found he had the unenviable distinction of coming out of the greatest bull market in history with a lot of experience, a great amount of knowledge, much more confidence – and a net loss of $889!

Nicolas Darvas had now traded for 5 years. 

Preview 12:49

This quiz tests your knowledge of the period when Darvas Danced around the world.  This gave emotional detachment and focus.  

Quiz 5 - Cables
10 questions
1 Lecture 09:06

When the Break Came…

Almost all stocks had been hurt or fractured. He reasons that if a stock has fallen from 100 to 40 it will almost certainly not climb up to the same high for a long, long time.

Without A Single Share…

For weeks he takes a closer clinical look. The sunny summer camp of the bull market was filled with powerful athletes.

But some were stronger than others.

The bear market turned the sunny summer camp into a hospital. The great majority of stocks were sick. Some more so than others. 

When the Break Came…

Almost all stocks had been hurt or fractured. He reasons that if a stock has fallen from 100 to 40 it will almost certainly not climb up to the same high for a long, long time.

It was like an athlete with a badly injured leg who would need a long period of recuperation. He could not make money buying a stock and cheering it on. 

If One Horse Is Going to Win…

It will win, even if thousands of onlookers are cheering for another one. JONES & LAUGHLIN had convinced him of that. He could remember himself pushing the stock upwards with his mind to no avail.

He just STAYS ON THE SIDELINES and waits for better times to come. HE FIRMLY REFUSES TO TRADE!

Quotations in Barron’s…

He uses Barron’s to detect those stocks that resist the decline.

He reasoned that if they could swim against the stream, they were the ones that would advance most rapidly when the current changed. Certain stocks began to resist the downward trend. 

Earnings Quality…

On closer examination, he found that the majority of these were companies whose EARNINGS TRENDS pointed sharply upward.  

Capital was flowing into these stocks, even in a bad market.

The capital was following earnings improvements as a dog follows a scent.

Slaves to Earnings Power…

He realizes that stocks are slaves of earnings power.

He decides that while there may be many [fundamental] reasons behind any stock movement, he would look only for one [fundamental reason]: Improving earnings power or anticipation of it. 

To do that, he would marry his technical approach to the fundamental one.

Techno-Fundamentalist Theory

He would select stocks based on their TECHNICAL ACTION in the market. But he would only buy them when he could give IMPROVING EARNING POWER as his fundamental reason for doing so. 

He decides to take a 20-year view. 

He looked out for those stocks, which were tied up with the future and where he could expect that REVOLUTIONARY NEW PRODUCTS would sharply improve the company’s earnings. Certain industries … were rapidly expanding and, unless something unforeseen happened, their expansion should soon be reflected in the market.


In the years before automobiles the smart operators went into railroads. They knew these would supersede the covered wagon and the stage coach.

A generation or so later, the shrewd investors moved out of railroads into automobiles. 

Forward-looking, expanding companies like GENERAL MOTORS and CHRYSLER were comparatively small firms then.   But they represented the future!

Fashionable Stocks

People who bought [GENERAL MOTORS and CHRYSLER] at the time and stayed with them during early expansion made a lot of money. These are WELL-ESTABLISHED stocks by the 1950s. 

They were not for the forward-looking speculator.  Stocks which promise future development … might be worth 20 times as much in 20 years. 

Women’s Fashions Alter…

Women will raise or lower their hemlines one or two inches roughly every two or three years.  The same with stocks.

While the fashion persists, the forward-looking investors get in and stay in. 

Then slowly the fashion fades and they are out. They are putting their money into a new-style stock … like an automobile, which can also fly. 

How to…

Buy into this year’s fashion? He could only do it by carefully watching the market for signs.

What he had to do was to find stocks that would be hoisted up because they stirred people’s imagination for the future. 

He carefully watched this general bracket of expanding stocks in [NEW INDUSTRIES] in tune with the jet age. He was not interested in the company’s individual products.     

New Vigorous Infant Industry

In fact, he did not want to know what they made – that information might only inhibit him.

He did not care what the company’s products were, any more than he was influenced by the fact that the board chairman had a beautiful wife.

But he did want to know whether the company belonged to a new vigorous INFANT INDUSTRY and whether it behaved in the market according to his requirements. 

Directly Against Advice…

Of many financial writers with conservative backgrounds who have been pounding into investors for generations that they must study company reports and balance sheets, find out all they can about a stock’s background, to make a wise investment.  

High Territory Trading

He made up his mind to buy high and sell higher.  Using his hard-bought training, he attempted to find these expensive-but-cheap, high velocity stocks. 

He searched constantly for them because he felt sure that they would move up on the first sign of a better market.  He carefully watched a dozen stocks which seemed to be in this category, checking their quotations every week, analyzing their behavior for any sign of hardening.     

The Importance of Volume

He closely observed their price action, and he was on the alert for any sign of unusual activity as well. He had not forgotten the importance of volume.

He prepared to operate in higher priced stocks because of brokerage commissions. It was cheaper to invest $10,000 in a $100 stock than in a $10 stock.   

Low flat fees of discount brokerages have solved this problem today.

$10,000 In One Stock

Could buy:

1,000 shares of a $10 stock ($300 commission)


500 shares of a $20 stock ($250 commission)


100 shares of a $100 stock ($90 commission)

W.D. Gann made the same point. But, in reverse.  Gann made a lot of money in beaten down stocks breaking upward from extended downtrends on high volume.  This is another worthwhile phase of the low/ high volume winner/ loser positive/ negative price impact cycle.

The Correct Buying Point

If his buying point was correct, the broker’s commission was not important. It came off of his profit.

But, if his timing was wrong and he was stopped out – that was another matter

Then the two commissions, one for buying and one for selling, had to be added to his loss. His mistakes would be less costly if he bought higher-priced stocks. 

It Could Not Sink Forever…

As he watched the market continually sinking, he knew that it could not sink forever.  Sooner or later stocks would begin to move upwards

They always had. Bear markets were always followed by bull markets

The educated art was to watch for the first signs, be sure they were real, and buy before everyone else noticed and the prices began to rise too high. 

His Waterloo…

His mind went back to the battle of Waterloo in 1815.  A recent loss at Quatre Bras had generated an overwhelmingly pessimistic investor sentiment. 

If England was indeed lost to Napoleon any securities issued by the government would become immediately worthless. 

At this famous battle Nathan Rothschild had an agent who, as soon as victory was certain, set off for London as informant. 

After first depressing prices by short selling, Nathan Rothschild started buying every British government share he could before anyone else heard the news of English victory. 

This British government share is a consolidated annuity (consol).

When they did, of course, the consol market price rocketed and Rothschild sold at a huge gain.  The principal remains the same – to get in faster than the other fellow. 

Five Years He Had Trained…

He knew he had learned an enormous amount.  His Canadian period taught him not to gamble

His fundamentalist period taught him about industry groups and earnings trends. 

His technical period taught him how to interpret price action and the technical position of stocks.  And, now he reinforced himself connecting everything.

A Jigsaw Puzzle…

Where finally all the pieces fell beautifully into place.  He was certain this method would prove successful in the future. He felt calm and confident waiting for the market-tide to turn. 

It Began to Happen…

Reading Barron’s, he noticed that, while the averages were still showing a decline as they had for several months, a few stocks were beginning to peep up, almost as unnoticeable as primrose buds on a winter day. 

It was still a question whether these tender shoots would survive or be killed by frost. 

He began to sense the end of this baby-bear market. 

He Was Sure…

That the leaders in the previous market would probably not lead again. 

He had to find new ones. 

Later this proved right because hidden away in the market quotes during this period were some stocks which were apparently of not much interest to anybody – certainly not to him. 

He had hardly heard of them.

November 1957…

These stocks were not dead

One day they were destined to wake up. 

  • ZENITH RADIO @ $116

They would leap into a new leadership of the market.  They were going to make him $2,000,000.

Training 6 - Baby-Bear

Quiz 6 - Baby Bear
10 questions
1 Lecture 17:22

From The Arc En Ciel In Saigon

He noticed an unknown stock while reading Barron’s weekly called LORILLARD. Lorillard began to emerge from the swamp of sinking stocks like a beacon

Despite the bad market it rose from 17 into the first week of October.

The stock established itself in a narrow 24/27 box. Share volume for that week was 126,700 shares which contrasted with 10,000 shares earlier in the year during normal trading. 

Nice Price Action…

The steady rise in price and the high volume indicated to him that there was tremendous interest in this stock. 

As for fundamentals, “I was satisfied as soon as I found out about the wide acceptance of their ‘Kent’ and ‘Old Gold’ cigarettes.”  He decided that if it showed signs of going above 27 he would buy it.

Daily Cables…

He asked his broker to cable him daily quotes.  It soon became clear from these quotes that certain knowledgeable people were trying to get into the stock in spite of the general state of the market. 

Few people at the time had the faintest indication that LORRILARD was to make Wall Street history. That it was to shoot up to a most astounding high in a relatively short time, watched by the amazed and gasping financial community. 

By Mid-November 1957

LORILLARD became even more independent. It began to push upward toward what he estimated to be a 27/32 box.   This isolated strength in the face of general weakness was very impressive to him.  

He felt he had sufficient proof of its strength. He decided to become a bull in a bear market.


The Stop-Loss Order

Darvas writes “As you see, although I felt quite secure in my judgment with my merged technical and fundamental viewpoints, I did not for one moment consider abandoning my chief defensive weapon – the stop loss order. No matter how well built your house is, you should not think of forgetting to insure it for fire.”

Bought 200 @ $27-1/2

With a 5.5% initial stop-loss. He was well satisfied with his purchase

He braced himself for a big rise. 

This came, but not in the way he had assessed it.  His first experience was disheartening.

On Tuesday, November 26, the stock dropped exactly back to his stop-loss of $26. He was sold out.   To add insult to injury, seconds after he was stopped out, it started to rise. The share price closed at $26-3/4.

A Short Reaction

However, the reaction was so short and the rise that followed so firm, that he decided to go back into it.  That same week he bought back his shares at $28-3/4.

Again he fixed his stop-loss at $26. 

Now his stop-loss is wider at 9.6%. But this time LORILLARD’S behavior was perfect. 

The quotations never came close to his stop-loss. This was a firm indication that he was on the right track, and that his theory applied to this stock. 

December 1957

LORILLARD rose over $30 and made a new 31/35 box.  His experiences with similar stock movements in the past told him that it was being ACCUMULATED

He felt he had the right stock.  Now it was a question of getting into it with more money at the right time.  

The Right Moment

He carefully watched his daily quotes.  He looked for the right moment as a fighter looks for an opening to land his blow.

The big surge he had been expecting occurred after a false move towards the end of January.  LORILLARD started to move decisively out of its box.

Everything Was Encouraging

This seemed to be the ideal moment. Everything was encouraging – the technical action, the fundamentals, the pattern

Also, the New York Stock Exchange had just lowered its MARGIN REQUIREMENTS from 70% to 50%.  This meant that his limited capital had much more purchasing power now. 

Every $1,000 could buy $2,000 worth of stock. 

This was important to him, because he needed his funds for another stock he was watching at the time. He added another 400 shares at $35 and $36-1/2.

Dancing About in Its Box

While he was travelling around the world dancing, LORILLARD was steadily dancing about in its box.  It would do this for a short time and then, with an impeccable, almost predictable thrust, move into the box above. 

LORILLARD boxes began piling on top of each other like a beautifully constructed pyramid.  

The Trail

On February 17, 1958, LORILLARD bounced up to $44-3/8. The stock acts badly.

In one single day his stock dropped to a low of $36-3/4 and closed at $37-3/4.

He raises his stop-loss to $36.  This was less than 2 points below the closing price ($1-3/4). This $36 stop loss was trailed 18.9% below– $44-3/8. 

The setback was very short and the stop was not touched. He buys 400 more shares at $38-5/8.

He Was Very Happy

Almost immediately it left this price behind.  The quotes came in:  39-3/4 – 40-1/4 – 42.

Everything looked as if he had planned it.

His broker sends him three weeks’ issues of a well-known advisory service.

Week after week this service strongly urged its subscribers to sell LORILLARD short.  The third recommendation reads “Lorillard was obviously under distribution around 44 last week after we told you to start it on the short side.” 

This Amazed Him

But he had long ago become so disillusioned with advisory services that he did not pay attention to it.  Instead he started to recommend LORILLARD to any American tourist who mentioned the stock market to him. 

March 1958

In the third week, LORILLARD entered on an even more definite upward-thrust. 

It jumped 4-1/8 points (dollars) in one week.  Its volume increased to an astounding 316,600 shares.

It established itself decisively in the 50/54 box.  In the second week of April LORILLARD left its new box.  It pushed through to a new high of $55-1/4 then IMMEDIATELY DROPPED into its former 50/54 box. 

He Raises His Stop

To $49. This is $1 below the bottom of the 50/54 box. 

He wavered for a moment, on the verge of selling, but he decided against it. 

By now he had trained himself to BE PATIENT and, although he could have taken an easy $20 per share profit on his earliest purchase, he sat back determined not to take too quick a profit. 

His LORILLARD Cost Figures



Position Size


Share Price





























50% Margin

He carries the last three purchases on 50% margin. 

This enables him to keep the rest of his capital for a further investment, which turned out to be a stock called DINERS’ CLUB

He first became interested in this stock while he stilled battled with LORILLARD at the turn of the year. 


Had just SPLIT 2-FOR-1, and in the last week of January 1958 its WEEKLY VOLUME SWELLED to 23,400.

He considered this unusually high for this stock.  As this INCREASE IN VOLUME was accompanied by an ADVANCE IN PRICE.

He decided to check the stock’s fundamentals. The company was a NEAR MONOPOLY IN AN EXPANDING FIELD.  Darvas writes “The credit-card system, of which it was one of the early pioneers, was firmly entrenched.

The company’s earnings were in a definite uptrend.  He bought 500 shares at $24-1/2.

His stop-loss was $21-5/8. That’s 11.7% behind his entry price.

His First LORILLARD Purchase

Had already yielded a profit.  If it came to the worst he would lose it on DINER’S CLUB.

A few days after his purchase the stock advances

He immediately bought another 500 shares at $26-1/8. The pattern evolved perfectly – first at 28/30, then a 32/36 box.

The last penetration was accompanied by a volume of 52,600 shares for the week. This was higher than any other week’s volume in the newly split stock’s history.  

Stop-Loss Insurance

As he saw his profits piling up, he did not for a moment forget to trail his stop-loss insurance behind the rise. On the first 28/30 box, he increased his stop to $27.  A buck below the lower limit. 

On the second 32/36 box he raised his stop to $31. On the fourth week of March the stock penetrated a new 36-½/40 box. 




Position Size


Share Price






















He Already Had

A profit of over $10,000. Still, according to his theory, he had to hold on. 

The stock behaved as if it would go even higher. 

Every indication pointed to that.  Suddenly his cables began to read differently.

The stock unexpectedly seems to have lost its will to rise

It looked as though its LAST PYRAMID WOULD HESITATE on the brink of going in reverse. He raised his stop-loss to $36-3/8.

This is just a third of a percent… 0.34%! He is stopped out with a …

$10,000 Profit

This completely confirmed the technical side of his approach.  American Express had decided to launch a rival credit card. 

This had been the reason for the hesitation of the stock near the $36 mark. 

Some people had known this before the announcement and were selling out. Without knowing it he was their partner.

The technical side of his system based on the price action had warned him to get out. 


During all that time he spent with LORILLARD and DINER’S CLUB, he never neglected to follow the quotations of other stocks in BARRON’S.  Great interest was springing up in a stock called E.L. BRUCE, a small Memphis firm.

The company made hardwood flooring.

This DID NOT fit his fundamental requirements of a new expanding infant industry.  But the technical pattern was so compelling he could not take his eyes off of it. 

E.L. BRUCE’S Street Movement

What amazed him was the movement of E. L. BRUCE on Street. It usually traded below 5,000 shares a week.

Then the stock suddenly woke up and started to move. 

In the second week of April 1958, share volume rose to an astounding 19,100 shares. From there the WEEKLY VOLUME climbed to 41,500 – 54,200 – 76,500 shares, with the PRICE jumping 5 to 8 points [$5 to $8] WEEKLY without any sign of a downward reaction. 


Went from $18 in February to $50 at the beginning of May.  Only then came its first reaction to $43-1/4 at the beginning of May

He could not be sure, of course, but this reaction seemed to him only a temporary halt, a refueling. He felt it would continue to rise. 

He tried to find a fundamental reason, but he could not.  Still, the volume was there, the price action was there, the rhythm of the advance was there. 

A Lot of It

Fundamentals or no fundamentals, if it went over $50, he would buy it, and he would buy a lot of it.

But he needed money.  His DINER’S CLUB sale had released some of his [MARGINED] money, but that was not enough. 

He could have used his savings, but after the JONES & LAUGHLIN disaster he had decided never again to risk more money than he could afford to lose without ruining himself. He never again added to his market funds from his show-business income.  


LORRILARD’S penetrations were not decisive, its REACTIONS WERE DEEPER. He sells 1,000 shares the second week in May for an average price of $57-3/8.

The total price on the sale was $56,880.45.

His profit on the deal was $21,052.95. This, with the $10,000 he had made from DINER’S CLUB, meant that in five months he had nearly doubled his capital

He felt pleased and proud and ready, like a giant-killer, to deal with a powerful and erratic stock like BRUCE

Two Accounts

He called New York and opened two accounts with two other brokerage firms

He had concluded after the LORILLARD deal that his system was working so well that he did not want to entrust it into the hands of one firm. 

He felt that if anyone were to follow his operations, this might make it difficult for him through his 3 accounts in 3 brokerages.

May 1958

In the third week of May 1958, he cabled New York to buy 500 BRUCE at $50-3/4 with his automatic on-stop buy order [buy stop order]. 

He placed a stop-loss at $48.  This was 5.42% below the prevailing price of $50-3/4.

The stock acts beautifully such that he decided to take full advantage of the existing 50% margin conditions.  He makes more purchases because his stop-loss was not touched.

Each was protected by stop-losses between $47 [7.39%] and $48 [5.42%].  


He figures that, should he be stopped out, he would only lose his DINER’S CLUB profit. 




Position Size


Share Price











































The Right Timing

E.L. BRUCE really began to climb as if drawn upwards like a magnet.  It was spectacular. Soon his 3 brokers told him that the stock had surged over $60. 

By June 13th, it had advanced to $77.

He had to fight a HARD BATTLE WITH HIMSELF not to phone New York and find out what was going on. 

No,” he said to himself whenever he felt like calling his brokers, “That will only mean rumors and you may do something silly” he thinks. 

Modern psychology teaches that refusing to engage in any form of rumor (gossip) is integral to anger management.

It Nearly Stopped His Heartbeat

It was one of his brokers. It nearly stopped his heartbeat.  The broker said: “They have suspended trading in BRUCE on the American Stock Exchange.” 

He nearly dropped his phone as he listened. He was terrified

He had over $60,000, his entire capital, invested in it! 

$100 a Share

Far from being broke, he could now sell BRUCE for $100 a share in the over-the-counter market.  Certain traders on Wall Street, forming their views on a purely fundamental approach, had decided that BRUCE’s book value and earnings indicated that the stock’s price should not be more than $30 a share. 

Therefore, they had started to SELL THE STOCK SHORT between $45 and $50, confident they would be able to fulfill their bargains by buying it back at a price much nearer $30. 

A Grave Mistake

SHORT SELLERS made a grave mistake. 

A New York manufacturer named Edward Gilbert was trying to OUST the Bruce family from CONTROL of the company.  He and his associates were trying to obtain a MAJORITY of the 314,600 shares outstanding which the Bruce family owned.

Edward Gilbert

It was this move that had rocketed the price.  The volume was terrific.

More than 275,000 BRUCE shares were traded during a period of ten weeks.  The short-sellers who had so jostled each other to push the stock to dizzy heights were squeezed by their own frantic efforts to buy back their short positions.  

They were caught with their pants down by the mysterious upward surge of the stock market. They could not buy the shares at any price to fulfill their obligations

No Orderly Market

Finally, as it was impossible to assure an orderly market because of the frenzied dealings, the American Stock Exchange suspended trading.  But this made no difference to the desperate short sellers. 

They still had to deliver the stock. Now they were willing to pay anything over-the-counter for BRUCE. 


The broker asks if he wants to sell at $100.  All of this that he had just heard from his broker would still come under the heading of “rumors” which he had sworn to never listen to again. 

Then he made one of the most momentous decisions of his life.  He said, “No, I will not sell at 100.

Later, he gradually sells out the stock on the OTC market in blocks of 100 and 200 shares for an average price of $171.

For a $295,305.45 Gain!



Buy Price

Sell Price













































Buy Price

Sell Price

$ Raw Return

% Raw Return


























He Was So Happy

He did not know which way to turn.  He told his story to everyone who cared to listen.  He showed telegrams to them.

Their only reaction was “WHO GAVE YOU THE TIP?NOBODY BELIEVED HIM.  

Training 7 - Theory

Quiz 7 - Theory
10 questions
1 Lecture 12:55


Should have made him eager and less cautious.  Yet, somehow it made him more cautious.

He had made over $325,000 in nine months’ investment.

He was determined not to lose it by a wrong move.  So many operators have made big money in nine months and lost it in nine weeks.

He decided this would not happen to him.

Overconfidence has been detected among many professions by both psychologists and economists. This leads to higher turnover and deeper losses.


The first step he took was to WITHDRAW HALF OF HIS PROFITS from the market. With his remaining capital he EYED THE MARKET WARILY

He watched for possible well behaved stocks.   He cautiously bought 500 shares of MOLYBDENUM

He had bought it at $27, paying $13,606.25.  Almost immediately, he was stopped out at $26-1/2. He had clawed back $13,132.78

Remember the research by U.C. Berkeley professor Terrence O’Dean?  It shows that investors lose because they tend to cut their winners short and hang on to their losers. 

Nicolas does the exact opposite.  His system cuts losing positions short and hangs onto winners. 


He bought 500 shares at $31-3/8, paying $15,860.25. It turned around and looked as if it was going to slip under $30, so he sold out at $30-1/2 for $15,056.94. This is a 5.06% loss.

Then, as he saw nothing interesting, he ventured back to LORIL-LARD.  This stock… had now become a weary slow moving obesity. 

It became his Americanpet.”

This was an utterly wrong attitude but he could not seem to help it. This is how the LORILLARD operation looked …




Buy Price

Sell Price



$ Return
























That Did It

The third loss finally broke his sentimental attachment and he did not buy it again.  He realized that LORILLARD now moved at a very leisurely pace, it was obviously no longer a stock for him.  

After he withdrew from LORILLARD, he sat back and assessed his overall position. It looked like this…

His Overall Position
















Overall Profit:



Among the stocks that caught his eye was a little, unknown company called UNIVERSAL PRODUCTS.  It was quoted around $35, running up and down between $35-7/8 and $33-1/2.

He found out it was an electronics company and therefore he felt it qualified as far as his techno-fundamentalist theory was concerned.  

July 1958

He felt he could get a better feel of the stock’s movement if he actually owned some of it.  He decided to make a pilot buy. 

He sent out the following cable: “BUY 300 UNIVERSAL PRODUCTS 35-1/4 OR BETTER

Next day, when he received advice that 300 shares of UNIVERSAL PRODUCTS had been bought for him at $35-1/4, he wired: “ENTER STOPLOSS 32-1/2.

Now there was nothing to do but sit back, watch and wait for the next move.  His side rule: Do nothing.

August 1958

He notices that UNIVERSAL PRODUCTS is beginning to firm up.  He cables: “BUY 1200 UNIVERSAL PRODUCTS 36-1/2 ON STOP 33 STOPLOSS

This represents a 9.59% stop loss. Do you notice a pattern in the percentage width of his stop losses?

When he returned to the Imperial Hotel in New Delhi he received the notice: “BOUGHT 1200 U 36-1/2 (37-7/8 – 35-1/8) ETC

This meant he had bought his stock at $36-1/2 and it closed at 36-3/4 on average.

Now the question was: “Will his stock advance or will it return to its former box?

He Was Quite Excited

Although he had already FIXED THE LIMIT OF HIS POSSIBLE LOSS, now it was a question of whether his judgment was right or wrong.

He could hardly wait for the next day’s cable

When it finally arrived, it showed that UNIVERSAL PRODUCTS had closed at $38-1/8. Its range for the day was $38-3/4 - $37-1/2. The price was clearly running upward!

He Was Right

For the time being. In the next few days the stock continued to advance, and he bought another 1,500 shares at $40.    Shortly thereafter, UNIVERSAL PRODUCTS changed its name to UNIVERSAL CONTROLS and split 2-for-1. 

It continued to act well by after his last purchase

He decided that he had as much UNIVERSAL CONTROLS as he cared to carry

Notice that Darvas works with a very small collection of stocks that is rarely more than 5.  This is called a portfolio. Some common portfolio possibilities are 500 S&P, 30 Dow, 10 stock, 5 stock, and 3 or fewer stock portfolios.

This was his exact position (Prices Averaged) …




Buy Price


First (Pilot)














Skyrockets in Flight

The secretary of Nicolas Darvas did not have the courage to buy UNIVERSAL CONTROLS.

The personal secretary’s father advises his son, “what is the point of buying a stock if it might go down?“  While his father was engrossed in carefully examination of the books [fundamental analysis] the stock went up to $50.


In February 1958, the stock had just SPLIT 2-FOR-1 and was the object of heavy trading [VOLUME] before it quieted down into a 39/47 box. It stayed CALM in this area for several MONTHS.

He had the feeling that it was a calm that precedes the storm. In March, he cables: “QUOTE THIOKOL”


The quotes duly arrived but, except for a few weeks of short-lived flurry in April, nothing noteworthy happened.  After a few weeks he cables: “STOP THIOKOL QUOTES START QUOTING AGAIN IF RISES OVER 45

He reasoned that if it reached again toward the upper frame of its box that would be the moment to watch it again.

Upper Frame of Box

In the first week of August THIOKOL starts to reappear in his telegrams. [Now] above $45 it looked as though it was flexing its muscles for an upward jump. 

He decided for a PILOT BUY, and cabled.

BUY 200 THIOKOL 47-1/4” The order was executed at this price for a cost of $9,532.26. 

Three Weeks

Is how long it took for THIOKOL to find its true dynamics. 

At the end of August he felt so. At the end of August he felt the moment had come.

He cables: “BUY 1300 THIOKOL 49-1/2 ON STOP”

The purchase was executed @ $49-7/8 on September 2, 1958 for $65,408.72.


With his 1,500 shares he saw the stock rapidly rising over 50 and trading in the range of 52/56. A week later he receives notice that Thiokol had decided to issue stock rights.

These rights [WARRANTS] were given as bonuses to the holders of the stock at the rate of one right per share.  In turn, with 12 of these rights you could buy one share of THIOKOL at the special price of $42.


The stock was quoted over $50.  If you wanted to exercise your stock rights [WARRANTS]. If not, you could sell them on the American Stock Exchange where they were listed and traded for a limited period (EXPIRATION). This was cheap indeed.

Rights = Warrants ≈ Call Options

However, there was an important feature about these rights that made them very interesting. According to stock exchange rules, if the rights were being used to purchase the company’s stock he could take advantage of what they called a “special subscription account.” 

The broker was permitted to lend him up to 75% of the current market value of the stock.  

In addition, there was no commission charged on the purchase. He decided to plunge in with all his free cash.   Today, high leverage is obtained across the Chicago Board Options Exchange.  Call options are far superior to the rights Darvas purchased.  Many levels of strikes allow you to modulate the intensity of leverage.  Nicolas did not have this luxury


Here Is How He Stood

   Original Investment


   Profits After Losses


Total Capital


Cash Withdrawn


Free for Investment


Purchases Now Held:



   1,500 THIOKOL



   70% cash under margin rules

(of $190,300)


   Free for further investment


Special Subscription Account

He discovered that despite the regulation permitting a 75% loan – that there was wide disagreement among brokers concerning the amount he could borrow from them in a special subscription account. 

While one broker was willing to lend 75% of the purchase price of the stock, another was willing to advance a full 75% of the market value of the stock.  THIOKOL being quoted around $55 the later proposition was extraordinarily attractive.

They will loan him $123,750. He proceeded to take advantage of it. 

36,000 Rights

He buys 36,000 rights at an average price of $1-5/16 for which he paid $49,410. This entitled him to buy 3,000 THIOKOL at $42 per share. 

This would have otherwise cost him $126,000 because 3,000 X $42 = $126,000. But, under the rights subscription he only had to add another $6,000 cash

The Buy-Back

He figured he could sell his original lot of 1,500 THIOKOL shares and buy twice as much back under the special subscription rules. 

He sold his stock at an average price of $53-1/2. 

This would have otherwise gave him buying power of $60,187.5.  Because ($53.5 X 1,500) X 0.75 = $80,250 X 0.75 = $60,187.50.

The difference is due to fees.  

With this he buys a second block of 36,000 rights which he converts into a second block of 3,000 shares.

An important article by two major state university finance professors shows that the highest expected returns are from deep in the money calls.  Second are puts

Read Brian Boyer and Keith Vorkink. 2014. Stock Options as Lotteries. Journal of Finance 69 (4). 1485–1527.

The difference in expected returns is huge.  Deep in the money calls on momentum stocks are the best option investments.  Long calls are most like rights today. According to the research in the #1 ranked academic journal in the field of finance the deep-in-the-money call has the least lottery like payments and offers the most downside protection.  Nonetheless, always remember that deep-in-the-money calls are riskier than owning the stock outright.

The Operation Looked Like This

  • Sold: 1,500 shares THIOKOL stock;
  • Bought : 36,000 THIOKOL rights;
  • Converted: 3,000 shares THIOKOL stock.

He does this in two blocks of 36,000 rights.  His total value of 6,000 shares is $350,820.

In the second week of December, THIOKOL shifted from the American to the New York Stock Exchange.

It immediately moves up 8 points (dollars) and the following week was touching the 100 mark.

The broker becomes nervous and telegraphs: “YOUR THIOKOL PROFITS NOW $250,000

Added to BRUCE

He now had over a half-a-million dollars! This was much more money in fact than he ever thought he would have. 

It would make him a rich man for life.

The realization that he had all this money came to him with startling SADNESS.  Every fiber in his being seemed to be saying, “Sell, Sell.” It was the biggest temptation in the world.

What Should He Do?

Would the stock rise still higher – or should he take his profit and get out?  Perhaps it wouldn’t rise any higher – there might be a fallback

It was a terrible dilemma, the old one of “when to sell” was much magnified because of the large amount of money at stake.  Leverage from rights increased the possibility of total loss

If he did the right thing here, it would change his whole life.  If he made the wrong move, he would regret it forever.

He Felt Very Alone

Nobody on Earth could give him any advice on what to do in this situation.  He decided to go out and have a few drinks by himself and consider the situation.

Before he went out, he sat down at his dressing table and wrote on a little card, “Remember BRUCE!

He thought this would remind him of what he had learned in the past.  Every time he felt like sending a cable to his brokers telling them to sell THIOKOL, he pulled out his card, looked at it and hesitated.

Finally, …

He decided not to sell.  It was the best example of his new market technique and it was anything but easy to do. 

By the time he arrived back at his hotel he was exhausted

He must have looked more like a man about to commit suicide than one who had just made himself a small fortune.

But He Proved Right

THIOKOL continued to rise and by making that decision in Paris, he was able to hold on and make much more money out of the stock. A few weeks later, in January 1959 he was holding 6,000 THIOKOL and 6,000 UNIVERSAL CONTROLS.

They were both doing very well indeed, THIOKOL was standing on the $100 mark and UNIVERSAL CONTROLS had risen to $45.

Danger Ahead

How little did he know that he was preparing to make a complete fool of himself?

Within the next few weeks he would bring himself within whistling distance of ruin.  

8 - Half-Million

Quiz 8 - Half-Million

Quiz 8 - Half-Million
10 questions
1 Lecture 08:48

Unexplainable Instinct

He had a very clear conception of how he had done it and he was also convinced he could repeat the feat again. He could almost tell what stocks would do. 

If after an eight-point [$8] advance a stock dropped back four points [$4], he did not become alarmed.

He expected it to do just that. He slowly started to imagine he was a Napoleon of finance. After all, he reasoned to himself rather smugly, how many people could do what he had done.


The truth was that as his pocket had strengthened, his head had weakened.

He had grown over-confident. This is the most dangerous state of mind a stock investor can develop in the stock market. 

It was not long before he received a bitter lesson the market always hands out to those who think they can carelessly master it.


What he believed a FOOLPROOF SYSTEM; he felt that if he moved nearer to the market, nothing could stop him from making a fortune each day. As the scene of his future triumphs, he chose the uptown office of one of his brokers. 

He was fascinated by his first visit to the office. There was an air of ACTION, BUSTLE, and NOISE.


In a few days of trading, he threw everything he had learned over the past six years overboard. He did everything he had trained himself not to do.

He talked to brokers. He listened to rumors. He obsessively watched the ticker.

It was as if the “GET-RICH-QUICK” demon had gotten hold of him.

He completely lost his clear perspective he had so carefully built up. Step by step he led himself along a path where he began to lose his skill.  


The first thing that deserted him was his SIXTH SENSE. He did not “feel” anything.  All he could see was a jungle of stocks running up and down without rhyme or reason. 

Then his INDEPENDENCE went.

He gradually abandoned his system and adopted the attitudes of others.   He was following the crowd.

His reason forsook him and emotion took over completely


Instead of being the lone wolf, he became a confused, excited lamb milling around with others, waiting to be clipped. It was impossible for him to say “no” when everybody around him was saying “yes.” 

He got scared when they got scared.  He became hopeful when they were hopeful. 


Nothing like this, not even in his first novice years, had ever happened to him.  He lost all his skill and control.

Everything he touched went wrong

The careful system he had built up collapsed around him. He put in dozens of contradictory orders. He bought stocks at $55. 

They went back to $51.  He hung on.


That was the first thing he threw away.


BOXES? He forgot about them.

He BOUGHT AT THE TOP. Soon as he bought, the stock started to drop.  He became frightened and He SOLD AT THE BOTTOM. As soon as he sold the stock started to rise. He became greedy.


Tremendous Frustration

He developed a tremendous frustration.  Instead of blaming his own stupidity, he invented different reasons for his failures

He started to believe in “They.” “They” were selling me dear.

They” were buying stock from me cheap.  He could not, of course tell anyone who “They” were – but that did not stop him from believing in them. 

Fighting THEM

Fighting “Them” – these grey ghosts at the back of his mind – made him reckless.  He became stubborn.

Even though stocks went on beating him, each time they hit him he just wiped off the blood and come back for more. 

He kept telling himself that he was more than a half-a-million dollars ahead of the market and therefore this could not possibly be happening to him.  How wrong he was!

A Lunatic’s Chronicle

It was period of complete disaster. He lost $100,000 in a few weeks. 

He could still hardly believe it.

Now he knows that it was caused by EGOTISM leading to VANITY leading to OVER-CONFIDENCE, which in turn led to disaster. It was not the market that beat him.

It was his own unreasoning instincts and uncontrolled emotions. Ruminations have a special relationship with anger management on controlled thought.

Day-Trading Stocks

He bought stocks and sold them a few hours later.  He knew that if he bought and sold on the same day, he was permitted to operate with as little as 25% margin in his account. 

Instead of profiting from this, he succeeded in losing several thousand dollars each time. 

Day trading results based on Taiwan study indicate that investors have little hope.

Day Trading Losses [Part 1 of 2]








% Loss

























































































Day Trading Losses [Part 2 of 2]








% Loss




























Melancholy Table

Nicolas Darvas writes: “Do you wonder, after this melancholy table, why I shuddered whenever I looked at stocks?” He was READING too much.


That is why he rapidly reached the stage where he could read the figures on the stock market quotations but they no longer told him anything.   His mind had become blurred

This last phase really frightened him. He felt like a drunk who loses touch with reality and cannot understand why. 

Modern finance literature shows an inverse relationship between portfolio turnover and returns. This means that the more trades you make the less you should expect to profit. 

He Suddenly Realized Something

There was no easy solution to the problem. For a long time, he was baffled.  Then one day, as he sat in the Plaza Hotel AFRAID to make a telephone call, he suddenly realized something.

When he was abroad he visited no brokerages, talked to no one, received no telephone calls, watched no ticker

The Solution

Was whispering to him but at first he could not credit it.  It was so surprising, so simple yet so extraordinary that he could hardly believe it. 


When he was traveling abroad he had been able to assess the market, or rather the few stocks in which he was interested, calmly, neutrally, without interruption or rumor, completely without emotion and ego. 

Know Not, Sin Not

He had operated on the basis of his telegram, which gave him his perspective.  It showed him the way that stocks were behaving.

There were no other influences, because he did not see or hear anything else. 

In New York there were interruptions, rumors, panics, contradictory information; all flowing to his ear. 

As a result of this his emotions became involved with the stocks – and the cold, clinical approach had gone.


He reviewed the situation and got rid of every stock except for UNIVERSAL CONTROLS and THIOKOL. These were behaving well and he left them alone.

He gave instructions to his brokers to never telephone him or give him information of any sort on any pretext whatsoever.  The only communication he wanted from them and from Wall Street was his usual daily telegram.

He Wandered Around

Paris in a daze, his head still spinning with blurred, meaningless columns of stock market quotations.  His daily telegrams arrived – they still did not make much sense to him. 

He had completely lost his touch.

He felt like a man who has had a terrible accident and feels he will never be well again.  He was thoroughly demoralized

The Next Day’s Cable

He impatiently waited for the next day’s cable. 

When he received it, there was no doubt: the figures were clearer and more familiar.  As though a veil was being lifted, once again images started to form before his eyes, giving him some view of the stock’s future. 

Gradually, like an invalid, he began to regain his confidence

He recovered enough courage to try to approach the market again.  He decided as a permanent rule that he would never visit a brokerage office again.

The New Rules

Rule #1:  Never visit a brokerage.

Rule #2:  Brokers must be prohibited from picking up a telephone and calling him.  

Rule #3:  He must have quotations by cable and nothing else.

Rule #4:  His brokers must never quote any stock to him, except the ones he asks for

Rule #5:  They must not tell him about any new stocks as that would immediately come into the rumor class. 

These rules apply even if he is in a New York hotel.  In this way he places Wall Street thousands of miles away from him. 

New Stocks

He would pick himself as he always had, by reading his weekly financial paper. When he saw one that interested him and seemed to be preparing for a rise, he would ask for quotations. 

He would only ask for one new quotation at a time. 

Then as he did before, he would study it carefully before deciding if it was worth going into. 

He was like a man who has survived a plane crash and knows he must fly again immediately or lose his nerve. He knew only one way of making this method foolproof. He booked himself on a plane back to New York.  

9 - Second Crisis

Quiz 9 - Second Crisis

Quiz 9 - Second Crisis
10 questions
2 More Sections
About the Instructor
Scott Brown
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Major State University Finance Professor, Investments Expert

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Dr. Scott Brown and “Intelligent Investing” — helping you get the most out of your hard earned investment capital.

As an investor, I have spent over 35 years reading anecdotal accounts of the greatest investors and traders in history. My net worth has grown dramatically by applying the distilled wisdom of past giants.

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(In the last six years we have exploded our net worth and are absolutely debt free, we live a semi-retired Caribbeanlifestyle in atriple gatedupscale planned community from a spacious low maintenance condo looking down on our tropical beach paradise below).

My Curriculum Vitae:

Investment Writing and Speaking:

I am an internationalspeaker oninvestments. In 2010 I gave a series of lectures onboard Brilliance of the Seas as a guest speaker on their Mediterranean cruise. Financial topics are normally forbidden for cruise speakers. But with me they make an exception because of my financial pedigree.

On day 6 the topic I discussed was “Free and Clear: Secrets of Safely Investing in Real Estate!“ The day 7 topic was “Investment Style and Category: How the Stock Market Really Works!” Then on day 8 I spoke about “The 20% Solution: How to Survive and Thrive Financially in any Market!” The final talk on day 11 was “Value Investing for Dummies: When Dumb Money is Smart!

Gina Verteouris is the Cruise Programs Administrator of the Brilliance of the Seas of Royal Caribbean Cruise Lines. Regarding my on-board teachings she writes on June 19th, “You have really gone above and beyond expectations with your lectures and we have received many positive comments from our Guests.”

I sponsored and organized an investing conference at Caesars Palace in Las Vegas in 2011 under my Wallet Doctor brand. This intimate conference was attended by 14 paying attendees.

As such many strides were made in financial education that week. For instance I met a woman who is a retired engineer from the Reno, Nevada area.

She made a fortune on deep in the money calls during the bull markets of the 90s.

This humble and retired engineer inspired me to look more seriously at deep in the money calls with far expiration. She also gave me an important clue regarding trading volume.

Her call option and volume insights have been confirmed in the Journal of Finance.

In 2012 I gave a workshop at the FreedomFest Global Financial Summit on stock investing at the Atlantis Bahamas Resort. I was also a panelist on a discussion of capital markets.

My course “How to Build a Million Dollar Portfolio from Scratch" at the Oxford Club is an international bestseller. In 2014 I co-authored “Tax Advantaged Wealth” with leading IRS expert Jack Cohen, CPA. This was the crown jewel of the Oxford Club Wealth Survival Summit.

I have been a regular speaker at the Investment U Conferences.

In 2012 I gave a workshop entitled “How to Increase Oxford Club Newsletter Returns by 10 Fold!” The conference was held at the Grand Del Mar Resort in San Diego, California. This resort destination is rated #1 on TripAdvisor.

In 2013 I spoke at the Oxford Club’s Investment U Conference in San Diego California. The talk was entitled “The Best Buy Signal in 103 Years!” Later in the summer I spoke at the Oxford Club Private Wealth Conference at the Ojai Valley Inn.

This was at the same time that Jimmy Kimmel married Molly McNearney in the posh California celebrity resort. It was fun to watch some of the celebrities who lingered.

I also operate a live weekly investment mentorship subscription service under the Bullet-Proof brand every Monday night by GoToWebinar.

Academic Research:

I am an associate professor of finance of the AACSB Accredited Graduate School of Business at the University of Puerto Rico. My research appears in some of the most prestigious academic journals in the field of investments including the Journal of Financial Research and Financial Management. This work is highly regarded on both Main Street and Wall Street. My research on investment newsletter returns was considered so important to investors that it was featured in the CFA Digest.

The Certified Financial Analyst (CFA)is the most prestigious practitioner credential in investments on Wall Street.

Prestigious finance professor Bill Christie of the Owen School of Business of Vanderbilt University and then editor of Financial Management felt that our study was valuable to financial society. We showed that the average investment newsletter is not worth the cost of subscription.

I am the lead researcher on the Puerto Rico Act 20 and 22 job impact study. This was signed between DDEC secretary Alberto Bacó and Chancellor Severino of the University of Puerto Rico.

(See Brown, S., Cao-Alvira, J. & Powers, E. (2013). Do Investment Newsletters Move Markets? Financial Management, Vol. XXXXII, (2), 315-338. And see Brown, S., Powers, E., & Koch, T. (2009). Slippage and the Choice of Market or Limit orders in Futures Trading. Journal of Financial Research, Vol. XXXII (3), 305-309)

Graduate Degrees:

I hold a Ph.D. in Finance from the AACSB Accredited Darla Moore School of Business of the University of South Carolina. My dissertation on futures market slippage was sponsored by The Chicago Board of Trade. Eric Powers, Tim Koch, and Glenn Harrison composed my dissertation committee. Professor Powers holds his Ph.D. in finance from the Sloan School of Business at the Massachusetts Institute of Technology [MIT]. Eric is a leading researcher in corporate finance and is a thought leader in spin offs and carve outs.

Dr. Harrison is the C.V. Starr economics professor at the J. Mack Robinson School of Business at Georgia State University.

He holds his doctorate in economics from the University of California at Los Angeles. Glenn is a thought leader in experimental economics and is the director of the Center for the Economic Analysis of Risk.

Tim Koch is a professor of banking. Dr. Koch holds his Ph.D. in finance from Purdue University and is a major influence in the industry.

My dissertation proved that under normal conditions traders and investors are better off entering on market while protectingwith stop limit orders. The subsequent article was published in the prestigious Journal of Financial Research now domiciled at Texas Tech University — a leading research institution.

I earned a masters in international financial management from the Thunderbird American Graduate School of International Business. Thunderbird consistently ranks as the #1 international business school in the U.S. News & World Report, and BloombergBusinessWeek.

Academic Conferences:

I spoke at the 2010 annual conference of the International Association of Business and Economics (IABE) conference in Las Vegas, Nevada. The research presented facts regarding price changes as orders flow increases in the stock market by advisory services.

I spoke at the 2010 Financial Management Association [FMA] annual conference in New York on investment newsletters. The paper was later published in the prestigious journal “Financial Management.”

I presented an important study named “Do Investment Newsletters Move Markets?” at the XLVI Annual Meeting of the Consejo Latinoamericano de Escuelas de Administración (CLADEA) in 2011 in San Juan, Puerto Rico. The year before that I presented my futures slippage research at a major renewable energy conference in Ubatuba, Brazil.

I spoke at the Clute International Conferences in 2011 in Las Vegas, Nevada. The research dealt with the price impact of newsletter recommendations in the stock market.

I presented a working paper entitled “The Life Cycle of Make-whole Call Provisions” at the 2013 Annual Meeting of the Southern Finance Association in Fajardo, Puerto Rico in session B.2 Debt Issues chaired by Professor LeRoy D. Brooks of John Carroll University. Luis Garcia-Feijoo of Florida Atlantic University was the discussant. I chaired the session entitled “Credit And Default Risk: Origins And Resolution.” Then I was the discussant for research entitled "NPL Resolution: Bank-Level Evidence From A Low Income Country" by finance professor Lucy Chernykh of Clemson University and Abu S Amin of Sacred Heart University and Mahmood Osman Imam of the University of Dhaka in Bangladesh.

That same year I presented the same study to the Annual Meeting of the Financial Management Association in Chicago, Illinois. I did so in session 183 – Topics in Mergers and Acquisitions chaired by James Conover of the University of North Texas with Teresa Conover as discussant. I chaired session 075 – Financial Crisis: Bank Debt Issuance and Fund Allocation. Then I was the discussant for TARP Funds Distribution: Evidence from Bank Internal Capital Markets by Elisabeta Pana of Illinois Wesleyan University and Tarun Mukherjee of the University of New Orleans.

Academic Service:

I am a member of the MBA Curriculum Review Committee, the MBA Admissions Committee, The Doctoral Finance Admissions Committee, the Graduate School Personnel Committee, and the Doctoral Program Committee of the School of Business of the University of Puerto Rico.

Financial Journalism:

I am the editor of Momentum Investor Magazine. I co-founded the magazine with publisher Daniel Hall, J.D. We have published three issues so far. Momentum Investor Magazine allows me to interview very important people in the finance industry. I interview sub director Suarez of the DDEC responsible for the assignment of Puerto Rico act 20 and 22 licenses for corporate and portfolio tax reduction in the third edition. Then I interview renowned value investor Mohnish Prabia in the upcoming fourth edition — to be made available via Udemy. Valuable stock market information will be taught throughout.


In October of 2010 I arranged for the donation to The Graduate School of Business of the University of Puerto Rico of $67,248 worth of financial software to the department that has been used in different courses. This was graciously awarded by Gecko Software.

I have guided thousands of investors to superior returns. I very much look forward to mentoring you as to managing your investments to your optima! –Scott

Dr. Scott Brown, Associate Professor of Finance of the AACSB Accredited Graduate School of Business of the University of Puerto Rico.