“Life is a game. Money is how we keep score. Gaining more knowledge is the only strategy.”
Everyone has their own story about how and why they entered the stock market. The promise of a better future, exponential returns, and financial freedom. One thing you must have realized from the very beginning is that the stock market does not discriminate. It does not matter which caste, color, race, or religion you belong to in the stock market. All that matters is whether you can gain enough knowledge to be profitable more times than you lose.
If you are reading this, you are likely not a fund manager or a CEO of a large financial institution. We are the average investor willing to create a fortune with the little capital we have.
And the future is worth dreaming about. Making a profit in the stock market means beating other investors in their own game. To bet against the current value of a company is basically to claim that you know better than the average Joe.
And how do I gain the knowledge to see further and more clearly?
By gathering as much information you can. Books are a great way to expand your horizon and learn to paddle in the stock market. In this article, we will discuss one of the classics in the investing world: How I Made $2,000,000 in the Stock Market.
What the Book is about
This book is not written by a hedge fund manager managing billions of dollars of other people's money. How I Made $2,000,000 in the Stock Market is the story of Nicholas Darvas, an ordinary dancer who performed at shows, and how he became a millionaire with his absurd investment strategy.
The book is about how he could amass such a fortune with little seed capital without looking at any tips, financial stories, or recommendations from his brokers. In fact, Nicholas actually lost money whenever he listened to other people's recommendations, whether personally or in magazines and newspapers as recommendations of "experts."
Interestingly, the daily and weekly stock prices were all the information he needed to evaluate stocks. He studied the price movement of companies to get a "feel" about the movement of the market and the company. Nicholas Darvas had to stay away from the broker houses in America because he had to tour the world for his performance. But while he was in the snowy village of Kashmir, or in the mountainous regions of Nepal, or in Japan where he was mistaken as an American spy, Nicholas Darvas consistently beat the market while being away from it physically.
To keep this article organized and easy to read, the major takeaways from the book are summarized in the points below:
1) There are other ways to invest in stocks than just Fundamental Analysis.
Nicholas Darvas' trading strategy did not have anything to do with fundamental analysis. As a matter of fact, Nicholas Darvas did not see any gains when he was using the fundamental approach.
You should realize that the investing world is divided into two equal parts on the debate between fundamental analysts and technical analysts. Sharesansar as an organization does not prefer one strategy over another. We are only summarizing this book in which the character Nicholas Darvas sees more returns with his technical strategy.
Nevertheless, Nicholas liked to call his strategy "techno-fundamentalist" because he used a few assumptions of the fundamental side too. Even though his strategy was mostly technical, he still considered improving earning power or anticipation of it as a deciding factor in his trades.
The issue with fundamental investing, Nicholas argues, is that the general market does not see how you see the market. In other words, even if your valuation is right, the market might take ages to see the fact. As a result, Nicholas justified that better profits can rather be made with the market trend in mind.
Nicholas gives this example of how you can do nothing for the market's reaction:
During one of his plays, George Bernard Shaw encountered a critic. After the curtain fell everyone cheered and clapped except one man who booed.
G.B.S. went up to him and said: "Don't you like my play?" The man replied, "No, I don't."
Whereupon Shaw said: "Neither do I, but what can the two of us do against all that crowd?"
As a fundamental investor, you can't blame or shout at the market for not seeing the "real" trend. Also, we are here to make money and not to be proved right. If a strategy makes more profitable trades than bad ones, you have a strategy that works.
2) To beat the market, stay away from it.
In the book How I made $2,000,000 in the Stock Market, there are two instances in Nicholas Darvas' trading journey when he lost a huge chunk of his portfolio. He calls these instances his "crises."
Both crises were caused by listening to people he thought were more knowledgeable than him.
Nicholas was fully a dancer-performer when he started trading. He used to ask investment advice from whoever he met, including the waiters of the hotels where he performed. Obviously, he lost money doing that.
Then Nicholas started to read finance columns on newspapers and the analysis published by experts on trusted sources. However, his portfolio did not seem to improve.
Only later did he realized that no one was better informed about the market. The bitter truth was that most sources he classified as credible were actually trying to entice the general investors and dump their own shares. The hard lesson of analyzing the market yourself was learned by Nicholas after he saw significant losses.
Also, Nicholas felt that being close to other investors and brokers can actually work against you. Humans tend to act irrationally in a crowd, and whenever Nicholas traded from the broker office with other investors, their sentiments affected his own, and he ended up making illogical decisions out of fear and greed.
Nicholas actually earned more when he was miles far away from the broker floor, while he was touring the world when all he could study was the price movement of stocks and not the emotions of traders.
3) Successful investors/ traders are not better market predictors. They are better risk managers.
Nicholas Darvas did not devise a better investment strategy in the latter part of his investment journey. In other words, he did not crack the code of the market and became an invincible investor.
His investment strategy was always simple. He noticed early on that prices stay in multiple boxes. It is very hard for a stock to go out from this box, but when it does, a new trend (breakout or breakdown) forms and the price moves until it can find a new box. Nicholas figured out that this strategy can be tapped on to make money.
This strategy of his is very similar to the theory in technical analysis that says that the price of a stock likes to be in the tunnel formed by the upper line joining the highs and the lower line joining the lows. If the price moves beyond this tunnel, a breakout is confirmed.
With this simple strategy, Nicholas bought a small number of shares in the beginning to test the water. If the price rose further, he would then bulk up on his portfolio.
However, once the stock started to soar, Nicholas would adjust his narrow stop-loss just a few points below the price of the stock. This means that if the trade was profitable, he would collect enough profit, and if it went bad, he would be stopped out with the stop-loss and incur a minimal loss.
We can see how this improves the risk to reward ratio. There is no reason why this strategy won't be profitable in the long term.
Rather, the hardest part of trading was controlling his attitude and mental urges. A disciplined trader is a focused trader. A focused trader with the right strategy is a lethal weapon.
4) You may be the market king. But the market is God.
The book "How I Made $2,000,000 in the Stock Market" documents a period when Nicholas earned half-million dollars for the first time.
And instantly, he began to feel like someone who had cracked the hidden code. Previously, he was a silent trader. But now he began to engage in discussions about the stock market. He got more close to the market by trading from the broker's offices.
And soon after, he began to lose his touch. Anything he touched stopped being profitable. He witnessed that the stock movement was less and less clear to him now as if someone had taken away his investing spectacles.
Overconfidence and acting on immediate impulses came in the way of him and his simple strategy that had given him fabulous returns. In a way, he became carried away.
It can thus be learned that the market always stands taller than the investors in it. It does not care how much you hold in your portfolio and how your performance was in the past. If you mess up this time, you simply mess up for bad.
This can be summarized in better words as:
"For a trader, winning is extremely dangerous if you haven't learned how to monitor and control yourself."
Investors/Traders think that they are losing consistently because they haven't figured out the market. However, one should realize that no one has ever figured out the market. No one ever will.
As a matter of fact, 90% of investing is a mental game. With a strategy that works more than half the time, anyone can generate impressive returns if they are tough as nails and as disciplined as a Shaolin monk.
With that, let us leave you with this quote:
"Interest reads a book. Commitment applies the book 50 times."