How I Made $2 Million in the Stock Market. Nicolas Darvas
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the smart thing to do was to stay with them.
But how to start? How to find what stocks to buy? You could not pick them out with a pin. You must have information. That was my major problem: how to obtain it. I now realize that this is, in fact, impossible for the ordinary man, but then I thought I had only to ask enough people to learn the great secret. I thought if I asked often enough I would get acquainted with people in the know. I asked everybody I met if they had any stock market information. Working in nightclubs I meet rich people. Rich people must know.
So I asked them. The question was always on my lips: “Do you know a good stock?” Oddly enough, everybody did seem to know one. It was surprising. Apparently I was the only man in America who did not have his own first-hand stock market information. I listened eagerly to what they had to say and religiously followed their tips. Whatever I was told to buy, I bought. It took me a long time to discover that this is one method that never works.
I was the perfect pattern of the optimistic, clueless small operator who plunges repeatedly in and out of the market. I bought stock in companies whose names I could not pronounce. What they did and where they came from, I had no idea. Someone told someone who told me. There could have been no more slap-happy, ignorant buyer than I was. All I knew was what the last head-waiter in the last nightclub I had performed in had told me was good.
Early in 1953 I was performing in Toronto. Because of my first extraordinary $8,000 break with BRILUND, Canada was the land of financial milk and honey as far as I was concerned, so I decided this was a good place to go looking for a “hot tip.” I asked several people if they knew a good, reliable broker, and eventually I was recommended to one.
I must admit I was startled and disappointed when I found his office. It was a tiny, dingy, prison-like room full of books, with strange scrawls on the walls. Later I found out that these are called “charts.” There did not seem much smell of success or efficiency. Sitting at a rolltop desk was a busy little man poring over statistics and books. When I asked him if he knew a good stock he reacted at once.
He smiled and pulled out of his pocket a dividend check bearing the name of a famous gold company, KERR-ADDISON.
He stood up and said: “My friend, take a good look at that. That dividend check is worth five times what my father paid for the original stock. That is the sort of stock everyone looks for.”
A dividend five times the price of the original stock! This excited me as it would any man. The dividend was 80 cents so his father must have paid only 16 cents for the stock. It looked beautiful to me. I did not realize he had probably been holding his father’s stock for thirty-five years.
The little man described to me how he had been looking for that kind of stock for years. In view of his father’s success he felt the answer must be in gold mines. He confided to me that be had at last found it. It was called EASTERN MALARTIC. Working with is production figures, estimates and financial information, he reckoned that these gold mines were capable of twice their present gold production, therefore five dollars invested in their stock would soon be worth ten dollars.
On this piece of erudite information I immediately bought 1,000 shares of EASTERN MALARTIC at 290 cents. As I watched anxiously, it went to 270 cents, then to 260. Within weeks it was down to 241 cents, and I hastily sold my stock. I decided this painstaking, statistically-minded broker did not have the answer to making a fortune.
Yet the whole thing continued to fascinate me. I went on following any tip but I seldom made money. If I did, it was immediately offset by my losses.
I was such a novice that I did not even understand about broker’s commission and transfer taxes. For instance, I bought KAYRAND MINES in January 1953. It was 10-cent stock, and I bought 10,000 shares.
I watched the market like a cat and when next day KAYRAND went to 11 cents per share, I called my broker and told him to sell. By my reckoning I had made $100 in 24 hours, and I thought I was being smart by taking a quick small profit.
When I talked to my broker again he said: “Why did you decide to take a loss?’‘-‘’A loss?’‘ I had made a hundred dollars! He gently explained to me that the broker’s commission for buying 10,000 shares was $50, and for reselling the shares next day it was another $50. In addition, there were transfer taxes on the sale.
KAYRAND was just one of the many strange stocks I owned at that time. Others included MOGUL MINES, CONSOLIDATED SUDBURY BASIN MINES, QUEBEC SMELTING, REXSPAR, JAYE EXPLORATION. I made money on none of them.
Yet I spent a happy year on this Canadian buying and selling. I felt I was the successful businessman, the big stock market operator. I jumped in and out of the market like a grasshopper. I was delighted if I made two points. I often owned 25 to 30 stocks at one time, all in small parcels.
For some of them I acquired a special liking. This came about for different reasons. Sometimes it was because they were given to me by a good friend of mine – other times, because I had started by making money with them. This led me to prefer these stocks more than others, and before I knew what I was doing I had started to keep “pets.”
I thought of them as something belonging to me, like members of my family. I praised their virtues day and night. I talked about them as one talks about his children. It did not bother me that no one else could see any special virtue in my pet stocks to distinguish them from my other stocks. This state of mind lasted until I realized that my pet stocks were causing me my heaviest losses.
In a few months my record of transactions looked like the trading record of a small-scale stock exchange. I felt I was doing all right. I appeared to be ahead. If I had carefully studied my statements I would not have felt quite so happy. I would have realized that, like a horse player, I was buoyed up and excited by small gains, and overlooked my losses. I completely ignored the fact that I was holding a lot of stock which was standing well below the price I had paid for it and looked like staying there.
It was a period of wild, foolish gambling with no effort to find the reasons for my operations. I followed “hunches.” I went by god-sent names, rumors of uranium-finds, oil strikes, anything anyone told me. When there were constant losses an occasional small gain gave me hope, like the carrot before the donkey’s nose.
Then one day, after I had been buying and selling for about seven months, I decided to go over my books. When I added up the values of the bad stocks I was holding I found I had lost almost $3,000.
It was on that day that I began to suspect there was something wrong with my money-making scheme. A ghost at the back of my mind began to whisper to me that, in fact, I had no idea what I was doing.
Yet I was still ahead. I consoled myself that I had not touched the $3,000 I had originally paid for BRILUND, and I had about $5,000 of my profit from that transaction besides. But, if I continued like this, how much longer would I keep it?
Here is just one page from my profit-and-loss accounting. It tells the whole sad story of defeat in microcosm.
OLD SMOKY GAS & OILS
Bought at 19 cents
Sold at 10 cents
KAYRAND MINES
Bought at 12 cents
Sold at 8 cents
REXSPAR
Bought at 130 cents
Sold at 110 cents
QUEBEC SMELTING & REFINING
Bought at 22 cents
Sold at 14 cents
Obsessed by my carrot-before-the-nose gains, I had not noticed I was losing an average of a hundred dollars a week.
It was my first stock market dilemma. The market had several much more serious dilemmas in store for me in the next six years but this one was in some ways the worst. On my decision at this point depended whether I would continue to operate in the market.
I