Nicolas Darvas: The Man Who Took on Wall Street and Won

by Darrin Donnelly on March 8, 2012

What is it about Nicolas Darvas’ story that has made it so endearing over the last 50-plus years?

His first book, How I Made $2,000,000 in the Stock Market, is considered a Wall Street classic and his subsequent books remain brisk sellers decades after they were written.  Why do these books continue to captivate traders of all skill levels so many years later?

Obviously, there is an inspirational factor to it.  When someone overcomes incredible odds and does the seemingly impossible – in this case, turning just over $30,000 into $2.25 million in less than two years – it certainly excites and motivates us all.  It reminds us of the enormous potential the stock market holds if the stars align just right.

But the stock market has a long history of such “rags-to-riches” stories.   These tales inspire us, for sure, but they don’t continue to captivate us decades later the way Darvas’ story has.

So what is it?  What makes Nicolas Darvas go beyond the mere subject of an inspirational true story to a Wall Street legend whose teachings continue to educate and fascinate us several decades later?  What makes Darvas and his writings so timeless?

I believe it’s Darvas’ folk-hero status among independent traders that makes him so compelling to this day.   Here was a guy whose success in the stock market was fueled largely by his anger at the Wall Street establishment.  He felt the game was rigged against him and was determined to beat the Street on his own.

Nicolas Darvas was most certainly not a member of the Wall Street “insider club.”  He had no Ivy League education, he didn’t grow up in the bucket shops honing his trading techniques, and he had no wealthy mentor to guide him through the jungle of stock market speculation.  In fact, Nicolas Darvas stumbled into the stock market purely by accident at the age of 31 when he, working as a ballroom dancer, was paid by a nightclub owner in stock instead of cash.

By pure luck, the value of that initial investment nearly tripled in two months and from that point on, Darvas was hooked by the wealth potential offered by the stock market.

However, as is often the case with beginner’s luck, the blessing soon turned into what felt like a curse as Darvas spent the next four years losing his money by following all the mainstream Wall Street advice.

Some of Nicolas Darvas’ mistakes were his own fault.  He trusted the “tips” he got from wealthy acquaintances.  He overtraded, feverishly entering and exiting stocks, sometimes holding 25-30 stocks at a time.  He tried to “get rich quick” by focusing on highly-speculative penny stocks.

After learning these harsh beginner mistakes, Darvas acknowledged that he needed help from the Wall Street pros.

It was during this period that Darvas realized most of these so-called professionals weren’t any more successful than anyone else trying to make it in the market.  In some cases, they were downright fraudulent in taking advantage of “average Joe” traders like Darvas.

Nicolas Darvas tried numerous financial advisory services and “professional” newsletters, only to find that they were often involved in “pump and dump” strategies.  That is, they would buy a penny stock, tout that stock in their newsletters in order to give it a big boost, and then sell those stocks immediately, booking a fast profit.  The vast majority of the newsletter’s readers, people like Darvas, were left buying into a recommended stock just as it was peaking and then being forced to sell it for a steep loss.

Darvas didn’t have a much better experience with advice from the professional brokerage firms he worked with.  He found that these brokers could give endless high-finance-sounding reasons for why a stock should go up, but that rarely ever translated to a stock actually going up.

Darvas became convinced that the “Wall Street pros” took advantage of the small-time investors like himself.  He felt taken advantage of by these “insiders” who seemed to be the only people getting rich on Wall Street – at the expense of regular people like Darvas.

This type of sentiment towards the Wall Street institutions sounds alarmingly familiar to what we hear today, doesn’t it?

Fueled by anger at the Wall Street establishment, Nicolas Darvas decided he had to start acting in his own self-interest.  Wall Street could not be trusted.  If Darvas was going to beat this game, he’d have to think for himself.

This conclusion led Darvas to create his own strategy, a powerful method known as the Darvas System, which eventually made him a multi-millionaire.

Darvas never let go of his anger towards Wall Street.  His second book, Wall Street: The Other Las Vegas, was perhaps his most aggressive attack on the Wall Street establishment.

The powerful Wall Street machine fought back, of course.  They banned his books, attacked his credibility, and even went so far as to outlaw his recommended stop-loss method on the American Stock Exchange!

But Nicolas Darvas never backed down.  He’d continue to call out Wall Street in each of his books.  He’d continue to fight for the individual trader and expose some of the more questionable methods employed by the major Wall Street firms and financial advisors.

Today, some of the methods Darvas spoke out against have been outlawed or at least regulated.  However, when we see headlines about insider trading scandals, Ponzi schemes, pump-and-dump scams, etc., we can’t help but feel like we’re all being taken advantage of by Wall Street’s “good ol’ boy network.”  We can’t help but feel, like Darvas did, that there is an insider network designed to keep the very few on the inside rich at the expense of the vast majority who are locked out of it.

Nicolas Darvas fought for the individual trader.  And he never stopped fighting.  He never stopped ringing the bell on the fraud and deceit that often went unchecked on Wall Street.

That, more than anything else, is why I think Nicolas Darvas remains a hero to the individual trader and why his message continues to be so popular, several decades later.

 

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