While there is no shortage of new and interesting investment books published each year, a few classic titles have become legendary on Wall Street.
These are books that have reached elite-level status among traders and investors. They were written decades ago and are still read and re-read by Wall Street’s best. They’re handed out to new traders by some of the greatest investors of our time and they’ve become essential reading for anyone who wants to enter the stock market.
If you were going to name the three titles that are most often given this “classic” status, they would be The Intelligent Investor by Benjamin Graham, Reminiscences of a Stock Operator by Edwin Lefvre, and How I Made $2,000,000 in the Stock Market by Nicolas Darvas.
The Intelligent Investor is considered the bible of value investing and in 2003, financial writer Jason Zweig gave this book the star treatment by adding extensive updates and commentary in an effort to “modernize” the classic text from Benjamin Graham.
Reminiscences of a Stock Operator is the unofficial biography of legendary trader Jesse Livermore. It is to trading circles what The Intelligent Investor is to investing circles. In 2010, Jon Markman gave this definitive trading tome the star treatment it deserved with an updated, expanded, and annotated edition.
Now, Steve Burns has stepped in to give Nicolas Darvas’ classic book its long overdue revision. The result is nearly 100 pages of expanded commentary to go with the original work from Darvas.
I interviewed Steve Burns to discuss why he felt it was important to update this legendary Wall Street book, how he went about completing this overwhelming task, and how this new version of the book will help today’s traders benefit from the wisdom of the Darvas System.
QUESTION: I think the best compliment one can give about a book is to say, “I wish I had written that book.” When your book first came across my desk, THAT was exactly my reaction. I’ve often felt that How I Made $2 Million in the Stock Market deserved an extensive modern revision and you obviously felt the same way, but tell our readers why you felt compelled to update this Wall Street classic?
STEVE BURNS: Well, I think a lot has changed since Nicolas Darvas wrote his first book. Many think that he just got lucky or was in the right place at the right time. In reality though, he stumbled upon the principles that allow people to win big in the stock market and I wanted to go inside his story, between the lines, and explain what those principles were and why they still work today.
Q: I can’t think of a better person to write this new edition of Darvas’ book than someone who actually used the system to make a lot of money with it in today’s stock market. Tell us about your success with the Darvas System?
SB: My really big money was made by trading Darvas-type stocks during market Uptrends. I was very heavy into the tech sector in the late nineties and actually had enough capital at that time to pay off my house in March 2000 if I had chosen to do so. Unfortunately, I would learn some hard lessons about position sizing and risk management as I lost 50% of my account by 2002.
After reading Darvas’ book, I was back to even by 2004 and went on to grow my accounts to $250,000 by 2007. I sidestepped the 2008 meltdown in my two primary investment accounts by simply going to cash. After the financial panic was over and an Uptrend began in March of 2009, I got back into the market and I have continued to grow my accounts.
The key to my success was being focused on trading stocks with growing earnings that continually made higher highs. Some of my favorites over the years have been Research in Motion, Apple, Google, and Priceline.
Q: Updating a book like this had to be an overwhelming process. How did you go about determining what needed further explanation and what needed to be updated for the new version of the book?
SB: I read the book again with fresh eyes, asking myself if a first-time reader or new trader would understand the underlying wisdom of what Nicolas Darvas was doing in his trading. Also, I realized the Darvas did not have stock options in his day, but he did use full margin and special “rights” that were granted on one of his stocks. So, I thought that given the chance, Darvas would likely use options if trading during our time to control risk and make big bets.
Also, while he used price boxes for his trading, in modern times, he may have liked charts and moving averages that have the same meaning as a specific price support level had in his time due to the easy availability of stock charts now.
Q: In your book, I felt you made a very compelling case that Darvas would use options if he were trading today. I also strongly agree with you that one of the big mistakes traders make today in trying to apply the Darvas System is being too focused on the specifics of his famous “Darvas Boxes.” The real key has always been the recognition of valid support and resistance levels. “Darvas Boxes” help with this recognition, but there are several other ways – often more appropriate ways – to evaluate these levels. For example, other proven chart patterns, significant moving averages, etc. Are there any other major ways you think the Darvas System has been misunderstood by modern traders?
SB: I completely agree, “Darvas Boxes” were only a tool he used in his era because price levels are what people watched on ticker tapes at that point in time. With the proliferation of technology and instant charts, everyone is now able to use charts and moving averages to measure movements. I believe Darvas would accept anything that worked to make him money in the markets.
I think the other misunderstood aspect of Darvas’ method is that he was a gambler. Readers should understand that Darvas managed risk with automatic stop losses and trailing stops. He had “insurance policies” in place at all times. His losses were generally small, his stops were fairly tight.
A lot of people also think that Darvas just got lucky. In reality, he was trading the right stocks, using the right system, at the right time. This was not luck. He did his homework and his persistence finally paid off for him.
Q: Every time I go back and read How I Made $2,000,000 in the Stock Market – and I’ve done this too many times to count – I’m always struck by the fact that I still pick up new pieces of insight or new trading lessons. I never stop learning from this book. I assume you can relate to this. As you went back through this book in order to update it, what were some of the key lessons that stood out to you?
SB: Yes, I have the same experience. This time the asymmetric risk dynamics of his trades really stood out. That is, tight stops for a very limited downside, but an unlimited upside. He would let winners run for as far as they would go. This was one of the main reasons he was so successful, beyond merely picking the right stocks. Also this was the first time I realized that the “rights” he had loaded up on with one of his stocks (Thiokol) were similar to modern-day options. Darvas would have been an option trader given the chance!
Q: A lot of people hear the story of how Nicolas Darvas turned $30,000 into $2.25 million in 18 months and they assume that Darvas’ incredible experience was too good to be true, that it was a fluke occurrence. When I first heard the story, that was certainly my reaction. After all the research you’ve done on Darvas and his story for this book, how do you respond to that type of reaction?
SB: While I had the same initial reaction, I have come to understand that Darvas was using all the key principles of successful traders. He discovered these principles through his reading of hundreds of the best investing books of his time and through losing his own money in real trading. He was also a technician who studied price action and took the scientific approach in trying to discover what really made money, not just relying on his own opinions of what should make money in the markets.
Q: A lot of people hear the Darvas story and think that his strategy may have only worked because he took advantage of a certain period on Wall Street when such methods were easier to profit from. In other words, they think that while a strategy like the Darvas System worked in the 1950s and ‘60s, it would not work as well in modern markets. How do you respond?
SB: So many people have proven that it works in many different bull market cycles. William O’Neil, who recommends the Darvas book as one of the best, made more than $200,000 and bought a seat on the New York Stock Exchange in his twenties. Dan Zanger made $42 Million in the Internet bubble in less than two years and credits Darvas as a main influence. There are so many of these stories. As long as there are Darvas-type stocks, there will be big winners using the Darvas System. Just this year, I rode Apple and Priceline for hundreds of points to have a 51% gain on my trading account in one quarter.
Q: I think Nicolas Darvas and his story have been gaining popularity among traders in recent years. My feeling is that this is due to the fact that trend following has had such overwhelming success over the last couple decades and Darvas is being recognized as one of the fathers of the trend following method. What’s your take on why Darvas’ popularity seems to be increasing these days?
SB: People love success stories and want to know how to become rich. Well, Nicolas Darvas makes a bold statement with the title of his book – How I Made $2,000,000 in the Stock Market. I think that draws people to it. They want to learn how he pulled off such a feat.
Q: You write about this a lot in your book, but could you briefly share a few key “updates” to the Darvas System, concepts that you think are important for the modern trader to understand in order to benefit from the Darvas System in today’s market conditions?
SB: I think my two biggest innovations with the Darvas Method is using in-the-money stock options in place of stock to capture moves with much less capital needed and much less risk. Also, in many cases I have started using the 5-day exponential moving average line and the 10-day simple moving average line as support levels in place of price boxes. That is, if one of these moving averages is acting as support on a chart.
Q: It’s difficult to find a trading strategy with a success record as long as the Darvas System’s. Darvas originally published his book in 1960 and traders continue to use it and endorse it today. Why do you think some traders or investors have a hard time buying into the Darvas method?
SB: Many simply do not believe in it, they think it is just a gimmick. These are people who have not done their homework. The Darvas Method is simply one of the very first trend following systems for stocks. It’s shorter-term investing in the best growth stocks with the most price momentum – investing in companies that are currently changing the world.
Q: I know you’re passionate about educating traders, especially helping newbie traders avoid the bad habits that can cost them a lot of money. What one or two pieces of advice would you like to give traders who are either brand new to the game or those who are going through a particularly disappointing period?
SB: One, find a mentor that can give you a shortcut to success, someone you can interact with and ask questions. Darrin, your Darvas Trader PRO newsletter is one of the few that I can say is excellent for executing the Darvas principles.
Two, do not focus on the money you can make, focus on the money you could lose. ALWAYS control your positions sizes and cut your losses at your predetermined stop. If the support level fails, get out.
Q: Thank you, Steve, I really appreciate your kind words about me and my newsletter. And I really appreciate you taking the time to answer these questions and share your wisdom with so many traders.
SB: Thanks for having me back again, and thanks for all you do.
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