My First Half-Million

The overwhelming success on the stock E. L. BRUCE had made Darvas more cautious. He had made over $325,000 in nine months’ investment and was determined not to lose it by a wrong move. 

Many operators made big money in nine months and lost it in nine weeks. The first step he took was to withdraw half of his profits from the market. With the remaining capital, he monitored the market carefully, watching for potential new well-behaved stocks.

He ventured back to Lorillard only to be sold out thrice. He realised that this stock no longer worked for him.

In July 1958, ‘Universal Products’, then an unknown company grabbed the author’s attention as it satisfied his theory. The price was $35 and fluctuated between $35.85 and $33.5. To get the feel of the stock movement he purchased 300 stocks at $35.25.

In the third week of August 1958, he bought 1200 shares at $36.5 with a stop loss of $33. He bought 1500 more shares within the next few days.

His transactions for Universal Products were–

Pursuing the same theory, he went on to buy 6000 shares of Thiokol for $350,820 in various transactions. Thiokol reached $100 and Universal Products was $45. He was tempted to sell but he decided to hold. 

In January 1959, when Darvas returned to New York, his brokers informed him that his overall profits in the stock market were more than half a million dollars.

Takeaway- Great traders are always mindful and understand that it is likely to give back all the trading profits with a series of bad trading losses if the risk is not controlled. Overconfidence is extremely dangerous and doesn't consider the skills and trading record of a trader. Keeping the money made should be the first and foremost priority. 

It is not advisable to habitually go back to a favourite stock that has made money in the past; its run is likely over unless it shows the best price strength again.

Big profits are usually made at the beginning of a new bull market. It is essential to take the first few leading stocks that show breakouts above old resistance levels because these will be the biggest winners in a bull cycle. At the same time maximum leverage should be added to the winners as paper profits assemble. It is futile to wait for a pullback at the onset of the new trend because there may not be one. Hence it is better to take the buy signals when they occur.

Nothing focuses the mind like purchasing even a few shares of a company. It is like being in the game from being a spectator. Taking a tiny position will also amaze you at the focus on the price action that you will unexpectedly gain.

A common trait of rich traders is that they hold their opinion loosely. They know that they could be wrong on any trade at any time. At times, they will instantly flip and reverse a position that they believed in because of an unexpected reversal or event.

At one point, Darvas was carrying about one-third of his entire account on one stock, which looked reckless. However, the deep thought behind such trade was: 

1. He only bought the strongest stocks at a breakout from a prior trading range. This good entry put the odds in his favour. 
2. He added more stock only after he had paper profits in his initial holdings.
3. He had the stops in place to limit losses.
4. He was long mostly when the market was in an uptrend.
5. He focused only on a few stocks, so he was well aware of their movements and volatility.

Traders find it difficult to let their profits run long. On the contrary, they let their losses run because they don't want a loss. They choose to wait for it to come back. Traders also get nervous about profits because of the fear that the market will take them back, so they lock them in a hurry and end up with small wins and big losses.