You may have heard of a dancer-turned-investor named Nicholas Darvas who startled Wall Street with his "How I Made $2,000,000 in the Stock Market." The book distinguished itself in the simplicity of its approach. So how did he do it? The common-sense attitude he displayed is still inspirational today.
To begin, Darvas dealt only in stocks which were "in tune with the jet age," growth stocks. He selected only those that appeared to be developing trading activity and strength. No attempt was made to buy a stock at the bottom; instead, he took action only after it had begun to rise.
He watched his selected stocks and kept charts, which consisted of a series of "boxes." If a stock should move up to a higher box and stay there, he would buy it. If it should move down to a lower box, he would sell.
For instance, if a stock had fluctuated in a 55 to 60 range, that would be its first box. Then, if the stock should move out of that range to fluctuate in a range of 60 to 67, that would be his next box. If the stock should demonstrate its ability of staying in that box, he would buy it, and place a stop-loss order to sell a few points below the buying price. If the stock should rise, he would raise the stop-loss price. If it should fall through the stop-loss price, he would be automatically sold out.
Mr. Darvas called his method "Techno-fundamentalism," but it is essentially a technical approach based on the idea that market is its own indicator. It is "fundamentalism" only in the sense that he used a daily market average of industrial stocks as a basic indicator of the stock market trend. Stock prices may indeed be determined by fundamental values in the long run, but he concerned himself only with what the market was doing at the moment.
Behind this seemingly rather simple approach is a much deeper theory, which sees the price of any stock as a reflection, at a given moment, of the sum total of hopes and fears of investors and speculators. And this reflection is considered registered in the price of that stock at any given moment. The price of the stock itself may then serve as a stimulant for buying or selling.
The usefulness as well as limitations of this technical approach has been used by many professionals in one form or another. In his "The Sophisticated Investor," Burton Crane, financial columnist of The New York Times, recommends it in the following words:
"Don't be too eager to get in on the ground floor. Sacrifice a little of the profits to make sure that somebody else believes what you've been told. In other words, let volume and price up a bit before you buy. Increased price and volume are the only confirmation that matter."
People who are not familiar with market behavior may not like the idea of buying a stock with its price already up a bit. Surely it would be better to buy at 10 than at 12. What is at stake, however, is something considerably more important than a couple of points.
What would happen if what you have believed true should turn out to be mere rumor? The risks would be considerably higher in the case of little known stocks. They would be hard to dispose of, even at a bargain price, in time of trouble. By their very nature, little known stocks have what traders call a "thin market" even under normal conditions. In abnormal market conditions, as when information turns out to be rumor, an obscure stock could mean crisis. You might be lucky to get out of it with half of your investment.
Take a page from Darvas' book and begin your own dance with investing. Partners change, tunes change, but the basics of good investing remain true.