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. He dealt only in stocks which were "in tune with the jet age," growth stocks. He selected only those which 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 will be further explored. Here, it will suffice to say that it 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.

The increased price and volume Mr. Crane mentioned should considerably lessen the danger of a stock which you, perhaps, shouldn't get into in the first place. It would mean that a lot of people were going into it with you. Some should know something about what they're doing. Among them might be relatives or friends of the directors, or officials or associates of the company.

You might ask what if the story, even if confirmed, should be only enough to move the stock a few points which the "increased price" has perhaps already accounted for? Wouldn't you be "frozen" in the same way as if you were getting into a wrong situation?

That is not the same. You could then get out, perhaps with the loss of some commission, but that would not be nearly as tragic as when information turns out to be rumor. Besides, you shouldn't get into any stock in which you only expect to make a few points. Mr. G. M. Loeb, a partner in E. F. Hutton & Co., shrewdly observed in his Battle for Investment Survival that it is really more advantageous to aim at doubling your money than at a return of 4 to 6 per cent. For the hard fact of Wall Street is that if you aim at only a 4 to 6 per cent profit, the chances are you will wind up with nothing, or more likely with a loss. On the other hand, if you should aim at doubling your money, then you will probably get a substantial profit, even though far short of your original objective.

Mr. Loeb's observation is much like an old Chinese dictum: "Aiming at the large would get you the middle; aiming at the middle would get you the small," or, I might add, nothing or even a loss. The author of this Chinese dictum was perhaps too moderate in temperament to warn more emphatically against too slim a margin of safety in your calculations.

To wait for a little confirmation through increased price and volume in a stock is one thing; to wait final confirmation in the form of news announcement is quite another.
 
You are more likely to lose money if you insist on not buying until good news is officially confirmed. That's why the Wall Street adage says "Sell on good news."

Why do professionals sell on good news? Because, in the words of William A. Doyle of the highly popular The Daily Investor, "many other people (mostly non-professional) will jump in to buy the stock on the good news and they will sell out at a good price."

"Also," continues Mr. Doyle, "good news often leaks out and gets around before it is formally announced. If the people who have advance knowledge of the news do a lot of buying, that will often send the price of the stock up. Then, if they and others sell when the good news is official, the price of the stock may dip."

The market is not a one-way affair. This is true not only of the market as a whole, but of individual issues. That is not to say that what goes up will inevitably go down; quite a few stocks have registered one new high after another without much interruption.

For the overwhelming majority of stocks, however, the opportunities provided by market swings are too frequent to pass up. The difference between the high and the low even in short-term swings often equals or exceeds a year's growth.

The opportunities are even greater if you know how to capital-in on what I call "market disorder," which is created by unusually sharp setbacks. When the market suffers a series of severe reversals, as when it breaks through a psychologically important support zone like the 600, as measured by Dow-Jones Industrial Average, people often get panicky and sell indiscriminately. This creates excellent opportunities to buy favored issues or switch into them from issues you want to get rid of. Though it may entail a small loss, plus brokers' commissions, good stocks bounce back fast during a market rally which would more than cover the loss suffered in the wrong situation.

The Market Pendulum

The opportunities are even greater if you know how to capitalize on pendulum swings from one group of stocks to another. In the excitement over the soaring popularity of one group, the market may overlook its possible future setback. On the other hand, in a moment of despair, it is possible that you may overlook this central fact: bargains are in the process of being created.

                                                9/21/60   10/6/60         10/25/60       11/18/60

American Photocopy                70           70                 714               72½
Beckman                                  91           893/4            764               89
Cenco                                      49           493/8            427/8            503/8
IBM                                         520         508               50l½             558½
Martin                                      5l3/8       52                 483/8            581/8

The tabulation above shows the short-term market swings between September 21 and November 18, 1960, for American Photocopy, Beckman, Cenco, IBM and Martin. You can readily see that in less than two months, the five stocks listed there showed several wide swings, amounting in the case of Beckman, to 15 points between its high of 91 (9/21) and low of 76¼ (10/25). This is a decline of almost 17 per cent from its high of 91. Even for supergrowth IBM, the difference is 57 points between the low of 50l½ (10/25) and high of 558½ (11/18), representing more than 11 per cent. It means that for each 100 shares of IBM you bought or sold between the two dates, separated only by three weeks, the difference is a whopping $5,700!

The difference is even greater in the case of more-volatile electronics stocks. The following table covers the same period.

                                                9/21/60   10/6/60         10/25/60       11/18/60
Atlantic Research                      48¼        454               33a               41
Barnes                                      37½        34½              25½              333/8
Cubic                                       585/8      601/4            401/2            50
Electronics Specialty                 268         l5½               11s                l2½
Gulton                                      534         465/8            39                 463/4
Heli Coil                                   41           37½              293/8            30
Victoreen                                 141/2      135/8            11                 12¾
 
In the case o£ Atlantic Research, the difference between high of 48¼ (9/21) and low of 33a (10/25) is 15 points, a decline of almost one third. Barnes low of 25½ (10/25) is almost a 50 per cent decline from its high of 37½ (9/21).

You could have made 7s points by selling Gulton short at 46s (10/6) and buying it back at 39 (10/25). Or you could have made 7¾ points by buying Gulton at 39 (10/25) and selling it at 46¾ (11/18). Or, if you wanted to make switches, there were plenty of opportunities. For instance, Electronics Specialty and Victoreen closed at 268 and l4½ respectively on September 21—a difference of almost 12 points. Less than two months later (11/18), they were quoted at 12½ and l2w respectively, with Victoreen even 14 higher. Fifteen months later (3/62), however, Electronics Specialty was quoted at 27 against 9d for Victoreen. Even wider gyration was shown by Cubic Corp. which sank to l6½ (3/62) from 604 (10/60).

So watch your carefully picked stocks closely and follow their swings, particularly in a general sell-off when people are panicked into indiscriminate selling, which should create beautiful opportunities for buying your favorites!

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