Can you learn trading from books part 2 | stockbee

12/15/2008

Can you learn trading from books part 2

In Part 1 I talked about some books on growth investing, in part 2 books by Livermore, Darvas and Ralph Wanger are covered.

 Jesse Livermore

How to Trade In Stocks  

  • Jesse Livermore started as a pageboy and quickly turned a day trader. After several years of day trading he realized real money is not in day trading but in catching big moves or position trading. 
  • After that realization he quickly built a large fortune. Starting from scratch he built a fortune of 100 million in 1920's by trading in the growth stocks of that era. He used large leverage and made very concentrated bets in stocks and commodities. 
  • Excessive leverage, lavish spending, affairs,  divorces and clinically depressed personality contributed to his burst. 
  • This book was written at the very end of his career as he was trying to make another comeback and wanted to raise money by starting advisory services. He committed suicide one year after this book was published. 
  • This small book distills his years of experience and method. The key messages of the book are:
    • There are times when one should speculate and times when one should not. Trying to make money everyday is not a successful speculative strategy.
    • His primary method was to buy new high in a trending stock after a consolidation or correction
    • He concentrated all his efforts on leading stocks of his era. Which at that time were the growth stocks from  industries like steel, motor, railroad,  mail order, aircraft makers, and  commodities. 
    • He had a theory about pivotal point for buy and sell. These pivotal points were basically breakouts after correction or consolidation.
    • He also found other pivotal points like round numbers of 100, 200, 300 and so on, all time high in recent IPO, long (2-3 year) range breaks)

    Nicolas Darvas

    How I Made $2,000,000 In The Stock Market

       

    Wall Street The Other Las Vegas: The Other Las Vegas
     
    • Nicolas Darvas was a Hungarian born dancer, who got interested in stock market after he got paid for one of his performance in stocks. 
    • He got fascinated by stocks and spent hours studying the market and trying to make money on short term moves in stocks without much success. From 1952 to 1956 he tried various methods of stock selection and churned his account till he put in place his own method of trading momentum/growth stocks called "box theory" which was simple a method to buy a second leg of a bull move in a growth stock after it had a had a consolidation period or trading range(which he called box). He bought the stock after the stock made a new high or 52 week high after such consolidation.
    • Once he had his method in place, in span of 18 months he made 2 million starting with 10000 capital. If you look at the 5 or 6 stocks which made him that 2 million, you will notice they were the growth stocks of that time.
    • Most people got fascinated by the "box " idea and they forget that the reason he was successful was because he chose the growth stocks to use the box on. Also he timed his entry with start of a new bull market, which was one of the top 10 bull market year. Between 1957 to 1958 the overall market went up by 50% plus. Which makes 1958 as one of the top 10 bull market years since 1825. Besides that he used huge leverage to magnify his returns. 
    • The key to his 2 million profit was:
      • Growth stocks with established momentum
      • Buying after correction/consolidation
      • Concentrated positions
      • Leverage
      • Avoiding bear markets
      • A bull market of 50% plus magnitude
    • There are numerous websites selling stock picking service using Darvas box technical system. But all those systems miss out the essential element of Darvas method, which was growth investing. He himself subsequently wrote more books and elaborated on his method as techno fundamental approach to investing in growth stocks.

    Ralph Wanger

    Zebra In Lion Country: The Dean Of Small Cap Stocks Explains How To Invest In Small Rapidly Growing Companies

     

    • Ralph Wanger was a mutual fund manager at Acorn Fund. For 25 years he put together a 16% plus annualised returns for his fund.
    • His primary focus was investing in small growth companies for medium or long term holding periods.
    • He says investors are like zebras in lion country. If they stick to the middle of the heard, it is safe , but they get meager amount of grass to eat. The richer rewards in the markets are on outer edge where the risk of lions eating you is high. So one must balance safety , risk and reward.
    • His methodology consists of first identifying a predominant theme likely to play out over many years and then find smal companies likely to benefit from that theme for many years.
    • The best investment picks are growing small companies with following characteristics:
      • fast growing market segment
      • dominant market share
      • good product design
      • low cost and efficient manufacturing
      • skilled marketing
      • high profit margins
      • strong balance sheet
      • understandable business
      • and entrepreneurial management
    • He was always looking for home runs as against singles. 


4 comments:

juan said...

This are great books..I learned alot from them....I also learned a lot about hedge fund trading strategies from 2 other great books. Hedge Fund Trading Secrets Revealed..by Robert Dorfman..and Confessions of a Street Addict of course by Jim Cramer..written before he got really famous..both are riveting and very informative. You should check them out if you like reading behind the scenes stuff about hedge fund and what methods they use..

Pradeep Bonde said...

This list specifically talks about growth investing books.
There are lots of books on hedge fund investing. Hedge fund strategies may not be the best strategies for individual investor. Jim Crammer book The Confession of Street Addict talks about how to trade using insider information, which post Reg FD is illegal. Plus most individual investors do not have access to such information.

juan said...

thanks for the input.....your list is great......actually dorfmans book is for the individual trader

Pradeep Bonde said...

I have seen lot of spam for that self published ebook on various message boards, which makes it a big suspect.