How 2 Stock Market Amateurs Became Millionaires in a Year

Source: Shared by Blog Reader Quiet Motivating

One peculiar aspect of the stock market is that anybody can participate. There are no (or very low) barriers to entry.  All you need is an easily available online brokerage account and the money to fund it, usually a minimum of two-thousand dollars.

Once you’ve done that, anybody – even a complete amateur – can get into the game of buying and selling stocks alongside professionals. It’s hard to think of any other endeavor where that takes place. Imagine walking onto the field of a professional football game and saying, “send me in coach, I’m ready to play.”

Of course, the stock market can be overwhelming at first and many amateurs feel that they are at a substantial disadvantage due to their lack of knowledge.

Fortunately, information on how to become a successful investor has never been more widely available than it is today, and investors can proceed at whatever pace they are comfortable with until they feel they have acquired enough knowledge to give them an edge.

Lack of previous stock market experience should never be an impediment when learning to invest.  Approaching the market with no preconceived ideas allows you start from scratch, and over time, develop a strategy that works. This is the story of two such people, who went from being complete stock market amateurs to stock market multi-millionaires.

The Ballroom Dancing Millionaire

In 1943, Nicolas Darvas was a normal twenty-three-year-old living in abnormal times. While studying economics at the University of Budapest in his native Hungary, he realized that it was only a matter of time before his country was occupied by either the Nazis or the Soviet Union, so with a forged visa and $100 in his pocket, he fled to Turkey.

From there he made his way to Europe and eventually the US where he settled in 1951. Once in America he trained to become a ballroom dancer and got so good at it that he began touring the world, making a good living as a professional.

At one point, a promotor who had booked some of his shows asked if he could pay Darvas in stock instead of money. Darvas, up until then having had no experience in the stock market, agreed. Unfortunately, due to a scheduling conflict, he was unable to complete the shows and feeling bad about canceling, offered to buy $3,000 worth of stock from the promotor, which was trading at $0.50 per share.

Darvas forgot about the stock until he happened to glance at its price two-months later, when to his surprise, he found it trading at $1.90 per share. The ease with which he made a $8,400 profit shocked and intrigued him, and he decided to become more active in the market.

However, like many amateurs who win big early, he ended up giving most of it back over the next several years. But he did more than lose money in those years, he studied the market, obsessively pouring over financial newspapers and company earnings reports.

He also devoured stock market books, beginning with the following:

• ABC of Investing, by R. C. Effinger
• The Stock Market, by Dice & Eiteman
• The Securities Market: And How It Works, by B. E. Schultz
• Your Investments, by Leo Barnes
• Profit in The Stock Market, by H. M. Gartley
• Consistent Profits in The Stock Market, by Curtis Dahl
• You Can Make Money in The Stock Market, by E. J. Mann

In addition to these books, he continually re-read on a weekly basis, The Battle for Investment Survival, by Gerald M. Loeb, which though published in 1935, is still widely read today by market professionals.

Through trial and error, he also eventually came up with his own set of investing rules, which he followed with ruthless discipline. They are as follows;

1. I should not follow advisory services. They are not infallible, either in Canada or on Wall Street.
2. I should be cautious with brokers’ advice. They can be wrong.
3. I should ignore Wall Street sayings, no matter how ancient and revered.
4. I should not trade “over the counter”—only in listed stocks where there is always a buyer when I want to sell.
5. I should not listen to rumors, no matter how well founded they may appear.
6. The fundamental approach worked better for me than gambling. I should study it.
7. I should rather hold on to one rising stock for a longer period than juggle with a dozen stocks for a short period at a time.

More importantly, he refined a system for buying and selling stocks which he called the “Darvas Box.”.

He started with a list of industries that he thought would perform well over the long-term. Then he picked what he felt were the best fundamental stocks in each industry – focusing mostly on higher priced stocks in order to marginalize the effects of the then high, fixed-commission structure.

Then he waited.

What Darvas was looking for were spikes in volume. Once he saw that, he would wire his brokerage and ask them to monitor the stock and send him quotes on a regular basis.

[Side note: All this took place long before the internet or even the ability of the average person to get stock quotes, outside of those published in the newspaper. Darvas spent much of his time touring Europe on the ballroom dancing circuit and by the time he received the newspapers he was using to find these volume spikes, they were typically at least one-week old].

When monitoring stock quotes, Darvas noted that stocks on the rise tended to form price ranges, or “boxes,” based on his specific set of rules. He defined the upper limit of a box as the highest price achieved during an advance, that was not penetrated for at least three consecutive days. The bottom of the box was just the opposite – a low that had not been penetrated for three consecutive days.

Once a box was identified, Darvas instructed his broker to buy shares just above the top of the box and set a stop loss just below the bottom of the box. If another box formed on top of the first one, he would add to his position when the top of that box was broken and move a trailing stop up just below the bottom of the newest box.

Using this method, Darvas turned $30,000 into $2.45 million in 18 months during the bull market of 1957-58 (about $21 million in 2016 dollars). He chronicled this feat in his book How I Made $2,000,000 in the Stock Market, published in 1959.

The Millionaire Pool Contractor

Growing up in San Fernando, California, an area known locally as “The Valley,” Dan Zanger’s background couldn’t have been more different than that of Darvas. As the son of two doctors, it was expected that he’d attend college, but after a brief stint, Zanger dropped out and became a snow bum, skiing the slopes of Colorado and Idaho for a few years.

After taking a series of odd jobs he returned to Los Angeles and began working for a landscaping company. Eventually, he got a contractor’s license and began building pools, which provided him with a modest income. [According to Zanger, he made on average about $50,000 a year as a pool contractor.]

But construction was not his passion. His mother loved the stock market and Zanger often watched the Financial News Network (a precursor to CNBC) with her. One day, at the age of 25, he noticed the volume exploding in a particular stock running along the ticker tape at the bottom of the TV screen.  When the stock hit $1.00, he made his first purchase ever, selling it a few weeks later for $3.00.

This initial foray into the market hooked Zanger so much so that he began carrying a QuoTrek – one of the first devices invented to receive mobile wireless stock quotes – and checked it obsessively as he went from construction site to construction site. He also began regularly reading  and re-reading  How to Make Money in Stocks by William O’Neil, the founder and publisher of Investor’s Business Daily.

Yet it wasn’t until 1997, almost 20 years after his first stock purchase, that he began making serious money in the market. Noticing big moves in tech stocks which were just beginning to benefit from the internet boom, Zanger sold his car and used the proceeds to aggressively begin trading.

Relying solely on chart patterns, price, and volume, he began exploiting the massive intraday moves being made in stocks, mostly those listed on the tech-heavy Nasdaq exchange. One of his favorite patterns to trade was the Bull Flag.

A Bull Flag occurs when a stock rises rapidly, on extremely high volume, over a number of days and then rests anywhere from a few of days to a few weeks. When viewed on a chart the movement resembles its namesake, a flag. When the top of that flag is broken, the stock is a buy (not completely dissimilar to how a Darvas box is traded).

Zanger’s plan was to be in the fastest moving stocks, in which volume was expanding, as long as they kept going upwards. Once a stock stalled, or worse, failed, Zanger was quick to exit.

This technique served him well. In one year, he turned $11,000 into $18 million. Within two years it had turned into $42 million, both records for each respective timeframe. Zanger had his trades and returns during this period audited by a third party accountant firm, which you can view on his site, Chartpattern.com.

To be sure, the late 90’s was filled with stories of average people quitting their day jobs to become full-time traders. Many of them made a lot of money. Most of them lost it all, and sometimes more (due to using margin).

What is perhaps most amazing about the Dan Zanger story is that when the internet bubble burst and the stock market began to crash in 2000, he was skilled enough to recognize what was happening in real-time and get out – preserving the lion’s share of his winnings in the process.

Million Dollar Takeaways

It’s entertaining to read stories of those who started with nothing and became multi-millionaires in the stock market, but do they provide any practical lessons for the average investors?

Mostly “yes,” with a little “no.”

Critics will point out that both men made their millions in exceptionally strong bull markets, the likes of which are rarely seen. This is true, but both also regularly made bigger returns on individual stocks than what the broader market was making at the time, which means their stock picking and trade management abilities were sound, something that is valuable in any type of market.

However, most people will not end up making millions in the market anyway because that’s not the point of becoming an active investor. The goal of most self-directed stock market investors should be to improve their returns the best they can by becoming educated and engaged, even if that just equates to an extra few hundred or thousand in their pockets at the end of the year.

So, on the “yes” side, there are a lot of things to learn from Darvas and Zanger.

• Don’t be intimidated by the stock market: Don’t worry about being a novice. Neither Darvas nor Zanger had any formal financial background in finance (save for a few courses in economics by Darvas). In fact, neither one of them even graduated college.
• Become a student of the market: Both men were obsessed with learning about the market. They read not only the financial wisdom of their times, but went back in history to read the stories of great investors who came before them – much of whose wisdom about the stock market is timeless.
• Don’t give up: Both men made money in the market very quickly, and then proceeded to give it all back. That is normal when you are first learning to invest and it often takes a long time before you become profitable on a regular basis. In Darvas’ case, it took 5 years. In Zanger’s it was much longer.
• Forge your own path: Despite consuming a massive amount of conventional wisdom about how to make money in the stock market, Darvas and Zanger both created their own unique strategies. They did this by taking bits and pieces of other strategies and them refining them in a way that worked best with their own personalities.

At the end of the day, the biggest takeaway is that there are always opportunities to make money in the stock market – no matter if you are a ballroom dancer or a pool contractor – as long as you are an informed and involved investor