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View Full Version : Wondering about Darvas' box theory in stock market



Juicifer
1-10-12, 5:29pm
I have been reading and studying material about investing in stocks. I tried ForEx for a while but it's not for me. I have a trial account with Questrade and purchased BAC (Bank of America). I tried entering the stock market in 2008 and I focused on BAC then as well so I kind of have a good feeling about them.

Anyways, I tried a few trades based on Darvas' box theory and I have to say that it is not as dumb as it seemed. It's not based on day trading but still, on my fake account I got a return of 29.4%. Which is pretty good.

Now, I know it's not that the stock market is not that simple, I do my technical homework and keep charts as well. I'm wondering though why no one talks about this box system, is it obsolete because Darvas traded in a market before the internet?

Because I have been doing very good on my trial account I want to open a live account and start trading gently. But if it appears that my return was beginners luck and someone has a good opinion about this box system I'm willing to reconsider. :) and do more homework first.

bae
1-10-12, 6:48pm
A lot of people have good opinions about astrology....

stuboyle
1-12-12, 3:20pm
If it was proven to work, everyone would do it, and then it wouldn't anymore, if that makes sense.

I just like the idea of buying during periods of permission and selling on euphoria. I also am big into high-yielding dividend stocks like AT&T. The dividends provide some downward protection. I have my portfolio dripping, so if the price goes down that just means I buy more shares when the dividends come in.

Juicifer
1-13-12, 6:47am
I have been practicing with a trial account and I didn't do bad. I used Bank of America just to see how thinks work. The big disadvantage of Darvas' box theory is the work that is involved. I found that the Stochastics charts %K and %D are useful as well and more accurate, it's offered on Bloomberg.com for each stock.

Bank of America started to go down yesterday and this was expected. I got tot 33.4% before it dropped. I also 'bought' BMO (bank of Montreal) and that is still rather steady. I feel more confident now and will start a live account in the next couple of weeks and I'm just going to put $1,000 in it to give it a whirl.

bae
1-13-12, 10:18am
I think you are just gambling, frankly, and not investing.

freein05
1-13-12, 12:01pm
I think you are just gambling, frankly, and not investing.

I agree with this comment. I have been investing in the stock market for over 20 years and agree with bae.

loosechickens
1-13-12, 3:38pm
I agree with bae, also. What you are talking about is not investing, it's gambling. Which is fine, some gamble on the stock market and some gamble in casinos, etc. But it's important not to confuse that with investing. Which is a very different animal and seldom results in big, quick profits, but does build wealth over time.

uji
1-14-12, 4:29pm
Okay, but what is the difference between gambling and investing? ;)

Whenever you "invest" money without a guaranteed return and guaranteed protection of your principal, you are gambling, by definition. You can argue about whether the odds are long or short: but it's all gambling. I'd say that the only investing that's not gambling is saving (CDs, YMOYL's long bonds, etc). But that's not usually called "investing", but "cash" or "savings."

So when we call another's investment scheme "gambling," what do we mean? Are we just saying that the odds are longer than we "investors" are comfortable with? We mean that the "risks" outweigh the "possible return", perhaps; but is that really any different than saying that we prefer shorter odds? And if it is, aren't we still referring to "gambling"?

It's a question of degree, perhaps. But just because black jack provides a more reliable return at a casino than roulette doesn't make the one "investing" and the other "gambling", does it?

freein05
1-14-12, 4:45pm
I look for solid stocks paying a good dividend. They may go up or down in value but I still get the dividend income. I have used the income over the years to buy additional investments. Over the last year I have been able to buy good solid stocks paying more than a 5% dividend. Which is far more than the .75% money market accounts are paying.

Since I retired I now live off of the dividends. I also have bonds. This method is not a get rich quick plan it takes time and you have to do your home work on a stock before you buy it. It has taken me over 20 years of investing to reach where I am today.

Edited to add: When I first started investing I could only afford usually to buy 100 shares of a stock. I now usually buy 1,000 shares. It takes time using my method and if you have the time you can also do it.

razz
1-14-12, 5:31pm
It depends on so many variables including age, knowledge etc.

When investment houses able to afford analysts and consultants are not making money, when there are so many stock exchanges doing trades at any time of the day, when trades are set in advance to take advantage of any gains or even microgains from trades in $millions+ of shares, one person is not investing, simply gambling as others have said.

Experts (Benjaimn Graham) have advised that you need to know the stock company really well, monitor its activities for a few years to truly understand how it is as an investment before you buy one share. Limit your number of stock as well.
The Couch Potato did as well as most mutual fund companies and better than some with all their highpriced staff.
http://canadiancouchpotato.com/model-portfolios/

And from today's news:
http://business.financialpost.com/2012/01/14/in-defence-of-couch-potatoes/

Gord Pape is a mutual fund guru (promoter)who advises the boomer and older generation.

uji
1-15-12, 11:38am
It has taken me over 20 years of investing to reach where I am today.

It's clear to me that research and patience are key to successful "investing." Dividend stocks sound like the ticket but, again, those dividends aren't guaranteed, are they? If you count on that income (not just add it to the rainy-day-fund), what happens if they decide to lower or do away with the dividend. They can do that on a whim, can't they?

I understand that if you've done your due-diligence it doesn't feel like gambling -- but isn't it, still? This is not rhetorical: I genuinely am unclear how folks feel about this. I would prefer to get twice what I make in dividends on CDs but, since I depend on that income to live, I have to be sure it will be there. I am with the CDs. Would I be with dividend stocks?

Another question about dividend stocks: How is price related to dividend yield? That is, if your stock generally runs around $100/share with a yearly dividend of $x, what happens if the stock drops to $75/share? Does the dividend automatically change, or is it the company's call?

freein05
1-15-12, 1:09pm
You are correct in that dividends are not as safe as CD's held at an FDIC insured bank. You are also correct in that dividends can be lowered or eliminated. I have had that happen to me in my early years of investing. I now look at the industry a business is in. I look at their year end financials for a few years. One important thing I look at is the companies income vs how much of that is paid out in dividends. This ratio will depend somewhat on the industry the company is in. A company like a drug company will have a lower pay out because a lot of it's income is used to finance research and development. But most important is that the company have their dividend more than covered by it's income.

I use a full service brokerage and have had the same broker for a number of years. He knows how I invest and will pass along ideas. I also get analyst opinions on the stock. This is second nature for me as I worked in banking for 35 years and have had an interest in the stock market since I was a kid.

It is not for everyone. Mutual funds are another method to invest in the market. There are mutual funds and Exchange Traded Funds that invest for dividends this is a good way to go. I have a few of them in my portfolio. I would recommend you look into them.

loosechickens
1-15-12, 1:58pm
We also use a trusted broker who has worked with us for well over 20 years. When we first started with him, he sat us down and said "I am not in the business of helping clients get rich quickly, I am in the business of assisting them in growing wealth over time", and he has been true to his word.

We invest a large percentage of our invested capital in such things as solid, dividend paying stocks. We hold those stocks, sometimes for many years, and while most have appreciated in value over time, certainly kept up with inflation, our primary reason for holding them is to live off the dividends. Yes, a company CAN reduce or eliminate its dividend, but large companies, whose stock is often held by pension plans, larger investors looking for income, turn themselves inside out to not reduce or eliminate dividends. If you examine a company and it has paid a dividend regularly for the past 40 years, through good times or bad, it is likely to guard that record carefully, because that is a major part of its stock value, that performance.

We get a dividend return far above what we could get in CDs, etc., and even through the recent stock market crash in 2008, while the price of many of those stocks went way down, the dividends continued with little reduction, and our dividend income remained close to what it had been. We used the opportunity of the depression of prices to consider those solid stocks "on sale" and added to our position in some companies.

EVERYTHING is a gamble, in one sense. But, as someone said, today, with programmed trading, split second trades (far faster than an individual investor can make with something like Ameritrade, etc.), you are a lamb in a world of wolves when it comes to trading. Far better to look at investing in solid companies for the long term, growing wealth slowly, looking at investments for production of income and keeping up with inflation in pricing, etc.

It's worked for us. We sleep soundly. We were able to watch our stock investments go down in 2008, consider that "numbers on paper", continue to receive and live on our dividend payments, and have watched those stock investments recover, while having allowed us a period of time when they were "on sale" to buy some solid companies for greatly reduced prices.

we just don't try to invest in the fast lane with the big boys.....that is definitely a losing game over time for the small investor, IMHO.

loosechickens
1-15-12, 2:09pm
"Another question about dividend stocks: How is price related to dividend yield? That is, if your stock generally runs around $100/share with a yearly dividend of $x, what happens if the stock drops to $75/share? Does the dividend automatically change, or is it the company's call? " (uji)
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The two are mostly unconnected, unless the reduction in the price of the stock reflects some problems with management, profits, etc., at which point, the dividend might well be lowered to reflect the losses of profit in the company. But in general, stock price and dividends are often more or less unconnected. The company pays its dividends based on the performance of the company's business, not the price of its stock.

freein05
1-15-12, 2:12pm
Good post loose. As far as stock dividends and the price of the stock go, any of the daily price reports on a stock will generally quote the price of the stock and the dividend in dollars and next to it the equivalent in percentages. The % quoted will go up if the stock goes down in value and down if the stock goes up in value. I use Yahoo finance for most of my quotes.

uji
1-15-12, 3:25pm
EVERYTHING is a gamble, in one sense. But, as someone said. . . you are a lamb in a world of wolves when it comes to trading.
VERY helpful, loose and free. (Well, it was pretty "loose" and certainly free.;))
I guess "finding the broker" is the biggest gamble in the mix, and I guess due-diligence is the word there, too. Out in the sticks like we are, it's hard to know where to find someone of the sort the two of you have. You need a personal relationship, I imagine. Not something you can do with an on-line sort of outfit.

bae
1-15-12, 3:59pm
I guess "finding the broker" is the biggest gamble in the mix, and I guess due-diligence is the word there, too. Out in the sticks like we are, it's hard to know where to find someone of the sort the two of you have. You need a personal relationship, I imagine. Not something you can do with an on-line sort of outfit.

Actually, I've been successfully managing a large amount of capital for ~20 years now. I have found that boring, faceless Internet brokers are the best for my purposes - I use Schwab. They execute orders with reasonable efficiency and at low cost. Their online tools for managing my account are helpful, and their research tools are OK.

I don't want a "personal relationship with my broker". I don't want some guy trying to sell me on investment ideas, or trying to push whatever crackpot derivatives-backed issue his brokerage is having on fire-sale that month.

I think if you are investing, you need to educate yourself, and do your own homework, and not be led by the nose by a broker.

To me also, there's a huge difference between "investing" (which of course still involves risk), and "trading" (especially with some clever "system", which is essentially gambling IMNSHO). Just because both activities involve some risk, doesn't make them remotely equivalent. Getting out of bed in the morning is a risk.

For context, last year my Schedule D took 10 minutes to fill out, by hand. I only move in/out of a handful of positions a year.

loosechickens
1-16-12, 12:06am
If you have deep enough interest in the details and complexities of managing your investments on your own, as bae does, I'd think it the best way. But for me, doing the research to sift through investments makes my eyes glaze over. Bae has the education, training and background that requires, and sounds as though he also has the interest to delve into the details of his investments. I just don't.

We realized long ago that while we try to stay informed, and are active partners with our broker in making decisions, neither of us is deeply enough interested in managing our money to spend the time or engage in the complex details that we'd feel necessary to do the job ourselves. We take the view that we wouldn't try to take out our own appendix, and just as we would look for a doctor for that operation, we look to our broker who spends his full time immersed in investments, to guide us in managing our money.

Perhaps we're lucky in our choice of a broker, because he (and now his son, who is a CFP and now in the office with him) have NEVER tried to sell us stuff, or push any "hot" deals, etc. Quite the opposite, in fact. Both have considered our relationship to be a long term proposition, and that they will do well with us doing well. We have recommended them to several fairly wealthy people who are now their clients, so what they haven't made in commissions from us, they have made by acquiring new clients because of having done a great job for us.

And, actually, both have been a temperate influence, tamping down my desires to invest in the tech bubble, preventing me from any panic in the 2008 debacle, and quietly assisting in steering the ship, instead. And we've come through those hard times relatively unscathed because of them. Numerous times, when I've asked about making changes, they have advised staying with what we had, so certainly no "churning" of commissions has occurred. In fact, THEY were the ones who instituted and have maintained a "buy and hold" strategy over the years, which has served us well, as well as having tax expertise that we didn't have to make investment decisions with an eye to tax savings, etc.

We've always felt that they've made decisions in our own best interest, often at the cost of commissions to them. They've taken seriously the job of managing our little box of coins, and done an excellent job of it. We certainly have become far wealthier with their help than we could ever have done on our own.

But, if you're like bae, and have the interest, then by all means, study, learn and do it yourself. But look at investing as a long term proposition, not a get rich quickly gamble, no matter whether you do it yourself or choose to have a partner to guide you.

Like bae, we don't move into and out of positions all that often.....if a particular stock has probably reached its target price and another in the same class seems to be a better bargain for growth, and also pays a similar dividend, we may change, but for the most part, we have a well diversified mix, with most trading occurring with the need to rebalance the portfolio, rather than trading in and for itself.

uji
1-16-12, 5:10pm
I think if you are investing, you need to educate yourself, and do your own homework, and not be led by the nose by a broker. . .

Sounds like excellent advice. If one were to educate themselves in the matter of dividend-paying stocks, where might one start? Free recommends comparing company income with dividends payed out, industry-wide out looks, and the track-record of paying dividends.

Clearly one is looking for a good record (over time) of paying dividends. What is one looking for in comparing earnings to income? How does one judge long-term outlook for an industry? etc.

Amazon, for example, has a dozen or so books with "Dividend Stocks" in the title -- even one for "idiots", which certainly would cover me. Anyone suggest any one specifically?

flowerseverywhere
1-16-12, 9:28pm
If you want to keep your money don't get books from amazon. go to your library and start reading books that are the highest rated on amazon. The idiots book is a good start, but keep going from there. One book has one persons opinion and that is the kind of stuff that gets people in trouble.

always keep in mind that a broker needs to make a living. They are not giving advice for free, they have a family to support, most likely a mortgage and car payment and commissions could certainly prejudice their advice. If you pay a load or a broker fee you start out behind. With todays volitile market you could lose a lot quickly.

freein05
1-16-12, 11:46pm
You can also watch the Yahoo financial pages many times they will have a list of high dividend paying stocks and various annalist will state their reasons for recommending the stock. If you do your own research and are comfortable with making your own trades you can save money by using a discount broker. I have used both and now use a full service broker. It is more costly. I make the decisions and let the broker know this is my style of investing. I have an old broker so he is well established. Many times new accounts will get young brokers who are hungry. You need to establish with your broker how you will handle your account and if they still try to push you fire them.

As flowers said you could invest in a stock today and it could lose value tomorrow. Do not panic sale. I did not do anything during the recent crash and even bought some. My portfolio is now about where it was before the crash and my stocks have continued to pay dividends.

This is not investment advise. Please do your own research and decide if investing in the market is right for you. It is you money!

uji
1-17-12, 9:39am
Oh, I'm in no position to do anything fast. My wife and I are in the black every month with laddered CDs in Roth IRAs that -- so far -- we haven't needed to touch. So anything I did would be slow and methodical. Thanks for the advice and the caveats. I still believe (pace Bea) that "investing" vs "gambling" is a distinction without a difference; but it is also clear from this thread that if you truly understand the odds ("risk") you can most likely get better returns than I am currently. I figure, too, that even if eventually one goes to a full-service broker, it is probably best starting off making the decisions and purchases oneself; that way, one learns the turf and can better judge/regulate a broker if you decide to get one.

So, I'm off to the library with my 5-star list from Amazon...