A Foolish Investing Strategy

Motley Fool Hidden Gems members have it tough. Not only are we beneficiaries of investment returns that have performed a reverse knee drop on the market average -- Tom Gardner's picks have a total average return of 43.8% compared with the meager 8.8% offered by the S&P 500. We then have to figure out whether it's too late to add to a winning stock.

One of the most common questions I see from new investors who have joined this marvelous service goes something like this: "I have Foolishly saved up $4,000 to fulfill the 2005 limit of my Roth IRA, and to my pleasure and dismay, my investment in Mine Safety Appliances (NYSE: MSA  ) has risen 112% since my initial purchase. I am thrilled that my investment has doubled in such a short amount of time, but I was hoping to get some more money in the stock before it rocketed off. Is it too late? I hear a lot of investors say that you should only average down, but is it ever OK to average up?"

For the record, Mine Safety has shot up 195.9% since Tom selected the company for the August 2003 newsletter. Indeed, one of the reasons this question is often asked is that so many of the Motley Fool Hidden Gems picks have done so well. We could easily substitute Mine Safety with Middleby (Nasdaq: MIDD  ) or guest analyst Zeke Ashton's selection of Saucony (Nasdaq: SCNYB  ) .

Let's look at the question this way. If you had bought some stock in Microsoft (Nasdaq: MSFT  ) in 1988, would it have been too late to put more money into it in 1995 even though it had already risen substantially? Instead of Microsoft, how about FedEx (NYSE: FDX  ) or Johnson & Johnson (NYSE: JNJ  ) ? Not only is it Foolish to be Peter Lynch-like and let your winners run, oftentimes it's a wise choice to average up on some of your champion performers.

A great way to approach this decision is to answer the following: "What is the best use for this allocation of cash? Average down in an existing position? Average up in a current holding? Or stay in cash until an opportunity surfaces?" By coming from this direction, we can drive around the road trap of thinking that's it's always smartest to average down on a Krispy Kreme (NYSE: KKD  ) and it's too late to put more money in a FedEx. Many times, the best use of your cash is in the same skyrocketing stock that you already own.

Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.