Something Old or Something New?

Last week there was some discussion on our Rule Maker Strategies board about why we choose to add to our positions every month rather than picking new ones. While I suspect the majority of long-term buy-and-hold investors choose to add to existing positions rather than purchase new stocks, I thought it would be worth discussing why we favor this approach.

For me, it's a lot easier and less time-consuming to check in on the performance of a company I already own than to study and evaluate a new stock. And, while I may not be the best one to speak to this issue (since my schedule is always overloaded) I know time is our most precious resource. I spent Labor Day weekend with my family. My wife and I took our three-year-old son to Yankee Stadium for the second time this year, and then we spent a quiet night at home watching a movie.

I could have spent that time studying a potential investment, but I think my choice paid big dividends. Last night when our son went to sleep, he asked us to leave the Yankees game on the radio so that he could listen until he fell asleep. It's the little things like that, and the feeling I get when he says, "Daddy, you're my best friend," that are worth more than any returns I get from investing.

Hopefully, as we go through life, we're accumulating money to invest, but that's not the end-all and be-all. We should also be enriching our lives in other ways. If we only use our money to purchase new stocks, we're missing more than half of the ingredients.

It's also my view that the strongest part of any investing philosophy is a willingness to add new money to existing positions. As a matter of fact, the biggest change that's come about in my approach to investing during the three years I've been writing for the Fool is the realization that I can invest successfully by adding to my existing holdings instead of searching all the time for new companies.

My favorite investor is Philip Fisher, and we discuss his investing philosophy regularly over on the Grape's Fisher Kings discussion board. According to the latest information I know about, Fisher holds just six stocks in his portfolio. His average holding period is more than 20 years. Fisher's approach involves a rigorous study of the company that's refined over time. It's an approach that focuses on the quality of management and the way the business is run above all else. The longer we study and follow a company, the better we get to know and understand its management and its approach to running the business.

As we learn more about our companies, we get better at knowing when to add to existing positions. We get better at analyzing daily news stories, separating the music from the noise. I don't always make the right decision, but I'm better at deciding when to add to an existing holding than figuring out whether to buy a new company.

For example, in September and October of 1998, there was a great deal of FUD (fear, uncertainty, and doubt) around portfolio holding Cisco Systems (Nasdaq: CSCO). If you were familiar with the company, its position in the market, and the opportunities in front of it, you had a much better chance of overlooking the FUD than someone less familiar with the company. And, long-term investors in Emulex (Nasdaq: EMLX) were less likely to panic when a crook issued a fraudulent press release than those in it for a quick buck.

I don't, however, recommend adding money to existing holdings blindly. If the company's performance is deteriorating, if its outlook for the future looks weaker than you thought when you first purchased it, or if the financials are taking a turn for the worse, then it's probably not a good idea to add to your existing position. If you find that you have doubts about management's ability to deliver the kind of results you expect, you should think about selling.

If you ever wondered why we check in on the performance of our companies once a quarter, it's so that we can keep close tabs on business performance. If you regularly look for new investment opportunities rather than adding to existing holdings, you might consider the benefits of holding fewer companies and getting to know each one better.

Your Turn:
When you have money to invest, what are you most likely to do with it? Take this poll on the Rule Maker Strategy discussion board.

Related Link: