Motley Fool co-founder David Gardner has a remarkably good track record in the market. Does he only pick winners? Heck no. But does his portfolio of stocks outperform the market fairly consistently, and over the long term? Oh yes, and by an appealing margin. (Feeling skeptical? Look deeper into our website and see for yourself -- the man keeps score of his performance with ritual consistency.)
Naturally, you might want to replicate such profitable results, but to do that, the answer isn't simply to copy his stock buys -- it's to emulate his investing style. So on this week's Rule Breaker Investing podcast, Gardner shares the six core traits of his investing philosophy.
In this segment, he explains No. 2: "Add up instead of double down." In other words, add to your winning positions, rather than buying now-cheaper shares of your decliners. But why not scoop up more of those bargains? Gardner explains.
A full transcript follows the video.
This video was recorded on Sept. 19, 2018.
David Gardner: Trait No. 2: And now I will mention my mnemonic system that's going to help you and me, I hope, remember these six principles. Each of these six has the number of the principle somewhere implicit in the words I'm using. I was just kind of emphasizing Rule No. 1 with that first one and I do like that one rhymes with run. Let Rule No. 1 -- Let your winners run. High.
But Trait No. 2: "Add up instead of double down." I think you heard the two words in there. It's double. And a lot of people use the phrase "double down" or think that they should be adding to the thing that's dropped. After all, four of the most harmful words ever unleashed in front of investors [unfortunately constantly parroted and reparroted] are buy low, sell high. Four of the worst words.
Why? Because that third word, sell, has so many people thinking that that's a natural thing that you need to do shortly after you've bought low. And so you have everybody violating Rule No. 1, because in large part concepts like buy low, sell high are just, frankly, wrong-headed as we've been talking about a couple of decades over in my neck of the woods.
So add up, instead of double down. So I do like to add money to investments. I think you should, too. As fellow Rule Breakers, how No. 2 says, "Yeah, that's a good thing to add money," but add to the ones that are winning. The ones that are going up.
You know, in some ways investing is like a horse race. Here's the trick. You're allowed to invest during the race. And so once Secretariat gets up by about 10 lengths halfway through, in the world of the stock market and how we invest as Rule Breakers, you're allowed to put money in the race right then. And guess who I'm going to bet on? I'm betting on Secretariat. And Secretariat might choke, and you don't always win this way, and when you don't, it does hurt. But in my experience, the guys that are out ahead [the horses, the investors, the companies], they tend to keep on winning.
So let's you and I make sure that if we're going to keep adding money to existing holdings, we're adding them to the winners. How many investors have quit the game [maybe Igor's friend, for example] because they put too much in things that were not doing well, and then they added to that. They threw good money after bad, as the old saw goes. How many people have been burned and how badly? I bet I'm speaking to a few of them now.
I've had experiences like this, too. I used to, as a kid, think that you want to buy low, so I was adding to the ones that weren't doing so well. No! We should be Trait No. 2 of the Rule Breaker investor -- adding up instead of doubling down.
So before we move on to No. 3 I said I'd pull kind of a classic quote for each of these, and the one that feels right for Trait No. 2 of the Rule Breaker investor is this one: "I try to find excellence, buy excellence, and add to excellence over time. I sell mediocrity. That's how I invest." Find excellence, buy excellence, and add to excellence over time. Enough said.