Buying the dip -- waiting for a stock you own to fall before buying additional shares -- is a time-honored tradition in investing. Furthermore, some investors will refuse to add to a successful company when shares have climbed higher, insisting they'll wait for the stock to "come back down," before buying more. This sort of "price anchoring" might be one of the biggest wealth killers out there.
On this episode of Fool Live that aired on Nov. 30, 2020, Fool.com contributors Danny Vena and Brian Withers discuss how "adding to your winners" can make investors far more money than "buying the dip."
Brian Withers: Some of your favorites: Shopify (SHOP 5.88%), Netflix (NFLX 5.03%), MercadoLibre (MELI 5.84%). You bought in, and as you got more comfortable with the company added to them at a higher price.
Danny, I remember you told me something early on, that you wouldn't wait for a stock to drop before you bought it. You actually bought stocks when they went up. You want to talk about that?
Danny Vena: That's true. I actually still do that today. Early in my investing career when I finally figured out the concept of adding to your winners. Early on, I thought the folks that we're going to make the most money were the people that we're buying when the stock was dropping because you are getting it on sale, but I hadn't quite grasped the difference between buying into winners and buying into losers.
What I would do is, I would put together a system that I would use personally. I would wait until a stock went up 40 percent. Once it went up 40 percent, I would look at it, I would see if anything about the investing thesis had changed. If it hadn't, I would invest the same amount of money in that stock that I had initially. I would do that repeatedly. Some of the stocks that have grown to my largest positions, MercadoLibre is one of them, is one that I invested in over, and over, and over again even when the stock was rising.
Actually nowadays, interesting story when I first started as a contractor for The Motley Fool, I had to open up a brand new retirement account for someone who is self-employed. As a result of that, I was looking at it and trying to decide whether or not I was going to have that mimic my existing portfolio or whether I was going to go in a totally new direction.
What I decided was, I went to the Motley Fool stock recommendations for both Stock Advisor and Rule Breakers. I looked back through the past several months, and what I found was I picked out the stocks that had risen considerably, 40%, 50%, 60%, 70%, 100%, and those are the ones that I bought for this portfolio, for this retirement account. That has turned out remarkably well since the early part of 2018 when I opened up that account. It has essentially tripled since then.
Withers: That's awesome.
Vena: I haven't added anything new to it over the last eight months or so, although I'm getting ready to start that again. But adding to my winners is something that I feel is probably one of the most lucrative things that I've done as an investor, and I would highly encourage people to do that more so than bottom beating.