Newton's first law of motion says that "an object in motion tends to stay in motion unless acted upon by an outside force." The same is true, more often than not, when applied to investing in successful companies. This is part of the basis behind the idea of adding your winners.
In this clip from Motley Fool Live recorded on Dec. 23, 2020, "The Wrap" host Jason Hall and Fool.com contributor Danny Vena discuss how adding to your winners can supercharge your investing results.
Jason Hall: Danny, this is something that you've talked a lot about, and your high-quality unscientific study proves it out.
Danny Vena: That's right. I have long been a believer in David Gardner's ideas about adding to your winners. That's something that's really difficult to put into practice for some folks. I started off having difficulty with that.
What I did was going back to the early years of my investing. I would watch my portfolio, and once a stock that I had invested in had gained 40%, I'd check the investing thesis, and whatever amount I had initially put into that stock, say for instance $250, I would turn around and I would add another $250 to that. At which point the total amount in the investment would be $500, and it would show that it was up about 20%, and rinse and repeat.
When I started as a Fool writer approximately about three years ago, I had to open a separate retirement account because I became a contractor. As a result of that, I'm a self-employed individual. I opened up a SEP-IRA. What I did was rather than investing in the stocks that I already own, I used a thesis that I had developed.
I went and I looked at the performance measures for stocks in Rule Breakers and in Stock Advisor. They keep a running tally. I looked at the stocks that had been bought most recently that had gained at least 40% or more, and I started adding those to that retirement account.
Now, three years later, that portfolio is actually up, let's see, 250% as of this morning. All of the stocks except for a couple, have beaten the S&P 500 and I haven't sold anything other than two companies that were due to be acquired. A lot of familiar names in there for folks who have heard me talk. But using that process, I added to the ones that were the biggest winners. So I have multiple holdings of DocuSign (DOCU +0.33%), of NVIDIA (NVDA 0.96%), of Okta (OKTA 0.66%), of Roku (ROKU 0.66%), of Teladoc (TDOC 0.28%), of The Trade Desk (TTD 0.09%).
But the point that I really wanted to make here is that every one of these stocks was already up 40% or more at the time that I initially bought it over a short period of time of less than a year, and I added to those as they gained 40%. I've got high-class problems now. I actually cannot keep the money going into that portfolio fast enough to be able to buy all of the stocks that have gone up 40% or more.
To me, this unscientific study proves that buying high-quality stocks and adding to your winners on a regular basis for whatever way works for you will end up giving you a much better performance across your portfolio than you might have otherwise. I was really pleased when I went back and looked at this. It had done far better than what I had anticipated.
Jason Hall: I think one of the keys there and we've talked about it before, is investing in great businesses with stocks that have moved higher. Not just stocks that have moved higher. Without any underlying business it's really doing well.
