To succeed at investing is not as difficult as it may seem. In fact, the common “buy low, sell high” wisdom might actually be preventing you from reaping the full potential of the best companies in your portfolio.
The best investors generally adhere to a few basic principles to outperform the market and generate life-changing returns. At The Motley Fool, co-founders Tom and David Gardner have been successful both by identifying companies with sustainable competitive advantages and by buying and holding stocks for the long term -- which eliminates the need to show consistently positive results on a quarterly basis.
One of the Gardners' key investing philosophies is that investors should add to their best-performing holdings rather than trim them. This may sound counterintuitive since conventional investing strategy teaches investors to rebalance their portfolios by trimming positions in winners and adding exposure to underperforming sectors.
Successful businesses tend to succeed for a reason. Therefore, stock market winners are more likely to continue to win. When Motley Fool investing services such as Motley Fool Stock Advisor and Motley Fool Rule Breakers re-recommend buying a stock, it's called a "double down buy alert."
What does a double down buy alert indicate?
The double down buy alert indicates that a Motley Fool investing service is recommending a stock for the second or even third time. This is a sign that the analysts are so bullish about the stock's future that they suggest buying it again, even at a higher price, essentially encouraging investors to double their holdings of the stock. The double-down signal often indicates that the stock is one of The Motley Fool's top stock picks, but the alert is distinct from others like The Motley Fool's ultimate buy alerts, which are issued when both Tom and David Gardner recommend the same stock.
The Motley Fool has recommended doubling down on only a few stocks, so the alert is one of the strongest confidence signals investors can receive. Among past recipients of double down buy alerts are Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Tesla (NASDAQ:TSLA) -- all companies with stock prices that have skyrocketed over their histories.
Double-down stock trading strategy
There are a number of benefits to the double-down trading strategy. First, the best stock to buy is often one you already own. While it's important to diversify your portfolio by owning at least 15-20 stocks, the stocks you already own tend to be the ones that you understand the best. Therefore, you can more easily capitalize on opportunities that arise when the stock is unusually cheap or when it loses value due to short-term reasons like simply missing earnings estimates.
The other reason why the double-down stock-buying strategy works is because winners tend to keep winning. While it may be tempting to add to your losers with the hope that they'll gain substantial value, you're better off selling your losers and reallocating that money to your winners. Past performance isn't a perfect indicator of future growth, but it's one of the most reliable signals available. Companies that outperform generally do so because they are better managed, can create and retain competitive advantages, and are implementing disruptive strategies.
How to take action on The Motley Fool double-down stock yourself
When The Motley Fool issues a double down buy alert, our analysts are encouraging investors to buy more of the stock, assuming they purchased it the first time it was recommended. While you don't have to double your ownership of the stock, historically it's proven profitable to add to your portfolio additional shares of the recommended company. A double down buy alert doesn't necessarily mean that the stock is expected to double in price, although there's a good chance it will, especially since Stock Advisor tends to issue double down alerts for only the most promising growth stocks in the market.
The Motley Fool encourages investors to take control of their own portfolios, so you'll have to make the decision for yourself whether to buy the doubly recommended stock and also decide how much of the stock to buy. However, the track record of Stock Advisor is clear. The investment advisory service has outperformed the S&P 500 (SNPINDEX:^GSPC) by a factor of nearly five since its founding in 2002. In other words, history shows that when The Motley Fool gives a double down buy alert, it's probably a good idea to follow that advice.