The Secret to Buffett’s Success

Every investor’s dream is to match the success of the legendary Warren Buffett. But one of the big secrets to his long-term success is no secret at all…

It’s simple: He doubles up on his winners! He buys more shares of a winning stock as it moves higher.

Unfortunately, many investors do the exact opposite.

They double down on their losers – and then they wonder why they’re not as successful as Buffett.

In late 2016, I presented a simple strategy based on his “doubling up” approach.

Today, I’ll explain how it can help you get the most out of your best investments…

Over the past couple of years, Buffett has been adding to his holdings in consumer-technology giant Apple (AAPL).

He first bought AAPL nearly two years ago… and has increased his position nearly fourfold while shares moved higher.

Take a look…

As you can see, this strategy has worked well for Buffett’s investment so far. Yet many individual investors don’t follow his lead.

Instead of adding to their winners, they add to their losing positions. They hope that buying more shares at a lower price will help them get back to breakeven faster.

This rarely works. But investors rationalize it by telling themselves a myriad of things, such as:

  • The market is just slow to catch on to my great idea.
  • I did all the research, and I know I can’t be wrong.
  • The stock is cheaper now – that makes it a better deal, right?
  • It won’t take much of a move up to get back to breakeven.

When we look at these reasons in writing, they seem silly. Yet investors will do almost anything to justify sticking with a losing position.

You can avoid all this frustration by doubling up on your winners. Here’s how we do it with my TradeStops software…

One of our tools generates a measure of risk and volatility for each investment. I can’t go into all the details here – the important thing is how we use it: We add to our position every time the price rises by twice the amount of this “volatility quotient.”

You can see an example of how this works with beer and wine maker Constellation Brands (STZ). We added to our position at each of the arrows below. Each time, shares had risen by twice their volatility measure at the time of our last buy. Take a look…

This is our favorite way to follow Buffett’s footsteps. Our tools make it easy. But the important thing is how well this idea works – and the difference it can make to your portfolio.

You can start doubling up on your winners right now… by buying more of the investments that have proven to be your best performers.

That is, you want to buy stocks that are demonstrating their strength with a solid uptrend. (We like our method because it also shows a stock’s strength relative to how much it typically moves.)

Doubling up is even more powerful when combined with a trailing stop… If you set a trailing stop for your investments, you’ll know exactly when to sell. And the best part is that if a stock starts falling right after you add more shares, you’ll still end up with a net profit – even if you get stopped out without any more gains.

When you double up, you’re playing with “house money.” That’s a great position to be in.

Importantly, we back-tested our TradeStops strategy for doubling up. We found that we made about 50% more net profit across all of our trades… And we did so without lowering our win percentage or taking on extra risk.

So don’t waste money adding to your losers. Keep your losses small with a trailing stop… And add to your winners instead.


Richard Smith

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Source: Daily Wealth