If you pick up a dollar on one street and spot another Washington on the ground a few blocks away, should you pick that up too? Of course.
It's kind of the same idea in the stock market. If a big winner on hand goes on to form another good base and breaks out successfully, it's okay to buy more shares. In fact, even a second full-size position can be made if the stock has the makings of a great winner.
Stocks that have turned out to be big-time stock market winners usually don't break out of a base and blast off without ever taking a breather. The majority of the time, it's not just one and done. Stocks will consolidate and go on to form new good bases.
Take some precautions before you get in.
First, make sure that the market is in a confirmed uptrend. Most stocks will move in the direction of the general market.
Second, make that the stock you're holding is a top-tier leader. It should be No. 1 or No. 2 at what it does.
Lastly, and probably most importantly, you should have a profit cushion of at least 20% in your current position before you think about buying again. Obviously, the bigger your prior gains, the more comfortable your buffer zone is. But if the new doesn't work out, you'd still cut losses on the new stake at 8%.
While the big money is usually made by concentrating a portfolio into a small number of positions, this can bring on extra risk.
Yet the potential for compounding one's gains in the stock market increases sharply when one has two or more full positions in a true market winner.
In "," IBD Chairman William O'Neil talked about how he accumulated a position in biotech Amgen (AMGN) in 1990 and 1991. "If the market price was 20 points over my average cost and a new occurred off a proper base, I bought more," O'Neil wrote.
Google (GOOG) shaped several bases en route to huge gains in its first couple of years after coming public. The search engine leader formed two cup bases from November 2004 to April 2005. Technically, this was a base-on-base pattern. (1) Google's earnings vaulted 126% in 2005 as sales grew 92%.
Google shaped a fresh in July through September (2) and broke out. Another base is another buying opportunity. The stock hit 475 by January 2006, up 119% from the base-on-base entry.