Long-term pyramiding in a true leader can help you build staggering profits while limiting your downside exposure.
Savvy investors and more than a few massive funds have long relied on this simple technique to enhance their own portfolios.
Pyramiding gets its name from the ancient tombs of Egypt: They're wide at the base and taper off at the top. That's what your position in a great stock that has a long run ultimately will look like.
First, find a fantastic stock that's embarking on a long run to much higher prices. Let the IBD 50, Research Tables and other market features be your guide.
While just a few of your stock choices will likely end up being a Google (GOOG) or a Green Mountain Coffee Roasters (GMCR), it does happen. For that rare occasion when it all comes together, take advantage.
Establish your initial position. Find that first-stage breakout and do what you've been learning to do.
Let's say you bought 1,000 shares of Green Mountain in November 2006 at 45.22. 1 It broke out from a 27-week saucer in screaming volume. Lovely.
Green Mountain advanced, then paused long enough to build a flat base. You're watching carefully and you add, say 20% of the size of that first position, to your holdings in January 2007, as it triggers its 53.70 buy point. 2 Ultimately, the size of the follow-on buy depends on your level of conviction and comfort level. Just make sure it's smaller than the original stake.
You also should raise your mental stop price on your initial position to no lower than break-even. You can't let that gain turn into a loss. In this way, you've added to your total investment but enjoy less downside exposure.
Four months later, you add another smaller wad of shares as Green Mountain pushed above a 66.10 cup-with-handle entry. 3 You're also raising your stops on your older, profitable shares.
Green Mountain posted a failed breakout in December 2007. Did you buy into it? You could have, with 100 shares, or 10% of your initial buy. No great harm. You wouldn't lose more than 8% on that last purchase.
And, assuming you notice the serious sell signals in January (such as a high-volume drop below the 10-week moving average), you would have sold your entire stake for a very nifty overall gain.