Smarter Money: Tough Love for Your Portfolio

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The other day I met a portfolio manager who bought and held Winstar(WCII Quote). At the same gathering, I met an individual who bought and held Merck(MRK Quote). The portfolio manager realized that he should have sold Winstar instead of averaging down. The wealthy individual wishes he had more money so he could buy Merck down here, 20% off its highs. Both men had the identical investment philosophy. One has made fortunes with it. Another has lost fortunes with it. What philosophy could be so great for one person and so horrendous for another?

The answer, of course, is "no philosophy." What mattered wasn't that each individual bought and held a stock. What mattered was the stock. Somehow during the last five years we married a couple of related concepts and came up with an idiotic, corrupted version of the "buy-and-hold" investing strategy. We figured out that if we liked a product, we could buy the stock behind the product and if it came down and we still liked the product, we could do just fine over the long term.

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Is Your Buy-and-Hold Stock Now a Sell?

So we bought Akamai (AKAM Quote) because we read that it made sites move fast, and then when it went down we bought more and when it went down some more we bought more, until, well, we ran out of money and are hopelessly under water. Similarly, the Covad (COVD Quote) DSL line seemed so nifty and the installer was so nice that we bought Covad and dutifully averaged down until we were blown out of the game. ...