It's always fascinating to read stories about average, everyday people who built fortunes by regularly investing small amounts over long periods of time in companies such as Chevron (NYSE: CVX ) , McDonald's (NYSE: MCD ) , and Coca-Cola (NYSE: KO ) .
If you worked for these companies, or regularly "trickled" money into them over the years, having amassed a fortune is quite feasible -- Chevron, McDonald's, and Coca-Cola have returned roughly 14.1%, 14.9%, and 15.0% annually over the past three decades or so, respectively.
But you can also get market-beating returns by buying into great companies at more opportune times -- whenever the stock goes on sale. Rather than regularly investing small, fixed amounts, investors can use the simple method of buying a stock in portions to manage risk and boost returns.
First, find a solid business
Of course, every situation is different, but big returns on investments always come on the backs of fundamentally strong businesses. And if you're confident that you've purchased shares in a great company, why wouldn't you consider buying again, particularly if the stock price is significantly below intrinsic value? Especially in pessimistic markets (like today's), fundamentally strong businesses can be bought for good prices.
For large, stable companies, buying more shares when the outlook for them is bleak can be rewarding. For instance, buying more British American Tobacco back at the peak of investors' pessimism over tobacco lawsuits would have juiced your returns considerably -- the stock has returned more than 1,100% from its low in 2000.
For younger, riskier companies, a strategy of acquiring shares in portions is a smart play. It limits your initial outlay and gives you a chance to buy again if shares experience an unwarranted drop.
For example, look at top retailer Best Buy and Internet auctioneer eBay (Nasdaq: EBAY ) . Both companies' stock soared several hundred percent in the late 1990s, only to have their prices whacked more than 60% from the market's peak in March 2000 until the end of that year. While most investors were licking their wounds and kicking themselves for not selling sooner, sharp investors who saw long-term value and competitive advantages in these companies were taking advantage of the pessimism.
Buying more shares of Best Buy and eBay near their lows at the end of 2000 would have earned you 251% and 225%, respectively, on that new money. The larger economic conditions had only a temporary impact on the solid, proven business models behind Best Buy and eBay.
Other companies, such as Celgene (Nasdaq: CELG ) and Oracle (Nasdaq: ORCL ) have experienced big drops in share price at some point, only to come roaring back. Investors who focused on the underlying businesses, rather than the stock prices, were more likely to grab the opportunity for significant profits.
The final caveat with this method is to ensure that you aren't throwing good money at a truly deteriorating company -- hence the importance of understanding the underlying business. In their Motley Fool Stock Advisor service, David and Tom Gardner track all of their investments and re-recommend promising companies when the price is right.
If you'd like to see which stocks they recommend you buy again -- and again and again -- you can click here and get a 30-day trial of the service for free.
This article was originally published Feb. 12, 2007. It has been updated.
Fool contributor Dave Mock buys pogs again and again -- more for sentimental than intrinsic value. He owns shares of Coca Cola. Coca-Cola and Best Buy are Motley Fool Inside Value picks. eBay and Best Buy are Motley Fool Stock Advisor recommendations. The Fool owns shares of Best Buy. The Motley Fool's disclosure policy keeps a shopping list handy.