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 Procter & Gamble (NYSE: PG ) , Johnson & Johnson (NYSE: JNJ ) , or Colgate-Palmolive (NYSE: CL ) .
If you worked for these companies, and/or regularly "trickled" money into them over the years, this is quite feasible -- Procter & Gamble, Johnson & Johnson, and Colgate-Palmolive have returned 13.6%, 13.5%, and 15.9% annually over the past two decades, respectively, even after taking into account the greater than 20% in price each has experienced in the past year.
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. And now would definitely count as one of those opportune times to buy cheap stocks.
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 -- or even downright outrageously cheap.
For large, stable companies, buying more shares when the outlook for them is bleak can be rewarding. For instance, family entertainment specialist and theme-park operator Walt Disney (NYSE: DIS ) was hit hard when tourism dropped in the wake of 9/11, and the creative juices in the animated-film division seemed to be drying up. But investors who saw long-term value in the Disney brand and bought on the pessimism are in a happy place today -- their investment is still up more than 20% from the low levels in 2001 while the S&P is still down more than 12% from its low point in September 2001.
For younger, riskier companies, a strategy of acquiring shares in portions is a smart play. It limits your initial outlay and reduces your exposure to significant drops should the company falter or broader economic conditions change.
Consider Internet mainstay Amazon.com (Nasdaq: AMZN ) ; the stock soared several thousand percent in the 1990s, only to have the share price whacked more than 90% in the two years following 2000. While many investors ran for the hills, wishing they had sold sooner, sharp investors who saw the long-term value in Amazon were taking advantage of the pessimism.
Buying shares of Amazon near its low at the start of 2002 would have earned you a whopping 623% on that new money. It took guts to put new money into Amazon then, just as it takes courage to overcome fears of doing so now. But history has shown that the larger economic conditions at the time had only a temporary impact on the proven business model behind the company.
Buy again
Other companies, such as EMC (NYSE: EMC ) and Amgen (Nasdaq: AMGN ) , 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 turn the event into an opportunity.
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 rerecommend 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.
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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 Johnson & Johnson and Colgate-Palmolive. Amazon.com and Walt Disney are Motley Fool Stock Advisor picks. Walt Disney is an Inside Value recommendation. Johnson & Johnson and Procter & Gamble are Income Investor picks. The Fool owns shares of Procter & Gamble. The Motley Fool's disclosure policy keeps a shopping list handy.
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