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, and/or regularly "trickled" money into them over the years, this is quite feasible -- Chevron, McDonald's, and Coca-Cola have returned roughly 12.2%, 15.7%, and 15.1% annually over the past three decades or so, respectively, even after taking into account the losses each stock has seen in the past several months.
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, buying more Altria back at the peak of investors' pessimism over tobacco lawsuits would have juiced your returns considerably -- investors have gained more than 500% from the stock’s low in 2000 with the benefits gained by spin-offs of Kraft Foods and Philip Morris International (NYSE: PM ) .
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.
For example, look at top retailer Best Buy. The stock soared several thousand percent in the late 1990s, only to be whacked for a more than 60% loss 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 Best Buy were taking advantage of the pessimism.
Even after a brutal 2008 in which Best Buy had again lost more than 60% of its value at one point, shares have rebounded and are up more than 250% from that 2000 low. Even after this rebound, investors with a long-term view still may find a great opportunity in a stock that's been beaten down because of larger economic conditions that will likely prove temporary in retrospect.
Other companies, such as Apple (Nasdaq: AAPL ) , IBM (NYSE: IBM ) , and Garmin (Nasdaq: GRMN ) , 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 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 Garmin and Coca-Cola. Apple and Best Buy are Stock Advisor recommendations. Coca-Cola is an Income Investor recommendation. Best Buy and Coca-Cola are Inside Value picks. Garmin and Philip Morris International are Global Gains selections. The Fool owns shares of Best Buy. The Motley Fool's disclosure policy keeps a shopping list handy.