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 General Electric (NYSE: GE ) , ConocoPhillips (NYSE: COP ) or Wal-Mart (NYSE: WMT ) .
If you worked for these companies and/or regularly "trickled" money into them over the years, this is quite feasible -- GE, ConocoPhillips and Wal-Mart have returned 9%, 10%, and 13% annually over the past two decades, respectively -- even after taking into account the pummeling that GE has experienced in the past couple of years.
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 is bleak can be especially rewarding. For instance, buying more Altria (NYSE: MO ) back at the peak of investors' pessimism over tobacco lawsuits would have juiced your returns considerably -- the stock has returned more than 580% 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 reduces your exposure to significant drops should the company falter or broader economic conditions change.
For example, look at Mobile Mini (Nasdaq: MINI ) . You've probably seen its portable storage units around construction sites and parks -- the company converts shipping containers into storage lockers and then leases them for use in commercial and residential markets. From 1997 to the beginning of 2002, Mobile Mini soared tenfold as it capitalized on rising demand for storage units. Then, in an abrupt six-month period afterward, the stock shed roughly 70% of its value.
When demand for portable units dropped with the slowing economy, margins began to shrink, and investors poured out of Mobile Mini stock. But the fundamental business operations remained intact.
Investors who bought at the peak but continued to hold the stock have still matched the broader market return. But money invested when the outlook was bleak is now up some 250%. The larger economic conditions had only a temporary impact on Mobile Mini's solid business model.
Buy again
Other companies, such as NVIDIA (Nasdaq: NVDA ) and Research In Motion (Nasdaq: RIMM ) 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.
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 NVIDIA and Mobile Mini, which are both Stock Advisor selections. Wal-Mart Stores is an Inside Value pick. The Motley Fool's disclosure policy keeps a shopping list handy.
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