It's always fascinating to read stories of average, everyday people who built up a fortune by regularly investing small amounts in stocks such as Procter & Gamble
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 14.8%, 15.7%, and 20% annually over the past three decades, 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 in small, fixed amounts, investors can use simple methods of buying a stock in portions to manage risk and boost returns.
First, find a solid business
Of course, every situation is different, but great returns on investments always come on the back of fundamentally strong businesses. And if you're confident you've already purchased shares in a great company, why wouldn't you at least consider buying again, particularly if the stock price is significantly below intrinsic value? If the business and its model are still fundamentally sound, it's a golden opportunity.
For larger, more stable companies, simply buying more shares when the outlook is bleak can be rewarding. For instance, buying more British American Tobacco
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 Internet stalwarts Amazon.com
Buying more shares of Amazon and Yahoo! near their low at the start of 2002 would have earned you 269% and 236%, respectively, on that new money. The larger economic conditions had only a temporary impact on the solid, proven business models behind Amazon and Yahoo!
Other great companies such as Cisco Systems and Starbucks have similarly experienced big drops in share price, only to come roaring back afterward. Investors who focused on the underlying business, rather than the stock prices, were more likely to grab the opportunity for a significant profit.
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 their investments for re-recommendations to buy, and this diligence pays off. As of January 2007, the average performance of companies they re-recommend for investments is 80.5%, compared with the 67.1% performance of all company recommendations. 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 on 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 Starbucks. Amazon, Starbucks, and Yahoo! are Motley Fool Stock Advisor recommendations. Colgate-Palmolive is an Inside Value recommendation and Johnson & Johnson is an Income Investor recommendation. A longtime Fool, Dave is also the author of The Qualcomm Equation. The Motley Fool has a disclosure policy.