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 FedEx (NYSE:FDX), ConocoPhillips (NYSE:COP), or Wal-Mart (NYSE:WMT) over long periods of time.
If you worked for these companies, and/or regularly "trickled" money into them over the years, this is quite feasible -- FedEx, ConocoPhillips, and Wal-Mart have returned 10.2%, 15.7%, and 12.3% annually over the past two 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 that 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, 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 happier today -- the stock is up more than 150% from its low only five years ago.
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 Mobile Mini, a company that leases portable storage units for commercial and residential markets. From 1997 to the beginning of 2002, Mobile Mini's stock soared nearly 10-fold as the company capitalized on rising demand for storage. 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 only slightly underperformed the broader market return. But money invested when the outlook was bleak is now up more than 380%. The larger economic conditions had only a temporary impact on Mobile Mini's solid business model.
Buy again
Other companies such as Genentech (NYSE:DNA) and Gilead Sciences (NASDAQ:GILD) have seen big drops in share price at some point in the past several years, 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 Mobile Mini. A longtime Fool, Dave is also the author of The Qualcomm Equation. Walt Disney, FedEx, and Mobile Mini are Motley Fool Stock Advisor recommendations. Wal-Mart is a Motley Fool Inside Value recommendation. The Motley Fool's disclosure policy keeps a shopping list handy.
