It's always fascinating to read stories of average, everyday people who built fortunes by regularly investing small amounts in companies 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 15.3%, 14.7%, and 17.3% 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 the simple method 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 backs of fundamentally strong businesses. And if you're confident 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? If the business and its model are still fundamentally sound, it's a golden opportunity.
For large, stable companies, buying more shares when the outlook for them is bleak can be rewarding. For instance, buying more British American Tobacco
For young, risky companies, acquiring shares in portions is a smart strategy. 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 shares of Amazon and Yahoo! near their low at the start of 2002 would have earned you 742% and 192%, respectively, on that new money. The larger economic conditions had only a temporary impact on the 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 significant profits.
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.
Amazon, Starbucks, and Yahoo! are Motley Fool Stock Advisor recommendations. Colgate-Palmolive is an Inside Value recommendation, and Johnson & Johnson is an Income Investor pick.
Fool contributor Dave Mock is also the author of The Qualcomm Equation. He buys pogs again and again -- more for sentimental than intrinsic value. He owns shares of Starbucks. The Motley Fool has a disclosure policy.