It's always fascinating to read stories of average, everyday people who built fortunes by regularly investing small amounts over long periods of time in companies such as American Express
If you worked for these companies, or regularly "trickled" money into them over the years, having amassed a fortune is quite feasible -- American Express, Hewlett Packard, and ExxonMobil have returned 14.3%, 15.8%, and 17.6% annually over the past three decades or so, 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 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? 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 back at the peak of investors' pessimism over tobacco lawsuits would have juiced your returns considerably -- the stock has returned more than 1,300% from its low in 2000.
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 top retailer Best Buy
Buying more shares of Best Buy and eBay near their low at the end of 2000 would have earned you 273% and 324%, respectively, on that new money. The larger economic conditions had only a temporary impact on the solid, proven business models behind Best Buy and eBay.
Other great companies such as Cisco Systems
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 that 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 Starbucks and ExxonMobil. Starbucks, Best Buy, and eBay are Motley Fool Stock Advisor recommendations. Best Buy is also an Inside Value recommendation. A longtime Fool, Dave is also the author ofThe Qualcomm Equation. The Motley Fool has a disclosure policy.