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 Bank of America
If you worked for these companies, or regularly "trickled" money into them over the years, having amassed a fortune is quite feasible -- Bank of America, Caterpillar, and Home Depot have returned 15.1%, 13.5%, and 20.8% 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 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 and Internet auctioneer eBay. Both companies' stock soared several hundred percent in the late 1990s, only to have their prices whacked some 60% from the market's peak in March 2000 until the end of that year. While most investors were licking their wounds and kicking themselves for not selling sooner, sharp investors who saw long-term value and competitive advantages in these companies were taking advantage of the pessimism.
Buying more shares of Best Buy and eBay near their lows at the end of 2000 would have earned you 276% and 279%, 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 Celgene
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 no shares of companies mentioned here. Best Buy and eBay are Stock Advisor recommendations. Home Depot and Best Buy are Inside Value recommendations. Bank of America is an Income Investor recommendation. A longtime Fool, Dave is also the author of The Qualcomm Equation. The Motley Fool's disclosure policy keeps a shopping list handy.