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 FedEx (NYSE: FDX), ConocoPhillips (NYSE: COP), or Wal-Mart (NYSE: WMT).
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 10.7%, 15.9%, and 14.6% 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 larger, more stable companies, simply buying more shares when the outlook is bleak can be very 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 has returned more than 110% in the past five years.
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 Motley Fool Stock Advisor recommendation Mobile Mini (Nasdaq: 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 more than tenfold as the company capitalized on rising demand for storage. Then, in an abrupt six-month period, 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. Money invested when the outlook was bleakest is now up nearly 250% -- even after the stock has dropped nearly 30% in the past six months with the return of another poor economic outlook. The larger economic conditions had only a temporary impact on Mobile Mini's solid business model before, and recent turmoil once again gives investors a cheaper price to consider.
Buy again
Other companies, such as Genentech (NYSE: DNA) and Gilead Sciences (Nasdaq: GILD), have experienced big drops in share price at some point in the past several years, only to come roaring back. Investors who focused on the underlying businesses, 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 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.
