It's always fascinating to read stories about average, everyday people who built fortunes by regularly investing small amounts over long periods of time 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 16.4%, 15.7%, and 18.6% 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 big 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? Especially in pessimistic markets (like today's), fundamentally strong businesses can be bought for good prices.
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 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 in a happy place today -- the stock has returned 78% 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.
Consider Internet mainstays Amazon.com
Buying shares of Amazon and Yahoo! near their low at the start of 2002 would have earned you 572% and 206%, respectively, on that new money. Even with the recent struggles Yahoo! has had in growing its content and search business, Microsoft's
Other companies, such as EMC
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 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 Johnson & Johnson. Walt Disney and Amazon.com are Stock Advisor recommendations. Colgate Palmolive and Microsoft are Inside Value recommendations. Johnson & Johnson is an Income Investor recommendation. The Motley Fool's disclosure policy keeps a shopping list handy.