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 American Express (NYSE:AXP), Hewlett-Packard (NYSE:HPQ), and ExxonMobil (NYSE:XOM).
If you worked for these companies, and/or regularly "trickled" money into them over the years, this is quite feasible -- American Express, Hewlett-Packard, and ExxonMobil have returned 10.2%, 13.3%, and 16.1% annually over the past three decades, respectively -- even after taking into account the brutal punishment each stock has seen in the current market.
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 small, fixed amounts, investors can use the simple method of buying a stock in portions to manage risk and boost returns. And now would definitely count as one of those opportune times to buy cheap stocks.
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 -- or even downright outrageously cheap.
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 have fared better than average -- buying Disney when the market reopened after 9/11 would give investors a 4.5% gain verses an 18.5% fall in the S&P over the same period.
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 top retailer Best Buy (NYSE:BBY). The stock soared several hundred percent in the late 1990s, only to be whacked for a more than 60% loss 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 Best Buy were taking advantage of the pessimism.
Even after a brutal 2008 in which Best Buy has lost more than 60% of its value again, shares are still almost double where they were from that 2000 low. And now, once again, investors have a chance to assess just how temporary the larger economic conditions may be and whether they should be buying Best Buy today.
Buy again
Other companies, such as Cisco Systems (NASDAQ:CSCO) and Starbucks (NASDAQ:SBUX) have experienced big drops in share price at some point, 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 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 American Express are Motley Fool Inside Value picks. Starbucks, Disney, and Best Buy are Stock Advisor selections. The Fool owns shares of Starbucks, Best Buy, and American Express. The Motley Fool's disclosure policy keeps a shopping list handy.
