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 Chevron (NYSE:CVX), McDonald's (NYSE:MCD), and Coca-Cola (NYSE:KO).
If you worked for these companies, and/or regularly "trickled" money into them over the years, this is quite feasible -- Chevron, McDonald's, and Coca-Cola have returned roughly 12.4%, 15.6%, and 14.4% annually over the past three decades or so, respectively -- even after taking into account the losses each stock has seen in the past few months.
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 large, stable companies, buying more shares when the outlook for them is bleak can be rewarding. For instance, buying more Altria back at the peak of investors' pessimism over tobacco lawsuits would have juiced your returns considerably -- investors have gained more than 430% from its low in 2000 with the benefits gained by spin-offs of Kraft Foods and Philip Morris International (NYSE:PM).
For younger, riskier companies, a strategy of acquiring shares in portions is a smart play. It limits your initial outlay and reduces your exposure to significant drops should the company falter or broader economic conditions change.
For example, look at Mobile 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 nearly tenfold as the company capitalized on rising demand for storage. Then, in an abrupt six-month period afterward, 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. Investors who bought at the peak but continued to hold the stock have still only slightly underperformed the broader market return. But money invested when the outlook was bleak is now up more than 180%, even with the stock down 20% year to date. The larger economic conditions had only a temporary impact on Mobile Mini's solid business model.
Buy again
Other companies, such as Apple (NASDAQ:AAPL), IBM (NYSE:IBM), and Garmin (NASDAQ:GRMN), 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 turn the event into an opportunity.
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 Garmin, Mobile Mini, and Coca-Cola. Garmin is a Motley Fool Global Gains selection and a former Stock Advisor choice. Coca-Cola is an Inside Value recommendation. Mobile Mini, and Apple are Stock Advisor picks. Kraft Foods is an Income Investor selection.The Motley Fool's disclosure policy keeps a shopping list handy.
