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
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 11.1%, 13.0%, and 15.9% annually over the past three decades, respectively -- even after taking into account the greater-than-20% drop in price each has experienced in the past year.
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, 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 -- their investment is still up more than 50% from the low levels in 2001, whereas the S&P is still down more than 7% from its low point in September 2001.
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 top retailer Best Buy
Even after a brutal 2008 in which Best Buy had again lost more than 60% of its value at one point, shares have rebounded and are up more than 275% from that 2000 low. Even after this rebound, investors with a long-term view still may find a great opportunity in a stock that's been beaten down because of larger economic conditions that will likely prove temporary in retrospect.
Other companies, such as Cisco Systems
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 ExxonMobil and Starbucks. Best Buy and Starbucks are Stock Advisor selections. American Express, Best Buy, and Starbucks are Inside Value selections. The Fool owns shares of American Express, Best Buy, and Starbucks. The Motley Fool's disclosure policy keeps a shopping list handy.