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 13.6%, 13.8%, and 15.5% annually over the past three 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 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 is bleak can be especially 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, even as the creative juices in its 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 up more than 80% from the lows of September 2001 -- far better than the S&P over that time frame.
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 (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 many investors were licking their wounds and thinking they should have sold sooner, patient 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 lost more than 60% of its value at one point, shares have rebounded over the long haul. They're now up more than 350% from their 2000 low. Even after this rebound, investors with a long-term view still may find great opportunities in stocks that have been beaten down by larger economic conditions that will likely prove temporary in retrospect.
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 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.
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, Walt Disney, and Starbucks are Stock Advisor selections. American Express, Best Buy, and Walt Disney are Inside Value recommendations. The Fool owns shares of Best Buy and Starbucks. The Motley Fool's disclosure policy keeps a shopping list handy.
