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 time-tested companies such as Home Depot
If you worked for these companies and/or regularly "trickled" money into them over the years, this is quite feasible -- Home Depot, Caterpillar, and McDonald’s have respectively returned 16.1%, 13.6%, and 12.4% annually over the past two decades.
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 the current market would definitely count as one of those opportune times to buy cheap stocks.
First, find a solid business
Of course, not every stock will yield such impressive gains, 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 its intrinsic value? Especially in pessimistic markets (like today's), fundamentally strong businesses can be bought for good prices -- or even downright outrageously cheap.
For many large, stable companies, buying more shares when the outlook is bleak has shown to be especially rewarding. For instance, buying more British American Tobacco back when investors' pessimism over tobacco lawsuits was at its peak would have juiced your returns considerably -- the stock has returned more than 1,300% from its low in 2000.
In a more recent example, stock in wireless technology giant Qualcomm
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. You've probably seen the company's portable storage units around construction sites and parks -- the firm converts shipping containers into storage lockers, and then leases them for use in 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 units. Then, in an abrupt six-month period, 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 took advantage of this and put money into Mobile Mini stock when the outlook was bleak are now seeing more than a 180% gain on that added investment. The larger economic conditions had only a temporary impact on Mobile Mini's solid business model.
Other strong performers, such as Adobe 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 rerecommend 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. Home Depot and Nokia are Motley Fool Inside Value recommendations. Intuitive Surgical is a Rule Breakers selection. Adobe Systems and Mobile Mini are Stock Advisor picks. The Motley Fool's disclosure policy keeps a shopping list handy.