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 General Electric
If you worked for these companies and/or regularly "trickled" money into them over the years, this is quite feasible -- GE, ConocoPhillips and Wal-Mart have returned 9.2%, 10.8%, and 12.9% 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 Altria
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
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 270% 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 NVIDIA
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 NVIDIA and Mobile Mini, which are both Stock Advisor picks. Wal-Mart is an Inside Value recommendation. The Motley Fool's disclosure policy keeps a shopping list handy.