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 American Express
In retrospect, it's easy to see how these fortunes can be built -- American Express, Hewlett-Packard, and ExxonMobil have returned 13.8%, 14.4%, and 15.4% annually over the past three decades, respectively. But each of these companies achieved this despite massive falls in their share prices at certain points. American Express' most recent plunge from the 2007 recession is in the realm of a whopping 80%, while HP was resoundingly punished following the dot-com meltdown, and ExxonMobil has taken big dips during deep cycles in oil and gas prices.
But that's precisely the big secret -- the long-term returns of these companies were boosted by having dividends reinvested when the stock price was on sale. And with each of these three still below recent highs and paying dividends, current shareholders are getting a good deal today. Investors can also mimic this powerful return-boosting principle by buying a stock in portions to manage risk. 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 volatile markets, 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, family entertainment specialist and theme park operator Walt Disney
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 lost more than 60% of its value at one point, shares have rebounded over the long haul. They're now up nearly 390% from their 2000 low. Even with the current rebound in the market, 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.
Other strong performers, such as Cisco Systems
In my opinion, each of the companies discussed here has a long track record of success and historically sound management, and is worth dripping a few more dollars into and buying again. 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 and larger trends. 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 Starbucks and ExxonMobil. American Express, Best Buy, and Walt Disney are Motley Fool Inside Value selections. Best Buy, Walt Disney, and Starbucks are Stock Advisor picks. The Fool owns shares of Best Buy. The Motley Fool's disclosure policy keeps a shopping list handy.