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 Chevron
In retrospect, it's easy to see how these fortunes can be built -- Chevron, McDonald's and Coca-Cola have returned 11.3%, 16.1%, and 15.8% annually over the past three decades, respectively. But each of these companies achieved this despite significant hardships along the way. For instance, Chevron plummeted from its 2008 highs amid a nasty hurricane season in the Gulf of Mexico. McDonald's shares dropped more than 70% from 1999 highs in little more than three years before resuming a strong growth trend, and Coca-Cola has yet to recapture its 1998 high when euphoria over global growth of sugared syrup was running over.
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 global market chaos would definitely count as one of those opportune times to buy stocks poised to grow.
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, buying more Altria back at the peak of investors' pessimism over tobacco lawsuits would have juiced your returns considerably -- investors have gained more than 730% from its low in 2000 with the benefits gained by spin-offs of Kraft Foods and Philip Morris International.
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 and Motley Fool Stock Advisor pick Best Buy. 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 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 such as Apple
In my opinion, each of the companies discussed here has a long track record of success and historically sound management. Yet even while I'd say IBM and Apple are both worth dripping a few more dollars into and buying again, I'm far less enthused about Garmin's future in portable navigation devices than I was a decade ago. Which illustrates the final caveat with this method; ensure that you understand the larger trends so you aren't throwing good money at a truly deteriorating company. 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 Coca-Cola and Garmin. Best Buy and Coca-Cola are Inside Value picks. Apple and Best Buy are Stock Advisor selections. Philip Morris International is a Global Gains recommendation. Coca-Cola is an Income Investor selection. Motley Fool Options has recommended a bull call spread position on Best Buy. The Fool owns shares of Best Buy and Coca-Cola. The Motley Fool's disclosure policy keeps a shopping list handy.