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
General Electric (NYSE: GE),
ConocoPhillips (NYSE: COP) or
Wal-Mart (NYSE: WMT).
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%,
10%, and 13% annually over the past two decades, respectively
-- even after taking into account the pummeling that GE has
experienced in the past couple of years.
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,
buying more
Altria (NYSE: MO) back at the peak of
investors' pessimism over tobacco lawsuits would have juiced
your returns considerably -- the stock has returned more than
580% from its low in 2000.
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 (Nasdaq: MINI). You've probably
seen its portable storage units around construction sites and
parks -- the company 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 soared tenfold as it capitalized on rising demand
for storage units. Then, in an abrupt six-month period
afterward, 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 bought at the peak but continued to hold the
stock have still matched the broader market return. But money
invested when the outlook was bleak is now up some 250%. The
larger economic conditions had only a temporary impact on
Mobile Mini's solid business model.
Buy again
Other companies, such as
NVIDIA (Nasdaq: NVDA) and
Research In Motion (Nasdaq: RIMM) have
experienced
big dropsin 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. Continued... |