How to Turn $1,000 Into $1 Million

Psst! Want to make a million bucks? Then read on.

Hidden Gems investing has nothing to do with getting rich quick. Sure, Tom Gardner's market-beating investment newsletter has had some astounding successes over the past year: Middleby Corporation (Nasdaq: MIDD) became a three-bagger in six months; FARO Technologies (Nasdaq: FARO) and Saucony (Nasdaq: SCNYB) were both two-baggers less than a year after their discovery.

But our objective at Hidden Gems is to invest for the long term. And I say "our objective" because we are all in this together, discussing prospects and finds alike on our discussion boards, helping Tom identify new small-cap prospects and keep track of developments at companies already discovered.

When examining a small-cap for Hidden Gems nomination, we look for excellent returns on equity. We look for free cash flow. We look for net cash on a balance sheet that is not always reflected in a company's market capitalization (lowering the enterprise value). We believe that companies sharing those kinds of traits are the ones that will become the Microsofts (Nasdaq: MSFT), Amazons (Nasdaq: AMZN), and Dells (Nasdaq: DELL) of the future. In summary, we look for companies that combine business performance, cash-raising prowess, and substantial undervaluation to create the potential to double in value over three years.

If you can double your money every three years through the magic of compounding, you can become a millionaire without ever buying a lottery ticket.

Here's how it works. Take $1,000. Double it: $2,000. Again: $4,000. Keep on doubling it, every three years, for 30 years total, and at the end you have $1,024,000. That's right. $1,000 + 30 years = $1 million.

This 2-times-in-3-years formula will not always play out according to plan. Indeed, out of 22 Hidden Gems selections to date (including two that were picked twice), nearly one-third of Tom's and his guest analysts' selections have lost us money. Still, 15 selections have made money for investors. To date, the average return of losers and winners combined has been an increase of 43.5% vs. the S&P 500's mere 5.3% gain. (Of course, I should add that these are one-year returns since the newsletter's inception in 2003.)

So, if you aspire to being a millionaire and are willing to put forth the effort to get there and to invest the patience necessary to stick with quality companies through good times and bad, Hidden Gems just might be for you. Click here and sign up for a free trial. We look forward to welcoming you to our merry band of prospectors.

Fool contributor Rich Smith has no beneficial interest in any of the companies mentioned in this article.