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Be the Millionaire Next Door

We don't advocate greed at Motley Fool Hidden Gems. But we also know you're not averse to becoming financially independent. In this article, I aim to show you our road map to becoming a millionaire.

Our search for the best small companies in the world is about both financial reward and investment mastery. Over the more than five years we've been opining on stocks, we've worked though market booms and market busts. In fact, we started in the middle of the biggest bust in decades ... except, well, this one. And through it all, we've beaten the S&P 500's returns by more than 5 percentage points since inception in 2003.

That's five points' worth of extra profits when things are good, and five points less pain than everyone else is feeling when things are bad. How do we keep beating up on the market? How can you do it? By thoroughly researching small-cap stocks and picking only the best of the best, individual investors can make millions -- over time.

Why small caps in particular?
These stocks are truly neglected by the large institutional investors that own the vast majority of the S&P 500. And that's good news for us.

If you haven't researched a small business like Hercules Offshore (Nasdaq: HERO  ) , MDC Holdings  (NYSE: MDC  ) , or American Oriental Bioengineering  (NYSE: AOB  ) , well, you're missing some of the great companies of tomorrow. We encourage you to look into them at your own pace. But in order to really win with these investments, you have to understand the precepts that have created extreme wealth and erased financial concerns for average people like Theodore Johnson, Hetty Green, Peter Lynch, and Anne Scheiber. You must learn to emulate their behavior.

In our opinion, it all starts by being a patient, long-term owner of high-quality, low-profile, small companies. Every one of those qualifications counts:

  • patient
  • long-term
  • owner of
  • high-quality
  • low-profile
  • small companies

Tap those ruby-red slippers and say that 10 times quickly.

As you master these precepts with us, some of you will earn millionaire status in as little as 12 years. For others, it may take 25 or 30. What's important, though, is that you mix a formula for non-temporary success. We're here to help you make that happen.

Learn from Shelby Davis' dynasty
Our dual roles are to teach you the principles and then do the research heavy lifting for you. We want to relieve you of the necessity of sorting through the nearly 5,000 small-cap stocks trading on the U.S. stock markets to find the very best -- companies like Dell (Nasdaq: DELL  ) and Wal-Mart (NYSE: WMT  ) , both of which grew from relative obscurity. Dell started as a computer direct-seller that raised just $30 million for its 1988 IPO. Wal-Mart began with one store in Rogers, Ark. They've become $17 billion and $188 billion companies, respectively, and they made their owners millionaires many times over. But finding the greatest small companies is only half the battle.

The other half is captured beautifully in the investment career of Shelby Davis Sr., featured in John Rothchild's book The Davis Dynasty. Davis formed a philosophy that helped him turn a $50,000 account into $900 million over his lifetime. How? By constantly buying new stocks and rarely selling any. For example, he bought into Chubb (NYSE: CB  ) very early and rode it to simply unbelievable returns.

Davis treated investing and ownership like a game -- a very serious game, mind you, but a game nonetheless. He stayed within his areas of expertise, didn't worry about whether the market was overvalued or undervalued from one year to the next, and methodically saved and invested new money each month.

That's your commitment -- to save and invest perpetually. Our commitment is to try to earn you something on the order of 15% yearly returns (with very low transaction costs and most taxes deferred for a minimum of three to five years). What follows are examples of how Hidden Gems can help four different investors, of different ages and financial means, and earning different levels of income, to make a million bucks. Chances are, one of these will be right for you.

Scenario 1: Start with $350 and add $350 in new savings each month. Do so for 25 years. You will end up with $1 million.
So you're fresh out of college and just starting your first job as a cubicle vassal in the big city? Dreams of millionairedom seem as "pipe" to you as the canned air you breathe Monday through Friday. But never fear, young capitalist. Take your present savings, what's left from Grandma's graduation gift, and every month, put away just 17.5% of your monthly $2,000 paycheck. In 25 years -- and my, how they'll fly -- you'll be able to afford that house on the hill.

Scenario 2: Start with $30,000. Add $350 per month for 20 years.
Thirty thousand dollars is a great place to start. You can slash five years off your timeline while investing no more every month than our recent college graduate. Just think: You put $350 a month into your retirement fund, and you'll likely be a millionaire long before you've even paid off that mortgage.

Scenario 3: Start with $100,000. Add $225 per month for 15 years.
Now we're talking. You're already 10% of the way to millionairehood, my friend. Just 90% to go and you're set. How to do it? If you've managed to save up $100,000 already, putting away an extra $225 a month for the next 15 years should be a piece of cake. No pain, all gain. Shave five years off the 20-year plan because of your present circumstance. You're there in 15 years.

Scenario 4: Start with $150,000. Add $500 per month for 12 years.
What?! You've already got $150,000 stashed away, but it's only earning 1% in a money market fund? Well, there's no need to be embarrassed. For one thing, you seem to have picked one of the banking crisis' survivors. And yes, wealth preservation has been the primary aim of history's greatest investors. But with retirement looming, you should earn at least a market rate of return. If you can stand the volatility of small caps, and can add $500 in new savings per month, we think you can get there in 12 years.

If you want to achieve your long-term goals, it starts with you being able to save money each month. We're aiming to achieve market-beating returns, meanwhile, and while we've based each of the above scenarios on a belief that we can earn about 15.5% per annum over long periods of time, you might be thinking 15.5% is pretty aggressive.

That's especially true in light of what the market's been doing lately. So heck, let's assume we're wrong and that markets won't rebound as strongly as we expect from this latest crash. Say we only earn you 10% yearly returns from this point on. Well, by regularly saving and investing, you'll still be a long way toward a million bucks.

The key, as we see it, is to gain complete financial independence and investment mastery by methodically saving and perpetually investing, by taking long-term ownership in sound small companies at attractive prices, and by rarely selling.

So do you want to become a millionaire or don't you? Take a gander at Motley Fool Hidden Gems for one month -- for free. If you like the service, sign on for a year or two, or for life. If not, cancel with no obligation. It's as simple, and as easy, as that.

This article was originally published on Dec. 1, 2004. It has been updated.

Fool contributor Rich Smith owns shares of American Oriental Bioengineering, which along with Hercules Offshore and MDC Holdings is a Hidden Gems recommendation. Wal-Mart and Dell are Inside Value selections. The Fool owns share of AOB. The Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 13, 2009, at 10:42 AM, Cougar727 wrote:

    Hey there. This is my first post so bear with me. I bought HERO back when it was $5.80 a share and have seen it drop like a rock since. I bought based on Motley fools recomendation and the high gas prices. So can anyone help me understand why it's dropping? At this writing it is at $3.10. I'm trying to decide if I should just get out or hang on to it. I've done well enough in my other stocks to be up overall but this one is dragging me down. Any Help out there?



  • Report this Comment On February 13, 2009, at 12:17 PM, novainsatx wrote:

    I couldn't get the numbers to work but I held on because MF said ' this is one of the world great co.' I lost 7 big and now I feel like a fool. HERO just is not making any money. They are broken ~ and now I am broke!

  • Report this Comment On February 14, 2009, at 6:52 PM, justforfuntoyou wrote:

    Market did not agree with your analysis al tall!

  • Report this Comment On February 15, 2009, at 11:58 AM, drosenth613 wrote:

    Cougar. what I learned is that you never make an investment decision solely based on these fool articles. They help to initiate your thinking about investments, but don't ever make an investment based Solely on what motleyfool says...

  • Report this Comment On February 19, 2009, at 4:21 PM, 44humble wrote:

    I invested in AOB back in early January, making several different buys as it fell. Motley Fool has been singing AOB's praises for several months. Its falling faster than a rock. Currently, price is 4.22, my average price was 5.41. HA, I doubt it will see five again. Reports earnings first week in March, we shall see, not holding my breath though.

  • Report this Comment On February 22, 2009, at 6:05 PM, Cougar727 wrote:

    Drosenth613, thanks for the advise and I do agree. I did look at several things including gas prices. My theory was as the gas prices climbed it would make Hercules more attractive. My bad. When the gas prices dropped that seems to have killed it.

  • Report this Comment On February 26, 2009, at 6:11 PM, RiverRover wrote:

    The point is to buy low and hang on for a LOOOONG time. We're talking 3-5 years in my case or decades if you're in your 20s or 30s or 40s. Almost everything is in the tank during this recession and it will take another year, perhaps, to even see daylight. I bought all my stocks last September just before the "crash" but I'm hanging on because they will go up....later. Patience and a strong stomach, as they say!

  • Report this Comment On March 02, 2009, at 10:50 AM, myTX30 wrote:

    I think this stock will eventually go back up. I am thinking of investing in this co. only because it will eventually go back up, hopefully by the summer. You can't expect to make a profit right now, everything is pretty much down.

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