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, and this article will show you a 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 first two-plus years of the service, Tom and his guest analysts have generated cumulative gains of 37%, versus S&P 500 returns of 11%. While that margin of victory may not be sustainable, we're strong in our belief that market outperformance in thoroughly researched small- and micro-cap stocks is the most efficient way for individual investors to make millions and to master business and investing.

These stocks are truly neglected by the large institutional investors who own the vast majority of the S&P 500. And that's good news for us.

Our aim is to explain to our newsletter members each month precisely how to orchestrate that success and exactly what sorts of companies to own. If you haven't researched small businesses like Hidden Gems watch list denizens Kenneth Cole (NYSE: KCP  ) or eFunds (NYSE: EFD  ) and Tiny Gems Monolithic Systems (Nasdaq: MOSY  ) or SM&A (Nasdaq: WINS  ) , you're missing what we think could be some of America's great companies of tomorrow. SM&A, for example, is a California-based company that helps defense contractors write winning business proposals -- hence the ticker. And there's a lot to like about the company, including $13 million in free cash flow over the past year. SM&A is still just a $140 million company.

We encourage you to look into these businesses at your own pace. But to really win with these investments, you have to understand the precepts that have created extreme wealth and erased financial concerns for once-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. Tap those ruby slippers and say it 10 times quickly:

1. patient
2. long-term
3. owner of
4. high-quality
5. low-profile
6. small companies

As you master these precepts with us, some of you may earn millionaire status through regular savings and investment anywhere from 12 to 30 years down the line. 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 heavy research lifting for you. We want to relieve you of the necessity of sorting through the more than 6,700 small-cap stocks trading on the U.S. stock markets to find the very best. That includes companies like Dell (Nasdaq: DELL  ) and Wal-Mart (NYSE: WMT  ) , both of which grew from relative obscurity. Dell started as computer direct-seller that rose just $30 million in its 1988 IPO. Wal-Mart began with one store in Rogers, Ark. They've become $75 billion and $190 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., who was 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 in Hidden Gems 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 situations 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.

Hint: If you're unable to find an online broker who will let you open an account with an initial stake of less than $5,000, Sharebuilder.com offers low trading fees and no account minimums. If you have a stake greater than $5,000, you'll find additional brokers offering very low trading fees -- Ameritrade's IZone, for instance. The good news is that trading costs seem to come down every day.

Scenario 2: Start with $30,000. Add $350 per month for 20 years.
This 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 did. 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 in the bank, but it's earning only 0.9% in a money market fund? Well, there's no need to be embarrassed. 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.

Conclusion
The goal of Hidden Gems is simple: to encourage our members to save money each month and to help them achieve market-beating returns on their savings. 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.

Now, you may have heard that the stock market averages 10% annual returns, and perhaps you think that 15.5% goal is pretty aggressive. It is. We're confident of our abilities. But, heck, let's assume we're wrong and that after a few geopolitical calamities, we've earned you only 10% yearly returns in Hidden Gems. 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 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 co-founder Tom Gardner owns shares of Intel. Fool contributorRich Smithdoes not own shares of any of the companies mentioned in this article. Dell is a Stock Advisor and Inside Value recommendation. The Motley Fool has adisclosure policy.


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