How to Turn $1,000 Into $1 Million

If you've found a get-rich-quick scheme, consider yourself lucky.

But if you buy stocks and hold them for the long haul, consider yourself a Motley Fool Hidden Gems investor -- one who knows that this game has nothing to do with getting rich quick.

Sure, even amid the current carnage, our market-beating small-cap newsletter has had some astounding successes: Middleby (Nasdaq: MIDD  ) has quintupled since 2003, and Transkaryotic Therapies tripled before it was acquired. And while many of our picks have given back their gains in this volatile environment, the team remains confident in the soundness of our strategy and the long-term prospects of our small-cap portfolio.

Save money. Invest it regularly. And let the magic of compounding returns work for you. It's that easy. We aim to invest for the long term -- and I say "we" because we're all in this together. We discuss prospects and finds on our discussion boards. We help identify new small-cap prospects. And we keep track of developments at companies already discovered.

Growth potential
When examining a prospect for nomination, we look for companies with superior return on equity (ROE) -- something greater than 15%, as with great long-term investments such as Procter & Gamble (NYSE: PG  ) and Diageo (NYSE: DEO  ) . But we look for superior ROE among companies already sporting value prices and much smaller market caps. Unlike Procter & Gamble or Diageo, these companies can still grow five to 10 times in size. Here are a few examples (though they're not official recommendations):

Company

Market Cap*

ROE

Dynamic Materials (Nasdaq: BOOM  )

$250

28%

Heartland Payment Systems (NYSE: HPY  )

$871

25%

RPC (NYSE: RES  )

$1,125

18%

Dril-Quip (NYSE: DRQ  )

$1,223

20%

*Amounts in millions. Data provided by Capital IQ, a division of Standard & Poor's.

We also look for free cash flow and net cash on a balance sheet, which is not always reflected in a company's market capitalization. For example, Dril-Quip has more than $100 million in cash and equivalents, and minimal long-term debt. We believe that companies sharing these traits can grow and beat the market over the years, just like Procter & Gamble and Diageo.

The companies we seek combine business performance, cash-raising prowess, and substantial undervaluation, and we believe they could double in value in three years.

This "two times in three years" formula will not always play out according to plan. But through hard work and patience, we are confident that over time, our collection of small caps will beat the market averages soundly.

So what's achievable for you? Let's look at two possible scenarios for long-term growth. For the sake of this comparison, we'll call them "Retire Comfortably" and "Set Your Grandkids up for Life."

Retire comfortably: $1 million in 45 years
We know our recommendations are averaging impressive returns. But let's not get greedy. We shouldn't simply take a start beyond even our most optimistic expectations and extrapolate it for decades into the future. What if we dialed back our expectations and assumed a still-aggressive annualized 16.6% return on our initial investment? A $1,000 investment would take 54 months to double. And under that scenario, it would take about 540 months (or 45 years) for that $1,000 to double 10 times and reach $1 million.

That should work nicely for any Fools who have just graduated from college, have $1,000 to invest right now, and would like a chance at retiring comfortably on the proceeds around age 65.

Set your grandkids up for life: $1 million in 75 years
Now for scenario No. 2. There are plenty of market skeptics out there, telling everyone who will listen that the United States is entering a long-term secular bear market. The Oracle of Omaha says that we should be prepared to see overall stock market returns in the mid-single digits for the foreseeable future.

Ah, but we're not investing in index mutual funds, folks. We're busily earning our keep by searching for just the good companies out there in the market -- rather than buying an index that incorporates the returns of a grab bag of companies, whether they're good or bad investments.

In the worst-case scenario, we're pretty confident that over the long term, we can match or beat the market's historical performance through hard work, diligent research, and patient perseverance. With the broad stock market averaging slightly more than 10% annual returns across extended periods of time, that should assure us a reasonable chance of at least doubling our $1,000 within 7.5 years. Total time to $1 million: 75 years.

The long view
Admittedly, in 75 years, even you youngsters out there will be far into retirement age. While you'll likely get your $1 million eventually, it may arrive too late to help pay for that vacation home in Florida or the Winnebago you'll use to get there. Heck, in 75 years, even your kids may have retired. But what about your grandkids? And their kids? That $1 million could come in handy for your Foolish dynasty.

As for you Fools today, there's still hope, even under this scenario. After all, Fools don't invest $1,000 in one shot and then sit back and wait for the money to roll in -- whether that money will be 75, 45, or just 30 years away. Fools continue to save and keep investing. Regularly. Meaning that even at the market average, you could accumulate $1 million sooner than you think.

Take action
So what are you waiting for? Time's marching on, and that money of yours won't grow itself uninvested. If you aspire to be a millionaire, are willing to put forth the effort to get there, and have the patience necessary to stick with quality companies through good times and bad, Hidden Gems might be for you.

Click here to sign up for a free 30-day trial. You'll enjoy immediate access to all of our back issues, past picks, and extensive discussion boards. We look forward to welcoming you to our merry band of prospectors for the stock market's hidden treasures.

This is an updated version of a Motley Fool Take published on May 28, 2004.

Fool contributor Rich Smith does not own shares of any company mentioned. Diageo is an Income Investor recommendation. Dynamic Materials, Heartland Payment Systems, and Middleby are Hidden Gems picks. The Motley Fool has a disclosure policy.


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