How to Turn $1,000 Into $1 Million

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

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

Sure, our market-beating small-cap investment newsletter has had some quick and astounding successes: Middleby has quintupled, Transkaryotic Therapies tripled before it was acquired, and more than a dozen other recommendations have at least doubled. Although some of these small caps could give back those gains -- after all, the market is a volatile place -- the team is confident in its long-term prospects.

And we're confident in our get-rich-slow philosophy. Save money. Invest it regularly. And let the magic of compounding returns work for you. It's that easy. Our objective is to invest for the long term. I say "our objective" 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 a company with superior return on equity (ROE) -- something north of 20%, as was long the case with great historical investments such as Cigna (NYSE: CI) and Charles Schwab (Nasdaq: SCHW). But we look for superior ROE at companies already sporting value prices and much smaller market caps, because -- unlike Cigna or Schwab -- these companies can still grow five to 10 times or more in size. Here are a few examples:

Company	Market Cap*	ROE
Value Line (Nasdaq: VALU)	$405	33%
LoopNet (Nasdaq: LOOP)	$509	23%
NATCO (NYSE: NTG)	$1,050	20%
Sanderson Farms (Nasdaq: SAFM)	$913	24%

*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, Hidden Gems pick LoopNet has $73 million in cash and equivalents and no long-term debt. We believe that companies sharing these traits can grow and beat the market over the years, just like Cigna and Schwab.

The companies we seek combine business performance, cash-raising prowess, and substantial undervaluation to potentially 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, and let's not extrapolate for decades into the future what has been a start beyond even our most optimistic expectations. 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, Warren Buffett, 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. Because Fools don't invest $1,000 in one shot and then sit back and wait for the money to roll in -- whether that money is going to 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 isn't going to 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. Schwab, Sanderson Farms, and Value Line are Motley Fool Stock Advisor recommendations. Middleby and LoopNet are Hidden Gems picks. LoopNet is also a Rule Breakers recommendation. The Motley Fool has a disclosure policy.