Here's Your Shot to Score Big

Anytime I need investing inspiration, I turn to "The Great One" -- but I don't mean Warren Buffett, Peter Lynch, or Benjamin Graham. And I definitely don't mean Jim Cramer.

You've probably heard The Great One's name dozens of times, but you may not know just how wise he is. Nonetheless, he's said some very smart things. For instance ...

"You miss 100% of the shots you never take"
That's but one of the many pearls of wisdom The Great One has dropped over the years. And while it might seem obvious, or even trite, it's a truth we often take for granted.

Just think of the person you never asked to the dance, or the job you never applied for, or the novel you never finished ... or the stock you never purchased.

It happens to all of us. We get nervous, or doubtful, or busy, or ... you name it. And that might end up costing us the person of our dreams, or the job we've always wanted, or our only shot at fame. But in the case of investing, it will definitely cost us a fortune.

Last year, three stocks sat on my watch list for a full 365 days:

A $17,100 mistake
Should I have bought all three? Perhaps. But by not investing in any of them, I wound up making a grand total of ... nothing. Nada. Zip. Zilch.

However, had I decided to take a shot, I would have scored -- big time. Five grand invested in each company at the beginning of 2007 would have been worth $32,100 one year later.

An even worse mistake
Each new year brings a chance to learn from our mistakes and move on. But we need to make sure that we move in the right direction.

Haphazardly plowing money into stocks on our watch lists isn't that direction. In fact, it could end up costing us even more than not investing at all.

Instead, we need to do our homework. That means reading quarterly reports, looking through financial statements, checking out the competition, reading up on management, looking for insider holdings, and assessing future possibilities.

Then, and only then, can we go ahead and take our shot.

And if we want to score really, really big ...
We have to follow The Great One's most famous piece of advice: "Skate to where the puck is going, not to where it's been."

You may already know that The Great One is ice hockey legend Wayne Gretzky. If not, all you need to know is that Gretzky was by far the greatest player ever to take the ice.

What made him The Great One? Quite simply, he was always one step ahead of everyone else -- not because of his speed, but because of his anticipation. While everyone else skated to where the puck had just been, Gretzky always skated to where it was going next.

That's the key to great investing, too
If you look back at my watch list, you'll notice an interesting correlation between market cap and percentage gain -- the smaller the business, the greater the returns. That won't always be the case, of course, but it's a quick and dirty way of showing that the best performers do indeed start small.

That's how you can skate to where the puck is going next.

It's simple math, really. While Google is one of the world's most powerful and innovative companies, it would have to pack on another $114 billion for its shares to double again.

Meanwhile, if Chipotle gains even one-tenth that amount, its share price should soar more than 750%.

Bigger isn't better, but size does matter
If you want even more proof of this investment phenomenon, just take a look back at 2007's top-performing stocks.

Here are a few companies that began 2007 with market values greater than $5 billion:

Data provided by Capital IQ, a division of Standard & Poor's.

And here are a few companies that began 2007 with market values less than $5 billion (but more than $50 million):

Data provided by Capital IQ.

While the gains of the top-performing large caps were certainly impressive, it's worth noting that the 33rd best-performing small cap returned 50 percentage points more than the ninth best-performing large cap. In fact, of the top 10 overall performers, none was a large cap.

So how can you score big in 2008?
First off, keep The Great One's advice in mind. Second, take a page out of my colleague Tim Hanson's book, and make sure to look for stocks that are:

1. Obscure.
2. Ignored.
3. Small.

These three traits have characterized some of the best-performing stocks of the past decade. More importantly, they will characterize some of the most lucrative stocks of the next 10 years.

In fact, we started our Motley Fool Hidden Gems service precisely to uncover businesses with these three traits -- companies poised to rank among the very best investments of the next decade and beyond.

In other words, the Hidden Gems team is dedicated to discovering where the puck is going next. And so far, they're scoring big -- they've uncovered some great businesses, like  Rofin-Sinar Technologies (NASDAQ:RSTI), and their average pick has returned 14 percentage points more than a like amount invested in the S&P 500. Are you earning returns like that? You could be.

Right now, you can skate along with the Hidden Gems team, see all of its recommendations, and take full advantage of its research with a free 30-day guest pass.

Thanks to the current market sell-off, many of today's most promising small-cap stocks are selling at bargain-basement discounts. In other words, if ever there were a perfect time to take your shot and score big, this is it. For a little help, simply click here to try Hidden Gems free for a full 30 days.

This article was first published Jan. 25, 2008. It has been updated.

Fool contributor Austin Edwards finally did buy shares of Apple, Chipotle, and Google in 2008 -- but only after doing his homework. Apple, Amazon.com, and priceline.com are Motley Fool Stock Advisor recommendations. Chipotle, China Finance Online, and Google are Rule Breakers picks. Chipotle B shares and Rofin-Sinar are Hidden Gems recommendations. The Fool's disclosure policy is the coolest game on Earth.