From Poverty to Prosperity

When Omaha oracle Warren Buffett started investing, he was able to turn $10,000 into the multibillion-dollar conglomerate Berkshire Hathaway. Similarly, Shelby Davis amassed a $900 million family fortune from an initial $50,000 stake.

Inspirational stories of stock market success like these give me hope that I'll be able to achieve my own personal financial goals. But what if you don't have $50,000 to launch your investing career? What if your bank account doesn't have $5,000 in it, let alone $10,000, to start building your retirement nest egg? Are you doomed to a life of penury and misery?

No! You don't need a trust fund as large as Paris Hilton's to start securing your financial future. In fact, a commitment to regular, small investments -- as little as $50 or $100 a month -- can be the start of a million-dollar retirement account.

A four-step plan
The four keys to achieving this goal are:

• Start today!
• Invest regularly. Every month, put away $250, $100, even $50.
• Look to the stock market for your best hope of realizing your dreams.
• Seek out undervalued small-cap stocks for your greatest returns.

You can beat the market
You know the importance of investing sooner rather than later. And you know that putting small, regular amounts into the stock market can make a big difference over time. But why small caps?

Small-caps are the market segment where investors can hope to make the greatest returns. Small caps give investors the edge, because institutions tend to ignore them and analysts don't cover them. By the time anyone realizes they're there, they've already grown much larger, and appreciated in price. Even the venerable Eastman Kodak, which traces its lineage back to George Eastman's experiments on his mother's kitchen table, started off as a small company.

To find those small-cap stocks, we'll run a simple screen, then turn to the Motley Fool CAPS community to validate those choices.

We want companies with market values less than $2.5 billion to qualify as a small cap. They should also trade above $5 a share to weed out penny stocks. In addition, I'm looking for stocks that have already begun the growth they'll display into the future. So I'm seeking companies that had an earnings surprise of 20% or more last quarter, but also have the prospect of growing earnings at least 20% annually for the next five years, according to analysts.

The CAPS advantage
I then paired my picks with the collective investing wisdom of the 60,000 professional and novice investors in the CAPS universe, filtering out all but the top-rated stocks on the list. If the best and brightest CAPS players also think these stocks hold potential, then we ought to take notice, too.

Here are some of the top stocks this simple screen found:

Of course, this isn't a list of recommended stocks to buy. We need to look a little more closely at these companies to see if the faith that analysts have placed in them is well-founded. This is a starting point for more research, but at least we've got the CAPS community to help.

Foolish final thoughts
Academics will tell you that individual investors have little chance of beating the stock market. They say the Warren Buffetts, Shelby Davises, and Peter Lynches of the world are the exceptions to the rule. At the Motley Fool, we think otherwise. Finding good, undervalued companies is not as hard as the professionals want you to think.

It is possible to make a more comfortable retirement for yourself, even if you have little money to start with, or you're starting late in life. You just have to commit to doing it now, and doing it regularly. No amount is too small. Let's get started.

This article was originally published in a different format on March 9, 2005. It has been updated.

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. Berkshire Hathaway is a Stock Advisor and Inside Value newsletter recommendation. The Motley Fool's disclosure policy would do Horatio Alger proud.