Poverty to Prosperity

When the Oracle of Omaha Warren Buffett started investing, he was able to turn $10,000 into the multibillion dollar conglomerate Berkshire Hathaway. Similarly, Shelby Davis began with $50,000 and amassed a $900 million family fortune.

Inspirational stories of stock market success like these show me there's hope I'll be able to achieve my own personal financial goals. However, I can already hear the objections. 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. With small caps, investors have an 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're first going to run a simple screen, and then we're going to 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, and they should trade above $5 a share to weed out penny stocks. I'm also looking for stocks that are going to grow in the future and have already begun the process. So I'm looking for companies that had an earnings surprise of 20% or more last quarter but that 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 them up with the collective investing wisdom of the 26,000 professional and novice investors in the CAPS universe and sought only the top-rated ones. 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 we've got the CAPS community helping us here.

Foolish final thoughts
Academics will tell you individual investors have little chance of beating the stock market. They say the Warren Buffetts, Shelby Davises, and Peter Lynches are the exceptions to the rule. We at The Motley Fool think differently. Stock investing is not brain surgery. 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 are starting late in life. It is possible to turn $100 into $1 million. You just have to commit to doing it now and doing it regularly. No amount is too small. Let's get started. There's no time to lose!

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

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