Psst! Want to make a million bucks? Then read on.
Motley Fool Hidden Gems
investing has nothing to do with getting rich quick. Sure, Tom Gardner's market-beating investment newsletter has picked some quick and astounding successes: Transkaryotic Therapies doubled in less than a year, Coinstar
But around here, we adopt more of a "get rich slow" philosophy. Save money. Invest it regularly. Let the magic of compounding returns work for you. At Motley Fool Hidden Gems, our objective is to invest for the long term. And I say "our objective" because we're all in this together, as we discuss prospects and finds alike on our discussion boards, and as we help Tom identify new small-cap prospects and keep track of developments at companies already discovered.
When examining a prospect for Hidden Gems nomination, we look for companies sporting IBM
In short, we look for companies that combine business performance, cash-raising prowess, and substantial undervaluation to create the potential to double in value over three years.
This "two times in three years" formula will not always play out according to plan. Out of 38 Hidden Gems recommendations to date (including five repeats), nearly one in five has lost us money. But 31 have made money for investors -- and a lot of it. Through hard work and patience, we are confident that, over time, those winners will continue to outweigh the losers, helping us soundly beat the market averages.
Do we expect our success in achieving annualized returns of 26% to continue in the future? No. We don't believe we can accomplish that type of performance year in and year out. We'll pick disappointing companies from time to time. Or we'll pick incredibly good companies that, like Pfizer
So what's really achievable? Let's take a look at three possible scenarios for long-term growth among the Hidden Gems recommendations. Call them the "Retire Early," the "Retire Comfortably," and the "Set Your Grandkids Up for Life" scenarios.
Retire early: $1 million in 30 years
You may recall that the first version of this article, which ran in May 2004, adopted this rosiest of scenarios as our performance objective. But on further reflection, it seems better to consider this a "utopian" result. It has the virtue of simplicity and easy math -- with some nice round numbers to boot -- all of which inspired me to write the original piece. And it goes something like this:
Take $1,000. Double it: $2,000. Again: $4,000. Keep on doubling it, every three years, for 30 years total, and at the end you'll have $1,024,000. That's right. $1,000 + 30 years = $1 million.
But will we really be able to look back 30 years from now and say we averaged 26% annual gains? It's not likely -- very few investors in the history of the market have managed to achieve such returns over any length of time. Still, we promise to aim high, with the objective of getting the best returns humanly possible for our subscribers. And we do believe that in 30 years' time, we'll look back together and take pride in having beaten the market over the preceding decades.
Retire comfortably: $1 million in 45 years
Surprisingly, the performance of the Hidden Gems recommendations is so far continuing to prove out the above thesis. To date, our annualized returns are in fact a bit higher than the 26% necessary to double our money every three years. But all good things come to an end, and this winning streak, too, will almost certainly stumble at some point. So assume that we slow down by, say, 50% at some point. If and when that happens, it will take us not 12 months, but 18 months, to achieve each 26% return on our initial investment. In that case, $1,000 would take 54 months to double. And under that scenario, it would take approximately 540 months for $1,000 to double 10 times to reach $1 million -- or 45 years.
That should work out just about right for any Fools out there who have just graduated from college, have $1,000 to invest right now, and would like a chance at retiring comfortably on the proceeds at about age 65.
Set your grandkids up for life: $1 million in 75 years
Now for scenario No. 3. There are plenty of market skeptics out there declaiming to all who will listen that the United States is entering a long-term secular bear market. The Oracle of Omaha says that we should all 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. The dedicated Fools at Hidden Gems are busily earning their keep helping our members to buy just the good companies out there in the market -- rather than buy an index that incorporates the returns of a grab bag of companies, be they good investments, bad investments, or Enron common stock. Worst case, we're pretty confident that over the long term, we can at the very least match, and more likely beat, the market's historical performance by dint of hard work, diligent research, and patient perseverance. With the broad stock market averaging just 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.
OK, admittedly, in 75 years' time, even you young'uns in short pants out there will be far into retirement age. While you'll likely get your million eventually, it may arrive too late to help pay for that vacation home in Florida. Why, in 75 years, even your kids will probably have retired. But what about your grandkids? And their kids? That $1 million could come in mighty handy to your Foolish dynasty.
As for you, well, there's still hope even under this worst-of-the-three scenario. Because the fact of the matter is that 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 in coming. We continue to save. We keep investing. Regularly. And that means that, even at the market average, it would take a lot less than 75 years to accumulate $1 million.
With 24 high-percentage ideas for winning investments reaching your email inbox every year -- plus a host of runner-up Watch List stocks and our patented stable of Tiny Gems as supplements -- you'll never be at a loss for investment ideas as you add to that initial $1,000 nest egg.
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 being 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, Motley Fool Hidden Gems just might be for you. Click here, and sign up for a free trial. We look forward to welcoming you to our merry band of prospectors for the stock market's hidden treasures.
This article originally ran on Nov. 3, 2004. It has been updated.