At Motley Fool Hidden Gems, we don't advocate greed. But we also know you're not averse to becoming financially independent, and this article will show you a road map to becoming a millionaire.
We search for the best small companies in the world for both financial reward and investment mastery. Through the first 20 months of the service, Tom, I, and our guest analysts have generated cumulative gains of 42% versus S&P 500 returns of 9%. While that margin of victory isn't sustainable, we strongly believe that market outperformance in thoroughly researched small- and micro-cap stocks is the most efficient way for individual investors to make millions and to master business and investing.
The large institutional investors who own the vast majority of the S&P 500 truly neglect these stocks. And that's good news for us.
The aim of Hidden Gems is to explain each month to our members precisely how to orchestrate that success and exactly what sorts of companies to own. If you haven't researched a small business like Rofin-Sinar (NASDAQ:RSTI), FormFactor (NASDAQ:FORM), or Portfolio Recovery (NASDAQ:PRAA), you're missing some of what we think are America's great companies of tomorrow. We encourage you to look into them, at your own pace. But to really win with these investments, you have to understand the precepts that have created extreme wealth and erased financial concerns for average people like Theodore Johnson, Hetty Green, Peter Lynch, and Anne Scheiber. You must learn to emulate their behavior.
In our opinion, it all starts by being a patient, long-term owner of high-quality, low-profile small companies. Every one of these words and phrases counts:
- patient
- long-term
- owner of
- high-quality
- low-profile
- small companies
Tap those ruby red slippers and say that 10 times quickly.
As you master these precepts with us, some of you will earn millionaire status in as little as 12 years. For others, it may take 25 or 30. What's important, though, is that you mix a formula for ongoing success. We're here to help you make that happen.
Learn from Shelby Davis' dynasty
Our dual roles are to teach you the principles and then do the heavy research lifting for you. We want to relieve you of the necessity of sorting through the more than 6,700 small-cap stocks trading on the U.S. stock markets to find the "very best." We're talking about companies like Dow Chemical (NYSE:DOW) and Coca-Cola (NYSE:KO) that rose from relative obscurity and cheap prices into valuations of $48 billion and $100 billion, respectively. They made their owners millionaires many times over.
But finding the greatest small companies is only half the battle.
John Rothchild's book, The Davis Dynasty, captures the other half beautifully in the investment career of Shelby Davis Sr. Davis formed a philosophy that helped him turn a $50,000 account into $900 million over his lifetime. How? By constantly buying new stocks and rarely selling any. For example, he bought into American International Group (NYSE:AIG) very early and rode it to simply unbelievable returns. Davis treated investing and ownership like a game -- a very serious game, mind you, but a game nonetheless. He stayed within his areas of expertise, didn't worry about whether the market was overvalued or undervalued from one year to the next, and methodically saved and invested new money each month.
That's your commitment -- to save and invest perpetually. Our commitment in Hidden Gems is to try to earn you something on the order of 15% yearly returns (with very low transaction costs and most taxes deferred for a minimum of three to five years). What follows are examples of how Hidden Gems can help four different investors, of different ages and financial means, and earning different levels of income, to make a million bucks. Chances are, you'll fit into one of these examples.
Scenario 1. Start with $350 and add $350 in new savings each month. Do so for 25 years. You will end up with $1 million.
So you're fresh out of college and just starting your first job as a cubicle vassal in the big city? Dreams of millionaire-dom seem as "pipe" to you as the canned air you breathe Monday through Friday. But never fear, young capitalist. Take your present savings, what's left from grandma's graduation gift, and every month put away just 17.5% of your monthly $2,000 paycheck. In 25 years -- and my, how they'll fly -- you'll be able to afford that house on the hill.
Hint: If you're unable to find an online broker that will let you open an account with your initial stake, Sharebuilder.com offers an innovative way to get the ball rolling with small sums of money. Then, once you've crossed the $5,000 threshold, you can move to one of the Fool's favorites: Freetrade.com, which actually lets you trade commission-free 20 times each month.
Scenario 2. Start with $30,000. Add $350 per month for 20 years.
$30,000 is a great place to start. You can slash five years off your time line, while investing no more every month than our recent college graduate. Just think, you put $350 a month into your retirement fund, and you'll likely be a millionaire long before you've even paid off that mortgage.
Scenario 3. Start with $100,000. Add $225 per month for 15 years.
Now we're talking. You're already 10% of the way to millionaire-hood, my friend. Just 90% to go, and then you're set. How to do it? If you've managed to save up $100,000 already, putting away an extra $225 a month for the next 15 years should be a piece of cake. No pain, all gain. Shave five years off the 20-year plan because of your present circumstance. You're there in 15 years.
Scenario 4. Start with $150,000. Add $500 per month for 12 years.
What?! You've already got $150,000 stashed away at Wachovia (NYSE:WB), but it's only earning 0.9% in a money market fund? Well, there's no need to be embarrassed. Wealth preservation has been the primary aim of history's greatest investors. But with retirement looming, you should earn at least a market rate of return. If you can stand the volatility of small caps and can add $500 in new savings per month, we think you can get there in 12 years.
Conclusion
The goal of Hidden Gems is simple -- to encourage our members to save money each month and to help them achieve market-beating returns on their savings. We've based each of the above scenarios on a belief that we can earn about 15.5% per annum over long periods of time.
Now, you may have heard that the stock market averages 10% annual returns, and perhaps you think that 15.5% goal is pretty aggressive. And it is. We're confident of our abilities. But, heck, let's assume we're wrong and that after a few geopolitical calamities, we've earned you only 10% yearly returns in Hidden Gems. Well, by regularly saving and investing, you'll still be a long way toward a million bucks.
The key, as we see it, is to gain complete financial independence and investment mastery by methodically saving and perpetually investing, by taking long-term ownership in sound, small companies at attractive prices, and by rarely selling.
So, do you want to become a millionaire or don't you? Take a gander at Hidden Gems for one month --forfree. If you like the service, sign on for a year or two, or for life. If not, cancel with no obligation. It's as simple, and as easy, as that.
Tom Gardner and Fool contributor Rich Smith have no position in any company mentioned in this article. The Motley Fool has a disclosure policy.
This column originally appeared on December 1, 2004. It has been updated.
