I love reading about investing masters like Warren Buffett, who started with just $10,000 and turned Berkshire Hathaway into a multibillion-dollar conglomerate. Or Shelby Davis, who 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. I know that faithful investors who stuck with Caterpillar (NYSE:CAT) over the years, despite its ups and downs, have been richly rewarded. Look at its long-term stock charts and you can see the value of sticking with good companies, even when they have occasional troubles. So with careful analysis maybe I'll find the next Johnson & Johnson (NYSE:JNJ), which grew from making individually wrapped sterile surgical bandages into a worldwide leader for pharmaceuticals and health-care products.
There's one problem, though, that's as jarring as fingernails across a chalkboard: 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? What if you can't tell the difference between a balance sheet and a balance beam? Are you doomed to a life of penury and misery?
The fact is, you don't need a trust fund as large as Paris Hilton's to start securing your financial future, and you don't need an accountant's grasp of financial jargon to profit from the stock market. All you need is the willingness to begin and learn. A commitment to regular, small investments -- I'm talking as little as $50 or $100 a month, folks -- can be the start of a million-dollar retirement account.
Without question, the earlier you start, the easier it will be and the more money you'll actually accumulate. But if you're like me and put off investing until later in life, you still have the ability to achieve your goals. The idea is to start, but start now.
Put the power of compounding to work for you
Investing small sums of money on a regular basis can have powerful results down the road. Let's say you put away $100 a month. After you've saved up $1,000, you invest it so that you earn the market's average rate of return, or 11% a year. Then you continue to invest $100 each and every month for 25 years, all the while earning the market's average return. At the end of 25 years, you will have amassed a nest egg of more than $165,000. Not too shabby.
But let's say that you earned 4% more than the market, or 15% per year. That nest egg would now grow to more than $325,000, and if you doubled the market's average, you would have a portfolio worth more than $1 million. It may be unreasonable to anticipate doubling the market over 25 years -- only the great Buffett has achieved such long-term results -- but it does point out the power of adding extra percentage points to your return. Now imagine the results you would enjoy if after a few years you were able to scrape together a few dollars extra each month to invest.
You
can
beat the market
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. They are what they call "outliers," people so far beyond the norm that they can be completely discounted. 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. Learning to look at financial statements, while daunting at first, is really quite doable and, dare I say, enjoyable, too.
Motley Fool co-founder Tom Gardner created a whole service dedicated to helping you find great stocks that will become the foundation of your million-dollar portfolio. Just as important, his Motley Fool Hidden Gems small-cap stock newsletter will also make you a better, more informed, and knowledgeable investor. Through online discussions, investment lessons, and interviews with investing masters, opportunities abound to increase your knowledge and skill.
With the advent of the Internet, online discount brokers now make investing small amounts easy, and they do it at low cost. Sharebuilder.com lets you buy stocks for as little as $4. Ameritrade does it for around $10, while Scottrade charges around $7. Holding down costs is an important part of maximizing your returns. Once you open your account, commit to putting that $50 or $100 away every month, and put the magic of compounding to work for you.
So where do you find these great investments?
The secret sauce of investing: small-cap stocks
Even the mighty Boeing (NYSE:BA) started off as a small-cap biplane manufacturer -- that is, a company valued at less than $2 billion. That's 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. They also have much simpler finances, making that daunting analysis we mentioned before that much easier.
So far, Hidden Gems has compiled a pretty remarkable record of finding those undiscovered, ignored small-cap companies. After two years, Hidden Gems recommendations have returned 37%, vs. the market's 11% return as measured by the S&P 500.
For example, Coinstar (NASDAQ:CSTR), the manufacturer of the ubiquitous green coin-counting machines, is up more than 56% since it was recommended just a year and a half ago by guest analyst Bill Mann. Stanley Furniture (NASDAQ:STLY) has appreciated 35% since Tom first recommended it eight months ago. And members have benefited from Tom finding the value in these concealed jewels before the market or their competitors do. Consider that Hidden Gems investors have more than doubled their money because sneaker maker Saucony agreed to be acquired by Stride Rite (NYSE:SRR) almost two years after it was recommended, or because TranskaryoticTherapies agreed this spring to be bought by Shire Pharmaceuticals for three times the price at which Transkaryotic was recommended just over a year ago.
So 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. The four keys to doing it 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 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!
Tom Gardner is offering a 30-day risk-free trial to Motley Fool Hidden Gems , the small-cap stock newsletter dedicated to helping you find your inner millionaire. Click here to learn more.
This article was originally published on March 9, 2005. It has been updated.
Fool contributor Rich Duprey is still working on his first million and does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
