"Over the years, small-cap stocks crush their large- and mid-cap peers."

That's how I planned to open today. By now, I'd be making my case -- dropping names like Nagel and Quigley among 70 years' worth of data from Ibbotson.

But you're no dummy
And by ... now! my inbox would be full. "Your numbers are skewed by a few abnormal years," you'd be shouting, or "What about survivorship bias?" And you'd be right. You'd have found the fatal flaw in all historical data: The future is not the past.

So forget the big numbers
Fortunately, you don't need Excel to tell you that many of tomorrow's big winners are small fries today. All you really need is a few clues to find them. After all, history tells us that the next Microsoft is very likely...

  1. Run by entrepreneurial zealots with ownership stakes.
  2. Free of convoluted relationships with investment banks.
  3. Able to grow its sales and cash flow exponentially.

And because it hasn't hit Wall Street's radar (yet), there will be pent-up demand when those revenues rocket and analysts catch on.

Get in near the ground floor
My father once told me to "be your own boss and die rich." He had a point. Smart investors gobbled up Coke (NYSE:KO) and got their fill of McDonald's (NYSE:MCD) -- and made fortunes. But even they didn't do as well as founders Asa Griggs Candler and Ray Kroc. Of course, this is nothing new:

The nearer your grandfather got to kindly old Walt, the sweeter his investment in Disney (NYSE:DIS). And just think of the money you'd have if his grandfather had been drinking pals with Thomas Edison. You'd be a General Electric (NYSE:GE) millionaire.

Sadly, most of us don't build empires, plant seed money, or ever encounter pure genius. But that's the beauty of stocks. We can still get in early. We just need to be patient and pick our spots. Or take a cue from Tom Gardner's Motley Fool Hidden Gems method and seek out companies with market caps below $1 billion offering:

  1. Solid management with big stakes.
  2. Great, sustainable businesses.
  3. Dominant positions in niche markets.
  4. Sterling balance sheets.
  5. Strong free cash flow.

Just remember those five keys
In the early '90s, they led tech investors to software pioneers like EMC (NYSE:EMC) and Seibel (NASDAQ:SEBL) -- and absolutely ridiculous gains. Just as decades earlier they led folks to IBM (NYSE:IBM). In just the past two years, they have led the Hidden Gems gang to a half-dozen stocks that doubled in value or more.

(In the spirit of full disclosure, I'll give you the whole story. As of Sept. 5, the Hidden Gems picks are up an average of 28.8%. For context, compare that with 9.6% if you'd bought the S&P 500 instead.)

September and October are notoriously volatile even in "normal" years. Stocks go on sale -- even great stocks -- for any number of reasons, especially this time of year. This market could yet give you a second chance, and when it does, you want to have a wish list of great small companies to buy on dips. I have mine right here.

If you need some help putting your list together, this is your lucky day. Tom Gardner is offering a 30-day free trial to Hidden Gems. It could be the thing for you. Of course, there is no obligation or pressure to subscribe. Click here to learn more.

This article was originally published on May 10, 2005. It has been updated.

Paul Elliott no longer owns (sadly) any of the stocks mentioned here. The Motley Fool has a disclosure policy .