How to Turn $1,000 Into $1 Million

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 had some quick and astounding successes: Middleby has quadrupled, TranskaryoticTherapies tripled, five other recommendations have doubled -- and relative newcomer Blackboard might just beat them all, having already jumped more than 50% in only six months. Although this small cap could give back those gains (after all, the market can be a volatile place), the team is confident in its superior long-term prospects.

Around here, we adopt a "get rich slow" philosophy. Save money. Invest it regularly. Let the magic of compounding returns work for you. Our objective is to invest for the long term. And I say "our objective" because we are all in this together, discussing prospects and finds alike on our discussion boards and helping Tom identify new small-cap prospects and keep track of developments at companies already discovered.

When examining a prospect for nomination, we look for companies with superior return on equity (ROE), something in the 20% to 30% range that has made great long-term investments out of companies such as PepsiCo (NYSE:PEP) and its 29% ROE, and UPS (NYSE:UPS) and its 23% ROE. But we look for that characteristic among companies sporting much smaller market caps because unlike PepsiCo or UPS, they still have plenty of room to grow. Examples would be companies like these:

We also look for free cash flow and net cash on a balance sheet that is not always reflected in a company's market capitalization (Winnebago has $113 million in cash and no debt, for example). We believe that companies sharing these traits can grow and beat the market over the years, just like Pepsi and UPS.

In summary, 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 60 recommendations to date, 21 are down and 39 are up. More importantly, the team has bested the S&P 500 by nearly 20 percentage points over the past two years. And through hard work and patience, we are confident that over time, a lot of today's losers will be long-term winners, helping us soundly beat the market averages.

So what's achievable? Let's look at two possible scenarios for long-term growth among the Hidden Gems recommendations. Call them the "Retire Comfortably" and the "Set Your Grandkids Up for Life" scenarios.

Retire comfortably: $1 million in 45 years
We know that our recommendations are averaging approximately 23% annual returns. But let's not get greedy, and let's not extrapolate for decades out into the future what has been a start beyond even the most optimistic expectations. What if we dial back our expectations and assume a still very aggressive annualized 16.6% 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.

Which should work out just about right for any Fools out there who have just graduated from college and have $1,000 to invest right now and who'd like a chance at retiring comfortably on the proceeds around about age 65.

Set your grandkids up for life: $1 million in 75 years
Now for scenario No. 2. 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 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 buying 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'ns 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 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. Meaning that, even at the market average, it would take a lot less than 75 years to accumulate $1 million.

And with 24 high-percentage ideas for winning investments coming to 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 to sign up for a free trial. You'll enjoy immediate access to all our back issues and past picks, with no obligation to subscribe. We look forward to welcoming you to our merry band of prospectors for the stock market's hidden treasures.

This is an updated version of a Motley Fool Take published on May 28, 2004.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy .