"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 and 70-odd years' worth of data from Ibbotson.

But you're no dummy
And by ... now! my inbox would be crammed. "Your results are skewed by abnormal years," you'd be shouting, or "What about survivorship bias?" And you'd be right. You would 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 to master Excel to prove that tomorrow's big winners are small caps today. You just need three telltale signs. After all, it's a pretty safe bet that tomorrow's Amazon (NASDAQ:AMZN) is ...

  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 this is important: It's off Wall Street's radar (for now), so there will be a ton of pent-up demand when those revenues rocket and analysts catch on.

Get in on the ground floor
My father once told me to "be your own boss and die rich." He had a point. If we were smart, we took stock in Ameritrade (NASDAQ:AMTD) and whooped it up with Yahoo! (NASDAQ:YHOO) -- but even then we didn't do nearly as well as their earliest investors, Joe Ricketts and Terry Semel.

And, of course, this is news to nobody: The nearer your grandfather got to old Henry, the sweeter his investment in Ford Motor. A fellow by the name of Herbert Henry Dow became the richest chemist in the world when his Dow Chemical (NYSE:DOW) took over the world.

And yet, few of us ever build empires or even get the opportunity to place venture capital. But we can get in early. We just need to be patient, keep our eyes open, and pick our spots. Or we can take a cue from Tom Gardner's Motley Fool Hidden Gems method and seek out companies with market caps below $2 billion that offer ...

  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 '90s, they led techies to AdobeSystems (NASDAQ:ADBE) andApplied Materials (NASDAQ:AMAT) -- and to absolutely ridiculous gains. Just as decades earlier they introduced the country club set to IBM (NYSE:IBM). In just the past two years, they have led the Hidden Gems gang to a more than half-dozen stocks that have doubled in value or more.

(In the spirit of full disclosure, as of December 4, 2005, the Hidden Gems picks are up an average of 32.7%. For context, that's compared with 12.2% if you'd bought the S&P 500 instead.)

It's been a decent few months for small caps. But a pullback is always just around the corner, especially when volume dries up around the holidays. When opportunity knocks, you need a wish list of great small companies to buy on the dips. I have mine right here.

If you need some help putting your list together, Tom Gardner is offering a special 30-day free trial to his complete Hidden Gems service. You can see what it's about and check out all the picks, without risking a penny. Of course, there is no obligation or pressure to join. Click here to learn more about taking a trial.

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. Amazon.com is a Motley Fool Stock Advisor pick. Dow Chemical is a Motley Fool Income Investor recommendation. You can view the performance of all the Hidden Gems picks with yourfree trial. The Motley Fool has adisclosure policy.