Poverty to Prosperity

When Warren Buffett started investing, he was able to turn $10,000 into the multibillion-dollar conglomerate Berkshire Hathaway. Similarly, Shelby Davis began with $50,000 and amassed a $900 million family fortune.

Inspirational stories of stock-market success like these give me hope that I'll be able to achieve my own financial goals. However, I can already hear the objections. 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? Are you doomed to a life of penury and misery?

No! You don't need a trust fund as large as Paris Hilton's to start securing your financial future. In fact, a commitment to regular, small investments -- as little as $50 or $100 a month -- can be the start of a million-dollar retirement account.

A four-step plan
The four keys to achieving this goal are as follows:

• 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 small-cap stocks for your greatest returns.

You can beat the market
You know the importance of investing sooner rather than later. And you know that putting small, regular amounts into the stock market can make a big difference over time. But why small caps?

Small caps are the market segment in which investors can hope to make the greatest returns. With small caps, investors have an edge; institutions tend to ignore them, and analysts don't cover them as much as they do the bigger fish. But by the time anyone realizes they're there, they've already grown much larger -- and much more expensive.

To find those small-cap stocks, we're first going to run a simple screen. Then we'll turn to the Motley Fool CAPS community to see what investors are saying about the stocks we find.

Let's start with companies that have market values of less than $2.5 billion, then find the ones that trade at more than $5 a share -- taking the latter step to weed out penny stocks. Because I'm also looking for stocks that are going to grow in the future and have already begun the process, I'm pinpointing companies that had a positive earnings surprise of 20% or more last quarter, and that also, according to analysts, have the prospect of growing earnings at least 20% annually for the next five years.

The CAPS advantage
I then paired my findings up with the collective investing wisdom of the 26,000 professional and novice investors in the CAPS universe, seeking only the top-rated ones. If the best and brightest CAPS players also think these stocks hold potential, then we ought to take notice, too.

Here are the top seven stocks this simple screen found.

Of course, this isn't a list of recommended stocks to buy. This is just a starting point for further research. We need to look a little more closely at these companies to determine whether the faith that CAPS investors have placed in them is well founded.

Want some help getting started? Join the Fool's CAPS community today. Even better, it's 100% free! Enter the realm.

Make seven picks on CAPS by April 24, and we'll send you a free copy of The Motley Fool Five-Star Report. Inside, you'll discover how to use CAPS as a research tool, and you'll receive a recommended five-star CAPS pick poised to beat the market for the next decade or more -- one that you can easily translate into profits for your real-world portfolio. But please hurry -- this special report will be emailed out on Tuesday, April 24. And it's being sent only to CAPS members who have their seven picks in by then. Get started now!

Blackboard, Vail Resorts, and FormFactor are all recommendations of Motley Fool Hidden Gems. Silicon Labs is a Stock Advisor choice. aQuantive is a Rule Breakers pick. Berkshire Hathaway is an Inside Value selection. You can check out any or all of these services with a free, no-obligation 30-day trial.

This article was originally published in a different format on March 9, 2005. It has been updated.

Fool contributor Rich Duprey owns shares of FormFactor but of no other stocks mentioned in this article. The Motley Fool has a disclosure policy.