Two Powerful Roads to Riches

These days, you're apt to find many investors sitting in dark closets, gnashing their teeth, biting their nails, wiping their brows, and waiting for the stock market to begin behaving in more familiar and appealing ways -- like going up, for example.

They've apparently forgotten, or perhaps they never knew, that they're probably not going to make a lot of money in their lives if they get out of the stock market when it goes down. I was reminded of two key ways to make money recently when flipping through an old issue of our Motley Fool Hidden Gems newsletter. In it, Seth Jayson pointed out two excellent ways to profit from stocks. Permit me to review and elaborate on them.

Simple indexing
The first takes hardly any time or brain power. You simply plunk your money -- regularly -- into an inexpensive broad-market index fund, such as one based on the S&P 500 or the Dow Jones Wilshire 5000. Either will immediately have you invested in hundreds or thousands of stocks, including many, many blue chips, such as Disney (NYSE:DIS), Pfizer (NYSE:PFE), and Verizon (NYSE:VZ).

This is dollar-cost averaging in action. If you contribute, say, $1,000 per month or quarter, then you'll be buying more shares when the market is low and fewer shares when it's high. One of the great things about this system is that you don't have to think too much. You needn't try and guess whether the market is headed up or down, or if you should sell or spend more. You just keep making your investments, and your nest egg will grow over the years. (It can sometimes take a lot of years, though, which is why stock-market investing should only be undertaken with money you won't need for five years, or even 10.)

Carpe the diem
The other approach, which you can do in addition to the one above, is capitalizing on great opportunities when they appear. So far, 2009 sure seems like a great opportunity to me. (My colleague Tim Hanson has called it "an extreme buying opportunity.") Jayson pointed out how superinvestors such as Warren Buffett and Shelby Davis have earned their outsized returns in large part because of their value-investing convictions. When others flee from some stocks or the whole market, and it seems like a scary time to invest, that's when these kinds of brave investors back up the truck.

It makes sense, too. Think of some great long-term performers, and you'll realize that there have been times when they've temporarily tanked. Those have proven, in retrospect, to have been terrific times to buy, and as the stocks have recovered and gone on to new heights, the value investors have profited handsomely.

If you want to take advantage of such opportunities, you can read widely and you'll certainly find some. Here in Fooldom, we're happy to offer thoughts on the market's 10 best stocks and what the best investments look like.

You can also screen for some promising candidates for further research. Here -- check out this list of contenders as an example. I used the free screener at our CAPS stock-rating service and looked for companies with earnings and revenue growth over the past three years of at least 8%. I also specified that they should have earned four or five (of a possible five) stars and have stock prices that are down over the past year. Here are a few of the results I got:

Source: CAPS.Fool.com.

Such companies have been whacked, yes, but that doesn't mean they can't surge for you in the months or years ahead. Indeed, Oracle has averaged a market-whomping 12% annually over the past decade.

There's another interesting thing you might notice above. Oracle's EPS growth rate is higher than its revenue growth rate. When EPS, the bottom line, is growing faster than revenue, the top line, it reflects a company finding ways to cut costs or otherwise wring more value from each dollar of sales. That's a good thing. Still, note that it's not too sustainable over the long run. At some point, the growth of EPS is limited by the growth of revenue.

Start small
My final bit of guidance for you is to do with a portion of your portfolio what Seth Jayson and the rest of our Hidden Gems team does -- look for high-performing small companies, because they have the most room to grow. The index funds (especially S&P 500 funds) will give you a solid weighting in big firms, but you stand a decent chance of juicing your returns by including some more dynamic little growers in your portfolio.

We'd love to help you find some, and here's how you can get a big list of recommendations for free -- simply try our Motley Fool Hidden Gems newsletter (with no obligation to subscribe). You'll gain access to all past issues and can read all recommendations in detail. I suspect you might want to keep the subscription to get the latest recommendations hot off the press, but see for yourself via a free trial.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Walt Disney is a Motley Fool Stock Advisor recommendation. Walt Disney and Pfizer are Motley Fool Inside Value recommendations. Petroleo Brasileiro is a Motley Fool Income Investor pick. The Fool owns shares of Pfizer. The Motley Fool is Fools writing for Fools.