How to Turn $1,000 Into $1 Million

If you've found a profitable "get-rich-quick" scheme, consider yourself lucky.

Foolish investing has nothing to do with getting rich quick. Sure, our market-beating Motley Fool Hidden Gems investment newsletter has enjoyed some fast and astounding successes: Middleby has quadrupled, Transkaryotic Therapies tripled before it was acquired, and a dozen other recommendations have at least doubled. Although our small caps have been giving back some of those gains of late (the market is a volatile place), we like the long-term prospects of the small caps we follow.

And we're confident in our "get-rich-slow" philosophy. Save money. Invest it regularly. And let the magic of compounding returns work for you. Our objective is to invest for the long term. I say "our objective" because we're all in this together. We discuss prospects and finds on our discussion boards. And we keep track of developments at companies we've already discovered.

Growth potential
When examining a prospect for nomination, we look for a company with a superior return on equity (ROE) -- something near or north of 20%, as is the case with great long-term investments such as Best Buy (NYSE: BBY), with 26% ROE, and Humana (NYSE: HUM), with 23% ROE.

But we look for superior ROE among companies sporting much smaller market caps, because -- unlike Best Buy or Humana -- these companies can still grow five to 10 times in size. Here are a few examples:

Company	Market Cap	ROE
AZZ (NYSE: AZZ)	$540 million	24%
Dawson Geophysical (Nasdaq: DWSN)	$415 million	22%
Quidel (Nasdaq: QDEL)	$619 million	17%
Sigma Designs (Nasdaq: SIGM)	$407 million	41%

Data provided by Capital IQ, a division of Standard & Poor's.

We also look for free cash flow and a strong balance sheet. For example, Hidden Gems recommendation Dawson Geophysical has $9 million in cash and no long-term debt. We believe that companies sharing these traits can grow and beat the market over the years, just like Best Buy and Humana.

The companies we seek combine business performance, cash-raising prowess, and the potential to double in value in three years.

This "two times in three years" formula will not always play out according to plans. But through hard work and patience, we are confident that over time, our collection of small caps will soundly beat the market averages.

So what's achievable for you? Let's look at two possible scenarios for long-term growth. For the sake of this comparison, we'll call them "Retire Comfortably" and "Set Your Grandkids Up for Life."

Retire comfortably: $1 million in 45 years
We know that our recommendations are averaging impressive returns. But let's not get greedy, and let's not extrapolate for decades into the future what has been a start beyond even our most optimistic expectations. What if we dialed back our expectations and assumed a still-aggressive annualized 16.6% return on our initial investment? A $1,000 investment would take 54 months to double. Under that scenario, it would take approximately 540 months (or 45 years) for that $1,000 to double 10 times and reach $1 million.

That should work nicely for any Fools who have just graduated from college, have $1,000 to invest right now, and would like a chance to retire comfortably on the proceeds at around 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, telling everyone 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. We're busily searching for the profitable companies out there in the market -- rather than buying an index that incorporates the returns of a grab bag of companies, whether they're good or bad investments.

In the worst-case scenario, we're pretty confident that over the long term, we can match or beat the market's historical performance through hard work, diligent research, and patient perseverance. With the broad stock market averaging slightly 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.

The long view
Admittedly, in 75 years, even you youngsters 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 or that Winnebago you'll use to get there. Heck, in 75 years, even your kids may have retired. But what about your grandkids? And their kids? That $1 million could come in handy for your Foolish dynasty.

As for you Fools today, there's still hope, even under this scenario. Because 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 75, 45, or just 30 years away. Fools continue to save and keep investing. Regularly. Meaning that even at the market average, you could accumulate $1 million sooner than you think.

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, Hidden Gems might be for you. You can check it out free with a 30-day trial. 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 May 28, 2004.

Copyright © 2008 Universal Press Syndicate.