*** Happy Holidays to everyone. I certainly hope you are enjoying family, friends, some adult beverages and fantastic food. I am.

In the spirit of the holiday season, I will keep my notes short today. After all, the market is closed. And we have food to eat! But I do have two interesting nuggets to share with you…

First, I hope you received your exclusive membership to join Carl Waynberg’s GRIP service. The GRIP is a screening tool that tracks “jumper stocks” — the most explosive small-cap stocks in the world. These are the tiny companies that trade on the forgotten OTC BB and pick sheets exchanges that eventually “JUMP” to the NASDAQ, AMEX or NYSE — and make investors obscene amounts of dough in the process.

If you haven’t read your GRIP report, please check your e-mail inbox now. It is
important to sign up BEFORE Jan. 1!

That email is so valuable, that I’m including a special link to the information…
http://www.agora-inc.com/reports/GRP/WGRPEC16.

If you sign up before the New Year, you will save 80% off the sticker price. This is the best deal you will ever see! You can be certain the price will rise quickly come 1/1/2005. Please take advantage of this offer while it lasts.

*** Speaking of 2005, check out Irwin’s essay on due diligence. It’s an incredible story about his run-in with the legendary Larry Ellison of Oracle (who just made headlines again after winning his 18-month battle to acquire PeopleSoft). As Irwin mentions, it’s just the kind of story that New Year’s resolutions are made of. Irwin, put the pedal to the metal…

The Difference Between Making a Profit and Killing

It was Monday afternoon, April 20, 1987, and I raced my V8 Mustang against the clock on a winding road. I was running late for an interview with one of Silicon Valley’s most notorious and controversial warriors — Larry Ellison, the founder and CEO of Oracle Systems. But my meeting with Ellison wasn’t for a job interview. At the time I had been a journalist — and I was absolutely determined to walk away with a blockbuster story.

Back then, before Oracle built it’s three enormous towers, the company had a tiny facility on a cul-de-sac… accessible through a steep, narrow road lined with eucalyptus trees.  When I arrived, his secretary showed me into his office. It was small, but had an expansive feeling. In an alcove over his right shoulder, a large Buddha offered a serene smile… quite contrary to the expression that Ellison had greeted me with.

I sat down across his desk and tried to warm him up with chitchat. He wasn’t interested.  So I delved right into the questions that I had written for myself in advance. His answers were either single-word comebacks or long-winded exhortations to hype a product — and time was running out on my interview.

Finally, it dawned on me how to crack Ellison. I started talking about how great his most fierce rival was. I could resort to this because I was thoroughly prepared going into the interview. You have to be when you’re climbing into the ring with a tough nut like Ellison.

And my preparation paid off… big time.

In a classic case of one-upmanship, he started bragging about the next-generation database that Oracle was about to introduce.

Forty minutes later, I left his office with a page-one scoop.

So what does my story about Larry Ellison have to do with small-cap investing?

Today, many small-cap investors will find themselves in a situation similar to the one I found myself in trying to extract meaningful information from Larry Ellison. Why is that?

Because expert information on small-cap opportunities is becoming increasingly difficult to obtain. And that often leaves only one person to dig it up… you.

But what do you really need to know, and even more important, how do you get it? This process is called due diligence. It is the most important aspect of successful investing, especially in fast-moving small-cap stocks.

Wall Street legends such as Warren Buffett, John Templeton and T. Rowe Price sometimes spend years conducting due diligence on a company or an emerging market before investing a single penny.  And you could do worse than follow their examples.  After all, these billionaires got their start with small-cap stocks.

So the burden falls on you to find the best quality intelligence on a company… before you invest.

For many would-be small-cap investors, due diligence often involves spending hours on the Internet. The problem with that is you’ll never find the critical qualitative information — the insider opinions that can often make the difference between a profit and a killing.

I’m suggesting a bold alternative. It involves that thing on your desk with the keypad and the handset, which produces a dial tone when you pick it up.

Reporters generally get their most valuable information from phone interviews. But since you don’t have the credentials of the New York Times or The Wall Street Journal, how do you break through to a company?

Before I give you some important tips about that, there’s one thing that you have to bear in mind.  As either a shareholder or potential investor, you have an inalienable right to get the best possible information from a company. That’s the primary job of investor-relations professionals. You can find their phone numbers on the company’s Web site.

That said, you also have to conduct yourself like a professional investor. You have to treat investor-relations folks with respect and courtesy, and not waste a lot of their time… just like a reporter does.

Based on my experience as journalist, here are some simple rules you can follow to get the information you need… and put you on the path to a moneymaking, small-cap investment.

Set up your phone call appointment in advance… and be punctual at the time of the call.  If you’re in a different time zone, make sure that you establish whether it’s eastern, central or Pacific time. E-mail can be a great tool for this initial contact.

Before your scheduled phone call takes place, be PREPARED. Preparation shows that you are a knowledgeable investor… just the kind of person that a company wants support from.

The best way to be prepared is to make a list of questions. Ideally, this list should take no more than 20 minutes to go through. You should ask about things that aren’t typically found in an annual report, such as:

* Management’s philosophy toward its employees and customers
* The life expectancy of a main product line
* Sudden changes in the marketplace that could either increase or reduce risk
* Emerging industry trends that could impact the company
* New formidable competitors on the horizon
* Employee turn-over (are the rats abandoning a sinking ship?)
* Local economic-development that could bring new employee talent into the region
* The company’s plans for domestic or international expansion.

A phone call is also a wonderful opportunity to ask about things you may not understand.
This could include:

* Arcane footnotes in an annual report
* Odd items in a financial statement such as asset write-downs or goodwill
* If there’s an unusually high volume of insider selling, why is that?
* The percentage of revenues derived from the single, largest customer (you don’t want
to invest in a company that relies on a single customer for most of its income)
* Is there a high level of returns on a new product?

As you go through your list of questions, don’t be long-winded. You’ll get great results by being polite, professional and to the point.

In fact, it’s those three qualities that helped me break through to Ellison. By being polite, I demonstrated a clear sense of respect. It was my professional demeanor that led him to trust me enough so that he knew I wouldn’t screw up this very valuable piece of information he was giving me.  And by getting to the point, I never wore on his patience.

So if you’re in the habit of making New Year’s resolutions, you may want to ponder one about using the phone to dial for small-cap dollars.

Happy investing,

Irwin Greenstein

December 24, 2004

The Difference Between Making a Profit and a Killing was originally featured in the Penny Sleuth.