*** Persistence, persistence, persistence. Whether you are a baseball player or a small-cap investor, the ones with the most persistence get the best results in the end.

Johnny Damon, the Boston Red Sox center fielder, is an all-star-caliber player. No question about it. But he was having a terrible series against the rival New York Yankees in the American League Championship Series this week.

During the first six games of the best-of-seven, winner-take-all bash, Damon looked ugly. He went just three for 29 at the plate – batting a miserable .103. It was the worst stint of his entire baseball career – even going back to his days of Little League. But he didn’t give up.

When Boston needed its center fielder the most, he came through. In game seven, the final game of the series, Damon broke out with three hits – including a two-run homer and a grand slam. He single-handedly dismantled the Yankees and gave his team a one-way ticket to the World Series.

Although I am not a Boston fan (I’ll stick by my Baltimore Orioles through thick and thin!), I did appreciate Damon’s effort – and that of the entire Boston Red Sox team. It’s nice to see persistence pay off – to see someone keep their head held high even when the chips are stacked against them.

And as a small-cap investor, persistence is a critical part of success.

One of the most frustrating aspects of being a small-cap analyst is finding out how many readers bail because one or two recommendations fall in price. People don’t pay for losers (man, I’ve heard that one before!). Everyone wants winners all the time. Well, unfortunately that isn’t possible.

Stock rise, and stocks fall. Sometimes you win, and sometimes you lose. But the people who quit because of one bad stock never give themselves the chance to win. And believe me, as long as the market exists, there will be winners -most of which will be small-cap stocks.

Every Friday, Investor.com lists the top-performing stocks (trading for $5 or more) on the major exchanges. This week, the top gainer was Isonics Corp. – a small-cap stock with a market cap under $100 million. (To give you a measuring stick of how small that is, Microsoft has a market cap of $305 billion!) It rose 41.5% on news it would develop portable explosive detection technology for the homeland security and semiconductor markets. That’s a huge deal for a small-cap company.

A new product launch, a new contract or even a solid earnings announcement can cause a massive rise in a company’s stock price. And Isonics is living proof of that. Show me a large-cap stock that has risen that much in six months – let alone a week! You may find one or two, but that’s about it. The small-cap market is chock full of such winners.

This week, nine of the top 10 performing stocks on the market were small-caps with a market cap of under $1 billion. Take a look at the list for yourself…

- Isonics Corp. (ISON:NASDAQ), market cap $95.9 million, rose 41.5%.
- The Robert Mondavi Corp. (MOND:NASDAQ), market cap $871.9 million, rose 34.4%.
- Polydex Pharmaceuticals Ltd. (POLXF:NASDAQ), market cap $20.5 million, rose 20.5%.
- Children’s Place Retail Stores (PLCE:NASDAQ), market cap $770.2 million, rose 21.3%.
- Sigmatel, Inc. (SGTL:NASDAQ), market cap $974.5 million, rose 26.5%.
- Select Medical Corp. (SEM:NYSE), market cap $1.7 billion, rose 20.9%.
- China Automotive Systems (CAAS:NASDAQ), market cap $270.7 million, rose 13.4%.
- Optibase Ltd. (OBAS:NASDAQ), market cap $72.1 million, rose 20.9%.
- Advanced Magnetics, Inc. (AVM:AMEX), market cap $114.7, rose 14.5%.
- OraSure Technologies, Inc. (OSUR:NASDAQ), market cap $308.6 million, rose 17.9%.

Of course, I can’t guarantee what stocks will be on this list next week, my small-cap friends. If I could, I’d be the richest man alive.

But I do know that resident Penny Sleuth Irwin Greenstein has figured out a way to help increase your chances of finding the high-risers. He’s run across an indicator that measures where some of the smartest (and richest) investors are putting their money right now.

Irwin, I pass the baton to you…

Where 2,800 Entrepreneurs Are Putting Their Money

It was a “tipping point” in Silicon Valley…when digital content was migrating from CD-ROMs to the Internet. I had established the regional office of a successful Los Angeles public-relations agency. Back then, we truly believed that our experience with TV could help the millions of new Web sites get coverage in the press to attract more “eyeballs.” That’s when I got the phone call…

An old friend of mine, who had already struck it rich in high-tech and moved to Honolulu, rang me up one afternoon. I remember how he had sworn up and down he was burnt out on tech. Never again would he run another startup. He looked forward to spending his days managing his $100 million from his magnificent ocean-view home office.

Who was he kidding? Once a tech junkie, always a tech junkie.

In that fateful phone call, he was fired up about a new company he wanted to launch. He talked about nutty stuff: hardened data centers, undersea broadband and millisecond downloads. Would I handle media relations for the launch? Since he’d be in San Francisco the following week for venture-capitalist presentations, I invited him to dinner at Boulevard. I figured the worst case was I’d have a perfect martini, a wonderful dinner and an interesting conversation.

How could I know that that dinner would change my life?

Over a bottle of Porter Creek Chardonnay and grilled monkfish, my friend laid out a plan for one of the most advanced data networks in the world. He had already recruited Cisco’s best and brightest to build it – pulling in the guys who literally wrote the book on Cisco routers. Whereas most networks were U.S.-centric (giving American users better performance), his idea was to launch a network where people in the United States, Europe and Asia all enjoyed the same incredible performance benefits for multifaceted data.

By the time the blackberry cobbler arrived for dessert, I had signed on with him. And we made history…

That company went on to create new market segments such as Web hosting, content delivery and managed services… pulling in millions in venture funding and ultimately revenues from corporate customers.

Thinking back to that dinner, I remembered my friend being so incredibly passionate about his idea…willing to do whatever it took to make the company an enormous success.

Now imagine if you could tap into the minds of the greatest entrepreneurs to find out where they were investing their blood, sweat and tears (and money). If you could, you would have the opportunity to invest in the hottest sectors, the hottest new technologies, and the hottest new companies all the time – before anyone else.

Sound impossible? Well, it’s not.

Sector Investing

There’s an index every small-cap investor should know about. It’s called the vFinance Entrepreneurial Confidence Index (but goes by VECI). Created by vFinance, Inc., the VECI uses online polling to pick the brains of entrepreneurs seeking capital and investors looking to put their money into the next big thing. The site is visited by more than a million entrepreneurs and investors every year – making it a magnet for innovative ideas.

The brains behind the Web site at vFinance, Inc. are among the best-informed experts in emerging trends. That’s because the company has more than 10,000 clients worldwide on both sides of the equation: the entrepreneurs and the financiers who develop companies and sectors the same way the rest of us mow the lawn.

By “sectors,” we’re talking about widely recognized broad industry categories such as energy, health care and transportation. And the VECI measures which sectors are ripe for expansion and which ones are well on their way to crashing down. This kind of information is far more valuable than any simple stock indicator.

The beauty of the VECI is that it’s a model of simplicity. vFinance clients are invited to participate in an online survey that measures entrepreneurs’ sentiments. Number crunchers then convert those data into meaningful statistics – including segment attractiveness. For investors, putting money into a segment versus a single stock is the difference between trying to a hit target with a shotgun or a rifle.

Here’s why…

Of the 8,856 publicly traded companies, maybe a handful will rise significantly in a given week, month or even a year. That’s it. And picking those winners can be tough, tough work. So instead of blindly trying to invest in the hottest stock – you can figure out what the hottest sector is and invest in several highflying stocks. And it just so happens that it’s the small-cap stocks that usually lead the way in any given index.

For example…

As of mid-October, the 2,800 entrepreneurs participating in the most recent VECI online survey had indicated a high level of confidence in gold and silver companies. In support of that, the bellwether Philadelphia Gold and Silver Index has risen over the past three months from $87.78 on July 20 to $101.68 on Oct. 20 – a boost of 15.8%. Exactly how good is that?

Well, the Russell 2000 small-cap index had gone from $564.19 to $569.26 during the same three-month period – for a humble uptick of 0.9%. So a gold and silver sector play would have yielded a breathtaking 1,655.6% more on your investment than the Russell 2000.

Digging a little deeper, there were some stellar gold and silver small-cap performers. Among them was Coeur d’Alene Mines Corp., whose same three-month results were up 16.2% – virtually tracking the Philadelphia Gold and Silver Index…and delivering one more piece of evidence on the prowess of the VECI (and about our sister publication, Penny Stock Fortunes, which nailed a staggering 221.05% profit on Coeur d’Alene Mines). And by the way, although Coeur d’Alene Mines only slightly outperformed the Philadelphia Gold and Silver Index, it crushed the Russell 2000 by 1,700% during the same three-month period.

But gold and silver wasn’t the only sector sizzler that entrepreneurs were attracted to in the survey. The other leaders were music production and energy, specifically oil and gas.

For me, the VECI fills a vacuum that was left when the tech bubble popped. When my entrepreneur friend and I were working together, there was a glut of so-called new economy publications like The Industry Standard, Forbes ASAP and Red Herring. They really took the pulse of venture capitalists and entrepreneurs – the visionaries who created breakthrough sectors such as Internet infrastructure, e-commerce and electronic gaming.

With those publications relegated to the dustbin, the VECI seems like a great replacement. In fact, it’s even better, because it’s devoid of the hype that characterized one of the most prolific sector-creation periods in modern history.

Is the VECI foolproof? No. Because even my entrepreneur friend invested in a few duds…but he also placed some incredibly lucrative bets on startups that may be the next sector stars of the small-cap universe.

For more information about the VECI, visit www.vfinance.com/eci.

Happy investing,

Irwin Greenstein

October 22, 2004

Where 2,800 Entrepreneurs Are Putting Their Money was originally featured in the Penny Sleuth.