Dow Jones 9892.75 -38.07 9:22 am PST, December 5, 2003  NASDAQ 1950.04 -18.76 For info, visit access.smallcapnetwork.com S & P 500 1065.61 -4.10 To be removed, please click here Russell 2000 540.70 -3.45 VOLUME 03: ISSUE 78  Feature: Got Due Diligence? Part One. If you lined up 5 car chassis, one right next to the other, could you tell which would end up as a Porsche and which one a Yugo? No, you couldn't. So it is, as well, with stock Due Diligence. The standard definition of Due Diligence goes something like this: "The process of investigation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts." Whatever. For investors, the real definition lies here: the practice of researching a stock to the point where an investor feels comfortable committing a portion of available capital into a --hopefully-- profitable situation.  Certainly, this validation process, carefully carried out, will go a long way to insulating investors against ugly and potentially wealth destroying opportunities.  That said, all the due diligence on an individual stock won't help if the overall market is uncooperative. Analogous to stocks in a falling market, when the cops raid a brothel everybody goes downtown. And there we have the major mistake made by most investors: choosing a stock without first doing market due diligence. At SmallCap Digest, we begin our due diligence on a favored stock only after we ascertain the state of the markets. Period. There is too much risk and too many factors working at cross-purposes to have blind faith in a good stock in a bad market. Since March of this year, the markets have been pretty darned good. Back then, it took stones to step into the market. Curiously, even though the NASDAQ is up about 45 percent since March 12th, I still see articles postulating as to whether it's time to get into the market. There are always opportunities, no matter the state of the market. However, before picking a stock to invest in now, the fact that the easy money's already been made must be factored into any discussion of due diligence. Both the DOW and the NASDAQ are bouncing off their century marks of 10,000 and 2,000 respectively. To begin a research regimen, investors must ascertain what percentage the market has already priced in--or at least discounted--to what appears to be decent economic growth ahead. It's important to note that the past year has been ugly, both economically and geo-politically. The current debt is huge, deficits are growing, the recovery is more than jobless and overseas military campaigns appear bogged down. And still, the markets continue to advance. Markets tend to see ahead. So should investors.  Markets foreshadow or predict, they don't--with some minor blips-- react to current  events.  Buy when everyone's selling and sell when everyone's buying--probably the most consistent way to profitable investing. Historically, the value of that approach is irrefutable. Intel (NASDAQ: INTC) has apparently replaced GM (NYSE: GM) and IBM (NYSE: IBM) as the markets' bellwether. Intel's vacillations have largely replaced market due diligence, as analysts and the media spend inordinate amounts of bandwidth commenting on every twitch and exhalation of the chip giant, and attempt to relate its singularities to the progress of the overall market . While of some value, this myopic fixation is dangerous. Pinning the hopes of thousands of stocks constituting dozens of sectors to Intel means investors will likely miss tons of other opportunities and may well get bushwhacked if this one stock does a market head-fake. If you want to invest in Intel because the market looks good, fine. If you invest in the market because Intel looks fine, you'll undoubtedly get nailed somewhere down the road. So how do you read the market? First you have to determine your risk tolerance. If you feel the market is oversold, are you prepared to wade in and be too early? Is there room to move higher after an already significant move? These are personal determinations, and relate to each investor's circumstances. Don't let a TV talking head tell you what to do.  Then, watch the sentiment numbers--the Market Volatility Index (VIX) is one of my favorites. A low number means the market should cruise higher because investors feel complacent. In March the VIX was in the 30's and everyone was scared. Since then it has fallen to 16 and everyone feels relatively good about investing. While investors should be aware of this sea change, the bon temps can go on for a while. As long as the VIX roils around below 20, the market will remain fairly friendly. Although, as noted above, the easy money's likely already been made. In conclusion, get a read on the whole market before you focus on a stock--or stocks-- to purchase. This way, you'll be on your way to choosing the Porsches as opposed to the Yugos. Like the market? Fine. We'll look at how to do due diligence on a stock against that backdrop in a future piece.   If You Haven't Already, Sign up for your FREE Preferred Membership! Over the past year, we've brought you 13 Trading Alerts. If you had invested $1000 in each one, your $13,000 investment would have grown to $23070, if you had sold, say, Friday November 7th, to pick a day. That's a 78 percent return in a less than a year. The best? Obviously, Cel-Sci. The worst? ThinkPath. If we strip those two out--the highest and lowest returns--the return on your $11,000 investment would have been a very respectable 51 percent. Not too shabby. By comparison, the S&P index has returned about 20 percent over the last year. The NASDAQ--to which we also alerted you at the low in March 2003--has returned around 40 percent in the same period. The NASDAQ Tracker (NASDAQ: QQQ) did slightly better than its benchmark having risen 45 percent. Oh yes, we told you about that one, too at $24 in February 2003. Now it's $35. And we're only looking at Trading Alerts. I suspect if we included all of our Company Profiles (check our Track Record), the numbers would likely have been even better. The best is yet to come. Sign up NOW! Joining our NEW Preferred Member Program is easy and simple. Just follow this quick two-step process: Opt-in your email address, then, make sure and confirm the request for confirmation you will receive in your inbox. That's it! 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