The Dow Jones Industrial Average broke the 10,000 mark for the first time in March, but the running of the bulls bypassed the four Virginia investment professionals who agreed to match wits against the Masked Investor in the Virginia Business stock-picking contest.

Each had an imaginary $100,000 to create a fictional portfolio of Virginia-based stocks. The starting prices were set on July 21, 1998, and their portfolios were left alone for a year. The value of each person's investments was recalculated on July 19, 1999, including dividends but excluding transaction costs and taxes.

Their combined portfolios ended up losing almost 10 percent of their value. By comparison, the average gain for the close of the 1998 contest was 14 percent, and the average gain for 1997's stock pickers was 38 percent. What happened? In many cases, our investors were small-cap casualties.

DAN GRANDSTAFF
Dan Grandstaff, of A.G. Edwards in Harrisonburg, achieved the biggest gain among the contestants. His portfolio grew to $118,212. Grand-staff watched nervously as the stock of Advanced Communication Systems dropped from $11.88 in July 1998 to $7.13 in September. But "then the Fed did its interest rate cuts, and that drove the market back up and the stock up to $16 in just two months," he says. "The fundamentals took over."

Grandstaff bet $30,000 of his portfolio on Advanced Communication because of his confidence in its niche — providing telecommunication and technology services to federal agencies. His confidence was rewarded with a $6,947 gain.

Reynolds Metals is another company whose stock was "beaten down." Grandstaff thinks the stock has climbed — netting a $3,324 gain on his $30,000 investment — because investors are expecting Reynolds to realize the benefits of its restructuring in 2000.

Grandstaff's investment in Mobil was his biggest win, increasing from $20,000 to $28,577 on the strength of the company's pending merger with Exxon. "With two high-quality companies like Mobil and Exxon," he says, "how can you be pessimistic?"

It was easy to be pessimistic about Owens & Minor. The company was recovering from the loss of a major contract with Columbia/HCA. Its stock tumbled, even though new contracts were being signed, reducing Grandstaff's $10,000 stake to $8,832.

F&M National was a modest performer. Grandstaff's $10,000 investment inched up only $530. He says F&M was built to be an attractive takeover target, but one top executive continues to exercise veto power.

DUKE VAN SELOW
Coming in second to Grandstaff was Duke Van Selow in the Virginia Beach office of Edward Jones & Co. His portfolio grew to $114,391, thanks to his stake in America Online, which ballooned from $20,000 to $36,632. "AOL will continue to acquire smaller companies, and more of its revenues will come from overseas," he says. Another tech stock stake — this one in Metro Information Services — dropped dramatically from $20,000 to $8,963. Van Selow blames a bad earnings report. Although the company performs technology consulting and software development in 42 U.S. markets, Van Selow now knows that investors were waiting for an excuse to take profits.

Hooray for hindsight, but give Van Selow credit for investing $20,000 in Capital One Financial, a credit-card company that returned $4,585. He also chose First Virginia Banks last year; he thought it was ripe for acquisition. But no buyers came forward, and his investment drifted down from $20,000 to $18,646.

Smithfield Foods was a different story, netting $5,563 on Van Selow's $20,000 investment. The company wants to be the dominant hot dog maker in the world and will continue to grow by purchasing small private companies, he says.

ALAN CULBERTSON
In 1997, and again in 1998, Alan Culbertson won this contest. This year, however, his $100,000 portfolio performed like a passbook savings account, edging up to $105,488. His big winner was Scott & Stringfellow Financial, which was acquired by BB&T, and his big loser was Guaranty Financial, a community bank that turned $40,000 into $27,886 for Culbertson. "Nobody is paying attention," he complains. "Guaranty is selling at a P/E that's 20 percent lower than the typical community bank."

Freddie Mac hasn't had a problem attracting investor attention. Culbertson raked in $3,515 on his $15,000 investment in the mortgage monolith. He got another solid performance from his Gannett stake, which increased from $15,000 to $17,534. "People love their local newspapers," he notes. "I think Gannett can reap the benefits of the information revolution without suffering from the threats of it."

WALLY FOUTZ
Wally Foutz was a financial planner in the Richmond office of Raymond James Financial when this contest began. Now he's doing the same thing in the Richmond office of Prudential Securities. Perhaps his impending career move clouded his crystal ball: His portfolio dipped slightly to $99,430.

He managed to pick up 10 percent returns on Fannie Mae and Reynolds Metals, but he too banked on takeover rumors that never came true for First Virginia.

Foutz longed to sell Sunrise Assisted Living, which lost $4,241 on his $25,000 investment, but the contest rules didn't allow it. "The stock has been all over the place," he says. "It had gotten up to $53 in December [from $35 in July 1998], and I would have probably sold at that point."

A recent acquisition made Sunrise one of the nation's largest assisted-living companies, but the poor performance of some competitors has made investors wary of the industry, Foutz says.

THE MASKED INVESTOR
The Masked Investor called on the forecasting prowess of chickens for his stock pickin's, and they pecked out only one winner, leaving his $100,000 portfolio down $47,125.

His only star was Walnut Financial Services, a business development company whose stock almost tripled in value. But his other small-caps did poorly.

What has the Masked Investor learned? Aside from never trusting the judgment of farm fowl, he discovered the short-term risks of investing in smaller stocks. The market may take a while to get to know them, and that makes them more volatile. In the long run, however, experts say small- and mid-cap stocks outperform their larger brethren. All it takes is finding quality companies, committing your money to them, and not letting the droughts and floods send you into a panic.