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Investments Inc.

spacer April 2000

It’s always a fine line to walk between the discipline of sticking to your methodology and becoming a fuddy-duddy who is impervious to change.

With this issue we are making a change to an official Contra philosophy.

Until now, any stock investments outside of the TSE and NYSE were not part of the main portfolio. We are removing that restriction, adding the Nasdaq and over-the-counter markets as potential sources of contra stocks.

At first blush, it may seem that we are joining the stampede of folks who are shunning the traditional exchanges for the hot action elsewhere.

Nothing could be farther from the truth, but nonetheless, there is a strong contrarian rationale for our decision.

The landscape of stock markets has changed dramatically the past few years. Nasdaq is now the listing of choice of some of the world’s most valuable corporations. Last autumn, the venerable Dow broke the NYSE monopoly and added a couple of the Nasdaq’s best-known names.

In Canada, the Vancouver and Alberta stock exchanges merged into a new entity, the CDNX, which has had a very successful start.

Part of this sea change has been a sweeping revision to the listing criteria at the NYSE. Plagued with the dichotomy of record-breaking indexes in contrast to horrible overall breadth, a novel solution was found: if investors have lost interest in these struggling small caps, then give them the boot.

Drastic, perhaps, but it’s one way to improve the neighbourhood.

Trouble is, some very good companies are being branded as losers under these new criteria. We thought Utah Medical’s CEO Kevin Cornwell put it well when he wryly noted, “Apparently the NYSE prefers large, unprofitable companies to small, profitable ones.”

Cornwell also correctly pointed out that the Nasdaq is a heck of a lot better than it used to be. No organization has embraced technology so enthusiastically in the pursuit of the goal of fast, automated and fair stock trading.

Nasdaq’s success has been spectacular, and it now trades more shares daily than any other market.

Even the over-the-counter market, though still an unruly territory where hapless pilgrims can be easily ambushed, has improved in terms of liquidity and bid/ask spreads. It is an area we have grown more comfortable with and we will endeavour to give you the benefit of this experience.

In fact, we’ve already snuck a couple of these selections into the letter.

Last October’s commentary featured a number of alternative investments. Two of those, Ameriquest and National Auto Credit, both trade on the Nasdaq OTC — having been delisted from the NYSE.

While the latter was sold for a two-cent loss per share, Ameriquest was up about six times within four months, and 17.5 percent was sold. Both are included in the Bought and Sold section.

So, in our search for turnaround candidates, we will be taking a close look at these cast-offs along with other plays that merit consideration.

Our focus will remain on the NYSE and TSE, but our net will be spread wider in search of Contra plays.

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