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Gal^Stad
Investments Inc.

spacer April 2003
Commentary

After the year 2000 saw our first net outflow of subscribers ever, the tide turned in 2001 as our improved results, contrasted with people losing their undergarments in previously hot investments, brought readers rushing to join the Contra club. Of course, this pleases us immensely, but as with any organization, it is the newest members who ask the most questions. We have decided, therefore, to tackle a whole bunch of your queries, en masse, in this space.

One of the most common questions is, "Now that I've signed on, how do I get started?" Well, as an independent investor making your own decisions, that's up to you. Some people we know jump to buy everything in our portfolio, as if stuffing their shopping carts with whatever they see on the grocery store shelves.

But there is a reason why the centrespread of every issue of Contra is divided into "Buys" and "Holds." When we make a purchase, the stock is rated as a Buy, by us and for us. That does not mean that it would necessarily fit into your portfolio; bear in mind always that we are not advising you in any way, shape or form to lay down your cash and put the stock in your pantry. We are not financial planners or advisors.

When we label something a Buy, we are simply saying that it appears to us to be a vastly undervalued company, and that we are willing to throw our money in that direction. It fits into our portfolio and, at current prices, is still a stock that meets our Buy criteria.

How long does a stock remain a Buy? Normally, until it becomes a Hold; however, tax reasons sometimes dictate that a stock that would otherwise remain a Buy, but which has declined substantially since our purchase, is sold as a write-off against gains made elsewhere in the portfolio.

Holds are stocks that we have already purchased and which we would no longer buy at current prices. Sometimes this is because they appreciate in value and no longer need a jump of at least 50 percent to reach our target -- one of our requirements of a Buy.

On occasion, stocks increase in cost, and while the target is still far away, our perception is that the risk/reward ratio has gotten out of whack and is no longer as attractive.

Then there are the stocks that decreased in value and, although they appear on the surface to be even more compelling bargains, the companies' fundamentals seem to have deteriorated.

Sometimes, after we have owned the stock for a while and gained a better understanding of the corporation, it is not so much the fundamentals, but our assessment of them, that changes. A classic example of this was Hartmarx; after witnessing the bewildering antics of that firm's management, we felt we had no choice but to switch it from a Buy to a Hold.

Personally, we would not buy stocks rated as Holds, but many do. Sometimes it works, and sometimes...

Many people ask about buying stocks in proportions that match the "Weightings" that appear in the centrespread. That doesn't make sense to us. These numbers represent nothing more than a percentage of the portfolio at a specific point in time and do not reflect accurately how much money we threw at each stock.

Since our purchase, the firm might have doubled -- or halved -- and the weighting will naturally have changed. If the size of the rest of the portfolio increases or decreases, again, the numbers in this column will be skewed.

Something that is relevant to our confidence in a stock is the "Purchase Weighting" that is part of the e-mail release we send out to subscribers whenever we buy a stock. For more information on this rating, check out the April 2002 commentary. It's a sprightly one!

Some new subscribers ask, "What if I do everything you guys do -- buy what you buy, sell when you sell?" They may say imitation is the sincerest form of flattery, but anyone who chooses to employ this technique should be aware that the Contra portfolio is designed as our portfolio, and is predicated upon our unique assumptions about our personal risk tolerance, lifestyle and financial condition. It is highly unlikely that our situation mirrors yours. You should base your decisions on your own circumstances. Here's a disclaimer of sorts: We Do Make Mistakes. And, unfortunately, we always will. Darn. Maybe you can spot our errors before we do.

"But if I don't follow you precisely, I won't achieve your results," is the common rejoinder to the above caveats. Very true; sometimes your results will be better, sometimes worse.

Another common inquiry: "I only have enough money for a few stocks. Which should I buy?" Whether you choose to buy those equities listed in Contra as Buys or any other stocks is completely up to you. Cherry picking should, on average, lead to better results. Of course, this should always be combined with that intangible called patience.

Some people have noted that sometimes the price of a stock moves upwards after our e-mail release. Indeed, that can happen -- it's that old supply/demand thing. You then would need to make a decision, relative to the target price, as to whether that stock remains a good candidate for an excellent return.

As you may observe, our initial sell target is set well above the price at which we procured our position. And even though stocks often do appreciate after we buy them, they will sometimes fall back a tad -- and, more often than we'd like, below our purchase price. We don't claim to be experts at pinpointing a stock's precise bottom; and quite frankly, we have yet to encounter anyone who has consistently paid out the right length of nylon when they go bottom-fishing.

We are loath to chase stocks, so sometimes our bids remain on ice for a while. Our modus operandi is to enter an open limit order at a price that seems reasonable, and have it expire at the end of the month if it has not been filled. The order might be re-entered at a later date, again somewhere below the market price. If our bid succeeds, so be it; if not, there will always be others to buy.

When we set our bid price, the order quantities are important. If many more shares are offered on the sale side than the bid side, our prospective purchase price will be even lower. Fishing expeditions when we try to buy? Absotootely.

Sometimes, conditions dictate that we jettison a loser for the tax benefit. Currently, we are mulling an exit point for Service Corp. International, the huge funeral home operator that we purchased at $4.51 in December 2001 and on which we booked a quick little gain with the bulk of our position. Currently trading at $3.14, the company's prospects remain positive, and if it weren't for the tax loss possibility, we would hold it in the portfolio -- in fact, we continue to rate it a Buy.

Given the decline in price, it may get dumped, but even so, we wouldn't rule out the possibility of a repurchase later in the year. This was the same gambit we employed when Fleming was booted and then repurchased a few years ago (and sold in 2001 for more than $31. Say, did anyone notice their Chapter 11 filing last month? Buy and hold until perpetuity? Ha!).

We're often asked who we use as brokers. For Contra stuff, we dwell firmly in the discount broker realm. Why pay full-service rates when we aren't taking a broker's advice on our purchases? Even so, we do believe that if full-service brokers give you a tip you follow up on, it is only fair to purchase through them.

We use a variety of discounters: eNorthern, E*Trade, Scotia Discount, TD Waterhouse and BMO Investorline. Each has its specific price advantages on certain kinds of trades, and comparison shopping rarely hurts.

Another reason we trade through various brokers is that it promotes diversification. If one of our intermediaries finds itself in a financial morass, which is not beyond the realm of possibility, the size of our sinkhole will be reduced.

Since everything else we do appears to be technologically savvy, why don't we take credit cards for subscriptions? This question remains up in the air. One option we are investigating, however, is PayPal, the system that lets you send money over the Internet using your e-mail address. We invite you to let us know if this alternative might be of interest to you.

Is there still something we haven't addressed? Dagnabbit! Well, you might want to take a walk through our website, or pick up Benj's book, The Contrarian Investor's 13: How to Earn Superior Returns in the Stock Market (published by Viking in Canada, Insomniac Press in the US).

Another alternative is to drop us a line, and perhaps our answer will fit like a glove -- of course, the response could just as easily be, "I don't know." It happens often enough.

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