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Gal^Stad
Investments Inc.

spacer April 2004
Commentary

Every year we try to have a commentary discussing alternative investments that appeal to us. Last year, this column slipped from the radar screen due to other priorities; however, the time has arrived to report on some other nooks where we have deposited funds.

One question that we often hear is, "Do you have other investments besides those in the Contra portfolio?" Of course we do; in our minds it would be fatuous to place all of our eggs in one basket.

(Those who have listened to us for years might be bored with another missive about the importance of diversification and the dangers of the devil of overdiversification. Given how often we have repeated ourselves in this regard, rest assured we are not going there.)

As you probably know, interest rates are near 40-year lows. This makes returns from bank accounts, GICs, T-bills and the like rather uncompelling. Still, safe-haven money and money in transition should be working for you.

So where do we put it? ING Direct's savings accounts are a reasonable spot. There are also the products of GMAC Financial Services, especially if one deals directly with the company rather than going through a broker or financial institution who will insist on skimming off their cut. Some of the smaller firms will offer rates on short- and medium-term funds up to a full percentage point higher than the larger players.

However, it is worthwhile to remember that your money is only government-insured up to $60,000, and not in all situations. Financial institutions do fail, and having too much moolah tied up with any one of them can be hazardous.

Given how low interest rates are, it is evident that they cannot go much lower. That indicates that one must be wary of investments which are sensitive to a rise in interest rates.

One area that could get hammered is real estate. Given that prices seem to be bubbling, a couple of pin-pricks from an interest rate hike or two could lead to the big phhhttt!!!!

A further indication that this sector is overheated is the success of REITs, which have performed exceptionally. However, property values only walk tall for so long -- even if they are built like Sheriff Buford Pusser.

Amidst overheating prices in the housing sector, CMHC -- in its charitable wisdom -- has decided to provide mortgages with no money down. Hey, guys, why not go one further and let people finance their homes with their credit cards?

Moves like this, during such bubblicious times, are downright scary. It reminds us of governments plowing pension contributions into the stock market right at the peak of the boom. Yeesh, must the groundwork always be laid for the negatives of history to repeat themselves?

Ah, but some of you moan, "Two- and three-percent returns? What gives? We want the big numbers!" As do we all. Still, as Conan O'Brien says, "Be cool, my investin' babies!" Realizing gains is but one side of the coin; the other is no less important: capital preservation -- or, more bluntly, not losing money.

As we saw from 2000 until last year, many ignored this latter mandate, to their peril. Once your financial ship sustains a major hit, it's damned hard to recover. If a 33 percent bite is taken out of your principal, you need to realize a 50 percent gain just to break even -- and that ain't easy, folks.

That said, we do occasionally make some plays that, for any of a variety of reasons, do not qualify for membership in the Contra portfolio. In many of these cases, one might even argue that they're speculations rather than investments.

Another warning: Optimists beware! In the Personality and Social Psychology Bulletin, Doctors Bryan Gibson and David Sanbonmatsu reported that pessimists do better in the stock market than optimists, as they are more cautious and therefore less likely to prolong a losing streak. For those of you who have observed us looking additionally dour lately, this might be why. We're always looking for an edge.

Over in biotech land, the search for various elusive panaceas continues, and investors often return to this realm for the tape-measure home runs that so few companies hit.

(All baseball metaphors aside -- and we love our baseball metaphors -- none of these companies is in the business of generating actual tape-measure home runs. And as far as we know, Balco has no plans for an IPO. Moving right along...)

A trio considered worth a nibble were Biomira, Micrologix and Stressgen, bought at $2.51, 61 cents and $1.12 respectively. None of these have had much luck lately, but they have stayed in the game for a long time, which in itself gives them credibility.

Whether or not these biotechs discover magical elixirs, a Brick beer or two will help the good times roll or, conversely, drown the sorrows. This outfit was purchased at 68 cents. The company behind this largely (and ironically) illiquid stock has an experienced management team that has enabled them to cope with their diminutive size -- if Molson is a two-four, these guys are a sip from a stubby. One insider, however, seems not to be discouraged by his firm's underdog status, as he recently bulked up his position. To which we reply, "Keep chugging, Mr. Insider!"

Farther from Earth, satellite parts provider Norsat International has made a hale and hearty move since a purchase at 57 cents. A few corporate sales are helping the cause, and the hope is that the relatively new management team will fulfill expectations.

Which raises the question: When does "new" become merely "relatively new"? The TV station in Barrie, Ontario, has been calling itself "The New 'VR" for so long that it's actually old. Then there's those "New" Democrats -- but don't get us started!

Mining is still an area of interest, although less so than before. A longshot bet at 47 pennies was Atna Resources, a little explorer praying for a worthwhile find on one of its properties. In the diamond hunt, there's Twin Mining, bought at 33.5 cents.

Another nifty pickup, at 31.5 cents, was Tiomin Resources; their big titanium play in Kenya might finally get off the drawing board and into the land of reality. Yeah, we know, they've been saying that for about six years.

Even though we feel that real estate will tumble, Prime Group Realty Trust on the NYSE was enticing enough for a play at $6.45. This firm's auditors recently announced that they are no longer concerned about its ability to continue as a going concern, but while it's out of the intensive care unit, full recovery is still far from certain. The debt load remains bloated, and competition for tenants in Chicago is fierce, as a number of new office buildings are in the pipeline.

Having lost a major tenant last year, PGRT seems destined to keep struggling. The kicker, though, is that it is looking to be bought out, merge, or at least do something exciting. Given that it is trading at about half of book value, there's a reasonable chance of some sort of action.

Another real-estate outfit that attracted us was Grubb & Ellis, at just north of a buck. This one is a bit of sentimental favourite, as we made a handy piece of change off it previously, buying at $2.55 and selling between $14.375 and $16. After that, it still had legs, topping $20.

Soon afterward, however, it hit the wall, and eventually lost its listing on the NYSE. It was exiled to the OTCBB, which is akin to being lost in the jungle with a bunch of hungry jackals in control of your fate -- more fun than Vegas on a Friday night!

Another of those tech plays that could be had at around cash value was the contact-manager-software maker eLoyalty, bought at $4.21. It has recently moved up smartly on news that they are finally selling some product, but pity the poor folks who invested in the IPO at a split-adjusted price of $350 a share. They ought to break even no later than 2065.

As for income-producing assets, it's been a while since we have bought any; prices are no longer attractive enough to warrant accumulation, and future increases in interest rates will likely undermine the value of most income trusts. However, at least one of us continues to hold the following names, as they offer a decent yield.

RioCan is one of Canada's best-known REITs, and with good reason. It's a large, well-managed organization with a diverse portfolio of properties anchored by high-profile, long-term tenants and an overall occupancy rate of over 96 percent.

The history of distributions is superb and currently yields 8.2 percent. However, as mentioned previously, real estate is currently high and mighty.

Another popular favourite is the pipeline operator TransCanada. Since disappointing investors a few years ago with a dividend cut, the company has supplemented its pipelines with power plants and is a cash-flow monster, pumping out $1.8 billion last year with $800 million in profit. Unfortunately, the yield is a bit thin, at 4.3 percent.

Also in power generation is Algonquin Power. Originally focused on hydroelectricity, this investment trust has branched out into other types of generation. Internal cash flow has been erratic, and at times distributions have had to be partially funded from capital. There is some question whether the current yield of 9.6 percent might be a bit too good to be true.

Westshore Terminals, Jimmy Pattison's big coal play, also has a checkered past, but with improved demand for coal, distributions are again a healthy 7.4 percent. Fording is the biggest customer, and its president has been invited to join Westshore's board. After a lot of squabbling, the industry seems to be one big happy family these days.

But given the harmful emissions generated by its use and the ever-swinging pendulum of public perception, coal will inevitably be seen once again as a dirty industry.

Finally, going offshore, there's Aberdeen Asia-Pacific, a closed-end fund that manages a bond portfolio with a heavy weighting of Australian issues and a smattering of "rim" countries -- notably Hong Kong, South Korea and Philippines. They have an excellent distribution record and currently yield eight percent.

Benj's latest book indicated that we have ramped up our interest in testing the waters on the short side. We're still very much in the experimental stage, but have started to get our feet wet with some real trades.

The first target was video game leader Electronic Arts. After a funky roller coaster ride, the position was closed out with a tepid profit.

Next up was a shot at Dell, initiated at $32.34. That position remains open, and is currently underwater. With a book value of less than $2.50, heavy insider selling, gobs of executive options and expectations that are over the moon, this one was just too good -- er, or is that too bad? -- to pass up, risky as it may be to bet against an industry giant like Dell.

Oh, enough stock talk. Though we might be preaching to the converted, you can be sure that paying down debt is still one of the best sources of financial returns -- as the guy in the Sam Adams beer commercial says, it's always a good decision.

For those in the 50 percent tax bracket, reducing a five percent mortgage yields a ten percent return -- safe and secure. To our way of thinking, a guaranteed value like this is to be prized.

Finally, here's one idea we've mentioned before. While one purpose of money is to insure the future, it is also designed to be spent. If you have been doing well over the past few years, why not spring for that vacation or boat or whatever?

Or help out the kids and grandkids so that you can watch them enjoy what you have given them, rather than wait until after your death to give them the funds. It may well turn out that you'll be able to observe their happiness from the Great Beyond, but our love of the sure bet tells us there's no time like the present. This way, a hug and thanks might be received. Now, that's a priceless return on your investment.

Before we draw this commentary to a close, we'd like to attack a mantra we haven't yet addressed: "You can never lose money by taking a profit." Well, actually, you can -- if a stock hasn't finished its run, you can miss out on gains that might have been obtained after you sold. Which is why we continue to tinker with the Contra system.

Even though we have in the past modified the method by which we arrive at our Initial Sell Targets, it has often happened that a stock's price slices through our goal, like a knife through hot butter, en route to far loftier heights.

Selling early, then reinvesting, even in another profitable company, will normally yield less because you end up being taxed twice -- and sooner. Compared with changing mounts in midstream, riding that first pony a little further, and being taxed only once, is ordinarily to your advantage.

Then again, if too many sell targets are missed and the stocks are held, particularly without dividends, it's not a worthwhile outcome. The happy (better than) medium is what we're always seeking, and perhaps it will one day be found.


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