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Investments Inc.

spacer January 2008

The last five years have been a particularly busy period for us. With a maxed-out subscription base until last year, there were times when our daily email inbox filled up faster than a Michigan landfill. So we thought it was a good idea to review the reader-mail archive.

One observation was that the predominant line of enquiry has changed from "What should I plow my profits into now?" to "How do I avoid losing my shirt?" Wholly expected, as a string of boffo years was followed by more moderate results and then an abysmal 2007.

Another finding was that a diverse and dynamic group of subscribers brings with it an equally varied degree of understanding of numerous issues — indeed, even some seasoned subscribers were fuzzy about the procedures, policies and philosophies unique to Contra the Heard. So we’d like to take this opportunity to make ourselves clear as crystal.

One matter of prime importance is that of independence. We consider you, as an individual investor, to be a self-reliant free agent. We have no knowledge of your wants and needs. You may or may not have a financial planner, advisor, accountant, wealthy barber or set of pushy in-laws who assist you in considering possible investments. There are a myriad of factors that should be taken into account and critically evaluated, using the resources you deem useful, before you come to a decision you can live with.

As writers of an investment newsletter, we tell people what we do, and use our experiences to attempt to educate about investing. The idea of starting some sort of mutual fund was addressed in our January 2004 commentary. In short, it ain’t gonna happen. Instead, subscribers get to look over our shoulders as our portfolio is managed.

The design of the portfolio is predicated on our personal risk tolerance, lifestyles and financial conditions. The likelihood that these circumstances mirror yours is about the same as bumping into Barbara Amiel in the clothing department at Walmart.

The point is that subscribers are expected to act on their own in order to achieve their personal goals. Many have become confident enough to use Contra as a complement to other investing ideas and styles within their total portfolio. Others say they emulate us, but allow themselves flexibility — they may wait to purchase a stock until it falls further, or buy on the way up, even after it has appreciated substantially.

Setting higher or lower sell targets is something we’ve heard quite a bit about. Subscribers can, and do, beat our own returns. How do we know? Because some of you have been renewing at the rate applicable for people earning 12.5 percent on the Contra selections. In the past year, that’s an accomplishment — perhaps we should be peeking over your shoulders!

Independence has another meaning that is applicable to us. We act alone and are not beholden to any broker, corporation or financial institution. It truly is our cash, sitting in various accounts, that is being used to buy these equities.

As far as which brokers to use, we consider the analyses written by columnist Rob Carrick of The Globe and Mail’s Report on Business to be the gold standard when it comes to answering that question.

We put our money where our mouths are by informing readers about stocks we actually buy. This includes those in the April issue that one or both of us like, but didn’t make it into the Contra portfolio. Perhaps even more important is the fact that we inform readers via email of our decisions to sell — this isn’t standard operating practice in this industry.

Normally, we unload some or all of a position at our initial sell target, which is set when the purchase is made.

When we say that Contra the Heard is not for everyone, we mean it. The contrarian investing style leads us towards companies with scary problems that are often described in gory detail in the newspapers. Or to firms so completely ignored that it is hard to imagine them ever being popular again. Under these conditions, the cheap often get cheaper, and the stock price can stay stubbornly low, even after the emergence of tangible evidence of fundamental improvement. This can be tough on a person’s constitution; a patient, almost stoic, attitude is essential.

Oh, how people love to ask about holding periods — i.e., “How long will it take for a stock to hit the target?” We never know, even with the myriad of tea leaves, crystal balls and astrological charts that clutter our office. Financial rewards sometimes arrive quickly, but there are lots of untimely duds that stay down for years.

While such delayed gratification may be frustrating, the targets are far enough above the purchase price that, once they are finally hit, the results remain excellent. The ones that spiral into oblivion are the ones that really hurt, and, last year notwithstanding, their numbers have been cut back in recent years. Such spectacular failures must be accepted, for to give up on all the losers would mean missing out on some multi-baggers that counterbalance those blowouts.

It is a fact that some investors are looking for more action than we offer; there are plenty of other services that cater to that need. Our focus is on our investment results, and careful stock selection is therefore imperative; trading for its own sake isn’t on the menu.

As indicated on our website, we send emails when we buy or sell something, or if a takeover offer occurs. Normally, that results in 15 to 25 emails per year — but, unlike other newsletter services, these are not distributed evenly throughout the year. Why such an unpredictable schedule? No two years are ever alike, for one thing. Secondly, our contrarian methodology favours buying towards the end of the year and early in the New Year, partly to take advantage of tax-loss selling. Expect to hear from us quite often at these times.

In some years, bargains are hard to find and stocks are not hitting our bid or offer targets, so there will be extended periods when we have nothing to say. The bottom line is that we won’t send you an email just so we can tack up a number.

Some subscribers feel they have to match Contra purchases at the time they are made, but as we have written in past issues, stocks often drop below our purchase price. Note also that every quarterly issue lists the stocks already in the portfolio that we would buy for ourselves today if we didn’t already have a stake.

Sometimes, subscribers write that they have not heard from us for a long time. As noted above, this could be because of the seasonal, unpredictable nature of the releases. Or it may be because our email addresses, and, are not on the recipient’s safe list, so our words are shuttled into a spam bucket. If this happens, we have no way of knowing about it.

One measure we have taken is to issue a quarterly email on the 10th of January, April, July and October. If you don’t hear from us on one of those dates, please check with your Internet service provider. If spam filtering does not appear to be the problem, then contact us.

Also, on our website, the dates of our releases are listed, so you can easily find out whether you have missed anything.

Nowhere in any of our material, or on our website, do we offer any guarantees — or promises of refunds for renewals, or freebie extensions after a bad period. Our belief is that people who have renewed know what they got into by subscribing. Still, we are not completely hard-hearted and will give refunds to new subscribers in their first three months under certain circumstances. We understand how they might have subscribed to a service that is not what they expected, and if they do not want to be with us, then we can accept that.

While we don’t know anything about your personal situation, it certainly hasn’t stopped some of you from asking if there is something wrong in our private lives to account for the proliferation of poor picks over the past couple of years.

Nice of you to be concerned, but really, there’s nothing to report. We're neither on the bottle, nor on the wagon, and mid-life crises have been limited to a few delusions of grandeur at Grand Lizard and Guitar Hero (can you dig it?). Our spouses and kids continue to put up with us, and there is no truth to the rumours that we have started a chinchilla farm in Red Deer.

It’s important to own up to mistakes of judgement, and we’ve made some doozies, but that doesn’t change the fact that this job is simply easier at some times than others.

Though most investors recognize that no methodology will work all of the time, it’s one thing to accept that fact on an abstract intellectual level, and quite another to work out just how many hurdles will have to be cleared on a practical level. All the companies we buy have problems, but the character and intensity of those difficulties changes with the bull/bear market cycle.

After a long bull market in which the market caps of most companies have increased, those who pursue bargains are faced with a diminished pool of prospects. Not surprisingly, hot money chases even enterprises in trouble — or, in the parlance of The Street, “even the turkeys fly.” At these times we buy gingerly, but we still do buy.

By contrast, after a bear market, our Stock Watch List swells, as even well-run firms with excellent long-term prospects lose their lustre. The probability of doing well on stocks that just need the economy to pick up rises sharply, and it is an optimal time to deploy cash reserves into the market.

As indicated in the Year in Review, in terms of opportunity we are currently somewhere in between the scenarios of feast and famine. Many value stocks have been royally hammered, but it doesn’t mean they won’t fall further. If the economy slides into recession, higher-quality companies will get trashed, and the attraction to put more cash to work will grow.

For those who want a better understanding of just what we do, be they older or newer subscribers, this website is an excellent resource. The commentaries over the last ten years or so cover a lot of material. Benj’s last book, The Contrarian Investor’s 13, examines in depth our modus operandi.

All in all, we do enjoy feedback, be it good or bad, so if you have something to say, or ask, is listening.

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