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Gal^Stad
Investments Inc.

spacer October 2009
Commentary

As Contra enters its 15th year, it's a good time to kick back and think about where we have been and where we are going. Overall, the ride has been excellent, despite the obligatory lumps and bumps. Our results have proven stellar, and even with two negative years in a row, we are proud that our long-term tally rates among the best out there.

And this year's numbers are looking pretty darn good, despite wariness about counting our chickens before they hatch — there are still two and a half months before the final reckoning for 2009, and we all know that a lot can happen in a relatively short time.

Over the years, we've had many opportunities to correspond with subscribers. While most of the feedback has been positive, of course, not all of it has. In the three-year period from 2001–2003, when the lowest return was 47.3 percent, not many disapproving comments were received. Less flattering, naturally so, has been the feedback of the past couple of years.

And through all of the past decade and a half there have been suggestions about how Contra might improve. Some have been adopted, and as you would expect, others rejected as not feasible for various reasons.

At this time, after considerable rumination, we have decided to make one major change: starting in January, there will be two Contra portfolios. The first will be the President's Portfolio, overseen by Benj; the new entity will be the Vice-President's Portfolio, under — you guessed it — the auspices of Ben.

How will this work? The current Contra roster will become the President's Portfolio. It will follow virtually the same methodology as before, with a bit of tweaking — although imperfect, this line of attack has stood the test of time. In a nutshell, the President's Portfolio represents the classic formula we've come to know and love.

As always, lessons learned from blowouts will be incorporated in the fond hope that they will become less frequent, but realistically, there will always be failures. What tangible changes can you expect? Consider the example of AbitibiBowater, a company we have written about — and beaten ourselves up over. Each of us wanted to punt that putrid pile of pulp to the curb at various times, but we couldn't agree on the precise moment, so it hung around — like the foul odour emanating from a paper mill — far too long.

With just one finger needed to press the trigger, perhaps the moment of decision will be reached in a more timely fashion — on both the Sell side of the ledger and the Buy side.

The Vice-President's Portfolio will be true to the principles of contrarian investing umbrella, but in some ways you'll see greater flexibility. Or, as they say in Pirates of the Caribbean, some of the "rules" will be treated more like guidelines. For example, with his "Six-Month Meditation" rule, Benj is exceedingly wary of purchasing any stock for the portfolio until it has been on the Watch List for at least half a year. Kind of like the school of thought that a prospect should spend time in the minors for seasoning.

Ben, on the other hand, felt last fall that it made sense to buy companies for his personal portfolio after a shorter period of deliberation, simply because stocks were moving from "too expensive" to "screaming bargain" in an astonishingly brief period of time. Similarly, many commentators argue that Nazem Kadri would be better off in the Blue and White than a London Knights sweater this season. Maybe our next project should be a Contra "Hot Stove" bulletin board?

Another rule that may get bent in the VPP is Benj's tenet of making the majority of his purchases towards the end of the year. Ben will certainly take tax-loss selling into account, but that timing could easily be trumped by, say, macroeconomic factors, or an assessment that the overall market is either grossly over- or undervalued. If conditions warrant, securities may be added at any time of year.

Benj's policy is that once a company is bought, no further repurchases occur for a minimum of six months. The VP Portfolio will allow for the possibility of building up a position over time, rather than acquiring the entire amount desired in one fell swoop.

You may also expect to see a few names in the new portfolio that seem, well, a bit boring. There are times when solid value stocks are, as a whole, spurned by the market. These may not be classic contrarian turnaround situations, but if an enterprise pays an attractive dividend and has a decent long-term upside, it can find a home in the VP stable.

We don't mean to give you the impression that the portfolios will be completely independent. Inevitably, there will be some picks so compelling to both Contra Guys that there will be some overlap. If our opinions of the potential for these commonly held positions should vary — another likely proposition — the timing of our buying and selling will differ.

The primary goals of having two portfolios are to bring a wider variety of stocks to your attention and to discuss somewhat different approaches to investing — both of which you have asked for. If you want to get an idea where we're headed, take a gander at one of our April commentaries from the last few years, where numerous stocks — including non-Contra plays — have been covered.

You can be fairly certain that, had the dual-portfolio system been in place, some would have shown up as Buys and you'd have been hearing more about them. Our hope is that the broader range of coverage will give you greater value for your money. Plus, there will be more contact with us, as the additional selections mean we will be sending more emails.

Speaking of which, the format and scope of our email releases about buys and sells will remain the same, though each update will specify which portfolio it concerns. And as you know, barring technological interference, we endeavour to transmit these notices to you before markets open the next day.

In a bid to cut costs or appear to embrace a "green" ethos, some organizations have treated hard copy as a relic of a bygone era and chosen to make the Internet their communication vehicle of choice. Where our quarterly is concerned, the status quo will be maintained.

While we recognize this platform is less environmentally friendly — and more expensive for us — fossils that we are, we cling to an appreciation for the idea of holding quality paper in one's hands. It is also then easier for readers to file each Contra if they so choose. Kindle and the sundry competitors entering the market place will have to wait for our business.

Our plan is to keep the page count of each issue of Contra at the current 20 pages in January and 16 in the other quarters. As you've surmised, we'll be talking more about more companies; to make room, our commentaries will disappear, unless one of us feels a burning desire to write about something. This doesn't mean you'll be in the dark as to our thoughts about markets or other events; rather, these thoughts will be in capsule form, rather than lengthier dissertations.

As next year unfolds, the picture will become clearer. In the meantime, if you have questions or suggestions about Contra's new direction, feel free to drop us a line.

At one point, we'd planned to stage a major event to launch the second portfolio. A deposit was put down at the Rogers Centre, talks were begun with the agents for Kanye West and Taylor Swift. Unfortunately, even though Kanye apologized — after a fashion — it appears that neither was terribly enthusiastic about making nice on our nickel. Those festivities will therefore be placed on hold, although we may still go ahead and trademark the proposed name for the event: Stockstock!


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