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  Contrarians are misunderstood

BENJ GALLANDER and BEN STADELMANN

Saturday, August 4, 2001

Quite frankly, most people don't understand us. They look at contrarians and assume that we always chafe against the grain. When people are buying, we're selling -- when they're selling, we're buying.

But the key to being a contrarian is not simply being disagreeable. Rather, it is choosing select moments in time to be on the other side of the fence, to jump onto a virtually empty bandwagon that the majority of investors are avoiding. Naturally, when we purchase those firms that are on life support, it is our belief that action has already been taken to resuscitate the bodies.

If we are correct, these firms will slowly regain a smattering of sustenance, enabling the stock price to stabilize or trend upward a tad, before a fairly wily group of reasonably early investors decides to plop down their change.

Then, later in the process, when the revival is more apparent, other players and institutions will jump on board, sending the stock skyward.

If everything proceeds according to plan, the time comes when the avid contrarian jumps off the bandwagon and heads into more propitious investments, leaving behind the herd still anticipating greater glory for the corporation.

Psychologically, it is not easy to be a contrarian. The weenie share prices of many of our stocks is enough to frighten even the most intrepid investors.

Plus, our buys are often made when pessimism reigns.

The irony is that often our buys are former high fliers that were considered wonderful investments when they were trading at two- and three-digit levels, with apparently vast upside potential. Many institutions that formerly pushed these enterprises with major buy recommendations, normally emblazon "AVOID" stickers on these outfits, when we are getting excited about them.

The plan this year was relatively simple -- an organized pruning of positions that we felt were near full valuation as economic concerns appeared fairly overwhelming. There was no difficulty unloading, because while our fears were a further downtrend, a huge part of the herd remained in buy mode.

So where are we at now? Recently our review of every stock on the Toronto Stock Exchange and New York Stock Exchange, with a smattering of the Canadian Venture Exchange and the Nasdaq Stock Market thrown in, rendered a relatively ambiguous crystal ball, with a leaning toward a pessimistic mode.

A major conclusion is what many people have already appreciated: When shares are measured against traditional yardsticks such as price-to-earnings ratios and dividend yields, a large proportion of the stock marketplace remains overvalued.

Ultimately, the stock review only found two tech stocks cheap enough to be placed on our Stock Watch list, namely Apple Computer Inc. and Lucent Technologies Inc. While many of these businesses have dived to 1998 valuations, our timeline is 10 years, and most of these companies were far lower during most of that period, or did not exist.

In all, about 35 positions were added, and these will undergo an ongoing review as possible buys. Not surprisingly, many of these were in the battered commodity and steel arenas.

Let actions speak louder than words: This year we expect to purchase the lowest number of stocks in a decade.

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