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  Respecting the Bear

BENJ GALLANDER and BEN STADELMANN

Friday, September 27, 2002

Before we took a hiatus this summer, we suggested that it was a good time to stay on the sidelines and go on a long vacation. Though our reputation rests on our ability to pick good stocks, this turned out to be pretty good idea. Not only was it one of the most glorious summers in memory (unless you are a farmer), but all of the major indexes continued to deteriorate.

Though the ranks of optimists are being depleted these days, the majority of prognosticators maintain that the bottom must be at hand. That would be lovely, but we're not counting on it. The economy remains weak, government deficits are looming, consumers are tired of doing the heavy lifting, and some sectors, such as financial services, are only beginning to deal with the wretched excesses of the past decade.

So what to do? One of the strongest elements of contrarian methodology is that it works in bull, bear, and sideways markets. For example, many out-of-favour stocks actually did very well during the big bear market of the 1970s, while the glamour stocks of the day, the so-called "Nifty Fifty," were humbled. We believe that many of today's large-cap blue-chip companies remain vulnerable to further severe declines, but that is no reason to abandon stocks willy-nilly.

It's more important to respect a bruin than fear it. We like companies with plenty of experience of living through lean times and have long since realized that they can't count on a revival next quarter to fix their problems. To survive requires a low cost structure, a solid reputation within the industry, and patient management that is more concerned with long-term success than repricing their options.

We found a company that appears to fit these criteria in Corriente Resources and established a position in July at 86 cents a share with a target price of $1.60. If you think telecoms have had it tough, take a look at the base metal explorers over the past decade!

Through it all, Corriente has stuck to its knitting, exploring for copper, and has found four solid prospects in Ecuador. So far, none of these have met the criteria of patron BHP Billiton but thatis not surprising. Only the largest and richest veins of ore can be profitably mined at current copper prices.

Eventually the economy will recover and demand for copper will rise. In many countries, industrial development, not overcapacity, remains the overarching problem. A tiny company like Corriente is always a speculative wager, but weire betting that they are tough enough, and lean enough to dance like a butterfly, around the bear.


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