A question that is often asked is, "Why do your returns vary so much from year to year?"

Our reason is that the portfolio is relatively small. Generally, the fewer the number of stocks in a portfolio, the more susceptible it is to price volatility. Fortunately, even with the raging ups and downs of the general market, the Contra stable has only been hit by negative returns twice since 1990. This is a record of which we are extremely proud.

Our experience is that the valuation cycle -- from an undervalued, out-of-favour stock at the time of purchase, through the period of recovery to full value and our sale -- is irregular. Quite often, the market is slow to appreciate the improvements in a company's fundamentals -- but when sentiment shifts, it often does so dramatically, as institutions and brokers gravitate towards strong performers and propel them even higher. For this reason, turnaround situations often more closely resemble the so called "J-curve" of successful venture capital funds, than the more linear progression of their big-cap, "growth" brethren.

So it stands to reason that, at any point in time, the companies in our portfolio will be at different points in this valuation cycle. When it happens that a large proportion of these stocks are toward the end of this process and are appreciating rapidly, we end up with another of those banner years. This natural variability is amplified by the effect of takeovers. Often these occur at substantial premiums and they are responsible for some of our best profits.

Finally, a year is a very short time frame. Over the long term, things tend to balance themselves out. That is why 10- and 15-year numbers are so important: the longer the term, the more merit you'll find in the results. And our 15-year figures certainly speak for themselves!