from the January 2001 issue
The new millennium, 2000 style, was greeted with one of those wonderful dichotomies that mark humankind: on the one hand, there was the hope for a new beginning; on the other, fears of computer failures leading to blackouts and water shortages.
In reality, except for the changing of the calendar, none of this came to pass. The new eras, with their gleaming novel paradigms that were being bandied about, retraced their footsteps to the old lesson that even with better engines, the same old human psychology remains at work.
Disaster fears dissolved into a yawn, proving that either the prep work was of such high quality that danger was subdued, or perhaps, just perhaps, the warnings of apocalyptic dangers were way overblown.
Some things are known, though. Stock markets that many seers suggested were infallible and would storm upwards to new heights, did surge momentarily as if there was no tomorrow, only to be cast back by the immutable laws of proportion.
So swiftly and disharmoniously did they turn that the revered Nasdaq — hailed by many as the new king of stock exchanges — was dismissed as a false prophet when it fell by almost 40 percent, a record tumble that demonstrated once again that what goes up, must come down.
The Dow, the old lion, was also humbled — not as drastically, losing 6.2 percent, but it was the first time this index has retraced its footsteps in a calendar year since 1990, as well as the largest decline since 1981. That invitation to Microsoft and Intel to join the Dow did not work out as planned. Meanwhile, over at the 500, the tech-heavy S&P was also negative, to the tune of 10.1 percent.
Here in Canada, things were not exactly serene, either. The TSE — read Nortel — climbed in record-breaking form, until the balloon was pricked and the two thudded back to reality, with the TSE making a 6.2 percent gain on the year.
Though this ranks Canada’s bellwether among the world’s best performers, it nonetheless reaffirms that old adage about not marrying a stock: Nortel was certainly hot and heavy for a while, but passion is fleeting.
Only exceptionally rare ones have the wheels to provide a thread to lifetime security, and the beauty is that they don’t feel hurt if discarded, nor do they pledge to get even, so there is no need to be sensitive as you shuffle shares to the sell pile. These are investment decisions, after all. Too many people tackle them as relationships.
Unfortunately for us, this was the year that the Contra Guys’ love affair with the market dissolved, as we posted a loss of 17.4 percent, our first negative tally in a decade. Ironically, this poor result is not as bad as 1990, which was truly hideous at negative 24.6 percent, so our 10-year annualized return actually improved to 25 percent.
A numerologist might suggest that we avoid years ending in zero — and perhaps as 2009 turns into 2010, we will close the shop and simply take a long cruise to warm climes.
Obviously, a loss of this nature is unacceptable. It took a bite out of our portfolio as well as those of many of our followers. We regret our lack of performance this year and expect to return to form in the near future. But let us be clear that, although the results for 2000 were an aberration in the Contra portfolio, there will always be losing years. That is simply the nature of this game.
What went wrong for us in 2000? Well, we stood pat on some positions a bit too long. Laidlaw should have been ejected earlier when its problems came to the fore. We were awfully close to selling at least some of our shares in AK Steel, Molecular Biosystems and Stelco before those stocks tumbled.
Perhaps too much of our portfolio was invested in retail, and while this sector did not do that badly during the year, our turnaround firms did not attract a lick of interest.
So, even though we were smart enough to avoid the dot-com disasters, we managed to get sucked into a few catastrophes of a more prosaic nature. But could-ofs, would-ofs and should-ofs don’t cut it in this world of investing. And we're not into making excuses. Live and learn.
Our portfolio turnover of 28 percent is not out of line with the rate over the past few years. We ended the year with 29 companies, exactly where we started. Our goal was to reduce the portfolio’s size, but a combination of factors — fewer sales on the positive side, the need for fewer tax losses, and a few deals at the end of the year that were too hard to resist — means our target size of 15 to 25 enterprises will have to wait.
It’s also noteworthy that while our portfolio turned south, we took money from our stash waiting on the sidelines — something we have not done in recent years — so that the value of our year-over-year portfolio increased by about 6 percent.
A peculiarity is that our holdings have become radically “cheaper” than usual, with the average share price decreasing from $4.63 to $2.11. This makes us more “pennyish” than ever. Why? On the one hand, a number of our buys at higher values decreased in worth; on the other, we procured firms such as Kelman and Shoney’s at 40 cents or less.
Once again, the Contra portfolio enjoyed a generous number of takeovers. We are justifiably proud of these transactions, and they dramatically enhance a tremendous long-term record. Our favourite was CompUSA, purchased in December 1999 at $5.56 and spun out of the portfolio three months later at $10.10.
Minolta-QMS was another beauty, as Minolta Investments gave us about 100 percent on our initial investment in two instalments.
The Nabisco Holdings sale at $30 also was quite lucrative, especially since the stock had sunk below $10 earlier in the year.
Molecular Biosystems’ buyout via Alliance Pharmaceutical wasn’t finished last year and will actually go into the 2001 books, giving us additional time to remember that, while virtually every takeover is a major benefit, the odd one does not stand up to form.
Our action plan? Inaction is the current ticket. Our gut instinct suggests that we have our best portfolio in years. Our major winners have all been dispensed with, reducing downside risk. Many of our remaining positions have been decimated, and various purchases have been made at a fraction of both the companies’ past stock valuations and our estimate of their worth.
The major negative? Our weighting in American stocks is higher than desired, and while our craving is to rectify that situation sooner than later, we will only take corrective action as opportunities dictate.
One general note: when energy prices careened downward, there was a belief that they would fall further and stay down. When oil was selling at $13 a barrel, as excellent a magazine as The Economist ran a cover story predicting a further plunge to the $5 level.
Natural gas prices were so low that many firms in the sector were backed into a corner facing the old survival issue. It hardly paid for companies to head out on search-and-find missions and, while a few members of the public paid lip service to that famous ’80s word, “con-ser-va-tion,” most people had rendered the concept as obsolete as disco.
What happened is well known: since demand was outpacing supply, and new sources were not readily available on the horizon, oil prices tripled and natural gas prices quadrupled. True to form — and human nature — they elasticized beyond reason on the high side and are now turning tail toward more reasonable levels.
The crux of all this is that investing was, is, and will be the same for our life spans — and well beyond — because human psychology evolves in the tiniest increments. This is a primary reason that the Contra methodology works over time. Unfortunately, as the short time span of 2000 indicated, it does not work all of the time.