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Gal^Stad
Investments Inc.

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Year in Review

2007 in Perspective,
from the January 2008 issue

After all the whining and whimpering that made 2007 sound like a year in which we were going to hell in a handbasket, when the numbers for the main North American indexes were tallied, it actually turned out to be a very average 12 months.

Leading the way was the Nasdaq, up 9.8 percent, followed by the S&P/TSX, which was up better than 7 percent. The bronze medal in this limited competition went to the Dow Jones, for its 6.4-percent gain. Finally, the much broader Standard & Poor's 500 scuffled forward to the tune of 3.5 percent.

While none of these numbers are anything to crow about, they're all in positive territory and close to historical norms -- that's nothing to sneeze at. And the two S&Ps both featured on the plus side for the fifth straight year, an impressive feat.

Meanwhile, around the globe there were a number of places to make big bucks. China's CSI 300 benchmark jumped 161 percent; the Bombay Stock Exchange's Sensitive Index upped 47 percent; Brazil's Bovespa Index 44 percent; the KOSPI index of Korea recorded its fourth double-digit percentage gain in five years, with a rise of 32 percent; Malaysia's KL Composite Index bounded 31.8 percent. Singapore's Straits Times index was dowdy by comparison, at a mere 16.6 percent.

Yet all of these look positively languid compared to the pace of Zimbabwe's market, which was up 322,111 percent. Now that's performance, folks! Oh, yeah, there was that hyperinflation thing...

Some markets did lose; the Nikkei 225 was down 11 percent, Ireland dropped 26 percent and the Venezuela New Policies 27 percent. Okay, the "New Policies" bit was our moniker. Overall, though, 2007 was definitely a time to be chasing returns in emerging countries.

Given the fine overall performance of markets since the tech bubble deflated, might it be time for a regression to a mean? The air, of course, is thick with worry. Subprime mortgages, a credit crunch, big debtloads, recession, high oil prices, wars, global warming -- all are reasons to question whether the end is nigh for this boom.

Chief amongst the concerns is the fact that, after a number of years of positive returns, even the best economies tend to have problems, setting up a roadblock or two on the road of progress. That scenario ought to play out, but considering that this is a presidential election year south of the 49th and that governments and bankers will likely pull the levers of stimulus to avoid an economic debacle, perhaps the day of reckoning will be postponed.

We'll bet both sides of the fence, content with our 21 stocks, while, as usual, having lots of money on the sidelines with which to jump in should the spanking of the market intensify or in the event that the odd exciting cherry is ripe to be picked.

At Contra, after our first losing year since the millennium -- and only our second since 1990 -- we'd welcome a regression to our mean. Down to the tune of 15.5 percent this year -- almost two-thirds of the loss courtesy of the USD -- this was our third-worst year ever. Our five-, ten- and 15-year tallies now ring in at 15.4, 16.2 and 21.8 percent respectively.

Perhaps even worse than the diminished returns is that Benj can no longer use one of his favourite jokes on the speaking circuit. Citing the losses in 1990 and 2000, he would quip, "From now on we'll have to avoid years ending in zero." Darn, what will he say now?

As it happens, the annual tallies don't tell the full tale. Our crappiest returns have coincided with periods when we've had less capital invested. So, while that minus sign in front of our one-year number does sting, we can take some solace in the knowledge that, in absolute terms, the damage could have been worse.

Conversely, when we have been more confident that the market is contrarian-friendly, we have invested at closer to full throttle and been rewarded with much better numbers. What's that about diligence being the mother of good fortune?

That said, our portfolio hovered around 15 stocks for much of 2007, so there was less opportunity to spread the misery around. Indeed, we can't remember a year when so many Contra positions tanked by more than 50 percent. In order of severity, this year's road kill casualties comprises Cygnal Technologies, AbitibiBowater, ATS Automation and Kelman Technologies.

Meanwhile, there were no huge wins, with only Viterra, the former Saskatchewan Wheat Pool, chugging ahead by more than 50 percent. So, overall, we were ugly on the upside and the downside.

Typically, at the close of previous down years, almost every one of the stocks in the portfolio was an overall loser since its purchase. But our current portfolio has not been as decimated as in the past.

In fact, more of our positions are up in value than have fallen -- which prevents us from writing, as we did in January 2001, "Our gut instinct suggests that this is the best portfolio we have had in years." At that time, we were coming off a loss of 17.4 percent, and our three-year return was also negative; we proceeded to reap rewards of 64.8, 47.3 and 68.4 percent.

Certainly, many people had tuned us out at that point: prior to last year, it was the only other time when subscriptions dropped off overall. Indeed, after maintaining a waiting list for eons, our subscribers now number fewer than our self-imposed limit of 1,000.

Be that as it may, right now the portfolio is much more eye-catching than in January 2004, after our triumvirate of huge wins had people thinking The Contra Guys could do no wrong. First of all, our holdings are not heavily weighted in any direction. There is a congregation amongst tech stocks, but gold and other commodities are conspicuous by their absence. Oil and gas is also missing -- well, except for the slim piece of our little doggie Kelman.

Another sector that is in absentia is real estate -- which was never dominant but was generally a portfolio staple. But, quite frankly, that does not bother us in the least. Prices in that realm still seem a mite unrealistic; with wage increases largely muted and so many people recently ensconced in new digs, the demand side of the equation is not what it used to be.

One thing that does make us proud is that, once again, a stock in the portfolio was taken over. This year it was our position in Solectron. That makes 15 years in a row in which at least one stock has been pursued -- quite a record, given the limited number of holdings in the account.

Of less concern to us now is the relative value of the C$ to the USD. Over the last number of years, we attempted to reduce our exposure to the greenback, which at one point comprised about 70 percent of the portfolio; we'd pared the American content back to about 50 percent -- a partial success, we'd say.

However, even if the USD continues to take a thrashing relative to global currencies, the Canadian economy is still so closely intertwined with that of our neighbours that it is hard to see Canada prospering while the U.S. fumbles. And, bearing in mind that this is an election year in the States, it is difficult to imagine a president who might inflict more damage to the national balance sheet than George W. Bush. So, whereas the exchange rate prompted us to curtail our cross-border shopping in recent years, this is no longer the strategy.

This year's numbers, and the beatings many of our companies have taken, took a toll on both our egos and our wallets. There are many ways that someone in this position might react. Our method is to make sure that our finances are diversified enough that we don't endanger our living standards.

Though Contra is a major part of both of our beings, it isn't the be-all and end-all; our lifestyles remain balanced with other pursuits, and we enjoy the quality of life this tremendously free and peaceful country offers. Irrespective of how many reincarnations we may or may not have, this is the life we know, and what a waste it would be not to enjoy it.


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