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Gal^Stad
Investments Inc.

Year in Review

1997 in Perspective,
from the January 1998 issue

In our Year in Review last January, we said, "Expect us to be calmer in 1997." We were. The 1996 abberation, where almost 50 percent of our portfolios turned over, was toned down to the 33 percent range -- still high by historical standards.

A major portion of the activity was rooted in takeover fever. Four stocks that started the year in the Contra portfolio saw suitors, three of them being exceedingly profitable. Goodbye to National Education, Dominion Textile, General Host, and Markborough.

While companies chase one or two of our picks every year, four is a record, and as a percentage of the stocks we own, outrageously delightful!!! We don't expect such fortune to shine our way next year, but then our tendency is to naturally temper hopes and desires. And then, if surprises occur, Yeehaw!!!

Our annual return this year was a stratospheric 53.2 percent, besting the TSE 300, which surreyed in at what in normal times would be a sturdy 13.0 percent, easily doubling the Dow at 22.6 percent. Contra's return also dwarfed the S&P 500's 31.0 percent, which not only clobbered the other indexes, but bested over 89 percent of the U.S. stock funds.

After commissions, our number clicked in at 52.6 percent with about 2.5 percent of this gain being the translation back to Canadian dollars. This was our best return since 1993 and ranked a number three in the past seven years. Maybe we're getting smarter again?

This extends the uptrend of the preceeding two years, and though our wish is for the trend to carry forward, as the refrain states, past returns are not necessarily indicative of future returns. The five-year number dances in at 33.9 percent, and the ten-year return registers 27 percent.

Our feeling is that the fine tuning to our methodology the past few years have contributed to these improved numbers, and hopefully will be echoed in upcoming years.

An aside on our return calculations. We have switched from using average returns to annualized returns. Reputable fund raters, like Morningstar, exclusively use the second figure, which we readily admit is a more rigorous measure of long-term performance.

Unfortunately, most funds continue to use the former terminology, although their calculations reflect the latter. This confusion drives us crazy, but our experience is that most mutual fund salespeople would not be able to explain these formulas if their lives depended on it.

Ben says that in his next career he will become a research biologist so that the age old question can perhaps finally be answered, "Why is it impossible for the gene for math and the gene for marketing to co-exist in the same strand of DNA"?

After two very strong years in 1995 and '96, our expectations were for a muted 1997. From April to December, we made a dozen sales, as the markets trended even higher.

When the crack appeared in October, our non-buying stand from mid-April (with the lone exception of Armco) appeared rewarded. But ever resilient, stocks bungeed back. As tax selling hit, our annual ritual ensued as five stocks were purchased. This gives us an exceptionally "young" portfolio, with over three-quarters of our companies picked up in the last two years.

What will 1998 bring? Ask the real market timers, as we did our act last year, anticipating the October crack. Our bets currently rest on individual stocks, although, of course, we do not remain impervious, nor oblivious, to market impacts.

Those into momentum investing would note that the Dow has climbed over 20 percent in each of the past three years, the only time in its 100+ annum history in which it has achieved that feat. Heck, at that rate the stroke of 10,000 is closer than the millennium.

Contrarians, though, might be taking a strong warning from the Dow geyser, especially combined with the cool breezes slinging this way from Asia. Will Asian typhoons combine with El Nino to create a vortex wreaking havoc and destruction? Questions, questions.

Nineteen ninety-eight should be a low turnover year for the Contra portfolios. With the markets remaining high by historical standards, as stocks reach sell targets, we will generally unload quickly. If the market tumbles, look for us to be heavy buyers. In the meantime, let's be quiet and enjoy this seemingly endless picnic.

One thing is clear. Our five-year numbers after 1998 will be lower than this year. We can't imagine approaching the 77.8 percent of 1993. Ah, '93 -- an excellent vintage.

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