A Different Drummer

The following was published in BCBusiness magazine.

What if all you’ve been taught about the basics of investing was wrong — or, at least, not always right for you? A contrarian’s view

By Jon Ferry

In Benj Gallander’s latest one-act play,The Suicide Parlor, a half-dozen people from various walks of like meet in the afterlife — a series of interconnected rooms they cannot leave until they have resolved their conflicts.

One of the six is a hard-edged stockbroker called Larry, a cynical young man who spends a lot of his time bickering with Vivien, a homeless woman with distinctly different views. Larry has limited experience of the market, and of life. He is, in fact, a jerk in suspenders.

Larry has wound up in purgatory because he has thrown himself off a tall building upon his first real-estate stock turbulence.

That, of course, is one way to deal with market volatility.

Another is to do what the mutual fund industry tells you to do: gather serviceable scraps of time-worn wisdom into a satisfying recipe, using the first four letters of the alphabet as a guide: Always diversify. Buy and hold. Choose quality. Dollar-cost average. It’s as simple as A, B, C, D and as tasty as alphabet soup.

Indeed, in some of its literature, one such fund group (in this case the Spectrum United group, but it could have been any of them) describes the four-pronged formula as “the tried-and-true method of dealing with market volatility.”

Well, playwright Gallander says you can take those cherished beliefs, of which Daddy would be proud, and shove them where the sun don’t shine.

A whiz-kid with an MBA from Dalhousie University in Halifax, Gallander is also the co-author of an investment letter called
Contra The Heard. He is what is known in the Canadian market scene as a “contrarian,” a species of stock-picker that thrives on turning traditional thinking on its ear and leading clients away from their predictable investment habits.

All of which is to say that Gallander likes mutual funds about as much as he likes cell phones and watches. Which is not at all. This contrarian son of a lumber salesman claims you can do better than a lot of these mutual funds simply by throwing darts at a dartboard.

“The problem with mutual funds is that on average they do worse than the market averages,” Gallander says. “You should do better on your own.”

This bring us to one of Gallander’s golden notions:
Over Time, Mutual Funds Perform Worse than Overall Markets. Indeed, the globetrotting author is hard on conventional beliefs and conventional belief-pushers.

Avoid Crowd Psychology is one of the chief “anti-investing” tenets contained in his latest book,
The Uncommon Investor (Insomniac Press, $19.99). He likes stocks when they are beat up. He likes to
Buy When a Stock Has Few Friends.

Of course, Gallander is more guru than kid — though he appears to baffle Bay Street with his preference for blue jeans and T-shirts over pinstripes and brogues. More hippie than yuppie, he lives in a Toronto artists’ co-op with domestic partner Yeing-Moi Yeung and teams up in the stock-picking biz with Ben Stadelmann in Seattle.

At 41 Gallander is old enough to have lost a lot of money in at least one big market downturn — in 1990 — and young enough to have recovered fully from it.

His losses came after buying in the 1980s into such “surefire” companies as, oh, the British Columbia Resources Investment Corporation (BCRIC), which seemed like a good investment at the time.

“They had good resources, government was behind it and the stock had been beaten up to some degree,” he says. Well, we all know what happened to BCRIC, the Socred government’s grand summer-of-’79 experiment in peoples’ capitalism. It fell like a brick.

“It went down and down and down,” notes Gallander. “Eventually Jim Pattison took it over.” Of course, the BCRIC debacle would not have resulted in personal misfortune if Gallander had already formulated another of his golden rules:
Only Buy Corporations that Have Been Listed for a Minimum of 10 Years.

Even if BCRIC had qualified under that rule, you can be sure Gallander would not still be holding the stock today; he does not think highly of the philosophy that pushes buying and holding& and holding. A good example of that kind of advice — “It usually pays to hold” — appeared in the Spectrum fund group’s October newsletter.

Christine Lasky, Spectrum vice-president of marketing, defends that advice by explaining to
BCBusiness that timing the market does not work for most investors, because they don’t get it right. Lasky suggests that it’s best for them to buy quality stocks — and to hold on to them. “It’s kind of time-proven over many cycles,” she says.

However, Gallander argues that the best stocks to buy are those that give you the opportunity of a big score. He advises you to set an ambitious stock price target — at least 50 percent higher than your purchase price, and preferably far more. Then, once your target has been reached, he suggests you sell at least half your shares.

The trouble with most investors, he says, is that they have no exit plan. And that leads to bad decision-making. His motto:
Beat the Market, Not Yourself.

Thinking big, it seems, can lead to big returns, at least in the hands of an expert. The
Contra the Heard portfolio boasts annualized returns of 27 percent over ten years and 33.9 percent over five years. Last year it returned 52.3 percent.

That has made Spectrum-style buyers-and-holders sit up and take notice. Gallander is proud of the fact that 15 percent of his newsletter clients are themselves brokers and financial analysts, even though it is his contention that stock brokers’ results typically lag behind market averages.

Gallander also takes aim at another of the brokerage community’s cherished concepts: dollar-cost averaging (investing a fixed dollar amount at specific intervals to take advantage of stocks’ highs and lows). He strongly suggests that investors
Do Not Invest a Specified Amount in Stocks Every Month.

The Spectrum United group talks of the “wonder” of dollar-cost averaging in volatile markets, saying “you’re pretty well guaranteed to always be in the market buying fund units when prices are low.” But Gallander says this is only a popular strategy because, for mutual fund managers, “nothing could be sweeter than obtaining a percentage of constant cash flow.”

Investors are also usually advised by more traditional planners to diversify their portfolios, and Gallander agrees that’s a good rule — but he disagrees that it’s a golden one. The reason? Another of Gallander’s own rules, of course:
The Greater the Diversification, the Lower the Rate of Return.

One way of avoiding that should be to seek quality, which leads to another of Gallander’s maxims:
Only Buy Stocks Listed on Major Exchanges. But, he stresses, quality is not much good to you if it’s already fully valued — or overvalued.

In fact, Gallander suggests you only consider stocks trading within 30 percent of their 52-week low and only consider stocks trading at less than 50 percent of their 52-week high.

Finally, you should never buy firms with a share price over $25. That flies in the face of market psychology. Gallander, you see, loses interests in stocks when he feels the odds are stacked against him.

That may stem from the days when, as a student at the University of Western Ontario, he studied blackjack. He even flew to Las Vegas to perfect his studies — until the casinos started to change the rules, working the odds in
their favour. A couple of months ago, he and Stadelmann tried to resurrect the old magic by visiting a casino in Washington State.

“We played and had a good time for a couple of hours, but we both just had lost the spark, because we knew the odds were against us.”

Veteran Vancouver investment dealer Peter Brown, however, thinks the odds are stacked against investors who avail themselves of the services of investment letter writers like Gallander. Brown says such stock-pickers are unregulated and that their due diligence is often poor.

“There are very few good ones,” he says. “I’m not impressed with them.” Investing, Brown adds, is a matter of adhering to certain simple principles; there’s no magic to it. “I mean, if you followed the letter-writers around North America, they’ve wiped out more people than not,” he says.

Brown stresses there is nothing new whatsoever about contrarian investing. In fact, he says, Vancouver’s own Peter Cundill, of Peter Cundill and Associates, wrote the book on it.

“For example, when all the advertising companies were losing revenue in the recession of 1981. Cundill went and bought J. Walter Thompson, a big position, about 20 percent of the company, for his clients because it was trading at $17 and it had an $18 share in cash in the company,” says Brown, of Canaccord Capital Corp.

Brown says another term for contrarian investing is ‘value investing’, and that the best values come at the bottom of a cycle. “Now the guys that are playing the stuff
in the cycle tend to be what you call ‘momentum’ players. They want to be where the liquidity is and the momentum is, neither strategy is wrong.” In other words, both strategies work — if you’re right.

Gallander insists he has been doing right by B.C. investors. In fact, he reckons nearly 15 percent of subscribers to his investment letter are from British Columbia.

Vancouver dentist Lorne Shankman hitched a ride with Gallander after playing around in the stock market for the better part of a quarter of a century.

“What Benjy taught me to do is not to be quite as conventional as everybody else,” he says.

Gallander has an active but disciplined approach to stock picking that sets him apart from the prevailing buy-and-hold philosophy, according to Shankman. In three years Shankman says he’s made “well over a couple of hundred percent” on Gallander’s stock picks. On his own investments, he has made only about 35 to 40 percent: “I tend to get frightened out when things go bad, you know.” Welcome to the club.

Gallander got into the market at 21 after graduating from Western. He read a number of books on stock picking, pored over every stock on the New York and Toronto Stock Exchanges and saw which ones were near their annual lows.

Next he checked out what their highs had been in the past 52 weeks. Then he got rolling.

One of the first stocks he struck gold with was base-metal giant Inco, making a quick return of at least 50 percent. “Inco was having a lot of difficulties and nickel mining was out of fashion and they were having problems with their employees. They ended up going into a major strike. And part of my assumption was that at some point better times would have to return.”

They did. Gallander went on to ride the good times with other out-of-favour stocks, such as Liberian Iron Ore and even Colgate-Palmolive.

Then, in 1990, his stock-picking train came to a screeching halt. In 1988 he had invested in the stock of something called Northland Bank. His rationale was that there had never been a Canadian bank that had gone under, at least since the 1920s, and that Ottawa would not let such a thing happen.

But the Alberta-based bank did, in fact, go bankrupt and he lost a chunk of change. In 1990 Gallander’s stock portfolio dippedby more than 24 percent as a result. So he decided to refine his contrarian strategy, building it up rule by rule, technique by technique.

Unlike many brokers, he was playing with his own money — as he still does today. That helped concentrate his mind wonderfully. His newsletter is currently in its fourth year and costs $250 for the first, introductory year, with an annual renewal fee of between $400 and $500 a year.

“Our benchmark, though, for the past two years has been: If you haven’t hit 12¹/2 percent return a year, then you can renew at the introductory rates,” he says.

Gallander says he is not a contrarian just for the sake of being a contrarian. He is often not contrarian at all. A contrarian, he says, picks his spots, choosing when to go against the crowd, when to go with it.

He is actually quite conservative and suggests many of the same things the more traditional advisors would: always pay off your debts, especially those where interest rates are highest and where the interest is not tax-deductible; if you want to sleep at nights, never short a stock; and never buy on margin.

Gallander acknowledges that there have always been contrarians, and that all he has done is blend various tried-and-tested stock-picking techniques. History is an excellent teacher, he says. Luck plays a part, too. And guess what? He has a rule for the too:
If You Miss One Train, Another One Will Come Along.