Guide for the young contrarian

Benj Gallander and Ben Stadelmann
Wednesday, October 1, 2003

So you finished college last spring, the new job is fresh as a daisy, and the paycheques have started to roll in. They may not be as big as your dreams, but they enhance your bank account enough to make the adage “invest early” a plausible bit of advice.

But how to begin? Good question.

At Contra the Heard, we always search for a fairly sure way to get a return on our money. Unfortunately, that is rarely easy. Even with our annualized 25.2 percent return over the past 10 years, we have had our share of disasters. Every investment sits somewhere on the risk-reward spectrum, and it isn’t always easy to find a comfortable place on that scale. Should I take more risk so that I might retire at 45, or try to play the safe-and-sound game?

Youth does have its benefits, chiefly the ability to make financial mistakes and still have time to recoup the losses. Someone in their early 20s can take more risks than a senior citizen who is not well endowed with funds.

Even with this advantage, however, it is not wise to be frivolous with hard-earned dollars — except perhaps for that trip to Daytona or Club Med. People like us, as waxy as we are behind the ears, would still think of venturing to those locales as investments, since heaps of memories are created.

One way to guarantee a return with your money is to pay down student debt. Investing in penny stocks that “promise” obscenely high returns may seem far sexier, but paying off those loans is almost always a better way to enhance your financial future. Once those debts are whittled down — or better yet, eradicated — the universe of stocks is more welcoming. Now, to be fair, this thought comes from two guys who are debt-averse. Other old salts may counsel what we perceive would a riskier, debt-laden path.

Our methodology is to attack stocks in arenas that are out of favour but likely to return to form. A current choice of ours is the high-tech sector, because while it has rebounded somewhat, many companies still remain down and out. Also, as surely as our ears continue to grow, tech is here to stay. One of our favourites in this realm is Novell, a company that produces about $1.13 billion (US) in revenue by providing computer network systems for business. Our purchase at $2.90 last December has just about doubled, but we perceive that a redouble — or better — is yet in store.

A geographical region that appears ripe for the picking is China. This land of more than a billion people will likely become an economic powerhouse this century.

Given that, one of the Contra Guys took a leap into TVI Pacific, a very junior gold and mineral explorer that has optioned expansive acreage in that country. The share buy-in price was six-and-a-half pennies, with an exit point at twice that.

Even without a major find, this stock has an excellent chance of tripling from that level, and if it gets lucky, a 10-bagger is not out of the question. However, being a pithy little company that must scramble to stay alive, it does not have enough depth to qualify for the Contra portfolio. Younger people with a sense of adventure could find this to be an interesting wild-card play.

One suggestion for parents looking to get their kids involved in stocks is to buy into firms that they recognize. While outfits like The Walt Disney Company and Toys R Us might work well for adolescents, a firm like Pantorama Industries, which operates such retail outlets as Original Levi’s Store, Roberto, Vintage Blue, and 1850, might work for the fashion-conscious graduate, even if it isn’t quite as hip as Gap or La Senza.

Pantorama used to turn a handsome profit, but recently has been forced to retrench to try to achieve some of that old magic. Bankruptcy is not out of the picture, but if same-store sales can be boosted, profitability will again blacken the bottom line and shareholders will return to pump the volume of this thinly traded issue. The same Contra fellow who purchased TVI bought into Pantorama in 1999 at 81 cents. The stock has been trading for months in the 30 cent range, with a recent uptick.

Investing should be thought of like a university course: one would be wise to study a number of books on the subject and make paper trades in a journal before plopping money on the table. This way, results can be more realistically evaluated than simply remembering the big winners that might have been.

A last word: as in other aspects of life, one learns over time. Do not be overwhelmed by your failures. Acquire knowledge from them and forge ahead. One does not achieve comprehension overnight.