You will notice that we changed our format for this issue. Dave wrote a rather extensive review of the last 20 years and his experiences during that time, and then he wrote a market outlook in light of those experiences. We felt that for this issue, that was enough. We hope you enjoy reading this issue as much as Dave enjoyed writing it. Next issue we plan to go back to our old format.

Maybe because 2000 is such a milestone, it is a good time to review our past and see what we can learn. Actually, it is not the number that is causing me to reflect, it is more a matter of current events, after all, 2000 is really only a number and what happens over the course of the future will not happen because of the year number on the calendar. It will happen as a result of things that happen, and how people react to those things

So let us take a journey over the last twenty years in Canada, which just happens to cover most of my investing experience. I will not bore you with all the details, but I am going to talk about some of the highlights, many of which bear striking resemblances to today.

If I can cheat a little, I think it was around 1979 that gold went up to over $800 an ounce and people were taking time of work to stand in lineups to buy it. I do not remember the exact details as to prices or timing, but I do remember watching the news which showed long line ups of people buying gold. My roommate at the time had some friends visiting. One of us made the comment that if you had any gold, you should sell it and sell it fast. The other agreed, but our visitors thought we were crazy, look at what is happening they said, "it is going through the roof" (famous last words). We agreed, but pointed out that when the person in the street takes time off work to stand in a line up, the end is very near. I think that that was the most accurate call I ever made, because I believe the price collapsed a couple of weeks later.

In 1980, Calgary was near the end of the Oil Boom. I was living in Ottawa at the time, working for the Auditor General of Canada as a young articling accounting student. That summer I visited Calgary for the first time. I was here on business, and as luck would have it, it was during the famous Calgary Stampede. Well, I often thought that I would wind up here, but I think it was during that trip that I made up my mind. That winter I started making contacts and investigating opportunities to move. The next summer I did and as you might have guessed, if you do not already know, I am still here. It was in the spring of 1981 when I was here meeting potential employers that I was having lunch with an executive search consultant. I remember her telling me that she dabbled in real estate. This was not uncommon as in Calgary real estate was all the rage. She also made the comment that she liked real estate because no one ever lost in real estate (more famous last words). I do recall making a comment to the effect that her comment might be a concern, because there is always a first time and when people start making comments like that, something is usually about to change. However, neither of us paid much attention as this was different, or so we thought.

Continuing on the real estate theme, that summer I moved to Calgary and began to work in the Audit department of an Oil and Gas company. About a year later, in the spring of 1982, things were really starting to slow down and it appeared that we were in for a recession that would last about three years. Companies were starting to lay people off and people who had been buying a bigger house, then selling the old one every two or three years were suddenly being stuck with two mortgages. It was about then that a young auditor told me that I better buy a house as prices had dropped a little and I should buy while prices are low. He said that this would soon end and that if I did not act quickly I would never be able to afford a house, as prices would go "through the roof" (and again, more famous last words). Well in 1984, a couple of years later, my wife and I did buy our first house, which we got for almost one third less than what it was worth when prices were about to go "through the roof". It is largely because of the good deal that we got in 1984, plus the things that we gave up over the years so we could pay down our mortgage (often at the objection of friends and some family who wanted us to spend on what they thought was important) that has made it possible for us to live in the Country home that we own today.

It was somewhere in there, around 1982 that Dome Canada happened. You may or may not remember the Dome story. Until about 1982, Dome Petroleum was the darling of the Canadian petroleum industry. It was leveraged like a financial institution, I think that its debt was about eighty percent of its total assets, it was growing like a weed and people were making a fortune on its stocks. They were going to develop Canada's North using everyone else's money. I remember being interviewed by them in 1981, and I must admit, I was mesmerized. What an exciting company. Then they came out with a new issue, Dome Canada. Those who got in early would make a killing. Employees were taking out second mortgages and investing as much money as they could. They were going to be rich, "No doubt about it!" (what's that, yes, more famous last words). I have to admit; I even bought some Dome Canada, but luckily only 100 shares. Without trying to remember the whole story, suffice to say that today, other companies own all of Dome's assets. I think Amoco eventually got most of them. My Dome Canada shares? Well let us just say that they made good wallpaper.

It was around about 1981/82, that we had the worst market drop of the last twenty years. Most people think it was in 1987, but the 1981/82-drop was much worse, just not as fast. It seems to me that the total drop of the TSE was about forty percent. In the late 1980's I often showed charts to clients to explain the importance of buying and holding. You see, while the market was dropping, it was about then that Canada Savings Bonds (about as safe an investment that you could buy) were paying 18% interest. But, by 1983 things were changing. Interest rates were finally starting to decline, and the stock markets were starting to take off. Basically, the next five years, until the summer of 1987 were great for stocks. I would show the charts and ask people if they had held stocks in 1982, which had just dropped 40%, then had their neighbor tell them that they had Canada Savings Bonds paying 18%, what would they do. Human nature would be to sell the stocks and buy the bonds, however, the best option was to keep the stocks, but only if you could hang in there, otherwise you would be buying high and selling low. Then along came 1987.

In the first half of 1987, equity mutual funds were all the rage. People could not wait to get in. Financial Planners were cropping up all over the place. It was near impossible to find a bearish analyst, although several claimed after the fact that they were predicting a crash. People who had never invested before could not wait to get in, after all "the market was taking off," (shall I say it, well I suspect by now you know what I am thinking). Then came Black Monday. The market dropped 20% in about a day. Only one half as bad as in 1982/83, but faster than anyone could imagine. Of course, this pushed many investors out of stocks for a long time.

I remember, shortly afterwards, my father-in-law said to me that there was no point investing in the stock market any more. I think I responded with something to the effect that he must think that I was pretty stupid then, because I had increased our equity position a week or two after Black Monday. Just for the record, I believe that the DOW was up about 5% for the year 1987 and that the TSE was around breakeven. What is really a shame is that a lot of people probably got out of the market and swore that they would never do that again.

Continuing with the 1980's theme, I cannot help remembering the excitement about Japan funds. I managed to dig up some old Financial Papers to get the history. In 1985, they averaged about a 12% return, then in 1986 they averaged about 88%, then 35% in 1987. I believe that it was late 1987 or 1988 when the financial planners started pushing Japan funds. I remember being told that one company was great because one of its funds (its Japan fund) was the second best performer the previous year. Well that may have been true, but there were only 5 Japan funds at the time and as I recall, they all outperformed everything else that year. For the record, as of Sept. 30, 1999, the Globe's Japanese Equity Index, (an index of Japanese funds), showed that the ten year average return for Japan funds was 1.2%, the 5 year was 1.5% and the one year was 75.3%. Maybe they are finally coming back, but if history repeats itself, you better be fast, or maybe it is too late already. It is interesting to note that I believe it was around the time the Japan market was peaking that Peter Lynch wrote something to the effect that he could not imagine why anyone would pay those incredibly high price earnings multiples of over 100 that many Japanese stocks were demanding. At those prices it would take over 100 years of earnings to pay for the stock. I guess he knew what he was talking about; I wonder if there is a parallel to some of the Nasdaq stocks today?

After Black Monday the markets as a whole were fairly quiet until the early 90's, when around 1993 they started to pick up and overall have been doing very well ever since. Yet I still have a couple of things that are worthy of comment. Around about 1994, a new thing started cropping up, it was called the Internet. Well, it was new if you ignored the previous 20 years, as it was really about 20 years old. However, it was only just becoming available to the general public. I remember hearing murmurs about this thing called the net. Actually, at that time few people had access to it and most people did not really know what it was. However, it was apparent that this thing was going to dramatically affect the future, so I had better learn about it. I remember using this new technology (Netscape version 1) and for many things using the old text interface. While I can recall some of the old text based protocols, I must profess, I did not understand nor know how to use most of them. I also remember this new thing called newsgroups; apparently they were the place to be. For a while I signed on to one about Canadian Investing. I eventually stopped; as it seemed to me that all anyone wanted to talk about was BRE-X and a few other hot mining stocks.

Oh yes; Bre-X. It seems that for a while people were always asking me about it, confident that I must be into that. My comment was always the same, it is overpriced, anything this popular must be overpriced. The reply would usually be that it was high, but it just keeps going higher, so don't you want to get in on this? (Can I say it one last time, "famous last words"). I doubt there is anyone reading this that does not know the rest of the story. Just in case, there was no gold, and it turned out to be one of the biggest, if not the biggest hoaxes in history. I have to admit, that while I stayed away, I did not expect fraud. The thing is, even if the gold was there, investors were acting unreasonably. First, the best I can tell, they were valuing the company not on the value of the gold that the company might lay claim to and produce, but either based on some totally unsubstantiated dream, or on the assumption that 100% of the gold was recoverable, was recoverable tomorrow, (not over say the next 20 years), and that there were no production cost. Not to mention that the government in the country where the gold was had demonstrated that on a whim it might change its mind about who could mine the gold.

Now; what about 1999? Technology is all the rage. Apparently, the Nasdaq rose more in 1999 than any other index in recorded history. There is little question that many of the valuations are excessive. There is also the "this time it is different" scenario. Many analysts are claiming traditional valuations do not work any more. Mutual Fund managers seem to be jumping on in fear of being left behind and loosing their jobs. Although, there do seem to be plenty of analyst and others warning of the bubble effect. So the question is, is it different this time, or are those going to prove to be more famous last words? In our market outlook section I will discuss what we think is the best strategy for the year 2000 and beyond. I must warn you though; you may not be that surprised.

The next decade should prove very interesting. If you think that the technological advances of the last few years were something, well, you have not seen anything yet. Actually, this is nothing new; it has been going on since the cave man discovered clubs. First there were rocks, then clubs, then spears, then projectiles, then fire etc., not necessarily in that order. Think what changes were caused by the wheel. The industrial revolution has brought about a level of prosperity that probably could not have been imagined a Century ago. My mother let me stay home from school to watch one of the first manned space flights. I remember her saying that when she grew up, they could not imagine anyone going into space. I will never forget, not that many years latter, looking at the Moon with wonder knowing that the Eagle had landed and I was about to watch Neil Armstrong make his first small step on television. Computers, invented in the 1950's, made significant gains in productivity for years, now PC's and the Internet are revolutionizing communications and the way we do business. I just cannot imagine the next hundred years.

Having said that, it is fair to say that technology will continue to revolutionize the world. It will be the driving force behind the economy and life in general for a long time to come. Perhaps forever. This may sound a little like the "this time it is different" last words. It is not. It is the "this time it is the same" speech. There will be great opportunities in the future, well-run companies that develop or use technology skillfully will thrive, and those that do not will die. Our four IFC principles are more important than ever. We expect this bull to continue for a long time, however, all bull markets suffer setbacks. Most years we suffer three or four, often one or two are intense. Given the rate of recent growth, a correction of twenty percent is very likely, and a forty percent correction for technology stocks should almost be expected. The question is; how much will the market rise first, and more importantly, what will happen to individual stocks?

Will we see some sector rotation, if so to what, and what about those beaten up small caps that were all the rage a few years ago? Will the market remain two tier with only a small portion of the companies participating? Are profits important anymore? Then there is the question of investor expectations, which especially for technology are way to high.

If you can get it right, then you can play this guessing game and make a fortune. However, there are a lot more ways to be wrong than to be right, so do so at your own risk. Hell, if you had played Bre-X right, you would have made a killing. We must point out though, that while there were lots of people beating themselves up because they were missing out on Bre-X, since its collapse, we have not met anyone who was upset that they stayed out of it. So here is our answer.

Principle 1: Balance your investments according to your personal circumstances. If you try to move in and out chances are you will do more harm than good. If you are balanced right for YOU, you can live through the inedible corrections and profit from the inedible rallies.

Principle 2: Always diversify your investments. This does two things, one defensive and the other offensive. If you had put all your money in Dome Canada or Bre-X, you might have been hurt badly. However, if you had put some money in either, a small amount in relation to your total portfolio, then the pain would have been minimal. Also, if you are diversified, chances are you will benefit from the growth of each sector, when it happens to that sector. If you invest in some of these amazing companies and the rally continues, you will benefit, if a big correction happens, you are protected, because you are not over exposed. But never buy junk.

Principle 3: Invest in Quality. Starting next issue we will be running our series on stock selection. One issue will talk about how to select quality companies. This may be the most important rule. We can guarantee that sooner or later hot technology companies will burn many people. However, not everyone will get burnt. Those that pick their companies carefully, have reasonable expectations and can ride out the corrections will do fine. There are a lot of companies that have been profitable for a long time, are steadily growing their profits, spending large amounts on research and because of the rate at which they are growing their profits, they may not be overpriced, or may only be a couple of years ahead of themselves in terms of share price. If you carefully select a few of these, you have excellent upside potential with reasonable risk. Of course you can go for some of these exciting high flyers that never made a profit, and if you pick the right ones, or get out in time you might get rich. Of course if you buy the right lottery ticket, you will get rich also.

Principle 4: Invest regularly and gradually. If you are like us and cannot time the market accurately, then the best choice is to invest regularly and stay invested. Sure, we will tend to add money to the stocks that we think offer the best value or opportunity at the time as long as they provide the quality we are looking for and complement our portfolio as a whole. We also dump stocks that we do not feel provide the quality that we previously believed they did. Sometimes we dump them because we like something better. However, these are minor alterations, overall, we regularly add new money and we stay invested. This is evidenced by our low portfolio turnovers of about 10% per year. You see, when we buy a company, it is because we think it is a great company, (with thousands of choices, why pick anything else) and we cannot imagine selling it, otherwise we would have picked another company.

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1. Balance your investments according to your personal circumstances.
2. Always diversify your investments.
3. Invest in quality.
4. Invest regularly and gradually.

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