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Five simple commandments for smart investors

A client called and said he just saw on that over the last five years all Canadian tech funds lost money, with an average loss of about 20 per cent; and in the United States the loss was similar (according to Morningstar).

"Do you realize," he said, "that at the same time, you guys made per annum nearly as much as the other tech funds lost?"

"So I told my son-in-law," the client continued, "that while he blew his money on Nortel, I invested in the best tech fund -- right here in town! Now he shows respect . . . How about that?"

I congratulated the client and decided to call my friend Tom Stanley to boast.

Tom runs Resolute funds, which, although it owns no tech stocks, still operates on somewhat Giraffic principles: In the early eighties, Tom -- then a fresh MBA -- heard my talk to some civic group about investing, and afterwards called to buy me lunch and query me further.

Later he formed the Resolute Growth Fund, and disgustingly made a fortune bigger than mine, which I didn't mind at all -- really. Yet before calling him, I prudently looked up Resolute on both Globefund and Morningstar -- and to my horror realized that it was at the top for all funds for 10 years' performance, in both Canada and the United States.

I swallowed hard and called Tom, and, making an effort to stay jovial, said I'd like to interview him for the column.

Well, Tom said he rarely speaks to the press, but seeing that I am not a real journalist, only an amateur, I made an effort again, arranged a meeting, and the following week went to his office.

Tom is enthusiastic and intense, and jumps up and walks about as he speaks. The Resolute Growth fund, he said, currently holds only 14 stocks.

"Why should I buy anything other than my very best ideas?" Yes, he said, "in the short term we underperform often" and occasionally even lose money, so Resolute is not for the faint of heart. But in the long term the strategy has paid off handsomely with a 10-year return of 27.9 a year.

(Full disclosure: A portion of my registered retirement savings plan is in this fund.)

How did Tom do it?

"I don't have an original bone in my body," Tom says. When he started, he studied John Templeton, Peter Lynch, Warren Buffett, and, he avers, took notes at my talk and during our lunch; and he now quoted to me from memory four of my own rules.

1. Get info directly -- do not rely on others for factual research. It's dangerous.

2. Look for conflicts of interest: What people lie about or fight over is often important.

3. Take notes of everything you do, and go back to see what worked and what didn't.

4. Look at what the smart money does -- as defined by those whose actions have worked.

In addition (rule 5), Tom tracks physical supply and demand meticulously. And although he prefers to invest in Canadian companies, where his access to information is best, he tracks supply and demand globally, then makes a few big bets and stays with them, disregarding quarterly -- and even yearly -- declines.

For example, in the second quarter of 2000 he made a big bet on oil, based on long-term demand/supply imbalance, even though public sentiment was very negative.

(On March 6, 1999, the Economist trumpeted: "The world is drowning in oil." In general, says Tom, you can make a lot of money betting against commonly held beliefs -- provided you do your homework.)

In 2004, when oil stocks became recognized, Tom concluded the best value was rather in oil sands; he bought UTS Energy Corp. in a big way, and is still a holder even though it has since tripled.

Finally, in 2003, he zeroed in on uranium -- again, same reasoning: Demand is rising (more reactors being built) while supply is depleting. Even Russia, having run out of bombs to dismantle, is prospecting for uranium. Yellowcake prices have risen more than 40 per cent annually over the last few years, and in next five years there is a possibility of a buying panic, says Tom; so uranium producer Cameco Corp. is a favourite holding.

His biggest mistake? The fund's first two years were "not too great," because he broke rule No.1 and relied on facts supplied by others. Since then he has done his own research (as do we), and results have followed.

By the way, Tom closed his mutual fund to new investors, but opened a private mutual fund that operates on similar principles.

On a personal note, I am happy Tom's new fund does not invest in tech stocks either. This way the laurels for both tech and non-tech funds have a chance of staying in Canada.

Avner Mandelman is president of Giraffe Capital Corp., a Toronto-based money management firm.

© 2007 The Globe and Mail. All rights reserved.

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