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He's seen it all, but never 'anything like this'

ddecloet@globeandmail.com

John Clark never did cut it as a lawyer.

"I went to law school for one day. Osgoode Hall," he says. "Then I retired."

Retired, that is, to a 43-year career on Wall Street and Bay Street that has taken him through the Nifty Fifty mania, the oil shocks, the rise of gold to $800 (U.S.) an ounce (then down and back up to $800 again), the Death of Equities, Paul Volcker's war on inflation, the bull market of the 1980s, Black Monday, the savings-and-loan crisis, the heady nineties' boom, the Tequila crisis, the Asian crisis, the Long-Term Capital crisis, the Death of Sanity in 1999, the great American housing bubble and, now, the Great Crash of 2008.

"I started in 1965 and I've seen a lot of markets," he says. "But I've never seen anything like this.

"Each day, you think it's a unique experience or series of events that are occurring that day [and] won't reoccur ... but it just goes on and on and on and on."

These are exceptional times, but, it must be said, Mr. Clark is having an exceptionally good time. Like his friend Prem Watsa of Fairfax Financial Holdings, the 68-year-old investor stands out as one of those people with enough white hair and wrinkles to see that a big disaster was coming in the U.S. housing market and banking system, years before it unfolded.

His bets - which included short-selling U.S. home builders and investment banks, while buying some Canadian bank stocks - paid off. At a time when major hedge funds around the world are in meltdown mode, his flagship, the JC Clark Preservation Trust, was up 15.6 per cent through September and managed not to lose money during the nightmarish first 10 days in October, which means it has outperformed the S&P/TSX composite by about 50 percentage points since New Year's Day. Last year, he smashed the market with a 36.7-per-cent return.

Unlike Mr. Watsa, though, who sees the potential for a lingering, Japan-style decline, Mr. Clark now sees a few reasons to be optimistic. Bullish, even.

"It's getting pretty close to capitulation, particularly here in Canada," he says. "You see it with the smaller-cap stocks."

Capitulation's a magic word, because it means other investors are giving up, so exhausted by their losses that they're practically numb, tossing out the good with the bad, mindlessly selling just because they can't take it any more. In other words, it's the point where true investors can set themselves up to make a pile of money. For instance, Mr. Clark is trying to buy a piece of a company right now (he won't say which one). Somebody, he says, is trying to unload shares in the same business.

"It looks like they'll take anything for it. And it's a great company. Terrific company!" The price keeps falling. "Somebody has said to their money manager, broker 'My wife can't sleep. I can't sleep. Sell. Get me out. I'm not waking up at 3 o'clock again. I can't take it.' " But if you own Canadian bank stocks, and you listen to Mr. Clark for a few minutes, maybe you'll be waking up at 3 a.m. Canadian banks have stood up well in a world of losers; though the TSX bank index is down by nearly one-third, American and British banks have been cut in half. There is no talk of partial nationalization, as Britain has just done to Royal Bank of Scotland and HBOS. No huge and historic Canadian financial institutions have been obliterated in the space of a few weeks.

Either the Canadian banking system is just healthier, or it's just going to feel the pain later. Mr. Clark doesn't know for sure, but he leans to the latter. "We've flipped," he says - buying U.S. bank shares and shorting some Canadian ones.

"In the States, nothing, nothing, nothing bad happened until house prices started to decline," he says. "Well, housing prices in Canada have just heeled over. There are a thousand differences between the Canadian and U.S. systems. But what does count is when the value of the asset against which you made your loan starts to decline; if there are any cracks in the system, they turn up very quickly."

It's easy to be negative on banks. What does he actually like? A stock that fits with the grim times: the death business. His firm is one of the biggest shareholders of Arbor Memorial, a funeral company based in Toronto.

The company has minimal debt. It has nothing to do with the credit crisis. You could hardly find a more recession-proof industry. Yet Arbor's shares are down 38 per cent this year, and trade below book value - which may be as good a sign as you'll find that we're near to the point of maximum pessimism. To Mr. Clark, it feels like December, 1974, again - a bleak period when "people were just throwing [stocks] out the window." The Dow Jones industrial average rose 63 per cent over the following two years.

As for who is responsible for the current mess: "Assigning blame for what's happened is a useless exercise at this point," Mr. Clark says. He'll leave that to the historians. And to the lawyers.

© 2007 The Globe and Mail. All rights reserved.

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