A time of risk and opportunity

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  It's a difficult time for investors, no doubt about it. The economic recovery which was supposed make an appearance in the second half of this year now seems to be on indefinite hold. In fact, there is growing concern that it may not happen at all this year and that we could in fact see a full-scale recession.

The technology and manufacturing sectors continue to be in a depressed state. The contagion has spread overseas  Europe is in an economic funk, with rising unemployment, falling stock markets and inflation that is running at higher than 3%. Japan continues to try to find a way out of its long economic malaise, with high hopes now pinned on the new government. In short, there's not much good news to be found anywhere.

In these circumstances, you need to be prudent with your money. However, conditions like this offer excellent opportunities for those with patience and vision. In the late '90s, we thought that stock markets always went up. Now the mood seems to be that they always go down. Neither is true, of course. Stocks will recover and those that invest widely will realize good profits. No one can predict precisely when the turnaround will come, but it will happen. It always has.

The key to success right now is to avoid extremes. Decide on an asset mix that you can live with comfortably and then deploy your money carefully. If you don't like taking a lot of risk, you may want to limit your stock market or equity fund exposure to 30% - 40% at the present time and hold mainly money market instruments and short-term bonds. If you're in for the long term and prepared to take more risk, this is the time to start gradually adding high-quality equities to your portfolio.

It is not a time to speculate, however. There is too much risk out there. If you want to build your stock portfolio, choose industry leaders with good balance sheets and a profitable bottom line. They are the companies that will do best when the inevitable rally takes hold.

SELL CN, BUY CP

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  One of the industry leaders that has done very well for members of our Internet Wealth Builder newsletter (IWB) is CN Rail. The stock was recommended by contributing editor Tom Slee in January 2000, when it was trading at $37.95. In the most recent issue of the weekly e-mail newsletter, he recommended selling the shares at $69.70 for a gain of 86.5% before commissions, including dividends. In his comments, he wrote:

"CN is a great company but if you look closely at those latest results there are a few warning signs starting to appear. For one thing, the company's revenue growth is slowing. Sales during the first six months of this year were up a meagre 3% over the first half of 2000 and CN's once rapidly-improving operating ratio (the amount of revenue needed to operate the system) has stabilized at around 70%, suggesting that management has cut expenses to the bone. This means future earnings growth will have to come from increased revenues. So if the economic slowdown is longer and deeper than anticipated, which seems likely, at some point CNR is going to disappoint the analysts. We all know what will happen then."

Mr. Slee recommended that IWB members use their profits to invest in Canadian Pacific, trading at $59.31, which is about to be broken up into several companies. He sees a potential gain here of 25% over the next 12 months.

We are currently offering a special introductory rate for new IWB members: 13 months for the price of 12. There's also a money-back guarantee  a full refund if you cancel by the end of the first month. For full details, see our home page at http://www.gordonpape.com

TRIMARK FUNDS BOUNCE BACK

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  If you're looking for conservative mutual funds to add to your portfolio, it's time to revisit the Trimark funds, now part of AIM organization. These funds went through a difficult time in the late '90s and suffered massive redemptions. But they are performing well in the current difficult environment. We updated three of the funds in the August issue of our Mutual Funds Update newsletter with the following comments:

Trimark Canadian Fund $ to $$$ Things have really turned around here. Value investing is back in vogue and this fund has been outperforming most of its peers as well as the TSE 300 by wide margins. After languishing through the tech bubble of the late '90s, the fund shows a healthy one-year gain and actually managed to eke out a small profit in the first six months of this year when most Canadian equity funds were down, thus making it a first quartile performer during that period. However, keep things in perspective. The fund did so badly from 1997-99 that investors fled. That exodus finally led Trimark to replace lead manager Vito Maida in February '99 with the team of Ian Hardacre and Carmen Veloso. It's taken a while, but they finally have it on track. This is an especially good choice in the existing investment climate, but avoid the back-end load option with its much higher MER.

Trimark Fund $$ to $$$ Here's another fund in the Trimark group (now owned by AIM) that's looking a lot better these days. Bill Kanko took over the fund in '99 and he's restored it to its former glory. The fund was a top quartile performer in 2000 with a gain of 12.6% (SC version). Kanko has kept it on top so far in 2001, with an advance of better than 3% in the first six months. That's very good, considering the distressed state of world stock markets. We're moving the rating back up to $$$ in recognition of this good work.

Trimark Canadian Small Companies Fund $$$ Many Canadian small-cap funds performed well in the first half of 2001, despite the weakness of the stock markets. This was one of the best, gaining 22% in the first six months of the year - remarkable in the light of what else was going on. In fact, this fund has been steadily improving since its launch, gaining 12.5% in 1999 and 16.5% in 2000. That's a tribute to the investing acumen of lead manager Keith Graham and his associate, Robert Mikalachki. The portfolio is well diversified, with industrial products and consumer products the largest categories. The managers have also been holding a relatively large amount of cash (13%) which makes the recent performance even more impressive. Foreign content represents slightly more than 20% of the holdings. Right now, this is one of the best-looking Canadian small cap funds around. We'll see if they can keep up the pace. Debuts with a $$$ rating.

For information on how to subscribe to Mutual Funds Update and to read a free sample issue:

http://www.gordonpape.com/mfudemo.cfm

MUTUAL FUND WARNING

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  If you own any mutual fund units outside a registered plan, you could be in for an unpleasant tax surprise. To find out the details and how to avoid the problem, read my CBC transcript dated July 31. You'll find it at:

http://www.gordonpape.com/cbcradio/Main.cfm?CBCTranscript=213

TIME TO GET MAD

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  There is growing concern that corporate financial reporting is misleading investors and may have contributed to the run-up in tech stock prices that ended so disastrously. This is a problem many people aren't aware of, but should be. Read our Feature Article at: http://www.gordonpape.com/News/Featuredetails.cfm?NewsletterID=758

DISCOUNT OR FULL-SERVICE BROKER?

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  We often get questions from people asking whether it is better to go with a discount brokerage firm or pay a somewhat higher rate for the advice of a full-service broker. For our view, check out this excerpt from my new book, 6 Steps to $1 Million:

< href="http://www.gordonpape.com/Q_and_A/qadetail.cfm?NewsletterID=763">http://www.gordonpape.com/Q_and_A/qadetail.cfm?NewsletterID=763

To order a copy of 6 Steps to $1 Million at 15% off the regular retail price:

http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=277

TEST DRIVE OUR PRODUCTS

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  Many IT readers have expressed interest in our newsletters and our on-line Mutual Funds Database, but want an opportunity to try them out before making a commitment. That's why we developed our Test Drive concept. For just $9.95 plus tax, you get a one-month membership in the Internet Wealth Builder, a three-month subscription to the electronic edition of Mutual Funds Update, and one month of access to the Online Database, which is currently being updated with the ratings for the 2002 Buyer's Guide to Mutual Funds. For full details, go to: http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=270

That's all for this month's edition of Investing Today. If you know anyone who you think would like to receive this newsletter, feel free to send them a copy of this issue. New subscribers can sign up at

http://www.gordonpape.com/InvestingToday/Newsletter.cfm

See you in September