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The Do Nothing strategy

Paul Sullivan

I've found the secret to investing.

This secret is so powerful, so surprising, that I can hardly wait to start up my investment guru-type newsletter and charge customers thousands of dollars a year to subscribe.

But before I do that, I'm going to let you, faithful Trade by Numbers reader, in on the secret, just because you're you.

Here it is: buy three stocks and forget about them for one calendar year. I call it the “Do Nothing” strategy.

That's it. Scoff if you like; the evidence is anecdotal but powerful.

Last October at this time, I wrote “Here's To You Uncle Horace” in which I invested $25,000, a surprise bequest from a man who was so cheap he'd hang paper towels to dry so he could use them again. Who knew?

Anyway, I invested the $25k in three stocks: Gordcorp, the gold mining company that was still digesting an $8.6-billion takeover of Glamis Gold, Cameco Corp., the world's largest producer of uranium, and Tim Hortons, because the lineup at my Tim Horton's was four times the size of the lineup at Starbucks, right across the lobby of my office building (science is our byword here at Trade By Numbers).

I bought 203 shares or $5,000 worth of Goldcorp at $24.60, 245 shares or $10,000 in Cameco stock at $40.90, and 315 shares of $10,000 Timbits at $31.50.

At the time, I was wringing my hands at the prospect of “a correction looming over the horizon.” I was particularly interested in a letter from David LePoidevin, an advisor at National Bank Financial, who argued that a yield curve inversion in the bond market - short-term rates higher than long-term rates - meant tight money coming. Banks were accessing capital at higher short-term rates, and lending it out at lower long-term rates, and that, LePoidevin argued, would lead to trouble. “I don't like the odds of there being good times just ahead,” he warned, “since 82 per cent of yield curve inversions led to recessions and 91 per cent led to down markets.”

Well, LePoidevin should get some sort of medal, because that's pretty much what happened with the meltdown in sub-prime mortgages in the U.S. We're seeing huge write-downs from the investment banks; Merrill Lynch and Co. will announce a $5.5-billion (U.S.) write-down and a third-quarter loss when it posts its results October 24th. And as I write, today's news is that J.P. Morgan Chase says third-quarter net income managed to rise 2 per cent despite more than $1.5-billion of write-downs and losses due to risky corporate lending and falling mortgage values.

There's more bad news to come, as analyst Howard Mason of Sanford Bernstein sees banking margins compressed due to the yield inversion, and the spreads are still growing within the realm of mortgage lending notes and commercial paper.

At this point, the credit crisis hasn't really spread, but the markets are volatile, to say the least, as investors are whipsawed by a teetering U.S. economy and stronger global markets.

At times such as these, there's nothing like a good cup of coffee. That and the Do Nothing strategy are keeping me in the pink, not to be confused with in the red. Today, Tim's stock is worth $35.62 (Canadian) a share; Cameco trades at $44.19 and Goldcorp is at $31.76. By doing absolutely nothing since last October, I calculate that I've made $806.05 on Cameco stock, $1453.48 on Goldcorp and $1297.80 on Tim's, a total of $3557.33, a 14.2 per cent gain! And this after a year of living very dangerously indeed.

Had I been paying closer attention, I might have pulled the trigger on Goldcorp last August when the company (TSX:G) reported a big drop in second-quarter net earnings to $2.9-million (U.S.) from a year-ago $190.4-million. There was an unanticipated, tax-related $104.4-million non-cash loss and production issues in Mexico and Nevada.

And Cameco (TSX:CCO) has had more problems in the past year than Uncle Horace had teeth. In one month, July, the uranium producer reported contaminated soil at its Port Hope, Ont. uranium hexafluoride plant, causing it to shut down for several months; in Cigar Lake, Sask., it required extra time to pump water out of its flooded mine, and in Kyrgyzstan, wherever that is, production estimates for 2007 were down a third. Commentators started calling it “beleaguered,” and a general rule is that whenever they start calling one of my stocks “beleaguered,” I'm out of there.

Or I might have pulled the trigger on all three on July 24, when the TSX dropped 400 points, its worst single-day loss in three years. Yet, I Did Nothing, and made 14 per cent.

I should say that all three of these companies have strong fundamentals. Cameco is responsible for 80 per cent of Canadian uranium exports, and uranium is one hot (sorry) commodity. Goldcorp plans to produce one million ounces of gold this year, and has some of the strongest reserves in a metal that goes for north of $750 an ounce, and what can you say about Tim Hortons? It's the national drink. Even if there's a full recession, all three of these companies are strongly positioned in essential commodities. So, after this annual checkup, it's time to snuggle down for the winter and go back to Doing Nothing for another year. Sometimes, there's nothing better to do.

Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.

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