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Tricks of the trade for ‘contrarian’ investors

Michael Graham is one of Bay Street's few elder statesmen, a rarity in a financial world where being a market research analyst isn't a path to career longevity.

Most analysts eventually get taken out of the business because it's hard to consistently make good calls. A few losers, and you're history. The relentless culling of the herd is why there are few grey hairs in the business.

But Mr. Graham, head of an eponymously named advisory firm, has survived on the Street for more than five decades, previously plying his trade at brokerages, like Midland Walwyn Inc., Wood Gundy and Dominion Securities Ames, that have long since subsumed into the big banks.

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By his count, he's been through 10 bear markets and six recessions. Not only has Mr. Graham survived that turbulent financial history, he's managed to prosper, which suggests he's done well for his clients.

In an effort to pass on some of his tricks of the trade, I recently chatted with Mr. Graham on his investment outlook.

Mr. Graham says he is trying to be "contrarily positive," which sounds like an oxymoron, but isn't. In his view, there are lots of negative "what ifs" hanging over the market, keeping investors cautious.

"What if the Middle East goes wrong? What if Europe runs out of time? What if Israel takes out Iran? What would that do to oil prices? There are lots of what ifs, but all of that nonetheless could be positive," he says.

Given that there are so many worries that could make investors hesitate to buy, he suggests it might be worthwhile to lean to the positive side. "This is a business where it pays to be a contrarian," he says.

Mr. Graham doesn't trade much, preferring to take a position in a modest number of conservative, blue-chip companies that together provide reasonable diversification and pay dividends. He's set up model portfolios with only six stocks, which he's dubbed his "six-packs." They're all Canadian, partly out of patriotism and partly because he believes Canada has many under-recognized great companies.

He says a common mistake is to hold too many stocks, so even the occasional big winner doesn't move the needle much. "If you have dribs and drabs of too many [stocks], a hundred shares here or two hundred there, where you should have a thousand, then you've got way too many holdings," he says. "To outperform, each holding in a portfolio must be meaningful."

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He rebalances his portfolios every now and then to take some profits in the winners, and re-invest the proceeds in the laggards. Occasionally when he loses patience with a company, he'll ditch it, but this happens infrequently.

Mr. Graham has designed three different six packs: one, a growth-oriented portfolio; another that features dividends and has a 5.5 per cent yield; and the last, a group of stocks that he believes have overtones of Berkshire Hathaway, a reference to Warren Buffett's penchant for picking the shares of good companies for the long haul.

Most typical of his approach is his growth-oriented portfolio, which had a total return of 21.1 per cent last year, nearly three times the 7.2 per cent from the TSX composite.

Bank of Nova Scotia leads the picks. It's Canada's most international bank and gives exposure to the financial industry.

Brookfield Asset Management Inc., the conglomerate involved in renewable power, real estate, and infrastructure, also gets the nod. In one swoop, it gives exposure to domestic and international markets across multiple industries.

He also holds high-flying Canadian Pacific Railway Ltd. "God bless Bill Ackman," he says, referring to the U.S. activist investor who's been shaking up things at the railroad, leading its share price to surge over the past year. Mr. Graham has been taking some profits in CP, to invest in his laggards.

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Enbridge Inc., the pipeline powerhouse, is "just such a magnificently diversified company and it is so strong," it deserves a place in his portfolio.

He's also holding both Encana Corp. and Cenovus Energy Inc., viewing them as a single energy pick, which they were before the companies did their split. Encana should do well when natural gas prices recover and Cenovus holds allure through its steam assisted gravity oil sands extraction technology.

Information provider Thomson Reuters Corp. rounds out the holdings. Thomson has been a disappointment because it has been hard hit by the downturn in the European banking business, but the company does have global reach and he likes CEO James Smith. He's hanging in with the stock, for now. "I'm going to give them another chance."

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