Young investor takes history into account

David Skarica is just 27, and only really began investing in the mid-nineties, just as the tech bubble was gathering on the horizon.

Despite his youthfulness and his lack of long-term exposure to the market's ups and downs, he wrote and published a somewhat prescient book called Stock Market Pains: How to Prosper in the Coming Bear Market.

The book came out in 1998, just as the Nasdaq Stock Market was preparing to more than double in the next two years. At the time, even seasoned market veterans who had been through numerous bubbles and subsequent market breakdowns and should have known better were mouthing those misguided words: "This time it's different."

But not Mr. Skarica, who recently retired his investment newsletter Addictedtoprofits.com and now focuses on freelance writing on everything from stocks to pro football. Even as a teenager he was looking ahead at what he was going to do with his life -- he took the Canadian Securities Course at 18 -- but his investing philosophy involves learning the lessons of history.

How he does it

Early on, Mr. Skarica was a big fan of newsletter writer Jim Dines and his "Dines Letter," and took away the idea of using technical analysis.

"I learned that technicals are always six to nine months ahead of the market, and the charts will turn before the fundamentals do." One of the big lessons the resident of Dundas, Ont., talks up is that when a market gets overheated and has a parabolic chart -- almost a 90-degree angle -- it comes down hard. He rhymes off several examples, including the Japanese stock market in the late eighties and gold in the late seventies.

Overheated markets roll around with predictable regularity, he says, and even though he was just starting out, that's what he soon felt was happening in the late nineties. "You had books saying the baby boomers were going to jump into the markets and the Dow was going to 35,000, and when books like that are bestsellers, then people are way too bullish."

And so it was that, in 1998 and 1999, with the tech boom in overdrive, Mr. Skarica began buying the out-of-favour gold stocks -- companies with producing mines such as Eldorado Gold Corp. (ELD-TSX) and Newmont Mining Corp. (NMC-TSX). Gold was under $300 (U.S.) at the time, and Mr. Skarica took more comfort in his position when in early 2001 Barron's came out with a doom and gloom story about gold.

"When something is so hated, there is no one left to push it down any more." A good move? Well, Eldorado was trading around a dollar at the time, and last closed at $3.39 (Canadian), and Newmont, which he bought at $16, has climbed to $52.09.

And even after a bubble bursts, the stocks that were the highest still aren't the place to be, he says. "Expectations still stay too high, and you have to work off the excesses." That's in part why he sees the overall market trending sideways for some time, and he says he isn't smart enough to play its ups and downs.

Instead, he's focusing on a few sectors, including gold, precious metals and energy stocks, which, although they've had a good run, he says still hold a good deal of promise.

Mr. Skarica favours mid-tier companies, those with one or two producing properties. This way, he feels there's some support from the fact the company is actually producing and earning an income, but is still small enough that the stock should move quite positively if the company finds a new deposit, or further drilling increases the resource ounces in its operating mine.

For mining companies, Mr. Skarica likes to talk about his four Ps, somewhat tongue in cheek, as the last one actually starts with an "eff" sound. The first "P" stands for people, particularly people who have a habit of finding deposits that can be mined.

"P" No. 2 stands for properties. Here, he's after quality, and that means staying away from recycled properties.The third "P," politics, is important. For example, he likes the story behind Glencairn Gold Corp.'s Ballavista project in Costa Rica, but notes that events such as the recent ownership challenge to the property can hobble a stock.

The fourth and final point only qualifies if you spell financing as "ph." On this front, he says, "You don't want the company to run out of cash, so they need to be well-financed, or be able to raise money."

While many uranium stocks have posted big moves, thanks to the metal having moved from $7 (U.S.) a pound to around $20 in the past couple of years, he feels there is still money to be made because of the plain old imbalance between supply and demand. "The Chinese have said they will be building one or two new nuclear plants a year, and for years the price of uranium was so low that there was no new supply, and there is a big deficit."

While Cameco Corp. (CCO-TSX), Canada's big player in the uranium business, has had a major move, he feels it still has some good longer-term prospects.

Best move

On the more conservative side of things, Mr. Skarica purchased shares in Gold Fields Ltd. (GPI-NYSE), near their low of $3 (U.S.) in 2001, and sold his position at an average of around $13 in late 2002 and early 2003.

On the more speculative front, he rode a rocket with Northern Dynasty Minerals Ltd. (NDM-TSX-VEN), buying in at just under a dollar in June, 2003, and selling the following January for $8.50 (Canadian).

"It had a perfect story," says Mr. Skarica, about why he invested in the company. "They had a big deposit, had proven resources and were drilling in Alaska on a property that had everything -- copper, silver, gold -- and they were drilling and expanded the resource numbers." he says."

Worst move

Despite the tech bubble having well and truly "blowed up real good," as John Candy used to say on SCTV, the wireless connectivity sector still managed to lure in speculators earlier this decade, and even into the beginning of this year. Mr. Skarica himself got caught up with SolutionInc. Technologies Ltd. (STL-TSX-VEN), buying in at between 30 and 35 cents, and selling at half that within the next 12 months.

"I went on the opinion of a friend I knew and trusted, but I didn't look in-depth," he readily admits.

Advice

"If you're speculating and the stock doubles or triples, take some profits and don't get caught up in your emotions."

Interested in being profiled in Me and My Money?

tony.martin1@sympatico.ca

The investor

Dave Skarica

Age: 27

Occupation: Freelance writer and consultant

Investment personality: Technically oriented

Portfolio: Newmount, Eldorado, Suncor, Goldcorp.,Full Metal Minerals; Rimfire, Dynasty Minerals; Wood Products

Rate of return: Ranges from 5 per cent to 80 per cent.