Anodyne Inc. Annual Report to Shareholders

First off, some missed distributions:

Parkland Income Fund (PKI.UN): 3510 units x .0967/unit = $339.42 (17 Oct)

TerraVest Income Fund (TI.UN): 1109 units x .041667/unit = $46.21 (17 Oct)

North West Company Fund (NWF.UN): 600 units x .27/unit = $162.00 (15 Oct)

Norbord, Inc. (NBD): 1208 shares x .10/share = $120.80 (21 Sep)

Loblaw Companies (L): 217 shares x .21/share = $45.57 (12 Sep)


Current Portfolio

Dominion Citrus Income Fund (DOM.UN): 12,346 units
E-L Financial Corporation (ELF): 7 shares
Hart Stores (HIS): 1769 shares
Loblaw Companies (L): 217 shares
Norbord, Inc. (NBD): 1208 shares
North West Company Fund (NWF.UN): 600 units
Parkland Income Fund (PKI.UN): 3510 units
TerraVest Income Fund (TI.UN): 1109 units
Amerigo Resources, Inc. (ARG): 695 shares

Cash balance, $1957.27


Performance

Anodyne Inc., 25 October 2006 - 25 October 2007: 22.46% increase

TSE 300 index, 25 October 2006 - 25 October 2007: 14.45% increase

Relative result: 8.01%


Discussion and Analysis of Results

Anodyne Inc. and the TSE 300 index have both been on a tear since my first attempt at public portfolio management toddled out into the world in late October 2006. For this first twelve month period, Anodyne Inc.'s gain has significantly exceeded the TSE's.

The TSE figure is important because it shows what you could earn by passively investing your money in an index fund. The index serves as an objective benchmark of my performance as an investment manager. If Anodyne Inc. reports a 5% gain while the index gains 15%, Anodyne's gain sounds OK on its own, but actually represents poor relative performance. Similarly, if Anodyne loses 12% while the index loses 18%, the relative result indicates better-than-average performance, despite the objective loss.

I judge my performance as you should, over the mid- to long- term. I hope to consistantly beat the TSE 300 index over a rolling three year period, a benchmark that many professional Canadian fund managers find hard to meet. Over shorter time periods the portfolio may fluctuate in value, sometimes impressively. These fluctuations don't bother me, and they shouldn't bother you, either.

The portfolio's composition is pretty focused, with one position (Parkland Income Fund, PKI.UN) representing approximately 60% of total capital. I'd diversify if I could find reasonably priced companies to buy, but most of the Canadian market strikes me as overvalued, and, given present conditions, I'd rather stick with companies I'm familiar with than "diworseify" into a host of new names and sky-high P/Es.

Dominion Citrus (DOM.UN) and Amerigo Resources (ARG) are not well-understood by the Canadian investment community. Their present prices represent attractive discounts to my calculations of intrinsic value, which emphasize an analysis of discounted cash flow over liquidation value. Emphasizing liquidation value is foolish in the case of companies whose cash flow conservatively covers their dividend payout ratio. A company like Amerigo is better analyzed as a "bond-like" investment.

TerraVest (TI.UN) has benefited from the involvement of Canadian activist investor George Armoyan. Its monthly distribution rate was recently cut to a more sustainable level; I had originally factored this possibility into my purchase price and timing.

Hart Stores (HIS) and Loblaw (L) are having trouble executing their business plans, which says more about the competence of current management than it does about the sustainability of the underlying businesses.

Norbord (NBD), North West Company Fund (NWF.UN), Parkland (PKI.UN) and Amerigo (ARG) are particularly well-run businesses that I plan to hold indefinitely.

I take my management of this imaginary portfolio pretty seriously, at least as seriously as writing art criticism and running the bookstore(s). It's a funny paradox: all my life, I have wanted to pursue a "creative" occupation (fiction writing; comic book scriptwriting; performance; radio announcing, etc). These ambitions have uniformly not worked out as planned. (I exempt photography and artmaking from this list; my off-the-radar artmaking is more like contemporary art remade as folk or fan art -- "your 'practice'," Neaera once called it, making me smile in the dark). All the things I'm good at are slow, require much patience (irony: a man with no patience meeting occupations that only bloom in time) and are not much valued by my culture as evidence of creativity. (Shopkeeper. Capitalist.) Around the century's end I started thinking seriously about escape.

"You are neither right nor wrong because the crowd agrees with you," says Benjamin Graham, the Shakespeare of my profession. Emerson concurs: What I must do is all that concerns me, not what the people think. This rule, equally arduous in actual and in intellectual life, may serve for the whole distinction between greatness and meanness. It is the harder because you will always find those who think they know what is your duty better than you know it. It is easy in the world to live after the world's opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.

- posted by cjb @ 6:44 PM