Newsletter July 18, 2005

InvestorsFriend Inc. Newsletter July 18, 2005

Introduction to this free newsletter

Greetings to all the recent new subscribers to this free newsletter. For the benefit of new subscribers, here is an introduction to this newsletter.

History – started as a free internet newsletter in June 1999. The newsletter has always been published as a link to a page on the (originally the site was named

Purpose – To educate readers about how to pick stocks based on fundamental analysis. To share useful thoughts about the market and how to analyze stocks. To allow InvestorsFriend Inc. to keep in touch with a list of interested investors.

Content – Business commentary about individual companies or the economy. Often includes links to updated articles on the website. These articles explore investment math and concepts in detail. Also includes editorial comments of interest to stock investors.

Audience – This free newsletter is targeted to anyone who is interested in understanding business and stock markets and how to make money in the stock market.

Stock Picks – Until late 2002 stock picks (buy / sell ratings backed up by analysis) were provided free to subscribers to this free newsletter and to visitors to the Web Site. In late 2002, the stock pick reports were switched to a paid subscription service. While the free newsletter continues to be of value as an educational commentary about the markets and how to analyze stocks, it is hoped that some of the subscribers to the free newsletter will decide to make use of the paid subscription service.

No hype – This newsletter is not about grandiose claims of 100% plus returns. It is not about “hot tips” or screams to buy this and sell that. Rather is is about helping investors understand the methodical process of analyzing companies and picking out winners and losers over the intermediate to longer term.

How to Make Money in the Markets.

This Web Site contains many articles on how to pick stocks. Perhaps one of the best places to start is to read about the methods that Warren Buffett uses (He is widely regarded as the world’s most successful investor ever).

Consider Subscribing to the Stock Picks

Performance of the stock picks has been excellent. In fact, the Strong Buys as selected at the start of each year are up a cumulative 300% in the past 5 and one-half years. However, it would not be realistic to have invested only in the Strong Buys. More realistically, the average gain for all the Buys and Strong Buys together as selected at the start of each year has been a cumulative 192% in the past 5 and one-half years or an impressive 21.4% per year.

You can subscribe to the stock picks for $10 per month. And you can cancel at any time. We even offer a money-back guarantee on the first $10 payment if you are not satisfied with the stock research received. (of course there can be no guaranties to the investment performance, subscribers invest at their own risk). The offer to refund the first $10 payment if not satisfied has now been in place for 10 months. To date, exactly one subscriber has taken up that offer. I believe that is a huge testament to both the maturity of the subscribers and to the quality of the stock research provided. As well, there has been a low incidence of cancellation of subscriptions. Most subscribers continue to find value in the stock research month after month.

Right now is a particularly good time to subscribe. This is because the second quarter earnings reports will be released by many companies in the next four weeks and therefore we will be particularly active in updating many of the stock ratings in the next 30 days or do. By subscribing now, you would receive timely access to these updates.

Editorial Section

The following are some comments on economic topics that have been in the news.

Paper Currency

You may often hear alarmist cries that most of the world’s currencies are just “paper” and are (horrors) no longer backed by gold. However I would point out that these so-called paper currencies are readily converted into any kind of good, service or asset that you might desire. And, given low inflation, they are convertible into these “real goods” on a stable predictable basis. Gold’s value in terms of real goods and services has, in contrast been extremely volatile. I for one am not concerned that our currency is not backed by gold.

Free Trade

The most fundamental thing that is responsible for the wonderful world of comfort and abundance that most of the population of the developed world lives in; is free trade and the associated specialization of labour and capital. Without such trade and specialization, we would each be forced to raise or hunt our own food and build our own shelters by hand.

I take this as a given. I also take as a given that free trade within a small village is a good thing. By logical extension I therefore conclude that worldwide free trade is a good thing.  If free trade within a village is good, then why not within a City, within a province, within a continent, within the whole world? Having accepted that free trade within a village is a good thing, I just see no logical place to draw the line and say free trade should stop at some arbitrary border.

I believe that a lot of the popular attitudes toward free trade are clouded by antiquated almost tribal instincts. For example, while patriotism to your Country has its place, I don’t think it has a place in the free market. As an example, Americans are generally encouraged by various journalists and politicians to buy American. But I really have to wonder why it would be okay for an Iowa farmer to buy equipment made in say New Jersey even if the same equipment were available (at a higher cost) from a local Iowa factory, but it would be considered bad news if the farmer bought from China. I can’t understand why people from Iowa would be accepting of losing jobs in their state in favor of jobs in say New Jersey, but they are supposed to get up-in-arms about any hint of job losses to China.

I believe in the fundamental principal that when it comes to our economic decisions we should all just do what is best for us, and the overall country and world economy will take care of itself. I also believe that all people of the world are equally worthy of my business. I see no reason to go out of my way to favor a Canadian over a Chinese resident when it comes to my choice of suppliers. Of course I would generally prefer to deal locally just for my ownconvenience and would pay a small premium to do so.

Also I fail to see the harm that befalls the U.S. when a country like China provides it with lower cost goods. Those lower cost goods add to the standard of living of most Americans by making things more affordable. As to the job losses, I do believe that the unemployment rate in the U.S. is very low. And as to the argument that many of those remaining American jobs are low paying, I guess that would explain all the new cars on the road and the new houses going up and the relentless rise in the standard of living.

Canada  – U.S. free trade.

Consider the following four facts:

1. Canada is the United States’ largest trading partner – they do more trade with Canada than any other country

2. Canada’s economy and population is roughly 10% of that of the U.S.

3. There are many countries in the world with populations much more comparable to or larger than that of the U.S.

4. The U.S. is a trading nation.

There must be something wrong here. How could Canada possibly be the biggest trading partner of a country that is 10 times our size? and in particular how could we possibly beatout other large economy countries like Japan and China and the United Kingdom. My conclusion is that the United States is not really that much of a trading nation. The UnitedStates is largely a self-sustaining economy and trades mostly within its own borders. As proof, consider that Canada’s trade with the U.S. accounts for roughly 34% of our economy and therefore roughly in the range of 3% of the United States’ economy. The United States may be theworld’s biggest trader in dollar terms, but when it comes to trade as a percent of GDP it is well down the list of the world’s trading nations.

But I believe that this is changing. I don’t think it takes any great insight to predict that within a few years Canada will lose its spot as the number 1 trading partner of the U.S. I suspect China will grab top spot. But I think this is “all good”, it  will result from an opening up of trade generally and this will benefit Canadians.

Floating Currencies

I find it interesting that the United States complains bitterly that China refuses to increase the value of its currency in relation to the United States dollar. The complaint seems to be that China is therefore selling its goods too cheaply (Gee I wish the stores around me would sell me stuff too cheap, but I would not complain if they did). The Chinese have pegged their currency value to the United states dollar. In effect I believe this is like saying they are using the United states dollar as their currency. What I don’t get is why that is a bad thing when it comes to China but it is okay for the entire United States to use the same dollar. I would guess that there is as much or more trade between California and the rest of the United States as there is between the U.S. and China. And yet no one suggests that California should adopt and float its own currency. There must be many rural areas of the United states that have lost jobs and industry to other states. And yet no one has suggested that any states (a number of which certainly have economies bigger than Canada) should adopt their own currencies to prevent trade deficits.

Trade Deficits

Much is made of the trade deficit of the United States. But nothing is said about the trade deficits that must exist between the individual states. I wonder why when we consider trade deficits that it is important to consider it only at the country level?

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Shawn Allen
InvestorsFriend Inc.

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