‘Warren Buffet’ of Winnipeg Storied value investor with track record of beating U.S. market opens up about new podcast, basics of good investing

A lot of famed Canadian investors can arguably be dubbed “Canada’s Warren Buffett.”

When thinking of a north-of-the-border version of the legendary American investor, Prem Watsa, chief executive officer of Fairfax Financial, often comes to mind. So, too, does Stephen Jarislowsky, founder of JFL Global Investment Management.

Yet another well-known value investor — essentially bargain-hunting stock picker — is a local product: Larry Sarbit, now semi-retired.

He’s managed billions of dollars of assets over his decades-long career. And his track record during his prime speaks for itself: from 1988 to 2016, his U.S. value approach outperformed the S&P 500.

That’s a monumental feat given most active managers fail to beat the underlying index over the long term.

Sarbit recently spoke with the Free Press about a new endeavour: a podcast called Simply Sarbit, co-hosted with popular Canadian wealth adviser Darren Colemen.

“The idea behind it is to simplify investing concepts, presenting them to people who may not know much about what real investing involves, and they want to learn more,” Sarbit says, adding he aims to offer “little chunks” of wisdom he has gained over his long career.

“That may be presumptuous on my part, but I want to address subjects like what a good business looks like.”

So just what does a good business look like?

“Great management is absolutely key,” he says. But so, too, is understanding how a company makes its money — which involves grasping whether the product or service it provides is in demand and, more importantly, difficult for competitors to duplicate at a lower cost.

In recent years, that has been a harder ask for value investors with respect to the most popular companies on the U.S. stock market. The share prices of the largest companies — Microsoft Corp., Apple Inc. and Nvidia Corp. — have largely been fuelled by exuberance over artificial intelligence’s potential to generate significantly higher profits.

“But can you look forward five years and tell me what the environment will look like for AI?” Sarbit says about this fast-evolving technology. “I haven’t got a clue — and that’s far outside of my area of expertise.”

That’s another key point about being a successful value investor: stick to areas of the market where you can understand how a company is profitable and will continue to be so in the future.

Although this formula has served Sarbit well long-term, it has also meant his portfolios have underperformed in roaring bull markets.

On the flipside, his approach has avoided, or at least mitigated, the deep downsides of market crashes (the late-1990s dot-com bubble and 2008 global financial crisis).

What’s more, market downturns are often fire sales for value investors like Sarbit, where great companies with “moats” making it difficult for competitors to lay siege to their market share can be purchased at a discount.

While many publicly traded companies produce great products and services at a profit, as a value investor, Sarbit looks for those trading at a discount to their fundamentals: revenues, profits and strong management team, to name a few of many.

That’s why bear markets present great buying opportunities for value investors.

Yet this approach requires investors to ignore the “short-term noise of the market,” he says.

Rather, value investors focus on companies’ intrinsic worth and potential for long-term growth in profitability.

To do this, it helps to have a business owner’s mindset because as a shareholder, that’s what you really are.

“If you had to own the whole company, would you be happy?” he adds. “If the answer is ‘yes,’ then you won’t be thinking about how the stock price is doing today; you’ll be thinking about where the business is going in the future.”

Inevitably, this approach leads to building a more concentrated portfolio rather than a broadly diversified one.

“If you own 50 companies in a portfolio, over the long-term you are likely to end up with an average outcome and then you might as well buy an index fund, an ETF (exchange-traded fund).”

To that end, most people without time or inclination to read financial reports on dozens of stocks are probably better served investing in low-cost index funds, he says.

For those willing to do the work, seeking to be successful value investors, Sarbit’s podcast is a good resource, covering topics like dividend investing and the history of financial bubbles.

“We don’t talk about individual companies,” he adds. “We try to convey the philosophy of buying great companies.”

Although it is difficult to imagine a company with a competitive moat that will hold fast well into the future, especially given how technology is rapidly changing the economy, Sarbit offers one such company with a product familiar to everyone.

“Coca-Cola’s been around for more than a century,” he says. Its share price has had its ups and downs over many years, but over the last four decades, its overall performance has been exceptional.

Case in point: if all the dividends were reinvested, a US$1,000 purchase of Coca-Cola stock in December 1985 would be worth about US$105,000 today.

By comparison, the same sum invested in the S&P 500 would be worth close to US$9,000 today.

Now, past performance is no guarantee of future growth, but as Sarbit notes: “That’s the kind of business you want own, where you can ask, ‘Will people still be drinking Coke still in five years?’”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com