On numerous occasions, the MOI Global community has had the pleasure of learning from Canadian value investor Larry Sarbit, chief investment officer of Sarbit Advisory Services, based in Winnipeg. Larry follows a long-term-oriented “business owner” approach to investing.
We are pleased to feature below an exclusive conversation with Larry from 2013, delving into numerous aspects of his investment philosophy.
Larry started his career with Richardson Securities as an analyst in 1979. He went on to become a portfolio manager for Investors Group in 1987. He managed the U.S. Growth Fund from 1987 through 1998. Larry inherited just over $185 million in assets; by the time of his departure from Investors Group, he managed over $3 billion in assets. In 1999, Larry went to AIC and launched the AIC American Focused Fund, which he managed from 1999 through 2005.
Listen to an excerpt of the exclusive interview. In this segment, Larry Sarbit discusses the four pillars of successful business investing.
The following transcript has been edited for space and clarity.
The Manual of Ideas: Larry, you’ve been in the investment business for three decades now and before we talk about that investment approach of yours, that’s allowed you to stay and thrive in the industry for such a long time, tell us a bit about how you got interested in investing to begin with.
Larry Sarbit: I ended up in the investment industry by accident. I trained as a geographer. I got a master’s degree in geography – urban geography. I came back to my alma mater and started teaching geography back in 1978. And I discovered very quickly that I was in the wrong place. It was an epiphany. Fortunately for me it came quickly so I got out and found myself on the street wondering what I was going to do next.
I applied for a job at a brokerage firm here in Winnipeg back in 1979. To my absolute amazement, they called me in. Even more amazing was that I got hired and I had absolutely no background whatsoever in finance – zero. I didn’t know what stocks were or anything – nothing.
How I ended up in the business was pure serendipity. The time was right. Nobody at that time, if you think back to 1979, people didn’t want to come into this business. Certainly in Canada at that time you earned far more money working for the government than you did working in private industry, and never mind the financial industry, which was really suffering bad times. I got in because nobody wanted to come in. I was a contrarian even back then.
…forget about numbers and just think about buying a business. If you were going to buy a business, if you wanted to go into a private business somewhere, how would you perceive it?
MOI: How things have changed contrasting it to today’s environment where most people can’t get enough of the financial services industry and that seems to be the career choice of most graduates today. So in a way, a very different environment than when you first started. In terms of your investment approach, you describe it as common sense business investing and you talk about the four pillars of successful business investors. Tell us what you mean by that.
Sarbit: Being just common sense – it’s just saying forget about numbers and just think about buying a business. If you were going to buy a business, if you wanted to go into a private business somewhere, how would you perceive it? How would you think about it to be successful?
I derived a lot of this from Warren Buffett, of course. But he thinks business. He is very much a rational business investor. He’s not a stock market guy, he’s a business owner – that’s how he perceives himself.
When I look at how successful businesspeople have achieved their wealth, all I’m trying to do is copy what they have done—just duplicate as much as possible how a successful business owner and manager has behaved in the past.
What they have, the first pillar we would say is buy a wonderful business. A terrific business is a business that has terrific characteristics: It has a sustainable competitive advantage. I don’t know if you want me to go into these in any amount of detail, but first and foremost you have a business that has terrific characteristics that mean that its odds of success are going way up. Again, that’s just rational. That’s what businesspeople do all the time. They care about price or what they pay for it, but first and foremost it has to be a terrific business. They don’t mind paying a bit more for something that is truly, truly great.
The other thing that successful businesspeople have done is they have almost always done it in one business. They have not done it in a well-diversified portfolio of stocks – that is not how wealth is created. It is created almost every time in one business. Occasionally two businesses, but you don’t see a hundred businesses. That just is not how it’s done.
You can’t manage hundreds of businesses. You can’t understand hundreds of businesses. And you end up as Warren Buffett says – you end up “diworsifying” your efforts. And that is the exact opposite way to which successful businesspeople have behaved.
And of course, it takes time to build a business. You don’t get instant returns. Building a business, if you own and run a business, it’s a multi-year, multi-decade, perhaps generational process of growth.
People in the stock market seem to think that they should be given returns on a regular and short term basis. If you think in that fashion, if you approach it as a rational business owner and keep this top of mind, and start with those principles, you have a far greater probability of creating wealth.
MOI: You hear a lot of people say they’d like to buy a wonderful business and pay a bargain price for it. Perhaps you can talk a bit about the dilemma here and the reasons why wonderful businesses become attractively priced. Give us a sense of how you generate such ideas.
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