Sticking to basics

The letter from Nebraska was brief. Tony Arrell, a young media analyst at a small Toronto brokerage firm, had issued a long report on Thomson Corp. and the economics of newspaper publishing. The letter-writer sent his compliments. But for Arrell, the signature didn't mean much: Warren E. Buffett, who was chairman of Berkshire Hathaway Inc., one of the largest shareholders in Washington Post Co.

"I barely knew who he was," Arrell recalls. "He was not a household name at all in those days." Nearly three decades later, Buffett is the world's most famous investor, and Arrell, 60, is making a fine living by emulating the Oracle of Omaha's style, which he culls to 14 words: "Good companies bought when they're out of favour and held for the long run."

Arrell was a late convert to the buy side. He spent the first two decades of his career bouncing around Bay Street's investment houses, first as an analyst, then as a research director, then as an executive.

In the late 1980s, he ran Walwyn Inc., the predecessor to Midland Walwyn, which owned part of a start-up investment shop. Arrell bought control of the shop in 1992.

That firm, Burgundy Asset Management Ltd., and its affiliate, Beaujolais Private Investment Management, are named for French wines. Arrell likes investments that get better with age, too. The typical stock in the Burgundy Partners' RSP Fund is held for five years, and several companies--Johnson & Johnson, Altria Group Inc. (formerly Philip Morris), M&T Bank Corp. of Buffalo--have been there since the fund's inception in 1993 or shortly thereafter.

And, of course, there is Berkshire Hathaway.

When Arrell talks about investing, his language is infused with Buffettisms. Burgundy looks for companies that have a competitive advantage--an unassailable brand name, dominant market share and a low cost structure--often in industries where it's hard for new competitors to gain a foothold. But those companies must also be run by competent people, he says.

Finding companies with both good economics and smart management is hard enough; what's harder still is buying them on the cheap. The firm's managers keep a wish list--dubbed the Burgundy Dream Team--of firms to invest in if their share prices get bashed. A lot of the best bargains recently, Arrell says, have been found in Japan. "Many Japanese companies have been hoarding cash because the banking system's crappy, so there tend to be hidden assets." This year, he toured China, Hong Kong and South Korea for three weeks, and is headed to India in the fall.

But many of Burgundy's big winners have been classic Americana. One example: McDonald's Corp., which suffered through an awful time in 2002 and 2003. Customers were turned off by its cholesterol-clogged menu and dumpy restaurants, sales were sluggish and its shares plunged to $12 (U.S.). Arrell and his analysts calculated that the value of McDonald's real estate alone was worth that, even if the restaurants never sold another Happy Meal.

Burgundy bought millions of shares, and the stock has traded near $30 (U.S.) recently. "Really great investors are rare, and one of the reasons they're rare is that to be really good, you've got to be doing what others aren't doing," says Arrell. "You've got to have the courage to stand alone."

Burgundy Partners' RSP Fund