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Stephen Jarislowsky, CEO of Jarislowsky Fraser


Globe Investor will be running profiles of prominent investors and exploring their investing strategies in its Investing Heroes series. We start with an interview with Stephen Jarislowsky, who shares his philosophy and advice with us.

His book's title is The Investment Zoo, but Canadian investing guru Stephen Jarislowsky should have considered calling it The Investment Jungle instead.

The 84-year-old billionaire investor, the founder and CEO of Montreal-based Jarislowsky Fraser Ltd., is known for being frank and outspoken, particularly in his advocacy for better corporate governance and shareholder rights.

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In the investing world, "you're always besieged by predators," he says in an interview.

"Everyone is a predator of the investor."

What can an investor do to avoid being a victim?

Get smarter and become more reasonable, Mr. Jarislowsky says - smarter as in properly researching your investments; reasonable means managing your expectations.

"You should not be motivated by greed, which is still what investors mainly are," Mr. Jarislowsky says. "Be motivated by preservation of capital and realistic growth."

His investment philosophy is to find premium, non-cyclical companies - ones that have a predictable rate of earnings and dividend growth -- and keep his money in them for the long-term.

His guide for investors on how to do so, The Investment Zoo, is a classic blueprint for value investing. While it has controversial bits - for example, Mr. Jarislowsky is an unabashed fan of putting 100 per cent of your money into equities if you're a long-term investor, something few financial advisers advocate -- his book also deals with how to find value stocks and how to know whether or not to invest in them.

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Some of his advice:

Diversify within your portfolio

Pick stocks in four or five major sectors and some specialty groups. Make sure the stocks are top quality and always think long-term -- by making fewer trades, you will also save on commissions.

What top quality means

While Mr. Jarislowsky believes he shares many traits of the value investor, he believes "there's no sense in buying a value stock unless there's some growth to it."

In The Investment Zoo, the zoo also refers to the variety of stocks in the marketplace. There are thousands to choose from. Your job as investor is to find "a few of the best species"-companies that are non-cyclical (so you can avoid market timing) and also will generate earnings of at least 12 per cent annually for many years. These companies should also be the best in their field, with solid management. Out of thousands of companies across the world, Mr. Jarislowsky writes, only about 50 fit all his criteria and are worth a closer look.

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Think big

Look at larger companies that are market leaders, because if they hit a rough patch they are more likely than smaller companies to be able to get a second chance.

Know when a stock is cheap

Mr. Jarislowsky suggests comparing historical average price-to-earnings ratios (how many times the annual profit you pay when you buy a stock) to current rates and do the same for dividend yields. So if a stock has a historic P/E ratio of 14 to 15, you want to buy when the P/E is lower and sell when the P/E goes up (say to 24 to 26).

How to figure out the value of a company

A company's P/E is just the starting point: An investor also has to look at a company's balance sheet. The key considerations are: bank debt (it shouldn't be higher than accounts receivable); current ratios (a company should have at least twice the current assets compared with current liabilities).

Check net income and make sure interest charges are low, so that companies will pay or raise dividends. If a company increases dividends while net and cash income are also growing, it's a good investment possibility.

Mr. Jarislowsky also advocates looking for signs of whether a company is well-managed or not: Are there good cost-control measures? Also, if sales are rising but margins are not improving, it could be a bad sign of poor management.

More on value investing:

  • These fund managers bought, held, prospered
  • Value investor guru's strategy still works
  • Value investing thrives after market meltdown
  • Graham's strategy still stands tall
  • Fund lessons from Bill Miller

Not surprisingly, Mr. Jarislowsky believes few individual investors have the discipline or the patience for his kind of value investing, especially during rough bear markets like the one we just experience. "That's why people like ourselves are in business.

It takes discipline

It's a point that George Athanassakos, a finance professor, understands only too well. As the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, he not only teaches value investing to his students but also offers seminars to the public. To be a value investor, he says, "people first have to manage their psychology - patience, discipline, strength of character, and most of all stability."

That's because it takes discipline not to jump on the latest hot stock or to avoid panicking when those around you are.

Prof. Athanassakos' description of classic value investing - as developed by Columbia University professor Ben Graham in the 1930s - is very disciplined indeed. First, investors have to find undervalued stocks by using metrics like P/E ratios. The second step is to take stocks with low ratios and find their intrinsic value (through statistical analysis, like looking at cash flow and the assets of the company).

"The stock is undervalued if the current stock price is at least one-third below the intrinsic value," Prof. Athanassakos said.


"If a stock has a value of $10 and is trading below $7, then we buy. If it's above $7, we don't buy. We wait. Because it's not truly undervalued yet."

Prof. Athanassakos says that though Mr. Graham's approach is classic value investing, there are a lot of variations.

Warren Buffett, probably the best-known value investor, "likes to buy companies that have a huge competitive advantage," Prof. Athanassakos says. "He says these companies have such a great strength that nobody can beat them down."

So while there may be fluctuations, Mr. Buffett is confident that over the long term the stock prices will rise.

More about Warren Buffett:

  • Think like Buffett: Tips from a pro
  • What Warren Buffett owns
  • Warren Buffett sings a different tune in his advice to investors
  • Investing by copying Warren Buffett's style
  • To restore trust, look to Warren Buffett
  • Buffett's hits and misses in 2009
  • A baby Buffett portfolio

It's an approach similar to that of Mr. Jarislowsky, and one of the reasons he is hesitant to embrace the moniker of value investor.Traditionally, value investing doesn't include picking companies that are leaders in their sectors.

Mr. Jarislowsky says he prefers to say that he "knows the difference between quality and no-quality speculative [stocks]"

But in the very next sentence he concedes that he is "a value investor to the extent that unless I have a very close fix on something, I would never invest in anything that has too high a multiple."

Tom Connolly, a long-time value investor who runs a newsletter and a website, believes The Investment Zoo should be required reading for investors.

In fact, Mr. Connolly was such a fan of the book that when he noticed it didn't have an index, he put one together and posted it to the Internet. Mr. Jarislowksy's record stands for itself, he says. He has 50 years of experience and his company is one of Canada's top firms.

"I follow pretty well everything he said over the years," Mr. Connolly says of Mr. Jarislowsky. "And everything's in the book."

"In an industry where it is very hard to obtain unbiased advice, Mr. Jarislowky tells it like it is."

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