For nearly four decades, Larry Sarbit has been scouring the investment universe for beaten down stocks and other undervalued opportunities. And he’s had a good run so far, with his IA Clarington Sarbit U.S. Equity Fund returning 9.3% annualized over the last five years. Lately, though, his fortunes have changed. His fund is actually down 1.1% over the first 11 months of 2016, and Sarbit professes to having enormous difficulty finding new companies to buy. “We’ve kind of run out of ideas,” the CEO and chief investment officer of Winnipeg’s Sarbit Advisory Services says half-seriously. He’s only bought one business so far in 2016 and he’s currently holding 55% of his portfolio’s assets in cash.
It’s a far cry from when he started out at Richardson Securities in 1979 as a research assistant. Sarbit hadn’t planned to make his career in investment management—he graduated from York University with degree in geology—but he needed a job and Richardson was hiring. Back then there were plenty of cheap stocks to choose from. In 1984, he read “The Superinvestors of Graham-and-Doddsville,” a screed written by Warren Buffett that laid out the case for value investing, and his career course was set. “The article was about these guys outperforming the market and what they all had in common was that they were taught by Benjamin Graham,” he says. Graham, the father of value investing, “taught them to think and act differently.”
Sarbit only got the chance to start picking securities himself when he joined Investors Group as a portfolio manager in 1987. Since then, he has done a remarkable job of following Graham’s and Buffett’s style of value investing, which essentially involves buying strong companies that, for one reason or another, trade below their intrinsic value. There are two rules to this kind of investing, says Sarbit. The first is don’t lose money. The second is don’t forget rule number one. “That’s stuck with me for my entire career,” he says. “It just made complete sense.”
Of course, there’s more to it than that. Sarbit wants to buy shares of a company with the same mindset as if he were purchasing the entire business. “We want to be true owners,” he says. What does that mean? The company must have long-term potential; it needs some sort of sustainable competitive advantage that will keep it in business for years to come; he wants double-digit returns—“Why bother buying a business if you’re not getting at least that for taking on the risk of owning a company?” he asks; and it should have a successful and ethical management team.
That last point is so important to Sarbit that he used to employ an investigative journalist to dig into the backgrounds of executives in the companies he wanted to buy. Now he has a team of experts, internal and external, across different sectors and disciplines for due diligence. He wants to make sure that the people running the company behave in a way that will build value for shareholders. “If you’re going to buy an entire company, you wouldn’t just look at financial statements,” he says. “There are a lot of bad people out there and we need to make sure the people running our businesses are great.”
He’s stuck to this discipline for his entire investing career—after Investors Group he worked at AIC and then opened his own fund management shop in 2008—but stocks have become so expensive now that it’s been hard for him to find companies without compromising the value criteria he has long stood by. While other managers are stretching their definition of inexpensive, Sarbit has stuck to his guns. The problem with pricey stocks is that it can take years or decades for shareholders to get a decent return. The Coca-Cola Co. (NYSE: KO) is a good example of this, Sarbit says. In 1998, Coke, which he regards as a fabulous business, was extremely expensive. Nearly two decades later, the stock price is the same as it was back then. “You haven’t made any money over the last 18 years and it’s a great company,” he says, shaking his head. “That’s what happens when you pay an extraordinarily expensive price.”
His only buy this year was in January when he purchased shares in movie and television production company Lions Gate Entertainment Corp. (NYSE: LGF). It fell in the early-year stock sell-off, but also got hammered after the fourth Hunger Games movie failed to meet expectations at the box office. With the stock’s price cut in half, Sarbit scooped it up because he thinks demand for content is only going to grow.
Since then, things have been quiet. Sarbit doesn’t feel pressure to spend his cash hoard, even with his fund’s performance taking a hit, because there’s nothing to spend it on. More than other managers, he’s content to wait. “Holding cash can be a wonderful thing,” he says. “To be able to have that cash when you need it can be a wonderful position to be in.” (His idol, Warren Buffett, once famously described cash as “a call option with no expiration date.”) Sarbit also says that his large cash position will protect him when markets fall.
Eventually they will drop, he says, and when that happens he’ll put his money to work. He doesn’t prefer one sector over another. There are good companies across all industries, he says, but many of the operations he’d love to own are currently trading at between 20 and 30 times earnings. He knows it could take a while before equities get cheap again, but he’s confident they will. Now 64, with no intention to retire, he doesn’t mind being patient. Indeed, being patient is one of the four pillars of Sarbit Advisory’s investment philosophy, along with concentration (holding just a few names, typically 10 or 12, in a portfolio), buying “wonderful companies” and paying only bargain prices for them.
“It’s not a lot of fun right now, but sooner or later prices will come down,” he says. “If I’ve learned anything, it’s that the time you wait is more than made up in returns from buying super companies at a bargain price.”
Sarbit bought just one new stock for his portfolio in 2016: Lions Gate Entertainment