Canada’s Warren Buffett

Working on a total-return basis, 45 of the 76 income trusts in the Canadian Edge “How They Rate” coverage universe that converted have outperformed both the S&P 500 and the S&P/Toronto Stock Exchange Composite Index since becoming corporations, some spectacularly.

— Roger Conrad, Canadian Edge

Starting in January, virtually all Canadian income trusts became ordinary, tax-paying corporations. Many announced cut-less conversions where their dividend amounts remained the same despite the higher corporate tax rates. Others announced modest cuts but maintained high dividends. And still other Canadian income trusts decided not to convert (at least not yet) because of tax-loss carryforwards, foreign-source income, or a variety of other reasons.

According to Roger Conrad, editor of Canadian Edge, the bottom line is this: as a whole, after all conversions, these former Canadian income trusts still pay an average dividend yield “comfortably above 7 percent” and the 15 percent withholding tax in U.S. IRA accounts has been eliminated. The elimination of dividend withholding alone boosts the cash distributions received by U.S. investors in IRA accounts by 17.6%! (15%/85%). No doubt about it, investing in Canadian stocks has never looked brighter.

All Canadian Stocks Must be Considered Opportunities Now

With the trust tax advantage gone, it’s time to look at the entire universe of Canadian stocks for investment opportunities. I thought a good place to start would be to piggyback on some of Canada’s greatest investors. In the U.S., the greatest living investor is Warren Buffett, whose investment vehicle, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), has compounded annual returns for its lucky shareholders of 22% for 46 years.

Buffett wannabes in the U.S. with investment vehicles the average investor can take advantage of include Sardar Biglari of Biglari Holdings (NYSE: BH), Eddie Lampert of Sears Holdings (NasdaqGS: SHLD), Thomas Gayner of Markel (NYSE: MKL), Ian Cumming and Joseph Steinberg of Leucadia National (NYSE: LUK), and Bruce Berkowitz of the Fairholme Fund (FAIRX).

So, the question is: who is the Warren Buffett of Canada? I can think of six contenders, and I’ll list them in ascending order of importance (saving the best for last):

6. Stephen Jarislowsky

German born and a Harvard MBA, he is a billionaire and founder of the Montreal-based investment management firm Jarislowsky Fraser. Prior to the 2008 financial crisis, he advocated that Canada and the U.S. issue a joint North American currency called the “Amero.” He is the author of The Investment Zoo, which provides eight investment rules:

  • Your best bet for building wealth over the long term is to build a portfolio of high-quality large-company stocks that have great management and a track record of doubling earnings every five to seven years – preferably in non-cyclical businesses.
  • Choose stocks over alternatives such as property (cyclical) and bonds (lower returns over the long haul) and be wary of alternative investments, such as gold and art.
  • Start as early as you can and select and hold these companies for the long term. Do not trade unless you have clearly made a mistake. Trading only adds dealing costs and possibly triggers a tax charge too. Be a long-term investor, not a gambler, and keep costs to a minimum.
  • Shares produce an average real return of 5% to 6% a year (after inflation). The earlier that you can start, the more miraculous will be the effects of compounding over a working life.
  • Put your plan in place and do not waver in the face of short-term market fluctuations. You do not own the market, only those companies in which you are invested.
  • Look at market bubbles as an occasional opportunity to take profits and market slumps as an opportunity to top up your holdings with cheap purchases.
  • Do not be swayed from your plan by smooth-talking financial advisers or stock brokers. Beware of mutual funds because of their high charges and often pedestrian performance.
  • Keep yourself informed on the companies in which you invest. Make a point of reading your companies’ financial reports.

I can’t rate Mr. Jarislowsky higher because it is hard for “average Joe” U.S. investors to invest with him. His firm recently started some retail mutual funds, but they are available only in Canada. In the U.S., his firm only offers separately managed accounts for high net worth individuals. 

5. Irwin Michael

Not a billionaire, but a Wharton MBA and a fabulous deep-value investment manager of the ABC Funds. He currently likes small-cap Canadian companies, saying “Canada is the preferred place in the world” to invest. According to Mr. Michael:

Large caps are analyzed to death. But with small caps, there’s not a lot of information, so you have to dig it out yourself, and that means there are more mispriced companies in the market relative to large caps.

His mutual funds are only available in Canada (hence, his fifth-place ranking), but the long-term performance of his Fundamental-Value Fund is fantastic. You can find a list of his Canadian stock holdings by clicking here.

4. Bruce Flatt

CEO of Toronto-based Brookfield Asset Management (NYSE: BAM). The company was founded more than a century ago in Brazil as a developer of electricity infrastructure and then merged with a Canadian company to form Brascan (Brazil + Canada). Brascan changed its name to Brookfield in 2005.

I like the fact that Flatt heads a publicly-traded company that U.S. investors can easily buy. On the downside, his investment expertise is in “real assets,” not stocks, so he’s not really like Buffett and you can’t piggyback on his investments to create a similar portfolio. Nevertheless, Flatt is a superb asset allocator who focuses on investments in real estate (including timber), renewable power, and utility and transportation infrastructure. Since Brookfield listed on the New York Stock Exchange in 1997, Brookfield has outperformed Berkshire by more than 680 percentage points:

Source: Bloomberg

Here in the U.S., he recently became Chairman of General Growth Properties (NYSE: GGP) after it emerged from bankruptcy on November 9th. GGP is a REIT focused on shopping malls and pays a 5% dividend yield.

3. Murray Edwards

Edwards is a cool dude and billionaire. As a true Canadian, he loves hockey and owns the Calgary Flames. His day job is being vice chairman of Calgary-based Canadian Natural Resources (NYSE: CNQ), which is one of the largest oil and natural gas producers in the world. Like Flatt, Edwards focuses on “real assets” rather than stocks, but his expertise in energy investments is unparalleled.  Since CNQ began trading on the New York Stock Exchange in 2000, Canadian Natural has outperformed Berkshire by an astounding 1300 percentage points:

Source: Bloomberg

To be fair, much of that outperformance is due to the rise of oil prices and the industry-wide outperformance of the energy sector during the first decade of this century. Edwards is also a director Ensign Energy Services (Toronto: ESI.TO) (Other OTC: ESVIF.PK), Canada’s second-largest oil services company. As far as stocks go, he owns a big chunk of Penn West Petroleum (NYSE: PWE), one of Roger Conrad’s favorite stocks in the Canadian Edge Aggressive Portfolio.

2. Paul Desmarais

Not just a billionaire, but a billionaire almost four times over. Founder of Montreal-based Power Corporation of Canada (Toronto: POW.TO), a financial conglomerate that owns a number of other asset management companies, including U.S.-based Putnam Investments.  You can find the organization chart by clicking here, but some of the publicly-traded subsidiaries include Power Financial (Toronto: PWF.TO), IGM Financial (Toronto: IGM.TO), Great-West Lifeco (Toronto: GWO.TO), and Pargesa Holding (Swiss: PARG.SW).

Over the past 15 years, Power Corp. of Canada has outperformed Berkshire Hathaway by 494 percentage points:

Source: Bloomberg

To say that Desmarais’ outperformance is impressive would be an understatement. The only reason Desmarais is not number one in my ranking is that his investment vehicle, Power Corp. of Canada, is not listed on a U.S. exchange. For a detailed discussion of Desmarais, click here and here.

1. Prem Watsa

Named “CEO of the Year” in 2008 by Canada’s Globe and Mail, India-born Prem Watsa is my choice as Canada’s Warren Buffett. He is founder and CEO of Toronto-based Fairfax Financial Holdings (Toronto: FFH.TO) (Other OTC: FRFHF.PK). Unlike Berkshire Hathaway, Fairfax Financial actually rose during the 2008 calendar year, an amazing accomplishment during the worst financial crisis since the Great Depression of the 1930s.

Watsa is a great stock picker and, more importantly, shuns risk.  Since its inception in 1985, Fairfax Financial’s stock has returned an annualized 22% for shareholders, which matches Berkshire’s long-run stock return of 22% since 1965. Even better, Fairfax has compounded book value per share at 26% annually since inception, which blows away Berkshire’s 20.3% annualized number. Bloomberg data on Fairfax only goes back to November 1987, so based on an equal time period of 23 years, Fairfax Financial has outperformed Berkshire by a huge 544 percentage points:

Source: Bloomberg

The icing on the cake are Watsa’s shareholder letters, which are almost as entertaining as Buffett’s Berkshire letters. Congratulations Prem!

Find the Best High-Yield Canadian Stocks With the Help of Canadian Edge

For income investors looking for high dividend yields, most of these Buffett-like stocks won’t work because they retain most of their earnings for reinvestment rather than pay them out to shareholders in the form of dividends.

Consequently, income investors’ best bet are Roger Conrad’s top recommendations in Canadian Edge, which focuses on the highest-yielding Canadian corporations (formerly known as Canadian income trusts) that have the strongest underlying businesses. As Roger likes to say, buy businesses first and yields only second.

To find out which Canadian income stocks pass Roger’s strict investment criteria, give Canadian Edge a try today!