Stephen Jarislowsky’s secret: buy stocks you never plan to sell

The legendary stock picker seeks out growth as well as value, and thinks young investors need to learn the virtue of patience

Stephen Jarislowsky

Jarislowsky Fraser co-founder Stephen Jarislowsky. (Jarislowsky Fraser)

Stephen Jarislowsky has no need for awards or statistics to establish his prowess as an investing mind. The fact this self-made man ranks 46th on Canadian Business’s Rich 100, with a net worth of $2.1 billion, says it all. And while he stepped down as CEO of his firm, Jarislowsky Fraser, in 2012, he still comes into work every day to manage his clients’ portfolios, at the age of 91. “It’s fascinating,” he says. “Investing puts you in touch with everything in life. It’s a perpetual exercise of the brain.”

Jarislowsky started his firm in 1955, selling investment research to companies that had big pension funds to manage. The firm was so successful–he would interview the management teams of companies he considered worthy of investing in, a novel idea the time–that clients started asking him to manage their money in the place of their pension managers. In this way, he entered the investment management business.

While the markets have gone through several cycles since then, Jarislowsky’s investment philosophy hasn’t wavered from his early report-writing days. The one thing he wants from a stock is to be able to hold it for as long as possible. Why? Because people should avoid paying capital gains taxes at all cost, he explains. (His clients are virtually all wealthy investors whose portfolios exceed the limits of tax-sheltered registered accounts.) “We don’t want to hand over a great deal of money to the government,” he says. “Capital gains isn’t really capital gains for long-term investors.”

In other words, the longer he holds onto a stock, the more returns compound. Of course, he does have to pay up when he eventually sells, but the less turnover in his portfolios, the longer his assets can grow. Being able to do that, though, means buying companies that will, in fact, be around years into the future. While there are many smaller companies and emerging-market businesses that he finds interesting, he prefers sticking with larger North American operations, such as TD Bank (TSX: TD) and TransCanada Corp. (TSX: TRP), which Jarislowsky Fraser holds in its Select Income Fund, and have better long-term prospects.

He also wants to own businesses in stable, but growing, consumer staples-like industries, such as healthcare and alcohol. “Everyone drinks beer,” he says. Cyclical stocks might make a lot of money over the right five-year holding period, but if you hang on too long, the share price could drop in a downturn and then take years to rise again, he reasons. Even if you sell at the right time you’ll have to pay tax.

While Jarislowsky likes buying undervalued stocks, don’t call him a value investor. Good growth is important to him, too. The best stock has a combination of both attributes. “I’ve never understood this idea that you have to be growth or value,” he says. “I want to buy a company that’s valuable in terms of the balance sheet, but unless I can satisfy my need for appreciation, then I have no interest.”

It’s also important for a company’s management team to be honest and adopt ethical practices. In 2002, Jarislowsky partnered with Claude Lamoureux, the Ontario Teachers’ Pension Plan’s first president, to found the Canadian Coalition for Good Governance and Jarislowsky has publicly admonished Frank Stronach and Conrad Black, among other high-profile CEOs, over corporate excesses. The best companies have good governance policies, he says. CEOs must also know how to motivate people around them. Above all else, they need to be honest.

Jarislowsky won’t put a time limit on what he means by long-term, but he has held ExxonMobil (NYSE: XOM) in his personal accounts since 1948, when it used to be Standard Oil. Now, he likes Alimentation Couche-Tard (TSX: ATD-B), CGI Group (TSX: GIB-A) and Accenture (NYSE: CAN), all companies that he says help him meet his target return of around 9% per year.

If there’s one piece of advice that this wise stock picker would give to younger investors, it’s to be patient. He’s noticed over the years that more people want to make money quickly, but that’s not how investing works. “You have to drive at a certain speed and you don’t want to have any accidents,” he says. “Get there in good time. That’s good enough for me.”