Five Investing Tips From The Best Investor You've Never Heard of

I recently read Picking Winners, the excellent book on Scott Fraser — who is one of the best investors you’ve never heard of.

His long-term record is nothing short of extraordinary. From 1990 through early 2020 — when the book was published — he returned 19.5% per year to his investors. 

That’s enough to turn a $10,000 initial investment into something worth $1.845M, and it absolutely crushed both the S&P 500 and TSX Composite. In fact, that result even beat Warren Buffett, who gave his investors a 12.5% per year return from 1990 through February, 2020.

Despite that excellent record, virtually nothing is known about Scott Fraser. The man lives a quiet life in Montreal, still investing on behalf of about 50 clients. At the time the book was written, he had about $110M in assets under management, and a personal net worth of about $20M.

So what gives? Why isn’t Fraser a multi-billionaire by now? And perhaps more importantly, why has nobody heard of him? Why aren’t there dozens of Scott Fraser quotes on Twitter each day, just like the other great investors?

It’s a fascinating story, and a little sad too. So grab a beverage, settle in, and let’s take a closer look at this extraordinary investor who gets so little attention.

The beginning

Fraser was born in Montreal in October, 1928, and he never really left.

His father was the head of an investment company, so Scott was immersed in the family business from the beginning. He remembers a relatively prosperous childhood after his father mostly got out of the market ahead of the 1929 crash.

By 1951, Fraser had graduated from McGill and begun his own finance career. He first started at McLeod, Young and Weir, in a junior role that had him running errands for one of the founders, James Gordon Weir.

He learned a ton from his mentor, and he regularly picked the brains of the more senior guys in the office.

After an adventure in London — a profitable one, I might add — he was back in Montreal working with another legend in Canadian finance, Stephen Jarislowsky. The two men teamed up and started Fraser Jarislowsky in 1958, without much of a plan at all.

The two settled into their respective roles relatively quickly. Jarislowsky was the main analyst, identifying what he thought were great companies, and writing reports on them. Fraser would edit these reports and then go about selling their portfolio management services.

Their first big break came in 1958. Bell Canada’s pension fund wanted advice on their Canadian stock portfolio. The firm was hired on an advisory basis, and provided valuable input that helped the fund pick winning Canadian stocks. This arrangement was so successful other companies eventually hired Fraser Jarislowsky to do the same thing.

Eventually, the two partners would clash. They had different investment styles and, according to Fraser, his results were much better than his partner’s. But he was also more comfortable taking larger positions in stocks he really liked. The breaking point was when Jarislowsky vetoed Fraser’s purchase of more Harlequin shares, which was one of Scott’s favourite — and most profitable — investments. That was unacceptable to Fraser, so he left.

Despite being Jarislowsky’s partner for some 20 years, he walked away with zero equity in the company. Jarislowsky kept it all. 

The two partners had always operated on a handshake agreement, so Fraser didn’t have any real documentation to back him up. Fraser Jarislowsky eventually sold to Bank of Nova Scotia for $950M in 2018.

There’s evidence that perhaps Fraser was the problem. He continued to manage money on his own for a small number of clients, and he worked for a number of investment managers over the years — including Lank Roberton Macaulay, Jones Heward, Magna Vista, AGF, Rempart Asset Management, and, since 2014, Landry Investment Management. He always seemed to run into some sort of problem with management.

Despite his wealth, he isn’t a flashy guy. He was happy to run a closed-end investment fund for years while only getting paid $2,000 per year. He lives in a fairly regular house in suburban Montreal and his idea of an exotic vacation is going salmon fishing in New Brunswick or going to a squash tournament in the United States. Yes, he still regularly played even as he entered his 10th decade.

And he was active in giving money away, including funding eye care research through his alma mater, McGill.

The rules

Let’s take a closer look at five of Fraser’s investing rules, axioms that run counter to a lot of prevailing investor knowledge out there.

Working capital is wasted capital

Fraser’s most important big rule is probably one of his more controversial ones, so we’ll talk about it first.

Essentially, he views all capital as sacred. It is a precious resource that should be put to work no matter what. It makes no sense to hold it on the balance sheet and have it sit there, doing nothing.

That’s exactly how he views working capital — it’s precious capital that’s being wasted. It should be put to work. He hates what he calls “lazy” cash on the balance sheet. Whether a company puts it to work paying dividends, buying back shares, paying off debt, or expanding operations doesn’t matter as much. He just hates seeing it sitting there, being wasted.

In fact, Fraser takes this view on cash a step further. He doesn’t view cash as an asset or a liability. It can be either or, depending on what management does with it. Building a fancy head office is generally a poor use of cash. So might a dividend, depending on the company’s ability to reinvest in its business.

Cash management goes hand in hand with the quality of management. Good mangers minimize their working capital, while poor ones will often keep a lot of cash around.

He’s concentrated

Fraser and I disagree on this next rule. He’s got no problem taking a concentrated position in a stock if he likes it enough, even going up to a 30% position.

He did exactly that with CCL Industries in the 2010s, a position that made him (and clients) a lot of money.

“You have no control when you have a lot of small positions in a lot of different companies, particularly if you’re investing internationally,” he told his biographer in 2020.

By then, Fraser was in his 90s and was connected enough to pick up the phone and call the CEO or CFO of one of his investments. He would tell them what his issue with whatever decision and often these folks would agree with him and fix the problem.

Fraser has the ability to call up major decision makers. You and I don’t. So I understand concentration from his perspective.

Worry about corporate governance

Like a lot of investors, Fraser is worried about the management quality of his underlying companies. But instead of overly worrying about returns on invested capital or other ratios, he’s more concerned about how the top brass acts.

Many investors limit themselves to investing in companies with large insider ownership, which tends to go hand in hand with taking care of shareholders. But Fraser’s analysis is a little more complex than that. He really doesn’t care about insider ownership; he wants senior managers who consistently act in the company’s best interest and not in their own. 

Fraser points to both Canadian National Railway and Canadian Pacific Railway as examples here. He admires both companies for being fair with employees, shareholders, and customers. Both companies are subject to the booms and busts of the business cycle, but he’s convinced both will continue to be good investments because they ultimately attract quality managers who will treat people fairly.

Cash generation is king

Like a lot of investors, Scott Fraser doesn’t really much care about EBITDA, or even earnings. The latter is just a number that matters to the tax man.

No, he’s all about cash flow. That’s the metric he tracks religiously.

As a hardcore dividend investor, I do the same thing. I’m constantly on the look for stocks that generate tons of cash which may be temporarily unloved by the market. That cash can then be used for all sorts of different things — like paying dividends, buying back shares, or growing the company.

Fraser specifically points at R&D (research and development) expenses as something to keep an eye on. He views R&D as an investment in a company’s future, yet it is characterized as an expense on the income statement. He particularly likes companies that generate lots of cash while spending somewhat aggressively on R&D.

Sell your least loved stocks first

Over the years, Fraser inevitably sold most of his stocks, and usually for a nice profit. Like a lot of investors he often had a lot of ideas and not so much capital.

So he would sell something to free up some money. He’d choose which stocks to sell by following a simple rule — he’d identify which one he liked the least and sell that one.

Typically, it would be one that wasn’t doing particularly well, but not always. Sometimes the thesis would change and Fraser would sell a huge winner because something soured him on the stock.

That’s exactly what he did with CCL Industries. He held the stock for most of the 2010s and booked a huge profit. He then sold it because the company was accumulating too much cash on the balance sheet. Fraser loves negative working capital, but CCL was quietly stacking cash. So he sold.

He worries about taxes, too, with that elephant in the room always impacting his decision. But he doesn’t let the tax tail wag the dog. If an investment is successful he’ll sell and pay his taxes on the gain.

The bottom line

Picking Winners is an excellent book. I recommend it to every Canadian investor. It’s an easy read and it’s packed with plenty of easy-to-digest wisdom.

I really enjoyed it, and was happy to learn about this little-known investor. Scott Fraser has quietly become a legend in the investing field, and more investors should be aware of his accomplishments.

Fraser was a unique thinker who didn’t pull any punches, an approach that often didn’t win him any friends. I admire that in the man, someone who stood up for his principles no matter what.

I know I recently implemented some of Fraser’s investment wisdom into my own stock picking criteria, and I hope everyone reading does the same. He truly was an extraordinary investor.

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