We Study Billionaires - The Investor’s Podcast Network - RWH016: The Best Of The Best w/ François Rochon

Episode Date: November 13, 2022

IN THIS EPISODE, YOU’LL LEARN: 02:51 - How François Rochon began his market-beating investment journey three decades ago. 08:12 - How the “margin of safety” concept guides him in business, markets, & life. 10:14 - How to succeed by investing in great companies at reasonable valuations. 12:12 - Why it’s critical for investors to have a long time horizon. 15:37 - How to become a better investor by cultivating humility & preparing for disappointment. 16:48 - What he learned from Warren Buffett about the importance of owner’s earnings. 21:47 - Why François resists the temptation to overpay, even for great companies. 25:12 - Why he highlights his investment mistakes in an annual list called the Podium of Errors. 34:03 - How to survive & thrive by taking a middle-of-the-road approach to diversification.  38:30 - Why he believes that market predictions are a waste of time. 40:24 - How he handles bear markets emotionally & uses them to improve his portfolio. 43:10 - Why he loves companies like CarMax, Visa, Alphabet, & Markel. 47:56 - How the president of Constellation Software embodies everything he seeks in a leader. 53:59 - How the best businesses remind François of the beauty & uniqueness of great artworks.  1:11:24 - How he was influenced by studying & meeting investment icon Peter Lynch and what François learned from investing legend Lou Simpson. 1:21:49 - How the best investors succeed by straying from the tribe & forging their own path. 1:15:44 - How it helps him to read broadly about philosophy, art, science, history, & psychology. 1:26:16 - Why it’s rational, not naive, to be an “unwavering optimist.” 1:35:16 - Why François believes that persistence & patience are the key to human achievement. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. François Rochon’s Montreal-based investment firm, Giverny Capital. Giverny Capital Asset Management, his U.S.-based partnership with David Poppe. PanzaCollection of art built by Count Giuseppe Panza, one of François’ heroes. William Green’s book, “Richer, Wiser, Happier” – read the reviews of this book. William Green’s Twitter. NEW TO THE SHOW? Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: Bluehost Fintool PrizePicks Vanta Onramp SimpleMining Fundrise TurboTax Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hi folks, I'm absolutely delighted to introduce today's guest, Francois Rochon, who's one of the great investors I wrote about in my book, Richer, Wiser, happier. Francois runs an investment firm in Montreal called Giovanni Capital. He has a superb long-term record. Rochon Global, which is a portfolio of personal and family accounts that he manages, has racked up annual returns of about 14% a year, over nearly 30 years. To put that in perspective, he's beaten his benchmark by more than five percentage points a year

over almost three decades. That's a huge margin of outperformance. So this is someone we should definitely listen to when he explains how to build long-term wealth in the market. As you'll hear in this conversation, Francois's success as an investor is based on one surprisingly simple principle, which is that the price of a stock will eventually reflect the company's intrinsic value. Warren Buffett's teacher Ben Graham explained this principle by saying that in the short run, the market is a voting machine, but in the long run, it's a weighing machine.

The trouble is, it can take a pretty long time for this process to play out, and for the market to recognize a company's fair value. One advantage that an investor like Francois has is that he's extremely patient. He's perfectly happy to buy a great business at a reasonable price, and then just sit on it for many years and the knowledge that the market will eventually, eventually reward him. I find it tremendously clarifying to interview Francois because he's so rational and clear-headed about how the stock market works and what it takes to generate exceptional returns. But I also love chatting with him because he's such a broad thinker who's equally fascinated by

literature, psychology, philosophy and art. In fact, I think he's as passionate about buying great works of art as he is about buying great stocks. As Francois explains, his mission both as an investor and as an art collector, is simply to buy the best of the best. I hope you enjoy our conversation as much as I did. Thanks a lot for joining us. You're listening to The Richer, Wiser, Happier Podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life. Hi, folks, I'm thrilled to be here with today's guest, Francois Rochon, who's joining us from his office in Montreal. It's wonderful to see you, Francois. Thanks so much for being here today.

Well, thank you for having me. It's a delight always to chat with you. It's been a few years, I think, since I interviewed you for my book. So I'm happy to be here with you again. Yes, at least five, five, six years, and a while. Yeah, so we're overdue. I wanted to start by asking you about the period, I guess 30 years ago, around late 1992, when you were working as an engineer and you first fell in love with investing.

What happened that set you on this immensely successful 30-year journey that you've been on as an investor? Well, I believe the first book I read was One Up on Wall Street by Peter Lynch. And it was the first time, really, that I read about value investing. The idea that a company has a value and you can purchase it on the stock market way below its intrinsic value. And to me, that was something new because I didn't have any strategy for investing or any idea how investing worked. To me, it almost looked like a casino and was dominated by financial sharks. So overnight, my views of what the stock market was really changed when I read one up on Wall Street. And then it led to read the Ben Graham book, The Intelligent Investor,

And then went on to Warren Buffett's little letters and really reading those annual letters, probably at the beginning of 1993, really changed my whole views of the investment world. But more importantly, it gave me a real passion to invest in the stock market. You had a very scientific background. I remember once reading that you were obsessed with abstruse sort of physics theorems and the like. and you'd come out of college, become an engineer, right? So, but then as a child, if I remember rightly, back when you were about 11 or 12,

you were already fascinated by the numbers of stocks kind of moving up and down in the papers. What do you think it was that inherently fascinated you about the stock market from such an early age? Well, I guess, like you say, in those days, you read the market quotes in the newspaper, So do you have all those big pages of the small numbers going up or, you know, a quarter, going down a quarter? And I just found that fascinating. I didn't know exactly what it meant, but I thought all those little numbers interested me a lot. And I had interests for mathematics. As you said, I became an engineer.

And even though I was interested in the stock market pretty young, I used to play the board game called a stock ticker. You know, you have dices and you would own shares of, I don't know, grains or industrial products. And I found that board games so fascinated. I remember I made a version on a computer much more sophisticated, so it got even more interested. But I think the view at that time to me is that the prices of the stock market was really, you know, when I programmed it on the computer, I used. random formulas. So it was just

like a casino, so things would go up and down based just on the odds of the right numbers. So to me, science, physics and mathematics through engineering was a more rational way

earning a living. But when later, because of Buffett and Graham and Peter Lynch had discovered that you could use your rationality to analyze companies, I understand the values of companies. It really struck a chord with me because I was someone that liked to understand things and I wanted things to make sense.

You were also obviously pretty obsessive because I remember you once telling me that I think Red Peter Lynch's other famous book, Beating the Street, something like 10 times in your youth. And then I think, as I remember from our last interview, you started to read Buffett. And then I think in early 1993, you told me you actually wrote to him and he sent you all of these annual reports for, I think this stack from like 1977 to 1992. I mean, that's kind of an extraordinary thing to do as well, right? What were you thinking in writing to Buffett? And then what did you actually learn once you started to really dig into those 15 years of annual reports? Well, I think from a very early age, I was a self-learner. So I always wanted to know things by reading books or, I don't report or anything.

So pretty quickly, I understood that Warren Buffett was the great master of investing. So to me, to write him, to ask that he sends me everything that is written that is available was just the logical things to do, just to study. the great master. And to go back to the art analogy, I think if you want to become a great painter, you want to study the great masters of the past. So you go to museums and you just look at Claude Monet or Bonnet or Bangal, all those great artists, and you learn from them. And that's what I did when I started and still doing it today. So obviously as an engineer, one of the things that presumably resonated for you was also this idea of the margin of safety, right?

when Buffett and Munger talk about it, they would often talk about it in terms of a bridge. Can you talk about that notion, which seems to me just vastly important? Oh, yes, yes. Ben Grant made it as key to value investing. He chose those three words, margin of safety. And, you know, 70 years later, I think there are still the three right words. And yes, as an engineer, it's really resonated with me. And I would say that also this marginal safety principle, I think, can be extended to more than just valuation,

but in terms of the quality of the business, the quality of managers, and the quality of balance sheets also. So we see it this year, the companies that have a little too much leverage on the balance sheet, they can be quite hurt by the increase of interest rate. So you want a margin of safety, not just on valuation, but on all the important part of running a corporation. I also remember you once saying to me how this idea of the margin of safety really runs through every error of your life. I remember you, hopefully we'll get to talk more about your art collecting later, but I remember you saying to me once that you bought some great piece of art and you timed it at the payment over four years in some interest-free way. and so you were kind of keeping the commitments down.

And likewise, with the cost of your office and the like, you were very careful. I think you once said to me that if your revenues dropped by 80%, you'd still survive. You'd still be able to hang in there. Is that fair to say that this idea of the margin of safety runs through pretty much your entire approach to life? I think you have to. If you're in the investment business, probably over decades of investing, you'll go through a very tough time at some point, you know, the market being down 50%. So revenues down 50%, it hurts a lot of companies.

So your goal is to be able to survive such period, even if it happens only once in your career. So from day one, I've been always very, very prudent and always have a margin safety in terms of keeping expenses no more than 50% of revenues. So to go back to day one, you started investing money for your family in July 1993, and you launched what was called the Rochon Global Portfolio. And at the time, you were still working as an engineer during the week, and you were kind of moonlighting as an investor on weekends and in the evenings. And if I remember rightly, you were spending your Sundays at the library reading Value

Line and annual reports and the like, was it a very joyful experience? I mean, were you just sort of intoxicated by what you were reading of Buffett? and Graham and Lynch and the like? Oh, it was. It was really like discovering how to turn the lead to gold. That was a feeling that obviously I didn't have that much experience yet. So I was perhaps a little naive. But that was an exciting period, very excited.

And I do remember reading old value lines from the 60s, from the 70s and 80s, and trying to identify companies at some point we're trading at very, very low valuation and studying afterward what had happened to those investments. And I remember reading, I think, the 1973 or 74 value diogen R. Brock, and I think the stock went down 80% in the correction of 7374. And at some point, I think it traded four or five times earnings. So these were exciting. because I discovered that if you could identify great companies and be able to purchase them

at reasonable valuation, it could do very, very well. And I would say at the beginning, it still happens today, but in the beginnings, you could find some very great companies trading at very, very low valuations. And so, you know, when I started to really purchase companies, the first few years, I did very, very well because there were great opportunities in those days. I'm not saying there's not anymore. Let's say it's a little harder today than it was probably 93, 94. So you quit engineering after maybe three years of discovering the joy of real serious investing and went to work for an investment firm in Montreal. I have the sense that it was a disillusioning experience

and showed you a lot about the disadvantages of institutional money management. Can you, talk about what happened, what you saw there that made you think, yeah, I want to be in this business, but I want to work for myself so I can follow the rules that I want to follow instead of doing it in this misguided way? Well, I don't know if it's misguided. I think most money managers are sincere doing their best. I really do. And so when I worked at that big firm that manage institutional clients, they did the best they could. And, you know, they had pressure from the clients to do well on a quarterly basis or at least on a yearly basis. So I just realized in real life, I wouldn't say I lost illusions. I just realized that in real life, it's hard

to have a long-term horizon. Your clients, in those cases, the institutional clients, have to share your time horizon for the relationship to work because if your clients don't give you the time horizon you need to get the rewards from equity investing, it's a wasted time to invest that way. So I realized that most people in the business, I have the luxury of having a long-term horizon. So, you know, when I realized that, I said, well, if I really want to invest the way I believe is the best way to invest, I have to start my own firm. And when I started to gather clients in the early 2000s, I really took the time to explain to all those clients that we needed to have both of us, have a long-term horizon and not

to focus too much on the short-term results. And I don't know exactly when I started to talk about my rule of tree, but pretty early I thought the importance of that rule, which is basically one. year out of three, the stock market will go down. One stock out of three that you'll purchase will be a disappointment. And at least one year out of three, you'll underperform the index. And I think when you accept that from the start, you deal better with market fluctuations, the mistakes you'll make securities, and you have to accept from the start that you'll have years you'll underperform the market. Even if you do a good job and you study, you'll

studied a company very well and you made some intelligent long-term choices. You can have two or three years in a row that you underperform and you have to be able to accept that. It seems also that that rule of three is a fundamental reminder that you need to be humble as an investor, that a third of the stocks you purchase are likely to do poorly. A third of the time you're going to underform the index and a third of the year's the stock market's going to fall by 10% or more. It's kind of wiring yourself in a way from the start, conditioning yourself from the start, have fairly realistic and humble expectations about the roughness of the terrain you're going to have to navigate. Oh yes. And I think as the years go by, I think it's very hard

to be, to stay humble and get even a little more humble because it's a very tough industry. It's a very tough. When you want to beat the stock market over many, many, many. years, not just three or four years, but over decades, I think you have to be armed with a lot of humility. And I think humility is kind of the catalyst to help you come a better investor because you always want to learn more and understand more. I think it turns out that it's kind of a good tool to help in the learning process. There's a very fundamental insight at the heart of your approach to investing, which comes up again and again in your letter. to shareholders, your quarterly letters, your annual letters, which have spent the last few days

reading with great interest. They're fantastic letters. Thank you. And the insight really, which sounds so obvious, but that you've helped me to kind of pound into my own head, is, as you put it, that the stock market always reflects the fair value of companies over the long term. Can you talk about this idea of the convergence of a company's intrinsic value and its stock market value over time. Because it seems to me an absolutely foundational insight that most investors who are treating the market kind of as a casino simply don't understand. And once you understand it, it's a little bit like understanding the laws of

physics, right? Yeah. Well, I think it's a kind of with the stock market, there's a kind of a paradox because in the short term, and short term can be a few years. In the short term, The quotations of any stocks or even the general stock market can be irrational, unpredictable, and totally out of sync with the intrinsic value. But in the longer term, all the forcers seems to balance themselves. And every quotation in the stock market eventually will affect the intrinsic value of a company. Any company, I don't think there's any exceptions. So this paradox, once I believe you understand that, you can see that the key ingredients is first to understand the businesses you invest in so you can have a general view of what you think it's worth.

But the second part, you have to be patient. You have to accept that it can take some years for the rewards to be returned to you in terms of a good return in the stock market. But I think here lies the key way to deal with this paradox. You have to consider yourself as an owner of the shares of the company you own. And since I think I started in 1996, I was inspired by Warren Buffett, of course, I started to measure the owner's earnings of the companies in the portfolio. So put very simply, I would say that I would try to see. my portfolio as a holding of companies and try to measure how much the intrinsic value of the

portfolio has increased the one year compared to the previous year. And this is done very simply by just adding the earnings of all the companies you own that compared with the previous year. By doing this, I think I helped myself get more impervious market quotations. And I know that over the long time, there were many, many years. If I'm right, in the owner earnings part, the quotation of the stock market will eventually reflect that. And so far, my experience has been since 96 that there's been a very, very strong correlations between the increase of the owners and the companies we own and the quotation in the stock market. The correlation is so striking when I look at your shareholder letters that it's worth actually

kind of dwelling on the numbers. There was one point in one of the letters where you said, over 20 years from 1996 to the end of 2015, your company's intrinsic value increased by 1,102% and the value of their stocks increased by 1,141.41%. So incredibly close, 1102% for the increase in intrinsic value, 1141% for the increase in the value of the stock. So as you point out again and again in the shareholder letters, this is not a coincidence. The correlation, is kind of amazing. It is amazing. I think the fundamental process

that lies behind the approach of value investing. If the value increases, let's say, a thousand percent over 20 years, the market will increase the value of the stocks by a thousand percent. But over a year or two or three,

anything can happen. So that's why I say it's kind of a paradox. But if you keep focusing on what's happening, to the companies you own, eventually the stock market will reflect it. So one of the things that seems, if I understand this correctly, to be fundamental to your approach, is that you're looking for outstanding companies that basically are increasing their intrinsic value faster than the average. So if you expect, you often talk about how stocks historically maybe go up six or seven percent a year in the US and maybe there's a two percent dividend,

something like that. So let's say historically you'd expect an eight or nine percent return. What you're looking for is outstanding companies that can grow maybe five percentage points faster than that. Is that a fair summary of what seems like a pretty simple approach, but obviously is incredibly difficult to pull off? It is. It is what I'm aiming for. I don't remember exactly, but I think since 96, the increase in the owner's earning a portfolio on average, and if you include the dividend, it's close to 13% annual. So it's probably a little more than 12% in terms of earnings per share growth and perhaps less than 1% of dividend because many companies in the portfolio don't pay dividend.

So that 13% is probably, like you say, 4% or 5% better than the average of the stock market, let's say, the S&P 500, which probably has grown exactly as you say, probably 9% over the last 25 years. That's what I'm trying to do when I purchase a stock for the portfolio. It's a company that I believe if you combine the earnings growth going forward and the dividend yield, you come close to 12, 13% annually. How do you deal with the pressure not to overpay for these outstanding companies? Because there's a section of your annual letter where you talk about your mistakes in the

past. Much to your credit, every report you go through various mistakes. And they almost always are errors of omission rather than commission. They're things where you fail to buy them. And it seems to me repeatedly, year after year, the reason why you failed to buy them and missed out on huge returns is because they were slightly more expensive than you wanted them to be. So how do you get these outstanding companies of prices that you can bear? It's not easy because if I want to be logical here, if I'm going to own a company, let's say, for 10 years, that's going to grow its earnings by 12, 13, 14% annually. To get that reward in terms of the stock, there can be a slight decrease in the P ratio, but not too much. because let's say if you quadruple your earnings over 10 years,

but the P ratio goes down from, I don't know, 30 to 20 times, you don't earn 15% annually on your investment because there was some P contraction at some point in the future. So ideally, you want the P ratio in the future to be similar to what you're paying. So I'm not necessarily looking for, let's say, a bargain company that trades at way below a, its intrinsic value. Of course, I like it when I do. But to me, if I can find a great company

and in the future, the P ratio is similar to when I purchase it. If I'm right on the growth rate, of course, it can be a good investment. The danger is that if you overpay a little bit, you kind of discounted a few years in advance the future growth. Also, it go back to a in Graham to have this margin of safety when you purchase the stock. But like you said, I made the mistake of not purchasing great companies because I wanted that P ratio to be lowered the stock traded, that I missed great investment because of that. So it's to find the right balance of, you know, keeping the margin of safety principle in line and always at the same time always trying to see that perhaps if you pay a little higher

than you'd like to, the growth rate of the company will be high enough that even if there's a little shrinkage of the P ratio at the end of your investment, you'll still do okay. So if you can find a company that can grow by 20% a year and you lose a little bit on the P ratio after 10 years, you'll probably do okay. So I think many mistakes I did can be in Twitter or FACSET research or Starbucks. I fail probably to see that the growth rate would be much higher than 12 or 18%. I don't remember exactly, but I think in terms of FACSET research, it was probably 17, 18% annually, the growth rate since I've been watching it for more than two decades now.

So it warranted a much higher P ratio that I was ready to pay. So I think that's one big lesson. When you do find an outstanding company, you have to be able to pay a high pay rate rate ratio. Yeah, I remember, Francois, you writing about, I think, selling FACCET too early and missing out on a 25-fold gain over two decades or failing to buy Quickbook and missing out on a 3200% return or watching Fox Factory holding soft 500% over six years and missing out on that. And I'm wondering, what's the best?

benefit of having this section of your shareholder letter called the podium of errors where you, to use Charlie Munger's phrase, you rub your nose in your own mistakes? How is it helping you other than a degree of self-lidulation? Well, I think it keeps me humble because you don't have to search very hard to find mistakes you've made. But having this yearly podium of three mistakes, It makes me think usually in January at the end of the previous year, you know, to look up what would I choose the three best mistake of the year. It forces you to go back and pass decisions, both in things you did purchase and the ones you did not purchase. I think having this section in the annual letter every year, I think it builds kind of a process of always trying to learn from your past decisions. And I think looking at companies that you didn't buy, let's hope that by studying those,

to the example, a very good example of facts that and into it, you want to be sure that in the future you don't make the same mistakes. So perhaps, let's say for instance, there's a little amount today, which I think is a great company, but the P ratio is a little high. It makes me think perhaps I should learn from the past mistakes and perhaps pay a little higher price than I would like to. And I hope I can always improve and become a better investor all the time by focusing on those mistakes, but also to learn from those mistakes and try not to repeat them too often. It's challenging, though, because I think of a lot of the really smart value investors

who've come undone over the last year. One of the lessons that they learned is that it was okay to pay more. And so they kind of relaxed their standards and then came undone. when a lot of very high quality companies plunged that they had overpaid for. And so it's dangerous, right? You can learn the wrong lesson from your mistakes. Can you talk a bit about that? Because this is one of those eternal paradoxes, I think, where, yeah, it's just difficult, right?

Because the conditions change as well. Yeah. Well, I think Ben Graham talked about that in one of his book, that the biggest mistakes you make is not in the bull market overbearing. paying for a great company because eventually, you know, earnings will keep growing and the P ratio will get back to normal level and they'll do okay. The biggest mistakes in the bull market is to purchase companies of poor quality and they don't come back after the bare market because they're not profitable or the P ratio was so high. They have to be a limit to the P ratio

you pay. I think if you pay 100 times earnings for a company and the P ratio goes down to 20 times during the bar market, you're down 80%. It takes a lot of years for earnings to grow, though you can get back to five times your level during the bear market. So there has to be some limit to the P ratio you have to pay. I don't know what's the right number, but I know it's not 100 times.

Bear markets are painful, but sometimes you have to still focus on the company and as long as the company is growing its intrinsic value at good ratios, probably it's a good time just to stay patient. accept that if you pay, let's say, 30 times earning and it goes down to 20 times during a correction, you're down 33%. But, you know, if you're right on the company, eventually earnings will keep growing and the stock will recuperate all the losses and even more gain good returns. But if you pay a high p ratio to accept that there is that downside, of course.

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Back to the show. You've quoted a wonderful line that Ben Graham famously quoted in a speech of his from 1958 that comes originally from the Roman writer of it, I think, from his metamorphoses. So this is about 2,000 years old, where, as you explained it in one of your shareholder letters, the sun god Phoebus says to his son, whose name I can never pronounce. maybe Faton, something like that, who wanted to fly their chariot through the sky. The wise father, God, says, you will go safer in the middle road. And of course, the sun ignores this, loses control of horses and crashes to earth and

almost destroys the world by setting it on fire. And you've said that you consistently followed the middle road in investing, which I think kind of describes what you were just saying, like how to balance this desire for growth, for outstanding growth and a desire to pay the right price not to get too ahead of your skis. Can you talk about that idea of the middle road, which seems fundamental to your approach? Yes, I think the middle road, there's many ways to see it, but in terms of our investment process, I would say first we look for great companies that grow the intrinsic value at quite high ratio. So, you know, we don't want the revolutionary companies that grow 50% a year, but you have to pay a very high P ratio.

And sometimes people used to say that more companies die of indigestion than from starvation. So what he meant by that is that companies that try to grow too fast sometimes create their own doom. So we look for companies that grow their intrinsic value, but we're very prudent for companies that grow at more than 20% annually. So the middle of the road in this case would be companies that grow the intrinsic value, let's say 12 to 20% annually. And in terms of valuation, of course, we like to pay very low multiple, but even for great companies, we don't want to pay too much a high multiple. Like I said, we don't want to experience a P reduction in the future. So again, the middle of the road is to find probably companies that are not necessarily trading at very low valuation, but not too high valuation. So let's say 20, 25 times earnings.

And I think also in terms of market cap, of course, very young companies can grow very fast, but they're more risky. usually they don't have a boat yet around their castle. So usually you want companies that have a good history of building a boat around their business. Usually you don't get that for very young companies. And with very big companies, yes, they can have a boat, but they're so dominant. They're so big. It's hard for them to grow at high ratios. You know, I'm thinking Procter & Gamble or Coca-Cola, for example, great companies,

but they won't grow earnings much more than 6% or 7% annually. So the middle of the road here would be to find a company that is big enough, old enough, that they have a strong competitive advantage, a big mouth around their business, but at the same time it's not too big so that they don't have any growth prospects in the future. So I think, again, the mineral of the road applies in our investment process here in terms of size, necessarily in terms of big cap, large, small cap, but really in terms of where they are, their path of growth in the future.

I'd say you also have a very middle of the road approach to diversification, right? Can you talk about how you balance the benefits of concentration and diversification, so you have a chance of outperforming but also more likely to survive? Yes. Many of the great money managers that I studied, you know, Philip Fisher, Glenn Greenberg, of course, Warren Buffett and Charlie Bunger, most of the time they were very concentrated. Let's say, sometimes 10 stops, that's if, for instance.

And they've done very well, and they waited for the right opportunity with a very large margin of safety, and they've done well. But for myself, from my personal experience, I thought that 10 is a little low. And I was more, I felt more comfortable with something like 20 to 25 names. So a typical weight between 3 and 5%, let's say, in a single security. And from the almost 30 years experience now, having around 25 names a portfolio, for me, seems to be the right balance between having enough securities that if you make one or two mistakes, it doesn't hurt too much the portfolio.

And at the same time, I think 25 names is concentrated enough so that we're not too diversified, that the more names you have, the closer to the SNP 500 returns you'll have. So you don't want to have too much names of portfolio because the odds of beating the index go down very quickly. So I think that's the right balance for us. Again, it's probably middle of the road here.

It's the right balance having enough securities of proper diversification, but not too much so we are too diversifying. Another really fundamental tenet of yours is that it's basically futile to make market predictions. You say that people are always writing to you or grabbing you in elevators or whatever and saying is now a good time to invest. Can you talk about this really fundamental insight that it's just a game you don't want to play, trying to predict where the market's going, where the economy is going, or any of these big macro or geopolitical things that you deem too difficult to know?

Yeah. Well, I never tried to predict a stock market. I think it's unpredictable. And one lesson that was very useful to me, and lucky enough, it was not mistakes I did myself, but just watching other great investors. You know, I want name names, but I remember a very, very brilliant. investor that was a great stock picker, really. But he was very prudent and he always kept 20% in cash.

So his investments, the stock CEO, let's say that 14% annually, but having the 20% in cash yielding close to nothing reduced his overall results to 10, 11% annually. So I observed that and I said, this doesn't make sense. is such a great stock picker. Why not be 100% invested and just live with the ups and down the stock market? And I learned a lot from that.

So I said to myself, my goal, my mission is to find great companies, to be an owner of great companies. It's not to predict what the market will do. And when you have some cash, in some ways, you're trying to predict the stock market.

You're trying to wait for a correction to invest that the 5, 10, 20% in cash that you keep. And I think the odds of being able to achieve that from my observation are not that high. So do you never really have any cash? No, I don't. And then when you get whacked in the short term, like we're seeing at the moment, which is a pretty painful and uncomfortable situation, even for a lot of very prudent investors who are getting hit quite hard,

how do you deal with it emotionally? Well, personally, of course I don't like it. It's not a pleasant experience. I try to always go back to the idea that we own companies and try to focus on what's happening with the companies. And what I try to do is every time there's a correction, a bear market, I try to see if there's ways to improve the portfolio. So I'll sell companies in the portfolio that either are not as undervalued as others

or that perhaps the fundamentals are not as strong as usually when there's a recession, you can see the companies that are strong and those are less strong than you hope for. So I'll try to improve the portfolio because there will be opportunities with every bar market there's opportunities. And that's what I've been trying to do every time there's a market correction, probably sell or reduce holdings that either the fundamentals are not as strong as hoped for or that valuation has not come down as much at the others and increase the ones that I believe are the most undervalue in the portfolio. If I'm right doing this, technically when the market

do rebound, the portfolio will have improved prospects going forward. So that's what I'm trying to do. Is there anything particularly dramatic that you've done over the last couple of months where you think, yeah, I've seen some kind of disruption where some area of the market's been really clobbered and I've actually kind of seized the opportunity to upgrade the portfolio dramatically. I want to say dramatically, but probably we purchased a three or four trades, either selling or reducing one olding or buying or increasing one other holdings. We've done three or four and we're thinking of doing more because in the last few days, many of the securities and portfolio always gone down quite a lot and some are getting at very, very attractive level. And like I always

say, it makes sense to sell a company that, I don't know, trade at 60% of intrinsic value to buy one that trades at 40% of intrinsic value. And in our markets, you'll have things like that. Can you mention one or two things, Francois, that you've been able to pick up that are particularly, I mean, this won't come out for a few weeks. So, but something that epitomizes what you do. So not so much a stock pick as something that gives a sense of your approach to, in a way, what Ben Graham said, that you're making the market your servant, not your master. Yeah. Well, one stock that we already own for a more than two years is five below, which I think is a great,

great company. And the stock went down probably 35, 40 percent at some point, and we increased it. I think we reduced, well, I remember we reduced Doroama. which is a fine company, a great company in Canada. But I think the two were trading at similar P ratios, but I believe that five below will grow much faster in the years to come than Dallara. So probably Daraama is a little more stable in terms of their revenues and profits. So market gives it higher multiple because these days the market likes stability.

But I think over five years, five below will do better. So we just sold one that looked less attractive and increased the one that is more attractive. Perhaps if I could take another example, one stock is down 20% today as we are speaking is CarMax. I think it's down to 67. And I believe, I don't know exactly when, but within five or six years, a company can earn $12 a share. So at 67, if I'm right on that $12 a share that's in 2020, 7 or 2028, this is a stock that could triple in value at least. So I think it's a great opportunity. It's already, well, it's a lower today in terms of size, but it's already in our top five holding in the portfolio.

But this is an example of a company we could increase. Of course, the results, the last quarter were a little disappointing, but I know that I've been owning CarMax for 15 years. I know that, yes, it is a great company, but it is a cyclical company. When there's a slowdown in the economy, sales go down and you have to accept that. But if you have a long-term horizon, I think that's a great opportunity. The stock is down 50% in the last year. I don't think the intrinsic value has gone down 50%. A lot of your biggest holdings are things that you've owned for many years. I was looking through various holdings of yours. I think Bukch-Hathaway, you bought in March 2000 at the height of the tech bubble when it was under $30 a share,

and now it's what, 270 even after, this is for the B shares, even after dipping fairly substantially. Carmax you bought in 2005, Dollarama, 2010, and it's gone up. I think CarMax was 2007. Okay. At a perfect time, I think, just before the 2008, I think of a problem. Yeah. Visa you've owned since 2010.

Google slash alphabet since 2011, Markell, since 2013. If you look at the common denominator among these very sort of integral positions in your portfolio, what do companies like that have in common that illustrate what you look for in an outstanding business? Well, I think all the companies who mention a combination of having great managers, but not only great businesses, but kind of unique businesses. And, you know, the idea of having a vote is that I believe these companies are something special that gives them strong competitive advantage.

But if I had to summarize in one sentence, I believe they have a unique business model. And, I mean, if your visa is very similar to MasterCard, of course, but I think the two together, they're as great businesses as you can find. I think Google Alphabet is fantastic business. I mean, it's really dominating our world today. I don't know exactly the number, but they probably have 40% of all ads on the Internet or something that's indirectly.

I think CarMax is a very unique business. I think they've got something like 4% market share of all the used cars sold in the U.S. every year. And I don't think probably the closer now is Carvana, but Karana is not profitable yet. So I believe that Karmac has a very unique business model and very well managed, in my opinion, also. And capital allocation is very important in the companies we look for.

You talk about Berkshire Attaway, but we could talk also of Amatech or Constellation Software or MTI food. I think those three companies have a very strong history of intelligent capital allocation. And, you know, if you're going to own company for 10 years, a lot of your returns will be the fruits of intelligent capital allocation over the years. And that's one very important criteria we look for. You obviously have invested primarily in the US over the years, but there's an important component of your portfolio that's Canadian companies, which is particularly interesting for the rest of us since you obviously have local knowledge as someone who's lived in Canada for a long time.

I remember once, I think last time we spoke, I don't know if you had already picked out Constellation Software, but I'm fascinated by that company because the CEO, or I guess the president he's called has a kind of cult following. He's sort of often viewed in the same way as a Bezos or a Buffett in certain circles of the software world, for example. Can you talk about that? Because I remember you saying at one point that really that entire investment in Constellation Software was based on the fact that you thought Mark Leonard was this extraordinary leader. Yes. I remember as yesterday, I think there was a Christmas party in 2013. I was at some friend. And that, A young friend of mine, very young, he asked me if I know this company Constellation Software.

And I was a little ashamed because I thought I knew all the great companies. So I said, no, I don't. So I think it was almost on Christmas Eve. I read the 2000, well, probably 2012, annual report of consolation software written by Mark Leonard. And I remember when I read that, that was love at first. site. I said, this is my kind of God. I knew it because 20 years of reading the report, that was on the best I've read. And I, of course, did a little more research, read about the company, read the annual letters, tried to understand everything about the company, and probably

a month later. I think the day after I read the annual report, I bought a few chairs just to follow it, but a month later, you made a sizable investment in the company and never sold a share. So, was almost 90 years ago. And have you met him at all? Yes, a few times. And I think he's a great guy, a great human being, a great businessman,

as great as you can find. What makes him stand out as a business leader? That's a good question. You know, people want some scientific approach to, you know, assessing managers, what makes a great manager,

manager. But I remember a friend of mine said, well, this is the kind of person you'd like him to marry your daughter. And I think that sums all the great managers, either Tom Gainer or Mark Leonard or Stanley Mott, M.T.Y. Food, they're great human beings. You want them to manage your capital. I mean, if I had to go away, you know, I always use that analogy of the Gilligan Island test if you're stranded on a desert island for 10 years. And I remember the show at Gilligan Island? Yeah. Who would you entitle your capital with?

And that's one question I asked myself, do the CEO of the company we invest? I'll be happy for him to manage our capital if I'm stranding 10 years on an island. And I think Mark Leonard, I would sleep very well at night, this desert island. that he's there in managing Consolition Software. Same thing with Tom Gainer at Markele or Stanley Ma at Mott, MTF, of course, Warren Buffett at Berkshire. It's actually, it's a great insight. With someone like Tom Gaynor, who I know well from Markell,

which you've owned, I think, for 10 years now, practically. Yeah, it's also 10 years. I mean, Tom, you would, yeah, you would just, you know, if you keeled over, you'd say, you know, before you keeled over, you'd say, Tom, can you just make sure my family is okay financially? Like, you manage the money. And make sure it's great. Yeah.

Yeah, it's interesting. That's a great filter, actually, to think of who you want to partner with, not just as a money manager, but as a CEO. And most of us, I think because most of us don't really think of our investments in such a long-term way, we underestimate the importance of that personal element, of that trust. Yeah. And these are not easy to explain because they're kind of. of subjective. They're based on judgment. But, you know, as you get more experience, I think

that's something that comes with experience, better judgment. Well, I like to think so. And that judgment helps us, you know, select great people because, you know, we've heard a lot, we've seen a lot, and we can see great managers because they're so rare. And I would probably go back to the art analogy here. When you go to museums and go to and visit the best museums in the world, pretty quickly

you can see which are the greatest artists. I always say that beauty is hard to describe, but when I see it, I know it. And I would say that if you look at a lot of art in your life, you'll be able

to identify masterpieces. I think it's the same thing with companies and CEOs. If you see a lot of them, if you read a lot of annual reports and you study a lot of companies and eat a lot of businessmen and business women over the years, after a while, you'll be able to identify the really great ones. I wanted to talk in some detail about art because a lot of our listeners won't know that you've invested very heavily in art over the years and you have this corporate art collection. Well, that's really your art collection, but it's called the corporate art collection.

It is a corporate art collection. by the corporation. But I remember you saying to me once that you basically put half of your share of the earnings into art and about a quarter of it. Yeah, I know, I love it. And a quarter, I think you said you were saving to build a museum one day. And so art is a very, very fundamental part of your life. And I once talked to you about Roy Newberger, the great art collector and money manager whose son, Jimmy, I know well. and Roy Newberger really went into the money management business largely to fund his art collecting.

And you said much the same, right? You said to me once, yeah, I may have gone into the investing business kind of to fund my art collecting as well. So it's very fundamental to who you are, right, your art collecting. Yeah, I think so, yes. This idea you mentioned before of uniqueness is really important. And I wanted to talk about a bit more because you said to me once that just as you look for uniqueness in business models. That's really what you're looking for in art.

Can you talk about the parallel between buying great art and buying great companies? It's a similar process. I would say probably the biggest difference is when I buy a work of art, I never want to sell it. As when I purchase a stock, ideally, I would want to keep it for many, many years. But I realize that most of them, at some point, you have to sell it. So I would say that's probably the biggest difference. But besides that, I think the process is very similar.

I really try to find the best of the best. In French, we say la creme de la creme. So I want to find who are the greatest artists. Not only that, what is the greatest creation period and what were the best work of art? And I think the same thing with companies. You want to find the greatest companies, but you have to realize that same with artists. Companies have great periods and not so great periods.

So you have to be able to identify that probably the company that you're thinking of investing is really its best period of growth and compared to the best period of creation for an artist. So I think to be able to identify that, you really have to understand in depth the artists and the companies you're studying. But, you know, it's also the fact that you have to look at a lot of companies and a lot of artists to be able to identify those rare artists, those rare great companies. And I think Peter Lynch used that analogy that it's like looking for pearls. You have to open a lot of oysters. The more oysters you open, the more pearls you're likely to find. So I think that's the same thing.

You have to look at many, many companies or the work of many artists. And I think another ingredient needed is you have to love the process. I mean, it's not work going to museums and looking at great artworks because I enjoy it. I really love it. And it's the same thing with companies. I want to study companies. I'm not thinking I'm working. I'm enjoying myself.

And nothing excites me as finding a new company I didn't know about and realizing a little bit like Constellation Software some nine years ago. That, wow, that's a fantastic company. I'm really happy that I found that. And I want to learn everything about it. So it is a very similar process. But I think the key thing, the two key things, you have to enjoy the process and you have to look at a lot of things if you want to be able to identify the rare masterpieces, both in the art

world and the corporate world. You also said something that really fascinated me when I interviewed my book, Richer Wise, Happier, where you, this didn't get into the book in the end, and I hope I'll get to write about it in my next book, if I ever dare to climb the mountain again. But you talked about the beauty of certain businesses, and we discussed Starbucks, for example, when you said Starbucks is a beautiful company. And then you talked to me about the fact that Buffett almost teared up and choked up when he talked about a company like Iscar, that there was a kind of beauty there. Can you talk about that idea of the beauty of certain businesses? Because it's such a, it's something that most of us don't really think about, but it's clearly there.

What are you seeing that also, in a sense, is paralleling what you're seeing in a work of art that has a beauty and a cleanness and a purity and a perfection to it? Well, it's not easy. Like I said a few minutes earlier, beauty is I know it when I see it. But I think the beauty usually is simple. Like you say, it's pure, but it's very simple. You look at it and very quickly you realize that you're in front of something special. And I think all those great companies have seen over the years, usually when I read there, when I look at the balance sheet, the number, it's a very simple business.

I mean, there's not too much things capitalize when you look at the cash flow statement. It's beautiful. I mean, you look at the net free cash flow a year. It's always throwing more cash than their spending, and the excess is either allocated to acquisition or dividend or start buybacks. But basically, it's a simple accounting. It's a simple business. They've got a simple balance sheet.

I remember the first year, I remember reading the auto report of Microsoft. I don't know which year, probably 1994. They had nothing on the balance sheet, excess cash, a lot of cash, but that was it. I mean, how easy it is to understand that you can see that everything that has to be expense is expense. Nothing is capitalized. And even after that, they make 25% net margin. So, I mean, this is the experience I have when I read that. I think it's great, it's beautiful, it's simple, it's easy to understand.

And that's what I want to focus. I want the companies that are easy to understand about clearly as something special and something simple. The problem is things change, or sometimes companies can be very strong, very beautiful for many years, but the dynamic of the industry changes or they make acquisition that turn out not as expected. So you have to accept that also, that contrary to a work of art that stays static, that stays always beautiful. Companies are a living organization. So it changed constantly.

So you have to accept that what can be beautiful in one year, five years can be quite different. So that's just the nature of investing. But I think that makes it also very interesting. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together

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Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. There's something about this idea of simplicity that's really profound to me, and I end up writing

a whole chapter about it in my book. And when I was reading through your shareholder letters over the last few days, this really leaped out at me. I jotted this down from your 2020 letter to shareholders, where you wrote, as always, our philosophy remains very simple. We own approximately 20 companies with solid balance sheets, conservative accounting, a durable competitive advantage, and a management team dedicated to shareholders. and of course, we're always cautious about the price that we're willing to pay.

And it really struck me as a beautiful example of the way that the best investors kind of simplify this extraordinarily complex game. And I just wondered if you could talk about this idea of simplicity, because we live in such a complicated world and we're also confused so much of the time that it seems like a kind of superpower to be able to reduce the game to this kind of simple essence. Yes. I think it goes back to when I started to invest. Probably it was Warren Buffett that took the baseball analogy

and used the example of Ted Williams. In this book called Science of Itting, he had this very systematic way of analyzing his batting average depending on where the ball was in the strike zone. So I think he subdivided the strike zone in 77 baseballs and calculated this batting average for every one of the 7-7 zones. And discovered that in some zones he was batting 400, but in some other zones he was batting 240.

So I said, well, if I want to maintain a good batting average, I think he did because I think his lifetime batting average is 344. Well, he had to be very disciplined and very selective. But the disadvantage of that approach is when the ball, is in the area of 240, you have to be disciplined enough not to swing, even though if it's in the strike zone. So when that happened, you have a strike called up against you. In the stock market, you don't have that. You can have a perfect ball in the middle of the plate, but you have the luxury of not swinging if you don't want to. You don't have any call strikes in the investment world.

And Warren Buffett said that's the most beautiful thing about investing. So by, by, you know, trying to simplify things, what we're trying to do really is to focus on those 400 zone in the strike zone where, you know, odds are very high that we'll have it if we swing. And I think that's just that. The more simple you get down to it when you follow or analyze a company, I think the odds of having good returns increase and you have the luxury of waiting for the perfect ball. But of course, if you never swing anything, you won't have much return. So that's the equivalent of being cash. So that's the trick. Sometimes you have to swing perhaps not perfect balls that are probably in the 280 or 190 zone.

And sometimes you have to accept that perhaps you'll have a little lower average because you couldn't get a perfect ball. But I think if you're very patient, you'll have your chances in your investment career to have great opportunities and creative opportunities, by definition, are simple. I mean, all the great investments, I think, were very simple businesses. You know, the valuation was reasonable, and I knew the manager was great. And sometimes when I get into a little more complicated things, it didn't turn out as well as expected.

And you have a short list, I think, not that shorter list. I remember reading that your firm tracks about 350 stocks. very closely. So you have this list of companies that you're just kind of tracking and waiting for the moment when they become cheap enough for you to buy? Yes. And also there's many of those 340 or 50 that you mentioned that we just want to follow with them very closely. And perhaps we're not 100% sure that there are kind of securities. We want to be sure that we understand the companies very well. And it's easier when you follow them very closely. But out of those 300 or so, there's probably 80 and 90 or perhaps 100 companies that really

it depends just on the price. If the price was low enough or the valuation was reasonable enough, we would invest. Yes. It's curious to me going back to what you were talking about with art. In a sense, this is one area where it's very hard to assess the intrinsic value of anything. seems somewhat arbitrary. And you're unlike the stocks that you're looking at where you can assess the intrinsic value of the business. With the art that you're acquiring, a lot of it is actually contemporary art. It's not past masters where you know from old masters that they've survived

the test of time of three or four hundred years. It almost seems like you're approaching art as a venture capitalist where, as you described it to me last time we spoke, you're looking to acquire artworks that will be considered important in 20 years. I'm throwing out a lot of half-baked thoughts here to you, but can you talk a little bit about that? Yes. I believe I have a similar approach to art. I don't think I'm a venture capitalist in art. Some, yes. Some young artists, I'll purchase the award because I think they're very interesting. I believe they've got a great future. But most of the art works I purchase are from artists that I believe, I may be wrong, but I believe that they already are important.

They already are great museums and have a singer and unique voice. And I'm pretty sure that in 50, 60 years, when we want to look at what are the most important artists of our time, we'll select those artists. I mean, for instance, I think James Dorell or Bill Viola, two great American artists, They're not that well known for the general public, but I mean, I don't think any museum's director would argue that they're important artists, one in the light art and the other in the video art. And I don't think any museum director would argue that in 50 years, they'll be considered important. Perhaps they're too contemporary to be known for the general public as Pablo Picasso or Jackson Polaro. luck. But I think in 20, 30, 40 years, they'll be considered probably close to be as important

as those great artists. You've obviously met some extraordinary people over the years, Francois, both in the investing world and in the art world. And I wanted to ask you about a couple of them. I mean, obviously, you went also to meet Peter Lynch, so I'd love to hear about that. But also Lou Simpson, who died earlier this year, was obviously an important force in your life. And you've also described meeting Count Giuseppe Panzer de Biumo, whose name I'm definitely mispronouncing, who you've described as the greatest collector of contemporary art in history, who I think you met back in 2009 in Italy. Could you talk about a couple of those people, Lou Simpson and this count,

who I think clearly have had a big effect on you and your way of seeing the world? Oh, yes. Well, Peter Lynch was the first money manager I read about and has been a model since then. Of course, he was very diversified. I think when he managed Magellan Fund, I think he owned 500 or 600 names. So it was a little different than my approach, but he did very, very well. He really had an incredible passion for finding great companies, young companies that were on the verge of having great years. of growth. And as for Lou, while Lou is one, well, was one of those great investors that

own very few securities, probably 10 or 12 or something about. And I always admire how he could summarize in one or two sentences, the strength of a business. And I remember it was because of him with Dessend Schwab. And he compared Charles Schwab company to Geico and basically saying that like Geico, Schwab had a structural advantage to all those big competitors. So he understood very, very profoundly the company is invested in and admired in a lot and he had lots of lessons to teach and like you say, very sadly he passed away the beginning of the year. As for the Camp Panza, yes, I met him in 2009. That was probably six months before he passed away.

And that was probably one of the most important meanings of my life because I met, like I said, I think the greatest contemporary art collector of all time. You know, he didn't have the resources of some billionaires today that can purchase almost anything they like and it's good for them. But yeah, limited resources. So he was very, very selective that could only purchase artists that were not yet very well, And he looked at everything. I mean, he knew almost all great artists or all important artists at the avant-garde in the 1950s, 60s, 70s, 80s.

And exactly as I described, he had the approach of looking at many, many, many artists, like if you're putting a lot of oysters and identify the great ones, finding those rare pearls. And I think he was great at it then because he was so passionate, because he knew all the history of art. I mean, in his house, he had all the books on the history of art starting probably with the Italian Renaissance. So he was knowledgeable, he was humble, he was curious, and he read everything, he could find out anything. And that's why it was so great. I think he had, I don't know, today a succession has managed it, but I think at some point he had probably 2,500 works of art.

Most of them important works of art. So it was, I think, and now many of them are in museums, but I think he had something truly Robert Reimer that he had purchased in the early years. So Donald Jodd was not known at all. So I would say he was a great art picker, probably the greatest, at the greatest of all time. So in a way, there's a common denominator with these people that you admire that I also see in your own approach of this extreme selectivity, whether it's with great art or great businesses,

obsessively learning, passionately learning about the subject, seeing a lot of companies, a lot of artists, and then being extremely selective in going after quality. is that a fair conclusion? Yes, because what is exceptional, by definition, is rare. So if you want to find them, you have to lift a lot of rods. You have to look for it. And if it's not something you enjoy with passion, you won't have the persistence, the persistence necessary to look everywhere.

But when you enjoy it, it's like watching baseball games. If you enjoy baseball and you're watching two or three baseball games a day, It's not work. You enjoy it. And after a while, you probably know all the great players. And you can identify which one you would put on your team if you were a team manager. I was thinking about this last night, François, because I, you know, I probably worked till about midnight or thereabouts, you know, reading your, you know, letter after letter of yours. And then I get up early this morning and I keep going with it.

And I don't know. It didn't seem to me like work. It's interesting. It's really engaging. I'm looking at this stuff. And I'm like, oh, that's how he thinks. That's what he's figured out. And it's very hard to fake that, like actually finding it inherently interesting.

So I'm as happy to do that research as I would be to watch Netflix. You know what I mean? That kind of, that feeling, I think this runs through every profession where I think you kind of, Munga talks about this, right? You have to find something where it doesn't really feel like work. Yeah, you have to enjoy it and have a passion for it. And I think you want to understand also the fundamental nature of, any field that you study.

And all the fields, either be philosophy or psychology or the arts or these sciences, they're complex fields. There's many layers. But if you enjoy them and you enjoy reading about them, slowly you'll learn. It's like kind of an osmosis process. Very slowly goes into your blood. And I think that's how you get.

passionate, then this passion is transformed it to something concrete. You can do something constructive with that interest by building an art collection or a portfolio of securities. I remember Monich Pabry, who I guess in some ways had a similar kind of predilection for science and engineering and the like. I think he studied electronic engineering. One said to me that when he started to study Buffett, he realized that Buffett had kind of of revealed the laws of investing and that they were as immutable as the laws of physics. And I was wondering if you had that same sense as you were studying investing, as someone who came from a scientific background, an engineering background, loved physics.

Did you have a sense that you were kind of cracking the code, that you were discovering these kind of laws of investing that are kind of immutable almost? Yes. When I started, I was very enthusiastic. I remember when I read the Bourne Buffett's letters. I really felt like I understood something that many people don't understand. And it always eludes me why many people don't really understand the fundamentals of equity investing. It always intrigues me why someone would sell its portfolio because it's down 25% and he fears that it will go down another 10%.

So he sells and hopes who to buy later. I don't understand that. I mean, I don't think it makes sense. The only explanation is that the thing they let their fears and emotions get the better of the rationality that probably they do possess. So probably one part of the investment success is not only knowing about the principles, but having the right behavior. Everyone has emotions. But I think you have to be rational when you decide to take actions. Emotions is one thing and actions and another thing.

So you shouldn't act on emotions. You always should act on reason and rationality. And I think that's the right behavior that Warren Buffett does explain, you know, over and over. I've been going to the meeting for, I don't know, 23 years. Every year, he explained the importance of having their right attitude toward market fluctuations. But it's hard because people are emotional. Sometimes they, even though they understand the concept of buy and hold and you should not sell in the downturn, some people, it's just very hard to resist the fears that they have to, they could lose money.

And I think in your book, you talked about my theory of the tribal gene. Yeah, I love that idea. Can you explain it? I thought it was such a beautiful insight. My idea is that as human beings, we have this gene that, you know, it's been passed on over thousands and thousands of years that I call it the tribal gene, that when the tribe is running one way, we have the urge of following the, tribe just because it's for our own security.

And that was the right thing to do, you know, 30,000 years ago when there was a big tiger coming in the village. So I think that tribal gene has been passed on and it's part of the DNA of most humans. But for some reason, my own personal theory that has no scientific basis at all except observations is that probably something five percent of human beings don't have that gene. They are able to go left when most of the tribe goes right. And I think I call it the absentee gene because it's missing, the missing gene. So I believe that great investors, great artists, great philosophers, great scientists don't have a tribal gene. For some reason,

probably just nature of odds being born that way. And because they have this missing gene, they're able to go left when everyone goes right. And I think if you have your genetic irritate, so you have the tribal gene, I think it's very hard to be the index because you won't be able to go right when everyone is going left and not succumb to a market pressure

when the stock market is down. So I think one part of the success of a great money manager is that they have this missing gene. You don't have the tribal gene. That's my theory from observation. I think it's the same thing with great artists and great thinkers and great builders. I certainly see it with writers as well. I mean, maybe I'm flattering myself.

I'm not saying that I'm a great writer, but I don't have the tribal gene. There's something profoundly independent about the way I live my life. And I think that's one reason why I'm drawn to certain investors. They're profoundly independent. And so I sort of saw the same thing in a lot of the great investors I've written about that they're straying from the hood and then they're solving these problems in an incredibly independent spirited way, trying to figure out how to live, how to invest, how to break the code of the markets. I mean, if I'm honest about it, the dumb thing about this is that I have that

characteristic, but I went into a profession that's crappily paid in comparison to investing. So you guys were wiser in, maybe I don't know, I'm being facetious, but you guys were, you guys were shrewder about channeling your non-tribal nature in a more profitable way than us writers. Well, I don't know about that, but I know for sure there's more to wealth. That's also having a happy life when you enjoy getting up in the morning and loving what you do. And if it is writing, that's the right choice. Of course, to go back to the missing gene, I think when you talk about great investors or great artists, great writers, great scientists, is really what you're saying, you're talking about people that have creativity.

They build something that wasn't there before. They go uncharted territories, uncharted path. And to be able to do that, you have to be able to go into a path that has not been drawn before. And I think you need the capacity to not follow the tribe to be able to go into uncharted territories. But that's the ingredient for creativity. It seems like part of it for you, Francois, as well, is that like people like Ben Graham and manga, you have this kind of polymatic tendency to be reading from all sorts of different fields and drawing connections that necessarily obvious.

So, you know, we talked before about you quoting from of its metamorphoses, but I remember you quoting from the Count of Monte Cristo, which is like this 1,400-page French novel set in. in the 19th century, but you'd also be studying history and psychology and philosophy and then you have your science background. Can you talk about why it's a benefit to have this kind of very polymatic approach to reading and gathering insights from all these different areas? Well, I do believe it's a benefit, but I don't think benefits are the main goal, to me at least. The main goal is I'm just passionate and interested.

I'm curious. I like to learn about history and philosophy and cultures and arts and science and how things work. I'm just interested and curious and passionate. But I do believe that the more fields you understand, the better you can understand as a whole the human race, human nature. And I think when you understand human nature, you have more tools to understand investing. Because corporations, they're not made of robots. They're made of human beings. And they act, even though it's a corporation, it's all system act as a group of human beings or the act.

And some do well, some less well. But in the end, it's really about understanding human beings. And like we talked about, I mean, the reason I invested in consolation software was because of Mark Leonard, I think he's a great human being. So if you want to understand human, I think you have to study all the fields that they are involved in. And I think was it Charlie Munger that said that a man with a hammer looks at every problem as a nail? Well, I think the more kind of the more different numbers of hammers you have, the more different type of nails you'll be able to dress. So I think that's the same thing. Yeah, I think he said to a man with a hammer, everything looks like a nail.

So it's man with a hammer syndrome is what you want to avoid. Yes. So I think that's the key thing. I think the more fields you understand, probably your understanding of human nature will, will increase. But again, I think the key factor there is it's not work. You have to do it because you enjoy it and you're curious and you want to learn about it because you won't really learn if you're not really passionate about it.

Yeah, I think you're totally right. I end up reading obsessively about all these weird esoteric things like sort of, you know, Tibetan Buddhism and the like or Kabbalah. And it's not because I'm trying to please anyone or get any particular payoff. But you end up, because you're looking in these weird areas, you end up coming up with these insights. So you're like, oh, I see the same thing in the stock market or in business or in literature. And so, yeah, you can't really fake the interest. But if you have the interest, if you harness some weird interest like that, it ends up yielding incredible benefits, I think.

One thing, Francois, before I let you go, I wanted to ask you about that I feel like you've figured something out that's really important. that a lot of people haven't figured out, which is you write a lot in your letters over the years about the importance of unwavering optimism. And I think it's a really interesting insight. You know, here we are in this very difficult period where we're getting hit with inflation and there's, you know, the market has been kind of melting down and, you know, there are fears of recession and there's war in Ukraine and the like. And it seems to me that one of your secret weapons is one that Sir John Templeton also had, which is that you're an unwavering optimist. And I wonder if you could talk about why you are and why you have this kind of

confidence in what you call the world of free enterprise. Yes, you're right. I think nothing was ever built on pessimism. I think you never make wise decision with fears. I think optimism is an important ingredient to success, not the only ingredient, but one important ingredient. I would say if you study human history and you go back many, many years in the past, I think the only conclusion is that you cannot be not amazed of how much we've improved over the last centuries. I mean, just in terms of technology, it's incredible the changes that we've made. And you have to understand what is the fountainhead of those improvements. And it's the human mind.

It's just inventing things, creating things, finding ways of doing things better always, very slowly. And not in a linear fashion, of course. There are some tough periods and some better periods. But over a long period of time, the improvement has been quite steady and quite impressive. I mean, the standard of living has probably doubled every 25 years in the last century, which is incredible. And so people worry about climate change, and they're right to be worried. And they worry that we won't have any oil and we'll have to find alternate energy. And I think they're right too.

not necessarily that we won't have any oil left, but I think we do have to find better sources of energy. But what will bring those changes, those improvements, either for energy or affixing climate changes, who will come from ideas and the human mind. And if you think about it, all the great progresses of the last century came from idea. Nothing really has changed our environment of nature and human nature, but we find ways to always improve things because we have this drive as human beings of never being satisfied. We always want to improve our situation.

And I think this drive is very powerful and gives me the feeling that the thing will always improve. There'll be, you know, there'll be tough periods. There'll be, you know, crisis and catastrophes. I accept that. And I've been accepting that for 30 years. And, you know, I've seen the recessions. I've seen terrorist attacks.

I've seen, you know, a lot of crises in many countries. But in the end, I think the human race always advances forward. And the right approach is to be optimistic that will find solutions to all of our problems. We have to put our minds to it, but I'm confident that the survival gene, this is probably the most, the strongest

gene we have, we want to survive, we want to move forward is a very, very great fuel for human investment. And pretty optimistic is going to continue. So I would say that in the next, I don't know if it's going to

be around 50 years, but I'm pretty sure if I'm around our standard of living will have increased by 300% and we'll live even better than we're living today. And I'm pretty confident that we'll find solutions to all our big problems like climate changes and inflation. I think part of what I like, Francois, that your optimism isn't a naive temperamental impulse that just infuses everything. It's built very much on a data-driven knowledge of the past.

And so remember, for example, reading in one of your letters, you talked about a tale of two sitters by Charles Dickens, and you said that since its publication in the 1850s, the percentage of people living in extreme poverty in the world has fallen from 87% to less than 10% today. And you mentioned that the average standard of living has increased by a factor of more than 25 times since the book was published in 1859. So you look at that and you think, this isn't naive, this has happened, this is our history, and think of all the terrible things that we've been through in that last 160 years since that book came out. And likewise, there's an extraordinary table that I think you originally drew up during the 2008-2009 financial crisis

and then published again updated in March 2020 at the initial height of the COVID pandemic, where you listed 14, I think, major corrections over the last, I think, 60 or so years, followed by these massive rebounds. And it was very striking to me again. It's a data-driven reason for optimism. You listed, for example, in I think 1973 to 74, the market fell something like 48% and then was followed by 106% gain over the next five years or so. And this process seems to have happened again and again.

Can you talk about that sense of just that the sun also rises, right? But here we are going through a difficult period. And yet, when you look back historically again and again, the sun also rises. Yes. It's the lesson that if you study human history, that's the lesson. And Amber I'm Lincoln said 150 years ago. So this two shall pass away. And Ben Graham said that this phrases summarize the whole human history.

Things passed. Crisis passed. And in the end, the human race continues to always improve things and moves forward. And I would say same thing with companies. Like we talked at the beginning of the interview, companies grow their earnings six, seven percent yearly and give a 2% dividend on average. So that's an 8 or 9% return for stock. So of course, when they go down 30, 40, 50%, there's every reason to believe that within 5 or 6 or 7 years, years, they'll make new records just because earnings continue to increase.

Increasing earnings at 7% annually double the whole earning in the U.S. every 10 years. So it makes sense that every 10 years, the SNP 500 or the Dow Jones Industrial average, doubles in value because earnings have doubled over the last 10 years. And that'll be a recession, of course, and earnings will go down in recession. but they'll rebound and eventually they'll make new records. So I think that's very reassuring to understand that because you know that there'll be tough times, but if you're patient, you'll be rewarded. It's beautiful because it means you have to understand these fundamental forces that are at play here,

like the power of intrinsic value growing, the power of productivity increasing, the power of human ingenuity to solve problems. But once you kind of understand that, you don't really need to be that naive to, to be optimistic, I suspect? No, I don't think I'm naive, but just realistic. That's just the nature of our human society. And there are some very bad things. I couldn't agree with more.

I mean, for everything you read about tragedies and terrible things that happen all over the world. But there's also great, great things, great accomplishment, great things that are a civilization have built over the years. And you have to look at that either also. Both are important. And in the end, I think the overall balance is that more good I've come out of the human history than that. You also have this box in all of your quarterly letters called Philosopher's Corner, where you often have these great quotes. And I particularly like this quote from Winston Churchill that you used, where you quote him saying,

continuous effort, not strength or intelligence, is the key to unlocking our potential. And it strikes me as a consistent thread in what you've been discussing, whether it's art collecting, saving to set up a museum one day in Montreal, which I hope you'll get to do to display all this wonderful art that you've been collecting, or building a collection of great businesses over the years. It seems like that kind of continuous effort, that perseverance, whether you look at an art collector like your Italian mentor or someone like Peter Lynch just turning over a million rocks to find good businesses. It seems like that prosaic ability just to keep plugging away, making continuous effort is kind of the secret to a lot of these things. Oh, yes. I believe to use a

bridge analogy, I think that persistence and patient trumps intelligence and strength. I mean, persistence, I think, is the key ingredient to all the great human achievement. And patience also, It's basically the same thing, but persistence plus patience equal a great reward. But you have to accept that you'll have some bumps in the road and you'll have some setbacks. But if you keep working hard, because you enjoy it, because you have great goals, eventually if you have the right approach, the right values, and you keep at it, I think eventually things will turn out well. Franco, I think I should let you go.

You've shown extreme patience in putting up with hours of my questions. So thank you so much. It's a pleasure, William. And I've learned a great deal from you over the years. And as I was looking over my notes this morning from our last interview and going over you at shareholder letters, it just made me think, wow, this guy's really figured out a lot of stuff. You're very kind, but don't worry, I still make lots of mistakes.

That's a thing I can approve. Join the club. But no, you've thought deeply about some really important things, and I'm looking forward to interviewing you more, I hope over the years to come and continuing to learn a great deal from you. So thank you very much. Well, thank you. Thank you very much. All right, folks, thanks so much for listening to this conversation with Francois Rochon. I hope you found it as interesting and enlightening as I did. I'll be back very soon with some fantastic guests, including a legendary investor named Joel Tillinghast, who manages about $70 billion.

Peter Lynch, who hired Tillinghastep Fidelity 36 years ago, has said that he's one of the greatest and most successful stock pickers of all time. So, I hope you'll join me then. In the meantime, please feel free to follow me on Twitter at William Green 72 and do let me know how you're liking the podcast. I'm always delighted to hear from you. Until then, take care and stay well. Thank you for listening to TIP.

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