We Study Billionaires - The Investor’s Podcast Network - TIP626: Intelligent & Rational Long-Term Investing w/ François Rochon

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Franchois Rochon to discuss how he's managed to vastly outperform the market over the past 30 years. Since he started the Rochon Global Portfolio in 1993, his annual returns net of fees have been 13.6% versus just 9.2% for the benchmark. Francois's investment approach is firmly rooted in three principles, patience, humility, and rationality, all of which are discussed in-de-end, during this conversation. During this chat, Franchois and I also cover what led him to work

Starting point is 00:00:35 with John Philip Bouchard in the early days of Javerney Capital, the foundational investment principles at Javerney, how he realized so early in his career that you can't predict the stock market, the tribal gene that sets 5% of investors apart from the rest, how we can be mentally prepared for declines in the stock market, his biggest investment mistakes, how Franchois views Berkshire Hathaway's role in his portfolio given Berkshire's massive size, how Franchois assesses the strength of a brand, his view on the valuation of today's market, what lights his passion for investing, his favorite investment books, and so much more. This is a very rare conversation with a phenomenal investor, so I really think you're going to enjoy this one. With that, let's dive right into today's

Starting point is 00:01:20 episode with Francois Rochon. Celebrating 10 years, you're listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Fink. Welcome to the Investors Podcast. I'm your host, Clay Fink, and today it's such an honor to be joined by Franchois

Starting point is 00:01:58 Roshan, who's the founder and president of Giverney Capital, Franchois. It's such a pleasure to be joined by you today. Thank you for joining us. Well, thank you for inviting. So over the past couple of weeks, I had the great pleasure of reviewing your 2023 annual letter and many of your other previous letters, and I highly recommend them to everyone tuning in. I wanted to highlight Franchois's returns here at the start. He started Gavarney Capital in 1998, and he's had a very successful track record. Since he started It is Rochon Global Portfolio in 1993. His annual returns net of fees have been 13.6% versus just 9.2% for his benchmark. But Franchois, it wasn't until 2002 you hired your first employee, Jean-Philip Beauchard.

Starting point is 00:02:45 You might have to correct me on the pronunciation there. But I was curious if we could start by you telling the story of how you met him and the qualities you saw in him that made you want to make him the first hire for good. I think I met Jean-Philippe in 2000. So he wrote me an email. He had read an article. I had written a website. And he told me there was a fan of Warren Buffett. They liked my call on, and we had lunch and became friends.

Starting point is 00:03:16 And, you know, you wanted to work with me as a Bernie Capital. So it was such a small operation at the beginning. I mean, I can't even pay a salary for myself. I cannot hire anybody. But he was very patient. And after two years of, you know, exchanging ideas and, you know, just being friends, he started at two days a week and then three days a week. And one year later, in 2003, he started full time.

Starting point is 00:03:41 And that's when we took an office in old Montreal. And really the firm really started to grow pretty fast starting from there. So it took a while. So it was a very slow process. And JP became vice president. He was also the first one that became a partner, a part owner of the firm. And since then, it's been a great partnership and a great friendship. Yeah.

Starting point is 00:04:10 And I believe you said the word patience there. And in studying your background, that's one thing that really just stuck out to me with you and studying Giverney Capital. It's just this slow growth and is slow, sustainable. And not only in just studying like the types of companies you own, but studying the firm itself, you just see that patience is just embedded in everything you do. And you can just see that you being kind of the one-man shop for a decade or so before bringing more people on board and just focusing on that very long-term approach. Yeah, I think patience is the most important quality.

Starting point is 00:04:46 I think in general in life, but more even so in the investment business. I think that's the most important quote by far. Do you think that JP and yourself had fairly similar personalities, or do you think there were different strengths you guys had that complimented each other over the years? Different strength. I mean, he's a much more people-oriented person than I am. He's very, very good with people.

Starting point is 00:05:13 And, you know, you can spend an afternoon there, ma'er, and meet three people and have three friends at the end of the evening. So, I mean, very few people, I think, are that good establishing a relationship. And it's very sincere. He's a very sincere person. And he really enjoy talking with people. And he loves business. He loves the business world.

Starting point is 00:05:37 He loves to talk to entrepreneurs about the company they founded and what was the key to the success. He's always in the, you want to learn about the investors and managers and business. people. Me, I'm more a boat person. I like to read. I like to sit down and look at my Excel file and try to, you know, do some modeling on where a company can grow and be in the next five years. So I'm much more comfortable in my office than, you know, outside of the office as JP is. Since you mentioned reading, you had an engineering background before discovering the work of Peter Lynch and Warren Buffett and eventually mailing Buffett and getting letters directly sent to you and then just committing to that life of investing and eventually starting Governey Capital.

Starting point is 00:06:29 And I thought it was interesting how you have written about Governe's competitive advantages. The three you wrote were patience, humility, and rationality. So for those in the audience who might not be familiar with you, maybe you could outline sort of the broader investment principles that are embedded in this rationality to help paint a picture for this conversation. Yeah, I mean, Warren Buffett once said that if you think you need an IQ of 180 to succeed in investment world, you're getting it wrong because you don't. It's really simple mathematical skills and understanding accounting and understanding businesses.

Starting point is 00:07:10 But it's not a question of IQ or you. even how many hours you work or the resources, the financial resources you may have, because when you think about it, all the big institutions have billions of dollars to help them obtain results. And usually they have difficulties to be the index. So if it's not IQ and work and money, what is it? I think it's human qualities, behavior. And I think the most important quality, yes, patience, of course, but in terms of approaching the investment world, I think it's humility. You have to know what you can understand and what you can't.

Starting point is 00:07:48 You have to accept, I believe, that you cannot predict the stock market or the economy where interest rates are going. And it takes a lot of your ability to be able to do that because you have the pressure, a lot of pressure from clients and other investors, to have an opinion where the market is going or what the economy will do next year or so. But I think the right, the truth is that nobody really knows what the economy will do the next few quarters or what the stock market will do next to a quarter or a year or so. So I think you have to recognize that and say, well, I won't, you know, spend time on things that are not productive and focus on spending my time on what is useful and productive, which is to find companies that you can understand are within your circle of understanding and competence. and finding 20 or source securities

Starting point is 00:08:39 and buy them at attractive level and hold them many, many years. I think that's the right recipe. But to be able to get to there, I think you have to be humble. And humble, it's never really, you're never really there because you have always have to improve that quality.

Starting point is 00:08:57 And the paradox a little bit with the stock market world is that you have to be humble, but at the same time, you have to be able to have confidence in your judgment. Because when you're buying something that is not proper and you're making, let's hope so, an intelligent investment, you have to have confidence in your analysis and judgment, whatever other investors say,

Starting point is 00:09:19 even more so when it's an investment that is out of favor for some reason. So we have to have confidence in your judgment, you know, state of course. So we have to find the right balance and having that confidence that is fundamental enough that the best of the best, results and at the same time being able to always stay humble and always be in the having your an open mind new facts and things that perhaps doesn't make you happy when that it happens or your company but you have to face the truth and say well this investment I purchased two three years ago it's not working out so let's

Starting point is 00:09:56 sell and buy something else but you have to be able to be able to do that so it's a combination of being humble and being rational also you have to look at facts and try to be as emotionless as possible. So that's a combination of those three qualities, being a rational investor, being a patient investor, always being humble. Yes, I really loved how you really simplified your competitive advantages to those three qualities. And I have a lot of questions related to many of your comments there.

Starting point is 00:10:28 But I wanted to start by sharing one of my favorite parts from your letter in 2023. So you wrote very few economists or market strategists would have predicted what happened in 2023. First, the quote unquote most predicted recession in history has not yet materialized. The stock market did very well against all odds. And from the first days of my investing career, I decided not to try to predict the stock market and or the economy. Therefore, I have always been nearly 100% invested at all times.

Starting point is 00:11:00 In the world of stock market predictions, agnosticism is a source of more wealth creation than dogmatism. I was curious if you could speak more to how you came to this conclusion so early in your investing career of not trying to predict where the stock market is going to go. Because even 30 years later into this investing journey is something that just so many people want to try and do. Yes, I was, you could say I was lucky because I started by reading, you know, in 1992, 1993. I started to read Peter Lynch's one up on Wall Street and then Intelligent Investor by Graham and John Tableton's book and Philip Fisher's, Warren Buffett's letters.

Starting point is 00:11:43 So all those great investors, they all add something, well, I would say two things in common. First, they were value investors, so they would look at stocks as partnership of businesses with an intrinsic value when you could buy such securities in the stock markets sometimes. discount to the intrinsic value. And the second thing, all those great investors never thought they could predict the stock market.

Starting point is 00:12:08 So they bought undervalued securities. They could not really pinpoint the best time to buy them. And all those securities for the long run, and then, you know, in the end, they did well. And it's not because they were able to predict the exact perfect time to buy and sell securities or enter or exit the stock market. it's really because they act like investors, business owners. And if you look at the history of that Graham, Talton, Lidge, Fisher, Buffett, they have very different kind of securities.

Starting point is 00:12:41 They were very different. If you look at their portfolio, Piel Lynch, I think, at 500 stocks in this portfolio. And, you know, most years Warren Buffett, that probably 90% of the portfolio in 10 stocks. But they have those two things in common. So right from the start when I got interested in the stock market, I was inspired by those masters.

Starting point is 00:13:04 And very quickly, I decided I would use their philosophy and fundamental ideas to invests. And one very important idea was not to take the stock market. So I started being 100% invested right from the start that, you know, we're here 30 years later. I've never met an investor that over many years good results in predicting the stock market. So I've been confirmed in that belief. And I've heard hundreds and hundreds of predictions. And I think most of them just using a coin toss probably at similar results. I like how you mentioned that a lot of those investors invested in different types of companies

Starting point is 00:13:53 are invested in somewhat different types of ways. And I think for you, you really had this focus on quality. It seems like that sort of endured over much, if not all of your career. So it's studying these great investors and using this principle of rationality of K. What makes most sense to me? And it's interesting to how so many people, they sort of went through a similar transition as Buffett of buying these optically cheap stocks and transitioning more to quality. Were you just really inspired by like Peter Lynch and Philip Fitchie? Sure. How did you sort of come to that approach? Well, of course, Philip Pischer was a big fan of buying a few carefully selected companies on that many, many years and not decades.

Starting point is 00:14:37 I think probably I don't know exactly when I read that, but I think I read a quotation by Charlie Bunger and said that in the end, usually their return of the portfolio will closely resemble the performance of the companies themselves. many, many years. And I remember in the early 90s, Horne Luffet has this table or calculation he called owner's earnings. So for the public securities in the portfolio, he would count what's the earnings that those securities had a year and it would compare it to the previous year. So in 1996, I decided that I would do that for the portfolio. I would compare the performance of all the securities combined, so the increase in the earnings per share of the whole. companies, I would compare that number to the previous year, so you have the growth in O'R's earnings of those companies, and then I would use that growth number and compare

Starting point is 00:15:34 it to the performance of the portfolio. And I started that in 96, and we're here in the last annual letter at 2023, so we're talking about 28 years, 28 full years. The companies we have all over the years have grown the intrinsic value, if you combine a dividend with that about 12.9% annually and the performance of the stock themselves, if you exclude the currency movements including dividend, was 12.9%. So it's an incredible, it cannot be a random event. It's really the stock market really reflects over many, many years the performance of the companies you own. Of course, one important part of that is you have to be prudent not to overpay for the

Starting point is 00:16:20 the companies you purchase because you can be right on the growth in the owner's earnings, but if there's a reduction in the P ratio after a few years, you could perhaps have a lower return for your portfolio. But I always try to be very prudent and not to overpay. I'm not saying that I always look for bargains, but I try to pay a fair price so that if everything goes well, the intrinsic return will be reflected in the portfolio performance in the stock market. So that's what I want. I want to have a kind of, I would want my portfolio to be kind of in the stock market,

Starting point is 00:16:57 to be kind of a mirror. In your letter, you also shared, you mentioned one of my favorite movies. It's the founder, which tells the story of Ray Kroc and the McDonald's brothers in the early days of their gross story. And I absolutely loved the example you shared. It was an example of you studying the expansion of McDonald's and Ray Kroc in the, the late 1960s. I was curious if you could share what you learned with the audience here. I don't remember the name of the president. Was it Arizon born or something like that?

Starting point is 00:17:29 And you see it in the movie. He had the brilliant idea of adding a real estate component to the McDonald's corporation. It did very well. And it was a brilliant idea and transformed the growth model of Eric Rock for McDonald's. And after watching the movie, said, well, it's funny because I never really heard about that story. So I read about Arizonborn and discovered that, you know, was it 1968 or something like that? He left the company and because he didn't agree with Rick Rock. So I tried to read more about that and, you know, he wanted to pause the growth in new restaurants because he was worried there would be a recession and Rick Rock insisted on continuing to open new restaurants. And it turned out that even if whatever would have happened

Starting point is 00:18:18 and probably in terms of recession or not, it was such a fantastic growth. On those years, it would just clone it, clone and clone those restaurants over the U.S. And I think the right thing was to continue to open new restaurants, even if in the short term at least there were some prospects of a recession. So I think, yeah, the Ray Crowd, the right approach, I think, well, let's ignore, let's not be affected by our, opinions on the economy and just focus on growing our business and we have that incredible business

Starting point is 00:18:54 that we can expand incredibly it turns out. So I thought, well, that's one reason more because we could find many other examples that you have to put aside any opinions you have on the economy and just focusing on the business and the gross prospects that that business can have. And I had pulled the numbers that you shared in your letter. It was around 9.5.000. In 1967, McDonald's, they had $51 million in sales, and they executed on the growth strategy you mentioned. And five years later, sales grew to $385 million. And then by 10 years later, $1.4 billion.

Starting point is 00:19:33 So it's just like that focus on the long term and just executing great businesses executing on their strategy pales in comparison to trying to time when the best time to execute on it really is. Yeah. And the great thing, yeah, I had in my archives, the whole Valley Line of McDonald's, so I could find the old figures of the 60s and 70s. And I'm a big fan of Valley Line. And before I, you know, I started to read them on a weekly basis. I even wanted to read about past issues.

Starting point is 00:20:03 So I went to the library when I was young. And all those great companies, I wanted to study that I made photocopies of all the ValleyLine. I put them in an archive and, you know, never know when you want to study the history of, an old company or even a company how they did a few years in the past. And I think the example of McDonald was so fascinating. I was helped in that example by having my old better life at McDonald's. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:24:41 Back to the show. So one of the things I can really appreciate about that, too, is just tuning out a lot of the noise, you know, turning to things like Value Line and turning to these timeless principles instead of this timely noise that's just constantly chattering. And it reminds me of a quote you had from your 2013 letter. you wrote that most people are wrong most of the time. I was curious if you could talk more about this idea and how it might tie into filtering out so much of the noise in the world.

Starting point is 00:25:15 Well, it's been 10 years. I don't exactly remember what I wrote, but I think it wasn't that letter. I talk about the importance of what I call the missing G. So my theory, because I have not proven it scientifically, But my theory is that most human are born with a tribal gene in their DNA. Just how our species works. I mean, that gene has been transmitted for generations because, you know, 10,000 years ago

Starting point is 00:25:48 when we lived in huts and small villages and there was a tiger that would come to the villages and people would start running, well, the intelligent thing was not to ask too much question and start running yourself because you don't want to be the launch of the tiger. So the urge to follow the tribe has been genetically embedded in our DDAA just for probably useful reason, at least 10,000 years ago. And most human, most normal human have that gene. My theory is that probably some 5% of human beings don't have that G, for whatever reason.

Starting point is 00:26:26 The RDDNA is not totally as accurate. as others, we could say that. I don't know if it's an handicap or let's say that just don't have that cheat. So I call it the missing gene. And those people are able to not follow the tribe whenever it's running. When everyone's going right, they are able to go on the left. So the problem is not that people are doing the wrong thing. It's just that most people are doing the same thing.

Starting point is 00:26:50 They're just following the tribe. Most of them on an unconscious level, probably. And so when the market is going down, a lot of people will be selling. And, you know, it's just because they have the tribal gene. They cannot help themselves. And when a stock is very popular and they want to buy it. So, but you have that 5% of the population that probably they can become artists, writers, scientists, and have novel ideas.

Starting point is 00:27:17 They are able to go into a new path of discovery, whatever field they are. So in the investment world, those 5% are able to buy something that everyone is selling. They are able to invest in the stock market when everyone is depressed and panicking. And they're able to not succumb to the latest fad, whatever it may be. So when everyone wants to invest in intelligence, artificial intelligence, or the internet or whatever fashion there is, you know, they are immune to this idea of following the tribe. So I think those 5% are able to generate the superior returns. they are able to do different from the others.

Starting point is 00:28:00 And we're talking about John Tapleton, and they said that the first ingredient is you want to do better than the others, you have to do something different from the others. So following the tribe isn't the way to do it if you want to have superior returns. So that was my theory, and I still think that's the right approach.

Starting point is 00:28:20 So like I said at the beginning, it's not a question of intelligence and hard work and resources. First thing, you have to be. be able to do something different. So you have to be, uh, to have that misin gene or you need not to have the tribal gene. That's probably the first ingredient to have some odds of doing better than the index. Yeah. I mean, I couldn't agree more really. It just sounds so obvious that if you want different results from others, you need to do things differently than others, but there's just that's such a strong

Starting point is 00:28:55 temptation to just follow the crowd. And I'd like to think that some people can kind of learn their way to getting to that 5% because, you know, many people haven't been exposed to the likes of Buffett, Munger, and these ideas of why people fall prey to these types of things and might make us recognize some of our biases and why we're naturally tend to, you know, be our own worst enemies in investing. Yeah, I think you can learn, but you have to be in the 5% that can do things differently because if not even if you know all all the rules are the investment principles when the time comes you know I've met my share of great businessmen that aren't able to go against the current and they'll

Starting point is 00:29:42 do the wrong thing in the wrong time and it's like I said it's almost on an unconscious level so they don't really realize it so they really think that they're doing the right thing and they're trying to do intelligent thing it's just The investment activity is really a relative to the others activity. So if you have a return of 7 or 8% and the average is 7.8%. It's nice. It's okay. But if you want to be able to earn 10, 12 or more, then you need something different. I think this ties well into one of your favorite mongerisms that I'm going to share here.

Starting point is 00:30:20 If you're not willing to react with equanimity to a market price decline of 50%, two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get. Why is this your favorite mongerism? And I'm curious if any stocks come to mind that you've painfully had to hold through one or multiple 50% declines in their share prices. Well, I think most of the stocks have all over the years at some point, probably this stock dropped 50%. That happens almost all stock. It happened to Berture. I think that way, I think. I think Charlie said that in the years he owned it, the dappet three times. So, I mean, that happens to almost any stocks.

Starting point is 00:31:01 So probably in that quote, it was talking about the general stock market. And since I started to invest, so 30 years ago, there was two times the market went down 50%. First one was in 2001, 2002. Close to 50% press 49. He is a devouture. But in 2008 and 9, I think from top tick to bottom ticket, went down 56%. So, the 2008-9 was probably the biggest bear market since 1974. And it was a tough period.

Starting point is 00:31:32 I mean, at some point, you know, we could be worried about what happened to the economy. But I was finding a lot of opportunities, and the companies we own, I was confident they would make it true. And they had good balance sheet. They were still profitable. And the valuation was as low as I ever seen, at least in the years I started to invest. So I remember I was an interview in a newspaper, I think it was February 2009, and I said, well, in French it rhymes. I called it the occasion of generation, but in English it doesn't rhyme.

Starting point is 00:32:08 So it's the opportunity or generation. So I said, well, that's the best opportunity we have in this generation to invest in the stock market, just because valuation are so low. But most of the people I talked to didn't share my enthusiasm. I remember I even went on TV and I said that it was a great time to invest and was very excited and, you know, the person that was interviewed me, I looked like me like I was a portion. Everyone was panicking and worried and I was there saying, almost with a smile, this is a great time to invest.

Starting point is 00:32:39 So, and, you know, I talked to some other investors, other managers I knew and some of them shared my enthusiasm, but many of them were worried and they would say all the same thing. Yes, stocks are cheap. but they will be cheaper soon. It will continue to fall. And said, well, but if you think of the idea of Charlie, that you have to stay calm and rational, and accept there will be big troughs of the stock market from time to time,

Starting point is 00:33:09 well, when it happens, you're almost ready for it because you know it's going to happen sometime. And I was ready for it. I didn't know when it would happen. But I thought in my lifetime, though, it's going to happen a few times. so I better be prepared mentally. So when I happened, I just said, well, let's focus on finding what's the best opportunities, the best tasks we can purchase.

Starting point is 00:33:30 And yeah, it did well. The portfolio did well from then. Well, the next time we have a major drop, I know who to invite on the show and help spread some optimism with the audience. I'm curious, zooming back to the great financial crisis, turning back to that tribal gene. It's so easy to say you shouldn't sell a great company. when the stock price goes down. But I think the difficult part might be when you see the fundamentals

Starting point is 00:33:56 deteriorating or maybe potentially slowing down. Was assessing businesses during that time difficult for you? Or were there any companies you thought were great where you're just like, you know, you have to part ways with this. And maybe in hindsight it ended up being a mistake. Can you talk more about managing a portfolio through a period like that where you have these major short-term headwinds, but you have that longer-term focus as a backdrop? Well, I think one question you have to ask yourself is to look at all your companies, the portfolio, and see if there's any one, any company that, you know, there is some odds they won't make it. Usually they will be either non-profitable or have lots of debt.

Starting point is 00:34:36 So I don't think we had a lot of companies in the portfolio that was really in danger of going on. We owned a few banks and I think, you know, I think we had Wells Fargo, did okay, but Bank of the Ozards also did okay. I remember that I think it was in February 2009, M&T Bank went to, I think it was $36. And I knew they see you very well of Wellbers, and I thought, this is a bargain. And this is a great company.

Starting point is 00:35:06 I know that there's a solid bank. They'll make it through the Great Recession. And I wanted to buy shares, so I had to sell something else. And I think if my memory serves me well, we sold Walgreens. Walgreens, it's a great company. We just didn't see as much growth prospects as it had before. But, you know, Wolverine was also cheap when we sold it.

Starting point is 00:35:29 But I think with some insight, it was a good idea to sell Walgreens to buy an empty bank. I think we also bought Omnicom. The big ad agency, I think we paid eight times earnings for Omnicom. and they had a good dividend. It has not, we sold it a few years later. It had done okay, but it does not crown that's fast. But to me, when I bought it in 2009, I mean, the downside was very low, I think, like trading at eight times earning.

Starting point is 00:35:57 It's very rare that you buy a solid boot chip company at those levels. So they had a good balance sheet and buying back shares. But basically, I just hold on to the stars I already own. I mean, some tough period like Carmax, I think earnings went down in 2008, or Mooc Industries, I think also at that time I owned, we sold it a few years later. But Mooc, I really liked the CEO and he would do intelligent things and find ways to improve the profitability of the company and make it through the financial crisis. and Moab did, so did CarMax, and so did M&T Bank in Wells Fargo. So, I mean, I think Disney at some point in 2009,

Starting point is 00:36:45 traded at 8 to 9 times earnings. You won't see such a great company. While in those years, it was a little, the fundamentals were better than they are today, but I mean, it was a fantastic company managed by Bob Hager, so you could buy it at 8 or 9 times earning. So that was a great, great opportunity. You've talked a lot about letting your winners run and cutting your losers or watering the flowers and cutting the weeds, as Peter Lynch would say.

Starting point is 00:37:11 I'm sure many people also really appreciate you sharing your biggest mistakes in your letters. Each year you highlight what you call your podium of errors. And Novo Nordisk is a Danish pharmaceutical company. It's the world leader in developing drugs for diabetes. And it received the on honorary 2023 gold medal for your podium of errors. I was curious if you could talk about this mistake and why it made gold for you. I don't remember exactly when I started to follow. No. Probably it was in 98 or something about it. So at least 25 years ago. And it was already then a leader in Davenoese Rock. And that was a great company. And, you know, I didn't. In those years, I was probably not ready to pay a P ratio 20 times. So I just followed it from. from a distance but really in 2014 I went to Copenhagen

Starting point is 00:38:05 visited the headquarters of the company and read much more about the history of the company and the business and their drugs and I remember saying to myself wow this is one of the finest companies in the world and I think it for some reason their business model is a little different than the Merit and the Pfizer's Bristol Myers quid and all the others I think they add a very strong niche in the the diabetes market. And so I knew in 2014 it was a great company, but like I said in the annual later,

Starting point is 00:38:37 the stock was trading, no remember exactly, but 20, 22 times, and that was a whole high. But the P ratio stayed high. And very recently, they started to commercialize Ozepik. Now, it was not a 10 or 11, and 12% row anymore. Now, it's a 20% roar because it's been a huge success,

Starting point is 00:38:58 I think today is 37 times. So it's been a huge winner and you know it wasn't right in my you know circle of understanding I understood the business very well I like the culture of the company for some superficial reason and I didn't invest. I started to make the mistake in 98 but you know in 2014 I think I had learned much more about it and I was I would have been able to to make a a sound decision, I did that that was, I believe, the biggest mistake, at least for that year, because I've made other mistakes, something even worse. And in sharing your mistakes, it seems like you agree with Buffett that your biggest mistakes are mistakes of omission rather than mistakes of commission, where you find the novo notice

Starting point is 00:39:48 of the world and not buy them instead of buying a company and it ended up not working out. Is that a fair assessment? Oh, yeah, sure. And that's the nature of the investment world. If you have one stock in a portfolio that does, I don't know, a thousand percent over eight or nine years, even if you have two or three companies that go under, you lose everything.

Starting point is 00:40:11 You'll do okay because the ones that increase a thousand percent compensate by far the losers you'll have. But to be able to have to have a, return it once there's 1,000% in the stock, well, you have to keep it. Because if you sell it after a 500% increase, you'll miss the next double. So, and you know, I'm talking about 1,000% but there's some securities in my list of mistakes. It's probably 10,000% is a company at Starbucks has started 30 years ago.

Starting point is 00:40:46 I think it's up probably 20,000. Yeah, I would say 20,000% since the first day I looked at it. or faxed research or yeah I mean one of the horrible mistakes of the last years is O'Reilly Auto Part because I bought O'Reilly I think at $20 in 2004 I went to visit a company misery and I thought was a fantastic company purchased at $20 but very sadly we sold it umz that he remembered a price probably something 300 or five years ago today it's a thousand dollar stock so if we had owned it and and Keith did all those years, 20 years, that made 50 times of money.

Starting point is 00:41:28 So, yes, we did well because we probably made 15, 20 times of money, but we could have done much more. And it's still a great company today. So these are a very costly mistake. I had a few losers of 50% or 60% of over the years, but these are very, very small cost compared with, you know, having a stock not bought that has a thousand to thousand percent. And it's worse when you understand the company,

Starting point is 00:41:58 because you can use some example of some semiconductor company that you didn't really understand and went out a thousand percent. But when it's a company that you understood and you know it was a great business and you didn't purchase just because p-racial signal high, that's where it is the mistake. Not missing some company that are way outside of our circle of competence. You also highlighted in your letter that you have the very ambitious long-term objective of achieving a return of 5% higher than your benchmark before applying fees. And historically, your benchmark's grown by 9.2% and your fund before fees is grown by 14.7%, which represents 5.5% spread.

Starting point is 00:42:42 And if we just broadly assume that the overall market or your benchmark goes at, say, 9%, then you're shooting for, around 14% at least on average per year. In light of this, I couldn't help but notice Berkshire Hathaway. Presumably, it's another one of your big winners and it's also one of your larger holdings. I don't know the exact percentage, but Berkshire, I looked at how much their earnings have grown over the past five years. And I came out to around 12.5%. And that's with a 40% increase in earnings in 2021. And that's pulling the adjusted numbers from your letters. And I was curious. to get your take, given Berkshire's size, and given your ambitious objective of 5% alpha, if this is a stock you've considered trimming or potentially cutting to add to more attractive

Starting point is 00:43:33 opportunities? Well, first, you're right to use the objective, the adjective, ambitious, because it is ambitious. It is not only ambitious. It's very, very ambitious. I mean, the odds are way against me. So, but, you know, I'll try it. For sure, so I think you have to have high objectives in lives and, you know, ambitious targets. So I'll certainly try to attain it. And you're right also that by owning Berkshire, it's going to be hard to have, let's see, 14% annual return. I think it's going to be probably closer to 10.

Starting point is 00:44:09 In the last few years, probably 11, 12. But as the company continues to grow and be bigger, it's not going to be hard for them to grow up probably more than 10% a year. So it took me a problem because I first bought it in 2000, so I've been only in 24 years. I remember when I bought it, the first time was in March 2000 and the height of the tech bubble. When the NASDAQ was 5,000 then, you know, a lot of people were saying that Buffett was out of it. And I think we purchased Bursa close book value then. So it was a, it did okay. It was a good investment.

Starting point is 00:44:46 Perhaps not as great as I was. hoping for. Although Warren Buffett has been writing for many, many years, that it would be hard to sustain the growth, the past. So I was aware of the problem of the size, but it probably took me out to act on it. And just a few years ago, I started to trim it. Because I think for many years, it was an 8 or 9% percent, 10% weight. But when they acquired BNSF, 2009, And we exchanged, we owned the BNSF in the portfolio, and we exchanged a share tax-free exchange BNSF for shares of Berkshire, so the size of Berkshire increased again.

Starting point is 00:45:30 So it took me a while to probably try and begin to trim it. And we did a few years ago. Today I think it's a 7.5% weight in the portfolio. And as we find other ideas that we believe will do better, we probably will continue to slowly trim it. slowly trim it and buy something else. Just because, as you explain, the size of pressure is so huge, which is very hard to compound, very high rates.

Starting point is 00:46:00 But to me, that's almost a riskless investment. There's no really any risk in investment. I'm sure it's probably the most solid company in the world. So I'll accept perhaps a lower return because I have this very big confidence. that the risk is almost zero. So that probably was one reason we continue to own it. But you're right. If I want to attain those very ambitious objective,

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Starting point is 00:50:03 And that was a company that your firm acquired shares in. 2022 and that conversation is going to be released after this one. Related to Lulu Lemon, you wrote, we've been following the company since IPO in 2007 and believed that the company has an exceptional brand. Now, this company has started to get on more people's radars because the, especially value investors, as the share price has recently declined. And I find Lulu Lemon somewhat interesting because there's a lot of value in their brand. And brands are a really qualitative factor and at times they can be significantly impacted in unforeseen ways. Just one example that sort of comes to mind is Chipotle in the

Starting point is 00:50:47 issues they went through in 2015 and that was, Chipotle was actually one of your other podium of errors that you highlighted in your letter. So for a company like Lulu Lemon, I was curious if you could talk about how you go about assessing the durability and the strength of a brand. Well, you're right. It's not It's not objective. There is some qualitative analysis you have to do and you have to have a judgment, how solid is the brand.

Starting point is 00:51:15 I think Warren Buffett always used the expression, consumer franchise. So in the mind of consumers, name equals quality and you're ready to pay a higher price. So it can be the Hershey chocolate bars or the Wrigley gum or, of course, Coca-Cola drinks. consumers when they have a pleasant experience with the product and they have a positive view of the

Starting point is 00:51:41 product and the name, well, that's franchise value. I think, in my opinion, Luman has that kind of brand. I wouldn't go as far as saying it's as strong as a Louis Vuitton, for instance, but I think it's a very strong brand. And I think they found a very interesting niche in the yoga market and they have expanded a little bit beyond that. I think the people love to shop at Lulman. And one good example of the strength of the brand is when they started to sell their product online. Most companies or retailers that started to sell online

Starting point is 00:52:21 usually at lower margins with the direct to consumer sales. But in the case of Lulamon, it was at least as profitable as in the stores. I think even the margins will lower. And very quickly, I think direct to consumers, I think it's 40, 45% of sales. So it's been a huge success for them. And the important part is that the margins were able to be maintained. So to me, it's a lot about the strength of the franchise.

Starting point is 00:52:53 And if you just look at the balance sheet, it's a fantastic business. And they've grown very fast. In the U.S., the growth poverty slowly down a little bit because it's a bigger company and used to, but internationally, they're growing very fast. I don't know exactly remember, but the last quarter, I think, sells internationally outside the Uttar, they grew 54%. So they're doing very, very well outside North America. They're very optimistic about their Chinese business, and so far it's been a good success.

Starting point is 00:53:26 So to me, this, you know, I don't want to do a pawn here, but this company has likes to grow. I've heard you state that with each of your purchases, you try to purchase with a 50% discount to the intrinsic value, taking Ben Graham's approach of the margin of safety to heart. And one of the terms you use with relations to these exceptional businesses is calling them masterpieces because of your interest in art. And I just love that phrase in thinking about. many of these great companies. But what I find interesting is that sometimes we can kind of fool ourselves when calculating the intrinsic value and making a spreadsheet say whatever we wanted to say because we found a masterpiece. So there's this balance of recognizing the brilliance in a company, but also being realistic and being rational in our assumptions of what the intrinsic value may be.

Starting point is 00:54:22 So maybe you could use Lulu Lemon or maybe just more broadly talk more about estimating the intrinsic value and having a proper margin of safety. Yes, I was trained as a scientist, so I graduated as an engineer. So I was trained to look at numbers. And I like to build first years. I tried to build very precise model of cat plate intrinsic value. But as the real world happened in front of my eyes, I realized that those models most of the time I was far from what really happened. So I said, well, I have to probably think this a little better.

Starting point is 00:55:02 And I remember reading many years ago. I think Ben Graham went to congressional earrings about the start market. Not exactly short a year. I think it was 1955. And he talked about value investing. and the person would ask Ben Graham, how would you value that company? He said, well, it's probably between $40 and $60 a share. And the person said, well, it's not very precise.

Starting point is 00:55:28 He said, you're right, but if the stock trades at 30 or 70, it's useful. And I still think that that's the right approach. You have to accept that it's not a precise science. You have to have a general idea what a company is worth. and accepting that there is lots of uncertainties because we're talking about the future. When you're valuing company, ideally you want to discount future cash flows at present value, but you don't really know the future then what will be those cash tolls. Obviously, the results has to be an incident.

Starting point is 00:56:00 So you have to recognize that and have kind of a broad spectrum of results, and that's where the beauty of the stock market helps. So if you believe a stock has worked $50, give you. will take $15, $20. Well, if you can acquire it at $25 or $30, you'll do okay, even if you're all wrong on the calculation you've made. So I remember when we purchased a little amount, I think we paid $300 a share in 2022. Well, I think it went up to $500, but today it's probably $350 or 60, so it has done okay,

Starting point is 00:56:39 but not that well because the P ratio decrease of lightly. But I remember I had a model where I thought the company would be five years later or so in 2027. And my target was that in 2027, the stock would trade at $600. So my buying limit was $300 or lower. Not very long period, but for a few weeks in 2022, he went to $300 a lower. So we purchase it. So that's how we're approaching. So again, the stock is down these days.

Starting point is 00:57:14 I believe it's probably an opportunity to, well, at least hold on to our shares, but perhaps even at some point increase it. I talk with a lot of just investors, you know, going to the Berkshire meeting, chatting with various people. And something I hear quite often is that the market's expensive. And when I look back at a lot of high quality businesses over the past 18 months or so, like their charts are just up into the right for quite a big number of them. So what do you say to people who, you know, get this margin of safety, buying high quality companies and being patient in them?

Starting point is 00:57:50 But they're having trouble sort of, you know, finding the right price or getting into the market. What would you say to someone like that that might be listening? Well, there's two, three things you could argue. Well, the first argument, which is just a reality thing. I think the S&P 500 is trading at about 21 times this year's estimate, which is on the high side of history. Historically, the S&P probably has traded 16 times, between 15 and 17 times on average. So, world on the high side of history. So of course, you have to be a little more prudent and more selective.

Starting point is 00:58:24 But this market reminds me in 1999 2000. I think at some point in the early 2000, the P ratio of the SNP went up to 26 times. So it's not as high today. But if you look at probably those famous, magnificent 7,000, I think the average P ratio of those seven stocks is about 35 times earnings and they make up 29% of the index. So if you would remove those seven names, which are great companies, I mean, very fantastic businesses, I mean Amazon, Microsoft, the Net-up, they're great companies. But if you would look at the rest of the market, those 493 stocks, the P ratio is probably

Starting point is 00:59:07 on average 16 or 17 times. So I would argue that the market looks a little high, but it's this, those valuation are pretty much polarized in a few outstanding growth companies, but probably if you would take a more broad group of companies, the valuation is probably not as that high. But, you know, Charlie said that the world has wise up. Investors have realized that owning great companies are worth paid for. If you look at Costco, it's a fantastic company, we own it. for I think five years, many years ago. But the P ratio is, what, 44 or 45 times? This is a fantastic business.

Starting point is 00:59:48 But if you pay 44 or 45 times, I think it could take some years to have a decent return starting from that price. So it really depends. If you focus on the top names of the SMP 500, the market is pretty expensive. If you look at those fantastic growth companies, like Costco or Copart, for instance.

Starting point is 01:00:12 I think Copart is a fantastic business, we don't know, but I've been following it for many, many years. Thank you trades in 37 times earnings. So if you look at those companies, of course, valuation look high in general, but you can find companies that are outside the radar or are not as popular or not views as strong. And you can find some good companies, great companies,

Starting point is 01:00:39 trading at the more reasonable valuation again. Turning back to humility, one of your comments in a previous interview that really stuck with me is that earlier in your investing journey, you were overconfident in your stock picks back then. And now you've learned either one way or another that a bit more diversification than what you initially thought is appropriate. So we'll call it around 20 names today rather than maybe 10, maybe even less back then. I was curious if you could speak more to one reason I find this so interesting is hearing it, you know, from one of the greats.

Starting point is 01:01:20 Just an amazing investor has been in it 30 years. He's saying I'm humble enough to know that 10 companies is a little bit too concentrated for me. So I'm curious if you could speak to that overconfidence that you hopefully overcame. You're right. I was probably more focused when I was young when I started. But I want to add that I know some very, very good investors. I would not like to be named. I know that pretty well, and they do have 10 million.

Starting point is 01:01:47 They have results, and they have probably some volatility from one quarter to the other, but they don't mind. So they're long-term investors. They have great clients that share the investment horizon, so they're doing well. Personally, I'm more comfortable with 20, 25. and 25 names, just different ways of thinking things. And I don't think one is better than the other. I think that at some point you have to be focused enough

Starting point is 01:02:18 so that you do have some odds of the index. I don't know the exact number, but if you have 50 or 60 names, I think it becomes very hard to be the index just because you're too diversified. So you have to find the right balance of having diversification enough so that if you make one or two mistakes,

Starting point is 01:02:36 it doesn't hurt the portfolio too much. And also at the same time, you want to be focused enough so that you do have some other averages. So to me, that number is between 20 and 25. But you're right, in the first years, I was more concentrated, and probably just from experience. I do remember one of the first big stocks I had that did very well was some microsystem.

Starting point is 01:03:01 And I remember buying it in 1994. My memory serves me well, the stock was trading, I think, at $24. They were earning more than $2 per share, so the stock was trading at 10 times earnings. And it was a growth of companies, so it was growing probably 20% a year. And at the same time, they had a very strong balance sheet, just cash, no debt, and the cash was about $12 per share. So you paid $12 for more than $2.00. So you, in fact, paid something like five times earnings.

Starting point is 01:03:35 for a very strong growth company. So, how about some microsystem that it did very well, and it became a large part of the portfolio in the first years of 5,95, 96. And at some point, I think it traded at 20 times earnings. I said, well, it's way too expensive, and I sold it. And after I sold it, I think it was probably in 1997. I think the stock increased by five-fold in two years.

Starting point is 01:04:01 So it went to almost 100 times earning at some point. So it shows out of my money. market can have ups and downs to be very optimistic about a business and paying a hundred times earnings five years before that was trading at less than five times so that's one very interesting point about the stock market but the other interesting point is that Sun Microsystem doesn't really exist anymore I think it was acquired at a very low-price iron goal at some point I don't remember when but the many years later so Sun was a great opportunity in 1994, but with insight three years later, it doesn't exist anymore. So I've learned

Starting point is 01:04:40 from that. I mean, if you, I want to be a long-term owner and a long-term shareholder, just buying great company at a very low valuation is not enough because you have to be sure, well, at least the confident that the business model of the business is durable. They have a competitive advantage that can be sustained for many, many years. That's very, very. hard to do but when you think about it O'Reilly AutoPars today is the same business as it was 30 years ago they've grown big number but or Starbucks it's basically the same business as it was 30 years ago so that should enter in your investment process not only balance sheet the quality of the business but

Starting point is 01:05:26 the durability of the business I mean that's one thing I've learned when I look back 30 years. Many companies that were leaders 30 years ago, some of them don't even exist anymore. It's having that humility and having that experience that thanks can change rapidly over five years or so. The first example you gave where the company ended up being a dud over the long run, you know, had you bought it and just hung on to it, ended up not being a great investment. So it's just recognizing, yeah, one of those in a 10 stock portfolio really makes a And some microsystem are very strong business. They have strong products.

Starting point is 01:06:05 They have these Unix computers. And they have, in some ways, I think they have invented the Java language. And I think the CEO was great. So they did nothing really wrong. It's just that it's a competitive world. And it changes. And in technology, it can change pretty fast. And if you just miss one detour at some point, you're out of the game.

Starting point is 01:06:26 And, I mean, look at Intel for so many years. It was an incredible business. when Andy Grohl was the CEO, I mean, it was one of the best businesses in the world. The last few years has been tougher for that. So it's just the nature of the business wall, and I think it's even more true in the technology. As a host of the show, I'm somewhat in awe by how many people in our audience are massive readers. So many people tell me how many of the books that they read that we mentioned here on the show. And I know you're in the same camp of that.

Starting point is 01:06:59 you love reading, you love learning. And I was curious if you could share a book that's really made an impact on you outside of the ones many people are probably familiar with, like Lynch's books, The Intelligent Investor and such. Maybe it's a book you've read recently or maybe it's a book you've continued to revisit over the years. It's really made a big impact on you. Well, there's many. I remember reading the autobiography of John Paul Getty, How to Be Rich. And that's an interesting title because it didn't write how to get rich, us to be rich. And that's a very interesting book. And there's a chapter in it on the stock market and how to accrue to the stock market.

Starting point is 01:07:39 And it was written many years ago. And in that example, I think he talks about the correction of 1962. Dow Jones went out 20 percent, I think, in some point in 1960. We had thought about all the companies he could find. I think in the book he also discusses the fact that he was a... to buy oil stocks on Wall Street at a fraction of what they would be worth if you would try to build a new oil rig in Texas. It was much cheaper to buy them at discounted value in Wall Street.

Starting point is 01:08:14 So when I read that, and I read that many years ago, I thought it was a very good book because this was not necessarily a money manager. really business map, but also it was a very intelligent stock investor addition to being a great builder of enterprises. There's many interesting book. One that kind of, we don't hear about it anymore, but was written in the early 80s was the money masters by John Train. That was a very good book. I really enjoyed it, and I reread that many times, and there's a very good profile on Warren Buffett and John Templeton. And when he wrote that, Warren Buffett was not that well-known.

Starting point is 01:08:58 So it's very, very, I reread that book a few years ago. And it's as interesting as when I first read it. And people don't really talk about the John Trains book, but he wrote many interesting books. Because I think after that he wrote a follow-up called the New Money Masters, and I think Peter Lynch is on that version. And I think he wrote a book called The Craft of Investing, probably in the early 90s.

Starting point is 01:09:24 Very good book, too. So John Train was a very good writer on the stock market. It's been a while since someone talked to me about these books, but they're still very, very good. I don't know if probably you can find them still in libraries or bookstores, but I think they're worth rereading. And I mentioned earlier that I was quite impressed by your patience over the 30 years. tenure, you know, just embracing that slow, patient, long-term growth in the early stages and then

Starting point is 01:09:58 reaping the rewards much, much later. And I was thinking about, you know, kind of the recipe to putting together such a successful long-term journey. And I thought about the passion that you've talked about and the importance of really enjoying what you do and being passionate about what you do. And it's interesting because not the vast majority of people would see reading 10Ks and annual reports is not the most fun thing in the world. So I was curious what it is about the game of investing that really sparks that intense passion within you. I think I like to find, and you talk about masterpiece in art. There's probably masterpieces and this is awesome. I like the idea of finding the few.

Starting point is 01:10:47 gems, a few outstanding creation, human creation, because a work of art, a painting by Jackson Pollock, or a business that was built by Robert Wilmer's, Mitybank, for instance. These are gems. They're very rare that you find such fantastic businesses that has endured decades and not so well. I think I'm interesting in finding excellence and I have the same emotion when I discover a new company I didn't know that is very interesting, an incredible track record. It's the same emotion as when I discover a new artist. I see an exhibition in a museum. I see a great artist and wow, you know, excited and I want to learn more, I want to read more, I want to see more of his work. It's the same emotion. So really I'm attracted to extra.

Starting point is 01:11:47 And by definition, the exceptional is rare. So we have to, I think it was people who are that they should want to find pearls. You have to open a lot of oysters. So it's the same thing in finding great artists or great companies. You have to look at a lot of them. And you can find those rare outstanding ones. And I think that's a very, very stimulating quest to find outstanding either artists or artists or

Starting point is 01:12:17 corporation. It's exciting. And when you do find them, it's like finding a pearl and oyster. You've opened 200 oysters and you know, your hands are very, you're, are very tired and the next one's going to be too painful to open, so you want to

Starting point is 01:12:34 stop, but you want to find a pearl. So you continue and that's a very similar emotion. And it's an endless quest. There's always new companies. And Sometimes even companies change. They change for the better sometimes, sometimes for worse,

Starting point is 01:12:50 but sometimes they do change for the better. So company you've been following for many years was okay, but not that great. And something happens in new management, a new product. And suddenly the company is blossoming. That's exciting when you find that. I think that's what's really kept being interesting in that activity. Wonderful. Well, Francois, thank you for sharing so many gems during this conversation.

Starting point is 01:13:16 today. I really appreciate the opportunity to chat with you, and I know the audience really appreciates you sharing all your knowledge here. I'll be sure to get all those books linked in the show notes for those interested as well in checking those out. So, Franchois, before I let you go, how about you give a handoff for people if they'd like to learn more about you or learn more about Giverney Capital? Where can they go? Well, they can go to our website, gerventicapital.com. And also, So some people are curious about where the name Giverny comes from. It's a small village north of Paris where Claude Monet had this fantastic garden, flowers, and water lilies, and it was a subject of the paintings of the last few decades of the great master.

Starting point is 01:14:02 And you can visit the Foundation Claude Maney at Giverney. It's a fantastic, fantastic visit. I would encourage anyone. But you can at least go to the website of the Foundation Clodd-Money and the Foundation. look at those beautiful flowers and all the ladies that had as created years ago. So the origin of Givini Capital, the name comes from that visit I did in 1990, Giverney when I was very young and still one of the most beautiful place I visited in the world. How old were you when you visited it?

Starting point is 01:14:37 I just had graduated as an engineer, so I was 21 years old. Amazing. And you still had that passion for, art back then as well. Yeah, I was already, I went to the museum that city in Paris, I think, when it was 18 years old. This is when I discovered Touliné's painting and been interesting in art since then. Wonderful. Well, we'll close it out there. Thank you so much, Franchois. I really appreciate the opportunity. Wow, that was my honor. Thank you very much. Thank you for listening to TIP. Make sure to follow. We Study Billioners.

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We Study Billionaires - The Investor’s Podcast Network - TIP626: Intelligent & Rational Long-Term Investing w/ François Rochon

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