The Art of Investing – François Rochon

François Rochon speaks about key lessons from his multiple decades experience in value investing. At Montrusco, Francois managed US accounts totaling more than $250 million. In December 1998, Francois founded Giverny Capital in order to offer investment management services to clients based on his investment philosophy of owning outstanding companies for the long term.

“Investing in stocks is an art, not a science and people who’ve been trained to rigidly quantify everything has a big disadvantage” – Peter Lynch

Mastering an Art Form

  • Choose an art form you truly love
  • Study the art’s masters
  • As a painter’s paint, an investor invests
  • Develop your own unique style
  • Have an independent mind
  • Always strive for improvements

How Not to Beat the Market

  • Think the same way (with the same time horizon) as other investors
  • Own lots of companies so you don’t differ much from the average
  • Believe you are “smarter” than others and can predict the market

How to Beat the Market

  • To be able to think for yourself
  • Own a few selected companies
  • Develop the right behaviours (rationality, humility, and patience)

Stock Selection Process

Financial Strength:

  • ROE > 15%
  • EPS Growth > 10%
  • Dept /profit ratio < 4x

Business Model:

  • Market leader
  • Competitive advantages
  • Low cyclicality

Management Team:

  • High level of ownership
  • Constructive acquisitions
  • Good capital allocation

Market Valuation:

  • 5 years valuation model
  • Try to purchase at half the estimated value in 5 years (15% annual report)

Rule of 3:

  • 1 year out of 3, the market will decline by 10% or so
  • 1 stock purchased out of 3 will not perform as expected
  • 1 year out of 3, we will underperform the index

Other Notes

  • Idea is to find masterpieces: rare and unique. Examples include Apple, McDonald, Starbucks, Ikea, Geico
  • Own a moat: protecting your castle from invaders by having uniqueness in product, service and/or corporate culture
  • 3 things to look for in market valuation: competitive advantages, financial strengths, management
  • Do not believe we can predict macro economic events, so we don’t predict it
  • Try not to be affected when others make more than us in stocks
  • Try to be impervious to stock market quotations in the short term
  • Accept that we don’t know the future and focus on what we can have some control over (own process)
  • Patience is not the ability to wait, but the ability to keep a good attitude while waiting
  • The “good attitude” is to focus on what is happening to the company, not to the stock
  • Important to recognize when to keep your shares because the fundamentals warrant it, and when to get out when you’re wrong
  • Advise to young investors is to pick stocks that you can understand easily. Very difficult to value stocks with a broad brush and it’s difficult to understand at the level you need to in order to invest in them
  • Only sell when: 1) Made a mistake and value of the stock is not what as expected, 2) Nature of the business has changed
  • Most costly decisions are not usually the stocks that were bought, but the missed opportunities in the market