#204 François Rochon – Episode Notes
François Rochon, is the president and portfolio manager of Giverny Capital.
François founded Giverny on his investment philosophy of owning outstanding companies for the long term and that philosophy has helped him in having one of the best investing track records there is.
If you invested $100,000 with François in 1993 that same $100,000 would be worth about $4.5 million today. But if you invested that same $100,000 only in the market you’d have just over $1 million. François is truly a legend in the investment world.
In this episode François discusses his investment principles, his approach to lifelong learning, dealing with your failures and how art is at the center of his life!
Key Takeaways
François Rochon’s engineering and arts background has largely contributed to his investing success, and his unconventional investing approach.
● “In the investment world, you want to be able to think on your own and not follow blindly the other investors”
The three pillars of his company, Giverny Capital, are Humility, Patience, and Rationality
● “Have the right human qualities to apply to your investing principles”
François believes that successful independent thinkers are missing the ‘tribal gene’ which is what pulls most people to “follow the herd.”
3:07 Giverny Gardens Trip 1990
In 1990 François had just finished studying engineering and had a big passion for arts, and so he went to Giverny, France in the summer where famous French painter Claude Monet lived.
François was looking for a big project for his life, and during that trip decided that he wanted to build a big art museum in Montreal. He knew that he needed to be financially successful for a project of that size, which led him to learning about stocks.
5:23 François’ letter to Warren Buffet
In 1993 François wrote Warren Buffet a letter explaining to him that he was interested in investing. Warren responded by sending him a big package for François to study.
After that, Francois’s vision of the stock market changed overnight
He learned from Warren Buffet:
● “If you were rational, ethical, and thorough in your analysis, you could do very well”
7:43 Engineering Education Applied to Investments
François explains how his engineering background helped his stock investments in two ways:
#1 → His engineering education encouraged students to learn outside of the classroom which taught François how to learn by himself
#2 → Studying engineering has given him a rational mind
8:57 Engineering vs. Stocks
François explains that as an engineer, you learn that things are not precise and you need a big margin of safety. Early on in engineering, he learned about the significance of numbers which applies to stock investing.
● “You understand that too much precision means nothing in stocks”
11:20 Outside Industries Influencing François’ Investing
François credits the art world because in both industries he is drawn towards uniqueness.
In art, François prefers masterpieces with unique characteristics and in investing he likes to see if companies have a uniqueness about them (business model, product, culture, etc)
Outside of art, François learned that he can apply the importance of margin of safety in engineering and psychology in stock investing as well.
● “You cannot remove the emotions but you can choose to act beyond them”
12:59 Understanding Personal Biases in Investment Decisions
François describes that investing is not an exact science, it’s understanding human nature
The most important person you want to understand in making an investment decision is yourself.
● “We’re the ones that put the barriers in front of rationality”
François has a philosophy he calls the “white paper approach” that he does every year. This approach requires him to look at any company or situation with fresh new eyes, without biases
● “If I were to build the portfolio again, would I buy all the same securities again?”
16:20 The Missing Gene
François believes that one important quality that successful people have is what he calls a ‘missing gene’.
● “ A large part of success is almost a new gene”
He believes that the majority of human beings have a tribal gene that makes them follow the tribe. The people that don’t have the tribal gene have stronger odds of overperforming.
● “In the investment world, you want to be able to think on your own and not follow blindly other investors”
18:59 Independent Thinking
François believes that independent thinkers are born with it.
When it comes to François’ investing, he sticks to quality in terms of quantity when it comes to buying companies for his portfolio
Instead of having too many portfolios
● “Be very focused on finding the best opportunities out there”
22:54 François’ Investment Style
François focuses on companies that have high profitability, low debt, and are typically very conservative companies.
● “The more you read or know about a company it helps to increase the odds of success”
He wants earnings to be understated and that the company has a long term view.
Quality is linked to the culture, which is why it’s so important to focus on great management
● “When you’re buying shares, you’re buying the future”
25:11 Disney Investment – 2005
François has read interviews with Robert Iger, and felt he was the right person because of the changes Disney needed to make at the time.
The most important change François felt was for Disney to have a better long term relationship with Pixar and Bob Iger had acquired Pixar.
Bob Iger focused on quality content before distributions, which is what ultimately led to Francois’ investment.
➤ Bob Iger 2005 Disney Letter to Shareholders
30:30 Everyday Practice
François wants to learn something new everyday. He dives into the quality of humility, and how this improves his appetite for learning and uncovers his biases.
● “The greatest quality as an investor, and a human being in general, is being humble”
32:55 Giverny Capital’s Competitive Advantage
François’s company, Giverny Capital, is built on 3 principles:
Humility, Patience, Rationality
He explains that it is important to have the right human qualities to apply to your investing principles.
● “The way you look at investments has to change and evolve but the fundamental principles have to stay the same”
34:07 Wisdom to Break Rules
François’ criterion for investing is that companies must be profitable. However, he provides Sean with an example in an Expedia investment that made him rethink this criteria.
François saw a possible success in Expedia before they were profitable, but because of this uncertainty he invested only a couple of shares in Expedia. He now wishes he invested more and saw the future potential for the company.
● “Sometimes you have to break your own rules”
36:03 Humility
Practicing and learning humility is a life-long process, François says.
Humility is to force yourself at saying, “I could improve”
François recommends taking time to sit down and think about if you are on the right path, and if you realize that you could change some things here and there, then you learn from those.
● “It’s not the most important thing to be right, but it’s important to improve yourself”
38:52 What François Could Improve
François didn’t see the potential in some companies a few years ago because of their high valuation.
It struck him that a lot of companies that he thought 5-10 years ago were way too expensive, in the end turn out to be great investments (ex: Amazon)
François has learned that he shouldn’t be too quick to put a company in the ‘too hard’ pile because the valuation is high.
● “Sometimes a few outstanding companies are worth the high valuation”
41:11 Patience
François claims that the best way to learn patience is to be impatient and see how painful it is. He has made the mistake too many times of being too impatient, and now looks at companies with a future forward mindset. (ex: 5 year projection)
● “The greatest attitude when investing in the stock market is focusing on the business, not the stock price”
François refers back to the Warren Buffet saying,
● “You should buy a stock that if the stock market was closed for 10 years, you would be happy to own”
43:45 Rationality
As the third principle of Giverny Capital, François explains the importance of being rational while also being creative and open-minded.
Find the right balance between an engineering mind and an artistic mind.
Too much of one can distort your results
● “Use the best of both ways of looking at the world”
47:17 Reflecting On His Success
François thinks a big part of his success is that he doesn’t have the tribal gene.
He says that in order to be successful, you have to accept that you will make mistakes and permit yourself to make mistakes.
The first step is accepting that you will make mistakes
● “Similar to an artist, some canvases turn out good and some don’t, just like investments”
51:46 François’ Recommendations
- Common Stocks And Uncommon Profits by Philip Fisher
- One Up On Wall Street by Peter Lynch
- Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger by Peter Kaufman
- Of Permanent Value by Andrew Kilpatrick
56:05 Residual Benefit of ‘Best Mistakes’
François includes a section in his annual letter of the 3 Best Mistakes of the Year
● “Was it really a mistake? Perhaps not”
Although he says this is a long process, he tries to be very honest with himself and rethink the way he sees securities.
● “I force myself every year to spend a few days thinking about the big mistakes of the last year and did I learn from it.”
1:00:23 Measuring Skill vs. Luck
François’ understanding of probability assures him that good luck is not sustainable.
● “I like to think it’s skill and hard work, but sometimes it can be luck”
Time is what he uses to distinguish between skill and luck.
● “Skill is really in the process in the way you invest, when you have a very sound approach the odds of success are good”
1:04:12 Hardest Part About His Job
François describes how challenging it is to rethink the process of investing after having a few tough years, especially with pressure to perform well for clients.
● “Sometimes you underperform for no reason, and sometimes there’s good reason for the underperformance”
François makes sure to distinguish if it is the right time to be patient or the right time to accept you’ve made mistakes
● “Focus on what’s happening to the companies, not the stock”
1:06:36 Wrap Up Questions
If François could sit down for an interview with anyone dead or alive, who would it be?
If François could own one painting what would it be?
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