#204 François Rochon – Transcript

Sean Delaney: François, welcome to What Got You There. How are you doing today?

François Rochon: I’m doing great. What about you? 

Sean: I’m doing very well. I’m very much looking forward to this conversation. You’re one of those thinkers I’ve learned a lot from, so I’m hoping the listeners can as well, and I think a good jumping off point could be what appears to be two inflection points in your career, and the first one I like to talk about is a trip you took to Giverny Gardens back in 1990. Can you talk about this?

François: Yes, I had just finished studying engineering and I had a big passion for arts, so I wasn’t sure exactly what that was going to do with my life now that the school was over. So that summer I went to France and went to visit Giverny, which is the city, well village, where Claude Monet lived a big chunk of his life, and I think from 1883 to 1926 or probably most of his life. And this is a beautiful place where he had gardens with water lilies and beautiful flowers, and beautiful house too. When I went there, I was really, really impressed and was looking for some kind of big project for my life, and I have this vision of building a similar setting somewhere in my hometown of Montreal where there would be beautiful gardens, a place where this beauty and harmony and also arts. So I said, “Well, I could build a museum within a beautiful surrounding,” and of course the next thing was I’ll need to get rich. So I should try to find probably something different from engineering or even being a painter because at that time I did also, as a hobby, as a painter. So I always had an interest in the stock market, and so I decided to study that domain a little more because I had such big projects.

Sean: Yeah, certainly making a little money there wouldn’t hurt being able to recreate the gardens there, but I’d venture to say, but potentially the second big thing was in 1993 when you wrote a letter to Mr. Warren Buffet. Can you talk about this and the reasoning why you wrote him that letter?

François: Yeah, so when I got back to Montreal in 1990, I decided that I wanted to get rich. So I tried on my own to study how to invest in the stock markets. I read books about investing, I also read books on accounting, and I tried all sorts of things including technical analysis of investing in stock markets. And I didn’t feel that it made a lot of sense, and at some point, I read an article in a newspaper and they talked about Warren Buffett and never had heard of him. So pretty quickly, I wrote him a letter, so probably early ‘93, and I told him I was interested in investing, and I would like to read his Annual Letters, so that was before the internet. So he sent me a big package in the mail of all of the Annual Letters since I think 1977. And I read that, and had a vision of investing in the stock market change overnight, so I realized that it was not gambling, it was not something that was totally without logic. If you were rational, analytical and very prudent and thorough in your analysis, you could do very well. So I started to apply Warren Buffett’s teaching to my investment, and not only did the results get much better, but also it made much more sense than before. 

Sean: Did you reimburse Warren for the postage to send those letters?

François: Sorry?

Sean: Did you reimburse Warren Buffet for the cost of postage?

François: No, but perhaps I should.

Little bit of interest.

Sean: Yeah, no, I love these two moments ’cause I think they really coalesce and show what you’ve been able to do and accomplish, and kind of the starting off point. A few minutes ago you were mentioning that you were trained as an engineer, and I would just love to know what this type of training, how that helped you become a better investor, having that background?

François: Probably, I would say it helped me in two ways. The first one… Well, probably it was enrolling in a polytechnic school in Montreal, and the way I learned about engineering was really true self. I was really self-thought, although I had teachers and everything, most of the learning was done through reading books. So I learned to learn at a university. And the second part, I would say is that I think you have a much more rational mind,for analysis and looking at probabilities and how the world functions then, in my opinion, when you study finance, so I have a mind that was, I think, better prepared for the investment world. 

Sean: You mentioned having that mind, so I’d really be intrigued to know about then as an engineer, you’re used to being so precise on things, and the imprecise nature of investing is something totally different, where 30, 35, 40%, even 50% of the time, you may be wrong. How do you deal with those two opposing forces?

François: Well, I don’t think there’s anything that is ambivalent there. I think as an engineer, you learn that things are not precise and that you need a big margin of safety, and you also learn very early about the significance of numbers. So I’m always amazed when you read that the return of a stock a year is 12.39%. I mean,stocks fluctuate sometimes by one or two percent a day, so what does the 0.39% really mean? So I think you understand that too much precision means nothing when you think you have a good scientific mind. And I think it helps you to look at things in a more realistic way.

Sean: So not having too much precision there, it almost sounds like you’re an artist in the investing world. Is that how you view yourself?

François: I like to think that I’ve taken… I like to think I’m always improving also the craft, but I’ve taken some good things from many different activities. Will it be finance or accounting, or the arts, or engineering or history, or psychology, I would say also. You can use a lot of good lessons from all those human activities and try to synthesize kind of a global mind that has a lot of ways of seeing the world.

Sean: Yeah, I love the multidisciplinary approach there, learning to be a better investor, and I know someone that you’ve bred is Peter Lynch, and one of the great quotes that he said was, looking back on his career, he learned much more studying history and philosophy than statistics, and you mentioned a few different disciplines there, which ones have been the big drivers for you that have had the biggest impact outside of investing that you use to become a better investor?

François: Probably on the art world, it’s really… I think the great artists and they’re great artworks have something I would say, almost unique, very original, but also a unique character. And when I look at companies, I try to find companies that have some kind of a uniqueness and their business model or product or service, or even in the management and culture of the company. So as masterpieces have something unique, great companies also have some unique character. And I think also… So I learned a lot, well, I talk alot about the margin of safety in the engineering profession, but also in the psychology world. I think you have to understand all the biases that human emotions put in front of rational thoughts, and you have to be aware of those biases and try to… I mean always say you cannot remove the emotion, but you can choose to act beyond them. And I think when you understand that, it really helps also in the investment world.

Sean: Yeah, you mentioned understanding the biases, and I feel like those have really come to popular light the past few years, talking about mental models and things along that line. I’d love to know what your process is like for better understanding the biases and then being able to understand then while making investment decisions? Is it very methodical for you or is it just something in a skill you’ve learned over time?

François: Well, it’s nothing really… It’s not an exact science, it’s really trying to understand human nature and probably the most important person you want to understand is yourself, so usually we’re the one that put the barriers in front of rationality. But a simple example would be, you buy a stock and you think very highly of the company and management, and things do not turn out exactly as hoped for. Sometimes it’s hard to convince yourself well you’ve made a mistake and you have to move… You have to be able to almost look at any company or a situation with fresh new eyes, so without biases, and that’s not easy to do. I force myself sometimes to, I call it a white paper, so I took… It’s not a real paper, but if I would build the portfolio again, from scratch, would I buy all the same securities, and sometimes it helps to see well if there are one or two that you’re not really sure, well perhaps there’s a good reason for that reaction and to look into it.

Sean: That white paper approach, how often are you doing that, going back and analyzing all of the purchases you currently have in your portfolio?

François: Yeah, you don’t wanna do that every week, but probably once a year.

Sean: Interesting. 

François: So you sit down and just try to… If I would start a portfolio today from scratch, would I have exactly the same names?

Sean: Is this something that you do every year, in addition to a few other higher level analysis of both yourself personally in the business overall?

François: Well, it’s not in the business plan, but I try to do it on a regular basis, being about once a year. Just sit down and think about it, everything and do you need to make some changes? And usually it helps you look at things from a new perspective.

And I think if you do it too much too often, I don’t think it’s as useful, but once a year is probably a good number.

Sean: Yeah, you bring up a great point, doing it too much, you might over-analyze and get in your own head there. You’ve brought up a few interesting points just about being able to think differently and understand unique things, and I know being a successful investor, you have to have that unconventional nature, and I just know for you, that’s one of your fundamental principles. So I’d love to hear how you go about being unconventional so you can have better returns?

François: You know it’s a little strange because I wrote a few years ago in one of the annular, don’t remember if it was 2013, but six or seven years ago, I said that I think one important quality, and I’m not sure it’s a quality, but something that was needed to be able to over-perform was what I called the missing gene. Basically think human being as a gene, a tribal gene that makes them follow the tribe, so when all the humans are running on the left side, I don’t know the exact number, but I would say 95% of people will follow the crowd and the tribe, and probably something 5% of people are able to go on the right side if they believe that’s the right way to go. And those people, for some reason don’t have the tribal gene, so it’s almost a defect because they should get it because it’s something that’s been passed for the last 20,000 years because we were chased by tigers, elephants or anything that we were hunting. But when I believe you don’t have that gene, the odds of over-performing are much better. So I think a large part of success is almost from the start your genes. Of course, I don’t have any proof of that, it’s just my own theory about that.

I always wonder why so many people aren’t able to be contrarian. I think it’s because the human body hasthat gene in it, because it’s probably for… On average, it’s a good thing to be able to follow the tribe, but in the investment world, you wanna be able to think on your own and not follow blindly the other investors. I think that’s one thing, that’s one very important key of success.

Sean: Yeah, you’ve written extensively about independent thinking being at the core of what you guys do and the importance of that. Was that something you were born with, or do you think you developed that more over time?

François: Think that we’re born with it.

I like to think, at least I don’t have that gene. But I think a lot of great writers, great artists, great scientists, great business men, or women, I think they have similar missing genes, and if you have a tribal gene, I think it’s very, very hard to resist, mostly during bear markets and panics. It’s very hard to resist the call of the herd. And if you can’t resist following the others, it’s almost impossible in my views for the long run to be able to beat the index.

Sean: I know one of the things you guys do at Giverny Capital is you keep the team small. Is this one of the things you’re specifically looking for at those rare times, you do bring someone new on? 

François: Well, we’re a little more than when I started because for a few years, I was all alone, but I think if you count everyone, well, we’re 15 now, so it’s still pretty small.

A lot of the firms, they’ll have different products, and the idea is very simple, because it’s better for marketing reasons when you have then different funds, so every year it is one or two that will do better than the others. It’ll be easy to tell, and when you have a few that under-performed, well the others can compensate. I’m not a big believer in that. I think we should have just one portfolio and something like 25 names in it, and be very focused on finding the best opportunities out there; the top 25 ideas and just focus on those. I think the more names, the less likely you are to over-perform the averages. So yeah, I think it’s very important to be focused and to have a very precise approach and discipline, so not only are you focused in terms of numbers, but you also focus in terms of the style you have to invest. 

And I think… I like to think that at Giverny, we have a style and the culture that try to be very, very selective on quality of companies and also discipline on the price we pay you for such great companies, because if you buy outstanding businesses that trade at 40 or 50 times earnings, I don’t believe you have enough margin of safety to have good long-term results. Probably a few of them will do okay, but you also will have a few big losers, and so what we want is to find great companies and buy them at reasonable valuation. And it’s a hard task, and I think I have to be very focused and selective and disciplined, and I like to think that all the people that look at annual reports and look at securities and analysis and think they all share that philosophy.

Sean: Yeah, I’m very much looking forward to exploring quality a little bit more in terms of how you analyze companies, but something you were talking about a minute ago was just talking about starting off basically on your own and then the ability to develop your own style. So I’m wondering, was there a certain point when you just felt comfortable that you had developed your own style?

François: I think pretty early I had my own style. It’s probably looking at companies that have very high profitability, high margins, high return on capital, very low debt level, very conservative also. Conservatism is really to an accounting that is always on the safe side. You want the earnings to be understated, instead of being over-stated, and also that they have a long-term view. They’re really, the managers are really building companies for the next decades, so everything they do, they have a very long-term horizon. The way they work with clients and the suppliers and their employees. So it’s really a culture thing, so it’s very important quality is really linked to the culture. I believe that’s why I think it’s so important to focus on great management. It’s not easy because it’s a little more subjective than just looking at numbers, but numbers, they are important, of course, but they mostly reflect the past. So when you’re buying shares, you’re buying the future, so you wanna be sure that only, not only does the company is a great past, but also that the management in place is being a great future for… For your ownership of the business.

Sean: I’d love to hit on a specific example of that subjective nature around great management, and you made an investment in Disney, I’m pretty sure it was the day Bob Iger became CEO, is that correct?

François: Yeah, in September 2005.

Sean: So this is interesting timing, just in terms of what’s happened the past few months here, with Mr. Iger stepping aside, what about him and the management that was in place made you put that investment on and feel comfortable with it?

François: That’s a very good question.

You know, I just read about him and I read a few interviews with him, and it just felt he was the right person, because at that time, Disney needed to do some changes. And I think the most important one was to have a better and strong long-term relationship with Pixar, and in the end, Bob Iger, they acquired Pixar and then Marvel in which I think was also a great acquisition, and they really focused on improving the quality of the movies they were producing and the content was really a big part of the focus with Bob Iger. I don’t wanna say anything bad about the previous management, I think the others before did a great job too, but they were probably more into distribution and finding where we wanna go with the company, and I felt that Bob Iger was more in tune with we need quality content first, and I believe that was the best way to go. So when Bob Iger was named CEO, I always knew the company very well because I owned it before, and we had… I think we own it for two or four years from ‘96-2000, and I had sold it then, and bought it back in 2005, and then look recently, but I think earnings, if you don’t count in the last few quarters, everything has grown, grown about 14% an annually during the time that the Bob Iger was there, which is phenomenal for a company of the size of Disney. And he’s down a great job,  and I’m a little sad that he is… Well, he’s not totally leaving yet, he’s not CEO anymore, but can’t stay there forever. But I think he’s done a fantastic job for Disney shareholders.

Sean: Did you happen to read his recent biography, The Ride of a Lifetime?

François: Yeah.

Sean: Yeah, it was great hearing those stories about the acquisition of Pixar, you mentioned one of those key and pivotal moments. That was a fun read.

You mentioned reading multiple interviews and you knew he was the guy, so it intrigues me, where do you find your best ideas? Is that how most of your investments come to fruition.

François: You know what… Yeah, it’s a job. It’s a strange job because it’s a job where you work everyday and it’s cumulative, and you do it all sort of ways, it’s just sometimes just by shopping in some malls, or going to eat in a restaurant, and you find it’s a good concept, and the food is great, and the price makes sense. Next question, like Peter Lynch would say, “What about the stock?” So I always say that our capitalist antennas are always on. What really I think helped is probably six months after we bought our shares of Disney, I was at the Berkshire Hathaway annual meeting, and I saw Tom Murphyat the hotel, at the lobby of the hotel, and I went to speak to him five minutes and I ask him about Bob Iger, and I knew that they worked together for a while, and of course, Mr. Murphy knew Disney very well too. And he said very nice words about him, and that was a kind of a confirmation that what I have had read before was right on target. This looked like a very, very strong person to lead Disney.

So sometimes you find little things that, little comments that someone that you trust and it helps validate your thinking. And everything is about probability, so you wonder most higher level of information that helps you increase your odds of success, so the more you read, the more you know about a company or management, usually it helps increase the odds of success.

Sean: You mentioned always having that antenna up, and whether it be you’re shopping in a mall or come across a certain article, it makes me think of a sports athlete, call it a basketball player, he’s working on his jump shot every day, a musician might be practicing specific scales. What about you? What do you need to do every single day to remain at the top of your game?

François: That’s a good question. I think the greatest quality as an investor, but probably also as a human being in general, I think is to be humble, to have humility.

So it’s not easy sometimes because you’re human, and then sometimes you can think you’ve done well and you have an ego that you wanna protect also, so humility is not necessarily easy to always be able to have when you’re studying or working with others or meeting with clients or companies or anyone. But I would say that what you want is to have the humility of always learning. So every day I wanna learn something, I want to read more about an industry, a business, about how the world is changing, and I talk about the importance of getting over our own biases. I think humility really helps because if you’re not humble, you won’t be able to see those biases, so I think humility is probably the greatest quality you can have as an investor. I said that once I said that the greatest artists I have met were also the more humble… The most humble ones, and that’s very strange because you would think that they’re the best of the best, so they… It’s not all great artists that were humble, we can think probably of some names, but a lot of great artists have met… They are humble people, and I’ve tried to cultivate humility, and like I said, it is not always easy, but there’s nothing like losing money on a start to get a little more humble.

Sean: Yeah, that… That’ll certainly do it.

I’ve heard you mentioned the past about Giverny’s competitive advantage, and you say it’s three things. Humility, which you were just referring to, patience, and then also rationality. Do these three still hold true?

François: Oh yes, I think so. I think the investing is really about principles and philosophy, investment philosophy, but they’re really principal, so you apply principles, and I think rationality, patience and humility is having the right human qualities to be able to apply your investment flaws or principles. And by definition, principles don’t change of course, some names in the portfolio can change because either you find something better or things change, and that’s just the nature of our civilization, that things evolve all the time.

So you have to be able to… The way you look at investments is to change and evolve, but I think the fundamental principles, they have to stay the same.

Sean: You mentioned the principal staying the same, and I know this is slightly different about following your own rules, and I know you mentioned in the past that you need to be able to follow your own rules, but you also have to have the wisdom to know when to break them. Can you just elaborate on this ’cause I know there’s a lot of nuance here.

François: Yeah, I try to think of a few examples. I mean, I remember at, it was many years ago, but I have… And I still don’t have this criteria that companies have to be profitable before investing, and probably 99, I’m not exactly sure, so more than 20 years ago, about some shares of Expedia and also I don’t think the company was profitable then, but I just felt that Expedia had a great brand, a great product, and I thought that the internet revolution that was just starting, they would be a winner. But just a few shares and I didn’t buy enough to make a difference, so… And of course, I started very well going forward, so that was a mistake, and I remember saying to myself, “Well, it’s not profitable, but I really believe that the company has something unique,” and I missed it. And so I thought myself was sometimes you have to break your own rule, and I labeled that wisdom, but I’m not that wise often so.

Sean: No, no, no, no, I appreciate the example and thinking on your feet there and being a little circle back that more than 20 years later. You were talking about humility, and this really intrigues me, how do you just make sure that you’re not over-extending yourself and going towards hubris, and if you do, how do you make sure that doesn’t start to cloud your judgment?

François: That’s not easy. And like I said, you want to know yourself, and wasn’t it Socrates that 2,000 years ago said that the biggest wisdom was to know yourself, and it’s a life-long process because we are framed in some ways, and it’s sometimes very hard to change the way you look at things.

But I think humility, it’s really to force yourself at saying, “Well, I could improve this,” or, “I don’t have the same opinion at others, but perhaps I should look at this and some other ways to see if there’s not something I’m missing.” But if you wanna be right, you won’t go in that direction. So you have to think for yourself, well it’s not the most important thing to be right. The important thing is to keep learning and to improve yourself and brick by brick, one day after another, you slowly improve as an investor because you’ve learned a little bit to overcome a few preconceptions that you have or biases that there wasn’t a way of improving yourself. But that’s not easy, and we’re totally non-scientific parameters there, so it’s really sometimes just to sit down on a chair and just thinking about, “Am I on the right path there?” Sometimes you are and you just stay the course, then sometimes you realize that perhaps you can change something and you just want just a little bit. It’s not the algorithm, it’s really about trying to understand your ways of seeing things and trying to look at the world in a very objective matter, which is not easy.

Sean: Yeah, ’cause I don’t think any of this is.

François: Yeah, so that’s not our nature to be objected, it seems.

Sean: When you’re sitting back in that chair and you’re really doing that deep work and that thinking, are there things recently that you come across that you feel you need more improvement in?

François: Yes, it struck me that a lot of companies that I thought, I don’t know, five or 10 years ago, were way too expensive, they had way too high P ratio. In the end turned out to be great investments, and I’m thinking Amazon for instance, and the… I’m not sure if it’s the right price today, but I looked at it, I don’t know exactly when, but six or seven years ago, and I thought was a little too expensive, and it turned out to be a big mistake because I don’t think I understood it enough then, and I probably under… Yeah, it was hard to see how fast it could grow, but they did grow very, very fast, and of course, the Amazon Web Service was an extraordinary business that they’ve built in just a few years, which is probably their main source of earnings today, and I didn’t see the potential a few years ago, and that was a mistake. So recently I said to myself, well, perhaps I should not be too quick to put a company into the too hard pile because the valuation is high. Perhaps sometimes few outstanding companies are worth their high P and it’s hard for someone that was raised reading Warren Buffett, and Ben Graham, and Peter Lynch to say, well perhaps I should pay a higher P sometimes when I really believe it’s worth it, so I try to look at that in a different angle than before.

Sean: No, that was another fantastic example, and I love to dive back into patience, and you’ve got a great saying, “Patience is not the ability to wait, but the ability to keep a good attitude while waiting,” and I’d love to know, how do you build that into your company so that each… 

François: Yeah, that was the quote, I don’t remember where I got it, but I read that on the internet, so it’s not from me, so… It is a great quote. It is a great quote and well, the best way to learn patience is to be impatient and see how painful it is. So I’ve made the mistake many, many times of being too impatient. And that’s the best way to learn to be more patient. So the quote saying it’s to have a good attitude, I think the greatest attitude when investing in the stock market is really to focus on the business, not the stock price, not a few short-term quarters. It’s really looking well, where is this company gonna be in five years, and what do I think it’s gonna be worth then and then if you have a shorter time horizon in the five years, I think it’s much harder to obtain good results or have good answers to what really the company is worth. So I think the good attitude needed for patience, it’s really to understand the business and really looking at stocks as parts of companies, and Warren Buffett said it very well that you should buy a stock that if the stock market was closed for 10 years, you would be happy to own. I read somewhere else another analogy that I really liked, I call it, well he called it, I don’t know who said it. But he called it the Gilligan Island test. So would you be on a desert island with Gilligan with no internet and no phone for 10 years and be happy about your portfolio when you go to sleep at night and I think that’s a good test. If you’re comfortable with that, probably, yeah, you’ll do alright for those investments.

Sean: Yeah, I’m sure just that little thought experiment will automatically eliminate many companies you might come across, but I love hit on the third leg of the stool and being rational, but I wanna know if there’s a balance for you between being purely rational, do you fear you miss out on the potential alchemy that might be experienced by some of those outliers?

François: Yeah, when I did the conferences that I did many times called The Art of Investing, I said about the importance of being rational, but also to be creative and have an open mind, So it’s finding the right balance and being kind of rational, analytical and scientific, and at the same time, you want to be open minded, creative, looking at things in very original and different ways, so it’s kind of different, but it’s kind of trying to balance an engineering mind with an artistic mind. And if you have a little too much of one, I think it can distort your results, so what you look for is to have the right balance and kind of use the best of both ways of looking at the world, because if you only look at numbers, annual reports, etc., it’s just… That’s not enough. Because like I said, the future returns depends on the future, you know, past numbers only reward past shareholders. So you have to be able to look at the investment and say, well, is this company really gonna be a leader for the next five or 10 years, and sometimes they have to change and evolve, and offer services and products that are new and improved, and they need to have the right culture to be able to go there.

I remember, probably, I think one of the best investors that understood that was Philip Fisher. So if you read all books by Philip Fisher, I think he described the process very well, what kind of things you should be looking for, a great company, and I remember there’s a chart in Common Stocks and Uncommon Profits I think from Hewlett Packard in the 50s, and it basically,the chart show the revenues depending on the number of year the product was introduced. So you could see that, I don’t know, for example, in 1957, 60% of revenues came from products they were introduced in the last three years, so you see that there was something in Hewlett Packard in those years that was really innovative and helped them always create new products and all of where the market needed to go. So I think for that, you need a little more open mind and creativity and not just looking at the numbers, you need a little more.

Sean: Yeah, François, I love this so much because there really is so much art behind this, and I’m wondering if you’ve been fortunate to have a very successful career. Have you just stepped back and thought to yourself, why can’t others do what you do, or why so few are able to?

François: Well, like I said, I think a big part of it, I think, is the tribal gene, I think most people, they wanna succeed, they want to be good investors and they wanna get creation, they wanna be good managers for their clients, I think that motive are very noble but it’s hard when you cannot fight the pressure to follow the tribe.

So I think a lot of it is just not having the tribal gene. I think the other thing that in my opinion, it really helps becoming a better investor, like I said, is to be humble. And being humble is truly to be in a perpetual state of always wanting to learn, and it goes very slowly, but if you learn something every day, well, after three years you’ve learned a thousand different things. And it’s tiny increments. It’s tiny things. But when they are all put together, I think it really helps to improve. And yet also to accept, and that’s perhaps a hard part also, and it’s probably to humility also, is to accept that you’ve made mistakes. If you make mistakes and you can’t really get over it, or you should feel humiliated or if worse, you deny them, you don’t wanna learn from them. I think one way to really improve is to look at your mistakes and try to learn something from them, but I think the first part is really to accept that you’ll make mistakes and it’s just the nature of the stock market. I think I said that in my rule of three, one stock out of three that we’ll purchase will turn out to be well, either mistakes or not exactly what we hope for. And you have to accept that’s just the nature of things. You’re investing and you don’t know the future, so you have to make your own assessment and your best judgment of things, but you have to accept that you’ll make mistakes.

It’s a little bit like an artist, an artist paints every day, and some canvases turn out very good and some don’t turn out very well, and some artists are very obsessed and get very depressed about not producing as good works as they think they should, but… I think it’s a waste of time to be depressed, of course, but I think you have to focus on accepting that you’ll make mistakes. For every mistake, you learn something, and you can advance a little step because you made one mistake or two or three, but you have to permit yourself to make mistakes. If you’re too scared to make mistakes, well, you won’t make great investments, so it’s many, many different things that have to be put together, I think, to become a great investor. It’s a never-ending task to always look for improving your craft of investing.

Sean: Yeah, everything you were just mentioning, I’m pretty sure it was your 2008 annual letter, and you had a great line in there, and I’m pretty sure it was along lines of “We’re always psychologically ready for a recession or a market correction,” and I think that just sums up what you referring to there. So I love just hearing some of the deep insights into that, and one of those things that keep coming up is around human behavior, and you mentioned that lifelong learning process. We’re always looking to learn more. Are there any resources books that really give a great perspective into human behavior that you found beneficial?

François: Well, there’s many. Probably Peter Kaufman’s book on Charlie Munger, Poor Charlie’s Almanac, and there’s a lot of speeches from Charlie in it, and I think that’s probably the best book on human nature I think that you can read. It’s fun to read too, so… I mean, that’s one of my favorite books.

Sean: Speaking of books you love, say your entire bookshelf got wiped out, you had to restart with five. What are you gonna put on the shelf first?

François: Oh, wow. I always like the Intelligent Investor. I think that everything is in there.

So the history of the stock market, the way of looking at stocks, the importance of margins, safety, many examples of investment over the years, and then I like the way Ben Graham wrote. I think it’s fun to read. So that will be the first one.

Sean: Do we have two, three, four, and five?

François: Oh yes.

Well, probably a Common Stocks and Uncommon Profits by Philip Fisher, Peter Lynch One Up on Wall Street. Well, I would put the Peter Kaufman book on Charlie Munger number four. And number five would be one of the many, many books written on Warren Buffet.. So many out there. I don’t know which one I would put there. Let’s try to think. What’s my favorite one?

Well, probably, the big one by Andrew Patrick On Permanent Aalue, the Story of Warren Buffett, which I think at some point at 2,000 pages, it was in two tones, probably it’ll get a very good story of all of Warren Buffett’s investments.

Sean: Yeah, always love hearing about some of those key reads that formulate someone’s thinking process, and you’ve talked a lot about just learning, and I feel like learning happens a lot at our edges of our capabilities, so I’m wondering now, just being so experienced in your career, is there anything now that you feel like you’re at the edge, and you’re just getting excited to even explore deeper?

François: That’s a good question.

I would say that the best thing would be to be able to identify great entrepreneurs, great management. Six years ago, we bought shares in consolation software, and I remember when I read the annual report, I thought that was one of the best annual reports I ever read, and I think that’s the key thing, is to find great entrepreneurs, and if you can invest in the company with a great seal pretty early, I think it can do very well.

Sean: What year was that consolation annual report?

François: Well, I read it in early 2014, so it was probably the 2013 annual report.

Sean: Okay, yeah, I’ve gone through some of these in the past. They always tend to have excellent annual reports. Speaking of assessing things from an annual perspective, your letters are fantastic by the way, I’ve gone through them all, and every single time I almost pick up something new, and one of my favorite things is, you’re very familiar with what you guys do, and you point out your best mistakes and award the medals there. Is there anything that’s called a residual benefit of doing this that only you internally get to understand?

François: Oh yes, of course. When I write the annual letter, probably where I spend the most time are the three best mistakes of the year, the three best medals of the year. And it’s a long process because I really try to be very honest with me, and sometimes you can think it was a mistake not to invest and… I don’t know, let’s say use Teska for instance, because the stock is up 1,000% in the last few years, but I try to really look back, was it a company for me? Was it a company I really understood? Was it a company that I really could value and have a good assessment of their earning power? And sometimes I realized that, no, wIe couldn’t, so was it really a mistake? Perhaps not, because I don’t think it really fit into my criteria and circle of competence. So it’s a long process and it really helped me to rethink the way I look at securities and trying to learn something, and most of the time, the big lesson was not purchasing a great company, a company I admired and understood, because the valuation seems a little high. Most of the time those were mistakes. Sometimes I sold too soon for some short term or simple reason that didn’t really make sense long-term, and sometimes I missed a change in management or a change in the business model of the company that I should have seen, because I knew the company well. And probably a good example of that is Microsoft. I think three or four or five years ago, I think Microsoft changed a few things in their business model. I think it’s a totally different business today than it was six or seven years ago, and I should have seen that. And that was a mistake, and I think I gave it the bronze medal this year. 

Because when it’s a company that you’ve known for many years, we’ve owned it, it for a while, you should be able to see that things change for the best, and sometimes it’s already reflected on the evaluation of the stock, but sometimes it isn’t. So in the case of Microsoft, I think we should have seen it, and that was a big mistake, not seeing, so… But doing that exercise, I think I really go deep into why didn’t I purchase that? Why did I sell too soon? Or sometimes it was a mistake just buying the securities in the first place, so what was a mistake? And I think that a long time is spent on that to just arrive to three names, but I think that the process is very useful because every year I learned something. I think to have that section forced to me, I force myself to put it in the annual report, I force myself every year to spend a few days thinking about what were the big mistakes of the last few years and what did I learn from that?

Sean: Yeah, you mentioned it at the start this conversation, to be a great artist, you have to study some of the greats, so that’s one of those techniques I’ve taken from you and implemented in the business I’m involved with, and just the benefits there have been so instrumental. So thank you for that.

François: Wow, very kind.

Sean: One thing I wanna touch on quickly, because this is so difficult to do, how do you measure skill versus luck in your own success?

François: Yes. Well, I like to think it’s skill and hard work, but sometimes it can be luck, but I understand probability, so I know that a good lock is not sustainable. So I don’t wanna count on that, so I never buy lottery tickets because I know the odds are not in my favor. So usually, I would say that skill is really in the process and the way you invest, and I think when you have a very sound approach, the odds of success are good. But odds of 65 or 70% of success, they’re not 100%, they’re 65 70, but it’s better than 50, because if you just toss a coin, it’s 50% chance of success, so you want a little more than that.

So I think skill is really to find your own way of looking at securities so that you can improve your odds of success. Probably the best you can do is something like two-thirds of the time being right. Which is 67% of success. It’s still good enough. And I think the key thing is to focus on your process to improve those odds. So you have investment flows or feed, kind of companies, you understand the margins safety, you have all those little things you do that adds up, so that you have 67% of success in investment decisions.

I think it’s really in the depth of your approach and soundness of your investment philosophy that you can hope so, have skills instead of luck.

And sometimes I look at other managers of portfolio and results, and I may be wrong there, but sometimes just by looking at the names in their portfolio, I know that they’ve been lucky because just happened that they own the ride stocks at the right time, but I’ll look at their portfolio over many, many years, and don’t see a real pattern of philosophy and approach that makes sense. And one thing I’ll look at, for instance, is their turnover ratio. When they have a turnover ratio of 100%, I think it’s very hard to convince me that they have a very precise and sound investment approach at least for the long run, So it’s a lot of little things that I think you can distinguish between skill and luck, but of course, there’s nothing like time that will really show if it was luck or skill.

Sean: Yeah, we talk about patterns of success, and there are a few people if any who have quite a track record, you do for such an extended period of time. I know we’re about to wrap up here, I’d love to know what’s the hardest part of your job?

François: The hardest part… Well, of course, when you have a few tough years when you underperform, or you’ve made some mistakes, and you have not as good results, and that can be challenging because you’ll rethink the way you look at things and see that if you were not mistaken or if there’s something you didn’t do right. Sometimes you underperform for no reason because you just… For some reason your stock are just out of favor, and it does happen, and sometimes there’s good reasons for the underperformance. You made mistakes, bad judgment of either management of the solidity of the business, so probably a tough part is really to distinguish is it the right time to be patient, or is it the right time to accept you’ve made mistake, sell and buy something else?

That’s very tough. And of course, when you have a few tough quarters, well the clients, not all of them, some can get a little inpatient and you don’t wanna disappoint them. There’s some pressure for performance, that you wanna be able to go beyond that and just focus on the long-term process and the long-term result of the companies. And I think it goes back to what I said earlier, it’s really to focus on what’s happening to the companies, not the stock, but when you have a few tough quarters, it’s a little tougher to be as emotionless as you’d like to be.

Sean: It’s certainly easier said than done.

François: Yeah, but if you wanna be a money manager, you have to accept that you’ll have periods of underperformance. Because it’s inevitable.

Sean: So François, we’re gonna wrap up here with two questions that I just always love hearing different people’s perspective on. So the first one is gonna be, if you could sit down for an evening in an interview with anyone dead or alive, but it just can’t be a family member or a friend, who would you wanna sit down to spend the evening with?

François: Well, as many great people admire, many great artists, and writers and philosophers, but if I just pick one to spend the evening and just ask questions about their life, it would be Warren Buffet. 

Sean: Maybe you should place a bid for one of his lunches one year. 

François: I’d like to, yeah. Press on too much of a value investor.

Sean: Exactly.

So the final one here… 

François: … The friends did that then they were very, very happy they did, so perhaps I should rethink the bidding for that auction. 

Sean: So we talked a lot about art, and I would love to know if you could own one painting, what would it be? Any painting?

François: Well, the first painting I saw, something like 33 years ago, that really struck me as being a masterpiece and really ignited my interest in arts was a painting by Claude Monet. He did a series of about 20 paintings at the… So I had to pick just one, it would be probably the one that is at the sunset. I think it’s at the Boston Museum of Fine Arts. So if I had to pick one, that would be the one. Sean: That’s a great place to end. François, this has been too informative for me and an absolute pleasure to spend this hour with you. I can’t thank you enough for the time. If you want the listeners to stay more connected with you, do you want them heading anywhere just to read more about you?

François: Yeah, probably the website. They can read the annual letters. When I think about investments and the stock market, it’s really in there.

Sean: Fantastic, we will have all that link up in the show notes, and once again, I highly recommend those, they are fantastic reads, but François Rochon, I cannot appreciate and thank you enough for joining us on what got you there.

François: Thank you very much.