[00:02:57] Francois Rochon: 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 he was a fan of Warren Buffett, he liked my cologne, and we had lunch, and we became friends.

[00:03:14] Francois Rochon: And, he wanted to work with me as a running captain. So it was such a small operation at the beginning, I can’t even pay a salary for myself, I cannot hire anybody. But he was very patient, and After two years of exchanging ideas and just being friends, we started at two days a week and then three days a week and one year later in 2003, started full time.

[00:03:37] Francois Rochon: And that’s when we took an office in old Montreal and 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.

[00:04:05] Clay Finck: Yeah, and I believe you, 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 Giverny Capital, it’s just this slow. growth 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.

[00:04:28] Clay Finck: And you can just see that you being 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, 

[00:04:38] Francois Rochon: I think patience is the most important quality I think in general in life, but more even so in the investment business, I think that’s the most important quality, by far.

[00:04:50] Clay Finck: Do you think that JP and yourself had fairly similar personalities, or do you think there were different strengths you guys had that complemented each other over the years? Different strengths. 

[00:05:02] Francois Rochon: He’s a much more people oriented person than I am. He’s very good with people and you can spend an afternoon and meet three people and have three friends at the end of the evening.

[00:05:13] Francois Rochon: Very few people I think are that good at establishing a relationship and it’s very sincere. He’s a very sincere person and he really enjoys talking with people and he loves business. He loves the business world. He loves to talk to entrepreneurs about the company they founded and what was the key to their success.

[00:05:36] Francois Rochon: He’s always in the, he wants to learn about the investors and managers and business people. I’m more of a book person. I like to read. I like to sit down and look at my Excel file and try to do some modeling on where a company can grow and be in the next five years. So I’m much more comfortable in my own space.

[00:05:57] Francois Rochon: Office than outside the office as JP is. 

[00:06:02] Clay Finck: Since you mentioned reading, you had a engineering background before discovering the work of Peter Lynch and Warren Buffet, and eventually mailing buffet and getting letters directly sent to you, and then just committing to that life of investing and eventually starting Verne Capital.

[00:06:19] Clay Finck: And I thought it was interesting how you have written about Giverny’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 some of the Broader investment principles that are embedded in this rationality to help paint a picture for this conversation?

[00:06:41] Francois Rochon: Yeah, Warren Buffet once said that if you think you need an IQ of 180 to succeed in the investment world you’re getting it wrong because you don’t, it’s really simple mathematical skills and understanding accounting and understanding businesses. But it’s not a question of IQ or even how many hours you work or.

[00:07:02] Francois Rochon: 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 beat the index. So if it’s not IQ and work and money, what is it? I think it’s human qualities, behavior.

[00:07:22] Francois Rochon: 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, you have to accept. I believe that you cannot predict the stock market or the economy where interest rates are going.

[00:07:41] Francois Rochon: And it takes a lot of humility 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 not. what the economy will do in the next year or so, but I think the right, the truth is that nobody really knows what the economy will do in the next few quarters or what the stock market will do in the next quarter or year or so.

[00:08:04] Francois Rochon: So I think you have to recognize that and say I won’t, 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 opportunity. Understanding and competence and finding 20 or so securities and buying them at attractive levels and holding them for many years.

[00:08:28] Francois Rochon: I think that’s the right recipe, but to be able to get there, I think you, you have to be humble and humble. It’s never really, you’re never really there because you always have to improve that quality. 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 popular 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, even more so when it’s an investment that is out of favor for some reason.

[00:09:08] Francois Rochon: So we have to have confidence in your judgment, state of course, so we have to find the right balance and have that confidence that is fundamental enough to the better results. And at the same time, being able to always stay humble and always be in the, having your, an open mind on new facts and things that perhaps doesn’t make you happy when that happens or your company, but you have to face the truth and say this investment I purchased two or three years ago, it’s not working out.

[00:09:38] Francois Rochon: So let’s sell and buy something. Hands, but you have to be on board with us 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 it’s a combination of those three qualities. Being a rational investor.

[00:09:57] Francois Rochon: Being a patient investor, always being humble. 

[00:10:01] Clay Finck: 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, 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.

[00:10:23] Clay Finck: 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 percent invested at all times.

[00:10:43] Clay Finck: 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, it’s something that just so many people want to try and do.

[00:11:09] Francois Rochon: Yes, I was you could say I was lucky because I started by reading, in 1992, 1993, I started to read Peter Lynch’s One Up on Wall Street and then Intelligent Investor by Ben Graham and John Tapleton’s book and Philip Fisher’s, Warren Buffett’s letters. So all those great investors, they all had something I would say two things in common.

[00:11:31] Francois Rochon: First, they were value investors, so they would look at stocks as partnership of businesses with an. intrinsic value and you could buy such securities in the stock market sometimes at a discount to the intrinsic value. And the second thing, all those great investors never thought they could predict the stock market.

[00:11:50] Francois Rochon: So they bought undervalued securities. They could not really pinpoint the best time to buy them. And they, all those securities for the long run, and then, in the end they did well. And it’s not because they were able to predict the exact perfect time to buy and sell security Or enter or exit the stock market.

[00:12:09] Francois Rochon: It’s really because they act like investors, business owners, and if you look at the history of Graham , Fisher Buffet, it, they are very different kinds of securities. They were different, very different. If you look at their portfolio, Peter I think had 500 stocks in his portfolio and most years weren’t enough at that.

[00:12:31] Francois Rochon: 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 and very quickly I decided I would use their philosophy and fundamental ideas when investing. One very important idea was not to take the stock market.

[00:12:58] Francois Rochon: So I started being 100 percent invested right from the start, we’re here 30 years later. I’ve never met an investor. Or 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 add 

[00:13:23] Clay Finck: similar results.

[00:13:25] Clay Finck: I like how you mentioned that a lot of those investors invested in different types of companies or invested in somewhat different types of ways. And I think for you, you really had this focus on quality. It seems like that’s endured over much, if not all of your career. So it’s studying these great investors and using this principle of rationality of K.

[00:13:46] Clay Finck: What makes most sense to me? And it’s interesting how so many people 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 Fisher? How did you Come to that approach?

[00:14:03] Francois Rochon: Of course, Philip Fisher was a big fan of buying a few carefully selected companies all those many years, if not decades. I think probably, I don’t know exactly when I read that, but I think I read a quotation by Charlie Munger and said that in the end usually their return of the portfolio will Closer to the performance of the companies themselves over many years.

[00:14:28] Francois Rochon: And I remember in the early nineties, Warren Buffett, that’s this table or a calculation he called owner’s earnings. So for the public securities in the portfolio, he would count the, what’s the earnings of those securities at a year and he would compare it to the previous year. So in 1996, I decided that I would do that for the portfolio.

[00:14:49] Francois Rochon: I would compare the performance. of all the securities combined. So the increase in the earnings per share of those companies, I would compare that number to the previous year. So you have the growth and owners earnings of those companies. And then I would use that growth number and compare it to the performance of the portfolio.

[00:15:08] Francois Rochon: And I started that in 96 and we’re here, what the last, in the last annual letter in 2023. So we’re talking about 28 years, 28 full years. The companies we have all over the years. have got the intrinsic value. If you combine the dividend with that, about 12. 9 percent annually and the performance of the stock themselves, if you exclude the currency movements, including dividend, it was 12.

[00:15:32] Francois Rochon: 9%. So it’s incredible, it cannot be a random event. It’s really, the stock market really reflects over many years, the performance of the companies you own. Of course, one important part of that is you have to be prudent Overpay for 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, so you could perhaps have a lower return for your portfolio, but I always try to be very prudent and not to overpay.

[00:16:08] Francois Rochon: 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 performances. So that’s what I want. I want to have a, I would want my portfolio to be in the stock market to be a mirror.

[00:16:31] Clay Finck: 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 growth 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 late 1960s.

[00:16:51] Clay Finck: I was curious if you could share what you learned with the audience here. 

[00:16:56] Francois Rochon: I don’t remember the name of the president. Was it Ari Sonborn or something like that? 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 gross model of a Ray Kroc of McDonald’s.

[00:17:16] Francois Rochon: And after watching the movie, I said it’s funny because I never really heard about that story. So I read about Harrison Bourne and discovered that, in the was it 1968 or something like that and he left the company and because it didn’t agree with Ray Kroc. So I tried to read. read more about that.

[00:17:34] Francois Rochon: And, he wanted to pause the growth in new restaurants because he was worried there would be a recession. And Ray Kroc insisted on continuing to open new restaurants. And it turned out that even if whatever would have happened, probably in terms of recession or not, it was such a fantastic growth out of those years, it would just clone and clone those restaurants all over the US.

[00:17:56] Francois Rochon: And I think the right thing was to continue to open. new restaurants, even if the short term, at least the, there were some prospects of a recession. So I think Ray Kroc is the right approach. I think let’s ignore, let’s not be affected by our opinions on the economy and just focus on growing our business.

[00:18:16] Francois Rochon: And we have that incredible business that we can expand incredibly, it turns out. So I thought that’s One more reason, because you couldn’t find many other examples that you have to put aside the opinions you have on the economy and just focus on the business and the gross prospects that business can have.

[00:18:37] Clay Finck: And I had pulled the numbers that you shared in your letter. It was around 1967 McDonald’s, they had 51 million in sales and they executed on the growth strategy you mentioned. And then five years later, sales grew to 385 million. And then by 10 years later. 1. 4 billion. So it’s just like focusing 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.

[00:19:09] Francois Rochon: Yeah, and the great thing is, I had in my archives the whole value line of McDonald’s, so I could find the old figures of the 60s and 70s, and I’m a big fan of Value Line, and before I, I started to read them on a weekly basis, I even wanted to read about past issues, so I went to the library when I was young, and all those great companies I wanted to study, I made photocopies of all of Value Line, I put them in an archive, and, you never know when you want to study History of an old company or even a company how they did in a few years in the past.

[00:19:42] Francois Rochon: And I think the example of McDonald’s was so fascinating, but I was held in that example by having my old line McDonald’s. 

[00:19:53] Clay Finck: So one of the things I can really appreciate about that too is just tuning out a lot of the noise, turning to things like value lines and turning to these timeless principles instead of this.

[00:20:04] Clay Finck: 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 in to Filtering out so much of the noise in the world it’s been 10 years.

[00:20:26] Francois Rochon: I don’t exactly remember what I wrote, but I think it was in that letter I talked about the importance of what I call the missing gene. My theory, because I have not proven it scientifically, but my theory is that most humans are born with a tribal gene in their DNA. Just how our species works. That gene has been transmitted for generations because, 10, 000 years ago when we lived in huts and small villages there was a tiger that would come to the villages and people would start running.

[00:21:02] Francois Rochon: The intelligent thing was not to ask too many questions and start running yourself because you don’t want to be the lunch of the tiger. The urge to follow the tribe has been generally embedded in our DNA. Just for a probably useful reason, at least 10, 000 years ago. And most humans, most normal humans have that G.

[00:21:25] Francois Rochon: My theory is that probably some 5 percent of human beings don’t have that G. Whatever the reason, their DNA is not totally as accurate as others. We could say that. I don’t know if it’s a handicap or let’s say that they just don’t have that G. So I call it the missing G and those people are able to not follow the tribe whenever it was running, whenever it was.

[00:21:46] Francois Rochon: One’s going 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. They’re just following the tribe. It’s most of them on an unconscious level probably. And so when the market is going down, a lot of people will be selling and it’s just because they have the tribal gene that cannot help themselves.

[00:22:08] Francois Rochon: And when a stock is very popular and they wanna buy it but you have that 5% of the population that. Probably they can become artists, writers, scientists, and novel ideas. They are able to go into a new path of discovery, whatever field they are. So in the investment world, those 5 percent are able to buy something that everyone is selling.

[00:22:31] Francois Rochon: 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 fab, whatever it may be. So when everyone wants to invest in intelligence, artificial intelligence or the internet or whatever fashion there is, they are immune to this idea of following the tribe.

[00:22:55] Francois Rochon: So I think those 5% are able to generate superior returns because they are able to do things differently than the others. And we’re talking about John Templeton and they said that the first ingredient. If 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.

[00:23:17] Francois Rochon: So that was my theory. And I still think that’s the right approach. Like I said, at the beginning, it’s not a question of intelligence and hard work and resources. First thing you have to be able to do something different. So you have to have that missing 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.

[00:23:45] Clay Finck: Yeah, 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 such a strong temptation to just follow the crowd. I’d like to think that some people can learn their way to getting to that 5 percent because, many people haven’t been exposed to the likes of Buffett and 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, be our own worst enemies in investing.

[00:24:19] Francois Rochon: Yeah, 

[00:24:19] Francois Rochon: I think you can learn, but you have to 

[00:24:21] Francois Rochon: be in the 5 percent that can do things differently, because if not, even if you know all the rules or the investment principles, when the time comes, I’ve met my share of great businessmen that aren’t able to go against the current and they’ll do the wrong thing at the wrong time.

[00:24:41] Francois Rochon: 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 an intelligent thing. It’s just that the investment activity is really relative to the other activity. So if you have a return of 7 or 8 percent and the average is 7 or 8%, it’s nice.

[00:25:05] Francois Rochon: It’s okay. But if you want to be able to earn 10, 12 or more, then you need something.

[00:25:12] Clay Finck: I think this ties well into one of your favorite Mungerisms that I’m going to share here. If you’re not willing to react with equanimity to a market price decline of 50 percent, 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.

[00:25:29] Clay Finck: Why is this your favorite Mungerism? And I’m curious if any stocks come to mind that You’ve painfully had to hold through one or multiple 50 percent declines in their share prices. 

[00:25:41] Francois Rochon: I think most of the stocks have all over the years at some point, probably the stock dropped 50%. It happens almost all at Berkshire Hathaway.

[00:25:49] Francois Rochon: I think Charlie said that in the years he owned it, it happened three times. So it happens to almost all stocks. So probably in that quote, it was talking about the general stock market. And since I started to invest, 30 years ago, there were two times the market went down 50%. First one was in 2001, 2002, close to 50 percent grass 49, S & D power.

[00:26:13] Francois Rochon: In 2008 and 9, I think from top tick to bottom tick, it went down 56%. So 2008 and 9 was probably the biggest bear market since 1934. And it was a tough period. At some point we could be worried about what would happen to the economy, but I was finding a lot of opportunities and the companies we owned, I was confident they would make it true.

[00:26:37] Francois Rochon: And they had a good balance sheet. They were still profitable and the balance sheet. Evaluation was as low as I ever seen, at least in the years I started to invest. I remember I was interviewed in a newspaper in, I think it was February, 2009. And I said, wow, in French it rhymes. I called it the , but in English it doesn’t arrive.

[00:26:58] Francois Rochon: So it’s the opportunity of a generation. I said that’s the best opportunity we have in this generation to invest in the stock market just because valuations are solo. But most of the people. I talked to them, but they didn’t share my enthusiasm. I remember I even went on TV and I said that it was a great time to invest.

[00:27:16] Francois Rochon: And I was very excited. And the person that was interviewing me, I looked like me, like I was a Martian, everyone was panicking and worried. And I was there saying, almost with a smile, this is a great time to invest. And 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 wouldn’t.

[00:27:37] Francois Rochon: People say all the same thing, yes, stocks are cheap, but they will be cheaper soon, it will continue to fall, and but if you think of the idea of Charlie, that you have to stay calm and rational, and accept there’ll be big drops of the stock market from time to time when it happens, you’re almost ready for it, because you know it’s gonna happen sometime.

[00:28:00] Francois Rochon: And I was ready for it. And 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 it happened, I just said let’s focus on finding the best opportunity, the best task we can purchase. And yeah, it did well.

[00:28:17] Francois Rochon: Our portfolio did well from then. 

[00:28:20] Clay Finck: 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 deteriorating or maybe potentially slowing down.

[00:28:44] Clay Finck: Was assessing businesses during that time difficult for you or were there any companies you thought were great where you’re just like, 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?

[00:29:05] Francois Rochon: I think one question you have to ask yourself is to look at all your company’s portfolio and see if there’s anyone, any company that, there is some odds they won’t make it. Usually they will be either non profitable or have lots of debt. So I don’t think we had a lot of companies in the portfolio that were really in danger of going under.

[00:29:26] Francois Rochon: We owned a few banks and I think, I think we had Wells Fargo do okay. Bank of the Ozarks also did okay. Remember that I think it was in February, 2009, M and t Bank went to, I think it was $36. And I knew the CEO of Berg very well and I thought, this is a bargain and this is a great company.

[00:29:48] Francois Rochon: I know that this is 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 from, if my memory serves me well, we sold Walgreen. Walgreen is a great company. We just didn’t see as many growth prospects as it had before.

[00:30:07] Francois Rochon: Walgreens was also cheap when we sold it, 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, a 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.

[00:30:26] Francois Rochon: It has done okay, but that’s not wrong. That’s fast. But to me, when I bought it, I Audit in 2009. The downside was very, I think, like trading at eight times earnings. Very rare that you buy a solid blue chip company at those levels. So they had a good balance sheet and we were buying back shares and, but basically I just held onto the stock I already owned.

[00:30:48] Francois Rochon: Some tough periods like CarMax. I think earnings went down in 2008 or Milwaukee, the street. I think also at that time I owned, we sold it a few years later, but. But Moab, I really like the CEO and how he would do intelligent things and find ways to improve the profitability of the company and make it through the financial crisis.

[00:31:11] Francois Rochon: And Moab did, so did CarMax and so did M&T Bank and Wells Fargo. And so the, I think Disney at some point in 2009 traded at eight to nine 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 it was a fantastic company managed by Bob Iger.

[00:31:32] Francois Rochon: So he could buy it eight or nine times. So that was a great opportunity. 

[00:31:37] Clay Finck: 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. I’m sure many people also really appreciate you sharing your biggest.

[00:31:52] Clay Finck: 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 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.

[00:32:16] Francois Rochon: I don’t remember exactly when I started to follow Novo. Probably it was in 98 or something like that. So at least 25 years ago. And it was already then a leader in Diabetes Drug, and that was a great company. And, I, And then in those years, I was probably not ready to pay a P ratio of 20 times. So I just follow it from a distance.

[00:32:36] Francois Rochon: But really in 2014, I went to Copenhagen and 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 MERS and the Pfizer’s, Bristol Lyons group.

[00:32:58] Francois Rochon: With and all the others. I think they had a very strong niche in the diabetic market. So I knew in 2014 it was a great company, but like I said in the annual letter the stock was trading, I don’t remember exactly 20, 22 times when I, it was a little high. And, but the p ratio stayed high and very recently they started to commercialize Ozempic.

[00:33:21] Francois Rochon: Now it was not a 10 or 11, 12 percent grower anymore. Now it’s a 20 percent grower because it’s been a huge success. And the p ratio I think today is 37 times. So it’s been a huge winner and it was right in my circle of understanding. I understood the business very well. I like the culture of the company for some superficial reason.

[00:33:43] Francois Rochon: I didn’t invest. And I started to make the mistake in 98. But, in 2014, I think I had learned much more about it than I was, I would’ve been able to make a sound decision. I did not. That was. I probably made the biggest mistake, at least for that year, because I’ve made other mistakes, some even worse.

[00:34:04] Clay Finck: And in sharing your mistakes, it seems like you agree with Buffet that your biggest mistakes are mistakes of omission rather than mistakes of commission, where you find a New Notice 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.

[00:34:25] Francois Rochon: 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. 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 a return of 1000 percent in a stock you have to keep it, because if you sell it after a 500 percent increase, you’ll miss the next double.

[00:34:57] Francois Rochon: And I’m talking about a thousand percent, but there’s some security in my list of mistakes. It’s probably 10, 000%. Yes. Company Starbuck started 30 years ago. I think it’s probably 20, 000, 20. Yeah. I would say 20, 000 percent since the first day I looked at it or facts at research or yeah.

[00:35:19] Francois Rochon: One of the horrible mistakes of the last few years is O’Reilly Auto Parts, because I bought O’Reilly, I think, at 20. In 2004, I went to visit a company, Misery, and I thought it was a fantastic company, and purchased it at 20. But very sadly, we sold it, I don’t exactly remember the price, probably something 300, four or five years ago, to the 1, 000 stock.

[00:35:43] Francois Rochon: So if we had owned it and kept it all those years, 20 years, that would have made 50 times our money. So yes we did well ’cause we probably made 15 to 20 times our money, but we could have done much more and it’s still a great company today. So these are very costly mistakes. I had a few losses of 50% to 60% over the years, but these are very small costs compared with having a stock not bought that.

[00:36:12] Francois Rochon: That’s a thousand and 2000%. And it’s worse when you understand the company, 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 it was a great business and you didn’t purchase us just because the P ratio is similarly high.

[00:36:33] Francois Rochon: That’s where the mistake is, not missing some company that is way outside the circle of competence. 

[00:36:39] Clay Finck: You also highlighted in your letter that you have the very ambitious long term objective of achieving a return of 5 percent higher than your benchmark before applying fees. And historically, your benchmark’s grown by 9.

[00:36:54] Clay Finck: 2 percent and your fund before fees has grown by 14. 7%, which represents a 5. 5 percent spread. And if we just broadly assume that the overall market or your benchmark goes up. say 9%, then you’re shooting for around 14 percent at least on average per year. In light of this, I couldn’t help but notice Berkshire Hathaway.

[00:37:15] Clay Finck: 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 at around 12. 5 percent and that’s with a 40 percent increase in earnings in 2021.

[00:37:34] Clay Finck: 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 percent alpha, if this is a stock you’ve considered a trimming or potentially cutting to add to more attractive opportunities. 

[00:37:53] Francois Rochon: First you’re right to use the adjective ambitious, because it is ambitious.

[00:37:58] Francois Rochon: It is not only ambitious, it’s very ambitious. The odds are way against me. I’ll try it for sure, so I think you have to have high objectives in life and ambitious targets, so I’ll certainly try to attain it. And you’re right also that by owning Berkshire it’s gonna be hard to have a, let’s see, 14 percent after overtime.

[00:38:17] Francois Rochon: I think it’s gonna be probably closer to 10. In the last few years, probably 11, 12, but as the company continues to grow and be bigger, it’s going to be hard for them to grow at probably more than 10 percent a year. So it was a problem for me because I first bought it in 2000. So I’ve been owning it for 24 years.

[00:38:37] Francois Rochon: I remember when I bought it, the first time was in March, 2000 at the height of the tech bubble. And my pass back was 5, 000 then, a lot of people were saying that Buffett was out of it. Then I think we would. We purchased Berkshire close to book value then, so it was okay. It was a good investment, perhaps not as great as I was hoping for.

[00:38:59] Francois Rochon: Although Warren Buffett has been writing for 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 to act on it. And just a few years ago, I started to trim it because. I think for many years it was an eight or 9%, 10% weight, but when they acquired DNSF 2009 or 10, we exchanged, we owned up NSF in the portfolio and we exchanged a share tax free exchange DNSF for shares of Berkshire.

[00:39:34] Francois Rochon: So the size of Berkshire increased again. So it took me a while to probably try and begin to trim it. And we did a few years ago, and today I think it’s seven. a half percent weight in the portfolio. And as we find other ideas that we believe will do better we probably will continue to slowly trim it and buy something else just because as you explained that the size of Berkshire is so huge, it’s very hard to compound at very high rates, but to me, that’s almost a risk less investment.

[00:40:10] Francois Rochon: There’s not really any risk in investing in Berkshire. It’s probably the most solid company. 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 objectives, probably the rational thing is to continue the brochure.

[00:40:40] Clay Finck: My co host, Kyle Grieve, and myself are going to cover Lululemon on the show. 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 Lululemon, you wrote, We’ve been following the company since its IPO in 2007 and believe that the company has an exceptional brand.

[00:41:02] Clay Finck: 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 Lululemon 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.

[00:41:27] Clay Finck: Just one example that sort of comes to mind is Chipotle and the issues they went through in 2015 and that was that Chipotle was actually one of your others. podium of errors that you highlighted in your letter. So for a company like Lululemon I was curious if you could talk about how you go about assessing the durability and the strength of a brand.

[00:41:46] Francois Rochon: You’re right. It’s not objective. There are some qualitative analysis you have to do when you have to make a judgment, how. Solid is the brand. I think Warren Buffett always used the expression consumer franchise. In the mind of consumers, name equals quality and you’re ready to pay a higher price.

[00:42:08] Francois Rochon: 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 product and the name that’s franchise value. And I think, in my opinion, Le Mans has that kind of brand.

[00:42:28] Francois Rochon: 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 Lululemon. 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, usually at lower margins with the direct to consumer sales.

[00:43:04] Francois Rochon: But in the case of Lululemon, it was at least as profitable as in the stores. I think even the margins were a little higher. Sure. And very quickly, I think direct to consumers, I think it’s 40, 45 percent of sales. So it’s been a huge success for them. And the important part is that it’s been, the margins were able to be maintained.

[00:43:25] Francois Rochon: So to me, it’s said a lot about the strength of the franchise. And if you just look at the balance sheet, it’s a fantastic business and that they’ve grown very fast. In the U S the gross poverty is slowing down a little bit because it’s a bigger company than I’m used to, but internationally they’re growing very fast.

[00:43:45] Francois Rochon: I don’t exactly remember, but the last border, I think, sold internationally and outside North America, they grew 54%. So they’re doing very well outside North America. They’re very optimistic about their Chinese business. And so far it’s been a good success. So to me, this, I don’t want to do a pond here, but there, this company has legs to grow.

[00:44:08] Clay Finck: I’ve heard you state that with. Each of your purchases, you try to purchase with a 50 percent discount to the intrinsic value, talking 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.

[00:44:28] Clay Finck: And I just love that phrase and thinking about many of these great companies. But what I find interesting is that sometimes we can fool ourselves. When calculating the intrinsic value and making a spreadsheet say whatever we wanted to say because we found a masterpiece. 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.

[00:44:55] Clay Finck: Maybe you could use Lululemon or maybe just more broadly talk more about estimating the intrinsic value and having a proper margin of safety. 

[00:45:05] Francois Rochon: Yes, I was trained as a scientist graduated as an engineer I was trained to look at numbers, and I like to build, first years I tried to build very precise model, calculate 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.

[00:45:28] Francois Rochon: So I said I have to probably think this a little better. And I remember reading many years ago, I think Ben Graham went to congressional hearings about the stock 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?

[00:45:49] Francois Rochon: He said it’s probably between 40 and 60 a share. And the person said it’s not very precise. He said, you’re right. But if the stock trades at 30 or 70, it’s useful. And I still think that’s the right approach. You have to accept that it’s not a precise science. You have to have a general idea of what a company is worth.

[00:46:11] Francois Rochon: And accepting that there are lots of uncertainties, because we’re talking about the future. When you’re valuing a company, ideally you want to discount future cash flows at present value, but you don’t really know the future. What will be those cash flows? Obviously the results have to be an estimate.

[00:46:27] Francois Rochon: So you have to recognize that and have a broad spectrum of results. And that’s where the beauty of the stock market helps. So if you believe a stock is worth 50 and it’ll take 1520. 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.

[00:46:51] Francois Rochon: I remember when we purchased Le Mans, I think we paid 300 a share in 2022. I think it went up to 500, but today it’s probably 350 or 60, so it has done okay, but not that well. There’s a p ratio. Decreased lately, but I remember I had a model where I thought the company would be five years later.

[00:47:15] Francois Rochon: So in 2027, and my target was that in 2027, the stock would trade at 600. So my buying limit was 300 or lower for a very long period, but for a few weeks in 2022, it went to 300 or lower. That’s how we approach the thing. Again, the stock is down these days and I believe it’s probably an opportunity to at least hold on to our shares, but perhaps 

[00:47:40] Clay Finck: even at some point increase it.

[00:47:42] Clay Finck: I talk with a lot of just investors, going to the Berkshire meeting, chatting with various people and something I hear quite often is that, you The market’s expensive. And when I look back at a lot of high quality businesses over the past 18 months or so, their charts are just up to the right for quite a big number of them.

[00:48:02] Clay Finck: So what do you say to people who get this margin of safety by buying high quality companies and being patient in them, but they’re having trouble finding the right price or getting into the market. What would you say to someone like that? That might be listening. 

[00:48:16] Francois Rochon: There’s two or three things you could argue.

[00:48:18] Francois Rochon: The first argument, which is just a reality thing, is 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. We’re open. on the high side of history. So of course you have to be a little more prudent and more selective, but this market reminds me of 1999, 2000.

[00:48:44] Francois Rochon: I think at some point in early 2000, the P ratio of the S&P went up to 26 times. So it’s not as high today, but if you look at probably those famous magnificent seven, I think the average P ratio of those seven stocks is about 35 times earnings. And they make up 29 percent of the index. So if you would remove those seven names, which are great companies, very fantastic businesses.

[00:49:12] Francois Rochon: Amazon, Microsoft, Meta are great companies, but if you would look at the rest of the market, those 493 stocks, The p ratio is probably 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, the, Charlie said that the world has wised up.

[00:49:47] Francois Rochon: Investors have realized that owning great companies are worth paying for. If you look at Costco, it’s a fantastic company. We owned it for, I think, five years, many years ago. But the P ratio is, what, 44, 45 times? This is a fantastic business, but if you pay 44, 45 times I think it could take some years to have a decent return starting from that price.

[00:50:10] Francois Rochon: So it really depends if you focus on the top names of the S& P 500, the market is pretty expensive. If you look at those fantastic growth companies like Costco or Copart for instance, I think Copart is a fantastic business, we don’t know, but I’ve been following it for many years. And it trades at 37 times earnings.

[00:50:31] Francois Rochon: So if you look at those companies, of course valuation looks high in general, but you can find companies that are little outside the radar or are not as popular or not viewed as strong. And you can find some good companies, great companies, trading at the more reasonable valuation you can. 

[00:50:55] Clay Finck: Turning back to humility, one of your comments.

[00:50:59] Clay Finck: And 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 when, than what you initially thought. is appropriate. We’ll call it around 20 names today, rather than maybe 10, maybe even less back then.

[00:51:24] Clay Finck: I was curious if you could speak more to one reason I find this so interesting is hearing it, from one of the greats. Just an amazing investor who’s 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. I’m curious if you could speak to that overconfidence that you Hopefully overcame.

[00:51:43] Francois Rochon: 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 good investors. It would not like to be named. I know that pretty well and they do have 10 names for them and they have results. And there is probably some volatility from one quarter to the other, but they don’t mind.

[00:52:05] Francois Rochon: 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 to 25 names, just different. 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 so that you do have some odds of beating the index.

[00:52:29] Francois Rochon: 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 enough diversification so that if you make one or two mistakes, it doesn’t hurt the portfolio too much.

[00:52:46] Francois Rochon: 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. And but you’re right, in the first years I was more concentrated than probably just from experience. I do remember one of the first big stocks I had that did very well was Sun Microsystem, and I remember buying it in 1994.

[00:53:12] Francois Rochon: 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 company, so it was growing probably 20 percent 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.

[00:53:36] Francois Rochon: So you paid 12 for more than 2% of earnings. So you, in fact, paid something like five times earnings for a very strong growth company. So I bought Sun Microsystem and it did very well and it became a large part of the portfolio in the first years, I think, four, nine, five, nine, six. And at some point, I think it Traded at 20 times earnings and I said it’s way too expensive.

[00:53:59] Francois Rochon: And I sold it. And after I sold it, I think it was probably 1997. I think the stock increased by fivefold in two years. So it went to almost a hundred times earning at some point. So it shows how the market can have ups and downs. So be very optimistic about a business and paying a hundred times earnings.

[00:54:18] Francois Rochon: Five years before that was trading at less than five times earnings. So that’s one very interesting thing. 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 by Oracle at some point. I don’t remember when, but many years later.

[00:54:38] Francois Rochon: So Sun was a great opportunity in 1994. But with Insight, 30 years later, it doesn’t exist anymore. So I’ve learned from that. If you want to be a long term owner and a long term shareholder, just buying a great company at a Very low valuation is not enough because you have to be at least confident that the business model of the business is durable.

[00:55:04] Francois Rochon: They have a competitive advantage that can be sustained for many years. That’s very hard to do, but when you think about it, O’Reilly Auto Parts today is the same business as it was 30 years ago. They’ve grown, big numbers, but, or Starbucks, it’s basically the same business as it was 30 years ago. That should enter in your investment process.

[00:55:27] Francois Rochon: Not only the balance sheet, the quality of the business, but the durability of the business. 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 

[00:55:42] Clay Finck: anymore. It’s having that humility and Having that experience that things can change rapidly over, over five years or so. The first example you gave where the company ended up being a dud over the long run, how you bought it and just hung on to it ended up not being a great investment.

[00:55:59] Clay Finck: So it’s just recognizing, yeah, one of those in a 10 stock portfolio really makes a, 

[00:56:03] Francois Rochon: And so Microsystems were a very strong business, they had strong products, they had this, these Unix computers, and they had, in some ways, I think they had invented the Java language, and I think the CEO was great 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 missed one detour at some point, you’re out of the game and, look at Intel for so many years, it was an incredible business.

[00:56:31] Francois Rochon: When Andy Groh was the CEO, it was one of the best businesses in the world. The last few years have been tougher for them. So it’s just the nature of the business world. And I think it’s even more true in technology. 

[00:56:46] Clay Finck: As a host of the show, I’m somewhat in awe of how many people in our audience are massive readers.

[00:56:53] Clay Finck: 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. You’d love reading, you’d 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.

[00:57:11] Clay Finck: Maybe it’s a book you’ve read recently, or maybe it’s a book you’ve continued to revisit over the years that’s really made a big impact on you. 

[00:57:18] Francois Rochon: 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, it asked to be rich, and it’s a very interesting book, and there’s a chapter in it on the stock market and how to approach the stock market, and it was written many years ago, and in that example I think it talks about the correction of 1962, Dow Jones went out 20 percent I think at some point in the 19th century.

[00:57:45] Francois Rochon: We’ll talk about all the companies he could find. I think in the book he also discusses the fact that he was able 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 on Wall Street.

[00:58:09] Francois Rochon: 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, it was really a businessman, but also he was a very intelligent stock investor, in addition to being a great builder of enterprises. There’s many interesting books. One that we don’t hear about anymore, but was written in the early 80s was the Money Masters by John Train.

[00:58:39] Francois Rochon: 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 Tapleton. And when he wrote that, Warren Buffett was not that well known, so it’s very, I re read that book a few years ago, and it’s as interesting as when I first read it, and people don’t really talk about John Trane’s book, but he wrote many interesting books, because I think after that he wrote a follow up called The New Money Masters, The New Money Masters.

[00:59:09] Francois Rochon: 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 nineties. Very good book too. So John Trane 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 good.

[00:59:28] Francois Rochon: I dunno if you can still find them in libraries or bookstores, but I think they are worth rereading. 

[00:59:36] Clay Finck: And I mentioned earlier. that I was quite impressed by your patience over the 30 year tenure, just embracing that slow, patient, long term growth in the early stages, and then reaping the rewards much, much later.

[00:59:53] Clay Finck: And I was thinking about the recipe for 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 that reading 10 Ks and annual reports is not the most fun thing in the world.

[01:00:15] Clay Finck: So I was curious what it is about the game of investing that really sparks that intense passion within you. 

[01:00:22] Francois Rochon: I think I would like to find you talking about masterpieces in art, there’s probably masterpieces in business also. I like the idea of finding a few gems. The few outstanding creations, human creation, because a work of art, a painting by Jackson Pollock, or a business that was built by Robert Wilmers and Ed DeBake, for instance, are gems.

[01:00:51] Francois Rochon: It’s very rare that you find such fantastic businesses that have endured decades. done so well. I think I’m interested in finding excellence. And I have the same emotion when I discover a new company. I didn’t know that was very interesting, that incredible track record. It’s the same emotion as when I discover a new artist.

[01:01:18] Francois Rochon: I saw an exhibition in a museum and I saw a great artist and wow, excited that 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 excellence, and by definition, the exceptional is rare. So you have to, I think it was Peter Lynch, that they should want to find pearls.

[01:01:43] Francois Rochon: 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 stimulating quest to find outstanding artists or corporations. It’s exciting. And when you do find them, it’s like finding a pearl in an oyster.

[01:02:09] Francois Rochon: You’ve opened 200 oysters and your hands are very You’re, are very tired and you’re, you’ve, the next one’s going to be too painful to open so you want to stop but you’re, 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.

[01:02:30] Francois Rochon: And sometimes even companies change, they change for the better. Sometimes for worse, but sometimes they do change for the better. So the company you’ve been following for many years was okay, but not that great. And something happens, new management, a new product, and suddenly the company is blossoming.

[01:02:47] Francois Rochon: That’s exciting when you find that. I think that’s what’s really kept me interested in that activity. 

[01:02:54] Clay Finck: Wonderful. Francois, thank you for sharing so many gems during this conversation today. I really appreciate the opportunity to chat with you. And I know the audience really appreciates you sharing all your knowledge here.

[01:03:07] Clay Finck: I’ll be sure to get all those books linked in the show notes for those interested as well in checking those out. So Francois, 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 Giverny Capital? Where can they go? 

[01:03:23] Francois Rochon: They can go to our website, giverny capital.

[01:03:25] Francois Rochon: com. And also 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 with flowers and water lilies, and it was a subject of the paintings of the last few decades of the great master. And you can visit the Foundation Claude Monet at Giverny, it’s a fantastic visit.

[01:03:50] Francois Rochon: I would encourage anyone, but you can at least go to the website of the Foundation. My son Goldman, and look at those beautiful flowers and all the ladies that Goldman has created years ago. So the origin of Giverny Capital, the name comes from that visit I did in 1990 and Erni when I was very young and still one of the most beautiful places I visited in the world.

[01:04:15] Clay Finck: How old were you when you visited it?

[01:04:17] Francois Rochon: I had just graduated as an engineer, so I was 21 years old. 

[01:04:21] Clay Finck: Amazing. And you still had that passion for art back then as well. 

[01:04:26] Francois Rochon: Yeah, I was already, I went to the Musée d’Arts in Paris, I think, when I was 18 years old. And this is when I discovered Tolman’s painting and have been interested in art since then.

[01:04:39] Clay Finck: Wonderful. We’ll close it out there. Thank you so much, Francois. I really appreciate the opportunity. 

[01:04:45] Francois Rochon: Oh, that was my honor. Thank you very much.

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