[00:02:51] François Rochon: And I really try to give the information I would like to have you know, if I was in their shoes.

[00:02:58] Clay Finck: And I think on page one of every single letter, I love that you highlight to your investors that they truly are partners as each partner is invested alongside the portfolio managers in terms of the stocks they’re invested in.

[00:03:11] Clay Finck: So everyone’s in the same boat and all the incentives are aligned. Why don’t most investment managers view their investment business as a partnership?

[00:03:20] François Rochon: Well, I cannot really speak for others. I would guess that it’s tough because usually the right thing to do for clients, it’s not exactly, not all the time, but often it’s not exactly what they’d like to be doing.

[00:03:35] François Rochon: So when the market is going down, a lot of investors want to sell or reduce their equity exposure. Some money managers, they don’t want to lose their clients, and they don’t want their clients to be disappointed. So they’ll perhaps been a little bit what they think would be the right thing to do.

[00:03:55] François Rochon: Just that the, the client is happy. And that’s a little strange because usually in any business you want to please the client you wanted. The client is always right. I would say in investing it’s a little different. Sometimes you have to fight a little bit with your clients so that you convince them.

[00:04:14] François Rochon: That doing the right thing for them long term, and I think that’s why it’s so important that we’re in the same boat. I’m not promising results to clients. What I promise is that we’ll all be in the same securities. If I do well, they’ll do well. I think that’s very important. So what I recommend to clients is what I’m doing for my myself.

[00:04:38] François Rochon: So that’s the way I’ve approached this business. When I started it, the 1998, so 26 years ago, I think that’s the right way to approach, but it’s not necessarily easy on the business way of looking of doing that. But I think long term, that’s the right approach.

[00:04:56] Clay Finck: Yeah. I think getting that pushback from your clients ties into the tribal gene. You’ve touched on in the past.

[00:05:03] Clay Finck: When we look back at 2024, what sticks out to you at a high level and what did you learn from the year?

[00:05:10] François Rochon: It was a good year. I mean, in general, most stock market in the world did well. Most indexes had, you know. More than the average year. So if you think that the long term equity do eight, nine or 10% a year, most markets were higher than that this year.

[00:05:29] François Rochon: So it was a good year for stocks still in the US at least very driven by the very, very large cap companies. So if you are, were not invested in those securities. It was a little tougher, so I don’t have the exact number in double my head, but I think the S&P did 25% last year, but probably the unweighted S&P 500 has done perhaps 13 or 14%.

[00:05:56] François Rochon: So it’s been a good year. But if you were not invested in the main stocks of the S&P, it was a, an NOCO year, but not as great as the one of the S&P 500.

[00:06:08] Clay Finck: And in 2024, the Rochon Global portfolio return 13.6% after fees, and your benchmark return 16.6%. Since your portfolio inception in 1993, your average return is 13.6% versus the benchmarks 9.4%.

[00:06:27] Clay Finck: And when I was looking at the table that outlines the history of the fund versus the benchmark, what sort of stuck out to me is. Just how well the benchmark has done over the past decade. So your benchmark is a hybrid of the S&P 500 TSX and a couple of others. In seven of the past 10 years, the benchmark returned 16% or more, and the remaining three years had a negative return, which brought the averaged over the last decade to around 9.7%.

[00:06:55] Clay Finck: So slightly higher than I’d say your stock market average and not quite as high as I would’ve anticipated. Looking at all those double digit years, what implications does the benchmark doing quite well have for your business, if any?

[00:07:11] François Rochon: Well, the S&P 500, that piece has done extremely well, much better than the other averages or other index, mostly because, like we said, the top holdings have done so well.

[00:07:24] François Rochon: They’ve grown their earnings at much higher than average rates. The PE ratio also has increased quite a lot, so I don’t exactly remember the right precise figure. Well, I think at the end of 2024. A top four of the S&P 500. So Apple, Microsoft Nvidia, and Amazon. I think their average PE on 2025 is 33 times earnings.

[00:07:50] François Rochon: That’s quite high historically. So it drives the whole index to an average P of SALTAN 23 times. But if you would consider the other 496 securities in the S&P 500. The average PE is probably 19 times, which is a little closer to historical. Still a little higher. We’re in the high side evaluation historically.

[00:08:13] Clay Finck: And you had mentioned in your letter that some of your retail holdings didn’t perform as well as you would’ve hoped. Includes companies like Five Below and Lululemon. And then some other names that did quite well are software type companies. So Meta, Alphabet, Booking Holdings, Constellation Software.

[00:08:30] Clay Finck: Over the years, has your strategy changed in terms of the business models or industries you like to be invested in?

[00:08:37] François Rochon: Not really. I think I’ve been always open to all industries, all sorts of companies. I really try to find great companies, companies that have some kind of competitive advantage. It can be a little harder when you go into technology securities because this world is changing so fast.

[00:08:57] François Rochon: How sure can you find a durable, competitive advantage? Because if the competitive advantage is not durable. It’s not really a competitive advantage. You want it to be large and you want it to be durable. And so probably with the experience of having more than three decades now of investment experience, I’ve learned that a lot of companies that are dominating in the technology field.

[00:09:23] François Rochon: Sometime they, they miss a turn and they lose their mojo, which hey could use that word, and they don’t maintain their competitive net. And we could look at many, many companies that 10 years ago, 20 years ago, they were dominating and they’re not today. So I think that’s a big lesson. But we did very well with some technology companies, but I think they all are kind of a very sustainable competitive advantage, or at least they were in some kind of niche that prevented competitors to attack their castle, the MO around the castle.

[00:10:01] François Rochon: Company, Constellation Software. I think it’s a very interesting example. Yes, they are in the technology industry, but I think they have very dominating business in all sorts of industries linked to the software, but a lot of recurring revenues and a lot of niche markets, and I think that makes them less vulnerable perhaps to new changes in the technology world.

[00:10:26] François Rochon: And if you look at the two companies like Meta and Google, Alphabet, they’re not really, in my opinion, technology companies. They’re advertising companies and they’ve built this incredible network and they’re these incredible algorithms. But it’s not changing that fast. I mean, when you think about Facebook and Instagram. It’s basically the bus. The same business today. It was 10 years ago. You know what I’ve changed is the number of users and the number of ads they’re able to sell to those, all those users, and I think that’s fantastic businesses.

[00:11:05] Clay Finck: I can’t help but think about the strong bias I can have and getting pretty interested in technology and software companies.

[00:11:12] Clay Finck: For some of the reasons you just mentioned, where these are asset light, you tend to see them scale very well, you see high margins and whatnot. Do you put guardrails on yourself to prevent too much concentration into one particular industry or sector?

[00:11:28] François Rochon: Well, we try to have a group of diverse businesses and diverse industries, but I think it’s much more important to own great companies that to have some kind of proper diversification.

[00:11:40] François Rochon: I think with 20 to 25 names, you are diversified enough so you don’t have a big weight in one single security. That could really hurt you if something goes wrong. It’s also concentrated enough so that you have some odds of beating the index, because of course the more stocks you own, the less. The odds of beating the index.

[00:12:03] François Rochon: So you want the right balance in the numbers, and I think that that right balance is 20 to 25 names. Of course, you don’t want them all in the same industry, but I think it’s much more important to find great companies. There’s many sectors that we do avoid. Everything linked to natural resources or commodities.

[00:12:23] François Rochon: We think it’s very hard to it’s not impossible, but it’s very hard to build a competitive advantage when you’re selling and commodity. So we, we just stay away from those industries and we don’t like industries also that have a lot of regulation, so, well, we’re not very interested in investing in utilities or, and healthcare related businesses where there’s lots of business with Medicare or Medicaid so that you can be sensitive to some changes in political reimbursement rates. So Allied, for instance, medical equipment companies, because I think they’re much more stable than some healthcare services business. So yes, we want diversification, but there’s many sectors that we do avoid, but nothing against those sectors, just that it’s very hard to have a competitive advantage in those sectors in my opinion.

[00:13:18] Clay Finck: From the beginning of your career, you’ve been an advocate of not trying to time the market and always being fully invested for the long term whenever possible. And it’s easy to believe that now isn’t the best time to buy stocks because we just had two phenomenal years in 2023 in 2024, and when we go back through history, it tends to show that we’re in for a wild ride when we have two 20 plus percent years for the S&P 500, what do you think people might be missing when they say today?

[00:13:47] Clay Finck: Isn’t a great time to buy stocks and it’s a better time to stay in something like cash?

[00:13:52] François Rochon: Well, you said it there, Clay. I think from day one, I wanted to be a hundred percent invested in the stock market and there’s many reasons for that. But when I did my self-education in investing, I read out, I could find on the great investors, Warren Buffet, Ben Graham, Peter Lance, Phil Fisher, John Templeton.

[00:14:16] François Rochon: They all a different ways of finding companies and different ways of investing a portfolio. I mean, Peter Lynch could own 800 names and Warren Buffet five, so different style, but they at two things in common. The first thing is they look at stocks as part ownership of businesses. So they were investors in terms of acquiring companies, not trading stocks.

[00:14:45] François Rochon: The second thing, they all believed that you could not predict the market. So I’m not saying that they were always a hundred percent invested, but they were convinced that the market could not be predicted. It was a waste of time to try and to predict that. So from day one, I decided that my mission would be to be invested in 20 to 25 companies and to act as an owner of those companies.

[00:15:12] François Rochon: And if they increase intrinsic value and let’s say 12, 13, 40% annually, eventually the stocks will work like that. So that’s my mission, is to find companies that if I own them many, many years, eventually the companies do well. I know that the stocks will do well. But you’re right, there’s some periods where valuation are much lower.

[00:15:36] François Rochon: Do remember very well the end of 2008 and beginning of 2009, which I labeled the opportunity of a generation where you could find great companies at less than 10 times earnings. Of course, you don’t find those, in the recent years, but my goal is not necessarily to when I invest in a stock is to make 15, 16, 17% annually.

[00:16:00] François Rochon: My goal is to optimize my capital to put it in what I believe will do the best, will do very well. And if it’s companies that will yield 12 to 13% instead of 13 or 16. Well, I think that’s still better than the three or 4% that I can get with treasury bills. So your opportunity cost is the right way to look at things where, what are the 20, 25 names that I believe are the best opportunities for my capital, for the capital of our clients at Giverny?

[00:16:34] François Rochon: And that’s the way I look at it. So yes. I much prefer to buy, let’s say, Disney at nine times earnings instead of 18 times. But I still think at 18 times it’ll do okay. And of course it’s better at nine times, but we’re not there. So my job is not to wait for the perfect opportunity is to allocate the capital and what to believe are the best opportunities that are available today.

[00:17:03] François Rochon: And the great thing is with the stock market, there’s always something interesting to do. There’s always some companies that, for some reason or the other, they’re not that popular with Wall Street and you can purchase them at reasonable evaluation. And I’ve never, in the last 31 years I’ve been doing this, I don’t remember a period when there wasn’t some opportunity and some securities.

[00:17:27] Clay Finck: That’s a wonderful point. I think a number of investors like to paint broad strokes on the market and say. Here’s what the S&P five hundred’s priced at. The market’s expensive, but what they fail to recognize is you can sift through that list and find plenty of opportunities if you look hard enough.

[00:17:43] Clay Finck: Yeah, always. So that first attribute before you mentioned not predicting the market, you mentioned viewing yourself as an owner of businesses and you estimate what you call owner’s earnings for each company in your portfolio to judge their progress over time. I was curious if you could talk a bit about how you go about estimating the owner’s earnings for each company.

[00:18:04] François Rochon: Well, it’s pretty easy. Just take the portfolio and the number of shares I own for each company and multiply that by the earnings. So I really, I’m doing a calculation. Let’s say I was a private holding company and I owned 25 companies in that holding. How would I judge the performance of my investment from one year to the other?

[00:18:26] François Rochon: Well, I would just calculate the earnings generated by the company owned and compare it to the previous year. So if earnings are up 12%, well there’s good chance that the intrinsic value of those business has increased 12%. Though that’s not the perfect measurement, but I think it’s considered that it’s about 25 companies.

[00:18:45] François Rochon: The whole thing I think makes sense and valuation process is the right way to look at it. So I multiply the number of shares by the earnings per share of every company and add them up. And compare it to the previous year. So I think this year was 12% in terms of earning growth and we have a dividend of probably 0.5, 0.6%.

[00:19:07] François Rochon: So it add up to 12.7% when you put the two together. So that’s been the, what I constantly, the intrinsic performance of the portfolio. And the important thing with the owner’s earning table is to look over many years. And it’s pretty incredible when you look at it, the how highly correlated those two are, the performance of the intrinsic business and the performance of their stocks in the long run.

[00:19:36] François Rochon: And I talk about a close to 13% annual growth in earnings per share owner’s earnings of the company’s own. Over the years, the securities themselves have done about 13% annually. So, and it makes sense in the stock market, can be very volatile, can be very rational from time to time. But in the long run, it always reflect the intrinsic value of businesses and he used to say that the market was manic depressive in the short term, but in the long term it was a waiting machine. And I think that’s still many decades after the intelligent investor. That’s still the right phrase about the stock market.

[00:20:15] Clay Finck: Yeah. I love how it can help simplify the game of investing.

[00:20:19] Clay Finck: I’m always reminded of Will Danoff in William Green’s book, Richer, Wiser, Happier, he shared with William that just a simple phrase, the stocks follow earnings. You illustrated intrinsic growth of the portfolio has been closely aligned with the growth in earnings per share. And I have the numbers right here where the stock prices increased since 1996 by 3344%, and the intrinsic value or the owner’s earnings increased by approximately 3266%.

[00:20:48] Clay Finck: So practically 13% annual growth for each. I also ran across this other chart online of a meta, the stock price over the past five or so years alongside the earnings per share and it’s, it’s amazing the difference of when that earnings per share fell off in 2022. The stock price just got absolutely hammered.

[00:21:08] Clay Finck: And then once the UPS recovered market sentiment quickly recovered right along with it. I had one more question related to owner’s earnings. So how do you think about reinvestments and R&D and CapEx as it relates to owner’s earnings and the intrinsic growth of your portfolio companies?

[00:21:27] François Rochon: Well, I guess R&D already expands so.

[00:21:31] François Rochon: The earnings are, you know, after R&D expenses, probably in terms of expenses of new investments. We’ll look at that if all the cash flows goes into CapEx and new acquisition of things like that, it’s important for the long term that these are wise, decision and capital allocation is done properly. That’s why I like companies that have lots of free cash flow, and not all of them, but many of the companies we own, they use that free cash flow to buy back shares.

[00:22:05] François Rochon: So if they grow earnings by nine or 10% and they buy back four or 5% of the shares each year while the earnings per share increase goes to 14 or 15% annually, and we have many companies in the portfolio, I’m thinking like Booking or high serve. They are buying back shares aggressively. And if the stock price is reasonably valued, that’s usually a very good allocation of capital.

[00:22:32] François Rochon: It’s better than investing in other projects that are not as strong as the existing business or some acquisition that per would say the diversification instead of just. Buying back the shares of the company, you already know very well. And you know it’s worth more. I would say that capital allocation is very important when we look at and when we make a final decision for an investment.

[00:22:58] Clay Finck: Absolutely. Let’s jump to your podium of errors. So each year you famously highlight three errors you’ve made during the year or in years prior. Similar to how Buffet oftentimes shares his investment mistakes and his letters as well. Can you talk about how helpful it’s been for you to write down and ponder the mistakes you’ve made and sharing them with your partners?

[00:23:20] François Rochon: Yes. I think it’s a vital part of improving ourself as investors to look at the mistakes. So I have a section in the annual letter called Five Year Postmortem. So we always look at the decision by and cells of five years ago. But the error, it’s really about the big mistakes and most of them are what the war and I would call mistakes of emission, that commission, but things you didn’t buy.

[00:23:50] François Rochon: And there’s lots of companies that don’t really understand, or they are outside My circle of competence have done extremely well and there’s nothing wrong with just staying away from things you don’t understand very well, but some companies I did understand very well, and I did not invest usually for futile reason.

[00:24:11] François Rochon: Main one being not ready to pay ai, perhaps a higher PE ratio. I’d like to, and that’s a tough balance because you want to be very conservative and have a margin of safety to get back to be Graham again. So you want to buy a companies that not only has great fundamentals, but have a margin of safety in terms of valuation.

[00:24:35] François Rochon: But sometimes you’ll miss great returns because perhaps you should have paid a little higher PE than you were ready to do. And the example of a Cintas, this year’s gold medal is a good example because I knew the company very well. I understood the business, a very simple business, and the valuation was reasonable, perhaps not a bargain, but reasonable.

[00:24:59] François Rochon: And I knew that the acquisition of G&K Services would really add to sales earnings and margins, and I didn’t do it then. I think the stock is up six or seven or eight times since then. So it was a big mistake. So usually the big mistakes are companies that are in our newer circle of understanding that you did not purchase because perhaps you wanted to be too prudent because great companies are not that common.

[00:25:28] François Rochon: So when you do find them, if the valuation is not extreme, and there are some examples that I think they’re great companies with the valuation just too high. But if it’s reasonable. You should purchase some shares and you know, if the stock go down 20% you can just buy more. So it’s not the end of the world.

[00:25:47] Clay Finck: I also wanted to touch on the final piece of your letter before I move on to a couple of your holdings, if you don’t mind. So in the conclusion you wrote about how risk management in equity investing boils down to just four considerations. So I was curious if you could talk about those four.

[00:26:05] François Rochon: I talked a lot about it because the risk of an equity portfolio, I believe it is way too much focused on volatility.

[00:26:14] François Rochon: And I think that’s not the right way to look at it. And in fact, I would say nephology three is a good thing. You want more of it. You want a lot of opportunities. Sometimes for a stock to go down 50% without any reason, that’s not a bad thing. Just an opportunity to buy more or even sell something else and buy more of what you already own.

[00:26:34] François Rochon: That looks much more attractive. So I think the stereotype that risky, he calls volatility is not the right way to look at it. And, but I wanted to be very thorough and think about what is really the risk of an investment portfolio. And I tried to come up with four dimension. I would say the first one, yeah, we talked about it.

[00:26:54] François Rochon: Diversification. I think the right balance is 20 to 25 names. That’s the right balance for me. I mean, if you talk about sad, he passed away, but if you talk to Charlie Munger probably would’ve said that three or four or five great companies is way enough. And I know some investors that have a hundred names, but for me the right number is 20 to 25, where like I said.

[00:27:18] François Rochon: It’s concentrated enough so that you have good odds of bidding the averages, but it’s also diversified enough that if you make a mistake or it’s just the nature of the capitalist system, that sometimes companies are a victim of some random things or new changes or competition that it’s very hard to find permanent withers.

[00:27:39] François Rochon: So you have to accept that. So almost any company, there’s always an intrinsic risk that there’ll be changes in their business model or. In their environment that make them a little risky. Of course. And that’s the second part of the, that process. But you have to look at the intrinsic risk of each company.

[00:27:57] François Rochon: But first I think that we’re having 20 to 25 name. Is diversification enough? If you have poor hive name? Well, you have to be very sure that you understand those business very, very well, and you have a large margin of safety in terms of the balance sheet and the evaluation. I have good friends, great investors, that have done well on a 506 security, so it’s still possible.

[00:28:23] François Rochon: So the second dimension, which is probably the most important one, is the quality of the company owned. So, like I said, we want companies that have a competitive advantage. Some ways that they protect their economic castle with a moat from invaders. Those that wanna take your castle want to take your business, and usually great companies realize great return on capital and great margin without the use of leverage.

[00:28:53] François Rochon: If you need a lot of leverage to have good return on capital, it’s usually not a sign of it’s that great of a business. So we don’t like it when companies are a lot of debt on the balance sheet. So that’s, I think the lower the level of leverage, lower the risk, the intrinsic risk of the business. And also accounting is very important.

[00:29:14] François Rochon: You know, when you analyze the intrinsic value, you try to assess the earnings. There’s an old saying that earnings is an opinion and cashflow is a reality. Usually the difference between the two will be aggressive accounting. So I always look at how the accounting is done at the company, and I am quite often come up with my own calculation of earnings.

[00:29:37] François Rochon: And sometimes it’s very close to what the company has announced in their, on the 10 K and 10 Qs, but sometimes it’s quite different. So, but that’s an opinion. That’s my opinion of the earnings. And I like companies that are very conservative in their accounting, and I think it’s much more than just accounting.

[00:29:57] François Rochon: It’s a sign of how the people at the top of the companies are. If they’re conservative in the accounting, they’re probably conservative in everything else. And if they’re aggressive in accounting, they’re perhaps a little aggressive on everything else too. So that’s usually a kind of a sign of the company culture.

[00:30:17] François Rochon: But they have a very conservative accounting and we talk about meta. If you look at meta’s financial statements. It’s probably one of the simplest business I’ve seen and everything is expense, so nothing, almost nothing is capitalized, and I like that. So when you look at the earnings of meta, I like to see, it’s like the worst case scenario.

[00:30:38] François Rochon: So it’s probably the real earning is probably a little higher. So it can’t say that about all the businesses. I can assure you of that. Yes, the intrinsic quality of the business, competitive advantage, having a durable advantage, but also looking at the counting and the balance sheet, I think these are very, very important.

[00:31:01] François Rochon: So after that, I found companies that meet your criteria comes a third part of the risk assessment, how much you have to pay for those companies. So that’s the valuation part. And again, we go back to Ben Graham of the importance of margin of safety. You don’t want to have valuation that discount many, many years of growth in advance, because that’s the nature of capitalist system.

[00:31:27] François Rochon: There’ll be recessions, there’ll be some potholes, there’ll be some problems that almost every company will encounter at some point in their existence. And if you have a very high valuation that has discounted many years of growth, when their tough years arrive, they’ll probably be a reevaluation of the PE ratio by Wall Street, and those can be very painful years.

[00:31:50] François Rochon: So like I wrote in the annual letter, of course, a company that trades at 40 times earnings is if everything else is equal, is riskier than a similar company that trades at 20 times earnings. So valuation is one dimension of trying to measure the risk of your portfolio. So we have, like we talked about the owner’s earnings, but we try afterward to come up.

[00:32:17] François Rochon: With the kind of assessment of valuation of the portfolio. And historically, if you look at our portfolio, the average PE ratio has been very similar to the S&P 500. Probably it’s a little lower these days because like we explained, the S&P 500 PE is a little higher than because of the top four of the index.

[00:32:39] François Rochon: But usually it’s very close. So to me, we own companies that are growing the intrinsic value by, let’s say 12% per year. Plus we receive a 1% dividend, so that’s a 13% intrinsic growth. And the S&P 500, probably as a whole over many years, will grow their remaining six to 7% a year, give a 2% dividend, so you get a eight to 9% return.

[00:33:04] François Rochon: So we have probably a 4%. Better in terms of intrinsic performance of the portfolio at a similar valuation. To us, that’s a level of risk in terms of valuation, I think is reasonable. And finally the fourth part, which is not really linked to the companies themselves or the stock market. It’s really about the investor in themselves.

[00:33:28] François Rochon: We, we talked about it at the beginning of the podcast, but I think it’s a mistake trying to predict the stock market that it’s a mistake but doesn’t prevent many people trying to do it. And I think the more you try to predict the stock market, the more you trade in general. I think the lower the return of the portfolio.

[00:33:46] François Rochon: So increased trading, increased predicting the market, I think increases the portfolio’s risk, and I don’t think a lot of people understand that very well. I mean, John Bogle talk about ETFs and said that it was like giving matches to a pearl maniac. I don’t remember the exact number, but I think the average holding period of the ETF of the S&P 500 is something like 17 days.

[00:34:12] François Rochon: I mean, how ridiculous is that? So at the ease of trading of securities like ETS. It gives the illusion that they have a riskless investment or approach, but in fact, the very fact that they’re trading so often increases the risk of the portfolio. They’re not passive investors at all. They own passive investments, but the way they, they trade them makes them active investors.

[00:34:38] François Rochon: And like I said, I think the more you trade, the higher the risk goes for reducing your return going forward.

[00:34:46] Clay Finck: And I’ll also mention that Giverny’s average holding period, first talk is eight years.

[00:34:52] François Rochon: Yeah. Used to be five years, but we’ve grown to be more patient over the years.

[00:34:57] Clay Finck: It’s quite a good attribute and shows, you know, how good you are at selecting those quality companies.

[00:35:03] Clay Finck: When I look at the four considerations you shared here, we have diversification, quality of the business valuation, and investor own behavior. And to a large extent, we have a pretty big control over a lot of these aspects. We can control how diversified we are. We can control what types of quality companies we want in our portfolio.

[00:35:23] Clay Finck: We control what valuation we decide to interact. We can’t control the valuation the market offers us, but we can take advantage when those opportunities are given to us. And then of course, we can control our own behavior, which pointing to the tribal gene you’ve discussed before can be extremely difficult for some people to control their behavior during market panics.

[00:35:41] François Rochon: Well, I think if they had to return in one sentence, you want to own great companies for many, many years, and they hope that in the long term. The longer you own securities, the higher the odds that the market will reflect the intrinsic value of the business. So that’s what you want to do. You want time to be on your side.

[00:36:07] Clay Finck: I wanted to take the chance to chat about a couple of your holdings. So according to your 13 Fs you acquired chairs and Booking holdings in Q1 and Q2 2024. I love how with a number of your holdings, you’ve been following the company and the industry for 10 or 20 plus years. So in this case, you were following Expedia in the early two thousands and discovered one of their main competitors Booking Holdings.

[00:36:32] Clay Finck: Talk about what you admire about this business and what led to you eventually making it a core position in your fund.

[00:36:38] François Rochon: Yeah, I don’t know if you remember that, but Expedia was a spinoff of Microsoft, so it became public, I think it was in early 2000. I don’t think it was profitable at that time, so it didn’t fit all the criteria, but I thought that the internet was really the way of the future for traveling.

[00:36:57] François Rochon: I mean, when I looked at that the first time, I said, well, the travel agency business I’m not sure that’s a great future. So I think I’ve been right on this and Expedia, and Booking and Priceline have done extraordinarily well, and they’re almost now dominating the industry. But the transition to everything online for travel is not completed.

[00:37:20] François Rochon: I think it’s still having some good years to really be completed, if I could say that that way. I think personally that Booking is probably the best managed of all the, the companies in that industry, and I would include the recent Airbnb, which has really transformed that industry. And Booking, I think, was wise enough to realize that the Airbnb was a threat and they started their own alternative lodging business.

[00:37:49] François Rochon: And I think the last few quarters, that segment of the business has grown faster than Airbnb. So Booking has done a very good job of adapting to that threat, and that’s another good thing. That I believe Booking did was probably some six or seven years ago. They made the decision of transiting the business from what they call being an agent to a merchant where they used to be mostly a third party business, and now they acquire hotel rooms or airplane tickets or other travel items.

[00:38:22] François Rochon: And they sell it so they have a more direct relationship with their clients. And also they have increased the relationship with clients in terms of using their apps instead of perhaps using a certain engine like Google. So they’ve really done a good job the last six or seven years. So increasing their relationship with the client and at the same time, I believe, increasing their moat.

[00:38:46] François Rochon: So at first there was a cost in terms of margins because the agent had a much better margin than the merchant business. So I was a little worried at first that the margin would be much lower and I wasn’t sure if they would be able to get back to what they were, let’s say, in 2016 or 17. But if you look at it, I think the highest margin in terms of net margin was close to 34% in 2014.

[00:39:15] François Rochon: And in 2022 it was 23% and 2023, it was 26%. And last year is what? 27%. So they’re not back to the level they were 10 years ago, but it’s still a good margin level. And what I like about Booking as they generated a lot of cash, and I talk about the importance of a conservative accounting and Booking is very conservative.

[00:39:39] François Rochon: Everything is expensed. So when you look at earnings, it’s free cash earnings. And they’ve been buying back shares with the excess cash in the last five or six years, they bought back on average 4% of this share each year, even in the very tough year of 2020 and 2021. They were still buying back shares and they were still profitable, which is incredible because in 2020 anything related to travel was not profitable.

[00:40:07] François Rochon: And Booking really continued to be profitable. Earnings went down, but still in the, not in the web. So they’ve done an incredible job. And I believe when we purchased shares last year, we paid something like 19 times earnings or something like that. So the valuation was very reasonable. For a company I believe can grow 12 to 14% annually.

[00:40:30] François Rochon: And you know, probably a third of that will come from buybacks because that’s such a high level of cash generation and I think a good capital location policies. So I think it’s a great company. And Q4 was very good. So, so far it’s been almost a year now, it’s been a portfolio. It’s been a good investment.

[00:40:52] Clay Finck: Yeah, I’m seeing just over $8 billion in operating cash flow and over 6.5 billion allocated to share buybacks, which is pretty incredible to see for a business generating 85% gross margins and they’re still able to grow. In the meantime, so at first glance, the valuation does seem quite reasonable.

[00:41:09] Clay Finck: Today it’s around a PE of 25. Your return on invested capitals over 40%, and it’s almost surprising to me that it sort of trades in line with the market. Why do you think the market doesn’t place a premium on this business? Is it the travel aspect or do you think there’s something else?

[00:41:26] François Rochon: Well, there’s of course the nature of the travel industry.

[00:41:29] François Rochon: I mean, it’s all cyclical. When there’s a recession people will travel less. But we could say about, same thing about ads, when there will be a recession. Both probably meta and well, Facebook and Google will probably experience a little bit drop in ads. So, and travel, it’s a little bit cyclical, but still grain businesses, and you have to accept that it’s just almost any industry.

[00:41:54] François Rochon: There’s ups and down in the economic environment. But what counts, again, get back to Warren Buffett is the moat, the moat around the business. And I think Booking moat is pretty strong and I think it has got stronger in the last five years. So they did good things and we talked about that, but they did good thing to increase that moat.

[00:42:16] François Rochon: And I think personally, in my opinion, their moat is stronger than Airbnb or Expedia. What I also like about Booking is that they’re very good I think in capital allocation, which is another positive. So not only is this a great business. There’s no de diversification to use a inch word, and they’re just buying back stock with the excess cash.

[00:42:40] François Rochon: And since the stock is reasonably valued, it’s a good allocation. I mean, yeah, it’s like you said, it’s probably around 25 times a trailing but forward. It’s probably 21 times estimates of this year, so it’s reasonable when you think about it, it’s. It’s a lower than the S&P 500 PE, but I believe that it’s a superior business.

[00:43:03] Clay Finck: Another recent addition to the portfolio is Brown & Brown, which is a smaller holding based on the 13 Fs was looking at. And Brown & Brown was featured in last year’s letter in the podium of errors. So it’s yet another company you’ve been following for more than 20 years that’s in the insurance brokerage business.

[00:43:21] Clay Finck: What prompted you to get back into the stock after owning it in the two thousands?

[00:43:26] François Rochon: Yeah, we owned the company I think for six years, from 2003 to 2009. I think when we sold it, there was many reasons that there was a change in management. I was a little skeptical that the new management would be as good as the previous one, and also they were entering a soft market.

[00:43:44] François Rochon: So earnings when all the sideways for a few years. But that was the reason I put it in mistakes section. I missed it when it turned out that the new management did a great job and they were able to rekindle the growth rate probably in 2013 or 14. And since then they’ve probably grown earning like close to 15% annually.

[00:44:07] François Rochon: So it’s been a fantastic business. And in fact, I would argue that the most insurance brokerage businesses. Quite impressive businesses. I mean, Aon is a great business. And there’s another one was the name Archer Gallagher. I think it’s another insurance brokerage business, and it’s done incredibly well over the years.

[00:44:30] François Rochon: I think they’ve grown in the last decade, something also 15 to 16% annually. So these are much more stable businesses than the insurance companies themself because in the insurance companies, like Warren would say, surprises are really positive. You make a mistake and underwriting, you can see the results.

[00:44:52] François Rochon: So that mistake five years later. So it’s very hard for an investor to really assess. Is the reserves and the earnings that the insurance companies are releasing. It’s that the reality, and they’re not of bad faith, it’s just the nature of the insurance industry itself. So any investment in insurance company, you have to be quite careful.

[00:45:15] François Rochon: I mean, as well at night with Berkshire or Markel. But some other insurance companies can be a all riskier. But in terms of the brokerage firm like Ron Run, they don’t take risks. So I think they’re very solid businesses, much less risk secure than any insurance underwriters. And they’ve grown mostly through consolidating the industry and they’ve done a great job at it.

[00:45:38] François Rochon: And if you look at Brown & Brown, I think the, like I said, the last 10 years, the earnings per share has been growing at 15% annually, which is quite incredible. Yes, we’ve been in our market for a while. But I think they can continue just by consolidating, by making Inquisition and increasing their level of market share can continue to grow at, let’s say, 12 to 14% annually.

[00:46:04] François Rochon: Now the question is why do we have such a small weight, a little more than 1%? Well, valuation was a little high, so we paid something 25 times earnings, which is really my kind of maximum. Usually I’m ready to pay, so if the stock was trading, let’s say are 17 or 18 times, I would probably have the sense that I have a larger margin of safety and I would probably be ready to have a higher weight.

[00:46:33] François Rochon: So I was hoping, perhaps not apply partners, but I was hoping the stock would go down after we purchased it and we could increase it to two or three or 4%, but I think it’s up 15 to 20% in since we bought it. So the PE ratios of it’s even a little higher today. 28 kinds. So my estimates of 2025, it’s on the high side of historical norms, but still I think it’s a great company and I think long term it’s gonna do well.

[00:47:03] François Rochon: So by any chance the stock goes down the next quarters or years, if everything is intact, could certainly add to it.

[00:47:14] Clay Finck: Brown & Brown is run by CEO, Powell Brown, who’s the grandson of the founder. So the company was started back in 1939 and now it’s run by the third generation family member. And I sort of see echoes of the way you run your firm where, you of course are treating your investors like partners. And many times with these family run companies, they’re treating their shareholders like partners because family run companies tend to think long term, tend to have a lot of skin in the game, and they’re in the same boat as their shareholders as well.

[00:47:44] Clay Finck: To what extent do you like to look for that in the companies you invest in?

[00:47:48] François Rochon: I always liked it when the founder is still the CEO of the company. To me it was always a plus. I remember many years ago we owned the fast and all. And was his name, Robert Curley was the, the founder and the CEO. And he owned, I don’t remember, let’s say 20% of the shares.

[00:48:09] François Rochon: And that’s one thing I like, and one reason we, we’ve owned HighCo for many years now is that we really like the Mendelson family. I think they’ve done a great job there. So, we like it when the founder or the family founder is still in charge or, and still own a lot of shares. Of course it’s a little different when it’s the third generation, but you know, if the culture and education has been passed properly can be very good and, and can be the equivalent of the founder of being still in charge. And I think Brown has done a great job.

[00:48:46] Clay Finck: And if we shift gears here to Alphabet, Munger has once called this one of the best businesses in the world. And I would say this historically has just been a dominant business model rather than a family run operation. And it was actually today they announced the acquisition of Wiz a cloud security business for $32 billion.

[00:49:08] Clay Finck: And this company was started just five years ago. It makes me ask if they’re entering into diversification phase here of their business. I was curious if you had a chance to look over the acquisition at all.

[00:49:20] François Rochon: Well, I read about it. I don’t have any insight, but I remember when they purchased YouTube many years ago, people were all skeptical also, and it turned out to be no wrong.

[00:49:29] François Rochon: So who knows? I think when you’re, you decide to become a shareholder in a business, you have to trust in the management decision judgment. I would say. If you don’t trust the management, why should you be in a, a shareholder? So I think Google, historically, they’ve been around for what, 25 years now, historically, has done very good acquisition and very good and wise decision.

[00:49:56] François Rochon: And like you said, it’s one of the best business in the world so, so far. I think they’ve proved that they know how to build a business, but it is just the nature also that industry that it can change and perhaps AI can be a threat for Google. It’s an opportunity, but it can also be a threat. And so many companies are trying to find ways of bypassing Google in their search, but so far they have kept something like 80% market share and search engine, and it’s been a fantastic business.

[00:50:29] François Rochon: And last year results were really great. So there are some worries. Some of them are political. I mean, there’s some pressure from the government, to prove that they’re a mono and monopolistic situation and they, they wanna kind of attack or break up the company. So there are some worries about what could affect them.

[00:50:51] François Rochon: But so far those worries have not materialized. And the company is still dominating, still doing well, but we are aware that AI could be a challenge for Google. And you know, just Amazon has done a a very good job in going to the search while similar search businesses and selling ad. So it’s not mountable, that’s for sure, in my opinion.

[00:51:17] François Rochon: But it’s still a great business. And as for the latest acquisition, well we’ll see. It turns out that I would give the benefit of the towel to the management of Google.

[00:51:27] Clay Finck: Yeah, it’s been amazing to me how well they continue to grow. Now search queries continue to grow. Ad revenue continues to grow. I think a lot of people are just saying, LLMs are coming for Google searches lunch.

[00:51:41] Clay Finck: So we’ll see how that is gonna pan out over time. And it’s also been interesting just to see how many value investors have been investing in Alphabet just because of, of course, the. The valuation at a share price of 160, the PEs around 18 or so. Of course there’s a lot of investors interested in this company, but, you know, five, 10 years from now who knows what Google search is gonna look like?

[00:52:05] François Rochon: Well, you know, I when we purchased it in 2011, so 14 years ago, the main worry back then is that. Would Google still be as dominating in the mobile industry as they were on the desktop? And that was the main worry of Wall Street debt. And the PE ratio was 15 times. So this was a 25% growth company then you could purchase it at 15 times.

[00:52:30] François Rochon: But there were some worries and they were valid worries. But you know, when we looked at it, we believed that they could adapt to this new device and they certainly asked. I don’t have the numbers top of my head, but let’s look at the earnings here. So this year estimates are for alphabet to earn something like $9 per share.

[00:52:53] François Rochon: And if you go back to 2018, when we bought it was 81 cents. So it’s a more than tenfold increase in 14 years. So it’s been a good growth. So of course it’s much larger today, so it’s gonna be much harder to grow earnings that fast going forward. But I still think it can grow, you know, around 12% a year in terms of earnings per share on the next five years or so.

[00:53:17] François Rochon: And so valuation of, like you said, 18 times is not demanding.

[00:53:23] Clay Finck: Speaking of LLMs and AI, I was curious if you use any of these tools in your research process or in your investing approach.

[00:53:33] François Rochon: Well, I would say in the research, we can use it for some time or we will ask questions from ChatGPT, for instance, or Google, but it’s still a competitor, but it’s a very good product and we will ask questions of information.

[00:53:49] François Rochon: And we’ll always validate those information that received that to be sure that there was no mistakes there. But I would say accelerate the research process if we have precise questions on historical things or data or competitive position or what are main players in industry. So I think it’s very helpful.

[00:54:11] François Rochon: I don’t think that it can really improve your decision process. I think that’s a different thing. Using gathering information quicker is not the same thing of making wiser decision. I think in terms of decision making, I still believe that human intelligence is probably more useful, so I like to use it to gather information quicker.

[00:54:37] François Rochon: But when I think about investment, I try to really, like I said, to assess the competitive position, assess the quality of manager and set the quality of the business and trying to very, always using a margin of safety, trying to get a general view of what the thing the company will earn in five years.

[00:54:58] François Rochon: And I think when it concerns the future, I think your wins are still have advantage in terms of judgment.

[00:55:06] Clay Finck: Well, Francois, I always enjoy bringing you on the show and I appreciate the opportunity to chat about your letter and your investment approach. For the audience here, before I let you go, how can the audience learn more about you and Verney Capital if they’d like?

[00:55:20] Clay Finck: Well, it’s pretty simple. We have a website and verney capital.com and they, they can go there and there’s lot of things to ring.

[00:55:27] François Rochon: Wonderful. Thanks so much. I really appreciate it. Thank you. Thank you for inviting me.

[00:55:32] Clay Finck: Alright everybody. Thank you for tuning into today’s episode with François Rochon. I wanted to take a minute to share some details on a new event that TIP will be hosting from September 24th through the 28th, 2025 in Big Sky, Montana.

[00:55:47] Clay Finck: The event is called The Investor’s Podcast Summit. We’ll be gathering around 25 listeners of the show to bring together like-minded people and enjoy great company with a beautiful mountain view. We’re looking to attract thoughtful listeners of the show who are passionate about value investing and are interested in building meaningful connections and relationships with like-minded people.

[00:56:08] Clay Finck: Many of our attendees will likely be entrepreneurs, private investors, or portfolio managers. I’m thrilled to be hosting this special event for our listeners and can’t wait to hopefully see you there. On our website, we have the pricing frequently asked questions and the link to apply to join us. So if this sounds interesting to you, you can check it out at theinvestorspodcast.com/summit.

[00:56:29] Clay Finck: That’s theinvestorspodcast.com/summit. We only have room for around 25 members of the audience, so be sure to apply soon if you’d like to join us. With that, thank you for your time and attention today, and I hope you enjoy today’s conversation.

[00:56:44] Outro: Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app, and never miss out on episodes. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.