While browsing all the articles that were posted on GuruFocus today, I noted an article about Giverny Capital, which I have never heard of until today. This article contains the 2013 annual letter to investors from the founding partners of Giverny Capital. Their return crushed the market by a very large margin and what’s more intriguing is that during the down years, their loss is much smaller than that suffered by the general market. Below are the returns of the Giverny Portfolio since 1993:
Those returns are by all means remarkable. What’s more remarkable is the way those returns have been achieved. Fortunately, The Giverny Portfolio managers (especially Mr. Francois Rochon) provided us with a great amount of insight. I’ve jotted down some notes from the 2013 letter and hopefully, we can all benefit from the wisdom passed along by Mr. Rochon.
1. Giverny’s 2013 return was achieved in a “triple play” fashion that includes the following components:
- An earnings growth rate of 15% for our companies with an additional 1% from dividends.
- An increase of the average price to earnings ratio (P/E) of our stocks from 14x to 17x.
- A currency gain of 8% linked to the drop of the Canadian dollar from $0.99 to $0.94.
2. Since 1996, the companies in Giverny’s portfolio have increased their intrinsic value by 867%, or about a tenfold increase. Meanwhile, the value of their stocks has increased 903% (including dividends but without currency effects). On an annualized basis, Giverny’s companies increased their intrinsic value by 13.4% and our stock returned 13.7% per year. The similarity between those two numbers is not a coincidence. During this same period, the companies comprising the S&P 500 increased their aggregated intrinsic value by 259% and saw their stock prices rise by 317%. Market performance and corporate performance are rarely synchronized over the course of a calendar year. But as more time passes, the synchronization between the two inevitably begins to reveal itself.
3. In each year’s annual letter, Mr. Rochon provides three annual medals for the “best” errors of the past year. In this year’s letter, Mr. Rochon said the following: “It is with a constructive attitude, in order to always improve as investors, that we provide this detailed analysis. As is often the case with stocks, errors from omission (non-purchases) are often more costly than errors from commission (purchases)… even if we don’t see them on our statements.”
4. Interesting, almost all three mistakes of 2012 (Trip Advisor, Buffalo Wild Wings and Church and Dwight) were due to inaction resulted from waiting for a better entry price and consequently “missing the boat.”
5. Last but not least. The following paragraphs reveal powerful messages to non-professional investors in terms of choosing outstanding businesses as well as risk management.
“Using rationality, along with our unwavering optimism, we trust that the companies we own are exceptional, led by top-notch people, and destined for a great future. They should continue to prudently navigate the often troubled waters of the global economy. Furthermore, the valuation assigned by the market to these outstanding companies is very similar to the valuation of an average company in the S&P 500, despite the fact that our companies have better growth prospects than average. Therefore we consider the appreciation potential for our portfolio, both in absolute and relative terms, to be well above average.
We also want you to know that we are fully aware of and grateful for your votes of confidence. It is imperative for us to not only select outstanding companies for our portfolios, but to also remain outstanding stewards of your capital. We certainly like to achieve good returns (and have developed a taste for it), but it must not come at the cost of taking undue risk. Our philosophy to favor companies with solid balance sheets and dominant business models, along with purchasing these companies at reasonable valuations, is central to the risk management of our portfolios.”