In March, Grahamites once again wrote for us an outstanding article for Gurufocus. In this case, the article was called "Giverny Capital - A true hidden gem." The Rochon global portfolio has had a truly impressive track record of a 15.5%* annual returns over the past 20 years, compared to 8.3% for the index. If you had invested $100,000 in 1993 with François, your assets would have grown close to $2,000,000 today. This track record, highly concentrated in stocks, is impressive and without a doubt raises our curiosity. We have read all his annual letters and were extremely impressed by the depth of his investment wisdom.
Our curiosity led us to ask Francois Rochon, the president, founder and portfolio manager of Giverny Capital, for an interview, in order to complement our understanding of his successful investment approach. We are glad that François agreed to meet with us in his office, although we unfortunately cannot reproduce the unique environment with the many outstanding pieces of art that are located at the offices of Giverny Capital. Thus, we will do our best to share with you his investment wisdom in this series of articles.
The history of François Rochon and Giverny Capital:
From a very young age, François has always been interested in the stock market, seeing that at the age of 12, he liked to play a board game called “Stock Ticker,” although he maintained for a long period the perception that finance was like gambling and much like a casino. Hence, he didn’t consider it as a career and went instead into engineering to be more “useful for humanity.” Although he had maintained his curiosity about stocks, his first computer program was related to the stock market.
In 1990, just after he completed his degree in electric engineering, Francois visited the Giverny garden in France, well known as the house of the famous impressionist painter Monet. In light of that, this trip changed François’ life, and since then he has had this dream to build a museum in a similar place as the Giverny garden and house, in the Province of Quebec, in Canada. He knew that building such a place would be expensive so he would need to be rich and, as an engineer, that would be really difficult. So he started learning more about business and finance by reading journals, books and attending courses.
Subsequently, he read Peter Lynch’s book ¨One Up On Wall Street,¨ which is another important moment that changed his life and in this same book, he learned about Warren Buffett. In the book, Lynch describes Buffett as the best investor of all. He then sent a letter to Mr. Buffett in early 1993 asking him to send him his annual letters, from 1977 to 1992, which he received and read. He then realized that this was the way to succeed. During this same period, he became good friends with Bernard Mooney: a writer for a business journal in Québec called ‘’Les affaires’’ and this friendship has also been a key to his success. Bernard Mooney is well known as the expert in the province of Quebec in Canada, on Warren Buffett.
Moreover, he also read Benjamin Graham, Philip Fisher and other great investors. He tried to invest in really cheap stocks, which were small, illiquid and not well known and traded below their net value. During his early career, he made a good return with such securities but was not convinced it was the way he wanted to invest. So he quickly changed toward investing in more quality companies, following more Fisher`s than Graham`s approach. He focused on quality first, while trying to distance himself from the price factor in the analysis phase to avoid being biased.
We have also learned that building a great team was also key for Giverny’s success. When it comes to recruiting new members in his team, the main quality he is looking for is integrity. He also wants people that are honest, hard-working, who tell the truth and are devoted to clients. This approach has been highly influenced from his reading of Barnett Helzberg’s book “What I Learned Before I Sold to Warren Buffett." Thus, the following is a revealing quote we liked from that book François recommended to us, in Part III of the book on hiring; ‘’Interviewing is an art rather than a science,’’ "80-90% of success depends on hiring people with good potential,’’ “Egoless managers not only recognize their weakness but aren’t afraid to hire people whose strengths far outshine their own.’’ François met with Mr. Helzberg in person in Omaha who told him that the most important thing is to find great employees. Great employees are those who will treat the clients very well. And if your clients are treated well, your business will do well. So he strives to find the greatest employees that he can who will treat clients well.
Jean-Philippe Bouchard is one of them, as he joined François in 2002 as an analyst. In light of that, today he invests with François as a vice president and portfolio manager, to find exceptional companies to invest in. Among the great team of ten people, we have to mention Nicolas L’Écuyer, the business development director, who’s bio caught our attention as he’s a four time Canadian Bridge Champion and Karine Primeau, the administrative director. With this great team, François is slowly accomplishing his dream of creating a museum like the one in Giverny in Québec as he allocates 50% of its profit made annually to slowly build his dream by acquiring contemporary art works.
Giverny Capital today:
Giverny Capital now manages around 500 million in funds for numerous accounts, based on his own portfolio as model. As stocks have historically been the best performing asset to own over time, Giverny decided that it would make sense to have the portfolio mostly comprised of equity investments. This portfolio has 20 to 25 stocks, chosen really selectivity among thousands of public companies worldwide. They take a very prudent approach with less than a 10% weight per stock (with the exception of Berkshire Hathaway). They can also invest in stock internationally, although in the past, they have mainly been concentrated on U.S. stocks.
Do you look for a good company before looking at the the price or do you look for a good price as a first filter?
It’s not easy but I try to distance myself from the price when I’m in the studying phase, as I try not to know nor focus on what the price of the stock is. I also look at the company as if it were a private company that I could purchase and then when I decided that it meets all my criteria, I tend to look at price. Consequently, the last phase of the analysis would be to compare what I think the company is worth to what it is trading on the stock market.
Many value investors do it the other way around, as they find a cheap stock and then try to figure out if it’s a great company. When you take such an approach, I think you become biased. Your company list will be considerably biased: You do want to buy these stocks because they are cheap and then you find reasons to justify their purchase as great companies. On the other hand, I try to be more objective and look at hundreds of companies and try to find the ones that I would like to own for the next ten years. And only then, I try to figure out what the price should be and wait for a better opportunity if the price is too high.
What are the main characteristics you are looking for at first when you are looking at a business?
Is it a great business? That’s the key question. Is it earning high returns on capital and command high margins? Does it have a good history of growing its intrinsic value and rewarding shareholders? Warren Buffett has this great phrase: “If a company has a lousy past and a great future, we’ll miss it.” It’s the same thing here; we first look at past numbers because when you are looking at the numbers, what you are really doing is looking at a sort of mirror of what a company has accomplished so far. But if you are going to make money, it will depend on if this performance continues in the future; so you are buying the present value of future cash flows when you are buying a stock. What I want is both a great past and a great future, so I focus on the past first than try to answer the question if everything is in place for a continuation of this great performance. In light of that, it could happen that it’s a great business and they had a few tough years and you think that there is something very solid and still present in the company. In the next few years, they could potentially solve the whole problem that they have and return to a great profitability. Although it’s a little more difficult to do, we do find such opportunities.
Can you give us an example?
Disney would be an example; when we bought it, its earnings had been going sideways for a few years but we understood the company and we thought that with a new management, a new approach and with a new leader, the company could do much better.
In your 1996 letter to partners, you mentioned that what makes a good investor is all in the approach and not in the intelligence or the education; do you still believe in that?
Yes, I think that the right attitude is tremendously important. You have to look at stocks as parts of a business. When you acquire a stock, you should treat it as if you were to acquire the entire company. I personally think that's it's the only way to approach equity investing. And the right attitude is also not to be affected by what other people think. That's not easy but not being affected by the ups and downs of the stock market and the stock itself is not easy to do. In turn, the right attitude is to have an ownership kind of perspective.
In our annual letter, we have a section called the “Owner Earnings”, where we try to assess if we were a holding company and our stocks weren't quoted, what kind of performance we would have. Again, I stole it from Warren Buffett as he did that in past annual letters. I don't think he has done that for a while but in the '90s or early '90s, he took that approach. At the present time, I think the Berkshire portfolio has gotten smaller compared to the rest of the business and the private ownership of companies. So the stock portfolio is not as important as it was in the early '90s or in the '80s. Back then, most of the capital was linked to public businesses so he did this exercise of calculating owner's earnings. He probably uses something similar today, but it's not as important as it used to be. But I kept this in our annual letter and I think it explains to our partners that even if our stocks did not do well, if they increased their earnings per share, then it's been a good year.
We have learned through your letter that Erich Fromm is your favorite philosopher. You have quoted many artists of several different backgrounds in letter. Does expanding the overall culture is important for an investor?
Charlie Munger has said it best “To the man with only an hammer, every problem look like a nail.” I think that, when you understand a lot of thing about human nature, you will be better prepared and equipped to deal with all the potential problems that are associated with investing in stocks. It’s a tough world to invest in businesses and companies, seeing that it’s very competitive, as a lot of things can influence the performance of stocks such as politics, consumer behavior and you want to know what is permanent and what is temporary. I think the more you know about the human civilization and humankind, the best you can improve your judgment. It’s an ongoing process because there are countless things to know. Moreover, the human society changes continuously so you have to be in tune with what is going on.
It’s all about building judgment, which is not about numbers: it’s about qualitative issues and trying to assess situations and people.
You are very interested in art; do you think your art enthusiasm makes you a better investor in any way?
Yes, the main common attitude towards investing and acquiring works of arts is looking for masterpieces when you build an art collection. I have been doing that for a while now. Ideally, you want to own works from the best artists: Something that is unique and has its own signature. Subsequently, when you transpose this attitude toward stock investing, you tend to look for masterpieces in companies and try to find the ones that are unique. You look for original ways of doing business and those that distance themselves from their competitors because they have an original approach. And you slowly realize with time that greatness is rare in the art world as it is in the business world.
Can you give us examples for both?
In this room, you have paintings by Pierre Dorion that I think is one of the best painters in Canada and photos by Lynne Cohen who sadly died last year. She was probably one of the best photographers who ever lived in Canada. Those are really unique artists and in terms of companies, if you look at one of our holdings for the last 8 years, Bank of the Ozarks, I think it is a very unique company and it's extremely well managed.
Take a company like CarMax (NYSE:KMX): it has a pretty unique business model, it has revolutionized the way used cars are sold to the consumer and in a very positive manner. This industry used to be controlled either by the dealership that would resell what they have acquired by selling a new car or most of the used cars were sold by mom-and-pop shops, which would give you no guarantees, no services and very little choices. I think CarMax has really transformed that industry. In turn, they have done that over 20 years and I think today, it would be difficult to duplicate their business model. You would need economies of scale and a brand. So people know that when they go to CarMax, they will have a lot of choices and a guarantee either by selling their car or buying a car. They will have a fair price for their old car and if they acquire a new car, they will have a guarantee. Thus, the customer feels more reassured then they used to.
If we go back to the Bank of the Ozarks, you said that it’s a really well managed bank, but how do you evaluate that? What are you looking for in a bank? Because I think it’s harder in the financial world to differentiate yourself from your competitor.
It is really hard. When it comes to banks, you look at……. To be continued in Part II
About the authors:
Charles Matte and Jean-François Nobert are two students from HEC Montréal, passionate about capital allocation.
* See disclaimer on returns at: http://www.givernycapital.com/en/rendements