The Art of Long-Term Investing: Lessons from Francois Rochon

Introduction to Francois Rochon and His Investment Philosophy

Francois Rochon is the president of Giverny Capital, which he founded over 30 years ago. His investment philosophy is straightforward - to compound capital at good rates, defined as 5% better than the index in the long run. Rochon aims to find a group of companies that can be owned for many years and will increase intrinsic value in line with his objectives.

His day-to-day process involves looking at all the companies he can find information about. When he believes he has found a company that fits his criteria, with attractive long-term prospects and valuation, he purchases it. Typically, Giverny Capital holds stocks for an average of 8 years, making them true long-term investors.

Rochon seeks out what he calls "compounders" - companies that can be owned for 10-15-20 years and grow earnings at 12-15% annually. This focus on high-quality businesses held for extended periods is core to his investment approach.

Influences and Development as a Value Investor

Rochon's journey as a value investor began when he read Peter Lynch's book "One Up on Wall Street." This introduced him to the concept of stocks as ownership stakes in actual businesses, rather than just tickers to be traded. Lynch's book also mentioned Warren Buffett as the greatest investor of all time, which led Rochon to study Buffett's approach extensively.

He went on to read Benjamin Graham's "The Intelligent Investor" and even wrote directly to Buffett, who sent him a collection of Berkshire Hathaway annual reports. Studying these materials solidified Rochon's commitment to value investing principles.

While his philosophy has evolved over time, the core tenets remain the same - finding great companies with competitive advantages, strong long-term prospects, and quality management that can be purchased at attractive valuations. This approach has served as the foundation for Giverny Capital's investment strategy for decades.

Navigating Market Cycles and Maintaining Discipline

Rochon discussed how he maintained discipline during challenging market periods like the late 1990s tech bubble. As a value investor focused on conservative accounting and profitability, he largely avoided the most speculative names. When the bear market hit in 2000-2002, Giverny Capital was well-positioned in more reasonably valued companies like Progressive Insurance and Berkshire Hathaway.

This experience reinforced for Rochon that valuation ultimately matters, even if it can take time to play out. He learned to be patient and stick to his principles, even when the market seems irrational in the short-term. This discipline has helped Giverny Capital navigate subsequent market cycles.

Valuation Approach and Margin of Safety

When it comes to valuation, Rochon acknowledges it is not an exact science. He references Ben Graham's view that valuation is more of a range than a precise figure. The key is having a sufficient margin of safety.

Rochon aims to be conservative in his estimates. While some exceptional companies may warrant higher multiples, he is generally wary of paying more than 25-30x earnings, even for promising growth stocks. The higher the multiple, the more future growth is being priced in, leaving less room for error.

He emphasizes the importance of understanding a business deeply and having high conviction before paying up for valuation. Even then, truly justified premium multiples should be the exception rather than the rule in a portfolio.

Learning from Mistakes and Missed Opportunities

One of the most valuable sections of Giverny Capital's annual letters is Rochon's discussion of investment mistakes and missed opportunities. He believes strongly in learning from both successes and failures to continually improve as an investor.

A recent example he shared was passing on Cintas several years ago due to valuation concerns when it was trading around 25-26x earnings. In hindsight, this was a mistake as Cintas went on to grow earnings per share by 400% over the next 8-9 years. The stock has performed even better.

Rochon notes this was particularly painful because Cintas was squarely in his circle of competence. He understood the business model, competitive advantages, and quality of management well. The only factor that kept him from investing was valuation seeming a bit rich at the time.

This experience reinforced for Rochon the danger of being too stringent on valuation for truly exceptional businesses. While a margin of safety is important, there can be a cost to missing out on compounders due to short-term price concerns.

Importance of Holding Winners

A key lesson Rochon has internalized over his career is the power of holding onto winners for the long-term. He shared the example of O'Reilly Auto Parts, which Giverny owned from 2004 to 2019, generating 15-20x returns. However, since selling in 2019, the stock has quadrupled again.

Similarly, he noted trimming positions in big winners like Visa and Dollarama when valuations seemed stretched, only to see them triple or quadruple further. Rochon now believes one of the most important skills for a long-term investor is having the conviction and patience to maintain large positions in their best ideas, even after significant appreciation.

He referenced Philip Carret's 1930 book "The Art of Speculation," which advised being "quick to take losses and reluctant to take profits." Rochon feels this principle is even more true than he initially believed. Keeping winners can make an enormous difference to long-term returns.

Focus on Business Fundamentals Over Macro Predictions

Rochon is adamant about focusing on individual businesses rather than trying to predict macroeconomic trends or time the market. He notes this approach was influenced by studying great investors like Peter Lynch, Warren Buffett, Benjamin Graham, and Philip Fisher.

While these investors had different styles, they shared two key traits:

1. They didn't believe the market or economy could be consistently predicted
2. They viewed stocks as partial ownership of businesses rather than just tickers to trade

Rochon adopted this philosophy early on and has maintained it throughout his career. He aims to always be fully invested, forcing himself to focus on finding attractive individual securities rather than making macro calls.

Over time, he has become increasingly "immune" to macroeconomic noise and short-term market movements. This allows Giverny to maintain a steady, long-term approach focused on business fundamentals.

Current Market Views and Recent Investments

While Rochon acknowledges valuations are generally higher now than during periods like 2008-2009, he still sees opportunities for patient investors. He notes the highest valuations are concentrated in mega-cap tech names, while many quality businesses trade at more reasonable multiples.

One recent purchase he highlighted was Booking.com in 2023. Rochon views Booking as the strongest player in online travel, with an excellent capital allocation track record and clean balance sheet. When Giverny invested, the stock traded around 18x earnings - a reasonable multiple for a business he expects to grow EPS at 12-14% annually.

Rochon believes Wall Street was overly focused on the post-COVID travel rebound potentially fading, creating an attractive entry point. So far, Booking has continued to deliver strong growth and been a successful investment.

This example illustrates Rochon's approach of looking for high-quality businesses facing temporary concerns, allowing long-term investors to build positions at attractive valuations.

Lessons and Advice for Investors

Reflecting on his decades of experience, Rochon shared several key lessons for investors:

1. Patience is critical - it often takes years for good analysis and decisions to be rewarded in the market.

2. Humility is essential - no investor can predict the future or avoid all mistakes. Accepting this reality is important.

3. Be quick to admit and learn from mistakes - don't become emotionally attached to positions that aren't working.

4. Hold onto winners - the power of compounding in great businesses over many years is immense.

5. Focus on what you can control - analyzing businesses and making good decisions, not predicting short-term market moves.

6. Maintain a long-term perspective - short-term volatility and underperformance are inevitable, even for skilled investors.

7. Look for simple, high-quality businesses - revolutionary concepts are exciting, but many of the best investments are in "boring" companies executing well in established industries.

8. Continually work to expand your circle of competence - always be learning and studying new businesses and industries.

Conclusion

Francois Rochon's investment journey offers valuable insights for both novice and experienced investors. His disciplined, long-term approach focused on high-quality businesses has delivered strong results over multiple decades and market cycles.

Key takeaways include the importance of viewing stocks as partial ownership of businesses, maintaining emotional discipline, focusing on fundamentals over short-term price movements, and having the patience to hold onto winners for extended periods.

Rochon's willingness to openly discuss mistakes and lessons learned is refreshing and instructive. His emphasis on continuous learning and improvement, even after 30+ years of investing success, is an example all investors would do well to follow.

Ultimately, Rochon's story reinforces that while investing is challenging, a sound philosophy consistently applied over time can lead to excellent long-term results. By focusing on great businesses, maintaining a long-term perspective, and learning from both successes and failures, investors can work towards achieving their financial goals.

Article created from: https://www.youtube.com/watch?v=4WN-mikk_bc