[MUSICAL SOUND EFFECT]
SPEAKER 1: Hello, and
welcome, everyone.
We have a very
special guest with us
here today, all the
way from Montreal.
Chances are, if you've enjoyed
the writings of Warren Buffett,
if you've heard
[INAUDIBLE] speak here,
you are very likely going
to enjoy the message
that Francois Rochon has
to share with us today.
He is one of the investors
whose letters I highly admire.
I love reading all of
your communications.
I love the clarity
in your thoughts.
And the special thing
for us, as Googlers,
is, this is one of the
most successful value
investors in the world today
who started off as an engineer.
So without giving
away too much, I'd
like to welcome Francois Rochon.
[APPLAUSE]
FRANCOIS ROCHON: So thank you
very much for inviting me.
I'm really honored to be here.
And I wanted to
do a presentation,
and I call it "The
Art of Investing."
So yes, I was trained
as an engineer.
I also had a very
big passion for art.
So when I started
Giverny Capital--
probably, you've
guessed that Giverny
is the name of the city
where Claude Monet lived.
And so you see a little
painting of Claude Monet
on the first slide.
So the art of investing,
I call it the art
of going beyond the numbers.
So I got the idea, really,
by reading Peter Lynch's book
"One Up on Wall Street."
And he said that
investing in stocks
is an art more than science.
And you know, people
that were trained
to think very rigidly,
to quantify everything,
it's a big disadvantage when
you invest in the stock market.
So we're going to
start with that.
And so as an engineer,
I was trained
with a scientific education.
So we're trained to
develop a rational mind.
You need to understand numbers.
And I think it's
a big advantage.
Because there's a lot
of financial belief
that-- you know, people that
are trained in the finance
business, I think they learn
things that, I believe,
are not really scientific.
And we don't need to
unlearn those things.
But at the same time, a
scientific education, I think,
has some of disadvantages when
it comes to the stock market.
We're trained to look at
past numbers on the belief
that the future will be similar.
Humans, sometimes, they
don't behave like atoms.
So you have to understand
that the financial world is
a very strange world.
And when you train to
think very rigidly,
it's hard, sometimes, to
understand what's happening.
And as a scientific, we're
trained not to judge,
but to gather facts.
And judgment is a big part of
the stock investing process.
And also, we're trained to
be very precise and right.
But investing is about being
unprecise-- imprecise--
and also accepting
that you will be wrong
30%, 35%, 40% of the time.
And that's a good ratio.
So I wanted just to put a quote
by one of the great engineers
of all time, Nikola Tesla.
And he said that
"instinct is something
that is important in science.
It transcends knowledge."
And I think that's a
very interesting quote.
But at the same time, there's
a big difference between art,
science, and alchemy.
And you know, during
many centuries,
alchemists tried to
change lead in gold.
And that's not really science.
And so this idea that I have a
great feeling about that stock,
that's not really art.
Neither it is investing.
It's really just being lazy.
So if you want to be an
artist in the investing world,
well, you want to
master that art.
So you want to first choose
an art that you really love.
You want to study the
masters of that art.
And also, it's important
that, as master paints,
investor invests.
So you want to be
active in your art.
And you want, also, to
develop your own style,
have an independent mind, and
always strive for improvements.
And I have this
quote by Woody Allen.
And he said that "in order
to be a jazz musician,
you have to listen to jazz.
And it's an act of love."
You listen to music not
because you want to learn it,
but because you enjoy it.
And gradually, through kind
of a system of osmosis,
it learn into you.
I think any art that
you want to learn,
you have to go to it
through an act of love.
And I have this
quote by Jim Collins.
And he said that "you can either
follow a paint-by-number kit
approach to life,
or you can decide
you want to create
your own masterpiece."
And in the investing world,
if you want to be original,
you have to accept
that, probably, you will
be different from the others.
And you'll probably have
to be eccentric, rash,
unconventional.
And that's a quote by
John Maynard Keynes.
He wrote a book called "The
State of Long-Term Expectation"
in 1936.
And it is the long-term
investor that, in practice,
will be very different
from the others,
and probably criticized
at some point.
Because "it is in the
essence of his behavior
that he'll be eccentric, rash,
and unconventional in the eyes
of the average opinion."
That means that if you
want to obtain better
results in the stock
market, you have
to be able to stand on your own.
And you'll be different than
the typical crowd of investors.
And that's sometimes
hard to-- it's fun
when you look at that picture.
But it's sometimes
a little hard.
Because you have to
be different and have,
sometimes, a very contrarian
opinion than the average
view on the-- either a stock
or the stock market in general.
So let's look at the
results of money managers
in general in our
investing world.
So that's the normal bell
curve of the typical results
as investors.
And this line here
is the S&P 500.
And the S&P 500 is
not right in middle
for the very simple reason
that managers charge fees.
So from scratch, they start
from, probably, 1% or 2%
behind the S&P 500.
So just because of that,
the S&P 500 probably
beats out 85% of investors.
So you want, always,
to think what not to do
if you want to beat the index.
So if you want to beat
the normal distribution,
what do you want not to do?
Well, if you think the
same way as most investors,
and you have the
same time horizon,
you'll probably end up
with the same results.
So also, if you own
lots of companies,
it's very hard to
differ from the index.
And I would add to that, if
you believe that you're smarter
than the others, and you can
predict the stock market,
I think it's a road to failure.
So what do you want to do if you
want to beat the normal curve?
Well, so far, the
last 24 years, we've
probably been in the
top 1% of investors.
So let's hope it's not
pure luck and that we
do have an investment
approach that
helps out to beat the index.
So what do we do?
We try to think for ourself.
We try to own very
few selected companies
and develop the right
behaviors, which
I'll go through a little later.
But these are rationality,
humility, and patience.
So perhaps we can go to our
stock selection process.
So that's the
science part of it.
So we start with the financial
strength of the companies.
We want companies that have
higher return on capital, that
have grown their earnings
per share, that also,
at the same time, have
a strong balance sheet.
So the debt to profit
ratio, usually you
would want something like
less than four times.
And we want a business
model that is very solid.
So we want companies that
are market leaders, that
have competitive advantage,
and low cyclicality.
And a competitive advantage
is very important.
And I'll go back to that
point a little later.
The management
team-- so we want,
you know, the CEO, the CFO,
the high management team,
to own lots of shares
in the company.
So you want a high
level of ownership,
so they're really in
the same boat as we are.
We want managers that have good
capital allocation skills, they
make constructive
acquisitions, and you know,
they really think long-term
when they make investments.
And then we have
market valuation.
So we want to stock that
we'll purchase at a level
that we can double our
money over five years, which
is something like
15% annual return.
So without being very precise--
because we know
that, probably, it's
an illusion when you
try to be too precise--
we try to have a view of
what we think the company can
earn in five years.
And it's going to help us to
modelize what kind of valuation
we can expect during that time.
A few words about art--
first, I want to say that
and beauty are, in some ways,
interrelated.
And you know, very few money
managers talk about beauty,
but I think it's important.
How do you define beauty
in the investment?
Well, we say that beauty,
usually, to our eyes,
is something that is rare.
We usually find
something beautiful
when it's something
that we seldom see.
And something that is
unique, we never see.
So it's really the rarest
of all the beauties.
And I always-- sometimes,
when I read an annual report
and look at the
numbers, when I have
these feelings that, wow,
this is a beautiful company,
it returns high
return on capital,
it has much better margin than
their competitors, you know,
there's something that
lights up in my mind.
So what you want is to find
what I call masterpieces.
And they have one quality,
they're rare and unique.
So I've taken some
example in the art world--
so the "Mona Lisa," a Rothko
painting, a Vincent van Gogh
painting.
And if you want to take
some example of business
masterpieces, well, I've
gone through the history
of the capitalist
world, mostly in the US.
And we can start with, probably,
one of the first technology
company in the 1880s
called National Cash
Register, that you've
probably heard about.
Hewlett-Packard,
that, many years ago,
was a very innovative company,
Apple, IKEA, T.J.Maxx, Geico,
the insurance company owned by
Berkshire, "Washington Post,"
H&R Block, Dun &
Bradstreet, Gilette,
McDonald's, Starbucks, I
think all these companies--
and we could
certainly add Google
to that lot-- these are
business masterpieces.
So you want to study
those kind of businesses
and see, what do they
have that was so unique.
And usually, the uniqueness,
in either their product,
or their service,
or the culture,
is the equivalent of
having a moat that
protects your castle,
your enconomic castle,
from invaders, which
are competitors.
So that's the key thing.
You want to own a moat with
lots of crocodiles and piranhas
in it so competitors don't
want to come near your castle.
So if we could resume kind of
what we look for in a company,
it's really three things--
the competitive advantages,
which we could say
is the artistic part of that,
the financial strength, which
is really the science part,
and the management team.
And this is where
judgment comes into play.
It's very important to be
able to judge management.
And you know, that's kind
of a subjective thing when
you're talking about judgment.
But you know, I always say--
I have this phrase that,
when you meet management,
you ask yourself, would I like
this man to marry my daughter.
And if their answer
is yes, it's probably
a good man to be partner with.
So we end up with something
like 125 stocks that
fits our criterias.
And the one that we do
buy for the portfolio
are the ones that
fit our criterias
in terms of market valuation--
if we can buy at a price,
today, that we hope
we can earn something
like 14% going forward, yearly.
So perhaps, just
take a few examples
to illustrate our approach.
Well, one company I think is
very unique is Walt Disney.
They have great brand name.
They own the Star
Wars franchise.
They own, of course, all those
historical stars like Mickey
Mouse and Winnie the Pooh.
And they bought Marvel
a few years back.
And you know, I always
say that Mickey Mouse
has three great qualities.
First, he is highly popular
and known all around the world.
Second, he is immortal.
And the third, he has no agent.
So you really own your star.
And that's a great
thing for Disney.
And the uniqueness of
business model of Disney
is that they have these big
movie blockbusters, like
"Alice in Wonderland" in 1951.
And then, 50 years later,
they can redo a new version
and make money again
with the same name.
And they did that recently
with "The Jungle Book."
They released the first
animated version 1967,
and they did a real
live version last year,
which was also a big success.
So it's kind like
opening an oil field
where you take all the oil.
And 50 years later, you
go back to the field,
and there's even more
new oil to take out.
And you don't need to
spend money on capital
and pay people to
guard you field.
It's really an extraordinary
business model.
We bought that stock probably
11, 12 years ago, I think,
in 2005.
We paid about $24.
And it was the day that
Bob Iger was named CEO.
And we've owned it since then.
So there was a period when
the stock did not do much.
As you can see, for four years,
the stock didn't do very well.
But earnings kept growing.
And we were patient.
And if you look over the 12
years we've owned the stock,
earnings have grown
about 13% annually.
And in the end, the stock
has more than quadrupled.
So if you're patient, and
companies grew their value,
eventually the
stock will follow.
I want to take another
example of a stock that's been
a while in portfolio, CarMax.
It's been, 10 years,
in the portfolio.
And as you can see, earnings per
share have grown at about 16%
annually since we
bought it in 2007.
And the stock has
done very similar,
even though the P/E ratio is
a little lower today than when
we first bought it.
We first bought it
in the summer 2007.
At that time, the P/E
ratio was about 24 times.
We bought more shares
in 2011 at 14 times,
and more shares in 2016,
again, at 14 times.
And today the stock is
above 18 times earnings.
So even though the
P/E ratio has been
reduced a bit over the years,
the stock has done pretty well.
It's done about 13% annually
even though earnings
grew about 16% annually.
And that's about 5%
better than the S&P 500.
Dividend included,
it has down about 8%
annually over the last decade.
So it's been a good investment.
I want to say a few words
about a competitive advantage.
As investors at Giverny, what
kind of competitive advantage
can we have?
Well, first, I think it's three
things, patience, humility,
and rationality.
Humility-- I think we
do believe that it's
impossible to predict
macroeconomic events.
So we don't try to predict them.
Also, one key
element is to focus
on your circle of
competence and to know where
the limit of that circle is.
And thirdly, we want to
recognize our mistakes
when we do them and always try
to improve our stock selection
process.
A few words on the
timing of purchases--
Woody Allen said that 80%
of success is showing up.
And so that's one
of the main reasons
we always want to be
invested in the stock market.
Because we believe that
owning great companies,
not trying to predict
the stock market,
is the key thing
to be able to beat
the index over the long run.
And by always striving
for improvement,
we try to study our
mistakes in details.
So each year, on
an annual letter,
we have this yearly metals that
we give to our best mistakes.
And it's a very popular
part of our annual letter.
I don't know why, because
it's very painful.
But I think that's
very important
if you want to continue
to improve yourself.
A few words on rationality--
we try not to be
affected when others
make more money
than us in stocks,
because there's always fads.
And you know, we
don't get into fads.
So sometimes we'll be
different from what's
going on in the very popular
part of the stock market.
But you know, we try to
be rational and say, well,
if we don't really
understand it,
if we don't think that's a good
area where our capital should
be invested, we just
stay away from it.
And we try to be impervious
to the stock market
quotation in the short run.
So it takes a lot
of rationality,
because the stock market
can be very, very volatile.
So we try to always be
calm and try to always
have the eye on the long-term
horizons of the company we
purchase.
And we accept that we
don't know the future.
And we try to focus
on part of the process
that we can control.
It's really, like I said, to
look for companies that we
understand, that we
believe, that have
a competitive advantage.
And you know, we accept that you
don't know exactly how things
will work out.
But you know, if you own great
companies with great managers,
eventually you should be OK.
And that comes up to something
we put out a few years back.
I call it the rule of three.
It's really to accept that, one
year out of three, the stock
markets will decline
about 10% or more.
One stock purchase out of three
will not perform as expected.
And one year out of three,
you'll underperform the index.
And the best managers
usually underperform
one year out of three.
So it's still a very ambitious
rule, a group of rules.
But if you accept that
from the start, when you'll
have some bad years on
some bad investments,
you'll be better
prepared psychologically
to deal with that.
And a few words on
patience-- well,
I have this saying that
"patience is not the ability
to wait, but the ability to keep
a good attitude while waiting."
So what's the good attitude
in the investment world?
It's really to focus on what's
happening in the company,
not what's happening
to the stock.
And that's sometimes
a hard thing to do.
But if you go back to
the example of CarMax,
CarMax stock, over
the last decade,
has been quite volatile.
It went down 25% a few times.
But if you look at the
earnings over those 10 years,
it's been a pretty
stable business.
So if you just focus
on what's happened
to CarMax over
the last 10 years,
I think, besides 2009,
earnings went up every year.
And it grew earnings by
more than 16% annually.
So just focus on that, and
forget about the stock price
movements, you'll be OK.
But I want to say another
word about patience.
That's not the same
thing as being stubborn.
And sometimes we fail to
recognize mistakes we make.
So I like to think
about the analogy of,
how do you get a
frog to be cooked.
If you put it in boiling water,
it will jump out of the bowl.
So what you do, you
put it on mild water
and slowly increase
the temperature.
And you know, the
frog won't get out.
Because you always
think, well, things
are getting a little hotter, but
they'll cool down eventually.
And you know, it never cools
down and eventually get cooked.
So what you want is
not to buy a stock
and, you know, earnings
are a little disappointing,
the fundamentals start to
deteriorate, the stock go down.
But you don't want
to sell at a loss.
So when investment
doesn't work very well,
I try to focus on what's
happening to the company
to be sure that I'm not
getting cooked like a frog.
And that's really important.
And there's a big
difference in knowing
when to keep your shares because
the fundamentals warrant it,
and recognize you
made a mistake,
and just get out of that stock.
And that's a big
difference between being
patient and stubborn.
So to summarize
what differentiates
an artistic investor, I would
say the conventional investor,
the typical investor
in the stock market,
either professional
or amateur, it's
really the focus
on market quotes.
They are short-term oriented.
They have an opinion
on everything,
and they try to predict
when to buy stocks.
And they cannot
resist the latest fad.
So I would say the
unconventional investor,
while he focuses
on intrinsic value,
he has a long-term horizon.
He's agnostic about many,
many things, including
where the stock market will be
in a few weeks or a few months.
And at the same time, he doesn't
try to predict when to buy,
but the focuses
more on what to buy.
And I would say the right
verb is what to own.
And of course, he resists the
fans and the popular beliefs.
And it's easy to write
in a presentation,
but it's harder
on the day-to-day
to resist what's
been very popular.
So that takes a lot of
independence of thought,
I believe.
So a wise investor must be able
to kind of balance many things.
So I talked about
the love for the art.
But at the same time, you
want to be very rational.
You don't want to fall
in love with stocks.
You want us always be rational.
You want to have a very
large field of knowledge
and look at many,
many companies.
But at the same time,
you want to focus
on your circle of competence.
You want to be open-minded.
But at the same time,
you have to have
independence of thoughts.
You want to be able
to value the business.
But at the same, time, like
I said in this presentation,
you want to be able to
go beyond the numbers.
So it's just not numbers.
If it was just
numbers, mathematicians
would all the billionaires.
So of course, it takes
a little more than that.
You have to have patience.
But at the same time, you don't
want to get cooked like a frog.
And finally, you
want discipline,
but you want to be able
to break the rules.
So I always say
that the discipline
is to follow your
own rules, but wisdom
is to know when to
break your own rules.
So sometimes we've bought
some stock that didn't really
fit our criterias.
But you know, we made a
judgment call that we believe,
most of the time,
either the business
has, really, something
special or the management
has, really, something
special, or ideally, both.
So finally, to summarize
in one sentence,
"To obtain better
results than the others,"
I would quote John Templeton.
He said that "you have
to do something different
from the others."
And at Giverny Capital,
what do we do differently?
Well, first, we
think independently.
We own very few
selected companies.
We have a very
long-term horizon.
I mean, I think, on average,
we own our stocks seven years.
And the typical investor on
Wall Street's at seven months.
So that's kind of
a 12-to-1 ratio.
And also, we try to develop
the right behaviors.
We want to be rational,
humble, and patient.
So that concludes
the presentation.
SPEAKER 1: Thank you.
Thank you so much.
[APPLAUSE]
Fantastic.
So folks, I want to read
something for you guys.
I think you might
find this interesting.
So "Good businessmen or
businesswomen are like artists.
They have to do something
with passion, something
innovative and
unique that will last
and that will inspire others.
In the final process,
I try to figure out
how much this marvelous
company should be worth and try
to buy it in the market at half
of what I believe it should
trade in five years if
everything goes as planned,
which is about 15% a year."
So these two paragraphs
are from an interview
of Francois in the year 2005.
And I'm sure it's
kind of obvious
how consistent your philosophy
has been over the years.
It's remarkable.
It's sort of, the
Francois Rochon of 2005
would have probably given
the same talk in very similar
words, as I can tell.
So what I want to
ask you is, has it
been easy for you to follow
this approach consistently?
Has it been tested
over the years?
Have there have been times where
you've questioned how you've
thought about these things?
FRANCOIS ROCHON: Yeah,
it's been tested.
Because like I said, we have
to accept that we underperform
one year out of the three.
And you know, in the good
years, it's easy to say.
But when those bad years
happen, it's really painful.
And you know, when you
have some partners--
well, the word you
use for clients--
you have to explain to them,
well, why you have a bad year.
And it sometimes can be tough.
And it can last
more than one year.
It can be two or
three years in a row.
So that's-- I think it takes
a lot of conviction that
you're on the right path, and
you're doing what you think is
best for, you know,
your partners.
And I think, if the
principles are sound,
eventually they will work out.
So again, the
importance of patience--
I think that's probably the most
important quality you need when
you invest in the stock market.
SPEAKER 1: So to people who
are listening to this talk--
there might be young
graduate students, people
who are getting into the
investing profession,
or a lot of individual investors
like ourselves who are saying,
this is a good approach.
Maybe I want to try it.
And you know, they could
have a couple of bad years
to start off with.
And what is your advice there?
FRANCOIS ROCHON:
I think there's--
patience, also, it's
important, of course.
But I think there's a
quality behind patience,
and it's humility.
You have to accept that
you'll make some mistakes.
And there's always things
that you can learn.
And I would say that the
greatest quality of Warren
Buffett is not
necessarily intelligence,
it's the humility.
I mean, he's the greatest
investor of all time.
He's the greatest of all.
But he's still
very humble, always
looking to improve and learn.
And I think that's
his greatest quality.
He's 87 years old, and he's
still striving for new learning
everyday.
You always want to
learn new things
and understand new things.
And if you have
those qualities, I
think you'll succeed in
almost anything you do.
SPEAKER 1: That's
very interesting,
because he has been quoted
to have said, in interviews,
that if you have an IQ of
160, you might be better off
giving 10 points to someone.
FRANCOIS ROCHON: Well, I
think he said selling, selling
some points.
SPEAKER 1: Yeah, selling, sure.
Thank you.
Yeah.
So you do believe that
it's more than the IQ.
It's the behavioral
traits, after a point,
that are critical.
FRANCOIS ROCHON: Yeah.
SPEAKER 1: OK.
So any advice to individual
investors, young investors
who might not be professional
investors like yourself?
What are some best practices
that one can adopt?
FRANCOIS ROCHON: I think, first,
you have to look for a company
that you can understand.
Because there's many,
many companies out there.
There's, you know,
thousands and thousands.
And it's hard to really
understand all those companies.
And some are just
very, very complicated.
So you're trying
to play a hard game
when you want to be able
to value every company.
You play an easier game
when you're very selective,
and you just go for the company
that you can understand.
And it goes back to the
analogy of Ted Williams,
that he wanted to wait
for the perfect pitch that
was in the sweet spot zone.
And I think that's the beautiful
thing about the stock market.
And Warren Buffett said
that many, many years ago,
that investing is the
greatest business of all,
because that's the
one you can choose
the ball you want to hit.
So you have the luxury
of standing at the plate.
And you know, we're waiting
for the perfect ball.
There's no called strike.
And that's, I think,
the most beautiful thing
in the investment business.
But at the same time, it's
a very competitive investing
world.
So there are some
disadvantages too.
But if you have the right
behavior, the right approach,
and you're very patient and very
selective, I think, in the end,
you'll succeed.
SPEAKER 1: Great.
So in your presentation,
Francois, you said,
you know, there's an
element of beauty.
Sometimes you recognize it.
And you also say that there
is science and mathematics
of investing.
And I was wondering if you could
take one company as an example.
One of the logos on your
slides was, I think, Starbucks.
FRANCOIS ROCHON: Yeah.
SPEAKER 1: And I'm sure,
like a lot of people here,
I recognize the company.
So can you describe what you
see in terms of the qualitative,
the beauty-like aspects?
And you know, like
you said, what
are the earnings potentials
five years from now?
FRANCOIS ROCHON: Yeah.
Well, Starbucks,
I looked at it--
I think the first
time was in 1994.
And I thought that
was a unique business.
And I remember coming to the US
in the early '90s and drinking
coffee in hotels.
And it was, you
know, bad coffee.
And I said, well, if you go
in Italy, you are in France,
you have great coffee.
But you come to the greatest
country in the world,
and you drink bad coffee.
I said, this didn't make sense.
And when I first tried
Starbucks, I said,
well, these people are on to
something, and they'll do well.
And I remember, I mean, Howard
Schultz was a very ambitious
and a very driven CEO.
And he was very confident
that it could be--
Starbucks could have
thousands, and thousands,
and thousands of coffee
stands everywhere
in US and in the world.
And I thought it
was indeed possible.
And the only thing--
SPEAKER 1: Is their coffee
better than Tim Hortons?
FRANCOIS ROCHON:
Oh yes, I think so.
But you know, I want
to be patriotic here
and say Tim Hortons is
a great company also,
because it's Canadian.
But you know, if I
had to have coffee,
I would go with Starbucks.
And you know, the
only thing that
prevented me to
invest 23 years ago
was that P/E ratio of Starbucks.
And I remember it was
trading at 40 times earnings.
And you know, that was
way too high for me.
But I don't know, I
didn't look lately,
because it's too painful.
But the stock is probably
100-fold since then.
So it's been a wonderful
company here, a wonderful stock.
And never owned it.
SPEAKER 1: So what
P/E ratio-- you know,
40 is maybe too expensive.
But what might be
a P/E ratio where
it would merit your attention?
FRANCOIS ROCHON: Well,
with some insight,
I would say that 40 times
earnings in '94 was cheap.
Because you know, it didn't at
all discount the future growth
to come.
But you want a big
margin of safety.
And I think it was in
1949 that Ben Graham said
that the cornerstone of
intelligent investing
is a margin of safety.
So if you pay a
very P/E ratio, you
don't have as much safety as
if you pay a lower P/E ratio.
But is it 20?
Is it 25?
Is it 15?
That's where judgment comes
into play to help you decide.
SPEAKER 1: Right.
I think I'm trying
to sort of make
it more practical for people
who are listening, just to--
I think, today, it's like
23, 24 times P/E ratio.
And would that sort of a
metric bring it-- you know,
you said you had 125.
Would it come up in those for
you to look at, for example?
FRANCOIS ROCHON: Well, I
think the management is great.
I think the business
model is great.
Just have to ask yourself,
where it is today,
will they be able to continue
to grow at a superior growth
rate going forward, which
I would define 12% or more.
I mean, every company,
even the greatest companies
in the whole history,
they come to a point
where they hit maturity,
and it's harder
to grow at a high growth rate.
So I mean, growing earnings
at 8%, or 9%, or 10%,
that's still quite
an achievement.
But it's not as exciting of
growing at 15% or more a year.
So it's going to be, probably,
harder for Starbucks,
but I've been saying
that for a few years.
I've been wrong so far.
SPEAKER 1: So maybe let's just
take a step back, Francois.
For the audience here,
what are some areas
in the market where you do see
both the elements of beauty
and that of value today?
FRANCOIS ROCHON: Well, I think
we took the example of CarMax.
And I think that's a
company that, I believe,
can grow by about 15%
annually for many, many years.
SPEAKER 1: Revenues or earnings?
FRANCOIS ROCHON: Well,
probably earnings.
Revenue is going to
be closer to 10%.
But with some margin expansion
and some buyback of shares,
I think they can obtain that 15%
growth in earnings per share.
And it trades at
18 times earnings.
So the P/E ratio is
similar than the market.
But I think their growth profile
is probably twice as good.
SPEAKER 1: OK.
I have a couple of
questions just, typically,
we ask all of our guests.
What are some of your favorite
managers or businesspeople
that you look at?
And then the second
part of the question
is, what are some
books, you know,
investing and non-investing,
that you've enjoyed that you
might want to share with us?
FRANCOIS ROCHON:
Well, managers--
well, I have a deep
respect for Mark Leonard
at Constellation Software.
I think he's really--
he's an artist.
I mean, he's really unique.
He's really original.
And he has a very, very
long-term horizon on everything
he does.
And I think Constellation
Software, which, you know,
is a Canadian
company is, I think--
I hope it continues to be.
But if you looked at it today,
it's really a masterpiece.
It's really something quite
unique, and a great culture,
and great artists at the helm.
SPEAKER 1: It's interesting
you bring it up,
because it's a
technology company.
Typically, value
investors, they've
had this rough interaction
with being in technology
versus not being there.
And also, it's one of
those companies that
has grown by acquisitions,
which, again, value investors
tend to shy away from.
So how do you look
at those two aspects?
FRANCOIS ROCHON:
Well, I would say
there's many ways to get rich.
So some, it's Starbucks.
It's just having one
concept, and they clone it
a thousand times.
And other companies-- I mean,
Berkshire Hathaway, that's
an example of a company
that grew by acquisition.
It's a holding
company that now have,
we could say,
hundreds of divisions.
So there's many ways
to-- and I mean,
McDonald's, for many years,
had just like Starbucks,
one concept that they
had to clone many times.
So I think that, in the
end, what really counts is--
over, let's say, a
decade, it's the growth
in earnings per share.
So if you have a
great business model,
if you have great management,
a great of return on capital,
it will translate into earnings
per share growth, which
will translate into a
stock that will go up.
So if you pay a reasonable
price, and the earnings
per share quadruple
over a decade,
there's a good chance that
the stock will do the same.
SPEAKER 1: How do you apply
the earnings per share
concept to a company like--
you know, Berkshire, you
mentioned-- but even Markel,
for example, an insurance
company where you may
not realize the earnings,
because you know, they're just
piling up on the balance sheet?
FRANCOIS ROCHON: Yeah.
Well, in terms of for
Berkshire or Markel,
probably a price to
book is a better--
it's not perfect,
but it's probably
a better-- way to value.
And you use a ratio.
I think, for both companies,
1.5 or 1.6 times book value
would make sense.
Because that's the
nature of their business,
that the earnings
are more erratic.
So you have to value
them some other way.
So you have to adapt to the
business model of the business.
SPEAKER 1: Francois, we
had one of our guests--
they brought up a very
interesting concept.
They said, you know, you look
at all these great companies,
and you recognize
that there is a moat.
And you know, over the
past 10 or 15 years,
they've displayed
that in their numbers.
And then you sit back
and ask yourself,
the future may not necessarily
be identical to the past.
So they said what really matters
is that the moat be growing.
It doesn't matter whether
it's small or big.
So how do you
think about growing
moats, or emergent moats,
versus established moats?
FRANCOIS ROCHON: That's very
hard, because moats always
keep changing.
And I remember, a few
years back, Charlie Munger
said that--
I asked a question to
Charlie about moats
and all those great
companies that seem
to see their moat shrinking.
And he said, well, I
know all those moats are
getting filled with sand.
And so I asked
him, which company
do you think has
an expanding moat?
And that was six
years, seven years ago.
And he said, Google.
SPEAKER 1: Interesting.
FRANCOIS ROCHON: I think
that's an incredible company.
And I remember thinking, well,
I knew about Google, of course.
But I said, well, I should
take a new look at it.
And we bought shares in
2011 after that comment.
So we were lucky.
Because at that time, the
P/E ratio was 15 times.
So if it would have been
a few points higher,
we probably would have passed
and missed an increase of 400%
since then.
So there's always new
companies with moats.
Some are expanding,
some our shrinking.
So we have to
follow that closely.
But if I had to
choose one criteria
to help me decide what's
the direction of the moat,
it's the managers.
I mean, those moats are
not built by angels.
They're built by human beings.
So what makes a
moat grow, I think,
is something in the
culture of the company.
And those things doesn't
come from thin air.
It comes from the top management
that builds that culture.
And then it translates into
a moat, and then high return
on equity for the shareholders.
SPEAKER 1: So when you look
at the high returns of equity
over the last 10
years, do you say
it was because of the culture?
Or are there other things beyond
just the numbers that you try
and study to identify
whether this is a culture you
want to be associated with?
FRANCOIS ROCHON: Well,
there's many things.
It's really, what's the
nature of the products, what's
the nature--
you know, the funny
thing with Google,
it was not the
first company that
had a search engine
on the internet.
SPEAKER 1: Right.
FRANCOIS ROCHON: It was
the last one that come up
with a new search engine.
But this one was
better than the others,
thinking Yahoo, or
AltaVista, or Excite, Lycos,
all those first companies
that had search engines.
So sometimes, it's
the first arrival.
And sometimes, strangely,
it's the last arrival.
So that's a tough
thing with investing.
Every story is
new and different.
So you have to--
when I said it's important
to have an open mind,
it's because if you have
this very strict frame
to analyze companies, probably,
you miss lots of things.
Because every situation is new.
And the future is all the
world's uncharted territory.
So you have to have
some principles.
You look for certain things.
But in the end, you have
to judge every situation
differently and by
their own parameters.
And if you look
at our portfolio,
we own something
like 25 companies.
And I think the reasons
we invested in those 25
differ very much from
one to the other.
Sometimes it's really
because of the management.
Sometimes it's really because we
think the brand is very solid.
And sometimes we
think the company has
lots of room to grow, and
it's just like a Starbucks,
where they just have to
clone the concept that they
have built. So
there's no one recipe.
It's really to have
an adaptive mind
and trying to understand
the nature of the business
you want to invest into it.
SPEAKER 1: So that leads
into my next question,
actually, which is, when
do you decide to sell?
Your said your average holding
period is about seven years,
and you invest in
quality companies.
And you know, you gave
the example of CarMax,
which you have been holding
on for several years.
But you sold a company like
Intel, if I remember correctly.
FRANCOIS ROCHON: Yeah.
SPEAKER 1: So can you
talk about how you
think about selling companies?
Because you think of
yourself as a partner.
So it must be an emotional
process as well maybe.
FRANCOIS ROCHON: Yeah,
we try to remove emotion
from the process.
But it's never easy,
because we're human beings.
So we're emotional.
So we have to accept that.
And sometimes accepting
it and going beyond,
well, that's why we have
those rules or processes that
helps to make a decision.
And there's really four
reasons we'll sell a stock.
The first one-- if we
realize we made a mistake.
And that happened.
And I don't know the ratio.
It's probably one out of three
or four stocks that we buy,
for some reason,
we've made a mistake.
And the thing to
do is just sell.
Accept that it's
part of the process,
and you're a human being,
and it's a tough world.
So when you've made a
mistake, you just sell and go
into some other investment.
The second reason-- it's
a little different--
is that you didn't
really make a mistake,
but the nature of the
business has changed.
There's a new
competitor, there's
a new economic environment,
there's new technology.
Whatever has changed in the
industry or the company itself,
it's not as great as when
you first purchased it.
So when you realize
that, you have to sell.
And it can be a year
after you bought it
or 10 years after you bought it.
The third one is probably
when I look at this situation
and I don't agree with
a management decision.
Usually, it's a big acquisition.
And when I feel that I
don't agree with management,
I just sell.
I mean, I have this
saying that if I
had to resume, in one
sentence, what investing is,
it's you become partner
with the top management.
If you don't trust
them anymore, there's
no reason to be a partner.
So we sell.
And the fourth reason, which is
probably the most common one,
we just found an investment that
we think has better prospects.
And so we sell A to buy B, not
necessarily because there's
a problem with A. But
it's just that we think
that B will be more rewarding.
SPEAKER 1: OK.
And finally, before we let
it out to the audience,
I want to talk about my favorite
part of your annual letters,
which is those medals.
And correct me if my
memory is failing me,
but was Valeant
one of the metals?
FRANCOIS ROCHON: Yeah.
Yeah.
It was a-- yeah,
it was a mistake.
We were lucky, because
we did make money
with that investment.
But it turned out
to be a mistake.
SPEAKER 1: Yeah, so can
you talk to the audience,
explain the medals
a little bit more,
and tell us how you give a
medal, even to something you
call a mistake, and still
make money out of it?
FRANCOIS ROCHON:
Well, I would say
there's a difference between
being good and lucky.
So we were lucky there.
So that was still a mistake.
Basically, well, we
make many mistakes.
And we only choose to
three to give medals to,
bronze, silver, and gold.
And most of the time, the
mistakes our omissions.
Starbucks is an example
as a company that
fits all our criteria,
and we decided
not to buy for, sometimes,
a simplistic reason.
And you miss, you
know, a 10,000% gain
over 25 years for that reason.
So we try to give medals to
the most costly mistakes.
And the most costly
are usually omissions.
Sometimes it's like Valeant.
That was a stock
that we did purchase.
And we made a mistake.
Well, in the case
of Valeant, I think
we have a lot of confidence
in the management.
And also, at the same time,
they had much more debt
than we were usually
willing to live with.
And we did kind of an
exception to our rules.
And it turned out
that it was a mistake.
So--
SPEAKER 1: But you got out way
before a lot of the other--
FRANCOIS ROCHON: Yeah, but
the selection was a mistake.
So it turned out, in the
end, financially, it was OK.
But that's still a mistake.
And that's the hard part.
When you look at your mistakes,
you want to be very objective
and say, well, this is a
mistake for those reasons.
But some stocks that I
didn't purchase that went up
100 times, but I really
didn't understand,
that's not really a mistake.
It's just that you
decided that this
was outside your circle of
competence, and you missed it.
But that's not really a mistake.
It's a mistake when it was
in your circle of competence,
and for some reason, you didn't
go through with the purchase.
Or it's a mistake
when you thought
that the company was in
your circle of competence,
and in the end, it was not.
So that's basically
the two reasons
a mistake will be in the
chapter of the annual letter.
SPEAKER 1: It's interesting
you separate luck and outcome,
which is what one of
our previous speakers,
Michael Mauboussin, talks
about, you know, skill and luck.
And then, Howard Marks
also says that, you
know-- when he was
here, he said, you know,
what will happen might
be different from what
should happen.
So you need to decouple
them in your thinking.
But thank you very much.
With that, let me open
it up to the audience
if we have any
questions for you, OK?
Folks, any questions
for Francois?
Yeah?
AUDIENCE: Hi, Francois.
FRANCOIS ROCHON: Hi.
AUDIENCE: Thank you
for the excellent talk.
FRANCOIS ROCHON: Thank you.
AUDIENCE: I've been reading
your letters over the years,
and it's really excellent.
One of the questions
I wanted to ask you
was, you were showing us
this chart about Walt Disney
and buying it at 24
times earnings, right?
How do you pay up
for good businesses?
Because the times when
these businesses are
available with this
margin of safety
is maybe when something
is wrong, maybe
when the market rightly or
wrongly thinks that something
is off.
And if that's not the case,
then how do you pay up?
But if that's the case, how do
you separate what the market is
thinking versus reality?
FRANCOIS ROCHON: We try to
focus on the very long term.
So we try to look five
years in the future.
And we come up with
our best judgment,
what we believe the earnings per
share should be in five years.
So let's say, Disney,
when we bought in 2005,
we said, well, we think this
company can earn $3 a share
in five years.
And then, if you think that
the fundamentals will still
be good past those five
years, we say, well,
it probably will warrant a P/E
ratio of, let's say, 20 times.
So that gives you a $60
stock in five years.
So if you can buy the
stock at $30 or less today,
and you're right on
the $60 in five years,
you should be rewarded earnings
something like 15% annually.
The earnings that
the company has today
is not really relevant to that.
So if they earn $1
this year, it looks
a little pricey at 30 times.
But if you have a long-term
horizon and you're focusing
on where the stock will be--
or the earnings will be--
in five years, in the end,
you'll be OK.
So having this long-term
horizon, I believe,
helps you to defocus on
the P/E ratio of today.
And it goes the other way.
If you find a cheap
stock, but you
look five years in the future
and you don't see any growth
prospects, there's
no real reason
to believe that the stock
will be higher in five years.
It can be higher in three
months just because the P/E
has gone from 10 to 12 times.
But we don't try to
invest for three months,
we try and invest for
at least five years.
AUDIENCE: Thank you.
AUDIENCE: I thank you very
much for the great talk.
And welcome to Google.
FRANCOIS ROCHON: Thanks.
AUDIENCE: So I have a question.
Considering, now, the
current market conditions,
there's a lot of warning
by people about the risk.
And there are a lot of fund
managers returning funds
to the investors.
So I wonder, what do you think
about the market in general?
And what's the risk and the
expected return for the, maybe,
next five, 10 years?
Thank you.
FRANCOIS ROCHON:
Yeah, well, of course
it's not as exciting for an
investor today as it was,
let's say, in 2009, when stocks
were really, really cheap.
But you know, it
was scary then too.
So I always try
to kind of defocus
what's happening to the market
and more focus on the companies
that we own in the portfolio.
And when we look
at our portfolio,
and we've got this group
of 25 companies that,
we're pretty
confident that they'll
grow their earnings
by at least 10% to 12%
in the next five years,
and their P/E ratio,
seems reasonable, there's no
reason, I think, to be worried.
I don't know what the market
will do in the next six
months, a year, or two.
But I think the companies we
own, in the next five years,
will do OK.
And if you look at the
general stock market,
we don't have views in general.
But we think that
companies can continue
to grow their earnings per
share at, say, 5% to 7%
annually in the next five years.
And you add a dividend to 2%.
So even though there's no P/E
changes over the next five
years, well, that would
translate into a total return,
for stocks, from 7% to 9%.
So it's not as exciting
as eight years ago.
But still, it's pretty decent
returns when you compare that
to bonds, which probably yield
something like less than 2%
over the next five years.
So it's not extraordinary
exciting to find opportunities.
But I think the returns will be
decent, mostly for the stocks
we own, and probably the
stock market as well.
AUDIENCE: Thank you.
SPEAKER 1: We have one
question over there.
AUDIENCE: Thanks for the talk.
I actually have a
couple of questions.
The first one is,
I was just look--
I don't know if it's
accurate or not.
I was just looking
at your holdings.
And I noticed you have
MasterCard, you have Visa.
MasterCard, you have, like, I
think, a position of $210,000,
whereas Visa, you have, like,
a position of $35 million.
I'm just wondering why you
bother keeping MasterCard,
with such a low
number, rather than--
because it won't even
move the needle, right?
Why not just put
it all into Visa?
Because they seem to
track each other anyways.
So that's the first question.
FRANCOIS ROCHON: Yeah,
well, that's a very easy--
we prefer Visa, obviously.
And MasterCard, we own a few
shares just to follow it.
But we think both
companies are great.
These are fantastic businesses.
We prefer Visa.
And MasterCard, just
to follow the company,
we have a few shares.
SPEAKER 1: Is that
because of Visa Europe?
FRANCOIS ROCHON:
No, just in general,
I think Visa is an
extraordinary business.
And I think it's hard to
say, because MasterCard
is a great business too.
But I think Visa has a
little something more.
AUDIENCE: And the
second question
is, in terms of the
big tech stocks,
right, I noticed
you have Google.
So thank you.
But just curious--
FRANCOIS ROCHON:
Well, thank you.
AUDIENCE: I was wondering if you
could maybe give your thoughts
on Apple, why you don't own it.
Because I mean, personally,
I own a position in it,
because I think it's
got a low valuation.
And it's got a very
good moat around it,
especially with all the
services added to it.
So just curious on
your thoughts on that.
FRANCOIS ROCHON: Yeah,
well, obviously, Apple
could be in the section of
mistakes, because I mean,
it's up, what, 50 times
in the last decade
or something like that.
So it's been a great investment.
It's a great company.
I mean, I can't argue with that.
And the valuation
does look very low.
And I think they do have a moat.
And probably, five years
ago, I wasn't that convinced
that the moat was that large.
And it turned out that it
is a very solid business.
And I think--
I don't know exactly
the number, but I think,
today, 10% of their revenues
are service-based and recurring.
And as it get a larger
part of their revenues,
I think that moat
will be expanding.
Still, a large part of
their revenues and earnings
come from selling new products.
And when you have to sell
something new every two
or three years, there's a risk
that you'll miss a product
launch, or something
will not exactly
satisfy the customer
for whatever reason.
Or you just have the
risk, also, of having
another company that comes
up with a new and improved
product.
So I think, if you
compare Apple and Google,
I think, Google's business
is more stable, and more
entrenched, and more recurring.
And I think the moat is
larger in Google than Apple.
That doesn't mean Apple
is not a great business.
And you have to ask yourself--
at that price, the P/E
ratio difference is so high.
I think Apple
trades at 15 times,
and Google is probably 25 times.
SPEAKER 1: What about Visa?
FRANCOIS ROCHON:
Visa is close to 30.
SPEAKER 1: So isn't'
that too high?
FRANCOIS ROCHON: Well, I
remember, many years ago,
Philip Fisher wrote,
in his book that--
"Common Stocks and
Uncommon Profits"--
the further in the future
you can see growth,
the higher the P/E
ratio you can pay.
So in terms of Visa,
I think you can
see the company having the most
protected for many, many years.
It's hard to figure out
who could hurt them.
And you can see many,
many years of growth.
So I think that warrants
a high P/E ratio.
But of course, it was better
in 2010 when we bought it.
I think we paid, I don't
know, 15 times earnings.
So obviously, we had a much
larger margin of safety then
than we have today.
AUDIENCE: I've got one more.
FRANCOIS ROCHON: I don't know
if that answers your question.
AUDIENCE: Yeah it does.
SPEAKER 1: Yeah, go ahead.
AUDIENCE: Maybe--
because I noticed
one of your largest holdings
is Berkshire Hathaway as well.
And they've taken a
big position in Apple.
FRANCOIS ROCHON: Yeah
AUDIENCE: So
indirectly, you actually
probably own more shares of
Apple through your holdings--
FRANCOIS ROCHON: There you go.
AUDIENCE: --of Berkshire
Hathaway than Apple.
I don't know if you look
into that, that, you know,
I own this company.
And it already
gives me exposure.
So I won't own it separately.
Do you think about that?
FRANCOIS ROCHON: Well,
that's not really a reason.
Of course, when we own
Berkshire, we own Apple,
and we own Coca-Cola, and we
own Geico, and some Burlington
Northern Santa Fe, and
Precision Castparts.
And BNSF and Precision
Castparts was in the portfolio
a few years back.
So we're still shareholders.
But you know, if we
thought that Apple
was a good purchase for
us today, owning Berkshire
wouldn't be a
reason not to do it.
SPEAKER 1: So
Francois, when you look
at something like Visa
or Apple, your portfolio
has low-debt companies.
Sometimes they might
even have excess cash.
So when you look
at the P/E ratio,
do you take the cash out?
How do you--
FRANCOIS ROCHON: Yeah, you
should do that, I think so.
Because I mean, that's cash that
could be returned to investors.
It's a little harder
for Apple or Google,
because a lot of those
cash is in other countries.
Sometimes a little
complicated to get back
in the US, the cash, and
give it to shareholders.
But in the end, in
some way or the other,
this cash will be
returned to shareholders,
I hope, and should be
taken out of the valuation.
But what you want
to do is really do
the sum of what you
expect the cash to be
generated by the company in
the future discounted to today.
And then you add the
cash that is today.
So you get a proper valuation.
SPEAKER 1: Right.
Well, it makes sense.
With that, Francois, thank you
so much for being with us here
today.
FRANCOIS ROCHON: Thank you.
SPEAKER 1: Really enjoyed your
presentation and your talk.
And thank you all for being
such a great audience.
Thanks.
[APPLAUSE]
It's so nice to have you.
Thanks.
