François Rochon of Giverny Capital.
In our past article, “Gurufocus Exclusive Interview With François Rochon Of Giverny Capital, 20x In 20 Years, Part I”, we discovered an outstanding investor: François Rochon, president, portfolio manager and founder of Giverny Capital, The Rochon global portfolio has had an outstanding track record of a 15.5%* annual return 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. François is not only a great investor but also a great art collector. His approach towards collecting art and investing is similar, as he is looking for greatness, uniqueness and characteristics that will last the test of time.
“Greatness is rare, both in the art world and in the business world” - François Rochon
We have been lucky to have him share with us a few thoughts on some of the investments he has made that have characteristics of being both rare and unique businesses that could be studied. These include Carmax, Disney and Bank of the Ozarks.
Interview:
If we go back to 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 can look at the numbers, seeing that you can learn a lot by only looking at the asset quality and you need at least one business cycle to have a good assessment of how the company did in good times and bad times. But if you look at the track record of Bank of the Ozarks, I think it’s been a public company for 20 years now, you can see their assets, their charges for bad assets and bad loans have always been lower than the average, their returns on assets are much higher, the balance sheet is stronger, as well as the asset to equity is always at a good ratio. But it’s really when I met the CEO that I understood that he’s an exceptional banker. And we have this phrase that is probably stolen from Warren Buffett that states the following “We don’t invest in a bank, we invest in a banker”, and we think that George Gleason is truly a great banker.
Is this a practice you do often to meet with the management directly?
With smaller companies, we try to. But with Disney for instance, we don’t have too because you have enough information from all the magazines and from the internet. But for smaller companies that are less known, I think it’s a good approach to have.
What are types of questions you ask and how does the process unfold when you meet them personally?
It’s not very complicated; today’s management teams are very regulated: they don’t say anything that is not of some public record. So what you really want to learn is what their long term plans are, the culture they plan to build within the company. These are very general ideas but those are the main things that you want to know. You don’t want to know about the next quarter, but you really want to know what kind of business they want to build and what kind of competitive advantages they want to build or maintain if they have any.
About Disney, I remember meeting with Tom Murphy in Omaha; Bog Iger, had just been named or was about to be named CEO. So we asked Tom what he thought of Bob Iger and he said some really really nice words. We knew Tom because he used to manage capital cities ABC; he’s on the board of Berkshire and he is probably one of the best managers of all time. He highly praised Bob Iger. So, it confirmed what we thought: Iger would be the right guy for Disney. These are little things that you can’t learn from a computer but these are very important factors. Tom Murphy is someone that has an extremely good judgment, has lots of experience, and he built a company from nothing to an empire in 3 or 4 decades. And he says this fellow is outstanding. It seems easy but in order to be able to make this assessment, you need to know who to ask and what questions to ask.
And Bob Iger has done a really incredible job and we have been really lucky. We bought our Disney shares the day he was named CEO. To be sure nothing went wrong, we waited until the day when it was officially confirmed.
You have a long term approach. There are sometimes fluctuations in the stock market, which can be quite significant at times. So how do you and your partner deal with that and do you sometimes panic?
We ourselves don’t panic, although our clients sometimes do in tough times. But we have had a good record on that front - even in bear markets - as our retention rate is about 95% annually. But you have to accept that it is not everyone who can live with the ups and downs. But so far, it`s been okay. The worst part was during 2006-2007 when we had poor results because we were not investing in stocks of natural resource companies and because of the rally in the Canadian dollar. Plus, people were making money with oil stocks and gold stocks, in which we were not investing. It is not that our returns were that bad, it is just that some parts of the market were doing so well, that some of our clients became frustrated. The “natural ressources fad” this pass away ultimately.
In a period of crisis like in 2008-2009, as you are mainly allocating funds in stocks, do you move your portfolio allocation in order to profit from the best opportunities?
Yes, we try to profit from opportunities as they present themselves; we can try to sell cheap stocks in order to buy cheaper stocks. But the best thing was to have some “fresh” dollars. Every fresh dollar I could find, I invested it in stocks and every person I succeeded at convincing to invest in the stock market did very well. I remember we hosted some conferences in 2008 and early 2009, which we called “the opportunity of a generation”. It attracted some people, but most of them didn’t invest; but those that did, did really well.
How often do you sell?
Not very often. On average, I think that we keep our stock for roughly six to seven years, but it really depends.
What triggers the selling?
When the reasons why we bought a stock originally are no longer present, we sell. Either the company has fulfilled all of its growth prospects or we just made a mistake in assessing those growth prospects. It could also be that the management was not entirely as we expected it to be; finally, sometimes, a stock becomes overpriced: future growth prospect are already discounted in the stock price; but that does not happen often. Most often, it`s just because we found something else. I always keep in mind what Peter Lynch said “You won't improve results by pulling out the flowers and watering the weeds”. So we try to keep our flowers !!
What are your thoughts about diversification? Do you own a lot of stocks in your portfolio?
Many great investors are very focused. I'm thinking of Charlie Munger , Glenn Greenberg, Philip Fisher, Warren Buffett and Lou Simpson. They are very focused people who tend to own ten to twelve stocks at a time, sometimes even less. I don't think we've reached a level of quality in terms of investing that makes us feel that we can have only ten or twelve stocks. We are more comfortable with twenty to twenty-five holdings, which I think is a good number. It's diversified enough so you eliminate most of the risk of owning just a few securities and it is low enough so you're not too correlated to the index.
In past letters, you mention that you have measured the intrinsic value of a business by its owner’s earnings and in an article, you have mentioned that you essentially define earnings’ potential by what a company can earn in five years and what is the reasonable assumption for the P/E ratio in five years. Can we ask you to describe to us a little more your process to find opportunities in that regard?
What we do is easy, so let`s take for instance Carmax… To be continued in Part III
* See disclaimer on returns at: http://www.givernycapital.com/en/rendements
About the authors:
Charles Matte and Jean-François Nobert are two students from HEC Montréal.
