Francois Rochon and the Art of Investing

Francois Rochon is a Canadian investor and the founder, long-term president, and portfolio manager of Montreal-based Giverny Capital. Since the founding of the firm, it has returned over 5,300% - an annualized return of 14.5%. Rochon himself invests with Giverny and has modeled the firms' investment philosophy after his framework and approach, and his viewpoints on investing are incredibly insightful.

Join us as we take a closer look at Rochon's philosophy, framework, and the artistic side of his investment process.

• Rochon believes that the management of a company primarily needs to be two things: extremely skilled, and passionate about their work.

• He only invests in companies where the management has high levels of ownership.

• He firmly believes that investing is an art.

• For Rochon, having a rational way of thinking and a long-term perspective is the best way to succeed

Francois Rochon has taken a relatively unconventional path to end up where he is today. He has a degree in engineering, and before going into investing full time he worked as a researcher and engineer for various companies in Canada. It was during this time that he found the writings of Benjamin Graham, Warren Buffett, Peter Lynch, and several other famous investors. This sparked an interest in investing, and Rochon sought to learn as much as he possibly could and eventually began managing various family accounts. In 1996, he started working as an analyst and eventually worked his way up to becoming a Portfolio Manager at Montrusco & Associates before starting Giverny Capital in 1998.

During a talk hosted by Alphabet in 2017, Francois talked about how having a science-based education brought with it different advantages and disadvantages. The two most significant perks of having a background in Engineering according to him are the fact that it develops a rational mind and a way of viewing numbers that can be very beneficial when investing.

The other side of the coin is that scientists are trained not to judge but to instead gather facts until they're certain they've arrived at the correct conclusion. Rochon explains that in investing, being able to judge after all the facts have been collected is an incredibly important skill to have, but being right all the time is practically impossible. Being right 40% of the time, he argues, is enough to become a successful investor while a scientist whose research and work fails four out of ten times is an unacceptable outcome.

For those with an interest in art, and more specifically in the life and work of legendary French painter Claude Monet, Giverny should be a name that rings a bell. It is a small and quaint village in rural Normandy, where Monet painted some of his most recognized and celebrated works. Rochon, who has a keen interest in art, founded Giverny Capital in 1998 with the stated objective of offering various investment management services based on the ideas and framework that had shown positive results when applied during his time as an analyst and portfolio manager. His investment philosophy revolves around owning a small number of great companies for the long term.

Perhaps owing to his background as a scientist and engineer, rational thinking is something that Rochon stresses as a large part of his and Giverny's framework. They do their best to avoid being affected when other people or firms make more money than them, avoid short-term analysis of the broader market as a whole, and instead choose to focus on things that they can control. That means continually reviewing their process, and evaluating why and how an investment was unsuccessful and how mistakes can be avoided in the future.

Since the start, Rochon has built up a culture at Giverny that emphasizes rational and independent thinking with a patient mindset. Humbleness is also a quality that Rochon likes to stress as it, according to him, is incredibly important not to get overconfident.

One thing that Rochon returns to throughout his writings is the importance of skilled and passionate management, something we're going to delve deeper into during the next paragraph. But the quantitative part of the stock selection process that he and Giverny apply when scanning for companies they're looking to invest in is, naturally, also incredibly important to understand Rochon's approach.

Giverny applies a valuation model with a timeframe of roughly five years, and its holding time for a stock is on average seven years. The goal is to purchase the stock at half of what the expected value is going to be in five years, something that over time will give them an annual return of roughly 15%, doubling their money.

To achieve this, Giverny invests in companies that show financial strength, measured primarily through Return on Equity (RoE) and growth in Earnings per Share (EPS). The company should have a RoE greater than 15% and showcase EPS growth at over 10%, while the debt/profit ratio should be under 4x. Besides financial strength, the company should have a solid business model and be a market leader in its field with low cyclicality and several competitive advantages. Some of the companies that he believes to be “business masterpieces” include names such as privately held IKEA, McDonald’s, Apple, and H&R Block, to name a few.

That looking for skilled management in companies seen as potential investments is important should come as no surprise, but according to Rochon, being skilled simply isn’t enough. In addition to being good at what they do, the management of a company that Rochon and Giverny invest in needs a management passionate about their work.

Rochon believes in CEOs and management with a vision for building something long-lasting and impactful. Instead of focusing merely on the next quarter's result, Giverny likes to place its trust in entrepreneurs and CEOs who have a vision of building something truly great. In Rochon's eyes, having management with this type of vision and with a solid plan on how to get there will mean that the results will fall into place, and hopefully be in line with the firms' expectations.

Another criteria that Giverny and Rochon look for is the incentives and the involvement of the people in leadership positions of a potential investment. In the words of the late and great Charlie Munger: “Show me the incentives, and I will show you the outcome”. This is a viewpoint that is incredibly important to Rochon and his collaborators at Giverny, as he and the firm strongly believe that people in management positions need to have significant personal ownership in the company they run.

However, having skin in the game is not all talk for Francois himself. Instead of merely managing the client's money through his firm, he places his money where his mouth is. As he states in the opening of every annual letter he pens, he, Giverny, and the firm's clients are all partners as he invests in the company’s investment portfolios and manages his own money together with his clients'.

As previously mentioned, Rochon considers investing an art form and does his utmost to remain an artistic investor. According to him, there are several things that people need to be an artist in the investing world. They need to have a long-term horizon, accept the fact that many things in the stock market are unknowable, walk their path, and focus on intrinsic value rather than short-term market fluctuations. But artistic investors also need the ability to judge more things than just numbers. They need to be able to make a judgment call about the management of a company, its place in the broader market, its competitive advantages, and so on. In Beating the Street (Peter Lynch's follow-up to his legendary book One Up on Wall Street) he writes “Stock picking is both an art and a science, but too much of either is a dangerous thing”, which is something that Rochon has taken to heart.

The best way to get an insight into Francois Rochon’s philosophy and his investing style is to read his writings. He is a long-time contributor to the newspapers The Gazette and Les Affairs, but for those looking to get into the nitty gritty of his approach, there is no better place to turn than to his annual partner letters. In these, he talks about his philosophy on things large and small within investing, his views on the state of the markets, and various tidbits and nuggets of wisdom insightful for any investor.

Francois Rochon has used the same approach and philosophy ever since he started investing, and has become incredibly successful using a relatively straightforward approach. His way of focusing on the things that he can control within investing and his approach, with its artistic flair, has proven to be a recipe for success in the long term.