#172 How Francois Rochon Invests (Giverny Capital)
What I learned from reading the “Letters to Giverny Capital Partners (2001-2025)” by Francois Rochon.
Today’s Chapter is based on the “Letters to Giverny Capital Partners (2001-2025)” by Francois Rochon.
François Rochon is a Canadian value investor and the founder, president, and portfolio manager of Giverny Capital in Montreal. Over several decades he has compounded portfolios at roughly 14–15% per year by focusing on owning a concentrated basket of outstanding, high return on capital businesses for the long term.
Here’s what I learned:
Patience is a Virtue
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”
— Warren Buffett
Francois Rochon repeatedly presents the idea that superior long-term returns are impossible without genuine patience. In his annual letters, he reminds his Giverny partners that the stock market rewards those who can wait through the inevitable storms rather than those that overreact over every headline or quarterly results. In his opinion, patience is not solely to wait but the discipline of refusing to sell your winners and to chase hot trends. He illustrates the importance of patience by referring to Philip Carret, the legendary investor, who was once asked what was the most important lesson of his 75 years of experience during an interview. He answered with just one word: “Patience”.
As such, Rochon’s experience managing Giverny Capital is a perfect example of how patience pays off in the stock market. Giverny Capital has earned an average return of around fifteen percent per year and the firm held companies for six to seven years on average, roughly twelve times longer than the typical investor. Rochon sees this low turnover as a direct result from his investment philosophy of investing in exceptional companies that deserve to be owned for a long period of time. As such, it is not surprising that Rochon argues that trying to predict short-term market direction is futile. Instead, he believes in being always invested in the market.
“Since no one really knows what the market will do in the short run, the best strategy, I believe, is to simply stay invested (at least as long as we find businesses that meet our criteria). And one thing that 2003 showed us again is that the first ingredient to make money in the stock market is to be present.”
— Francois Rochon
As a matter of fact, Francois Rochon is brutally honest in the fact that he cannot predict the market. He freely admits that he does not know where the market is going next month or next year. He acknowledges that some of his purchases will disappoint and that his portfolio will underperform the index roughly one year out of three, in what he coins as The Rule of Three. He writes, “In fact, I believe that there are stock market realities that should be accepted when we decide to become equity holders. I named those ‘The Rule of Three’: One year out of three, the market will go down (by more than 10%). One stock out of three that we will buy will be somewhat disappointing. And one year out of three, we will under perform the indexes. I don’t have scientific facts to offer you to explain this rule. That is why it is an empirical conclusion: it can be observed, it can’t be explained. But it can be psychologically useful as knowing this rule will help us navigate through market storms.”
As Rochon explains, after three decades of investing in the stock market, he is convinced that the biggest mistake that investors can make is to try to predict the financial markets and to try to wait for a better time to buy or sell stocks. He tells the story of a money manager who was an outstanding stock picker but that has been pessimistic about the stock market for 18 years who could have done more than 20% a year for more than three decades if he had just invested 100% of his portfolio in his favorites stocks and just forgot about the market.
“I would like to emphasize the most important lesson of the last twenty years: It is futile to try to predict the stock market over the short run. All previous lessons are useless if you try to predict the stock market over the short run. I have heard people say hundreds of times that they were waiting to buy great companies because they had negative views on the short-term direction of the stock market. Owning great businesses, managed by great people and acquired at reasonable prices is the winning recipe. The rest is just noise.”
— Francois Rochon
This reminds me of what we have learned from Lawrence Goldstein at Santa Monica Partners, who believes that investing in overlooked companies requires patience in order for their value to unlock. In fact, Goldstein once said “I believe that neglected stocks win hands down over longer periods of time and with less risk. Clearly, patience is the key to investing successfully in our kinds of securities.” As such, he frequently advocates for a long-term perspective, emphasizing to his partners in his shareholder letters that true value creation takes time. As he once wrote, “My belief of course is that patience is a virtue to be rewarded.”
By having a long-term perspective, Goldstein is able to ride out market volatility without panicking. He recognizes that short-term price fluctuations are inevitable but he doesn’t let them distract him from his long-term goals. Similarly, he reiterates to his partners that “Riding out the volatility and noise is essential to successful long-term investing. Put another way, we must keep control of our stomachs (though others around us may not) when sailing through stormy seas.”
By consequence, Goldstein practices an investment methodology that prefers holding investments for the long haul and allowing them to compound over time. By consequence, Santa Monica Partners have an “extremely low turnover [of companies in the portfolio] is the norm for us, of course, as ‘buy and hold’ is not just my preference and practice, but something that permeates my very being.” This low turnover not only reduces transaction costs but also allows him to defer capital gain taxes, further enhancing returns.
“For all we are concerned with is the long-term beyond the horizon. When we invest we like to think in terms of forever. We can care less about a quarter or a year and rather focus on the far away pot of gold on the distant horizon. Sometimes we reach it sooner because of the occurrence of a value-creating catalyst. Most of the time it is because the company over time just grows like a weed or like topsy and in the fullness of time we reach the horizon and the great value realization outs.”
— Lawrence J. Goldstein
For Goldstein, patience is not about idleness but about allowing compounding to work its magic. He cites examples like Balchem, a stock that became a “92-bagger in 20 years,” and Compass Knowledge, which quintupled in value in just two years. These gains were only possible because Santa Monica Partners held these investments through periods of stagnation and volatility, trusting that their underlying value would eventually surface. As Goldstein once said, “Patience and courage too is also important so as to be able to look across the investment valleys and beyond the peaks in order to make and be willing to hold on long-term to achieve what may be very successful and at times extraordinary investments.”
“Once in a blue moon you find one which is really a great one but to the ignorers ‘too small’ or ‘too closely held’ or its variations ‘doesn’t trade enough’ or is ‘illiquid’ or too this or too that. In almost all cases these companies don’t deserve their undervaluation. How do we as investors profit? Value will out in time. It always does.”
— Lawrence J. Goldstein
Focus on Intrinsic Value
“The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”
— Warren Buffett
A second lesson that can taken from Francois Rochon’s letters to partners is the concept that investing should be seen as purchasing a company rather than stocks. As such, he focused relentlessly on the intrinsic performance of the companies themselves rather than the changes in stock price. He believed that the market’s daily price is a noisy proxy and that true returns are driven by the underlying company’s ability to grow owner earnings and to create a durable competitive advantage. He writes that when assessing any company, he examines the following five pillars:
The business model (market share, product innovation, etc.)
The financial (balance sheet and profit margin) structure
Quality of management
Long-term growth perspectives (which are linked to the first three)
Market valuation compared to intrinsic value
You will see that the last pillar draws on Warren Buffett’s concept of focusing on owner earnings to track how much economic value the companies are truly creating. Since the beginning of his letters, Francois Rochon has published charts showing that the intrinsic value of Giverny’s portfolio companies do not grow at the same rate as their stock prices. However, in the long run, they should grow at the same rate. He writes, “In the long run, stock market performance will follow hand in hand the intrinsic performance of the underlying companies. But in the short term, there can be huge gaps between the two. You can notice that some years, the market performance was bellow intrinsic performance (1999, 2000 and 2002). This is 3 years out of 8 (40% of the time).”
“As you know by now, Giverny Capital is not like other money management firms. We evaluate the quality of an investment by focusing on the growth in intrinsic value instead on market price.”
— Francois Rochon
Concerning management quality, after studying and learning from Philip Fisher, Rochon concluded that the quality of the people running the business accounts for more than 90% of the company’s long-term success. Therefore, he often looks for leaders who love their business more than they love money and who treat shareholders as true partners.
As such, it is not surprising that Francois Rochon the daily changes in stock prices not as a reliable guide but as a servant that occasionally offers extraordinary opportunities precisely because most participants behave irrationally. He writes in his letters that downturns, corrections and periods of pessimism are the best times to invest into high-quality businesses as they can be purchased at a discount from their intrinsic value. As he explains, “The steep decline that followed the September 11 attacks and the subsequent rise of stocks remind us that, in the universe of stock markets, it is better to buy in rainy days than in sunny days. Because when the sky is all blue, stocks are often changing hands at prices that reflect the fact that a majority of investors (I) believe that the sky will stay blue forever. In recessions and other crisis, it’s the opposite: many will sell their stocks at any price thinking that never again will the blue sky return. To be able to keep in perspective stock market’s sunny days from rainy days is a quality that is quite useful to develop.”
This reminds me of the importance of understanding Mr. Market, a term coined by Benjamin Graham. Here’s how the legendary Warren Buffett explains in his own word in his 1987 Berkshire Hathaway letter to shareholders:
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?
The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
— Warren Buffett
Be a Contrarian
“Be fearful when others are greedy and greedy when others are fearful.”
— Warren Buffett
One final lesson that can be learned from Francois Rochon’s letters to his Giverny partners is the importance of having an investment philosophy that is rational and independent. As a matter of fact, he acknowledges that his approach in investing in a small number of high-quality businesses and having low turnover is greatly different from conventional wisdom in money management.
This approach of his was greatly influenced by the great John Templeton who once said, “It is impossible to obtain a performance superior to the average unless you do something different from the average”. Rochon explains further that, “Our investment philosophy doesn’t reflect the conventional approach toward portfolio management. To own few stocks, to avoid some industries that we know nothing about and to ignore market fluctuations is a sensible approach but that is far from being widely used in the industry. But that doesn’t disturb us a bit: since our beginning we have known that “being different” is the first ingredient of success (although there are many other ingredients needed!).”
Rochon’s contrarian approach is also apparent in his refusal to follow the crowd and to invest in industries that he does not understand. He prefers investing in companies that are within his circle of competence. Similarly, what differentiates him from other money managers is his emphasis on continuous learning and humility. Even after more than decades into the business, Rochon understands the limits of his circle of competences and is eager to study his past mistakes in his letters to partners in a dedicated section called “Mistake du jour”, where he lists out mistakes he has made over the years.
“There is a lot to learn from our mistake but it is a little less painful to learn from other’s mistakes.”
— Francois Rochon
This reminds me of what we have learned from Hetty Green, whose greatest edge as an investor was her willingness to go against the crowd. She always kept a stack of cash ready to take on opportunities created by prices going down due to fear. As a matter of fact, in an era where speculative frenzies regularly swept through Wall Street, ruining countless of investors who bought at the top of the market crazy and who panicked at the bottom, Green understood that following the herd was a certain way to lose capital. Instead, she built a contrarian investment philosophy and she possessed the discipline to execute it to perfection.
Her contrarian strategy in investing was honed early on, particularly during the economic turmoil following the Civil War. Wallach writes that “The devastation of the South, the high debt caused by the war, and the disarray of the Union created a stormy picture. Many people viewed the country’s economy as doubtful. Seeing chaos around the corner, they worried about the stability of the government and refused to pay face value for its greenbacks. Instead, they rushed to gold. The rules of the marketplace state that for every seller there must be a buyer. The more the public discounted paper money, pushing it down as low as fifty cents on the dollar, the more Hetty bought.“
“I buy when things are low and nobody wants them. I keep them until they go up and people are crazy to get them. That is, I believe, the secret of all successful business.”
— Hetty Green
There are three reasons why Hetty Green was able to implement this contrarian investing approach successfully. Firstly, she always had cash on hand. As Shane Parrish once said in an interview with Tim Ferriss, the reason why Warren Buffett is so successful is because he has a large stack of cash in the balance sheet, “and so, what he’s always doing is everybody thinks he’s out of touch and he looks like an idiot. But he always wins because no matter what the outcome is, he wins. If the stock market goes up, he wins. If the stock market crashes, he wins because he’s put himself in a position where no matter what happens, he can take advantage of circumstances rather than having circumstances take advantage of him.“
Secondly, Hetty Green only invested in things that were within her circle of competence. Notably, she mainly invested in railroads, bonds or real estate. She used her research skills to identify bargains others missed, but it was also a lot easier for her to buy things that are depressed when she knows what she is buying. As Wallach writes, “Whether it was a horse and buggy or stocks and bonds, her canny habit of investigating every possible facet before she bought helped make her successful. “
Green explains that to determine when stocks are cheap demands a thorough knowledge of “their history, their dividend-paying possibilities, and what they have sold for in the past. If one can buy a good thing at a lower cost than it has ever sold for before, he may be fairly sure of getting it cheap.”
“Before deciding on an investment, I seek out every kind of information about it.”
— Hetty Green
Thirdly, Hetty Green was extremely patient once she invested in an asset. She would often buy assets and tuck them away for years, sometimes waiting decades for investments to finally pay off. As she once said, “I keep them just as I keep a considerable number of diamonds on hand until they go up and people are anxious to buy.”
Beyond the Book
Read "Master Series: Francois Rochon" by Investment Masters Class
Watch "Buying Exceptional Businesses & Ignoring the Noise w/ François Rochon (TIP709)" on YouTube
If you are interested in having conversations with the eminent dead, consider trying my AI Chatbox prompted with highlights from over 100+ biographies I have read. Try it here.
If you enjoy reading my newsletter, please consider becoming a paid subscriber. You’ll be able to keep this newsletter going! Here’s what you get when you upgrade:
Voting on polls: you’ll get to vote on who I should write about next.
Requesting biographies: you can request a biography for me to read and write about next.
Supporting my next book purchase: all payments received will be used to purchase a new biography.