Prior to seeing Warren Buffett and Charlie in person, I attended the Value Investor Conference, which featured speakers such as Chuck Akre, Tom Russo, François Rochon, Robert Cialdini and more.
Over several posts, I’ll share what I learned from my week in Omaha!
To read the first post on lessons from Dr. Robert Cialdini and Joseph Shaposhnik, click here.
Today we’re hearing from Giverny Capital’s François Rochon.
François’ letters have always been well-written and insightful to me.
Here are the lessons he presented at the Value Investor Conference!
François Rochon at the Value Investor Conference 2023
Giverny Capital’s Investment Process
François began his presentation by explaining how Giverny Capital screens ideas and analyzes businesses. They are looking for large moat businesses that generate high returns on capital and free cash flow (FCF). They will do a five-year forecast and require a minimum CAGR of 15% for valuation.
His presentation outlined the investment process as follows:
1. Idea Generation
– Followed a large number of companies over a long period of time
– Regular contact with a network of industry sources
– Multifaceted approach using conferences, screens, and scuttlebutt
2. Quantitative analysis
– High returns on capital (ROC)
– Significant free cash flow
– Avoidance of excessive leverage
3. Qualitative analysis
– Business model: Unique assets, barriers to entry, brand awareness
– Management team: Manager owners, value-creating capital allocation
– Inclusion of ESG consideration at the valuation phase
4. Valuation
– 5 year valuation model
– Stock purchased at half its estimated value in 5 years (=15%/year)
What Margin of Safety means for Giverny
Giverny places a high priority on capital preservation. In other words, it means reducing the risk of permanent capital loss and inadequate returns.
There are several aspects in which the fund requires a margin of safety:
– Outstanding managers
– Solid balance sheet
– Profitable company
– Market valuation
Giverny’s competitive advantage
There is a lot of competition in the investment world, and many smart people are pouring into it. To outperform the competition, we need to do something different. For Giverny, it’s their behavior.
Here are the principles they live by:
– They focus solely on the fundamentals of a company, not on its short-term stock price.
– The fund also accepts that it will underperform its benchmark about one out of three years.
In most environments, they expect to remain fully invested and do not attempt to time the market.
– They know their circle of competence, as well as what they don’t know (and stay away from it).
– They recognize their mistakes and learn from them. Rather than denying them.
– Focus on long-term objectives rather than panicking during crises.
The quest for the “middle of the road”
People tend to fall into extremes most of the time. However, most things aren’t binary. Giverny strives to maintain a balance.
– They prefer investing in companies that are growing quickly but not too quickly. It’s dangerous and potentially fragile for a company to grow too fast or fall victim to shifting trends.
– There are economic benefits to using debt, but companies that use it aggressively are avoided.
– Don’t invest in companies at the beginning of their life cycle. He prefers to wait for the business model to be proven to be viable and sustainable.
– Willing to pay a higher P/E multiple than traditional value investors but there’s a limit they are not willing to cross.
– It is important to understand the difference between patience and stubbornness.
3 most important lessons over 3 decades
– Keep a long-term perspective and do not try to predict the stock market. Behave like an owner!
– Aim to reach a balance in everything. Travel the safer and wiser “middle of the road”
– Practice Rationality, Humility, and Patience and strive to improve them.
That’s all I have for you today!
I will be covering more lessons from the Value Investing Conference in the upcoming posts and… of course, my lessons from Buffett and Munger sharing during the Berkshire AGM.
Stay tuned.
Thomas
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