Choosing stocks the Rochon way

Francois Rochon is a celebrated portfolio manager. His firm, Giverny Capital, is known for its stellar track record, delivering over 14.5 per cent returns against the market benchmark of 9 per cent since its inception in 1993.

In a recent interview, Rochon discussed his investment philosophy, including his entry into finance. Here are a few takeaways from it.

Journey into the world of finance

Having studied engineering, Rochon never had any formal training in finance. Yet, his interest was piqued when he came across Peter Lynch's book 'One Up on Wall Street'. This led him to read about the legendary investor duo, Warren Buffet and Charlie Munger, and their company Berkshire Hathaway's legendary annual letters, which had a deep impact on him.

In Rochon's words, "Well, I believe the first book I read was 'One Up in Wall Street' by Peter Lynch, and it was first time really that I read about value investing. The idea that a company has a value and you can purchase it on the stock market way below its intrinsic value, to me that was something new...And then it led to Warren Buffet's letters which really changed my views of the investment world. But, more importantly, it gave me a passion to invest in the market."

Rochon's secret sauce to investing success

The two tenets that reign supreme in Rochon's investment strategy are the margin of safety and the belief that stock markets will value companies fairly in the long run. According to Rochon, margin of safety is more than just valuing a stock. It also includes evaluating a company and its management and whether it can withstand and thrive in challenging market conditions.

He says, "As an engineer, the concept of margin of safety really resonated with me. And I would say that this principle, I think, can be extended to more than just valuation. But in terms of the quality of businesses, managers and quality of the balance sheets. For example, this year, the companies that have a little too much leverage on the balance sheet can be quite hurt by the increase of interest rates. So you want a margin of safety not just on valuation but on all the important parts of running a corporation."

Besides evaluating a company's management, Rochon also recommends investing in companies that are fairly valued and have long-term growth potential. This can help generate consistent returns over time.

But, what makes Rochon's investments great?

A common theme throughout Rochon's long-term investments is excellent management and a unique business model.

As per him, a company is worth investing in if it creates value for its shareholders through its unique offerings while maintaining profitability in the long run. He cites examples of companies such as Berkshire Hathaway, Google and Visa that have distinct business models and are profitable, saying: "I think all the companies have a combination of great managers, but not only great businesses rather kinda unique businesses which gives them a competitive advantage...Also, I think that those companies have a very strong history of intelligent capital allocation. And, if you are going to own a company for ten years, a lot of your returns will be the fruits of intelligent capital allocation over the years."

Learning from mistakes

That's not to say Rochon's investments have been flawless. In fact, he has always been transparent about his investing goof-ups, even highlighting them in his annual letters. He believes that mistakes provide a good learning experience and keep him grounded. "The podium tree of mistakes keeps me humble...The section usually makes me think about what would be the three best mistakes of the year. It forces you to go back and pass decisions both in things you did purchase and the ones you did not...I think it builds kind of a process of always trying to learn from your past decisions...You want to be sure that in the future, you don't make the same mistakes."

These are some of the invaluable investing lessons imparted by Rochon. To delve deeper into his investment philosophy, we recommend you watch the full interview.

Also read: Aswath Damodaran's five valuation factors