Delivering a 14-per-cent annual return through sensible investing
Since July 1993, François Rochon’s portfolio has delivered an annual return of 14 per cent. And 2012 was another great year, returning 21 per cent for that portfolio.*
Rochon named his wealth management firm Giverny Capital, after the small town in France where the artist Claude Monet lived from 1883 to 1926 — “both to honour Monet and his works, and also to remind myself and my clients that successful investing is like gardening.
“To grow great trees and flowers, you have to know the climate and the soil, and which plants will and will not thrive there,” he said. “You have to pay attention to the flowers you plant, and tend them diligently. But the key quality needed is patience: You can’t plant a tree and then pull it out six months later, because it hasn’t grown fast enough. You will never get tall trees that way!”
The same philosophy applies to growing one’s financial investments. If you’re looking for a private-wealth manager who promises quick returns on stockmarket speculation, Rochon is not your man. Montreal-based Giverny Capital is in the investment business for the long haul, and its founder and CEO is any- thing but a stock speculator. Instead, he and his partners are sensible, methodical money managers who make money by finding and then investing in well-run companies that are profitable on a reliable, ongoing basis. Around 25 of such great companies make up the Giverny portfolio.
“We take Warren Buffett’s approach to investing,” Rochon explained. “Like him, when we buy shares in a company, we consider ourselves owners. As such, we are interested in all aspects of how the company operates, from the quality of products/services it offers to the ways in which it treats its customers, employees and shareholders.”
This is also why Giverny Capital tends to hold on to a given company’s stocks on average for five years, sometimes much longer. “Like any good owner, we are in for the long term,” Rochon said. “We are investors, not speculators.”
And the stocks Rochon chooses for Giverny Capital’s client portfolios are the very same stocks that he himself invests in. “When we are researching and then purchasing stock, we know that we are choosing for ourselves as well as for our clients,” he said. “We are really in the same boat as our clients. That’s a cornerstone value at our firm.”
Giverny Capital’s success lies in its methodical approach to identifying the right companies in which to invest. First, Rochon and his team find a candidate company that is very profitable and has low levels of debt.
“We then look for a company that offers something unique, be it a distinctive product or service, that competitors cannot match,” the CEO said. “We call this ‘the moat.’ It is what surrounds the company’s economic castle, and protects its business from the competitors.” And this competitive advantage has to be significant and sustainable: Giverny Capital does not invest in fads.
Next, Giverny Capital’s team verifies the company has a long-term growth potential that is higher than average, and that its management is honest, competent and dedicated to shareholders.
“Again, we and our own clients are becoming owners of this company,” Rochon said. “So we need to know that the top managers working for us are not only gifted, but trustworthy, too. Intelligence without integrity is highly hazardous for investors.”
When all these tests have been passed, the candidate company has to meet one last criterion: Its stock price has to be undervalued compared to the intrinsic value of the business. In other words, the price has to be right.
“Do things sometimes not go to plan? Definitely,” Rochon said. “Our strategy is about improving our odds of good return and, at the same time, reducing the risk we take. But you have to accept that some stocks won’t perform as expected — that’s just the nature of the business world. But, in the end, by doing careful research and choosing companies that are actually worth owning based on their profitability and long-term business case, we have delivered an average 14-per-cent annual return since 1993.” * Results as of December 31st 2012. From 1993 to 1999: private family portfolio managed by François Rochon before registration of Giverny Capital at the AFM in 2000. The financial statements of the Giverny portfolio are audited at the end of each year by Price Waterhouse Coopers (PWC). Results for 2012 are preliminary and unaudited. The returns indicated include trading commissions, dividend and other income but do not include management fees. Past results do not guarantee future results.