How to value a stock – lessons from François Rochon

Giverny Garden François Rochon
Giverny Claude Monet’s Garden Main Alley

François Rochon is one of the best value investors in the world. He invests in long-term compounders that aim to grow their earnings significantly over time. These include Berkshire Hathaway, CarMax, Alphabet, Ametek, Charles Schwab Corporation and Markel.

His investment record is incredible, averaging over 15% over the last 27 years.

Source: Giverny Capital Website

Below, I’ll outline some key takeaways from his interviews and annual reports that he has shared over time.

1. Great businesses have financial strength, a great business model, skilled managements and to be investable, they need to be selling cheaply in the market!

Source: François Rochon Talk at Google
François Rochon Talk at Google
We choose companies that have (sustainable) high margins and high returns on equity, good long term prospects and that are managed by brilliant, honest, dedicated and altruistic people. Once a company has been selected for its exceptional qualities, a realistic valuation of its intrinsic value has to be grossly assessed.

Rochon looks for businesses which meet the criteria above. The rationale is that a wonderful business in and of itself is great, but pairing it with financial strength and a gifted management team can boost its performance over time.

2. Concentrating on owner’s earnings, not stock price movements

Warren Buffett has always spoken to the importance of concentrating on business performance and not stock prices. Through studying Rochon, one of the biggest takeaways gained is the mechanism he uses to apply this Buffett principle. He simplifies the investing process by distilling stock returns down to two main sources, shown below.

From 2010 onwards, Rochon has stated this same explanation of what he concentrates on:

At Giverny Capital, we do not evaluate the quality of an investment by the short-term fluctuations in its stock price. Our wiring is such that we consider ourselves owners of the companies in which we invest. Consequently, we study the growth in earnings of our companies and their long-term outlook. Since 1996, we have presented a chart depicting the growth in the intrinsic value of our companies using a measurement developed by Warren Buffett: “owner’s earnings”. We arrive at our estimate of the increase in intrinsic value of our companies by adding the growth in earnings per share (EPS) and the average dividend yield of the portfolio. We believe that analysis is not exactly precise but approximately correct. In the non-scientific world of the stock market, we believe in the old saying: “It is better to be roughly right than precisely wrong.”

He does not include change in valuation as a further return driver, because over the very long-run, valuation plays a smaller role in stock returns. In order to address this, Rochon simply tries to buy stocks at cheap prices, so that any change in valuation (i.e. change in the P/E ratio) of a stock he owns contributes more upside than downside.

A stock return will eventually echo the increase in per share intrinsic value of the underlying company (usually linked to the return on equity).

Rochon simplifies the process of ignoring the noise around stock prices and volatility in markets by consistently analysing his portfolio from a business owner perspective. He believes timing the market is futile.

It is futile to predict when it will be the best time to begin buying (or selling) stocks.

Here is the result from his owner earnings assessment of his portfolio over time:

Giverny Capital 2020 Annual Report

As we can see, the underlying business return (12.6%) that Rochon measures is extremely close to the true return he achieved in the market (13.3%). So essentially, by concentrating on the businesses we own and how well they are growing earning power, the return we achieve in the stock market will follow.

3. Important psychological traits for successful investors to possess are patience, humility and rationality

There can be quite some time before the market recognizes the true value of our companies. But if we’re right on the business, we will eventually be right on the stock.
François Rochon, 2010 Giverny Capital Annual Report

When an investment doesn’t work very well, trying to focus on what is happening at the company and to be sure that I’m not getting cooked like a frog, that’s really important.
There’s a big difference between knowing when to keep your shares because the fundamentals warrants it and recognising you made a mistake and just getting out of that stock. This is the big difference between being patient and stubborn.
François Rochon, Talk at Google

Rochon explains that in investing, patience in waiting for opportunities as well as waiting for the market to fully value investments is an important quality to have. A great example is Rochon’s fantastic investment in Disney, presented below.

François Rochon Talk at Google

As we can see, François had to endure four years of no returns to eventually have his investment rewarded. The key here was to concentrate on business fundamentals. In this period, Disney acquired Marvel Entertainment (2009) and the Star Wars franchise (2012). EPS also grew at roughly 10% from 2005 to 2010. Rochon accurately balanced patience with stubbornness here, because from a business owner mentality, the business was doing great and the fundamentals were still in tact. Therefore, the lack of stock return was not a result of a mistake in choosing this business, but instead simply the market not valuing Disney’s quality accurately.

Humility: (1) we believe that it is impossible to predict macroeconomic events. (2) One key element is to focus on your circle of competence and to know where the limits of that circle is. (3) Thirdly, we want to recognise our mistakes when we make them and always try to improve.
François Rochon, Talk at Google
Rationality: (1) we try not to be affected when others make more money than us in stocks. There are always fads, and we don’t get into fads. (2) We try to be impervious to stock market quotations in the short run. (3) We accept that we don’t know the future and try to focus on the part of the process that we can control. This is to look for companies that we understand, that we believe have a competitive advantage and we accept that we don’t know exactly how things will work out, but if you own great companies with great managers, eventually you should be okay.
Source: 2010 Giverny Capital Annual Report Appendix 1

Also, applying this rule of three can allow us to stay rational and not get convinced to make any rash decisions. Rochon accepts these three facts above, so if he underperforms the index in a year or makes a mistake on a stock, he is willing to accept these and not get caught up in being perfect.

4. Valuation doesn’t have to be complicated

Let’s dive deeper into Rochon’s valuation methodology. He simply thinks about what earnings per share (EPS) could be in 5 years, multiplies this figure by a suitable P/E ratio and divides that value by 2 to arrive at the value today. Just as a side note, dividing by 2 is roughly equivalent to dividing by 1.15^5 (=2.011). This means if he buys it at this calculated price and is right about his assumptions, he will achieve a 15% return over the next 5 years.

Technically, the intrinsic value of a stock is equal to the sum of the discounted cash flows it can distribute to shareholders over time. This intrinsic value depends on the growth rate of the business, meaning a rational investor should be willing to pay more for $1 of earnings today if those earnings will grow substantially in the future. Rochon accounts for this fact in the P/E he assigns in 5 years. If he believes the growth prospects will be largely exhausted in 5 years, he might use a P/E around 10x and if the prospects are still high, he would stick to a higher ratio such as 15-20x.

One thing to be careful of is that Rochon uses owner’s earnings. A lot of times EPS makes sense, as we’ll see in the examples he gave below. However, in some cases, such is with Markel (a specialty insurer), he doesn’t use EPS. Instead, he uses the increase in book value as a proxy for intrinsic value growth.

Some businesses make long-term investments which flow through the income statement. For example, there are software companies that show accounting losses, but in reality are paying an upfront cost to acquire a valuable customer. In these cases, EPS wouldn’t be the ideal measure for true earning power.

Two examples

Let’s take a look at a successful example and a mistake of omission Rochon has generously shared with us over the years.


CarMax was a business that Rochon understood, which benefits from economies of scale in the used car market. Here is a quote from Rochon on CarMax:

It (CarMax) is a leader in its industry, conservatively and well managed, with an extraordinary reputation among customers and a long runway for growth in an industry where scale often provides a competitive advantage.
François Rochon, Value Investor Insight

The below graph shows the various times that Rochon purchased CarMax.

Here is a rundown of Rochon’s 2011 purchase.


Rochon’s Copart example is a mistake of ommission, which he explained below.

In 2011, I not only noticed that the company was doing well but also that the company had gone into debt (modestly) to buy back around 10% of its shares. Copart made $0.63 in EPS in 2011 and the stock was trading at around $11 or 18 times its profits. I loved everything about this company except the valuation. So I decided to wait for a better price. In 2019, the company made EPS of $2.47. This is the equivalent of an annual growth rate of 19% achieved over eight years. And the stock trades, as of this writing, at $80. That’s 27 times the estimated profit for 2020. We could have made about eight times our money in eight and a half years, or an annual return of 26%. And even without the expansion of the P/E ratio, the stock would have done very well.
François Rochon, 2019 Giverny Capital Annual Report


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