How to outperform the stock market like François Rochon

François Rochon is a prominent name in the world of value investing. He has a phenomenal earnings record from his long-term investments, averaging more than 15% in the last 27 years. Starting in the early 1990s, Rochon based his investment philosophy on the successful templates set by investing stalwarts like Warren Buffett, Benjamin Graham, John Templeton, Philip Fisher and Peter Lynch. Their successes inspired him to become a long-term value investor, but not without adding his signature style along the way.

A scientific approach in an artistic palette

The engineer in him helped Rochon to approach investing with a scientifically-inspired thought process. This acted as a rite of passage for him as he moved deeper into the world of numbers. But he didn’t let go of his passion for art either. He named his hedge fund firm Giverny Capital, a not-so-subtle ode to Claude Monet, the great impressionist painter who lived in the city of Giverny.

Further ingraining his interest in the art of investing was Peter Lynch’s book ‘One Up on Wall Street’. While on one side he went beyond the numbers, his scientific mindset balanced his approach to spot stocks that were prime for long-term wealth creation.

François Rochon believes that to master any art form and to call it your own, one must learn from the masters, apply it and then improve your philosophy continuously.

Reverse psychology

Rather than explaining how to beat the stock market, François Rochon explains how not to beat the stock market.

Needless to say, follow these mantras and you will never beat the market. But that’s not what you want, do you?

Rochon takes a potshot at herd mentality and points out what you must avoid to achieve above-average growth in the market. But at the same time, he also points out how patience, humility and rationality are just as important if you want to beat the market.

Rochon’s stock selection process

Rochon’s investment philosophy is largely based on four key tenets. He uses them to analyse any company and check if the stock meets his parameters. These are simple parameters, all or some of which are used by investors across the world. Here is a look at Rochon’s stock selection process.

Financial strength:

It is the scientific part of Rochon’s investing philosophy. These are purely based on numbers.

These are the three key pointers with which Rochon determines the financial strength of the company.

Business model:

Here comes the art bit! The company must be –

To grab Rochon’s attention. But then, how would you measure competitive advantage? according to Rochon, it lies in the uniqueness of the company - in its product, service or culture. Culture, in particular, is something that emanates from the top management. Rochon looks at the management to determine if the company will build or sustain its competitive advantage.

Management team:

Talking of management, Rochon goes into an even more discretionary call. He questions himself, “Is the person at the helm of the company good enough to marry my daughter/son?”. Only if he is convinced about it, does Rochon start his alliance with the company. Rochon also stresses the management team must be engaged in constructive acquisitions and deploy its capital astutely.

Market valuation:

Rochon and Giverny Capital follows a 5-year valuation model. In other words, they look for companies that can double their investment in five years, or grow roughly at 15% per annum. Here is how they go about it.

You can also use the simpler Value Research method which shortlists companies trading at a discount to their five-year median P/E or P/B

To sum up:

Rochon’s adherence to his core philosophy since 1993 is one of the main reasons for his success over the years. By doing so he is applying his aforementioned mantra of patience, rationality and humility into his work.

Stay tuned for part 2 where we are talking about rochon-alysing the indian stock market


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