19 Investing Lessons From Francis Chou

My full interview with Francis Chou of Chou Associates can be found here and originally appeared in my national bestselling book, Market Masters, which is available at Chapters, Indigo, and Costco, as well as on Amazon.ca.

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Francis Chou was a 25-year-old repairman for Bell Canada when he pooled $51,000 from himself and six coworkers to start an investment club. That investment club would eventually blossom into Chou Associates Management Inc., which now has around $1 billion of assets under management. The flagship Chou Associates Fund has boasted a long-running and consistent track record since its inception in 1986. Francis sent me Bloomberg screenshots of the Chou Associates Fund’s 15- and 20-year annual com- pound returns. Fifteen-year compound annual return: 11.69% versus S&P 500’s 4.23%. Twenty-year compound annual return: 13.19% versus S&P 500’s 9.81%.

An early investor with Francis Chou saw his $80,000 grow to $5 million and, at the age of 80, will be worth close to $60 million if compound rates stay constant.

Both Bloomberg screens were fascinating. The 20-year chart showed the Chou Associates Fund trailing the S&P 500 from 1995 to 2001, during the technology bubble, then vastly outpacing it from 2001 to 2015. Value investing won. Morningstar has shown that the Chou Associates Fund has achieved the highest return of all Canadian mutual funds between 1986 and 2015. Amazingly, Francis achieved the highest returns over this long period with one of the lowest standard deviations in the industry, meaning that his fund experienced only minor volatility or ups and downs. Therefore, the Chou Associates Fund actually ranks the highest according to the Sharpe ratio of portfolio risk-adjusted returns. Using his fund as an example, Francis will often say that the Modern Portfolio Theory (MPT) is bunk. “MPT says that to get high returns, your standard deviation has to be higher; however a positive correlation between risk and return is not found here [in my funds].”

Morningstar has shown that the Chou Associates Fund  has achieved the highest return of all Canadian mutual funds between 1986 and 2015.

Francis’s was the most challenging interview to secure for this book [Market Masters]. It took a letter, multiple phone calls, and multiple emails to both him and his assistant to finally schedule our talk. Francis told me, “You can get all of this information from my annual report” or “Go use what’s been written on me online.” However, I pleaded with Francis that those resources would not suffice, as I needed to produce an in-depth, informal, and entertaining interview. Finally, I got the interview. And trust me, it was worth it.

Francis’s office is located north of Toronto, far removed from Bay Street. It’s just him and his assistant, Stephanie, who work in the office, an office so spare that you could probably fit everything in it into one box. Francis is definitely not an accumulator of things, and he is the embodiment of a successful value investor. This tells you that all you really need to invest is a computer, account, and good ideas.

Francis is definitely not an accumulator of things... This tells you that all you really need to invest is a computer, account, and good ideas.

There is a tinge of sarcastic humor to some of what Francis says. At times, you’ll need to read between the lines, and his humor may not always come through on the first read. Also, occasionally during our interview, Francis would expect me to answer some of his questions. He asked me, “What’s the most important thing to check in the bank?” to which I incorrectly answered, “ROE.” He turned me, the interviewer, into the interviewee. To find out what I should have said, and to learn from a value investing master, you will have to read the interview [in Market Masters].

Francis Chou’s 19 Investing Lessons:

1) Relating shopping in India to investing: “It was my job to make sure I was paying the lowest price for the best quality.”

2) “I contrast the current scenario to the scenario in 1981 [high interest rates]. Everyone is so bullish but I’m really negative.”

3) “I didn’t know the market was going to take off in six months [in 1981], but I knew you couldn’t get stocks any cheaper than their prices at the time.”

4) “When you read about great men and women of the past, it is like having a conversation about world affairs in your living room. It is not only educational but it builds perspective about life and business in general.”

5) “My first job is to check whether the company in question meets my investment criteria. It could be a good company, a bad company, or it could be a CRAP [cannot realize a profit].”

6) “I do screens, read a lot, and talk to other talented portfolio managers to see where they are seeing bargains. . . . [And] before you make a purchase, you should look for investors who are negative on the stock.”

7) “I just go wherever I can find bargains. For instance, in the years 2000 to 2002, I was basically in distressed bonds. I just go wherever I can find something undervalued.”

8) “Whenever the majority of investors are purchasing securities at prices that implicitly assume that everything is perfect with the world, an economic dislocation or other shock always seems to appear out of the blue. And when that happens, investors learn, once again, that they ignore risk at their peril.”

9) “We continue to diligently look for undervalued stocks and will buy them only when they meet our price criteria — in other words, when they are priced for imperfection.”

10) “Initially I analyze bottom-up and then I go top-down.”

11) “Most investors invest in terms of premium or discount to book value. That is a serious mistake. Let’s say the year was 2006. You examine the loan portfolio [of a bank] and see all the junk there. As a result, you wouldn’t touch a U.S. bank with a barge pole.”

12) “I’m trying to buy 80 cents for 40 cents. It does not matter whether they are good companies, bad companies, or distressed companies.”

13) “The first thing you have to do in this business is to make sure that your valuation is accurate. If your valuation is wrong . . . then you won’t make it in this business.”

14) “You’re a businessman . . . you ask, ‘If I were to buy this company, how much would I pay?’”

15) “I don’t know what will happen two years from now where there could and probably would be newer technology.”

16) “I don’t want to chase businesses where management is making decisions that don’t make economic sense.”

17) “Sustainable earning power, business moats, and competitive advantage relate more closely to intrinsic value and therefore are more important than just increases in book value.”

18) “Investments are most profitable when the selection process is most businesslike. Therefore, you must have the skill level to evaluate a business.”

19) “You have to go against the grain. You have to do your own independent work, your own analysis, and you stand on the merits of your own judgments.”

Read my full interview with Francis Chou here.

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Robin Speziale is the national bestselling author of Market Masters, which is available in-store at Chapters, Indigo, Coles, and Costco, as well as on Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

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