Fran?ois Rochon's Fundamental Pillar
First and foremost, Fran?ois has built the entirety of his strategy around the fact that stocks are nothing more than a fraction of a business. Understanding this is what helped him move forward and determine which was the unit of analysis. The underlying business is what he would then focus on for three decades investing. In all of his shareholder letters, Rochon underscores this is the fundamental pillar for Giverny Capital and, in 2018, he clearly revealed what motivated this decision:
“So I took the time to study the source of their [great investors] outperformance and they all had one thing in common: they considered buying a stock as the purchase of a business and were all trying to buy these businesses at a meaningful discount to their intrinsic values” 2018 Letter
In fact, every year, Fran?ois includes an analysis of the evolution of the intrinsic value of the portfolio’s companies. He compares it with the evolution of the returns the fund has had in the respective periods. In the same table, a similar analysis is done for the S&P 500, the index Rochon utilizes as a proxy for performance. The concept of “Owner Earnings” was coined by Warren Buffett, and Fran?ois calculates companies’ increase in intrinsic value “by adding the growth in EPS and the average dividend yield for our portfolio”. He recognizes that, even though it is an ultimately imprecise measurement, the calculation is approximately right.
“We evaluate the quality of an investment by focusing on the growth in intrinsic value instead on market price. Growth in intrinsic value in one year is based on the growth in EPS and changes in the long-term perspective of this variable.” 2001 Letter
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The causal factor that inspired such philosophy was acknowledging that, over the long run, stock prices tend towards the fundamentals of the underlying businesses. Therefore, little attention is paid to yearly comparisons between both elements. Rather, it becomes apparent as each of these rows gets added year after year that they converge.
“Investing is acquiring a participation in a business. If the business does well over many years, all fog tend to disappear and the stock market reflects in all its brightness the true intrinsic performance of the underlying enterprise. Without exception!” 2005 Letter
Fran?ois ?destines no thoughts towards short-term price action, as there’s little “truth” behind it. The latter leads to another fundamental keystone of Giverny Capital investment philosophy: Patience.