Investing mantras: 4 key money lessons investors can learn from Francois Rochon

Investing transcends the mere interpretation of mathematical equations in stock valuations. According to Francois Rochon, the renowned president and portfolio manager at Giverny Capital in Montreal, Canada, investing is an art. Rochon advocates for investors to adopt an artistic approach, emphasizing the importance of behaving like artists in the realm of stock investments. This perspective highlights the imperative to invest and make decisions independently, regardless of the market’s tumultuous conditions.

Adhering to the principles of Ben Graham and Warren Buffett, Rochon has achieved remarkable investment returns. His portfolio has delivered a substantial yield of 14.8 per cent since 1993, surpassing the S&P 500’s return of 9.2 per cent.

His portfolio value as of September was estimated to be somewhere around $1,841,076,816. Rochon focuses on long-term compounders, companies that strive for substantial earnings growth over an extended period. Some examples from his portfolio include Berkshire Hathaway, CarMax, Alphabet, Ametek, Charles Schwab Corporation, and Markel.

An accurate evaluation of a stock’s intrinsic value is essential

Many investors concentrate solely on factors such as a company’s financial health, business model, and management expertise while overlooking the examination of the stock’s valuation. However, an appealing valuation is crucial for companies seeking to secure capital or attract acquisition interest. A sound valuation should encompass the company’s anticipated future growth and its intrinsic value. Overpriced stocks may hinder investment attraction, while an attractive valuation can enhance a company’s appeal to potential investors, potentially resulting in heightened capital and an elevated stock price.

Focus on business earnings rather than stock price fluctuations

It is imperative not to assess the merit of an investment based on short-term changes in its stock price. Investors should prioritize studying the companies’ earnings growth and long-term prospects. This can be achieved by estimating the rise in the intrinsic value of our portfolio companies, considering the growth in earnings per share (EPS) and the average dividend yield. While the precise stock value may not be pinpointed, this approach is certainly beneficial in evaluating potential stock price movements.

Patience, humility, and rationality are imperative to investing

The market may require time to acknowledge a company’s true value. Nevertheless, with a robust business model, effective management, and a history of successful execution, the market will eventually recognize the company’s merits. Consequently, the stock price will ultimately align with the genuine value of the company.

Also, it is essential to differentiate between patient investing and stubbornness when managing underperforming investments. Patience entails retaining a well-reasoned investment with the conviction that its long-term potential remains robust despite temporary setbacks. Conversely, stubbornness involves holding onto an investment even in the face of accumulating evidence indicating weakened fundamentals or diminished market prospects.

Valuation doesn’t need to be intricate

The intrinsic value of a stock is a projection of its genuine value, determined by its anticipated future cash flows. The calculation involves discounting all forthcoming cash flows to their present value. This implies that future expected cash flows are deemed less valuable than current ones, acknowledging the time value of money.

The intrinsic value of a stock is significantly influenced by the business’ growth rate. A company exhibiting a high growth rate is anticipated to yield increased future cash flows, rendering its stock more valuable in the present.

Prudent investors ought to be prepared to invest more in a stock with a high growth rate as they are essentially acquiring a stake in the company’s forthcoming cash flows. The greater the growth rate, the more substantial the value of future cash flows, prompting investors to allocate a higher value to the stock in the current period.

The intrinsic value of a stock is merely an approximation. The real market value of a stock may deviate from its intrinsic value, influenced by factors like investor sentiment, market liquidity, and short-term news events. Nevertheless, the intrinsic value remains a valuable tool for investors in making informed decisions. Grasping the intrinsic value aids investors in gauging whether a stock is overvalued or undervalued, assisting them in determining its suitability for inclusion in their portfolio.

Making investment decisions requires a thorough grasp of a company’s financials, encompassing its long-term investments and their implications for the income statement. While perfection is elusive, such an approach diminishes the likelihood of frequent inaccuracies. Rochon’s investment principles advocate for adopting the correct mindset in investment decisions, steering away from the herd mentality.