TIP709: The Art of Long-Term Investing w/ François Rochon
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On today's episode, I'm pleased to welcome back investing legend, Franchois Rochon. Since Franchois started the Rochon Global Portfolio in 1993, he's compounded capital at 13.6% per year on average net of fees, and the S&P 500 compounded at 10.6% over that same time period.

Francois firmly believes that buying great businesses at fair prices is the key to success as a long-term investor. He also believes that trying to time the market is a fool's errand and that stock price volatility is a gift to investors seeking to beat the market. During this conversation, we discuss why Francois spends the time to write a letter for his partners each year, his takeaways and lessons from 2024, how concentrated he prefers to make his fund,

why Giverny Capital will always remain fully invested and not try to time the market, the four key risks for equity investors to consider, why Francois recently made booking holdings in Brown and Brown core positions in his portfolio, his updated views on Alphabet, and much more. It's always a treat bringing Francois on the show, so I really hope you enjoy our conversation.

Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Playthink.

Welcome to the Investors Podcast. I'm your host, Clay Fink. And today, it's such an honor to be joined by Francois Rochon. Francois, thank you for taking the time for our listeners today. A pleasure.

So I had the pleasure of reading your annual letter recently, which I wanted to chat with you about today. So anyone who knows you knows that you're a big fan of great works of art. And on the front of each annual letter, you feature a new masterpiece for readers. When reading your letters, I can't help but think that just the letter itself is also a masterpiece as you really put a lot of time and effort into writing each annual letter. And I should also mention that all of your letters are on your website for Giverny Capital.

I was curious if you could just talk a little bit about why you put so much time into the creative aspect of writing for your partners. Well, I try to treat partners like I'd like to be treated if I was in their shoes. So if I was an investor with the portfolio manager, I want to know what he thinks, why he invested in those securities, and how is the portfolio doing, and how the companies we own

are doing. So I try to give a lot of information about what's happening with the old things, the companies we own, how the portfolio has performed, of course, over the long term. And I really try to give the information I would like to have if I was in their shoes.

And I think on page one of every single letter, I love that you highlight to your investors that they truly are partners as each partner is invested alongside the portfolio managers in terms of the stocks they're invested in. So everyone's in the same boat and all the incentives are aligned. Why don't most investment managers view their investment business as a partnership?

Well, I cannot really speak for others. I would guess that it's tough because usually the right thing to do for clients, it's not exactly, not all the time, but often, it's not exactly what they'd like to be doing. So when the market is going down, a lot of investors want to sell or reduce their equity exposure. Some investors

Money managers, they don't want to lose their clients and they don't want their clients to be disappointed. So they'll perhaps bend a little bit what they think would be the right thing to do, just that the client is happy. And that's a little strange because usually in any business, you want to please a client. You want it. The client is always right. I would say in investing, it's a little different. Sometimes you have to fight a little bit with your clients so that

You convince them that you're doing the right thing for them long term. I think that's why it's so important that we're in the same boat.

I'm not promising results to clients. What I promise is that we'll all be in the same securities. If I do well, they'll do well. I think that's very important. So what I recommend to clients is what I'm doing for myself. So that's the way I've approached this business when I started it in 1998, so 26 years ago. I think that's the right way to approach, but it's not necessarily easy on the business side.

way of looking at doing that. But I think long-term, that's the right approach. Yeah. I think getting that pushback from your clients ties into the tribal gene you've touched on in the past. When we look back at 2024, what sticks out to you at a high level and what did you learn from the year?

It was a good year. I mean, in general, most stock market in the world did well. Most indexes had more than the average year. So if you think that the long-term equity do 8%, 9%, or 10% a year, most markets were higher than that this year. So it was a good year for stocks. Still, in the US at least, we're very driven by the very, very large cap companies. So

If you were not invested in those securities, it was a little tougher. So I don't have the exact number on top of my head, but I think the S&P did 25% last year. But probably the unweighted S&P 500 has down perhaps 13 or 14%. So it's been a good year. But if you were not invested in the main stocks of the S&P, it was an OK year, but not as great as the one of the S&P 500.

In 2024, the Roshan Global portfolio returned 13.6% after fees, and your benchmark returned 16.6%. Since your portfolio inception in 1993, your average return is 13.6% versus the benchmark's 9.4%. When I was looking at the table that outlines the history of the fund versus the benchmark, what stuck out to me is just how well the benchmark has done over the

over the past decade. So your benchmark is a hybrid of the S&P 500, TSX, and a couple of others. In seven of the past 10 years, the benchmark returned 16% or more, and the remaining three years had a negative return, which brought the average over the last decade to around 9.7%. So slightly higher than I'd say your stock market average, and not quite as high as I would have anticipated looking at all those double-digit years. Robert Leonard

What implications does the benchmark doing quite well have for your business, if any?

Well, the S&P 500 at least has done extremely well, much better than the other averages or other indexes, mostly because, like we said, the top holdings have done so well. They've grown their earnings at much higher than average rates. The P ratio also has increased quite a lot. So I don't exactly remember the right precise figure, but I think at the end of 2024,

top four of the S&P 500, so Apple, Microsoft, Nvidia, and Amazon, I think their average PE on 2025 is 33 times earnings. That's quite high historically. So it drives the whole index to an average PE of something like 23 times. But if you would consider

The other 496 securities in the S&P 500, the average P is probably 19 times, which is a little closer to historical north. Still a little higher. We're in the high side of valuation historically.

Robert Leonard : You had mentioned in your letter that some of your retail holdings didn't perform as well as you would have hoped, includes companies like Five Below and Lululemon. Then some other names that did quite well are software type companies, so Meta, Alphabet, Booking Holdings, Constellation Software. Over the years, has your strategy changed in terms of the business models or industries you like to be invested in?

Not really. I think I've been always open to all industries, all sorts of companies. I really try to find

great companies, companies that have some kind of competitive advantage. It can be a little harder when you go into technology securities because this world is changing so fast. How sure can you find a durable competitive advantage? Because if the competitive advantage is not durable, it's not really a competitive advantage. You want it to be large and you want it to be durable. And so,

Probably with the experience of having more than three decades now of investment experience, I've learned that a lot of companies that are dominating in the technology field, sometimes they miss the turns and they lose their mojo, which could use that word, and they don't maintain their competitive net. We could look at many, many companies that 10 years ago, 20 years ago, they were dominating.

and they're not today. So I think that's a big lesson. But we did very well with some technology companies, but I think they all had kind of a very sustainable competitive advantage, or at least they were in some kind of niche that prevented competitors to attack their castle, the mouth around the castle. A company like Constellation Software, I think it's a very interesting example. Yes, they are in the technology industry, but

I think they have very dominating business in all sorts of industries linked to the software, but a lot of recurring revenues and a lot of niche markets. And I think that makes them less vulnerable, perhaps, to new changes in the technology world. And if you look at the two companies like Meta and Google, well, Alphabet,

They're not really, in my opinion, technology companies. They're advertising companies, and they've built this incredible network and these incredible algorithms, but it's not changing that fast. I mean, when you think about Facebook and Instagram, it's basically the same business today as it was 10 years ago. What have changed is the number of users and the number of ads.

they're able to sell to those old ones users. And I think that's fantastic businesses. Trey Lockerbie : Yeah. I can't help but think about the strong bias I can have in getting pretty interested in technology and software companies for some of the reasons you just mentioned, where these are asset light, you tend to see them scale really well, you see high margins and whatnot. Do you put guardrails on yourself to prevent too much concentration into one particular industry or sector?

Well, we try to have a group of diverse businesses and diverse industries, but I think it's much more important to own great companies to have some kind of proper diversification. I think with 20 to 25 names, you're diversified enough so you don't have a big weight in one security that could really hurt you if something goes wrong.

And it's also concentrated enough so that you have some odds of beating the index. Because, of course, the more stocks you own, the less the odds of beating the index. So you want the right balance in the numbers. And I think that that right balance is 20 to 25 names. Of course, you don't want them all in the same industry. But I think it's much more important to find great companies. There's many sectors that we do avoid.

everything linked to natural resources or commodities, we think it's very hard to, it's not impossible, but it's very hard to build a competitive advantage when you're selling a commodity. So we just stay away from those industries. And we don't like industries also that have a lot of regulation. So we're not very interested in investing in utilities or healthcare-related businesses where there's lots of

business with Medicare or Medicaid so that you can be sensitive to some changes in political reimbursement rates. So I like, for instance, medical equipment companies because I think they're much more stable than some healthcare services business. So yes, we want diversification, but there's many sectors that we do avoid, but nothing against those sectors, just that

It's very hard to have a competitive advantage in those sectors, in my opinion.

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And from the beginning of your career, you've been an advocate of not trying to time the market and always being fully invested for the long term whenever possible. And it's easy to believe that now isn't the best time to buy stocks because we just had two phenomenal years in 2023 and 2024. And when we go back through history, it tends to show that we're in for a wild ride when we have two 20 plus percent years for the S&P 500. What do you think people might be missing when they say today

isn't a great time to buy stocks and it's a better time to stay in something like cash. Robert Leonard : Well, you said it there, Clay. I think from day one, I wanted to be 100% invested in the stock market. And there's many reasons for that. But when I did my self-education in investing, I read all I could find on the great investors. Warren Buffett, Ben Graham, Peter Lynch, Phil Fisher, John Templeton,

And they all had different ways of finding companies and different ways of investing a portfolio. I mean, Peter Lynch could own 800 names and Warren Buffett five, so different styles. But they had two things in common. The first thing is they look at stocks as part ownership of businesses. So they were investors in terms of acquiring companies, not trading stocks.

And the second thing, they all believed that you could not predict the market.

So I'm not saying that they were always 100% invested, but they were convinced that the market could not be predicted. It was a waste of time to try to predict that. So from day one, I decided that my mission would be to be invested in 20 to 25 companies and to act as an owner of those companies. And if they increase their intrinsic value, let's say 12%, 13%, 40% annually, even

eventually, the stocks will reflect that. So that's my mission, is to find companies that if I own them many, many years, eventually, the companies do well, I know that the stocks will do well. But you're right, there's some periods where valuation are much lower. Do remember very well the end of 2008 and beginning of 2009, which I labeled the opportunity of a generation where you could find great companies at

less than 10 times earnings. Of course, you don't find those in the recent years, but my goal is not necessarily to, when I invest in a stock, is to make 15%, 16%, 17% annually. My goal is to optimize my capital, to put it in what I believe will do the best, will do very well. And if it's companies that will yield 12% or 13% instead of 15% or 16%, well,

Well, I think that's still better than the 3% or 4% that I can get with treasury bills. So your opportunity cost is the right way to look at things. What are the 20, 25 names that I believe are the best opportunities for my capital, for the capital of our clients at Giverny? And that's the way I look at it. So yes, I much prefer to buy, let's say, Disney at...

nine times earnings instead of 18 times. But I still think that 18 times, it will do okay. And of course, it's better than nine times, but we're not there. So my job is not to wait for the perfect opportunity, it's to allocate the capital and what I believe are the best opportunities that are available today. And the great thing is with the stock market, there's always something interesting to do. There's always some

companies that for some reason or the other, they are not that popular with Wall Street, then you can purchase them at reasonable valuation. And I've never in the last 31 years I've been doing this. I don't remember a period when there wasn't some opportunity and some securities.

That's a wonderful point. I think a number of investors like to paint broad strokes on the market and say, here's what the S&P 500 is priced at. The market's expensive. But what they fail to recognize is you can sift through that list and find plenty of opportunities if you look hard enough. Yep. Always.

So that first attribute, before you mentioned not predicting the market, you mentioned viewing yourself as an owner of businesses. And you estimate what you call owner's earnings for each company in your portfolio to judge their progress over time. I was curious if you could talk a bit about how you go about estimating the owner's earnings for each company.

Well, it's pretty easy. Just take the portfolio and the number of shares I own for each company and multiply that by the earnings. So really, I'm doing a calculation. Let's say I was a private holding company and I owned 25 companies in that holding.

how would I judge the performance of my investment from one year to the other? Well, I would just calculate the earnings generated by the company owns and compare it to the previous year. So if earnings are up 12%, well, there's good chance that the intrinsic value of those businesses has increased 12%. That's not the perfect measurement, but I think it's considered that it's about 25 companies.

The whole thing, I think, makes sense. And the valuation process is the right way to look at it. So I multiply the number of shares by the earnings per share of every company and add them up and compare it to the previous year. So I think this year, it was 12% in terms of earning growth. And we have a dividend of probably 0.5%, 0.6%. So it add up to 12.7% when you put the two together. So

That's been what I consider the intrinsic performance of the portfolio. And the important thing with the owner's earning table is to look over many years. And it's pretty incredible when you look at it, how highly correlated those two are. The performance of the intrinsic business...

and the performance of their stocks. In the long run, and I talk about the close to 13% annual growth in earnings per share, owner's earnings of the companies owned over the years, the securities themselves have done about 13% annually. So, and it makes sense. I mean, the stock market can be very volatile, can be very irrational from time to time, but in the long run, it always reflect the intrinsic value of businesses. And Ben Ram used to say that

The market was manic depressive in the short term, but in the long term, it was a waiting machine. And I think that's still many decades after the intelligent investor, that's still the right phrase about the stock market.

Yeah, I love how it can help simplify the game of investing. I'm always reminded of Will Danoff in William Green's book, Richer, Wiser, Happier. He shared with William just a simple phrase that stocks follow earnings. You illustrated intrinsic growth of the portfolio has been closely aligned with the growth in earnings per share. And I have the numbers right here where the stock prices increased since 1996 by 3,344%.

and the intrinsic value or the owner's earnings increased by approximately 3,266%. So practically 13% annual growth for each. I also ran across this other chart online of a meta, the stock price over the past five or so years alongside the earnings per share. And it's amazing the difference of when that earnings per share fell off in 2022, the stock price just got absolutely hammered. And then once the EPS recovered,

market sentiment quickly recovered right along with it. I had one more question related to owner's earnings. So how do you think about reinvestments and R&D and CapEx as it relates to owner's earnings and the intrinsic growth of your portfolio companies?

Well, I guess R&D are already expense. So the earnings are after R&D expenses, probably in terms of expenses of new investments. We'll look at that. If all the cash flows goes into CapEx and new acquisition or things like that, it's important for the long term that these are wise decision and capital allocation is done properly.

That's why I like companies that have lots of free cash flow. And not all of them, but many of the companies we own, they use that free cash flow to buy back shares. So if they grow earnings by 9% or 10%, and they buy back 4% or 5% of the shares each year, while the earnings per share increase goes to 14% or 15% annually. And we have many companies in the portfolio. I'm thinking like Booking or Fiservs.

buying back shares aggressively. And if the stock price is reasonably valued, that's usually a very good allocation of capital. It's better than investing in other projects that are not as strong as the existing business or some acquisition that perhaps Peter Lynch would say, a diversification instead of just buying back shares.

the shares of the company you already know very well and you know it's worth more. I would say that capital allocation is very important when we look at and when we make a final decision for an investment.

Absolutely. Let's jump to your podium of errors. So each year, you famously highlight three errors you've made during the year or in years prior, similar to how Buffett oftentimes shares his investment mistakes and his letters as well. Can you talk about how helpful it's been for you to write down and ponder the mistakes you've made and sharing them with your partners?

Yes. I think it's a vital part of improving ourselves as investors to look at the mistakes. So I have a section in the annual letter called Five-Year Postmortem. So we always look at the decision by ourselves of five years ago. But the podium error, it's really about the big mistakes. And most of them are what the Warren, I would call, mistakes of omission.

not commission, but things you didn't buy. And there's lots of companies that I don't really understand or they are outside my circle of competence, have done extremely well. And there's nothing wrong with just staying away from things you don't understand very well. But some companies I did understand very well, and I did not invest, usually for futile reason. Main one,

being not ready to pay perhaps a higher P/E ratio I'd like to. And that's a tough balance because

You want to be very conservative and have a margin of safety to get back to Ben-Gurion again. So you want to buy a company that not only has great fundamentals, but have a margin of safety in terms of valuation. But sometimes you'll miss great returns because perhaps you should have paid a little higher PUE than you were ready to do. And the example of a Syntax, the

This year's gold medal is a good example because I knew the company very well. I understood the business, a very simple business. And the valuation was reasonable, perhaps not a bargain, but reasonable. And I knew that the acquisition of G&K services would really add to sales, earnings, and margins. And I didn't do it. And I think the stock is up six or seven or eight times since then. So it was a big mistake.

So usually the big mistakes are companies that are in your circle of understanding, that you did not purchase because perhaps you wanted to be too prudent, because great companies are not that common. So when you do find them, if the valuation is not extreme, and there are some examples that I think they're great companies with a valuation just too high, but if it's reasonable,

you should purchase some shares. And if the stock goes down 20%, you can just buy more. So it's not the end of the world. Trey Lockerbie : I also wanted to touch on the final piece of your letter before I move on to a couple of your holdings, if you don't mind. So in the conclusion, you wrote about how risk management in equity investing boils down to just four considerations. So I was curious if you could talk about those four. David Collum :

Yeah, I've talked a lot about it because the risk of an equity portfolio, I believe, is way too much focused on volatility. And I think that's not the right way to look at it. And in fact, I would say volatility is a good thing. You want more of it. You want a lot of opportunities sometimes for a stock to go down 50% without any reason. That's not a bad thing. Just an opportunity to buy more.

even sell something else and buy more of what you already own that looks much more attractive. So I think the stereotype that risky calls volatility is not the right way to look at it. But I wanted to be very thorough and think about what is really the risk of an investment portfolio. And I tried to come up with four dimensions, I would say. The first one, yeah, we talked about it, diversification. I think the right balance is 20 to 25 names.

That's the right balance for me. I mean, if you talk, well, sadly passed away, but if you talk to Charlie Munger,

Probably what I said at three or four or five great companies is way enough. And I know some investors that have a hundred names. But for me, the right number is 20 to 25, where, like I said, it's concentrated enough so that you have good odds of beating the averages. But it's also diversified enough that if you make a mistake, or it's just the nature of the capitalist system, that sometimes companies are a victim of some random things or a new technology.

changes or competition that it's very hard to find permanent winners. So you have to accept that. So almost any company, there's always an intrinsic risk that there'll be changes in their business model or in their environment that make them a little risky. Of course, and that's the second part of that process, but you have to look at the intrinsic risk of each company. But first, I think that to have a 20 to 25 name

Is diversification enough? If you have four or five names, well, you have to be very sure that you understand those business very, very well and you have a large margin of safety in terms of the balance sheet and the valuation. I have good friends, great investors that have done well on the 506 security, so it's still possible. So the second dimension, which is probably the most important one, is the quality of the company owned.

So, like I said, we want companies that have a competitive advantage, some ways that they protect their economic castle with a moat from invaders, those that want to take your castle, want to take your business. And usually great companies realize great return on capital and great margin without the use of leverage. If you need a lot of leverage to have good return on capital,

it's usually not a sign that it's that great of a business. So we don't like it when companies have a lot of debt on the balance sheet. So I think the lower the level of leverage, the lower the risk, the intrinsic risk of the business. And also accounting is very important. When you analyze the intrinsic value, you try to assess the earnings. There's an old saying that earnings is an opinion and cash flow is a reality. Usually,

the difference between the two will be aggressive accounting. So I always look at how the accounting is done at a company. And I quite often come up with my own calculation of earnings. And sometimes it's very close to what the company has announced in their 10K and 10Qs, but sometimes it's quite different. But that's an opinion. That's my opinion of the earnings.

And I like companies that are very conservative in their accounting. And I think it's much more than just accounting. It's a sign of how the people at the top of the companies are. If they're conservative in the accounting, they are probably conservative in everything else. And if they're aggressive in accounting, they're perhaps a little aggressive in everything else too. So that's usually a kind of...

a sign of the company culture where they have a very conservative accounting. And we talk about Meta. If you look at Meta's financial statements, it's probably one of the simplest business I've seen and everything is expense. So almost nothing is capitalized and like that. So when you look at the earnings of Meta, I like to say it's like the worst case scenario.

So it's probably the real earning is probably a little higher. So you can't say that about all the businesses, I can assure you of that. So yes, the intrinsic quality of the business, competitive advantage, having a durable advantage, but also looking at the counting and the balance sheet, I think these are very, very important. So after that, the found companies that meet your criteria comes a third part of the business.

risk assessment, how much you have to pay for those companies. So that's the valuation part. And again, we go back to Ben Graham of the importance of margin of safety. You don't want to have valuation that discount many, many years of growth in advance because that's the nature of capitalist system. There'll be recessions, there'll be some potholes, there'll be some problems that almost every company will encounter at some point in their existence.

And if you have a very high valuation that has discounted many years of growth, when their tough years arrive, there'll probably be a re-evaluation of the P ratio by Wall Street, and those can be very painful years. So like I wrote in the annual letter, of course, a company that trades at 40 times earnings, if everything else is equal, is riskier than a similar company that trades at 20 times earnings. So...

Valuation is one dimension of trying to measure the risk of your portfolio. So we have, like we talked about the owner's earnings, but we try afterward to come up with a kind of assessment of valuation of the portfolio. And historically, if you look at our portfolio, the average P ratio has been very similar to the S&P 500.

Probably it's a little lower these days because like we explained, the S&P 500 P is a little higher than that because of the top four of the index, but usually it's very close. So to me, we own companies that are growing the intrinsic value by let's say 12% per year plus we receive a 1% dividend. So that's a 13% intrinsic growth. And the S&P 500 probably as a whole over many years

We'll grow there in 6% to 7% a year, give a 2% dividend, so you get an 8% to 9% return. So we have probably a 4% better in terms of intrinsic performance of the portfolio at a similar valuation. To us, that's a level of risk in terms of valuation I think is reasonable. And finally, the fourth part.

which is not really linked to the companies themselves or the stock market. It's really about the investor themselves. We talked about it at the beginning of the podcast, but I think it's a mistake trying to predict the stock market. It's a mistake, but it doesn't prevent many people trying to do it. And I think the more you try to predict the stock market, the more you trade in general, I think, the lower the return of the portfolio. So increased trading, increased predictability,

predicting the market, I think increases the portfolio's risk. And I don't think a lot of people understand that very well. I mean, John Vogel talked about ETS and said that it was like giving matches to a paromaniac. I don't remember the exact number, but I think the average holding period of the ETF of the S&P 500 is something like 17 days. I mean, how ridiculous is that? So,

The ease of trading of securities like ETS gives the illusion that they have a riskless investment or approach. But in fact, the very fact that they're trading so often increases the risk of the portfolio. They're not passive investors at all. They own passive investments, but the way they trade them makes them active investors. And like I said, I think the more you trade, the higher the risk of ETS.

of reducing your return going forward. Yeah. And I'll also mention that Giverny's average holding period for a stock is eight years. Yeah. It used to be five years, but we've grown to be more patient over the years.

It's quite a good attribute and shows how good you are at selecting those quality companies. And when I look at the four considerations you shared here, we have diversification, quality of the business, valuation, and investor's own behavior. And to a large extent, we have a pretty big control over a lot of these aspects. We can control how diversified we are. We can control what types of quality companies we want in our portfolio.

We control what valuation we decide to enter at. We can't control the valuation the market offers us, but we can take advantage when those opportunities are given to us. And then, of course, we can control our own behavior, which pointing to the tribal gene you've discussed before, can be extremely difficult for some people to control their behavior during market panics.

But I think if they had to return in one sentence, you want to own great companies for many, many years. And they hope that in the long term, the longer you own securities, the higher the odds that the market will reflect the intrinsic value of the business. So that's what you want to do. You want time to be on your side. Let's take a quick break and hear from today's sponsors.

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I wanted to take the chance to chat about a couple of your holdings. So according to your 13Fs, you acquired shares in booking holdings in Q1 and Q2 2024. And I love how with a number of your holdings, you've been following the company and the industry for 10 or 20 plus years. So in this case, you were following Expedia in the early 2000s and discovered one of their main competitors, Booking Holdings.

Talk about what you admire about this business and what led to you eventually making it a core position in your fund.

Yeah, I don't know if you remember that, but Expedia was a spinoff of Microsoft. So it became public, I think it was in early 2000. I don't think it was profitable at that time, so it didn't fit all the criteria. But I thought that the internet was really the way of the future for traveling. I mean, when I looked at that the first time, I said, well, the travel agency business, I'm not sure it has a great future.

So I think I've been right on this and Expedia and Booking and Priceline have done extraordinarily well and they're almost now dominating the industry. But the transition to everything online for travel is not completed. I think it still has some good years to really be completed, if I could say that.

that way. I think personally that booking is probably the best managed of all the companies in that industry. And I would include the recent Airbnb, which has really transformed that industry. And booking, I think, was wise enough to realize that Airbnb was a threat. And they started their own alternative lodging business. And

I think the last few quarters, that segment of the business has grown faster than RBB. So Booking has done a very good job of adapting to that threat. And also another good thing that I believe Booking did was probably some six or seven years ago, they made the decision of transiting the business from what they call being an agent to a merchant, where they used to be mostly a third-party business.

And now they acquire hotel rooms or airplane tickets or other travel items and they sell it. So they have a more direct relationship with their clients. And also they have increased the relationship with clients in terms of using their apps instead of perhaps using a search engine like Google.

So they really done a good job in the last six or seven years of increasing their relationship with the client. And at the same time, I believe increasing their mode. So at first, there was a cost in terms of margins because the agent had a much better margin than the merchant business. So I was a little worried at first that the margin would be much lower. And I wasn't sure if they would be able to get back to customers.

what they were, let's say in 2016 or '70. But if you look at it, I think the highest margin in terms of net margin was close to 34% in 2014. And in 2022, it was 23%. And 2023, it was 26%. And last year is what? 27%. So they're not back to the level they were 10 years ago, but it's still a good margin level.

And what I like about booking is they generate a lot of cash. And I talk about the importance of conservative accounting and booking is very conservative. Everything is expense. So when you look at earnings, it's free cash earnings. And they've been buying back shares with the excess cash. In the last five or six years, they bought back on average 4% of the share each year. Even in the very tough year of 2020 and 2021,

they were still buying back shares and they were still profitable, which is incredible because in 2020, anything related to travel was not profitable. And booking really continued to be profitable. Earnings went down, but still not in the red. So they've done an incredible job. And I believe when we purchased shares last year, we paid something 19 times earnings or something like that. So the valuation was very reasonable.

For a company, I believe, can grow 12% to 14% annually. And probably a third of that will come from buybacks because there's such a high level of cash generation and I think a good capital allocation policies. So I think it's a great company. And Q4 was very good. So, so far, it's been almost a year now. It's been a portfolio. It's been a good investment.

Yeah, I'm seeing just over $8 billion in operating cash flow and over 6.5 billion allocated to share buybacks, which is pretty incredible to see for a business generating 85% gross margins, and they're still able to grow in the meantime.

So at first glance, the valuation does seem quite reasonable. Today, it's around a PE of 25. Your return on invested capital is over 40%. And it's almost surprising to me that it sort of trades in line with the market. Why do you think the market doesn't place a premium on this business? Is it the travel aspect or do you think there's something else?

Well, there's of course the nature of the travel industry. I mean, it's a little bit cyclical. When there's a recession, people travel less. But we could say about same thing about ads. When there'll be a recession, both probably Meta and, well, Facebook and Google will probably experience a little bit drop in ads. So ads travel, it's a little bit cyclical, but still great businesses. And you have to accept that it's just all

Almost any industry, there's ups and downs in the economic environment. But what counts, again, get back to Warren Buffett, is the moat, the moat around the business. And I think booking moat is pretty strong.

And I think that's got stronger in the last five years. So they did good things, and we talked about that, but they did good thing to increase that mold. And I think personally, in my opinion, their mold is stronger than Airbnb or Expedia. What I also like about the booking is that they're very good, I think, in capital allocation, which is another positive. So not only is this a great business,

but there's no dewar-suffication, to use that pillaged word. And they're just buying back stock with the excess cash. And since the stock is reasonably valued, it's a good allocation. I mean, yeah, it's like you said, it's probably around 25 times a trailing, but forward, it's probably 21 times estimates of this year. So it's reasonable. And you think about it, it's a little lower than the S&P 500P, but I believe that...

It's a superior business. Another recent addition to the portfolio is Brown and Brown, which is a smaller holding based on the 13F I was looking at. And Brown and Brown was featured in last year's letter in the podium of errors. So it's yet another company you've been following for more than 20 years. That's in the insurance brokerage business. What prompted you to get back into the stock after owning it in the 2000s?

Yeah, we owned the company, I think, for six years from 2003 to 2009. I think when we sold it, there was many reasons that there was a change in management. I was a little skeptical that the new management would be as good as the previous one. And also, they were entering a soft market, so earnings went a little bit sideways for a few years.

but that was the reason I put it in the mistakes section. I missed it when it turned out that the new management did a great job and they were able to rekindle the growth rate probably in 2013 or 14. And since then, they've probably grown earning close to 15% annually. So it's been a fantastic business. And in fact, I would argue that the most insurance brokerage businesses

quite impressive businesses. I mean, Aon is a great business and there's another one, what's the name? Archer Gallagher, I think. It's another insurance brokerage business and it's done incredibly well over the years. I think they've grown in the last decade something also 15 to 16% annually. So these are much more stable businesses than the insurance companies themselves.

Because in the insurance companies, like Warren would say, surprises are really positive. You make a mistake and on the writing, you can see the results of that mistake five years later. So it's very hard for an investor to really assess, is the reserves and the earnings that the insurance companies are releasing, is that the reality? And they're not of that faith. It's just the nature of the insurance industry itself.

Any investment in an insurance company, you have to be quite careful. I mean, I sleep well at night with Berkshire or Markel, but some other insurance companies can be a little riskier. But in terms of the brokerage firm, like Ron Brown, they don't take risks. So I think they're very solid businesses, much less riskier than any insurance underwriters.

And they've grown mostly through consolidating the industry. And they've done a great job at it. And if you look at Brown and Brown, I think, like I said, the last 10 years, the earnings per share has been growing at 15% annually, which is quite incredible. Yes, we've been in a hard market for a while. But I think they can continue just by consolidating, by making acquisition and increasing their level of market share.

can continue to grow at, let's say, 12% to 14% annually. Now, the question is, why do we have such a small weight, a little more than 1%? Well, the valuation was a little high. So we paid something 25 times earnings, which is really my kind of maximum usually I'm ready to pay. So if the stock was trading, let's say, 17 or 18 times, I would probably

have the sense that I have a larger margin of safety and I would probably be ready to have a higher weight. So I was hoping, perhaps not my partners, but I was hoping the stock would go down after we purchase it and we could increase it to two or three or 4%. But I think it's up 15 to 20% since we bought it. So the P ratios, it's even a little higher today. Yeah, 28 times my estimates of 2025.

It's on the high side of historical norms, but still, I think it's a great company and I think long-term it's going to do well. So by any chance the stock goes down in the next quarters or years, if everything is intact, I could certainly add to it.

And Brown and Brown is run by CEO Powell Brown, who's the grandson of the founder. So the company was started back in 1939, and now it's run by the third generation family member. And I sort of see echoes of the way you run your firm, where you, of course, are treating your investors like partners. And many times with these family-run companies, they're treating their shareholders like partners because family-run companies tend to be

tend to think long-term, tend to have a lot of skin in the game, and they're in the same boat as their shareholders as well. To what extent do you like to look for that in the companies you invest in?

I always liked it when the founder is still the CEO of the company. To me, it was always a plus. I remember many years ago, we owned Fastenal. And it was his name, Robert Kerlin, was the founder and CEO. And he owned, I don't remember, let's say 20% of the shares. And that's one thing I like. And one reason we...

we've owned Heiko for many years now is that we really like the Mendelssohn family. I think they've done a great job there. So we like it when the founder or the family founder is still in charge and still own a lot of shares. Of course, it's a little different when it's the third generation, but if the culture and education has been passed properly,

can be very good and can be the equivalent of the founder being still in charge. And I think Powell Brown has done a great job.

And if we shift gears here to Alphabet, Munger has once called this one of the best businesses in the world. And I would say this historically has just been a dominant business model rather than a family-run operation. And it was actually today they announced the acquisition of Wiz, a cloud security business for $32 billion. And this company was started just five years ago.

And it makes me ask if they're entering into diversification phase here of their business. I was curious if you had a chance to look over the acquisition at all.

Well, I read about it. I don't have any insight. But I remember when they purchased YouTube many years ago, people were all skeptical also, and it turned out to be no run. So who knows? I think when you decide to become a shareholder in a business, you have to trust in the management decision, judgment, I would say.

If you don't trust the management, why should you be in a shareholder? So I think Google, historically, they've been around for, what, 25 years now? Historically, it has not very good acquisition and very good and wise decision. And like you said, it's one of the best business in the world. So, so far, I think they've proved that they know how to build a business. But it's just the nature also of that industry that it can change. And perhaps...

And perhaps AI can be a threat for Google. It's an opportunity, but it can also be a threat.

And so many companies are trying to find ways of bypassing Google in their search. But so far, they have kept something like 80% market share in search engine. And it's been a fantastic business. And last year results were really great. So there are some worries. Some of them are political. I mean, there's some pressure from the government, the prime minister.

to prove that they're a monopole and a monopolistic situation, and they want to kind of attack or break up the company. So there are some worries about what could affect them. But so far, those worries have not materialized, and the company is still dominating, still doing well. But we are aware that AI could be a challenge for Google. And just Amazon has done a very

a very good job in going to the search, well, similar search businesses and selling ad. So it's not a monopole, that's for sure, in my opinion, but it's still a great business. And as for the latest acquisition, well, we'll see how it turns out, but I would give the benefit of the doubt to the management of Google.

Yeah, it's been amazing to me how well they continue to grow. Search queries continue to grow. Ad revenue continues to grow. I think a lot of people are just saying LLMs are coming for Google searches lunch. So we'll see how that is going to pan out over time. And it's also been interesting just to see how many value investors have been investing in Alphabet just because of, of course, the

the valuation at a share price of 160, the PE is around 18 or so. Of course, there's a lot of investors interested in this company, but five, 10 years from now, who knows what Google search is going to look like? Well, you know, Clay, when we purchased it in 2011, so 14 years ago,

The main worry back then is that would Google still be as dominating in the mobile industry as they were on the desktop? And that was the main worry of Wall Street then, and the P ratio was 15 times. So this was a 25% growth company, and you could purchase it at 15 times. But there were some worries, and they were valid worries. But when we looked at it, we believed that they could adapt to this new device, and they certainly have.

I don't have the numbers top of my head, but let's look at the earnings here. So this year, estimates are for Alphabet to earn something like $9 per share. And if you go back to 2018, when we bought it, it was 81 cents. So it's a more than tenfold increase in 14 years. So it's been a good growth. So

Of course, it's much larger today, so it's going to be much harder to grow earnings that fast going forward. But I still think they can grow around 12% a year in terms of earnings per share in the next five years or so. And so valuation of, like you said, 18 times is not demanding. Speaking of LLMs and AI, I was curious if you use any of these tools in your research process or in your investing approach.

Well, I would say in the research, we can use it for sometimes. We'll ask questions from ChatGPT, for instance, or Google, but it's still a competitor, but it's a very good product. And we'll ask questions of information and we'll always validate those information that we see to be sure that there was no mistakes there. But I would say accelerate

the research process, if we have precise questions on historical things or data or competitive position or who are the main players in industry. So I think it's very helpful. I don't think that it can really improve your decision process. I think that's a different thing. Using gathering information

quicker is not the same thing of making wiser decision. I think in terms of decision-making, I still believe that human intelligence is probably more useful. So I like to use it to gather information quicker. But when I think about investment, I try to really, like I said, to assess the competitive position, assess the quality of management, assess the quality of the business

and trying to very always using margin of safety, trying to get a general view of what I think the company will earn in five years. And I think when it concerns the future, I think your wins are still of advantage in terms of judgment.

Well, Franchois, I always enjoy bringing you on the show and I appreciate the opportunity to chat about your letter and your investment approach for the audience here. Before I let you go, how can the audience learn more about you and Jaberni Capital if they'd like? Well, it's pretty simple. We have a website, jabernicapital.com, and they can go there and there's a lot of things to read. Wonderful. Thanks so much. I really appreciate it. Thank you. Thank you for inviting me.

All right, everybody. Thank you for tuning in to today's episode with Franchois Rochon. I wanted to take a minute to share some details on a new event that TIP will be hosting from September 24th through the 28th, 2025 in Big Sky, Montana. The event is called The Investor's Podcast Summit. We'll be gathering around 25 listeners of the show to bring together like-minded people and enjoy great company with a beautiful mountain view. We're looking to attract thoughtful listeners of the show

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dot com slash summit. That's theinvestorspodcast.com slash summit. We only have room for around 25 members of the audience, so be sure to apply soon if you'd like to join us. With that, thank you for your time and attention today, and I hope you enjoyed today's conversation. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes.

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