It is a heaven sent when an expert shares his views and also his mistakes. We have the opportunity to learn from the masters. In the letter ,François Rochon shares his investment philosophy, post mortem of shares purchased 5 years and some mistakes of omission he has made. The VISA transaction was interesting, in spite of knowing about the potential of the business, they waited for a price dip to pull the trigger. Read the letter in full and you will learn much.
Some snippets from the letter
Our portfolio turnover was less than 10% in 2015 and we estimate that our average turnover during the last several years has been around 15%. In other words, we keep our stocks for 6 to 7 years on average. This compares to an average holding period of 6 months for the average investor (professional or not). So we keep our shares something like 12 times longer than the average investor. Our long holding period is also consistent with our investment philosophy: to generate exceptional returns over the long term, you must own exceptional companies over the long term.
We can ascertain two facts if we look at the 15 most significant holdings in our portfolio. The first is that these holdings represent about 80% of the value of our portfolio. We therefore have a concentrated investment approach. Second, we can see the average holding period for these stocks exceeds 7 years.
The Keystone of our Philosophy
We believe that exceptional returns can only be obtained by owning assets that intrinsically generate exceptional returns. There are all sorts of assets that an investor can own. In our opinion, the best assets to own are productive assets—ones that are a source of continuous wealth creation. We’ve learned throughout the years that a company with a durable competitive advantage is an asset that falls in this category.
The basis of our investment approach is that we consider stocks as fractional ownership in real businesses. While this may seem perfectly obvious, the majority of market participants do not approach stocks in this manner (whether consciously or not) and the emphasis is placed almost exclusively on short-term stock quotes. From our perspective, we prefer to remain impervious to stock quotes and favor an analysis based on the intrinsic performance of our companies.
Visa
We were shareholders of American Express from 1995 to 2013 so we understood quite well the solid competitive advantages of credit card companies. MasterCard went public in 2006 and was an exceptional investment (one which we lamentably missed). We were anxiously waiting for Visa to also go public, which occurred with its 2008 initial public offering. We waited on the sidelines as its shares were trading at $20 when the company was earning $0.62 per share (a P/E of more than 30x).
The stock tumbled to $13 during the crisis of 2008-2009 and then climbed back to $23 in 2010. However, during the summer of 2010, the stock dropped 25% when Senator Dick Durbin introduced a bill which amended the Dodd-Frank bill to limit debit card transaction fees for retailers (interchange fees). The stock fell to $17 and we purchased shares. At that time, the company was earning $1.06 so the P/E had fallen from 23x to 17x within a few weeks. This was a very compelling valuation for this business as we believed that the company’s long-term prospects seemed exceptional.
In the chart above, you can see the incredible performance of Visa over the last five years: EPS has risen from $1.06 to $2.68—or a 20% annual growth rate. You can also see that the company’s shares rose from $17 to $78 during this period, or a 350% increase. This has been a very satisfying investment.
I must add a post-script to this port-mortem. We were lucky to have made this investment. Our luck was to have had the 25% drop linked to the Durbin reform as it’s highly unlikely that we would have purchased this stock without this unexpected fall. I had followed the company closely and held my nose at the P/E of 23x which was prevalent before the stock’s correction in the summer of 2010.
Is the fact that I didn’t buy the stock in the beginning of 2010 an error? Absolutely. Imagine if the company’s shares hadn’t dropped in 2010: by buying at $23, we still would have tripled our money in 5 years. We will still savor the fruits of this investment even if it’s a stroke of luck that eventually camouflaged this error.
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In 1930, Philip Carrett wrote one of the first books on the stock market entitled “The Art of Speculation.” In this book, he lists 12 Commandments of Investing. One in particular has always stuck in my head: "Be quick to take losses and reluctant to take profits." Peter Lynch also mentioned this rule in his own words in 1989 (in the book “One Up on Wall Street”) by writing: “Don’t pull out the flowers to water the weeds.”
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