Clay Fink (2:22)

So you just published your annual letter for 2025, which I certainly always enjoy visiting each year and we'll be getting to your letter, the markets and your investments as always. But I'm curious, as you look back on 2025, what are some of the things you learned throughout the year? It can be investment related or anything you found useful or interesting.

Francois Rochon (2:44)

Well, it was a tough year at first. Our biggest holding consolation software, although it had good results, that stock went down 26%. So that was was a little tough. Of course, we always keep the eye on the long term and you know, it's been in the portfolio for 12 years, so so far it's been a very rewarding investment. But last year was a lot tougher and we had two stocks that didn't do very well last year that really hurt us, carmax and fiserv. And perhaps we could go into a deeper later in the interview, but we sold them during the fall, but they were disappointing investments. CarMax even more because it's been in the portfolio for 18 years. So for many years it was a great growth company, but in the last few years it's been tougher. And at some point we decided that I think the business was not as strong as it was 10 years ago, so decided to sell. These were the three main stocks that really affected a little bit our performance last year. But we accept that there'll be ups and downs in the market in our portfolio, in our relative performance. And we know it's not a sprint, it's a marathon. So we're there for the long term. Been investing for 32 years and I intend to be there in 32 years. So let's hope that the best years are yet to come.

Clay Fink (4:03)

Excellent. Well, I do want to talk about some of the holdings you mentioned in a bit, but early in your letter you started talking about artificial intelligence. And that was kind of, you know, what's top of mind for so many investors as of late. And we've seen a lot of advancements in AI over the past few months and that's, you know, sending ripple effects throughout the markets before we get to, you know, how it's impacting the market. I'm curious, what are some of your takeaways with regards to AI? Maybe it's how you're using it, how it surprised you, or any other observations.

Francois Rochon (4:40)

There's two or three things I'd like to point out. First, the growth of improvement in the LLM has been quite impressive. I mean, was it three and a half years ago? ChatGPT was launched. first, you know, it was a resolution and we used it and it was great. And then Google came up with a version, well, many versions. But the latest version of Gemini was very, very strong. So for a while we only use Gemini, moreover, because we're shareholders of Alphabet. But recently I've been working a lot with Claude. So the Entropic LLM, man, this is quite something else and it's very well done, especially for finance people, where we asked Claude to build Excel model graphics, which are very, very well done. So it's a very impressive tool. But it's fascinating to see in just three short years how much it has evolved and also who where the leader is and how it change very rapidly. So I think that's one thing that people should remember. This is changing fast. It is a fast growing industries but it's very hard to predict where it will be in five and 10 years and more important, what kind of earnings and profits should investors use in their model. Now Entropic and ChatGPT OpenAI are not public companies so but there's many things that are related to them in a way. Market is very optimistic about some valuations and in the annual letter I said you have to be very prudent because there's also this circle where Nvidia invests in OpenAI and then OpenAI gives a contract for cloud software for Oracle and Oracle buys Nvidia chip with to build the system. So it's a little complicated and it's hard to really in those instances I think it's hard to value all the related companies so. But it is in my opinion a very big thing. It is a revolution in some ways probably as important as the Internet 30 years ago. We take it very seriously and that I know that the market is worried that it will be a threat to a lot of companies. And this is where I think you have to be able to find out or at least try to gauge which one will be very hurt and which one the market is perhaps worried too much about it.

Clay Fink (7:12)

Well, two things sort of stand out to me in your response there. One is just the speed of the advancement. You know, I think it was Claude, the end of 2025 sort of had a breakthrough release that you know, really impacted so many stock prices. Right. A lot of software names just getting hammered after that release. And I think it's just the market's looking forward at seeing these advancements over the past three years and who knows where we'll be five, ten years from now. And then the other thing that stands out to me is how the leader is changing so quickly. So for any of these companies to have a moat in the space is going to be very difficult.

Francois Rochon (7:49)

Yeah. And you know I took the example of the annual letter of Google. When Google came out with their search engine, was it 1990, 1998 or something like that? They were not the first company with a search engine. There was yahoo, there was altavista and fosig, excite lycos. There was something 20 big players and it was really the late arrival of Google that changed everything. And they are the ones that really got most of the market share. So it's really hard at the beginning to see which company will lead and which technology will prevail. And so there's nothing wrong with that. It's the beauty of technological advancements. It goes very fast. But if you're an investor, it makes the value assessments a little complicated when it's very hard to predict the future.

Clay Fink (8:39)

Yeah. So you sort of touched on the circular nature that you're seeing in the AI space where Nvidia is investing $100 billion in OpenAI and OpenAI is going out and doing these deals with these other companies. So I'd like for you to talk a little bit more on that where it can be very difficult to value some of these companies if the contracts they're getting are related to chips that might have a life span of three to five years. You know, if you're making billions of dollars this year, that's not necessarily going to be there a few years down the line. So it's really hard to say what those profits are actually worth. I'm curious if you could just talk a little bit more about that.

Francois Rochon (9:16)

Yeah. In the annual letter I took an example with just fictional numbers. But let's say Nvidia invests 100 billions in open A. OpenAI gives a contract of 300 billion to Oracle and Oracle buys 40 billion of chips of Nvidia over a three year period. So it translates to something like 7 billion of profit per year for Nvidia, let's say. So how should you value this $7 billion of profits? That's the key question if you're a shareholder or Nvidia. Look at that. Well, if you look at the stock market, it gives a P of 25 times. So 25 times 7 billion is $175 billion. So they capitalize this $7 billion over 25 years. Very short way. It's more complicated than that. But let's say, let's keep it very simple. Well, how recurring Is this $7 billion? It's not that recurring because in theory Nvidia would have to reinvest regular new money into OpenAI and OpenAI give the other contracts so that Nvidia can sell more chips. So in this example I use a three year contract of 40 billion. While you should capitalize at 7 billion, just three years because in fact it's not a recurring revenue because when you have a 25 time P ratio, well, it means that in some ways they believe those profits will be recurring for at least. Let's say two decades and that's not the case in this example. There's probably NBDO will get new contracts of course, but the fact that they indirectly they are financing their own sales, that makes it a little more complicated to value those profit to assets, to put a P ratio on those kind of earnings. But it's not all the earnings of Nvidia that are that way. So but I'm just saying it makes it more complicated to value those companies. It's a little easier to value, let's say Microsoft that sells, you know, licenses and they give recurring revenues from those licenses. And so you can, you can capitalize those recurring revenues and recurring profits over many years. And it makes sense when it's not as recurring. You should probably have a lower P ratio to reflect the fact that it's not a recurring revenue. But who am I to argue with the investors that invested in Nvidia because it's been such a fantastic company and such a fantastic investment? Just saying that I think investors should be aware of that.

Clay Fink (11:56)

So as a student of history, you drew parallels between these investments in the AI infrastructure with the fiber build out in the late 90s and the railroad boom in the 19th century where hundreds of railway companies would end up going bankrupt due to the over investment that was happening at that time. And Javerny has long been invested in two companies that are now participating in the AI buildout. We have Alphabet and Meta. Alphabet you purchased I believe in 2011, Meta in 2018, Alphabet. They're projecting capex spend of around 180 billion for 2026 and Meta's projecting over 100 billion. So as a student of history and given how history has played out as these new technologies emerge, and you see sort of the winners emerge later down the line and a lot of the early players tend to generate just not so strong returns. So how do you think about how these investments could play out for them going forward?

Francois Rochon (12:55)

Yeah, I used the example of the railroads and it was a little different back then because most of the capital was through debt offering. So those companies had lots of debt. So the reason most of them went under is because the interest charges were higher than the operating profits of the railroads. So it's a different situation. Well, it depends. If a company that build data centers doesn't have the money and borrows it, it's a different story. But in the case of Alphabet, for instance, they have the money. So the 180 billion which looks like a big sum. It is a big sum. They generate that every year. So I think cash flow are estimated at 200 billion next year, 2026. So they don't borrow that money. So even if they have a very low return on that investment, while it doesn't put the company in jeopardy. So it's a little different situation. There are some other companies probably that are building some data centers that you are borrowing money and those one probably would be in a tougher position if things don't turn out as expected. But in the case of both Alphabet and Meta, the only drawback is probably low return on those investments. Now we could argue being a shareholder Alphabet that I see those investment not as I'll use the hockey language, they're not as much as offensive as defensive. I think they are investing those large amount of money to protect their business. Mostly that's my opinion. Probably they'll say something else, but for myself, they are protecting their business because when ChatGPT was released, it was a valid threat to Google search business. Really valid. It was a real worry. They really took that seriously and they got, you know, all in into AI and Gemini is a great product but at first it was about a threat. And you could argue similar reason for Meta, probably a little different. But for instance, I think it was in 2022, Apple changes privacy settings and it cost something like 10% of revenues at Meta because it was harder to target ads to Meta, Facebook and several users while they invested a lot of money in AI and with those investments they were able to better target the ads. So those investments were very rewarding for Meta. And probably in my opinion, Meta is probably the company that has got the best return of investing in AI than all the companies I've been following because it really helped selling ads to all the advertisers and they were able to better target the ad to the consumers using all the data from the users of Facebook and Instagram. So for them it was not only to protect the business, but more than that, they were able to better target the ads. And if the ads are better targeted, they can sell them at higher prices to advertisers because they have higher odds of being watched or used or translated into revenues for the advertisers. So Meta has been early adopter AI and it's probably one that benefits the most from those investments. The great thing about Google and Facebook or Alphabet and Meta is the reason we own it. The main reason is that when you think about it, the products are free to users. This is fantastic. There's no other business like that. Billions of people use Google search engine or they go on Facebook and Instagram and they pay nothing. It's the advertisers that pay. So this is a fantastic business. You have no incentive to use another product because everyone's there and it's free, so why would you change to anything else? So in terms of Mode, I think that both Google and Facebook, Instagram, they have an incredible moat. So that's the reason we invested some years ago. There's something really unique about those businesses. Microsoft is a great business too, I have to admit, but Google and Meta are something else.

Clay Fink (17:12)

It's sort of ironic that Meta business is still growing, call it 20% year over year at this massive size that they are. But the market's still not necessarily convinced on their huge CapEx guidance. And they've already shown that these investments so far are paying dividends today. It's not speculative by any means. It's not the metaverse 2.0. So it'll be interesting to see how this shakes out, especially if their capex continues to increase exponentially and how that ends up playing out.

Francois Rochon (17:45)

Yeah, I remember three years ago when Meta was a little out of favor and people would talk about Mark Zuckerberg and how he was making mistakes and all that. My response, the proof is in the pudding. It's a fantastic business and the results are incredible. So, you know, I gave him the benefit of the doubt. Let's take a quick break and hear from today's sponsors.

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Francois Rochon (22:34)

all right, back to the show.

Clay Fink (22:36)

Speaking of the proof is in the pudding. Let's talk a little bit about Constellation Software. This is a company that a lot of investors have looked at in recent months in light of the drawdown in share price. Full disclosure, I personally own shares in the company and Jabirni Capital has owned shares for much longer than I have. It was your firm's top holding going into 2025 and it's a company that I think it felt like it could just do no wrong for so long. The stock, I should say never had a drawdown greater than something like 20%. But over the past six to nine months the stock fell by more than 50% from its all time high. And that's in light of Mark Leonard, their president and CEO stepping down and then fears related to of course, disruption from AI. So talk about how your investment thesis in Constellation has changed, if at all, in light of what's happened in recent months.

Francois Rochon (23:30)

The reason I invested in 2014 the first time was really margin art. I remember it was I think Christmas Eve 2013 and I read the annual report of cancellation. I didn't know cancellation at all. That was a Christmas party at a friend. A friend, another friend told me about this company and I was a little pissed off that I didn't know about it. So you know, first thing I did when I got home was to read the annual report and I thought that was. It has been a while since I've been that excited. Not about the business, not about necessarily the results, but the qualities of Marge Leonard, which I instantly saw. It was a great CEO instantly. So you could argue that I had some 20 years experience and I've read a lot of Annual reports and he's something else. And so that's the reason we invested. I thought that Martin Leonard was a fantastic CEO and we invested in 2014. So for more than 11 years we've been very rewarded. I think from 2014 to 2025, earnings have grown by 20% a year, which is really something. And I think the Stock is up 12 fold or something like that. So when Mark stepped down, that was quite worrisome because it was the main reason I invested. He had some serious health issues. He had to be operated without waiting for a single day. It was an urgent matter and his life was in jeopardy. But the good news is the operation went well. So Mark is still with us, so we're very happy. But he's now just on the board of directors. He's not the CEO anymore, but the person that took the job. Mark Miller has been with the company since almost day one. I think it's one of the first company that Constellation software purchased and CEO was Mark Leonard, the right hand man probably since 95. So I don't think there's anyone better than Mark Miller to take on, you know, the succession of Mark Leonard. So yes, I was a little disappointed of course that Mark Leonard was not the CEO anymore. But I think we got a very, very good CEO to continue the task of building consolation. And he has been there since day one. He knows a business as well. So I'm comfortable that the new management is fine. Now the second thing that Wirestop went down and probably to a more deeper reason was those AI threat. And it's not just Constellation, it's almost all the software related companies, all the software service companies, all the companies like Intuit or Adobe or FactSet Research or Morningstar. There's many companies that have seen their stock go down 30, 40, 50%, even more in some cases in the last, let's say two quarters. Now they believe that companies can replace software by, you know, having some AI do the coding and replacing the software in a business. I know that it's very impressive that AI coding can do a lot of things, but there's many things that are important when you are a company and you purchase a software either as software install or as a service. Well, first, if there's something that goes wrong, you need someone that will be reliable and responsible. I'm not sure that the ALM will do that. So that's the first thing. And second thing which is very important, the AI tools are as useful as the data they have. They just process data faster than you and I but that's what they do. They need data, so they need public data. And a lot of data for clients are private, so they don't have access to it. They cannot just replace the software if they don't have access past data of a client. So that's one thing. And also there's many software companies, like let's say for Intuit, for example, that handle the money of clients. So they send it payrolls or they send money to other companies, they work with employees. So when money is involved, I don't see ChatGPT or Claude Handling billions of dollars of money. It's a different kind of business. It's not just coding. There's a lot of things that are related when a software has been installed and kind of intertwined into the whole business of a company. So I think that's the case for most of the software that Constellation sells. They've got something thousand different companies all selling niche software. And even if AI coding could replace a few software, sometimes the cost of those software is not that big related to the whole business. So if you have a business that generates about $3 million, a small business that generates a million dollars of revenues, and you have a software that costs you five or $10,000 a year, well, I'm not sure you're ready to disrupt everything, to try to code it yourself to save five or ten thousand dollars a year. So yes, there are some applications that are very useful and I've seen some example of companies that I believe will have a tough time to endure with AI. But there are many different kind of companies in the software industry. It's a very, very large business, it' large industry. And there's all types of companies. And I think the type of service and software that Constellations sell, I believe in my opinion that most of them will not be too affected by AI. And Constellation is also aware of the threat and they're taking it very seriously. So they can use AI to improve their software and improve the efficiency that they sell those software. So it's quite complicated and it's very hard to know where it's going to be. So what the market really said is we used to pay 30 or 35 times earnings for good growers in the software industry. With this new environment, Wall street says, well, we're not ready to pay 30 times anymore. Ready to pay 18 perhaps, but not 35 times. So it's really a reevaluation of the P ratio. And you know, in some cases those P ratio were very high. So it discounted Many, many, many years of good growth going forward. So the Wall street is not just as enthusiastic about industry to put such a high P ratio as it did before. But now if you look at Constellation, you can buy a 20% grower at 18 times earnings. Well, that's quite low. It's low relative to their historical valuation and it's low compared to other companies are trading at 18 times earning and they're probably growing 4 or 5% a year. So if we're right about their assessment that the business is intact, I do believe that the stock is cheap.

Clay Fink (30:52)

So you highlighted there your admiration for Mark Leonard. And in your letter you even mentioned that he was your favorite CEO of the companies you owned. And given the recent departure, I thought it'd be appropriate just to talk a little bit more about that. What was it that you admired in Leonard? In the way he communicated with shareholders and just built this phenomenal business over the past 30 years.

Francois Rochon (31:19)

I've met him a few times, so I know him pretty well. It's going to sound strange, but he's kind of someone I would like to adopt as an uncle. He's wise, kind. He thinks of others before him. It's not that common with people that build businesses and they have strong ambitions and, you know, strong testosterone. That's just the nature of business leaders. But he's not like that. He looks like someone that was in the ZZ Top rock band, you know, with this big beard. But he was like an artist. He was very thoughtful, very sensitive. And, you know, at some point he said that, I don't want any salary. So he cut his salary to zero. No bonuses, no stock options. I mean, where do you see that? How often do you see that? I mean, the last time I met someone like that was many years ago. Robert Turland at Fastenal, I think his yearly salary was 120,000 and no options and no bonuses. And I remember at some point, that was many years ago, but at some point all the other managers convinced him that they needed to have a stock option program for young managers. And he didn't want to dilute the shareholders or what he did. They gave his own shares, part of his own shares to give to employees instead of issuing new shares. Now, I've never seen that anywhere in the business world. I mean, these are very, very rare kind of people. Very generous, always thinking the long term, always thinking for the good of the business and the shareholder. And they're not common, I can tell you that.

Clay Fink (33:07)

Just before we hopped on the recording here, I was Revisiting your letter and you have the appendix A and the appendix B at the end of the letter. And I just pulled this line from the appendix A where you share just your investment philosophy on one page, just so each year your partners are able to revisit that. And I just pulled one bullet point from that page. You wrote, we choose companies that have high and sustainable margins and high returns on equity, good long term prospects and are managed by brilliant, honest, dedicated and altruistic people. And what stands out to me about your response there is the altruistic piece. I mean, you know Shirley Leonard, when He's president and CEO, he could be making at least 10, 20 million. He could be getting stock options, he could be diluting shareholders just a little bit each year and paying himself in line with others. But for some reason he just looks out for the best interest of shareholders.

Francois Rochon (34:04)

Yeah, what can I tell you was one of a kind.

Clay Fink (34:07)

You've been speaking with some people in the VMS industry and monitoring what's happening within that industry. In learning more about the developments that are happening in AI, do people generally seem to think of AI as a headwind in terms of, you know, there's going to be more competition, the cost of coding is dropping dramatically, or is it an opportunity in a sense where these software companies can start integrating AI into their solutions, maybe creating new solutions that provide even more value to the customer? What was some of the things you learned in that?

Francois Rochon (34:40)

I have a good friend that owns a AI related business and he knows it was one of the first ones to see the potential a few years ago of AI and got two friends in fact that owned or own AI business. So I'm very lucky to have people that educate me about that industry. It is a big thing, it is a big revolution and I think anyone that takes it lightly is probably missing something because it is important. But you know, when computers became used in the corporate world in the 80s and 90s, it was important too. If you didn't purchase computers and software, you know, you were out of business very fast. So I think it's similar. You have to adapt AI to your business and use it intelligently because you know if your competitors do it, you'll be handicapped if you don't. So yes, it is important to use the latest technology all the time to improve your business. And it's true about AI, it was true about software, it was true about computers many years ago. So it's just the nature of our capitalist system that there's always new tools to improve things. So of course you have to use them. Some companies will be using them more intelligently than others. And some companies will probably benefit from this transformation. And some companies will be left aligned. And it's very hard at the beginning to see which one will be who will be who. But to go back to Constellation, one thing that people didn't really think about when they sell their shares of Constellation is that they're growing through acquisitions. And I think going the next few years acquisition will be much cheaper than they were five years ago. So they could benefit at least on that front by purchasing good companies that fit in their model but are more attractive prices. So we don't know. But perhaps some software companies are owned or purchased by private equity firms with a lot of leverage and perhaps at some point they'll have a little bit problem with the high price they paid and the leverage that came with it. And perhaps they'll need to sell a few of them. So Constellation have a good balance sheet. They have a lot of experience in acquiring and integrating companies. So I think they'll be well positioned first to integrate AI within their business, but also to make acquisition in the industry, probably at better price. And better price means better return going forward.

Clay Fink (37:19)

And it was actually just even a couple weeks ago it was announced that Constellation was purchasing shares and, and Savory Corp. That's a public company. It's not a arena you see them get into often just because public valuations tend to be higher. But yeah, it could even expand their opportunity set to make acquisitions at good prices. One of the other things that I personally saw in this drawdown with Constellation, I think a lot of people were caught by surprise by just how quickly the share price pulled back. And I noticed that some investors and even some fund managers sold their shares in the company during the decline. And they might not have necessarily sold because they were suddenly bearish on the company, but I think it was more a combination of trying to protect themselves from short term underperformance and maybe even trying to appease their clients, making sure their clients don't leave due to underperformance. And it reminds me of the Thomas Phelps quote about never making an investment decision for a non investment reason. Maybe you could talk a little bit how you go about handling client or in your case, partner relationships during these difficult times where your view might differ fairly significantly from what the stock market is telling us.

Francois Rochon (38:39)

I've been doing this for 32 years, so I've been investing in the stock market and I've seen my share of ups and downs And I have my share personally of bad years and underperformance. Probably the worst ones were in 2006 and 2007 when everything related to oil was doing very well. And now we underperformed in that period. And you know, clients, well, some clients or partners were not happy about it and wanted me to invest in oil related securities or even some potash related securities, anything that had the word commodity into it. And I said, well, you can do whatever you want. But the way I've been managing Giverny Capital since day one is I manage my own portfolio. I invest in what I believe is the best 25 names with a long term view that I believe will be the best investment combining return and risk. And I buy for the partners. The shareholding capital pines the same securities as I buy for myself. So that's been the philosophy since day one. I think that's the right philosophy. I didn't vent the wheel. I really copied Warren Buffett when he says that Berkshire were partners and I stole from his ideas and Berkshire Hathaway annual report. But that was the idea since day one. So when there's some years that the results are a little disappointing and yes, I have some pressure to adapt to whatever is popular, we said, well, if I don't buy it for myself, I won't buy it for you. Or if I think this company is sound and we should continue to hold onto it, I won't sell it because some of my clients or partners are not happy about it. It's tough. But being ready for that for 30 years. So I've accepted that there'll be ups and downs in my approach. I accepted that I'll make mistakes and when I make mistakes, try to recognize it as soon as possible and you know, if the right thing to do is to sell, I'll sell. And as I believe that a stock like I think the example Constellation applies if a stock has gone down 50%, but I believe that the business is still intact and the company is still growing at reasonable or even better strong growth rate, well, I'll just hold onto it. And that's one reason many years ago, 30 years ago, I started to measure what I call the owner's earnings. Again, I use Warren Buffett's approach in his honorable letters. But by focusing on what's happening to the company, what's the growth and the earnings of my company, I can probably have more perspective and be less affected by what the market is saying about the companies I own. I let the company themselves tell me what's happening So I really tried to act as an owner. So let's say the portfolio was kind of private equity. So I would own 20 companies. I would not let the market decide how much the companies are worth because it wouldn't be listed on the stock market. I would value, I would assess the value of the portfolio based on what's happening to the company themselves. So I would take the 25 companies I own, I would look at their earnings, I would combine them together and say, okay, last year my portfolio earned a million dollars. This year it earned 1,000,000.15. So I know that the earnings for the whole group increased by 15%, so they must be worth 15% more. So I let the company's own really indicate to me what they're worth. And the great thing with the table and the annual letter is if you look over 30 years, there's been a very, very strong correlation between the increase and the owner's earning of the global companies we own. Compared with the portfolio, the Lashon Global Portfolio, I think it's very close. There's been a very strong correlation, but it's over three decades. Sometimes it takes a few years for the stock market to really reflect what's happening to the company. But that's a great thing about the stock market. You know that at some point it will reflect the intrinsic value of business. So if you're right about the business, eventually you'll be right about the stock.

Clay Fink (43:07)

So in a very buffet like fashion, you highlighted your mistakes in the letter as well. You mentioned at the top of the interview, you mentioned at the top of the interview CarMax and Fiserv, these were two stocks in your portfolio that fell sharply in 2025. I think both declined by more than 50% throughout the entire year. And you decide to sell both of these holdings. And both of them also went through changes in management in an attempt to revitalize the business and get them back on the right track. Walk us through one or both of these examples on how you came to this decision, that the thesis was broken and it was time to move on from the position.

Francois Rochon (43:49)

Yeah. In terms of CarMax, there's probably many reasons, just not one reason. But you know, have owned it for many, many years. And I remember when Carvana came into the picture, probably 2016 or 17, and the company was losing a lot of money. So I thought, well, I'm not sure the business model will last. And I think was in 2022 the stock went down 98%, so it almost didn't make it, but they did make it. And they were able recently to become profitable. So really they have proved that selling cars by the Internet only. And I was a little skeptical that people would buy a car online without trying it first. But yes, it worked very much for Carvana. Now, CarMax adapted to that and they realized that they had to sell online too. And so they created, I think five or six years ago, what they called the Omnichannel strategy. So you could buy a used car online, or you could buy it on the 1Up CarMax store, or you can have a combination of the two. So that's why they call it Omnichannel. And I think it did okay, but it increased the cost of doing business. So, yes, they adapted, but it increased the number of people they needed to offer those services. So margins went down a little bit. Now, at the same time, new car retailers, let's for instance, use AutoNation, decided to be more aggressive in selling used car. And although they don't have the same margin as CarMax, it didn't really matter to them because they realized that the real profit is in the service business. So I think 50% of AutoNation's profits comes from the service side. So say, well, we're going to sell a used car probably at a very low margin, and directly afterward we'll get the service business. Now, the problem is for CarMax is they don't have the service business. So it put pressure in terms of gross margin and also in terms of market share. So they had more competition not only from Carvana, but also from stores that used to only focus on new car sales, but they started to be more aggressive in used car. So the market just became more competitive for CarMax. And so margins went down. And at first I thought it was a temporary problem more related to the used car cycle than specific problems to CarMax. But at some point, when I compare the results for Kal9 Automation and CarMax realized that the CarMax was having more permanent problems than what I thought at first. So when we realized that, we thought that the business model was not as strong or the moat was not as strong as it was 10 years ago, because we've been out in CarMax in 2007. So we've seen very, very good years of profitability for them. So I thought the moat was not as strong. There's nothing wrong really with the company. It's just the moat is not as strong, the margins are not as high. It made me realize that perhaps the company was not as strong as it used to be and probably wasn't sure that it would ever get back to the kind of margins they were earning, let's say in 2018 or 19. So I said, well, we've been patient enough and decided to sell. In the case of hireserv, it's all different. As I wrote in the annual letter, the CEO left the company. I don't remember when during the summer, Lincoln went into politics and spying. He's got the right to do whatever he wants, but I thought it was a little strange. And he was the one that really turned around First Data. And then when Pfizer acquired First Data, he became the CEO. So I thought he was the right man to lead Fiserv. And Pfizer had that incredible track record, I think 37 years of growing earnings per share every year. So this was outstanding business. But when the CEO left and was replaced by another team, results started to be a little disappointing. I'm not sure how deep the problems are. It's probably temporary. The thing is, the company has a little bit of debt. Not a lot, but a little bit. And I'm very wary of debt in general. So I always put a threshold that I don't want the company to be higher than that. So My threshold is 5 times net income. So let's say if A company earns 200 million a year, though, the net debt shouldn't be higher than $1 billion. And they were right on that level. So I thought if earnings went down 10, 15, 20%, I'm not sure exactly what kind of earnings I'll have this year, but if earnings went down, my threshold would make me more uncomfortable. And I decided that I didn't want to live with that risk. So there's many companies I've sold over the years. The main reason was that I was not very comfortable with the debt level. And I remember some years ago, we owned the Intercontinental Exchange and then acquired Bright Knight, and they increased the debt and we sold shares. And I think the stock has done well since then. So it's not always the right decision because sometimes companies do improve things, and in the end, the debt level is not that bad. So it's just that I'm a very prudent investor and I'm very wary of debt. So I'm very disciplined on that. But I've missed my shares of big winners because I thought that the debt level was a little high. Probably goes back to Ben Graham's approach. You have to have a margin of safety. So I think being very disciplined on the debt level adds, to me, the margin of safety. And I thought that Pfizer didn't have that margin of safety when it happened when we sold. But I know that the stock is very cheap. I think it trades at seven or eight times earnings. So I realized that we're selling at very depressed level, but I found that was a prudent thing to do. Let's take a quick break and hear from today's sponsors.

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Francois Rochon (53:16)

All right, back to the show.

Clay Fink (53:18)

So you broke out the portfolio returns for the Rochon Global portfolio over the past three decades and you compared that return to that of the S&P 500. So your portfolio outperformed the S and P over the first two decades and then underperformed over the most recent decade from 2015 through 2025. And I would say that the most recent decade has more to do with how the S and P has performed rather than how you've necessarily performed. And you've been consistent as usual over 5, 10 year time periods. So over the most recent decade, the S and P returned 14.8%, but much of that performance has been due to multiple expansion. So the median PE ratio of the S and P historically has been around 18 times, and the end of 2025 it was around 25 times or 40% above historical norms. I know you're not in the business of forecasting the direction of the stock market, but I was curious to get just your take on what this might tell us about where the S and P might go in the decade that lies ahead.

Francois Rochon (54:26)

Yeah, in the last decade it's been an extraordinary period for the s and P500. It's not just the increase in the P ratio. The earnings have done very well. Also, I'm not sure. I think on the table it was 10.8%, probably little more than 9% of that is earnings growth. And there's an average dividend probably 1.8%. So 9% is higher than historical numbers for the s and P500, if you go back 50 or 60 years, I think the growth rate in earnings for the S and p has been 6.7% per year. Which makes sense in a world where there's real GDP growth of 3%, some inflation of 3%, some improvement here and there. So 6.7%. And it's really in other way, if you go back to an old article by Warren Buffett, I think it was in Fortune in 1977, and he used the argument that companies earn 12% on equity on average over the long term. So if you retain 60% of those earnings, well that means that it translates into a growth of 7.2% because let's say 40% of profits are distributed in dividends. So that 6.7% is pretty a constant, could be 7, could be 6, but let's say between 6 and 7% is a constant. So 9% is an exception. It's been an exceptional 10 year period for the S&P 500. And the reason is that those extraordinary companies, Amazon, NVTR, Alphabet, Meta, Microsoft, have grown at extraordinary rate for companies their size. I mean when Microsoft was a small company and was growing 25% a year, it was an extraordinary fee. They were small so they could double in size every two years. But once you're at $1 trillion of market cap, I would have think that it would be much harder to grow at let's say 12, 15% a year in an economy that grows 4 or 5%. But they achieved it and they built these incredible businesses dominant in their industry, but also worldwide. It's not just a US gdp, it's the world GDP because they're really worldwide, those companies and they're really dominant everywhere. So these five companies have been incredible growers even when they got very big. So that's one reason. So that 9% growth, it's not a bubble. It's really because those companies have grown at incredible rate. So as they cut to be bigger weight in the S and P, their performance increase overall growth in earnings of the S and P. Because if you wouldn't probably subtract those companies, all the other sectors, I would guess that the growth has been close to 6% the average over the end. So yes, it's justified the 14.1% growth in the last decade for the S and P. That's while the 10.8% growth in earnings and plus dividend. But also the increase in the P ratio, it's also justified because these companies are growing faster than the typical company. And they warrant a high, higher P ratio. Now, of course, the key question is, going forward, will that be sustainable? Will it be sustainable for all the companies in aggregate, for the S&P 500 to continue to grow at 9% a year? And can the P ratio be maintained at 25 trailing or 22, 23 forward? I think if you look at history, every time The S&P 500P ratio went up a little higher than average, something happened to normalize things at some point. And I always say that the normal curve or the Bell curve or the Gauss curve, you can call it whatever you want to. It's a very strong force in the universe. I don't know exactly how it works, but I understand that it's very powerful. So even when you're an extraordinary business and you're dominant, at some point, size becomes an anchor. I mean, when you're at 3 or $400 billion of revenues, it's much harder to grow 15% a year than when you were at $1 billion of revenues. So at some point those companies won't be able to continue to grow at such growth rate. And when that happens, I think that the P ratio of the S and P will go back to more normal levels. Will it happen in two years or in five years? I don't know. But I would keep my expectation low for the S&P 500 for the next five or 10 years. I don't think there'll be anything wrong. Those businesses, I think they're very well managed and they're good companies. It's just that at some point they won't be able, just by their mirror size, they won't be able to grow at such ratios. So that the companies will continue to grow at 12, 13% annually. And if they do, I think at some point they'll do better than average, as they did for the first two decades.

Clay Fink (59:44)

I mean, Nvidia has to be the anomaly of anomalies throughout history. I mean, the stock's up 56% over the past 12 months. As of the time of recording, revenues in the most recent year are up 65% to over 200 billion. So I mean, just extraordinary levels of growth. And what also is somewhat remarkable to me about today's market is that despite the S&P 500 practically being at all time highs, a lot of very good companies seem to be trading at beaten down, or what we can call reasonable valuation levels. You look at just a couple of names in your portfolio. Brown. And Brown has seen its stock fall significantly due to AI fears despite the business continuing to grow. And then shares of Kinsale Capital, they're also down as well, despite it being a very well run business with a very capable management team. So it's just been quite interesting. A lot of my investing experience is that the market's up and up and about. Everything seems pretty pricey. But today it seems to not be that case, really.

Francois Rochon (60:50)

Yes, you're right. I mean, I follow hundreds of companies and I look at their valuation and there's easily 20 companies that I think are very attractive these days. And it seems when I look at their valuation and their performance in the last six months, that we're in a bear market for them, really. So many of them are down 30%, 40% and valuation are much more reasonable. So I think these days you could build a portfolio from scratch and have 25 companies that are very good companies and they trade. Probably you could have a portfolio below 20 times. So, yes, I think strangely enough, you're right. There's lots of opportunities and there are some specific reasons here and there. I think you talk about the insurance industry like Brown Brown and Kingsale. Yes, we are kind of entering softer market. But you know, when you invested in the insurance industry, you have to accept there'll be ups and down in the cycle of the industry, which is sometimes unrelated to what's happening with the economy or the stock market. But you know, if you want to purchase Brown Brown because you think it's a great business long term and it has a great manager and a good crew of companies that are acquired, well, probably it's better to buy it at 16 times earnings than 24, 25 times. And same thing with King Cell. I think King Cell is an outstanding insurer. Their underwriting ratio is incredible. I think the CEO is great. And you know, not that long ago I think the stock was trading P ratio in the I20s and today it's what, 17 times? Something like that. So there are opportunities. Yes.

Clay Fink (62:31)

And I actually wanted to ask you a little bit about Ken Zale because I was listening to a presentation that their CEO gave and he was comparing Kinsale Capital to the early success that Progressive had. So Progressive had something like 2% market share in the auto insurance market in the early 90s and today it's around 15, 16%, something like that. And today Kinsale has less than 2% market share of the excess and surplus insurance market niche part of the market they're targeting. And the reason I wanted to mention it to you is you first owned Progressive back in 1999. So you've been following this company for a very long time and then you purchased shares in Kinsale in 2024. Do you see similarities between the two in how this investment might play out with Kinsale and your experience following Progressive for just so long?

Francois Rochon (63:23)

Well, it's not exactly in the same business, but probably they have similar qualities. Probably one is the adoption of technology to help them improve their underwriting ratio. Progressive was very early in using antelematics to better measure the risk drivers. And King Cell has been very, very keen on using technology to have strong software and strong advantages. And it's all one software compared sometimes with other competitors at that different kind of software. They're not as integrated and as probably efficient as King Sale is. So that's one analogy. And the consequence of that is that they have a better underwriting ratio, so. Meaning they have better margins of profits, so higher return on equity and they probably can write more insurance because their cost ratio is lower than competitors. So, yes, you're right, there are similarities. Yeah, I think that's. We own both, so we like them both.

Clay Fink (64:33)

We can also talk a bit about the new positions you added in 2025. That's LVMH and Universal Music Group. So, remarkably, I don't know why I'm surprised, but you've been following lvmh for over 20 years now. You purchased when the share price was below €500, which is roughly where the stock is trading today. Why is now the time to enter lvmh?

Francois Rochon (64:58)

Well, I'm not that good in timing because I bought it last year and so far it has not yielded good results. So it's always the same thing. I try to assess what's the earning power and what kind of earnings will the company have in five years. And, you know, after. Or during the pandemic or after the pandemic, there was a very, very strong demand for Weaver Tahl products. Almost all the luxury products were very much in demand. I think the last two years has been much tougher. It's just the nature of the luxury market that there'll be ups and downs. Usually it's linked to the economic cycle, but sometimes not. And I think probably the years 21, 22, 23 were very, very strong. But at some point, consumers needed a cause in their purchasing and it's very hard to predict. But I think part of the slowdown is just a return to normal. So probably the first years, 20, 21, 22, was a little too strong relative to let's say historical norms. So there's part of that also, you know, inflation makes those products pretty expensive and it's been a tougher period for consumer in general. But I think the key factor is that you want the brand to be as strong as it's ever been. That's what you want. So perhaps people are a little wary of purchasing Louis Vuitton wire bags. But what you really want is the brand, the name still resonate to clients as quality, something you want to own because it's of quality and also it's a symbol of wealth. So I think those are intact. So that's the key elements. They've got many great brands. It's not just Louis Vuitton, they've got also doctor and they've got Tiffany brand, the Tiffany Jewelries, which I think is a fantastic business. I follow it when it was listed in the stock market. So I know the company pretty well. And Sephora I think is a fantastic business. I think people, when they talk about lvmh, they don't talk that much about Sephora, but It's probably just 10% of revenues. But I think it's growing pretty fast and it's a very, very strong retailer. We've been following also Ulta Beauty, which is a very, very well managed company. But there have been some pressure on margins because on the IM they got more competition from Sephora in the United States. So I think there's a lot of great brand in WOL lvmh. Now the only thing I'm not as enthusiastic is everything related to spirits. I mean, young people drink less and I think, I don't think that changing, I don't really understand why, because personally I like good wine, but young people drink less than the previous generation. So I think this part of the business of lvmh, it's more a secular problem than a cyclical problem. But the rest of the business I believe is more cyclical. So I think at some point earnings will rebound and I think probably from here earnings could increase 60 or 70% in the next five years. So let's say a 10, 11% growth rate and you've got a 2 or 3% dividend. So together I think we should be able to attain our objective of finding a 13% grower, including a dividend. So I think cloud emish from today's level, from today's a little bit depressed earnings. And also one thing that didn't help last year there was a temporary increase in the tax rate in France. So I think the Tax rate went from 28% to 33% for companies earning more than 1 billion euros. So that didn't help. Also the earnings per share. But let's say, let's hope it's really temporary and the tax rate goes back to 28% will be helpful for LVMH holders.

Clay Fink (69:02)

So in all of your letters you aren't shy to glorify the benefits of capitalism. And on that note, LVMH does have some decent exposure to mainland China. It's around 20% of their revenue and perhaps even much more when you consider what citizens are purchasing when they're traveling. I wouldn't consider China the most capitalistic country out there, but I know that some people might disagree with me. So just for fun, I asked Claude's AI chatbot on a scale of 1 to 10, how capitalistic are the US and China? And it told me China was a 5 to 6 out of 10 and the US is a 7 or 8. So it seems to agree with me on that part. And it seems to me that part of what is weighing on LVMH today is their segment in China. I was even surprised to find in my research that the Chinese government has even been cracking down on those who flaunt their wealth on social media. So just pretty interesting to see. So what is your take on LVMH having exposure in China?

Francois Rochon (70:07)

I think long term is going to be a positive thing for the simple reason it's not going to be a straight line. But I think China, the Chinese people going forward will continue to increase their wealth, their GDP per capita, just because they're starting from a lower point than, let's say France or Germany or United States, of course. So they will increase their GDP per capita at a higher rate than North American, for instance, not because they're smarter, it's just they're starting from a lower base, so a very low base because of all the years it was a communist country. So I don't know, I'm an optimistic person. I think at some point it's going to be a real capitalist society. But because I think capitalists will always triumph at some point, but sometimes it takes decades. But until then, I think even in a communist or semi communist state as they are, they will continue to improve their GDP per capita. So as they get richer at a faster rate than North American, I think they'll want to acquire LVMH products. Luxury products could also be Hermes Spags or Prada bags. But in general, I think demand for luxury goods in China will increase. There'll be ups and downs. Perhaps there'll be some periods like you described that the government doesn't really sponsor showing up your wealth. But that's temporary. At some point we'll be back to normal. And as the country improve and continues to improve the GDP per capita, it's going to be a stronger economy and they'll purchase more luxury goods. And I think it's going to be a good market for Louis Vuitton. Perhaps not in one year or two years, five years, 10 years, 15 years. And they're building a business for the next decade. They're not building it the next year or two.

Clay Fink (72:00)

Excellent. Well, to wrap up the discussion, I wanted to touch on some of the fundamental basics that you highlighted in your letter. So you highlighted that the three essential qualities for success in the stock market are rationality, humility, and patience. And it reminded me of Buffet talking about you only need so much intelligence to be a good investor. So much of it is just temperament. And I couldn't think of many investors who embody those traits as well as you have. So how about you talk about these traits and why investors tend to fall short in these areas from a behavioral standpoint?

Francois Rochon (72:35)

Well, there's many reasons. I can't really talk about what the others are going through in their own feelings or minds or anything. I'll talk about my own experience. Well, first, rationality. I always thought that to succeed in the business world, you have to be able to look at reality as it is. It's so easy to believe in things that would favor you. It's just human nature. You'll tend to want what's good for you to happen. And at some point you'll have trouble making the difference between what you want and what really is. So it's hard. But you have to always constantly try to look at things with a fresh pair of eyes that are the most objectives that they can be. It takes practice because it's not intuitive. But I think if you're really motivated, then the goal is very noble. We want to have good returns and get rich. So I'm very motivated to whatever it needed, even if it needs me to become rational. So from very early, and you know, Warren Buffett helped a lot, and Charlie Munger also, so you can read all the writings of Charlie and Moore, and then you'll have very, very good arguments to use rationality in your daily life. And the stock market is a place where there's so much emotions, there's so much hopes and fears that when you try to put aside emotions and just focus on the facts and be rational and objective. It gives you a fantastic advantage because most investors aren't able to do it. So that's one important quality. The second one, humility, it's a little bit similar, but, you know, if you've been investing for many years in the stock market, I don't see how you cannot be humble because you'll have your share of mistakes, you'll have your share of things you didn't buy that you should have buy. You have your shares of stocks that you were very, very hopeful that would do well, and there are big disappointments. But humility is the quality needed to improve yourself if you want to be a better investor. And again, you're in the quest of a noble quest for wealth and high return. So you're really motivated to improve yourself. Humility is the key quality needed because you cannot improve yourself if you think you know everything and you're. You're very good. You always want to be a better investor. And if you want to really learn and be a better investor every day, well, you have to be humble enough to say, well, I have something I can learn every day. And I remember many years ago, Charlie said something at annual meeting. I don't know if everyone really understood how important that phrase was, but he said that the greatest quality of Warren is that he was humble and he always wanted to learn more. And this is about the greatest investor of all time, already rich in billions of dollars. And Charlie was saying is improving because he's still humble after 60 years of investments. And that really stayed in my mind. And I said, that's so important to always be humble and always strive for improvement. And finally, patience. Well, I think you learn it by experience. Sometimes it takes years and years to be rewarded investment. And I use the example of Five Below in the annual letter, because we purchased Five Below, I think in March 2020, the beginning of the pandemic, the stock went down 50%, I think paid first $71. And five years later. So in April 2025, the stock was 55. So we had a loss of 20% over five years. So that's a tough loss for quite a long period of time. And we decided that we needed to be patient and things did improve. And finally today, almost six years later, I think the stock is 220. So we probably tripled our money over six years. But after five years, we're still losing money and that investment. So patience is very important. And I think the best way to be patient in the stock market is focusing on what's happening to the company. And I thought that the key factors for the key reason I invested in five below were still there five years later. They were opening new stores. Their stores were popular. There were some pressure on margin, but I thought they could be changed and addressed and improved. And there was the fear of tariffs that could put pressure on gross margins that in the end were not that bad. So things were okay. But you know, we decided that we should be patient with that investment. But there's many other examples where patience was needed and to be rewarded. I don't remember where I read that, but I think it said that genius in the stock market is really here disguised patience. I think the greatest quality is patience. And I remember many old stories. I saw an interview with Charlotte Carre on Wall street with Louis Rukeyser. I think it was in 1995. So when I started to invest on Friday evening you had this stock market program on pbs, which I watch religiously, and Louis Rokyser asked Philip carre, with your 75 years of experience, because I think Phil Carre was 98 at that time. And he said, what's your biggest lesson from those 75 years of experience? And Philip Carey thought about it and said, patience. And I still think after all those years, that's the greatest quality to have. I have to be humble, you have to be rational. But you also need patience to get the reward from all the work, all the analysis, all the rationality you put into it. If you don't have the patience, you won't get the rewards.

Clay Fink (78:45)

So well said. Well, Francois, I always enjoy the opportunity to chat with you, bring you on the show, really appreciate the opportunity and I'm sure the audience will certainly enjoy your insights and your timeless wisdom. For those interested, I'll be sure to get Francois's annual letter linked in the show notes. For those interested in giving it a read, I would highly recommend it. So. So with that, I think we'll wrap it up there. Thanks again.

Francois Rochon (79:08)

Thank you.

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