Art of investing

François Rochon of Giverny Capital made a presentation at google on “The Art of Investing: Analyzing Numbers and Going Beyond”. A summary of his presentation is given below.

Peter Lynch’s book “One Up on Wall Street.” He said that investing in stocks is an art, more than science. If you want to be an artist in the investing world, well, you want to master that art. You want to first choose an art that you really love. You want to study the masters of that art. It is important that, as master paints, investor invests, so you want to be active in your art. You want also to develop your own style, have an independent mind, and always strive for improvements. That means that if you want to obtain better results in the stock market, you have to be able to stand on your own and you’ll be different than the typical crowd of investors. Sometimes it is a little hard because you have to be different and have sometimes a very contrarian opinion than the average view on the either a stock or the stock market in general.

What should we look for in a company? It is really three things: the competitive advantages, which we could say is the artistic part of that; the financial strength, which is really the science part; and the management team, and this is where judgment comes into play.

Rochon thinks investors need to have three things: patience, humility, and rationality.

Humility – Rochon thinks that it’s impossible to predict macroeconomic events. So they don’t try to predict them. Another key element is to focus on your circle of competence and to know where the limit of that circle is. Thirdly, recognize mistakes when they do them and always try to improve selection process.

Rationality – Rochon calls it “the rule of three.” It’s really to accept that: one year out of three, the stock markets will decline about 10% or more; one stock purchased out of three will not perform as expected; and one year out of three, you’ll underperform the index. It’s still a very ambitious group of rules, but if you accept that from the start when you’ll have some bad years on some bad investments, you’ll be better prepared psychologically to deal with that.

Patience – Patience is not the ability to wait, but the ability to keep a good attitude while waiting. So what’s the good attitude in the investment world? It’s really to focus on what’s happening in the company, not what’s happening to the stock price. That’s sometimes a hard thing to do. There’s a big difference in knowing when to keep your shares because the fundamentals warrant and recognize you made a mistake, and just get out of that stock. That’s a big difference between being patient and stubborn.

Finally, you want discipline, but you want to be able to break the rules. Rochon always says that the discipline is to follow your own rules, but wisdom is to know when to break your own rules.