TIP800: Navigating an AI-Driven Market w/ François Rochon

22:41Clay: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 Jiberni 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.

23:17Clay: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.

23:29François Rochon:The reason I invested in 2014, the first time, was really March and I'd. I remember it was, I think, Christmas Eve 2013, and I read the annual report of Constellation. I didn't know cancellation at all. And there was a Christmas party at a friend. Another friend told me about this company, and I was a little pissed off. I didn't know about it. So first thing I did when I got home was to read the annual report. And I thought that 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.

24:12François Rochon:So you could argue that I had some 20 years experience, but I've read a lot of other reports and he's something else. And so that's the reason we invested. I thought that Marge 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, something like that. So when Mark stepped down, that was quite worrisome, because he was the main reason I invested. He had some serious health issues. He had to be operated without waiting for a single day.

25:00François Rochon:It was an urgent matter, and his life was in jeopardy. and but the good news is the operation went well so uh is still with us or we're very happy but he's now just on the board of directors he's not the CEO anymore and 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 uh that consolation software purchase and he was Mark Leonard the right hand man probably probably since 1995. So I don't think there's anyone better than Mark Miller to take on 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've got a very, very good CEO to continue the task of building Constellation.

25:50François Rochon:And he has been there since day one. He knows the business as well. So I'm comfortable that the new management is fine. Now, the second thing that why the stock went down, and probably to a more, for 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 Faxit 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 having some AI do the coding and replacing the software in a business.

26:41François Rochon: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 a software install or as a service. Well, first, if there's something that goes wrong, you'll 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.

27:30François Rochon: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 Cloud 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 have been installed and kind of intertwined into the whole business of a company.

28:14François Rochon:So I think that's the case for most of the software that Constellation sells. They've got something like a 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 $1 million of revenues, and you have a software that costs you$5 ,000 or$10 ,000 a year, well, I'm not sure you're ready to disrupt everything to try to code it yourself to save$5 ,000 or$10 ,000 a year. So yes, there are some applications that are very useful.

28:59François Rochon: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 kinds of companies in the software industry. It's a very, very large business. It's a very large industry. And there's all types of companies. And I think the type of service and software that Constellation 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.

29:40François Rochon: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 re-evaluation of the P ratio. And in some cases, those P ratios 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.

30:24François Rochon:But now, if you look at Constellation, you can buy a 20 % grower at 18 times earnings. Well, that's quite low. It's lower relative to their historical valuation, and it's low compared to other companies that train at 18 times earnings. 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.

30:52Clay:Preston Pyshko 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 and the way he communicated with shareholders and just built this phenomenal business over the past 30 years?

31:19François Rochon: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. I mean, 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 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 with this big beard. But he was like an artist. He was very thoughtful, very sensitive. And at some point, he said that I don't want any salary. So he cut his salary to zero, no bonuses, no stock options.

32:10François Rochon: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 Turlin 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. So what he did, he 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.

32:54François Rochon: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.

33:05Clay:I can tell you that. 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.

33:45Clay:I mean, 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 interests of shareholders. Yeah.

34:04François Rochon:What can I tell you? It was one of a behind.

34:07Clay: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 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?

34:40François Rochon:I have a good friend that owns an AI-related business, and he was one of the first ones to see the potential a few years ago of AI. I've got two friends, in fact, that owned all the 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 were out of business very fast. So I think it's similar.

35:24François Rochon:You have to adapt AI to your business and use it intelligently because 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-lined.

36:10François Rochon: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.

36:50François Rochon: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 a better price. And better price means better return going forward.

37:19Clay:And it was actually just even a couple of weeks ago, it was announced that Constellation was purchasing shares in Sabri Corp. That's a public company. It's not an 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 sort of 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.

37:58Clay: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?

38:39François Rochon: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 wasn't very well. And now we underperformed in that period. And 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.

39:25François Rochon: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 at risk. And I buy for the partners, the share of the capital clients, 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 invent the will. 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.

40:16François Rochon:Or if I think this company is sound and we should continue to hold on to 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 if the right thing to do is to sell, I'll sell. And I believe that the 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 a reasonable or even better, a strong growth rate.

41:00François Rochon:Well, I'll just hold on to it. And that's one reason many years ago, 30 years ago, I started to measure what I call the owner's earning. Again, I use Warren Buffett's approach in his general 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 perspectives 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 try to act as an owner. So let's say the portfolio was kind of a private equity. So I would own 20 companies. I will not let the market decide how much the companies are worth because they wouldn't be listed on the stock market.

41:51François Rochon: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 dollar. This year, it earned 1 million.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 ocean global portfolio.

42:45François Rochon: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.

43:06Clay:So in a very Buffett-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 Pfizer. 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 decided 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.

43:49Yeah.

43:49François Rochon:In terms of CarMax, there's probably many reasons, just not one reason, but I've 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 it was in 2022, the stock went down 98%. So it almost didn't make it. But they didn't make it. And they were able recently to become profitable. So really, they have proof that selling cars by the internet only, and I was a little skeptical that people would buy a car online without trying it first.

44:31François Rochon:But yes, it worked very much for Kavana. Now, CarMax adapted to that, and they realized that they had you to sell online too. And so they created, I think five or six years ago, what they call the omni-channel strategy. So you could buy a used car online, or you could buy it on the one-up CarMax store, or you can have a combination of the two. So that's why they call it the omni-channel. 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.

45:21François Rochon: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 auto nations profits comes from the service side. So say what, we're going to sell a used car probably at a very low margin, and directly afterward, we'll get the service business. So now the problem with this 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 Kavanaugh, but also from stores that used to only focus on new car sales.

46:02François Rochon:So 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 Cavanaugh and AutoNation and CarMax, I realized that that 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 owning CarMax in 2007.

46:40François Rochon:So we've seen very, very good years of profitability for them. So I thought the moat was not as strong. I think 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. Probably, I wasn't sure that it would ever get back to the kind of margins they were earning that same 2018 or 90. So I said, well, we've been patient enough and decided to sell. In the case of HyderServe, it's all different. As I wrote in the annual letter, the CEO left the company. I don't remember when, during the summer, I think it went into politics.

47:20François Rochon:and spying his cut 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 it was the right man to lead the Pfizer. And Pfizer had that incredible track record, I think, 37 years of growing, and he's per share every year. so this was outstanding business but when the co left and was replaced by another team results started to be a little disappointing i'm not sure how deep the problems are and 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.

48:14François Rochon:So my threshold is five times net income. So let's say if a company earns 200 million a year, 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 Night and increased the debt.

48:57François Rochon:And I 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 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, I have to have a margin of safety. So I think being very disciplined on the debt level adds to me, a margin of safety. And I thought that Pieserver didn't have that margin of safety when it happened, when we sold.

49:43François Rochon:But I know that the stock is very cheap. I think it raised seven or eight times earnings. So I realized that we're selling at a very depressed level, but I found that was a prudent thing to do.

49:54Clay:Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why Vanta is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, Vanta keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, Vanta gives you continuous automation across more than 35 security and privacy frameworks.

50:32Clay:Companies like Ramp and Ryder spend 82 % less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at Vanta.com slash billionaires. That's Vanta.com slash billionaires. Billion-dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise Income Fund, which has more than$600 million invested and a 7.97 % distribution rate.

51:21Clay:With traditional savings yields falling, it's no wonder private credit has grown to be a trillion-dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results. Current distribution rate as of 12-31-2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income.

52:02Clay:This is a paid advertisement. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10 % of all e-commerce in the US, from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics.

52:38Clay:So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your$1 per month trial today at shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. So you broke out the portfolio returns for the Roshan Global Portfolio over the past three decades.

53:30Clay:And you compared that return to that of the S &P 500. So your portfolio outperformed the S &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 &P has performed rather than how you've necessarily performed. And you've been consistent as usual over five, 10-year time periods. So over the most recent decade, the S &P returned 14.8%, but much of that performance has been due to multiple expansions. So the median PE ratio of the S &P historically has been around 18 times, and the end of 2025, it was around 25 times or 40 % above historical norms.

54:17Clay: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 &P might go in the decade that lies ahead. Yeah.

54:30François Rochon:In the last decade, it's been an extraordinary period for the S &P. 500, 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 a little more than 9 % of that is earning growth, and there's an average dividend probably 1.8%. So 9 % is higher than historical numbers for the S &P 500. If you go back 50 or 60 years, I think the growth rate in earnings for the S &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%.

55:12François Rochon:And it's really an other way, if you go back to an old article by Warren Buffett, I think it was in Fortune in 1977, and they use 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 they translate 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 seven, could be six, but let's say between six 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, NVIDIA, Alphabet, Meta, Microsoft, have grown at an extraordinary rate for companies their size.

56:15François Rochon:I mean, when Microsoft was a small company and was growing 25 % a year, it was an extraordinary feat. 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 U.S. 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.

57:04François Rochon:So that's one reason. So that 9 % growth, it's not a bubble. It's really because those companies have grown at an incredible rate. So as they got to be bigger weight in the S &P, their performance increased overall growth in earnings of the S &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 there. So, yes, it's justified that the 14.1 % growth in the last decade for the S &P, 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 higher P ratio.

57:55François Rochon: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 maintain that 25 trailing or 22, 23 forward. I think if you look at history, every time the S &P 500 P 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 curves or the Gauss curve, you can call it whatever you want, 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.

58:43François Rochon: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 the trio$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 &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 with those businesses.

59:26François Rochon: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 look better than the average, as they did for the first two decades.

59:48Clay:Preston Pysh, MD, 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 names in your portfolio, Brown & Brown has seen its stock fall significantly due to AI fears, despite the business continuing to grow.

1:00:35Clay:And then shares of Kinzale 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.

1:00:54François Rochon: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 In these days, you could build a portfolio from scratch and have 25 companies that are very good companies and they trade at probably, you could have a portfolio below 20 times. So yes, I think strangely enough, you're right.

1:01:34François Rochon:There's lots of opportunities and there's some specific reasons there and there. I think you talk about the insurance industry like Brown and Kingsell. Well, yes, we are kind of entering a softer market. But when you're investing in the insurance industry, you have to accept there will be ups and downs in the cycle of the industry, which is sometimes unrelated to what's happening with the economy or the stock market. But 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.

1:02:15François Rochon:And same thing with Kingsale. I think Kingsale is an outstanding insurer. Their underwriting ratio is incredible. I think the CEO is great. And not that long ago, I think the stock was trading a P ratio in the I-20s, and today it's what, 17 times, something like that. So there are opportunities, yes.

1:02:35Clay:Preston Pysh And I actually wanted to ask you a little bit about Kenzale because I was listening to a presentation that their CEO gave, and he was comparing Kinzale 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, Kinzale 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 Kinzale in 2024.

1:03:18Clay:Do you see similarities between the two in how this investment might play out with Kinzale and your experience following Progressive for just so long?

1:03:27François Rochon: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 telematics to better measure the risk of drivers, and KingCell 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.

1:04:17François Rochon: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.

1:04:35Clay:So we like them both. 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 euros, which is roughly where the stock is trading today. Why is now the time to enter LVMH?

1:05:02François Rochon:Well, I'm not that good in timing because I bought it last year and so far it does not use 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 after or during the pandemic, or after the pandemic, there was a very, very strong demand for Louis Vuitton products. Almost all the luxury products were very much in demand. In the last two years, it's 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.

1:05:42François Rochon:And I think probably the years 21, 22, 23 were very, very strong, but at some point, consumers needed a little pause 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, the years, 20, 21, 22, was a little too strong relative to, let's say, historical norms. So there's part of that. Also, inflation makes those products pretty expensive, and it's been a tougher period for consumers in general. But I think the key factor is that you want the brand to be as strong as it ever been. That's what you want. So perhaps people are all wary of purchasing Vuitton bags, but what you really want is the brand that may still resonate to clients as quality, something you want to own because it's of quality and also it's a symbol of wealth.

1:06:51François Rochon:So I think those are intact. So that's the key elements. They've got many great brands. It's not just Vuitton. They've got also DR. and they've got Tiffany brand, the Tiffany Jewelry, which I think is a fantastic business. I follow it when it was a market, so I know the company pretty well. And Sephora, I think it's a fantastic business. I think people, when they talk about healthy image, 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.

1:07:33François Rochon:But there have been some pressure on margins because in the IM, they got more competition from Sephora in the United States. So I think there's a lot of great grand in Louis Vuitton and LVMH. Now, the only thing I'm not as enthusiastic is everything related to spirits. I mean, young people drink less. And I don't think that's changing. I don't want to 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.

1:08:14François Rochon: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 the dividend. So I think LVM is 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 up from 28 % to 33%. For companies earning more than 1 billion euros.

1:08:54François Rochon: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 shareholders.

1:09:06Clay:Preston Pysh, MD, 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 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.

1:09:46Clay: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?

1:10:10François Rochon: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. It's a very low base because of all the years it was a communist country. So I don't know. I'm an optimistic person.

1:10:51François Rochon:I think at some point, It's going to be a real capitalist society, because I think capitalists will always triumph at some point, but 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 or LVMH products, luxury products. It could also be Hermes bags 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.

1:11:39François Rochon: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 Wivital, perhaps not in one year or two years, five years, 10 years, 15 years. And they're building a business for the next decade.

1:12:01Clay:They're not building it for the next year or two. 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 Buffett 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?

1:12:39François Rochon: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.

1:13:27François Rochon: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 Warren Buffett helped a lot and Charlie Munger also. So you can read all the writings of Charlie and Warren 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.

1:14:26François Rochon:So that's one important quality. The second one, humility, it's a little bit similar, but 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 that 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 a quest of a noble quest for wealth and high return, so you're really motivated to improve yourself.

1:15:09François Rochon:Humility is the key quality needed, because you cannot improve yourself if you think you know everything and 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 an 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.

1:15:51François Rochon:And Charlie was saying, he's 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 improvements. 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 they paid first$71. And five years later, so in April 2025, the stock was 55.

1:16:34François Rochon: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 in 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 Fibulo 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.

1:17:26François Rochon:And there was the fear of a terrorist that could put pressure on gross margins that in the end were not that bad. So things were okay. But 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 disguised patience. I think the greatest core on his patience. And I remember many old stories. I saw an interview with Philip Carey on Wall Street with Louis Rookiser. 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.

1:18:13François Rochon:And Louis Rookiser asked Philip Carré with your 75 years of experience? Because I think Phil Carré was 98 at that time. And he said, what's your biggest lesson from those 75 years of experience? And Philip Carré thought about it and said, patience. And I still think after all those years, that's the greatest quality to add. You 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.

1:18:49Clay: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 with that, I think we'll wrap it up there. Thanks again. Thank you. Thanks for listening to TIP. Follow We Study Billionaires on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources.

1:19:23Clay:This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice.

1:19:57Clay:References to any third-party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network. All rights reserved.