Giverny Capital's Francois Rochon suggests 8 keys to develop successful equity investments. Considering its performance (from 1993 +14.3% average annual vs. +9.2% of the S&P 500 index in the same period), it is worth listening to!

HOW TO INCREASE THE LIKELIHOOD OF SUCCESS IN EQUITY INVESTMENTS?

In this article we share 8 equity investments advices from “The Keys to Successful Investing“, a short paper by Giverny Capital, the investment fund headed by Francois Rochon.

Considering that since 1993 Rochon’s US portfolio has achieved an average compound return of 14.8%, compared to 9.2% of the S&P 500 index, and that many of these recommendations are shared by the most important investment gurus, we suggest you a careful reading!

1) Investing in shares and “feeling” shareholders of the company to all intents and purposes

If you look at the great masters of investment and their modus operandi, there is one thing in common: these investors behave like entrepreneurs.

When they purchase shares in a company, they first acquire part of an enterprise. Whether they buy a hundred or more than one million shares in a listed company, these gurus do not consider it an investment other than buying the company as a whole.

Giverny Capital's Francois Rochon suggests 8 keys to develop successful equity investments. Considering its performance (from 1993 +14.3% average annual vs. +9.2% of the S&P 500 index in the same period), it is worth listening to!

2) Stay invested

When making an equity investment, nobody can expect to buy low and sell when the stock price is much higher.

This is one of the most frequent mistakes made (not only) by novice investors.

Any equity investment, if it is not speculative, must allow a reasonable period of time for the security’s value to emerge.

Giverny Capital's Francois Rochon suggests 8 keys to develop successful equity investments. Considering its performance (from 1993 +14.3% average annual vs. +9.2% of the S&P 500 index in the same period), it is worth listening to!

3) Gain profits from market fluctuations rather than suffer them

“Mr Market’s metaphor”, as Warren Buffett‘s mentor Benjamin Graham taught us, illustrates the attitude the rational investor must adopt when approaching the market.

In fact, the irrationality of the market (alias Mr Market) is a source of investment opportunities.

Those who remain rational and not panicking know that long-term stock market prices will reflect the fair value of the underlying enterprise. Therefore, from this point of view, market fluctuations are allied with the investor and not enemies.

Giverny Capital's Francois Rochon suggests 8 keys to develop successful equity investments. Considering its performance (from 1993 +14.3% average annual vs. +9.2% of the S&P 500 index in the same period), it is worth listening to!

4) Leave a margin of safety

The margin of safety concept is borrowed from the engineering world.

When an engineer is building a bridge that has the ability to support a five-ton truck, he will build it so that it can support an eight or ten-tonne truck.

This represents a safety margin.

When we use this concept in the context of investing in shares of a listed company, it represents the difference between what is thought to be true of the company against the value of the share price at the time of analysis.

The starting point is the company’s intrinsic value, which we theoretically determine by calculating the current value of future cash flows generated by the company over its lifetime. Since this is a highly subjective analysis, we must consider a large margin of error.

The more irrational the market is about the value of a company during a selloff, the lower the price we can pay for the company’s shares, thus increasing our safety margin.

In addition, it should be considered that the safety margin can also be assessed by reference to more qualitative factors.

For example, the quality of the management team, competitive advantages and/or intellectual property, to name but a few. Finding solid companies at attractive prices is the cornerstone of this approach.

Giverny Capital's Francois Rochon suggests 8 keys to develop successful equity investments. Considering its performance (from 1993 +14.3% average annual vs. +9.2% of the S&P 500 index in the same period), it is worth listening to!

5) Remaining within your own field of competence

When it comes to selecting the companies to invest in, Warren Buffett is guided by what he calls his “circle of competence”.

What is of fundamental importance, he says, is knowing the limits of one’s own competences. If you do not know the difference between onshore drilling and offshore drilling, you probably do not have to make equity investments in this area.

Adventure outside one’s circle of skills significantly increases the likelihood of making a poor investment decision. In the market, in order to achieve better returns than others, it is necessary to know better the value of the companies in which you invest (the others are the market).

To be successful, it is important to carefully analyse the companies that you can understand and evaluate well.

6) Know when to sell your equity investments

Philip Fisher, the famous equity investment guru once said:”If you’ve done your job well when you’re buying, the time to sell is almost never”. Ideally, it would always like to keep exceptional companies in the portfolio, but a realistic investment approach is needed.

The reasons for selling a listed share should be harmonised with the reasons for buying it. The sale should be considered if these reasons no longer exist.

In other words, if the investor realises that he has made a mistake in his analysis or the company’s prospects have deteriorated, then it is time to sell.

A more pragmatic reason for selling is that most investors do not have unlimited capital and can sell even just to invest in another company whose potential seems brighter.

7) Learn from your mistakes

Mistakes are inevitable in the investment world: the key is to recognize them quickly and learn from them.

There are two categories of errors: the first is the failure to make a purchase decision, while the second is the (errated) decisions taken.

Other errors fall into the category of “psychological prejudices”, such as anchoring and overconfidence, which are good examples.

The “anchorage” is linked to the fact that our human nature is such that we often remain anchored to the first impressions, even when these perceptions are revealed to be disconnected from reality.

For example, consider an investor who bought two years ago at 50 $ any stock that is now trading at 25 $, after announcing lower than expected profits.

The investor remains anchored in the notion that his stock is worth 50 $ simply because it represents the purchase price. In fact, there is no link between the price paid per share and the value of the company. What matters is the future prospects of society.

Finally, overconfidence often manifests itself in a different form. His only remedy is humility.

Giverny Capital's Francois Rochon suggests 8 keys to develop successful equity investments. Considering its performance (from 1993 +14.3% average annual vs. +9.2% of the S&P 500 index in the same period), it is worth listening to!

8) A constructive attitude

What differentiates successful investors from others is not related to intelligence, but to attitude.

Warren Buffett often uses the adjective “rational” to describe good investors.

Rational investors are not affected by declines in share prices or crises.

In addition to a rational attitude, another important quality is the ability to learn and progress at all times. This is because on the stock markets we must constantly evolve, remaining in a constant state of learning and combining the passion for equity investments with the right amount of humility.

It is not at all easy – on the financial markets – to find the right balance between having a strong confidence in oneself and in one’s investment choices and remaining constantly humble.

In conclusion

Giverny Capital’s paper opens with this quote by Sir John Templeton: “To obtain better results than the others, you must do something DIFFERENT from the others“. BullsandBears.it also think that sometimes following the advice and long-term successful strategies of some (selected) investment guru is not such a wrong decision….

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