In his recent Master Series interview, Francois Rochon discussed a number of topics including his investment edge, tech stock valuations, Berkshire, and how you can miss out on some great buying opportunities by being too precise on valuation. Here’s an excerpt from the interview:
Year after year what I realise is most mistakes I’ve made is not paying perhaps a higher price than I should have for great companies. I think I probably have already evolved on that. I’m ready to pay 20 times earnings for good growth companies but sometimes there’s not that much difference between 20 times and 25 times.
There is between 20 and 60 but between 20 and 25, perhaps I’m trying to be a little too precise, or to prudent, and sometimes miss the big picture that if you find a great growth company and it doubles its earnings every five years, well perhaps valuation to some degree should be flexible a little bit. So I probably have evolved a little bit over the years with that.
You have to be careful because how much do you stretch? You can stretch to 25 and then 30 and then 40, I mean it never ends. You have to accept you still want a margin of safety and I think that’s the key element in The Intelligent Investor and when you read Ben Graham’s writings. Seventy years later, I believe that the key lesson from Ben is still the importance of margin of safety.
The margin of safety is not just in the price you pay, it’s also in the quality of the business, it’s in the balance sheet of the business and the accounting and also in terms of the quality of top management. When we bought shares of Constellation Software, I don’t remember how much we paid but we paid a reasonable valuation, I think 18 or 19 times earnings. To us the real margin of safety was Mark Leonard. We thought he was a great investor, a great manager and I mean to us it was not the valuation that was the key criteria it was really because of management.
You can read the entire interview here:
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