Home Value Investing Giverny Capital 2016 Letter: The Podium of Errors – Valeant Pharmaceuticals

Giverny Capital 2016 Letter: The Podium of Errors – Valeant Pharmaceuticals

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Giverny Capital – fund is run by Francois Rochon .. has done 15.3%pa since 1993beaten S&P500 by 5%pa for 21 years

2016 Hedge Fund Letters

Like Buffett he focuses on look-through earnings of the companies he owns .. not share prices…

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Letter looks at the outlook for the US, why he thinks ETF’s are a fad, how he ignores political environment and the mistakes he made in Valeant [he still doubled his money but got out when geared up and hiked drug prices] and not owning enough Mohawk industries

“At Giverny Capital, we do not evaluate the quality of an investment by the short-term fluctuations in its stock price. Our wiring is such that we consider ourselves owners of the companies in which we invest. Consequently, we study the growth in earnings of our companies and their long-term outlook.”

“Looking at economic fundamentals, the profits of American companies stagnated in 2016 for the second year in a row. Several causes explain this stagnation of profits on a global scale and we see this economic sluggishness as temporary. As we wrote in our first quarterly letter, we believe that corporate earnings power in the US is higher than what 2016 suggests.

A longer-term horizon provides more perspective on the profit growth of the companies in the S&P 500. Since I started in 1993, the companies comprising the S&P 500 have increased their profits by 450%, which is equivalent to an annual growth rate of 7.3%. The stock market rose from 423 at the end of 1992 to 2239 at the end of 2016, which is an increase of 429% or 7.2% annually. In the long run, there is a direct correlation between the performance of the stock market and the performance of the underlying companies. If dividends are included, the annual return of the S&P 500 has been over 9% per year since 1993.

Imagine everything that has happened since 1993 (when the Internet was still in its infancy). There were two recessions, six US elections (with three Democratic terms and three Republican terms). There have been wars, economic and political crises, horrendous terrorist attacks and worries of all sorts (remember the "Y2K bug" or concerns about the "US debt ceiling" and the "fiscal cliff" of 2012?) Yet, markets did well for the simple reason that all of the companies that make up the index did well. This was achieved despite all the crises and calamities that plagued our civilization. DESPITE is the key word in this sentence.”

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The Flavor of the Day for 2016

Every year, we present to you what we consider the “flavor of the day” in the financial world. In our opinion, the top prize for 2016 goes to index funds.

It’s not a coincidence if you have a feeling of déjà vu, since we proclaimed index funds as our “flavor of the day” in our 1998 annual letter. At the time, several investors, both institutional and private, had abdicated from active management and moved towards passive investing. The S&P 500 was then perceived by many investors as "unbeatable" and, as always, the trend of the day eventually subsided. The period from 1999 to 2002 was our best relative period to date, with the Rochon Global portfolio achieving a total return of +46% versus -22% for the S&P 500 over those four years.

At the risk of repeating what I wrote 18 years ago, the basic principle behind the purchase of index funds is perfectly legitimate. Indeed, the vast majority of portfolio managers do not beat their benchmarks so therefore an investment approach that favors investing in all the holdings making up market indices makes a lot of sense for those who do not know how to choose superior companies or managers capable of creating value. Obviously, I would be remiss if I did not point out that because our primary mission is to do better than the indices, which we have done since 1993, we are therefore in favor of an active (and assiduous) stock selection process.


On Politics..

Investing in the stock market is not about betting on the vicissitudes of the political world (and voters). Rather, investing is about owning businesses and nothing else. Strong companies do well because they create unique products and services that serve their customers and potentially enrich their shareholders. Political trends pass but good companies endure. I believe that the vast majority of companies that are doing well do so not because of politicians but in spite of them.

We will surely face another set of political uncertainties and economic worries over the next decade. They will have one thing in common: they will all be unpredictable. Despite this, what is predictable for a seasoned investor is that owning shares of quality companies will give rise to positive financial rewards over the long run.

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