Renowned global value investor Tom Russo is famously known for the notion of “Capacity to Suffer.” When we think about Mr. Russo, “ Capacity to Suffer” is also the first thing that comes to our mind. Although I am a big fan of “Capacity to Suffer” myself, I think there are a few important qualities of Mr. Russo that are very much underappreciated.
1. Staying focused and knowing the edge of your circle of competency.
If we look at Mr. Russo’s portfolio since the 1980s, it is very clear to see that he has focused on a fairly narrow universe: food and beverage companies, tobacco companies, liquor companies, and media companies. Of course there are companies in other industries such as Wells Fargo (WFC, Financial) and MasterCard (MA, Financial) but by and large, he has put most of the money in the focused industries. In an interview with OID a few years ago, Mr. Russo shared his insights on focus investing and staying within your circle of competency:
“When you narrow your perspective to a handful of industries, you develop contacts within the industries, and develop judgements about industries. And that gives you an ability to leverage the use of your time – which is the scarcest commodity you’ll find as an investor. The notion of trying to become a learned scholar of the entire SIC code of industries is really quite an impractical challenge. So the benefit of focus is if you know something about the beer industry, moving from SABMiller to Heineken to InBev is really a facility that you can enjoy. And I think the universe of opportunities that arises from that focus pays you back over time.”
“One of the lessons I took from Warren Buffett (Trades, Portfolio) years ago was to define the areas you are comfortable with and stick to them. Branded consumer businesses are those for which I have a natural affinity and that I think I understand. While I would have a hard time on the weekend observing what DRAM chip is in the cellphone of the person walking next to me, I pay a lot of attention to what people are wearing, or eating, or smoking or drinking."
2. Bet infrequently and bet big – the “20 punch card principle.”
Russo holds 19 positions as of Q1 2015. What’s remarkable is that he has only bought one new company since 2010 – JD Decaux SA (JCDXF). I then went through the historic portfolio holdings of Semper Vic Partners, L.P (interested readers can find the data from SEC’s website). My observation, which is probably roughly right instead precisely wrong, is that Russo owned approximately between 110 and 120 stocks since 1990. However, only about 60 of them are material enough to have an impact on the portfolio. That’s less than 2.5 stocks per year. Of those 60 stocks, 5 of them never left the portfolio since 1990 – Berkshire Hathaway (BRK.A, Financial), Nestle SA (NSRGY, Financial), Heineken (XAMS:HEIA, Financial), Altria Group (MO, Financial), and Martin Marietta Materials (MLM, Financial).
In another interview, Mr. Russo said that he took the idea of 20 punch card from Mr. Buffett in the early 1980s when Mr. Buffett spoke to his class when he was in Stanford Business School. For him, the number of businesses that pass his checklist is rare and he really agrees that investors are best served to take a very long-term approach when investing in order to take advantage of one of the very few benefits the US government provides investors with – the non-taxation of unrealized capital gains.
3. Extremely high batting average
The result of combining staying with your circle of competency with the 20 punch card principle is the extreme rarity of permanent capital losses. Russo’s current holdings are all winners (it’s too early to assess JD Decaux SA for now). Throughout his career, he’s lost money very infrequently. While there is practical obstacles to come up with a 100% accurate assessment, it would not surprise me if Mr. Russo has a batting average of over 90%. McClatchy Company (MNI) was a mistake of commission that he admitted. But other than that, I can’t think of any other mistakes of commissions that he has committed in the past.
I wrote this article because I think the circle of competency and 20 punch card principles are rarely practiced. Even when I study some of the most successful investors, very few of them practice both of them, yet these two principles are arguably the most important ones that most investors should adopt persistently. Mr. Russo has done an absolutely fantastic job and his track record speaks for itself. We can improve our investment process ourselves by learning from and emulating Mr. Russo.
