Tom Russo is a partner at Gardner Russo & Gardner LLC. According to Insidermonkey.com, his company managed to beat the Standard & Poor's 500 index by 4.7 percentage points annually between 1984 and 2011.
Last year, Russo gave a talk on his value investing philosophy at Google which Iāve posted below. This video was my first exposure to Russo, and I learned a lot. Russo was a student at Stanford University in 1982 when he attended a presentation given by Warren Buffett (Trades, Portfolio). He credits Buffettās presentation for inspiring him to pursue a career in the investment industry.
Russo states in very succinct terms how Buffett evolved from Benjamin Grahamās teachings which is growth is better than discount. In the old value investing model, investors would focus on buying a dollar for 50 cents.
There are some downsides with this approach. First, the rate of return is dependent on how quickly the market realizes the value gap. The longer it takes for the gap to close the less an investorās annual return would be. Second, there are tax consequences to buying and selling stocks at a discount. The strategy that Buffett has come to favor is to find companies that have high rates of return on capital so they can reinvest in themselves and compound wealth.
My only previous knowledge of Russo was that heās associated with the phrase ācapacity to suffer,ā which he credits another value investor, Jean-Marie Eveillard, with introducing. Russoās investing style focuses on consumer brands with pricing power that can reinvest for the long term. The capacity to suffer describes companies that can overlook short-term financial pain to prosper in the long term.
In the video, he gives examples of companies that invested properly for the long term as well as companies that went half way and were then disrupted by activist investors with short term goals. He stresses that incentives need to be set properly for companies to truly have a long-term perspective. As a result, Russo says family owned businesses with a controlling interest is one area he prefers.
He also favors European companies. The reason is that European managers are usually paid in cash and not in time-sensitive stock options. Russo believes that global commerce will be a big tailwind for prosperity as only a small percentage of the world lives in developed countries. He believes European companies are better prepared to expand into international markets because of their long-term outlook and their multicultural sensibilities. He uses Nestle (XSWX:NESN, Financial) as an example of a company where its top executives speak four languages on average.
I was pleased to learn that GuruFocus interviewed Russo last year and published it in two parts. The Google video and the GuruFocus interview compliment one another. You can read the interview here and here. My notes for the video with the time stamps for each topic are posted below.
| Minute | Topic | Comment |
| 00:00 | Intro | Discussion on delayed gratification |
| Ć | Ć | Russo focuses on businesses with the capacity to suffer. |
| Ć | Ć | Companies that reinvest capital at high rates of return so wealth continues to compound |
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| Ć | Ć | One-third of his portfolio was in beverages. |
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| 7:45 | He believes equities are the preferred investment choice for those who can endure short term pain. | Investing is about what you end up with. |
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| 9:00 | Nestle is one of his largest holdings. | They talk extensively about corporate culture. |
| Ć | Ć | Employees will change but the business should endure. |
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| 10:45 | Russo was at Stanford when he saw Warren Buffett (Trades, Portfolio) speak in 1982. | Value investing at that time was thought of as buying a dollar for 50 cents. |
| Ć | Ć | Internal rate of return depended on how quickly the value gap closed. |
| Ć | Ć | In this model, tax is a problem. |
| Ć | Ć | Over time, Buffett learned to prefer growth over discounts. |
| Ć | Ć | Buffett wants businesses that grow and compound over time so he can defer taxes. |
| Ć | Ć | There aren't that many good businesses in the world. |
| Ć | Ć | As an investor you should follow businesses that you find interesting. |
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| 12:45 | Russo found consumer brands to be most interesting. | Buffett talked about how See's candy allowed him to raise prices regularly. |
| Ć | Ć | Russo notes how he observed someone on an airplane ask for whiskey. |
| 13:30 | Ć | When the attendant disclosed that they didn't serve his favorite brand, the passenger chose water instead. |
| Ć | Ć | Russo looks for brands with that type of loyalty. |
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| 14:20 | Ć | Buffett said you need to find managers who are owner minded if you want to hold a stock for the long term. |
| Ć | Ć | Otherwise, managers will steal from investors I.E. agency costs. |
| Ć | Ć | This is very hard to find. |
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| 14:45 | Russo has found long term-minded managers in family controlled companies. | Ć |
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| 15:30 | Public companies are removed from shareholder interests. | Public companies are overly concerned about time and meeting milestones set by Wall Street. |
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| 17:00 | Russo likes companies that completely ignore short-term goals in pursuit of long-term prosperity. | In order to pursue this goal, this must have security and control. |
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| 18:00 | Russo reads a phrase from Google's IPO letter where the focus is on the long term. | Russo believes that most public companies make the mistake of underinvesting upfront costs because it helps their short-term results. |
| Ć | Ć | As a result, many companies' results are overstated. |
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| 18:35 | Russo says the phrase ācapacity to sufferā was coined by another value investor, Jean-Marie Eveillard. | Eveillard wanted that quality in his investment team. |
| Ć | Ć | āCapacity to sufferā is very rare in America because of impatience and expectations. |
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| 20:00 | If you start with the mindset that you want to invest in something that you're going to hold for a long time, the company needs to be able to reinvest internally. | Ć |
| Ć | Ć | Ć |
| Ć | Consumer brands tend to be very enduring. | He tells story of the day after communist China opened its markets; the most popular cigarette was a brand that wasn't allowed in the country for 55 years. |
| Ć | Ć | Somehow consumers remembered that brand. |
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| Ć | Ć | Strength of brands tends to allow for more regular cashflow because of pricing power. |
| 21:00 | Ć | Likelihood of finding owner-minded businesses goes up because over life of the company, they tend to be more self-funding. |
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| Ć | Ć | Many public companies don't have controlling owners because they're crummy businesses and may need to keep raising equity. |
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| 22:00 | Russo wants to have brands that have relevance abroad where the developing world's income is growing. | This allows the companies to invest maturing market cash flows into growing markets. |
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| Ć | The portfolio he oversees is primarily European. | 1) European managers aren't typically compensated in stock options. |
| Ć | Ć | Managers are paid in cash so they aren't as concerned about stock market price volatility. |
| Ć | Ć | European brands have a longer history. |
| Ć | Ć | With longer histories, long term focused corporate culture is more ingrained. |
| Ć | Ć | The brands have pricing power which allows them to reinvest. |
| Ć | Ć | Ć |
| 24:45 | Companies with aspirations to expand globally need to have multicultural managers. | It's rare to find people who speak more than three languages in America. |
| Ć | Ć | Not rare in Europe |
| Ć | Ć | At Nestle, the top 100 managers speak four languages on average. |
| Ć | Ć | At Kraft Foods in Illinois, managers aren't multilingual. |
| Ć | Ć | Ć |
| Ć | Russo gives the example of how people in other parts of the world love cricket. | 1.7 billion people love cricket, but people in the U.S. don't have a clue about it. |
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| 26:30 | Kraft had the ability to grow and expand in the U.S. but not abroad. | They don't have aptitude for marketing to other cultures. |
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| 27:30 | Russo discusses Cadbury Schweppes as a company that lacked the capacity to suffer. | He talks about their expansions into China. |
| Ć | Ć | After introduction to first city, their expansion plan was massively expensive, and it made reported income look horrible. |
| Ć | Ć | Halfway through the expansion, activist investor Nelson Peltz intervened. |
| Ć | Ć | That destroyed future growth for short-term profits. |
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| 30:30 | Google and Amazon (AMZN, Financial) are two companies with capacity to suffer. | Ć |
| Ć | Ć | Ć |
| 31:00 | GEICO has great example of capacity to suffer. | Buffett asked why GEICO didn't have more insurance policies. |
| Ć | Ć | The CEO responded that introducing new insurance policies lost money at the outset; however net present value of new policy would be $2,000. |
| Ć | Ć | No public company would have been able to introduce new policies if it was beholden to short term-focused shareholders. |
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| 33:30 | Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) capacity to suffer | Buffett held $50 billion in cash in 2008 despite losing billions in interest. |
| Ć | Ć | He recognized the short-term risk and saw the long-term opportunity. |
| Ć | Ć | Ć |
| 38:00 | General Electric (GE, Financial) is an example of U.S. short-term focus. | Overnight markets shut down and Lehman busted in 2008. |
| Ć | Ć | GE had $100 billion that it couldn't access. |
| Ć | Ć | On other hand Buffett had $50 billion and loaned $12 billion to GE at 12% plus options. |
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| 40:00 | Russo talks about U.S. government borrowings. | The U.S. has taken borrowings from $9 trillion to $18 trillion with Quantative Easing. |
| Ć | Ć | He thinks at some point interest rates will go up and we'll feel the consequences. |
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| 41:45 | Talks more about Nestle | It has multiple billion-dollar brands that are aspirational in the developing world. |
| Ć | Ć | When he first invested in Nestle, the CEO at the time said the company's planning horizon was 35 years. |
| Ć | Ć | They break the plan up into five-year increments. |
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| 43:00 | Russo presents slide depicting consumer necessities and desires as income goes up. | Nestle's Nespresso brand took 15 years to break even. |
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| 45:00 | Discussion of Pernod Ricard (RI, Financial), a spirits maker | Pernod Ricard took advantage of Diageo's (DEO, Financial) mistake in China. |
| Ć | Ć | Diageo was focused on short-term profits and left during a downturn. |
| Ć | Ć | Now, Diageo is struggling to get back in. |
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| 49:00 | Pernod Ricard's ownership structure allows long-term focus. | Ć |
| Ć | SAB Miller was taken over. | Russo was disappointed because it had the right mindset. |
| Ć | Ć | Revenues were growing, but EBITDA margin plunged as it stepped up investment. |
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| 50:40 | Brown-Forman Corporation (BF.A, Financial), spirits maker | Russo notes the irony that a family controlled business with a long-term focus is forced to cite it as a risk factor in the SEC filings. |
| Ć | Ć | Russo invested in it in 1987. |
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| 54:45 | Businesses have to have the capacity to suffer. | He shows table of his investment returns. |
| Ć | Investment managers need to as well. | Ć |
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| 56:30 | Question-and-Answer Session | Ć |
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| Ć | What are your thoughts on Mastercard (MA, Financial)? | At the moment 85% of global commerce is still conducted in cash. |
| Ć | Ć | The company is positioned to capitalize on the rise of global commerce. |
| Ć | Ć | They have partners in the form of governments IE in Africa. |
| Ć | Ć | Some countries want to enhance the form of tax collection. |
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| 1:02:45 | What are your thoughts on tiered share classes for ownership structure? | He likes structures that allow management to prevent short-term focused activists from intervening. |
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| 1:04:30 | Do you think there's a place for value investing in technology companies? | Companies with a culture that allows it to destroy itself are very important. |
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| 1:07:00 | How do you distinguish between companies wisely spending for the long term versus companies that are short-term focused? | Capacity to suffer is not enough IE Barnes and Noble's (BKS, Financial) Nook platform. |
| Ć | Ć | Gives example of newspapers that adapted well from radio to TV to cable |
| Ć | Ć | However, newspapers did not adapt to the Internet. |
