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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Tom Russo on the Capacity to Suffer

Tom Russo oversees over $4 billion as general partner of the Semper Vic Partners and Semper Vic Partners (Q.P.) limited partnerships along with overseeing funds in discretionary, individually managed accounts for individuals, trusts and endowments. He is a graduate of Dartmouth College (B.A., 1977) and Stanford Business and Law Schools (MBA/JD, 1984).

Russo’s Semper Vic Partners fund has returned ~15.5% annually over the past 26 years versus ~6.1% for the S&P500.


I invest in multi-nationals like Nestle (NSRGY) and Unilever (NYSE:UL).

Nestle – I visited their headquarters outside Delhi, India. They have a spectacular factory there, $500 million headquarters, and there were people who lived in the slums outside the factory tapping into the electrical line. However, this will be an area of huge growth, as the 1.2 billion people become richer and buy products like Nestle.

My family recently toured all over Africa. The tour guide told us to stand still and don’t run if you see a lion, tiger, etc.

But he showed us a picture of a certain type of buffalo; he said run for your life if you see this type of buffalo.

It is similar in investing. At 5 p.m., we are told to stay the course even if things go down, but there is a difference between being stubborn and right.

The greatest businesses are the ones that have not only the ability to generate tremendous amounts of free cash flow, but more importantly the ability to re-invest those cash flows back into the business.

Kraft does not have the capacity to reinvest their cash flows, but Nestle does. Both have 14x PE multiples, but they are different types of businesses.

You can see this with Kraft, when they bought Cadbury at a very high multiple.

Nestle on the other hand just bid $1.7 billion for a 60% stake Hsu Fu Chi International, which is a Chinese confectioner and snacks maker; even though it likely will take a hit on earnings over the next quarter or two, and the street might not like the move.

I met Jean-Marie Eveillard of First Eagle Funds, and we talked about what he looked for in potential analysts.

Jean-Marie stated that he looked for an analyst who has the capacity, which he understood not to be an American trait.

As a way of screening for companies we might be interested in investing in, we look for a company where there is a family management that has the capacity to suffer.

1999 was the best year for us even though we were down 2%. This was because we had investors who had this capacity to suffer and the fact that our investors are long term and didn’t leave us – the next 10 years were great for us. We returned 8.62% net of fees over the past ten years.

Warren Buffett described 50 cents $1 billion, but if it takes 10 – 20 years to close that gap, we are not compounding returns at a very high rate.

So we want 50 cent dollars with capacity to grow and suffer good management, and our use of a low turnover rate to increase tax efficiency. We are close to 100% invested at all times.

When I was at Stanford business school, Prof. McDonald said foreign investors only trust their own countries. He had a good point, and I decided to look at some foreign companies.

I started investing in the 1980s, and I thought the accounting was fine for Nestle even though it is not GAAP. In law school I learned about the way the government gave entitlement programs and the way they were devaluing the dollar.

I do not hedge currencies, and this is one of the reasons.

In fact, 1% of my return might have been due to the strength of the non-dollar currencies of foreign companies which I invested in.

A Nestle CFO one was talking about a 700 year old temple, but the world is over 700 years old; great companies need to realize that they will not be around to manage their companies over time, stressing the need to prepare. We like companies that have second or third generation of management from the family, that are devoted to growing their companies.

Most of our companies are European based. People asked about currency risk.

I said first off, Nestle is Swiss franc not the euro; however, other companies like Heineken (HINKF) do have a lot of their profits in the euro zone. Heineken is growing their business in countries which are not based on the euro. For Unilever, 55% of profits are not from euro.

President Sarkozy suffered when he extended work From 12 – 14 hours, but as he signaled change would be happening, so some companies were able to prepare for these changes and to negotiate on favorable terms with unions.

The capacity to suffer was I concept which I developed out of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) meetings.

GEICO – If you just looked at the economics, the company had to report losses on every new customer even though NPV for every new customer was $1,500.

When Berkshire Hathaway took them private, GEICO did not need to worry about this. They spent $950 million on their advertising budget. Now, GEICO has 11 million customers, and Berkshire has added $13.5 billion in shareholder value.

Another good example of Berkshire’s capacity to suffer: In the years leading up to the crash, they were holding $55 billion in cash reserves and therefore had lower reported profits; in 2009 they had a huge cushion and were able to lend money to GE (GE) on very favorable terms. GE had been doing the opposite, with over $100 billion in short term financing, and that is why they were desperate for sticky money when the crisis struck.

Berkshire has really profited over the years from its capacity to suffer.

EU scripts - They could have continued invested in dying Newspaper business. Instead they invested $150 million to start TV networks, by fifth year they had fully operating revenue. They did this because they were family owned businesses, which wanted to maintain a great company for future generations. TV network takes $600 million instead of being a dying newspaper.

Same with Washington Post.

Wells Fargo (NYSE:WFC) also has that same capacity to suffer with Wachovia, and although it is still suffering, it will likely bring a lot of profits over time.

In our US portfolio we bought Hasbro in the $20s. The street expected the company to report earnings of $2.50 a share. However, the CEO said 30 cents per share should be used to grow overseas and make new movies. They are a family controlled company, which has this capacity to suffer from analysts, and short term speculators if the move will make sense in the long run.

Nestle – Nespresso

Nestle started to underwrite Nespresso for years, and having visited their HQ we discovered they were sipping Nespresso, just to get the correct/perfect formula for espresso – they are now a $3 billion company. Nestle is expanding as GDP per capita grows; this upward migration in emerging markets helps Nestle.

Loreal left Russia during ruble crisis, but Nestle stayed, even though they lost hundreds of millions, and bought new companies and buildings. They made a fantastic decision because of their capacity to suffer.

Pernod Ricard

The company owns many famous brands. In 2000, Diageo dominated the Chinese market, but they did not want to suffer in 2000 as so many others did and therefore turned down possible accretive opportunities. Pernod came in in 2000, and now sells most of the 6 million cases. China now makes up 15% of their revenue.

Chinese travel to Europe is helping to grow brands like Chivas, since Pernod has introduced the product already in China, new affluent Chinese consumer is familiar with the product when they visit places like Europe.

They acquired Absolut in 2008. The CDSs went up by 800! This was largely because Pernod helped to finance the purchase.

And now they are moving into India with Scotch. Addressable market in India is over 100 million cases of Scotch-Whiskey.


Now has a huge market in South Africa, and have an international presence because they have capacity to suffer earnings birth pains in new markets. The company’s revenue and volume has grown significantly in Africa and Asia from 2004-2009, while EBITDA margins went from over 20% down to 18%.

Now they have gone into beer market in Sub Saharan Africa, which currently is mostly corn based produced locally. As consumers become richer they will switch to SABMiller, which they just built 100 million plant in Angola.

Suffering in India, but they will eventually succeed. At present the consumption per capita is low, but it will grow.

Our portfolio is full of companies that have the capacity to suffer:

Ticker Company Industry Shares Value ($1000) % Weighting as of

NSRGY Nestle S A Reg others 9,762,471 561,834 11.27%
PM Philip Morris International Personal & Household Goods 7,992,441 524,544 10.52%
BRK.A Berkshire Hathaway Inc. Cl A Insurance 3,556 445,567 8.94%
CFRHF CIE FINANCIERE RICH others 5,889,428 341,514 6.85%
HKHHF HEINEKEN HOLDING others 6,862,582 330,337 6.63%
SBMRF SABMILLER ORD $0.10 others 7,743,191 273,994 5.5%
PDRDF PERNOD RICARD others 2,686,029 251,195 5.04%
WFC Wells Fargo & Co. Banks 6,861,117 217,566 4.36%
UN Unilever N.V. ADS Food & Beverage 6,188,552 194,073 3.89%

Q&A: Do you ever sell?

I have never written a sell ticket for Nestle, and it has returned 14.7% annually since I purchased the company in 1987. Clearly the company is different than it was when I initially invested, but culture has survived.

Nestle had $30 billion cash from the sale of Alcon.

One sell-side analyst said sell the company because they have too much cash, and another sell-side analyst said sell because they will spend the cash on a new acquisition!

Richmond was 8% position. I sold some shares because I had to buy two new positions.

Q&A: Difference between wasting money and re-investing cash flows profitably? We look for companies that can grow organically, and I think Kraft is a good example of a company which cannot do this.

We have had missed opportunities, but reinvestment capacity and understanding the business means I have good shareholders who let me invest over time.

Why do you not own Coke (KO)? We own Berkshire, which gives us a decent size exposure to Coke. We also own SABMiller which has some Coke bottlers. However, I do not think some sugared water is the most powerful brand company.

Disclosure: Long WFC


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

Rating: 3.6/5 (27 votes)


Greg Speicher
Greg Speicher - 8 years ago    Report SPAM
Great stuff Jacob. Please keep it coming.
Yswolinsky - 8 years ago    Report SPAM
Thanks Greg loved your article on Russo from a year or two ago, absolutely fantastic.

Interview with Tom Russo to follow; it is in the final stages of editing, looking forward to posting!

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