Thomas Russo is a famous American hedge fund manager. He is a graduate of Dartmouth College with a BA degree in 1977 & later on went to study MBA at Standford Business & Law School completing the course in the year 1984.
Thomas A. Russo joined Gardner Russo & Gardner as a partner in 1989 & in 2014 become the managing partner of the firm. He manages approx. $9 billion through separately managed individuals accounts, trusts, endowments & Semper Vic Partners and Semper Vic Partners
Thomas Russo’s Investment strategy is influenced by the speech given by Warren Buffett at Stanford business and Law School when he was pursuing an MBA there. He described the background of the speech as it was a time when Warren Buffett was transitioning from cigar butt value investing to long term moat value investing.
I am not an expert on Mr. Russo’s investment strategy, but I have watched the following videos.
- Thomas Russo talks about Buffett and long term Investing
- Value Investing Live: Tom Russo
- Global Value Investing | Thomas Russo | Talks at Google(5 years ago)
- Global Value Investing | Thomas Russo | Talks at Google(2 years ago)
- Follow Buffett’s Investment Principles: Great Investor Tom Russo Continues To
- Great Value Investor & Global Brand Name Investment Specialist, Thomas Russo, Shares His Strategies
So you can call me a nerd.
Thomas Russo’s value investing is different the traditional value investing, he invests in companies that have long runways to re-invest their profits.
One of his greatest idea for investing developed, implemented & explained by him is the “Capacity to Suffer” which is covered in great detail in this article.
1. Problem with Cigar Butt Investing
He describes the problem with traditional value investing or cigar butt investing is that when we buy a low quality For example:- buying $10 worth of business for $4, but the problem with these is the time frame.
Time frame means when the stock will reach its intrinsic value. If the time taken is 2 years that the returns are 30% p.a. but if it takes 10 years then the returns are 6% p.a…And as the business is of lower quality the chance of an increase in the intrinsic value is very less.
2. Capacity to suffer
Capacity to suffer can explain by the famous Marshmallow experiment at Stanford University which was intended to study delayed gratification in children in the year 1972.
Where a group of children were presented an offer, they can eat a marshmallow kept in front as an immediate reward, or two small rewards if they waited for a period of time,
Capacity to suffer this means that whether management is willing to invest its profits to increase its capacity, sales, of future the profit by not caring about its present earnings.
The capacity to suffer increases the chances of widening of the moat and higher returns free-tax during the holding period increases.
Companies & management who are willing to increase their chance of survival & growth.
The capacity to suffer depresses the ROE and the ROCE of the companies for an extended period of time. But the fruit from this sacrifice can be extraordinary.
Warren Buffett’s GEICO Example:-
The cost of onboarding a customer cost $250 & the income generated from that particular customer was only $150 in that particular year, but the lifetime worth of that customer was over $2000.
When Warren Buffett brought a 50% stake in the company he asked the management what will it require to get more customers, he gave go-ahead to the management.
Now GEICO has more than 10 million customers against 1 million at the time of the purchase of GEICO. Now the value of the business is more than $20 billion but during the meantime, Warren Buffett’s ability to suffer has created extraordinary value for Berkshire Hathaway shareholders.
3. Professional management v/s Family run business.
The problem with the professional management is that they are compensated if the stock price reaches a certain value in order to do that they may undermine the long-term interest of the shareholders in order to get their stock options.
In contrast to that, a company that is family-owned can reinvest its profit and increase its wealth over generations instead of raising the stock price during the short term. It is very helpful for investors who invest in companies with a very long-term view also it is a very tax-efficient process.
Warren Buffett unwrote an insurance policy wherein if the value of the stock went down below $37 billion over a period of 12 years he has to pay the difference; in exchange for $5 billion. During this same time, the 2008 financial crisis came about & the stock portfolio stumbled he had to pass mark to market losses through the Profit & Loss Statements.
The policy went through as expected no money was lost, & in exchange, he got $5 billion, but during the period of 12 years, the stock fluctuation dampened the P&L. Which in the end resulted in huge value creation.
No professional management would have the insured this kind of a policy because they would have suffered on their stock options side if the market falls below an unexpected value during the period of 12 years.
4. Global Brands
The circle of competence of Thomas Russo are global brand, especially the liquor industry.
Why the liquor industry?
The profit margin of the famous brands in the liquor industry is generally high, as it commands a premium over other companies. So they have a lower additional capital requirement to grow their business.
Investing was around global brands Nestle & Heineken which were already present in emerging markets like India and China for many decades before he started investing in 1980 They were re-deploying their capital from developing Western markets to emerging markets to grow their business.
These brands were already there for decades & had established a competitive moat or as Warren Buffett says a “mind share”.
Also, this MNC had management who had the capacity to suffer as they had to pass huge costs establishing businesses in these new markets for years at that time.
5. Scope of reinvestment.
Some companies may or may not have the ability to reinvest their profit, for example, Ferrari the most famous brand & Car manufacturer in the world which is listed in the American stock market.
But their ability to re-invest or produce more cars at the same price would be very difficult and difficult to scale it up.
Companies with which have a good scope of investment are better to invest for example European FMCG companies who have been investing their profits from developed markets to emerging markets like India, China, Brazil, etc.
This mixture of global brands, emerging market & management who were ready to suffer in the short term for the long term yielded hugely profitable to Thomas Russo & his investors over years. That why Tom Russo portfolio consists of stocks like Berkshire Hathaway, Alphabet Inc., Nestle, etc.
Note: All the companies’ names used in the article are just for example purposes. They are not stock recommendations by any means.
Related Topic: 5 Investing Rules of Charlie Munger.