Thomas Russo: “Global Value Investing”  – Talks At Google

H/T HedgeFundConvos

Thomas Russo: “Global Value Investing”  – Transcript

Last three years we’ve suffered. Global brands. Almost a third of portfolio is in beverages.

Equities are the best way of investing for those capable of short-term pain for long-term gain.

Nestle – like Google, strong emphasis on culture. The people come and go, Google stays – same virtues and values.

Instead of letting the discount to intrinsic value close, let it compound over time – avoid the government.

The consumer doesn’t believe that there’s an adequate substitute for the brands we embrace.

Brands give pricing power, predictability of demand. It is brand loyalty that people/culture are responsible for creating.

Look for family controlled company. Exercise dominion over management for what’s right over next 10 generations.

US: typically no family entanglements, no image of shareholder. You want agents to be thinking about owners.

Public companies are far removed – about how to make the management more money – stock options.

Options lead to management caring way too much about time. Need to have security on control of the business.

Most public companies – error is on underinvestment up front.

Capacity to suffer – derived from Jean-Marie Eveillard – international investor, now at CBS. What he looks for in analysts.

Every day of life is worse than the day before. Returns don’t come easily. Be prepared to have deferred results.

Why consumer brands? Enduring. Number 1 cigarette in China post-communism: State Express 555. Hadn’t been in market, but still in mind of consumers. Look for ability to reinvest behind brands. Stronger brands = more regular FCF.

Likelihood of owner-minded businesses is high – tend to be more self-funded.

Most American companies not owned because constantly raising money to fund crummy businesses with bad results.

If a business is still controlled by a family, evidence that the biz at its heart is quite cash generative.

Not enough for cash generation, but for reinvestment globally – 95% of world exists, GDP escalating, income growing.

Brands with relevance abroad so that they can reinvest internationally.

This portfolio is primarily European (1) mgmt. comp/incentives (2) brands are abroad, embedded into culture. Leads to pricing power, which leads to reinvestment. (3) Multi-lingual/cultural managers.

Opening up new market – high fixed costs weigh on current income. If no supportive shareholders, you get activists.

Buffett & Geico – why only 2mln policyholders? Too expensive to grow. Every new policy loses $250 in first year. Ongoing make $150 per year. Reporting $300mln in operating profits. If wanted to grow 1mln new policies next year, would drop from $300mln to $50mln. Public co? Can’t pull it off. Inside BRK? Didn’t matter – no adverse selection, all about growing owners equity. NPV of each new insured = $2000. Today, 11mln policyholders. Book value does not capture it all. Need to have capacity to let income stmt bear burden.

Buffett in 2008 kept $50bln in 0.1% treasuries, suffered through. When GE rolled over, he was ready.

US Government – borrowing from $9tln to $18tln via QE – not invested but transferred. Money kept in overnight treasuries. Yield curve is short term. Massively understating what we’ve put ourselves into. Real cost of burden will show when rates go upward uncontrollably.

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Nestle – lots of $1bln brands. Multilingual, company doesn’t hurry. Our planning horizon is 35 years, try to break into 5 year segments.

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(These were pulled from his preso, another one from April 2015 here).

From subsistence to buying better to buying luxury. Investing behind that migration.

Nespresso – lost money for 15 years, but built it right. Built it to last and today do $5bln of business. Should’ve shut down Keurig, and more conscious of SBUX but still have a great business.
Diageo left China for the wrong reasons and now can’t get back in.

Pernod Ricard: When free-trade descends, we will sell so much authentic whisky, but for now we’re suffering.

SABMiller: when they invest, EBITDA margin comes down. Burdens reported profits due to up-front opening up markets.

Brown-Forman: Family ownership: risk factor vs positive. Decided to invest in Jack internationally. Years of burden on income statement. Voting control allowed them to do it unflinchingly. Next 10mln cases much easier than previous 10mln. Bought back shares w/ leftover cash.

Businesses have to have capacity to suffer, managers have to have capacity to suffer. My investors have to allow me to suffer. Will necessarily be out of step with markets if we’re going to add value long-term – 2000.

Questions…

MA thesis? Rise of commerce globally – same trends captured in rest of portfolio. 85% of world commerce is done via cash. They have partners in process of conversion, and they have capacity to suffer (financially, and in shareholder base). Met mgmt. in 2010 and they’re fine. Banga as CEO – bought first shares. Huge rolodex, globalist. His view: his job is to deliver to his successor a much stronger company. Since he’s at helm, gross dollar volume pass through at 13% growth. Incremental op income over volume at fixed base reinvested into programs. They have partners. In Africa, gov wants payment systems vs cash – biometrically activated cards or phones. Other countries want it for tax collection. 93% of commerce in Korea done through payment systems – no trust in people. Global commerce will grow, 85% in cash, will convert over time. So much work ahead of them that it’s a worth hold. MA margins lower than Visa because they’re investing more – that’s not a problem, it’s a good thing. Visa has to buy Europe – have their own problems. They don’t have the full globe yet, can’t invest yet. Not as harmonious. MA is way outspending.

Family controlled companies vs tiered share class? Blocking: thing that allows you to hold off activists – “no, we like it, and you can’t make us do XYZ.” Control vs economic interests – Google. I think it’s healthy, we’ll see with time. Allows you (Google) to do what you do without hot breathe of activist (see Yahoo).

Value investing in tech? Culture most important factor. Source ideas broadly, don’t come at it from the top. Technology is fast moving you’ll end up quickly obsolete without culture. Be willing to destroy what you’ve relied upon.

Thomas Russo: "Global Value Investing"  - Talks At Google
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