“I consider myself to be a farmer—not a hunter. And I think most people on Wall Street are hunters. They like to fell big beasts and I’m very comfortable planting a few rows and just tending to them carefully.” – Tom Russo
Thomas Russo is the Managing Member of the General Partner of Semper Vic Partners, L.P., and Semper Vic Partners (QP), L.P., limited partnerships whose combined investments are roughly $3 billion, along with overseeing substantially more fund through separate accounts for individuals, trust, and endowments. He is a graduate of Dartmouth College (BA, 1977), and Stanford Business and Law Schools (JD/MBA, 1984). Memberships include Dean’s Advisory Council for Stanford Law School, Dartmouth College’s President Leadership Council, and California Bar Association. Mr. Russo is a charter member of the Advisory Board for the Heilbrunn Center for Graham & Dodd Investing at Columbia Business School. He serves on the boards of the Winston Churchill Foundation of the U.S., Facing History and Ourselves, and Storm King Arts Center.
Tom Russo: Investment philosophy
Mr. Russo’s investment philosophy is based upon return on invested capital primarily through equity investments, investing in companies with strong global brands that offer huge growth potential in emerging markets. Mr. Russo is a value investor, with an emphasis on value and price, seeking out companies with strong cash-flow traits, strong balance sheets and a past of generating high rates of return on their assets. Finding such businesses at a reasonable or bargain prices is difficult, hence Mr. Russo’s approach is mainly focused on a limited number of industries in which companies have the aforementioned characteristics. The firm concentrates its investments in the food, beverage, media and tobacco and media sectors.
Key points of Russo’s investment philosophy:
Russo learned a lot from studying Buffett’s writings and going to Berkshire Hathaway annual meetings.
Reduce risk by investing in companies with strong, predictable cash flows.
Focuses on whether management thinks about themselves first or shareholders.
Russo believes it takes good management to hold a stock a long time.
Narrowly focused by industry food, tobacco, media, and beverage companies. This frees up a lot of research time and allows him to very clearly define his area of expertise: you cannot value what you do not understand.
Possible candidates must have:
- Powerful brands.
- Products provide a “sense of lack of substitutes”, that is, a reluctance to switch.
- Predictable cash flows
- Pricing power; important in an inflationary environment.
Russo finds that you pay more attention to businesses you are interested in and they are easier to track.
Sell side research is short term oriented.
Russo looks out 5-10 years.
- Uses Enterprise Value to EBITDA
- Allows Russo to compare businesses globally
- He wants to pay a modest multiple. 8x EBITDA is a general rule of thumb but it varies by company.
- Even though he purchases undervalued securities, because of his long holding periods, most of his returns have come from growth
- He wants the companies in his portfolio to be growing, that is, he does not want a stale basket of assets which lowers his IRR.
Lots of options are a red flag.
A controlling family may shoot down a management team that wants excessive options.
Another risk is when management risks the business; they risk want they need for what they don’t need; for example, a large transaction that promises a poor return on capital.
Below are Russo’s top holdings from You can view Russo’s recent trades which are released every quarter from the 13-F; however the holdings change very infrequently. One holding which will not show up is Cadbury, which Russo owned for many years, and bought more shares as the market tanked in 09. Cadbury was taken over by Kraft at a very high premium in 2010, and Russo is not a fan of Kraft so he sold out of the position.
Tom Russo bought Nestle in 1987, Berkshire Hathaway in 1982, Heineken in 1989.
Some great notes on Tom Russo’s style of investing from the 2014 Value Investing Congress in Las Vegas. The full set of notes can be found at Market Folly – Read more: http://www.marketfolly.com/2014/04/thomas-russos-presentation-at-value.html#ixzz3OFvru2oL
The full presentation can be found here.
- Core principles – fifty cent dollar bill, capacity to reinvest and capacity to suffer.
- Has long owned spirits companies, owns four of them currently. Entering the China spirits market – hasn’t deeply penetrated the market yet. Over-time should develop. Over half a billion cases in the Chinese market – plus express a desire for these beverages (i.e. cognac).
- Indian market is another huge potential market, only 1% of whiskey is from Scotland.
- Need to invest the right amount of money to grow the business – will lose money at the start (upfront costs like distribution, marketing, etc.). Very expensive early on. It burdens income in the beginning.
- Companies who have been able to invest in growth in a smart amount, generally are family-controlled companies, for which the street and activists cannot interfere.
- 60% of portfolio is family-controlled businesses.
- General Mills won over decades the yogurt war, relished the $300MM earnings contribution from yogurts at the peak and some point along the way they missed the greek yogurt trend. Didn’t devote money to protect the segment – believed they didn’t have flexibility. Greek yogurt was allowed to grow, to the point it is untouchable. General Mills had the capacity to reinvest in that category and missed it. Now Chobani will garner a $5B valuation (est.).
- Capacity to suffer example – BRK’s equity index put options a prime example, Warren got premiums to invest for 15 years, while taking a couple years of reported earnings hit (the end sum from premiums invested is what needs to be viewed instead).
- Mastercard and Nestle are examples of companies which reinvested into their business and temporary depressed earnings for LT growth.
- 1999 was Tom’s best year ever – he was down 2%, but the setup presented was amazing (i.e. buying opportunities).
- Why aren’t these principles followed? Wall Street is focused on short term results. Culture had changed to chasing quarterly results.
- Cash Flow conversion ratio – another street mistaken emphasis. Tom wants companies that can reinvest their cash – while the street wants a majority of cash to be distributed.
- Avoid family controlled company – another Wall Street mistaken concept. Talked about the differences between Comcast and Adelphia (went bankrupt). As investors we can gauge the caliber of people running the business.
- No ONE variable is the answer, you need to look at all the factors to stay aloft.
- To summarize – find businesses with a longer term horizon.
Tom Russo: Holdings
Gardner Russo & Gardner LLC’s top ten holdings as of September 2014:
- Berkshire Hathaway Inc Del
- Nestle S A
- Mastercard INC (NYSE:MA)
- Philip Morris Intl INC (NYSE:PM)
- Wells Fargo & Co NEW (NYSE:WFC)
- Heineken Holdings
- Cie Financiere Richemont AG ZU
- SABMiller PLC
- Pernod Ricard ACT
- Anheuser Busch Inbev SA/NV (NYSE:BUD)
(Note form 13F-HR does not include cash balances.)
Current holdings according to 13F-HR.
Tom Russo: Quotes
“I consider myself to be a farmer—not a hunter. And I think most people on Wall Street are hunters. They like to fell big beasts and I’m very comfortable planting a few rows and just tending to them carefully.”
“Investors are unable to get a clear view on 2006 because there’s so much noise in the numbers. There’s the competitive environment in Spain, there’s the impact from Kraft activities and there were currency swings. It doesn’t in any way impact the progress made on the domestic product.”
“We’re talking surgery, not amputation.”
Tom Russo: Articles
- Analyzing Special Businesses: When Margins Matter
- Tom Russo on the Capacity to Suffer
- Cash-flush Buffett loads elephant gun – Times LIVE
- Conversations With Tom Russo; Buys Lamar Advertising, Nextera Energy, Berkshire Hathaway, Wells Fargo
- Buffett’s Berkshire Returns to Profit on Derivatives…
- Unilever CEO Taps P&G Playbook as Sara Lee Heralds Acquisition
- Berkshire Raises Wal-Mart Stake, Adds Exxon, Nestle
- Thomas Russo: A Graham and Dodd Global Investor
- Nestle Withdraws Forecast; Sales Miss Estimate (Update1) -…
- The Long-Awaited Spinoff of Philip Morris From Altria Is…
- Buffett’s possible successor sees profit in catastrophes
- Tom Russo – Value Investor Congress 2006
- Oak Value Interview: Know the Business
- AIG May Rise as Greenberg Seeks Management Shakeup (Update2)…
- AIG’s Greenberg Felled as Probes of Insurer’s Practices…
- Spring 2012 Issue of Graham and Doddsville
- Bloomberg Special on the Future of Value Investing from Columbia Business School
- Thomas Russo Visits Professor Greenwald’s Class
- Thomas Russo – In Investing, “Then What?” Is A Very Good Question
Tom Russo: Newspaper cuttings
- Coca-cola Drops Quaker Bid .
- Quaker Oats shares bubble on takeover talk But it’s…
- Little guys who fled stocks may be commodity victims
Tom Russo: Videos
- Value investor Tom Russo focuses on elite global brands and their ability to attract hordes of new customers in emerging markets.
- Russo: Berkshire’s Combs, Weschler Great Investors
- Buffett Letter Is `Confident, Educational’: Russo
- Tom Russo on Why Investors Should Not “China Cleanse” Their Portfolios
- The Wisdom of Tom Russo – BeyondProxy | Value Investing
- Tom Russo on the Berkshire Hathaway Annual Meeting
- Tom Russo on the Event That Shaped His Path as an Investor
- Superinvestor Tom Russo on Portfolio Management and His Favorite Valuation Metric
- Tom Russo on How Investors Can Benefit from Europe Being a “Pass-Through Vehicle”
- Thomas Russo Value Investors Forum 2009
- Tom Russo & David Nadel
- Wallace Weitz & Tom Russo – Dynamic Value Duo