These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.
This presentation was not so much about presenting on one stock as it was about explaining his way of thinking, and the kinds of long-term decisionmaking he thinks is important for corporations … the things that Wall Street doesn’t like but that should be rewarded by long-term investors.
Russo has some “core principles” that he works with:
Wants to buy fifty-cent dollar bills — no surprise there, looking for a margin of safety.
Wants a “Capacity to Reinvest” — he wants long-term investments that can compound in taxable accounts, so he wants companies that can direct their free cash flow to growing the business for decades with a strong brand name and goodwill. The opening up of foreign markets is a great story for global consumer businesses.
And he also wants a “capacity to suffer” — you have to be willing to invest enough up front in your future growth that you can tolerate losses as you open up new markets.
He doesn’t like it when management underspends so they don’t look bad by losing money — management needs to be willing to suffer (family controlled companies, or those with big management stakes, do this better than most because they can fight off activist shareholders who want instant profits). 60% of his portfolio is family-controlled companies.
Example: All the big global spirits companies are popular in China, and China is very brand conscious, but they have only one percent of that market so if they have the capacity to invest in China there should be excellent long-term growth.
Same with the big beer companies, similar profile where locally made products dominate but international brands can organically invest in future growth.
Example of failing to patiently develop a market and reinvest: General Mills. They spent decades becoming the dominant US yogurt company, and they stopped looking over their shoulder and didn’t think to invest in Greek yogurt or invest in new products, so they were so straitjacketed by their dependence on earnings from their yogurt business that they didn’t reinvest anything in those yogurt brands. And now the category has been redefined by other companies, let by Chobani.
His portfolio, which is very concentrated at the top: