market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Thomas Russo of Gardner Russo Gardner who talked about global value investing.


Tom Russo's Value Investing Congress Presentation

•    Core principles – fifty cent dollar bill, capacity to reinvest and capacity to suffer.


•    Capacity to reinvest is one of the most exciting factors. In the past sold some domestic names which couldn’t reinvest in the long term (focus on international brands, especially consumer products).
•    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).
•    The mainland Chinese consumers are on the move – over 100 million will travel around the world and experience products such as Johnny Walker/Hennessy and will be natural brand ambassadors. That is just the Chinese market alone.
•    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. The right way to enter? Managements need to have the capacity to suffer, being able to take a hit to earnings in order to invest in new investments. I.e. – don’t be short termed.
•    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.
•    Also like businesses who are tax conscious.
•    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.
•    One of Wall Street’s mistaken emphasis – focus on R&D as a percentage of sales.
•    Reckitt Benckiser vs. Nestle – The Streets mistake on working capital as a percentage of sales. Talks on how analysts commented on a few CPO companies’ working capital practices, Nestle for instance. They saw Reckitt release working capital and questioned others as to why they are not doing the same. As Nestle grows into a higher mix in developing markets – they need to have working capital to keep product stock as distribution costs and stocking costs are higher. As they grow in these markets, need to grow working capital.
•    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.
•    Percent of business from new products (within 3 years) – another mistaken concept.
•    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.


Be sure to check out the rest of the Value Investing Congress presentations.