Tom Russo uses the phrase ‘capacity to suffer’ a lot. I had heard him talking of this before, but was reminded when I saw him being interviewed here (via MarketFolly). He doesn’t expect this unduly from investors in his funds (fortunately for them), but from his investee companies–the phrase refers to the preparedness of a company to endure a short-term hit to earnings in order to accrue greater long-term benefits. Buffett says something similar along the lines of preferring a lumpy 15% p.a. to a smooth 12%.
The phrase makes a lot of sense to me because it highlights one of the main advantages that small, retirement fund investors have over institutions and hedge funds–namely, that ability to think long-term without worrying about each quarter’s plus or minus return score. Fill your portfolio with companies that think the same way and good things will surely happen. So what companies do think that way?
Family Businesses
Russo loves family-run businesses, which are renowned for their readiness to think and act for the long-term. The security of that controlling stake can make analyst darts or takeover chatter little more than an irritation. (Incidentally, if you need evidence of this then read a transcript of virtually any earnings conference call with Jim Tisch and enjoy his lofty air of condescension).
Families think in generations, not quarters, and so are not as reluctant to make the necessary up-front investments required to establish distribution networks and advertise their brands in new markets. Of course this hurts short-term numbers, but it grows market share in the long-term. I think Hershey are being punished now for their investment in China–hopefully they will reap the rewards in the years to come. (Note: I know Hershey are not family-controlled, but the Hershey Trust’s control gives them the same security and long-term perspective.)
Russo also makes the point that fear of the malevolent family often results in perfectly good family businesses actually selling at a discount, rather than a premium, to their peers. To me, this has always seemed to be the case with Daejan Holdings, a well-run, London-based property business, but I have certainly never noticed it with Brown-Forman (unfortunately).
These are some of the family businesses that are heavily-backed in Russo’s portfolio:
- Richemont
Swiss purveyor of ‘luxury goods’ (i.e. expensive and unnecessary status symbols). This company takes pricing power beyond its logical conclusion in that some of its products appear to become more desirable the higher their selling price (a truly magical position for a company to be in). It is run by Johann Rupert, whose family also own 25% or Reinet, a holding company that has a huge stake in British American Tobacco. Cigarettes, wrist watches, and pens: money can be made in many and diverse fields. Originality is not required. - Pernod Ricard
French drinks business, run by Alexandre Ricard (yes, one of those Ricards). Pernod Ricard’s cocktail cabinet includes Jameson (excellent Irish whiskey, often seen prominently positioned with label facing outwards throughout Mad Men), Absolute vodka, Chivas Regal, Kahlua, Pernod, and Malibu (disgusting cocktail fodder, popular with teenage girls). Pernod Ricard has been hit hard by the unsporting crackdown in China on officials taking gifts, but in deploying 20% of its marketing budget on digital innovation is another company clearly thinking ahead. - Heineken
Another European family-controlled business, Heineken have been exporting their jolly little green bottles around the world (with notable success to the USA) for decades. The business was globalised during its period under the stewardship of the charismatic Freddie Heineken (a man who emerged from a kidnapping ordeal making cracks about the worst part of it having been forced to drink Carlsberg every day), but is now run by his daughter Charlene. Short shrift was given to a recent takeover bid by SABMiller. Incidentally, I wonder if the Guinness family regret selling out to Diageo? I would. - Brown-Forman
The distiller responsible for Jack Daniel’s, Finlandia, and Southern Comfort, the company was founded in Louisville, Kentucky and is chaired today by a descendant of the founding Brown family. The Brown family still control a comfortable majority of the shares and, rather than allow the brand to mature gracefully, have relentlessly worked to expand it around the world. It is still cool, and could there be anything more American than Jack D and Coke?
Suffer Like Buffett
Berkshire Hathaway is another big holding for Russo and Buffett’s strategies seem to epitomise his capacity to suffer theory. There are several obvious examples of Berkshire-style suffering, such as sitting on growing piles of cash as markets rise (something seen most starkly in the late 1990s) or selling huge put option contracts on the major market indexes to those of more nervous disposition.
Frustrating thought it can be to some investors who look at the ocean of cash and think about what they could do with a fat dividend cheque, the reality is that they probably couldn’t do as well with it as Buffett. Consequently he retains their cash and deploys it where he thinks best and when he sees fit. Buffett always puts long-term returns for Berkshire before short-term popularity with its investors.
Similarly with volatility, Buffett doesn’t hide from it; rather he embraces it. Whether it is selling those put options to take the worry from others, insuring against the big risks that nobody else will contemplate or bailing out financial institutions that nobody else will lend to at times of panic–decide your price, and then suffer!
Inevitables
As well as family business, Russo has his fair share of Buffett-style inevitables that pad out his portfolio. These are classic slow growers, which should see their revenues rise steadily in the years to come.
- Wells Fargo
Buffett’s favourite bank. Big, conservative and solid. If America continue to grow (and why wouldn’t it?), then Wells Fargo will no doubt collect more than its fair share of the profits along the way. - Nestle
The annoying phrase “elephants don’t gallop” always comes to my mind when I think of Nestle–the original multinational. Although another way to look at it is that elephants don’t get knocked over. Nestle’s products should become more affordable and its sales grow as people–especially in emerging markets–find that they have increased purchasing power and treat themselves to what would previously have been beyond their reach (coffee, chocolate, bottled water etc.). - Diageo
One of my personal favourites–an easy business to run, with a clear growth runway for its tried and trusted products (introduce more people to Smirnoff, Guinness, and Baileys and you will have new customers).
Asset Allocation
Russo doesn’t look for complicated strategies–he knows his field well and doesn’t stray. Is there a limit as to how much you should put into consumer goods? I can’t think of many investors I have seen with more than 50%, but Russo’s portfolio weighs in with 63% between consumer staples and discretionary. I have always tried to limit how much I put into this sector, but perhaps I shouldn’t. The longevity and pricing power of many of these businesses make them ideal hold forever investments, and I have yet to read about the Heineken family racing to divert their money into mining or energy.
Performance
How has Russo done? According to GuruFocus, he has beaten the S&P over 5, 10, and 15-years by +0.3, +1.5, and +5.7% respectively. I suspect (but don’t know) that the strong outperformance in the 15-year band was due to the Dot Com crash. Buffett-style investors seem to have largely succeeded in avoiding that particular mania.
Russo strikes me as an American version of our own Nick Train–select simple, high-quality businesses and sit back (or sit on your ass, as Munger would put it) to let the brands do the work while your dividends roll in. In addition to making concentrated bets and keeping his holdings for a long-time (he has held many for more than a decade), he takes a similar line to Train on currency fluctuations, which basically boils down to control what you can control (and currencies you most certainly can’t). I enjoyed this interview–Russo comes across as a relaxed, calm and confident investor. A nice antidote to many of the manic Jim Cramer-style hysterics who seem to be so prominent in the asset management business.
Keep things simple.
Disclosure: Long HEIO, DJAN, BRK.b.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.