Tom Russo (Trades, Portfolio) is a legendary value investor who has beaten the market for over four decades and has a net worth of approximately $113 million. He is a partner at Gardner Russo & Quinn, an investment firm with approximately $8.5 billion in assets under management.
In late September, Russo appeared in a two-hour-long interview on the “We Study Billionaires” podcast.
The following are some of the best takeaways.
Who is Russo?
Born in 1955, Russo was brought up in a small town in Pennsylvania. He earned a history degree from Dartmouth College in 1977 and got a business and law degree from Stanford in 1984. After that, he went to work at Ruane Cuniff & Goldfarb before joining Gardner Investments as a partner in 1989. He became the managing member in 2014.
Learning from Buffett
While at Stanford, Russo was lucky enough to have a special guest speaker attend one of his classes:
Warren Buffett (Trades, Portfolio). In a classic lecture, Buffett outlined his classic investment principle, which included “buying wonderful companies at wonderful prices” in addition to investing with a margin of safety, which means buying below the intrinsic value in order to account for any potential error.
During the lecture, Russo was most enlightened by Buffett’s focus on a qualitative approach to investing, rather than just pure numbers or a quantitative approach as expected.
In one particular example, Buffett outlined his purchase of See’s Candy in 1972. The business generated approximately $4 million in pre-tax earnings and Berkshire paid $25 million for the business.
Buffett reasoned that the business’ strong brand had a form of “economic goodwill” and untapped pricing power. He then proceeded to raise the price each year as he understood that husbands were unlikely to buy their wives “cheaper” candy for romantic occasions such as Valentine’s Day.
Russo took this lesson on brand pricing power and ran with it in his future career.
Investing in brands
Russo has invested in many consumer brands over the decades. Examples include Nestle SA (NSRGY, Financial), which is his second-largest position, Brown-Forman Corp. (BF.A, Financial), which owns Jack Daniel’s, and even Heineken NV (HEINY, Financial), which he bought in 1987.
The guru has invested in these companies based on two key principles: ability to reinvest and ability to suffer.
Similar to See’s Candy with Buffett, Russo looks for brands that have pricing power. For example, people pay more for Jack Daniel’s whiskey than they would for a cheaper, non-brand whiskey.
Russo’s belief is that many luxury brands such as Rolex and Cartier are not as discretionary and cyclical as people think they are. This is because they are often bought by wealthy individuals or as gifts for weddings, etc. The clientele is often insulated somewhat from economic cyclicality. In another Buffett comparison, Apple Inc. (AAPL, Financial) has one of the strongest brands in the world and also has pricing power.
Furthermore, the Heineken brand has a long-standing market presence internationally. In Africa, one-third of the market for beer is brewed and bottled in Western style. Thus, Russo deems that the other two-thirds of the market represent reinvest opportunities and a runway to expand. More recently, he said Heineken has won 20% of the rapidly growing and lucrative Indian market. India has a population of 1.38 billion, which is over four times that of the US The majority of people are low income, but many working-class people drink beer after work. In Russo’s shareholder letter, he revealed that 20 million Indians per year reach the legal drinking age.
In Brazil, he noted they sell more Heineken in glass bottles than any other country in the world. Also, the business is implementing bottle recycling, which will improve its cost structure.
Part of Russo’s strategy is to invest in family-run companies as he believes they tend to take a longer-term viewpoint and will not base a decision on a short-term hit in profitability to keep Wall Street happy. The ability to “delay gratification” is also a key trait of life success. Russo puts it as the ability to sacrifice “jam today for more jam tomorrow.” Another way of putting it is near-term pain for long-term gain.
Working with Bill Ruane
Early on in his career, Russo worked for investing legend Bill Ruane, who many may not remember. Ruane beat the market for multiple years and was the only external investor Buffett recommended others invest with when he closed his first investment partnership.
During that time, Russo went on investment retreats with Buffett,
Charlie Munger (Trades, Portfolio), Benjamin Graham and many other great investors. They were “playful” and “had a sense of humor,” which he believes was a characteristic trait of the “post-war” generation, who were very grateful and kept perspective.
When to sell a stock
One trait the guru learned from his mentor was the ability to sell stocks quickly. Russo noted Ruane did not have much of an ego and was happy to sell a stock as soon as the fundamentals changed, rather than waiting for it to reach a certain high again.
Russo executed this strategy when he sold Wells Fargo & Co. (WFC, Financial) and Altria Group Inc. (Mo, Financial).
Cigarette company Altria acquired a stake in e-cigarette company JUUL for $12.8 billion in 2018. In addition, it invested a few billion dollars to help people stop smoking, which would directly cannibalize its main business. Russo did not like the fact Altria had loaded up on debt and made these risky investments, so he sold immediately.
The second major sale for Russo was Well Fargo. This was due to increased “reputational risk” and many ongoing penalty payments derived from misbehavior that occurred during the financial crisis of 2008. Russo decided to use the funds to load up on JPMorgan Chase & Co. (JPM, Financial) instead.
The secret to Berkshire Hathaway’s success
Russo has been a loyal investor in Berkshire Hathaway (BRK.A, (Financial)BRK.B, Financial), having first purchased the stock in 1982 when it was just $900 per share. At the time of writing, the share price is over $420,000, so he has experienced a gain of over 54,000%. In 2022, the guru still has approximately $1 billion invested in Berkshire Hathaway, which makes up about 15% of his fund’s portfolio.
There are many secrets to Berkshire’s success. Russo shared a few you may not have heard before.
The first is the decentralized structure of Berkshire Hathaway, which has removed many layers of middle management and means the company can have just 25 people at the head office. Of course, one of those people is Buffett, who can focus entirely on capital allocation. Russo talks about the “send it back to Berkshire model,” which many companies it has acquired love. This means if a business does not have great reinvestment opportunities for cash, it can “send it back” to Berkshire’s head office. This enables him to then reinvest tax-free into new companies or existing businesses with higher returns on capital. This is a beautiful setup since, if the acquired companies were on the public markets, Wall Street would pressure them to do poor acquisitions or pay a shareholder dividend, which is taxed.
Berkshire Hathaway also has low agency costs. Agency costs are internal business costs, usually related to the senior management team for business expenses such as hotels, fancy dinners and even private jet trips. Russo pointed out that Buffett has created a “collaborative” agreement with senior executives. Each of the 140 executives have custom compensation packages, created by Buffett, which are only around three pages each. In comparison, the compensation packages for many other public company executives can be over 20 pages long as they have many protective legal elements. In many public companies, employee lawsuits and external lawsuits are commonplace. However, at Berkshire Hathaway, these lawsuits tend to be less both internally and externally due to the way Buffett runs the conglomerate based on values.
The final secret is the ability of the managers to call Buffett, whom Russo humorously called the “best investment consultant.”
Berkshire’s next generation
At 92 years old, Buffett is still actively involved in Berkshire Hathaway. However, he will not live forever and neither will his business partner,
Charlie Munger (Trades, Portfolio), who is 98 years old. The “next generation” of Berkshire Hathaway is Greg Abel, who is expected to be the successor CEO. Abel is not as charismatic as Buffett, but Russo believes he is “someone who can take on an enormous amount of responsibility.”
In addition, there is Agjit Jain, who created and ran the insurance arm, a notoriously difficult part of the business to run. When creating the insurance business, Jain reportedly spoke with Buffett almost every night on the phone and, therefore, one could assume he has been coached for success.
The other two members of Berkshire’s next generation are Buffett’s investing lieutenants, Todd Combs and Ted Weschler. These investors reportedly run their own stock investing portfolio and Buffett has mentioned in the past he “doesn’t check their tickets everyday.”
I personally believe the next generation is smart, but there will only ever be one Buffett. I also believe it would help Berkshire if the newer generation gave more speeches and talks, so investors can get to know them better.
Russo is a great investor who has learned principles from Buffett’s lectures and received guidance from Ruane. His focus on strong brands seems so simple and has parallels to Buffett’s early investments in See’s and Apple. The investor is just getting started and is one to watch.