These are our notes from an interesting talk by Thomas Russo at the Ben Graham Centre’s 2017 Value Investing Conference. Semper Vic has generated a compound annual return of 14.6% from 1984 through Q1 2017 compared to 11.0% for the S&P 500. He is a concentrated value investor that focuses on consumer brands.
The full talk can be found here - https://www.youtube.com/watch?v=pFEgm3s1cmc
We also encourage you to take a look at all of their videos - https://www.ivey.uwo.ca/bengrahaminvesting/resources/videos/
Key takeaways (while not a transcript, his wording has been used as much as possible to convey his thoughts as he presented):
Three Lessons from Warren Buffet
1) The government has given you the gift of deferring taxes on gains. You have to buy and hold to take advantage of this.
2) You can't make a good deal with a bad person. This has entirely to do with agency costs. Berkshire Hathaway has migrated from purely public companies to business that are family controlled and the benefit of a long-term frame of reference. The opportunity costs of management to take from you the owner in a public company is very high and hard to align interests. The families can have dynastic views and long-term thinking and if you can find the right family you can partner with them and have the same alignment (over 60% of their investments are family businesses).
The benefit is family control often comes at a discount as most investors think (wrongly) that professionals managers are really professional and they worry about the family bickering and dynamics, leading to improper allocation of valuation. The mother of all examples is Berkshire.
3) The ability to do nothing is massively undervalued. Berkshire may do nothing for years and build cash. We're typically fully funded but our portfolio turnover is something like 2.5%.
Investing business is simple – you are giving up something today if you want more later. Warren says it’s as simple as that and as tough as that. You only know what you actually have right now. You want to increase the odds that you will give up something today and have more later. So you want businesses that have the ability to reinvest profits.
The area I have focused on is global consumer brands. Consumers believe that there is not a good substitute (inelastic demand) and pricing power.
Previous business: Weetabix. Previously owned 20% of the company. Great solid customer base but could not reinvest. Had a pile of cash and purchased at a discount to intrinsic value (8x EBITDA). The family was smart enough to know they could not reinvest and built cash. The Company was ultimately sold to a Chinese group.
Russo Factors - #1 Capacity to Reinvest
Capacity to reinvest is defined as global brands with international headquarters usually in Europe. I have focused on international firms headquartered in Europe, which is good as most hate the European focus due to the bleak outlook for European consumer market. We want a less risky way to reinvest profits into the parts of the world that will grow. E.g. Unilever - don’t buy because of great business in England but because it has 85% market share in Vietnam and growing at 12% a year and can pour capital into a high return environment. Heineken - don’t buy because Dutch but because they have the largest presence in Vietnam and the 2nd most profitable market (and didn’t exist in 1994). The Company took high profits in Europe and reinvested elsewhere.
We also like to buy and invest in family-controlled, which provides us with a double discount. The families do not worry about short-term profits like Wall Street but can focus on long-term multi-generation wealth creation.
For companies, we look for multicultural and multilingual management teams (example: Nestle). These are soft tissue items but affect if a company has the ability to navigate around the world.
#2 Capacity to Suffer
We look for not just capacity to reinvest, but management team must also have capacity to suffer badly. Long-term investments will burden near term profits.
Example: Berkshire Hathaway – This is the motherlode for capacity to reinvest. Warren Buffett completely disregards reported profits, allowing him to make long-term investment decisions.
Example: Philip Morris – They have had a miserable four years. They have grown profits by 12% per year for the last four years but the growth has been masked by currency translation as they are based in the U.S. but all of their business is abroad. They did not succumb to wall street’s plea for profits through cutting advertising and other costs. They instead invested in a non-combusted cigarette, delivers 19 milligrams of nicotine in the first minute vs 2 mg of competitors. They spent $3 billion over three years to develop a platform while none of their competitors spent any meaningful amounts. This hit the bottom line but management was able to suffer through. Product is now doing extremely well with 20% of market share in Japan already. Their competitors reported higher profits through underinvesting but were not building wealth.