May 22, 2015

CONSUELO MACK: This week on WEALTHTRACK, great global value investor Tom Russo looks for leading consumer brand companies with the capacity to reinvest and what he calls the capacity to suffer. Why both qualities matter are next on Consuelo Mack WEALTHTRACK Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack.

In preparation for this week’s interview with global value investor Tom Russo, I read some articles about Russo’s investment hero warren Buffett. One of them was by, Roger Lowenstein, author of a wonderful Buffett biography, “Buffett: The Making of an American Capitalist”. We’ll have more on the book later.

In his 2011 article, “A Harsh Look at the Real Warren Buffett”, Lowenstein was uncharacteristically critical of Buffett for a management decision he made about a key employee. We will have a link to the article on our website. What caught my eye was Lowenstein’s observation about Buffett’s quote “searing independence.”

Here’s what Lowenstein wrote: “In 1969, after a fabulous run as a hedge-fund manager, he decided that Wall Street was barren of opportunities and returned his investors’ money. This was unselfish as well as prescient. The market crashed. Then, in the mid 1970’s, when the market was mired in a virtual depression, Buffett leapt back into the game, now using Berkshire as his vehicle. America had abandoned stocks, but to Buffett, popular sentiment was irrelevant. Traders looked at trends, volume charts, and moving averages. Buffett peered beneath the stock certificate to the underlying business. By focusing on the long-term business prospects, he reclaimed the economic values that were obscured by Wall Street sophistry.”

Well, fifty years after taking control of Berkshire Hathaway, Buffett continues to focus on long- term business prospects. He owns a portfolio of roughly 80 companies, for “forever” as he puts it. He has never sold a share of Berkshire personally, and has only recently started giving shares to charity through to the Gates Foundation.

But what are American investors doing? They have largely abandoned buying individual stocks… they are switching from actively managed mutual funds that do, to passive index funds. And they are certainly not holding for the long term. Trading is in, investing is out. This week’s great investor guest, Tom Russo is from the old Buffett school of investing in businesses, not pieces of paper.

Russo is managing member of the investment advisory firm Gardner Russo & Gardner which he joined in 1989. He oversees more than $9 billion dollars of separately managed accounts and Semper Vic Partners, a Limited Partnership. The global value, long-term oriented portfolio has beaten both the Dow and the S&P handily over the last quarter of a century.

I began the interview by asking Russo about his view that so much of investing has to do with storytelling.

TOM RUSSO: I think it defines the parameters in which successful investors operate. It helps describe the questions that are best asked. I remember the firm I trained with, the Sequoia Fund. Bill Ruane used to have a question that he would ask of managements when we’d visit for example, and he’d say, “What are the chances that your business will lose money next year?” and all of the conversation of Wall Street was about whether the firm would earn $2.10 or $2.11, and Bill would say, “What are the odds that you’ll lose money?” And of course the management team is first perplexed. Finally they’re a bit disturbed. At the end of it they’ll say something like, “Well, look. For that to happen, the following three things would have to happen.” Well, those are the only three things you should care about, and so the device, the technique of investing. You have to learn how to ask the right questions, and I always remembered the one that Bill Ruane used so well.

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