This article will give us information on how we can invest according to Thomas Russo. Thomas Russo had a great fortune of having grown up in the investment business, after dropping out of college he went to work for a Wall Street company. During the time 1977 to 1979 when he started trading, inflation was notorious and rates went from six percent to eighteen percent that was an extraordinary experience for him but it provided a lot of lessons. At Stanford law school, he was fortunate to spend time with Charlie Munger and Warren Buffett and that confirmed that his approach to investing would be characterized by sloth and lethargy. Warren Buffett described investment progress that was very long-term minded and when he started investing Warren Buffett was moving from the world of fifty-cent dollar bill investing to franchise investing.
Buffet made him aware that the fifty-cent dollar bill approach does not scale and is taxable, and if you could find a business that can reinvest its current cash flows into creating greater wealth, you wouldn't have to sell the shares and won't have to pay taxes. Thomas prefers investing in consumer brands because they have great benefits of having the consumer believe that there is no adequate substitute. In emerging markets there is population growth, there is consumer disposable income growth, GDP growth, and growth of infrastructure for distribution and those kinds of areas are welcoming to Thomas's investments. The brand that he typically favors are brands that have been left over from the west during the time of colonialism. They tend to own businesses that have massive amounts of free cash flow.
From mature markets in the west, they cannot be deployed profitably but they have the greatest fortune of unmet demand in the developing markets. Organic reinvestment is so much safer than trying to deploy your capital in wholly new geography. Their job is to provide multination and multilingual management. Seventy percent of their capital is headquartered outside the United States because the US does not have the same dynastic history as other European countries and they suffer from the vast reliance on stock options as compensation. Unfortunately, stock options offer one variable to the investment process and that is time. Sixty-five percent of the companies they have shares in are still controlled by their founding families.
That means when it's right to spend to activate the product like Lifebuoy, in another country like India, they will spend that money assured that if they build a factory that cost three hundred million dollars, typically end up building it when their initial capacity is running an overcapacity. When you are running at overcapacity, you are overstating profitability because you are operating at efficiency ratios that are not sustainable for long-term horizons. If you are one of their portfolio companies, they want you to pour money into the market to chase after the initiated demand, the moment they build the second factory they will be faced with enormous expenses in and around the process of building.
The trick is, soon after it switches on, they will take the factory that might have been running at a hundred and twenty percent of capacity at unsustainable margins and they bring up the volume. After that, both the factories will be running at half capacity. After both of the factories become absorbed, they will be back in business. However, since the reported profits have previously dropped, they will pick up when the demand that was created initially is met. Their strategy is to initially suffer while anticipating profitability in the future. During the suffering, management has to be protected against those adverse outcomes. For example, one of the companies they own shares in Brown-Forman rolled out Jack Daniels, and that richly awarded them.
In 1986 they bought the shares of Brown-Forman because they had dropped due to mismanagement. Brown-Forman dedicated itself to rolling out Jack Daniels globally regardless of the expenses they faced. Their earnings went down substantially as they took their US-based Jack Daniels profits and directed that money to develop the quality of Jack Daniels around the globe. That was back in 1986 today it has gone up in profitability because the cases of Jack Daniels are more valuable in the US due to the consumer's preference of going back to consuming bourbon. The Brown-Forman value rose from the fact that the global consumer could be romanced with the brand through heavy reinvestments upfront. Once the consumers accepted the product, they developed the lifetime value and that is priceless.
They don't care about quarterly or annual earnings but seek to create a product that will provide constant revenue over time. The capacity to suffer concept was given to them by Berkshire Hathaway. One of the things Thomas Russo fears about global value investing is agency costs. For example, Citibank would undertake bonds even if the markets had no interest in them and they put them in special investment vehicles. In a sense, the bankers were issuing them on behalf of businesses that had no buyers, and they created their vehicle alongside the balance sheet of Citibank, in which they would park these bonds. When Thomas saw those conditions, he sold the shares of Citibank and Citibank dropped by ninety-eight percent. The second fear of Mr. Russo is the lack of natural reinvestment.
The businesses that Mr. Russo owns have a very natural reinvestment, which means they go back to the markets where they have long standardly existed and reinvest to build distribution, marketing, and brand awareness. For example, he owned Wells Fargo shares, which is a domestic business, at some point they would sell them because they don't have their reinvestment opportunities. During the 2008 financial crisis, Berkshire Hathaway bought six billion worth of preferred shares from Bank of America. Bank of America gave Berkshire Hathaway seven hundred million per share, which was the price the stock was trading at during the time, and the investment made Berkshire Hathaway twenty-two billion dollars.
This shows us that the way Thomas Russo invests is influenced by Warren Buffett's style of investing and since he has mastered the strategy, can generate extraordinary returns from investing in global value chains. Thanks for reading and good luck.
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