Thomas Russo: "Global Value Investing: Factors that I Most Fear and [...]" | Talks at Google

Hello. Everyone welcome, to another great. Episode of talks, at Google we have a really special guest here today mr. Tom Russo he needs no introduction mr., Tom Russo of Gardiner, Russo and Gardner is. An exceptional, value investor, he, graduated from Dartmouth College with a degree in history and Stanford, with, degrees in law and business he. Has previously spoken, at Google about, investing, from. The last time he was here last. Summer he was awarded the Graham and Dodd Murray, Greenwald, price for value investing he also serves as a charter member of the, advisory board of the Healey, brain Center at the Columbia School of Business today. He will touch upon two, very important aspects of his investing first. The reduction of agency costs, the. Only thing, that comes to mind when people say agency cost is mr. Warren Buffett scored lethargy. Bordering. On sloth remains. The cornerstone of, our, investment, style mr.. Russo is an exemplar of the buy-and-hold strategy and, has, held many of his positions for decades. Secondly. He will talk about the capacity we invest in, doing so he'll, touch upon factors. Which. Form a sort of a checklist for him as he makes his, decisions, it, gives me great pleasure to introduce Tommy, so thank, you very much indeed. Speaking. Here it. Reminds me of what, it must have been like at the catacombs. Of ancient Rome where. There, were people. Sort, of who were underground. Because of the Roman army marching above and they were they were pursuing, their own novel, view of the world and the concept, that within within. The one company in the world that has more information, than anywhere else there's. A group of people here who believe that information, can help you invest. Wisely as, a way, to. Add value compared. To the. Migration. Towards passive, the, passive. Investors, who are the in fact Roman army above us here we, said we'll talk about why, it is that you can hope to make money by, investing with, a, substantial. Point of view so it's. It's it's fun to be here I'm delighted to have been asked.

To Join again, I'm. Gonna really just jump right in. And and, spend a little time on what I typically. Spend most of my time talking, about which is which, is a three-part, process of what it is that I look for in investing, because. I've given a bit of the same talk earlier, and and Saab thought might, be interesting to touch, on some other thoughts so in addition, to what, we'll go through at the start i've, supplemented. The comments, with. Things. I'm most worried about in, the form of a checklist and then mistakes. That I've made hopefully. We'll run out of time and I won't get to the mistakes that I've made but. Start off I, I had the great fortune of. Having. Grown. Up in the investment, business in, after Dartmouth College, I worked on Wall Street during, a period of time when inflation was notorious. It was 1977. To 1979. 1980, and and, interest rates went from 6% to 18% and, you, know you're seared, as an investor, by what you experience, when you're first starting out that was. An extraordinary experience I suspect those in your, generation. Who fall prey to Bitcoin. May end up seeing, similar. Painful. Moments, in the investment, business and you'll learn very good lessons from that but watching the watching. The fixed. Income markets, really writhed, during, my training was. Was terrific I went back to Stanford Business a law school that. Had the great good fortune both, schools, to. Have, spent time with two legends, at. Stanford, Law School Charles. Charlie. Munger, was on the Board of Visitors and I had a chance to meet with him when, I was launching my investing. Career and he was very influential. Then. Warren Buffett came to our value. Investing, seminar, and I, think that's really the thing that could. Confirm, for me the approach to investing. Would. Be characterized. By sloth and lethargy and all, of the other sins. Of inactivity. Because, what, they described, was an investment process, which, was very long-term minded. And, you. Know when when if you look at the first slide when, I arrived. Warren, was really just moving from the, world of 50. Cent dollar bill investing. To. Franchise investments. Franchise, investing, where there is economic goodwill. That, that, yields, a return above. What a commodity, would and, and. So the, 50 cent dollar bill approach, that typifies, early value investors, doesn't scale and it's, taxable, and the. First point warren made to our class was the government, only gives you one break as an investor, that's, the the, the. Tax. Deferral. On unrealized, gains and so if you can find a business that. Has the ability to reinvest, its current, cash flow into. Creating, greater wealth and. You don't have to sell those shares you don't pay tax that's very profound most, people, with very high turnover portfolios don't, get it.

That's. The one thing the second point is though if you're going to depend, on that reinvestment. Then the person, who runs the business for you the actual management. Have. To be trustworthy they're. Your agents. Management's. And if they don't represent, your interests then then the process, won't work they, must be owner minded. And and. Then, and then the next thing you'll need if. You're going to buy, some buy-and-hold you. Have to have a business that has a competitive, mode a business. That that will absorb reinvestment. And and. And return you for it and and. So for example with Berkshire, he started out with with. A with, a textile, mill and. It absorbed a lot of capital, and a destroyed, value, along the way and so, what you're looking for is a business, that has the capacity for. Reinvestment, and you really start it, has to have a durable competitive, edge and. For. Me, for. Some people that edges technology, I guess the assembled, masses here, would would have a technology orientation. For, me it's consumer, brands. Consumer. Brands have the great, benefit, of having. The consumer, believe there to be no, adequate, substitute. Once. I was at a at a conference in the spirits industry and I described, why, it was I like the spirits industry so well then I said it's, because you, know if somebody, offered you a. A drinking. You and they asked what you wanted if you said a Jack Daniels they came back and said no we, only have Jim Beam the proper, answer in the world that I inhabit is no, thank you, I would. I would rather have water than then. What. Is not my brand that brand loyalty is, terrifically. Important. And. So if you're going to have capacity to reinvest if if you have a brand and you can invest behind expanding. That brand into. Different adjacent, categories or geographies. It's, extremely. Valuable and. And. For me my. Goal is to find global, brands because. There you have the ability to expand, expand. Into the parts of the world that themselves should grow, if. You think about the, poppy the, developing, and emerging markets, the. Of population, growth you, have consumers, disposable income growth you have GDP, growth you have the growth of infrastructure. For distribution you, have all of that ahead, of us and, and, that's really the area that for. Me welcomes. Are our investments. You. Also have a very interesting factor. That the the brands that I typically. Favor. Our. Brands that are kind, of left over, from. The West during. A period of time when. It was colonial. We. Own Nestle, we own you and levar we own Heineken, we own Cadbury. These. Were products. That went around, the world but. In a very thin way there. Are the products, of of people. Who lived in countries that, they. Controlled, but. But, they alone could afford say, oh, gosh, Nino. Or. Nescafe. Or or. Maggi. Soup, those. Were those, were products. That the countries. In which we do a lot of business today. Were. Present. They were advertised, but. They were very, expensive. They were very. Inaccessible. And. They were because, of both they've. Become very aspirational. And. So as. Markets, around the world now begin to prosper. That. The, second. Begins. To work they have a more modern lifestyle. Where. They reach is, to the products, that they once aspired, to have a chance, and and. And we tend to then own businesses, that, have massive. Amounts of free cash flow, from. The mature Western, markets where it cannot, be deployed. Profitably. But. They have the great good fortune of unmet. Unmet. Demand, in. The developing markets and so, the organic, reinvestment. Is so much safer than. Trying to redeploy your capital into some wholly, new product some wholly new geography, our. Job is simply to reactivate. More deeply, now. That requires. To. Do it right you. Need multi. Multinational. And, multilingual. Management. In. In multicultural, I should say multilingual, and multicultural though, for example if. I ask this audience here how many people speak. More than one language. This. Is Google, how.

Many Speak more than two the. Hands keep going up over. Three okay. So. It's. An extraordinary. Capacity. It. At, Kraft, Foods, for, example, they, speak point nine languages. In. The. You. Know in that's these headquarters, the senior. Management will speak four or five languages, and the ability, for that to help them move around the world is extremely, valuable as. You all experience, here given your skills. Multicultural. A little more nuance for example in an audience like this in the US I can usually safely. Say without any answers coming back to me who's, your favorite cricket player I. Think. In this audience, I must have great I must, have a high, percentage, who could answer the question well I mean that's a big deal then 1.7, billion people will go to bed tonight think he found thoughts of just one thing which is cricket and there's. An American trying to travel the world your, your effectiveness, it just doesn't have the same impact, if you don't have those references, and those those talents. But. But. Companies. In the world, take, the reinvestment, possibilities. And invest, the right amount and that's, really because, of agency. Costs. It. Arises. From. The. Inability. To if. That's the right amount arises, in part from the fact that American, companies is, typically, American companies that's why, 70%, of my assets are invested in non us-based, companies, because I think we we, are much more apt to find the. Talent base the, historic, brands. In, parts. Of the world, through. Companies, that are headquartered in, Europe than in the u.s. the u.s. doesn't have the, same the, same dinah, stick history, and and. They certainly, they. Certainly suffer from one thing which is the, vast, reliance. On stock. Options, as compensation. And. Stock options. Unfortunately. Deliver. One variable, to the investment, process that. Shouldn't, really necessarily, be a. Factor. And that's time. For. A stock option to reward, you it has to be worth something on a given day and so. The management's. Were whose. Fortunes, depended. Heavily, on, stock options, become, very attuned, today's. This. Day they'll, either be worth something, or they'll be worthless and in. The process, of, making. Sure that they can the shares can be worth as much as humanly. Possible at, any given time. Management's. Of us-based. Companies, all too often fall. Prey to Wall, Street who. Promises. Them a high valuation, if, they only agree to make the quarterly, earnings every quarter, I was. Talking to somebody recently about. This subject about the need to show quarterly earnings and he raised his hands and said I used. To work for a, silicon, valley-based companies, I will, not name it because I will be blackballed. But it was a Silicon. Valley company and and, they, said every, you, know every quarter, about a month. Left in the quarter we get the directive. Which is stop. Spending money because. Blank. The head of the company wants, to make is quarterly. Bonus. Hurdle and we need to show we. Need to show profits, though you. Know when you're in a company, I hope it I certainly expect that not to be the case here I don't, suspect they take away ping-pong, balls or, bananas. Or, cappuccinos. As you near quarter and I hope not because that we show that the firm's still vigorously, on the right path, but. When you find that companies. Gauge. Their spending, off of. Reported, income which. Which, wall street's suggests, that if you only make the number and the number is a reported, income number which is completely, fictitious anyways. If. You make that number they will recommend, your shares that shares will be worth more because the multiple will apply to this fix it's not fixed, a fictional, number call earnings per share and you'll, have a higher valuation. That. Game, is extraordinarily. Corrosive. For, businesses, trying, to build long term wealth because. What you really want to do is just. The opposite. So. But. To to. Make the investments. That are proper. The.

Trouble, Is is that when they start out they, are extremely, burdensome, unreported. Profits, and so. What. You need to have our management's. That have the capacity, to make the right investments, for the very longest term. Without. Fear, of losing the jobs or. Without fear of takeovers. And because. Of that, most public companies don't have control, over the share registry, and and. If they don't invest. If. They do invest, the right amount for the very longest term they. End up at risk in the short term the, loss of their job the loss of corporate control and so, in our in our portfolios. I was, once characterized. As an investor, by four numbers, one. Of them is 70%, of our holdings, are non-us, companies, that are headquartered away, from the US. Seventy, percent of the companies, are in, in. The, top ten holdings, we're very we're very concentrated investors. The top three, holdings, on behalf of my clients. Are 30% of the assets so we're very concentrated. And. 65%. Of, our companies, are still controlled, by the founding, families. And. What that means is that when. When, when, it's right to spend, to activate, let's say lifebuoy. In India, or, it's right to spend to activate, more meelo, or more a, Maggi. Noodle, soup. They, will spend that money assured. That if you if you build a new factory these factories tend to be very lumpy and that's these case for example it costs about three hundred and fifty million dollars to. Build a, Maggi. Factory, or a powdered. Milk factory, or a decaffeinated. Coffee factory. Well each of those are core. Pillars, to their business, and. When, when they build something, like that, typically. They end up building it when, they initially, installed, capacity. Is running. At over capacity and you. All understand, if you're running an overcapacity you are overstating. Profitability, because. You've more than fully absorbed, the fix the fixed costs and your, operating.

Efficiency. Ratios that are not sustainable for the long term, and. So ideally. If you're one of our portfolio, companies we want you to pour money into these markets chase, after this the the, initiated. Demand. And. You. Have to build a second factory well. The moment. You start down that path you you, start to, accrue. The normal amount of expenses, in and around the process of building but. The real trick is is that very soon after it's it switches on you're. Gonna take the factory, that might have been running at one hundred and twenty percent of capacity, at, unsustainable. Margins, and you're gonna bring over half the volume in both your factories are not running at half capacity, well. You've just blown, a hole through your margins, and, and. It's, not until each, of those factories, then themselves become. Fully. Absorbed. That you're gonna be back in business, however. The fact that the reported profits, dropped as they did. Though. Bother some to some for. Us trained, under Buffett with, the idea of the capacity. To suffer through such. Burdens. On reported. Profits, when. Developing, wealth the wealth the. Wealth picks, picks. Up as those businesses, come back into full absorption sudden, you realize that you've met the demand you created, and. You're ready to build a third Factory, let's say or a fourth. In. Order to survive to that outcome management. Has to be protected and the, best, way that I found to, help protect management. Against those those adverse, outcomes is through family control so. Whether it's brown-forman which. Is controlled by the Brown family who's whose, discipline. Over, the years I've owned the shares to roll out Jack Daniels, their core product, globally, has, richly rewarded. Us think. Of 1986. When we bought the shares they, had collapsed, because of a mistake, in acquisition, and they, were only left with Jack Daniels, was. Which was about a four million case, brand, per year making them 300, and some million dollars, a year, and. They had a four hundred thousand, case, Jack, Daniels business globally, the. Family, who had lost a considerable, amount, of their fortune as a result of mismanagement. Dedicated. Themselves to rolling, Jack Daniels out globally with, all the expense that is suggested. Their. Earnings would go down, substantially, as, they, took their us-based, Jack Daniels profits, and directed. That money and the, expenses, attached to it to developing, a taste for Jack the annuals around the world that. Was back in 1986. Today. They. Still do four million cases in the US, it's. Gone up in profitability, because the cases today are more valuable. In the US because consumers. Have returned to bourbon and they, like to have honey or they like to have fire they have all sorts of flavoring and they're, making more money off their US business, but the US business did not grow the. Value of the investment in brown-forman. Arose. From the fact that the, the. Global, consumer could. Could, be. Romance. With the brand of the product and all the rest through, heavy investments. Upfront but. Once the consumer. Accepts the product. They. Develop, a lifetime, value, because, they'll drink X bottles, a year with X margin, per person, and you, can calculate the return on, that investment, you. Can assure yourself, that you'll, have nothing. But losses, up front but. Over time you, absorb those losses in your back and business in the in the case of Jack Daniels the, four hundred thousand cases in, the UN in the rest, of the world today. Are 13 million cases and they. Make about $100 a case so they've picked up value. Earnings. Of about 1.3. Billion, dollars, and, it's really only been. Permitted. Them because. During the period of investment, they were allowed, they. Have management, who ran the business had the capacity to, suffer through. Censure. By, sell-side, analysts, who were disappointed that they were no longer making, the numbers and he actually had threats from from. Outside. Activists, to, come in and try to dislodge corporate, control. With. Family control which is existing in something, like 65%, of my portfolio, the. Families can say to those who, wish, to disrupt. Go away we, we, wish to have a profitable. Dynastic. Future, and we don't really care about quarterly, or annual, earnings that's. An extremely, valuable pond, in which we fish. So. The. Capacity. To suffer, concept. Was was sort of first delivered to me through Berkshire, and if, you take a look. Well. I think we've pretty much gone over that but take a look at Berkshire there a couple of examples there which are so so instructive, in GEICO's, case they bought Geico, and only had a million policyholders. A. Policyholder. At Geico, is worth, $2,000.

That's, The net present value, of all, of their future streams of earnings and they, it's a very high number because. There's high persistency. At Geico very, few people cancel. And so. If you have a client of an insured they're, worth $2,000, and when they bought the business the only a million of them to the business worth two billion, plus or minus, the. Trouble, is when you bring on stream, a new canoe, insured the first year they have a loss of two. Hundred and fifty dollars, per insured. They. Make a hundred and fifty dollars annually, off of an insured, but. Bringing one on board loses. Them two hundred and fifty, so. If you're thinking about the math when Warren bought the business they had a million policyholders, or. Any $150, that's 150, million of profit. So. If the next year they wanted to grow the business by a million. Policyholders. Look. What happens to reported, profits. It. Goes to minus one hundred million dollars, the. The 150, that they were earning suddenly. Gets overwhelmed, by the 250, million that. Attaches, to the million new insured. Now. Warren bought the business they only had a million insured, now 14. Years later, he. Said in his annual report that Geico. For, all of those who are his. Partners, and want, to understand, what it is that they own because. Warren has. Said that he would like to always buy, shares, of Berkshire at the right price, Berkshire. Would love to repurchase his shares the trouble, is. That. Warren. Doesn't want to buy from someone who's uninformed, about it's worth so. Periodically gives us through the annual report. Gems. Like he, did three years ago and he said and by the way. Geico, is worth 20 billion dollars, more than what we paid for it and the. Reason was is that since, he's quiet. At. The costs, of income, he. Started to push hard he took his advertising, from 30 million to 900 million a year you, know that because every car. I have a commercial on television as a caveman or, a or, a gecko, or something, else. He. Grew the insured. Based out to over 11 and a half minute, I'm sorry excuse me it's at 13 million today, and. And. So he's added, a. 11. Million, 12 million policyholders, times. $2,000, per person that's 24, billion, dollars, today, what's, very interesting is this year, because there are lots of catastrophes, all over all, over the country weather-related.

Berkshires. Competitors. Their, dire. Sort, of life battle. Competitors. Decided. Not to renew. Business, this year and not to go after new business, because. They were showing losses, in other businesses and they wanted to report, numbers, that satisfied. The sell side who. Had expectations. About what what they, should do in. The, environment, where the losses elsewhere. Were so grave they, backed away warren picked up a million, and a half policyholders. This year because, he has no. He, has no care whatsoever, about. His reported, profits, now. He's, fortunate he controls 40%, of the company and other people friendly to him control the rest nobody's. Gonna take over Berkshire, if they underreport, profits, and Geico because they've taken on the, business that they're competitors, for. Went because. They had to show numbers differently, than Berkshire Berkshires. Created, the world that it occupies by. By. Focusing. Only on value, and not reported. Profits, anyone. Else could do it but it takes it takes the kind of discipline. And and Berkshire thrives, on that another, example, equity. Index, put options, this is an interesting one when. 2000. Take. A look here. Though. Yeah this is this, is it if you look here it's very hard to read anyways. Berkshire. Some-some. 10-15, years back had. The opportunity, to, receive, from an insurance. Conglomerate. Five billion, dollars. Of premium. With. The obligation. That he would. Make good, any, decline. In the value of that portfolio from, 37, billion dollars to any number below, four. Five billion, in cash which they gave Berkshire, Berkshire. Pledged, to. Make them whole whatever the decline took, now. Nobody. Else would, could. Make a pledge that, the insured, the, person seeking insurance we actually trust, because, few, would keep enough liquidity around, that if the markets really didn't melt down to zero that, they could actually be good for the money well Berkshire has a hundred and ten billion dollars of cash on the balance sheet and has, kept a huge, cash hoard the entire time so the insured, paid. Him five billion dollars which is way too much money in. Part, because he alone will have the money to make good on the commitment, if it happened that the equity markets went to zero globally. He. Also was paid far, too much money because, no other insurance, company what would bid the business, because. Once. They've established that. They that. They have, an obligation, to. Make whole anything, below thirty seven billion dollars they, face mark-to-market, and. What that means mark-to-market, means, that if equity. Markets around the world declined. He. Would have to he'd, have to pass the amount of his obligations. Increase, through, the income statement, and so. I bet, this has a little red button here I could.

Probably Point to it anyways if, you look at, something. Like 2008. You'll see in, one of the years he passed through his income statement, a six billion, dollar. Quote-unquote, loss really. Isn't a loss he had he, had ten, or fifteen years yet, before the contract, matured, it was just a valuation mark. No. Other insurance, company publicly, held could, withstand, that. Type of a markdown. Based, on mark-to-market. And, so I think Berkshires, succeeded, in that investment, largely. Because. They. Did not have. Competitors. Willing to take that take on the same risk. Go. Back a second, here. All. Right. Birk. Okay. Let's take, a look. Okay. Well we're gonna move on to the second, the second topic, which is one of the things I really do focus on and, obviously, the number in in some ways the factors I most fear, our businesses. Which fail in the, areas that I most esteem in Berkshire and so the start would be agency costs and and. I can assure you that. Probably. 90%. Of, the investments, I look at I just pass, on because. I just don't trust that the people who run the business, will, have our interests at heart and make investments for, the longest term and and. One of the examples, I'd say is, if. If if a business is, focus, on the near-term they'll, they'll either do one of two things they'll. Either. Fear. Saying. No. To Wall, Street when, the right answer is yes. Or. They'll fear, saying no to Wall Street I was saying yes to Wall Street when the right answer is no now, give an example, of this and it's sort of an interesting one of many levels but it has to do with heineken I, first. Bought Hayek in 1986. It. Was a mature. Western, market. 25, percent of the profitability, of high anything was from the United States and. And. They. Had no experience of the exposure in developing emerging markets, today. They have 75. Percent of their business in developing emerging markets, five percent of the profits comes to the US and the two most profitable markets are Mexico. First and in Vietnam second, so, the, business is completely, transformed itself by virtue of their willingness to suffer through the burden, on investment, along, the way for the past 25, years since I've held the stock well.

A Couple of years ago they had a chance. To. Buy a Brazilian. Brewer which would have doubled their size they have a twelve percent market share this business had sixteen percent and a B, InBev Budweiser's. Parent company had. The rest. Wall, street clamored. For, them to buy that business because, it would give them extra, scale, in that market. Problem. Was price. It was a five billion, dollar acquisition, Wall. Street clamored, on them to say yes do it Heineken, ran the numbers and said no, walked. Away four. Years later. The. The buyer Kieran, came, back to the market and said not. A good business not suitable, for us we'd, like to sell it Wall. Street having watched it underperformed, for, that period of time said. Absolutely. Don't even go close, to it no, don't even think about buying that business. Heineken, took a look at it thought look, pretty interesting, they bought it for seven hundred and twenty million dollars, now. You can make a lot of money buying, something for. Seven twenty instead of five billion, and. And, Wall Street and. Heineken, is 51%. Controlled. In the share price in shareholdings. By the family, so. When, first pressured. To buy it for five billion the, family said no said, stupid doesn't make any sense, at seven. Twenty when they were when. They were threatened, if they bought it they'd be downgraded by every analyst who. Cares, it's seven hundred twenty million dollars for eighteen. With sixteen percent of the market, the. The real trick, was that, having. Bought it at seven twenty they. Now recognize they have a billion, dollars, that will be passed through the income statement, putting, it together they. Have to move factories, or breweries, around the effort they have to redo the distribution, of grounds they're gonna be spending, a tremendous amount of money and that's going to burden the income statement, for the. Foreseeable, future and that, burden is what Wall Street really hates and that's. Why they. Recommended. Around, the news of this event that that that, that, they've they've gone mad they. Entering in the market that cost somebody else three billion dollars, four billion dollars and the, share price weakened. Along. Came another company, called SABMiller. South African, Breweries Miller, Beer, and and. They were being pursued, by Budweiser. And of. Course whether they do but they love a takeover, offer to. Buy Heineken. Because the shares had gone down the market was disappointed, they they bought the Brazilians. They. Sent a letter to hide again say we'd like to take you over for a very high price and. Hank it said no thanks, goodbye. They have fifty point, one percent of the vote and they, don't have to worry about Wall Street's pressure now. In, this context. They've already become as, profitable, as large as they have because of their capacity to suffer through the upfront cost of their investments, but this episode, they, said no, when Wall Street clamors, yes they said yes and well she said no and then as a result of that the bad the bad reception meant the shares went down they were offered to take over the which they said no and we we will continue to hold this year's I've held them since 1986. And I, think that's a pretty good example of how that works. So. Let's. Jump on to the section. That is what. I most worry about here we go. Factors. I most fear the, first one is is, the. First and only, really. Is agency, costs. We. Lost yep. There it is and you.

Know The list is enormous. The businesses, that I've owned that have suffered and we've actually sold them because. Of agency, costs, Citibank. At one point had. A business whereby. They. Would underwrite. They. Were under I'd bonds, even if the market had no interest in them and, and. They put them in something called a side. Pocket SIV and. And. In a sense the, bankers, were, issuing, debt, on, behalf of businesses, which had. No buyers and. And. So they, created a vehicle, alongside. The, balance sheet of Citibank. It. Was they. Would park these unsold. Bonds, at the, end of the year the management, would get their bonuses, for having produced, the bonds, and at. Some point off balance sheet they sat festering. And. A burden ultimately, on Citibank, and, when. I was described, that, condition. I sold, the shares immediately. Citibank. Turned out to be a, complete. Disaster thereafter they dropped by 98. Percent since. We sold those shares, and, it. Was a complete, disaster but for one thing for us personally is that through what we met a man named Ajay, Banga, who's. The chair who's the CEO of a. MasterCard. And and. We bought MasterCard. Soon. Thereafter, for. $20 a share it's now 170. It's. Been the best investment that we've probably made, and and. The investment really was based on the character. And caliber. Of this business leader who is exceptional. And unrivaled. We, did not buy, a. MasterCard. At the first iteration but it was a it was a tremendous. Dividend that came as a result of our our, activities, their. International, Speedway's of business that we owned and, a. Family. Called. The France family owned the NASCAR franchise, and. International. Speedway was a public, vehicle which, own tracks, and just, like coca-cola, has, a conflict, with its, bottlers. To. Have. The bother to spend more money so, coke the brand could become more valuable in this, case International. Speedway embarked, upon a, shareholder. Driven. Mandate. To build more tracks around the country, NASCAR. Is a great business, you know it's basically. Branding. Opportunity, for companies. That want to reach the middle America, and, it. Was regionally defined. Historically. And. And. They went on a hunt. For new locations, and they built seven worth places. Ultimately, they threatened the franchise, because, of oversaturation, and at, the end of it all they, were trying to build for 500, million dollars, a racetrack, in. Staten. Island over, a waste dump and, of, course a, completely. Ridiculous, extension. At that point, benefiting. The family because they get more revenue because of more more sites but. Destroying, value all along at, at. The company International Speedway that. Was a misalignment, of interest and you can see those, second. Thing I fear the most is lack of natural reinvestment, as I said the businesses, that we own have. A very natural reinvestment. Which is they just go back to the markets where they've long standed, li existed, and invested. Bill distribution. Marketing, brand awareness and all the rest so. You, know we own Wells Fargo, it's a domestic business. At. Some point we will sell it because, it doesn't really have the, reinvestment. Opportunities. We call that opportunity, white space and and. To, give you an order of magnitude we. Owned. Several. Brewers, in Africa, the the the. There's. 400. Million barrels, of beer consumed, a year and the businesses, that we collectively, owned only, manufacture. A hundred. Million of those barrels there's, 300, million barrels, that, are available, as, a National, Arena. Tees. Reinvest. What. I fear most is the understanding. That some, companies, don't know, what. Is enough Berkshire, is excellent, at that and. And. And and, made us a tremendous amount of money knowing that a certain, investment is. Very, very. Valuable, and not to reach for something that's beyond. Beyond. The. Realization. Potential. So for example than what I'm thinking of with Berkshire, understanding. What is enough in the, midst of the the, financial crisis of 2010, they, issued a six billion, dollar preferred. To. Or. They bought it explained I preferred from Bank of America the. Six percent, they, were only making half a percent on their cash it's, a big improvement off the cash but, really what they got from it was, in. Return, for their goodwill that's, conferred, upon them by virtue of their. Credit, review. Of Bank, of America it was valuable and I think Bank of America gave Berkshire, 700. Million. Call. Options, at, seven. Dollars a share which was the then market, price that lasted, for ten years that. That. Has, made Berkshire, 22, billion, dollars, so. A modest. Looking preferred. Six percent, beneficial. For them because there's a tax shield by the villains but, still modest. With, that warrant attached be. Turned, six billion dollars, into twenty eight it's. Extraordinary now, you. Know other people at the same time reached and for, yield but if you reach for yield, and it's too high chances, are you, know you'll, get what what the yield suggests which is more risk than you care for.

Anyways. So the by, far and away the next. Factor. I fear is is corruption, and I'll, give you a couple of fun examples, enrichment. Most. Of Richmond's. Competitors, luxury goods company most of their competitors in Russia did. Business with a facilitator. And the miss the facilitator, was really the Chechnyan mob. And. And, the way that works is you know they'll get you into anything upfront but, then they're your silent, partner for, the rest of your time and reach, might has enough money that they don't need a silent, partner they, were shown a building there's a twin, building, on the main boulevard. For shopping, for luxury and they, were shown one that they could move into immediately, for, a $500,000. A year rent. The. Next door was, the same building, kind of in poor repair, the, one that they could go into is fully repaired. The. One that they the, the. Next door one they bought for twenty five million, dollars. Instead. Of taking a half a million dollar a year lease for the whole building, they paid twenty five million for the building that they bought they, wanted, independence. And it had an upfront cost, they, did nothing but lose money, but. Over time they, own their future the, people who take the early bait come, in to get, active, quickly, in that market, rooo, the fact that they ever met the group because for the rest of time they'll take more and more and more money it's the mob and and. Respond. Not caring. About near-term. Income because it's controlled by the Rupert family and they want wealth not reported, profits paid. Way over the top but. They bought certainty, I visit. Heineken, in st., Petersburg. And, they, had a factory, that. They. This. Corruption, that. They had. Hire, a, local mob, for. Security, quote, unquote because. It's very hard under IFRS, to. Stash bribes, in an income statement so you think, you figure out something like security, so they had they, had hired this group to deliver you, know fifty people walking around with machine guns in this warehouse full of beer that they just brewed and. Then there's an they're all were brown shirts and inside there were group of people with machine guns who had white shirts I said why are the white shirt people. With machine guns well. Those are the people we hire to protect. Against the mob who. We have to pay this. Is a difficult, way to do business and, of, course it's all too common we still hold Heineken despite that but gives, you a sense of what we're what we're attuned to at least. Agency. Costs you know the story there excise. Tax it's very interesting, our. Businesses. Have a, have. A price. Inelastic demand, that, means that governments understand that they can raise the price on our products and the consumers, will keep us consuming, whether, it's cigarettes, beer or spirits, that's. The case. However. Around the world there's a new product which is this thing here, which. Philip Morris's invented, which is a it's. A heat not burn. Cigarette. Replacement, they, developed this over the past four years they spent two and a half billion dollars developing. This destroying. The reported, profits for two and a half years but they realized that if they didn't transition, from traditional cigarettes. To the next generation, someone else would and so, they invested, to destroy their own business ultimately came, up with this thing. Since. They've launched it five million, Japanese, have, converted, fully to. This product and they've given up, combusted.

Cigarettes, So it's a very big deal and, and. When. They launched, throughout the world they're, given a big discount, in excise taxes. And. That that excise, tax discount, is what helps underwrite, the cost of, developing, this product and sending it worldwide but. So. Taxes, are usually. Confiscatory. And, and and and, and and drive. Away pricing pop. Elasticity. But, in some instances, they'll, adopt something, this product, with an idea towards helping the, society. So. We just go, on regulation. You. Know you see it all over the, world in in in India, you, cannot, import, spirits. The. If there's one thing that, in India is is. Is a bankable. Outcome. It, is, their. Passion, for scotch, whiskey. As. A broad statement, and let me ask here, of any Indians. Here what, is it that. That. Would be most likely to travel. Home through duty-free with an Indian. It's. One thing you all have the same idea it's. Johnnie Walker Black Label two bottles, it's. Black Lee that's that's just it, the. Indians drink a hundred and twenty five million, cases. Of, of. Scotch. Like products, but. The tariff. Barriers are so horrific that, you can't really bring in scotch and that's why it's a duty-free thing. Scotland. Produces, seventy five million barrels a year and. And, we own three, we own for, Scotch, producers, and we believe, that over time that regulation. Because, of WTO. And all of the other, forces. That open, up markets that want to themselves. Be open to. Trade elsewhere that we will see a world where. Indians. Will get really, what they prefer which is a high-quality. Imported. Heritage. Beverage. And and, the the target market there's a hundred and twenty five million cases and so. Regulation. Prevents, it now in India, we own we own the shares of United brewery and. Fifty percent of the United brewery through Heineken. It's. Very hard to get economics. Right for breweries, because you, have to have a brewery in each province and obviously. Breweries scale in a much different level than the provincial, demand and there, are only thirteen thousand, legal outlets for beer, in India it's. 1.4. Billion people the, and, so. All. Of those forces, that. Relate to regulation. Will, over time open, up and I think lead to our businesses. Success. We. Talked about taxation. We. Have. It's. Very finely different cultural references. Chinese. Company, came about maybe, eight years ago, created. By to two, people. Who had studying. Trade in the US I met. With them they they sold leaf. And paper, for the cigarette industry, they, went public I met with them they spoke perfect. English they knew everything, about accounting, all the rest and I thought that's amazing, because for 25. Years I've, met with the management, senior, management, of Japan. Tobacco, its. Third largest tobacco company in the world. We, still talk to them through interpreters. Twenty-five, years later they still the fiction, of interpreters, you. Know when when it. And it really makes a big difference in terms of your ability to understand, I visited. Korea and met with the management from Lotte confectionery and, I think. Of an example of how cultural differences can play against you I asked. The interpreter that's the CFO, who, we're with what, the future, cash flow looked like for the next incoming. Years and they, spoke. Korean. Together, for about 40, minutes and, the. Answer came back better. The. Answer came back you know better, okay. I can't. Invest on that and, the, last example and again it's just a story, but it's a it's true, and fun I went. To see Asahi, beer and, and. I spoke through an interpreter for four hours just like that and completely, you know same kind of cool. Conclusionary. Answers came back and we, finished a miserable experience and afterwards we swapped business, cards and and. The man who received the card said oh you're. From Haren here from Lancaster, I grew, up in Redding now. He's in Japan he's he's, the director of Investor Relations for, the Asahi. Beer Japanese, beer but. He spent eight years of his life as a, teenager, living 20. Minutes from where our offices, are in Pennsylvania. And. He spent four hours of my life Torche shirring me with. A with a with a, translator. Only. The finish up by saying oh I grew, up in Lancaster you're, in reading and so, you. That's. Something that I fear the most is the inability to get information, and, then a quick look at some mistakes. Newspapers. I lost, a lot of money on newspapers.

They. Just, completely. Missed. You. Guys. You, know newspapers. Co-opted. Radio when it first came about they co-opted. Television, stations they understood, that they needed to buy up cable business they did everything, related, to median entertainment, and advertising. To. Keep the power and the franchise, within their own industry, and Along, Came. EBay. And, Amazon. Early, days then when Straits newspapers said let's partner, you've got the market we've got that we got the next-gen let's do it together I'm perfect, and the, newspapers, had become so monopolistic. Fat and and lethargic. And slothful that. They said no we want to keep it ourselves but. They had they just they just blinked, in this case and and we sold all of our newspapers, and there was it, was a disappointment. These. Are mistakes of commish and I actually owned those and. Mistakes. Of omission, are interesting, MasterCard, at the IPO we did not buy it they. Lacked a dynamic, leader Ajay Banga came along later on he. Went up fivefold, after, the IPO we did not own it then it dropped 80%, back. To something close to the start and we bought it the second time around but only because of the quality, of the CEO who came in, who's. One of the most masterful. Leaders. In business he's Indian he started, would. Excelled. At the finest school and his extraordinary, talented. I. Omitted. To buy Maotai I. Saw. Someone. Are you from, China, China. So mark tied the. Shares collapsed. Five years ago and when she, went. After. Banqueting. And luxury and and and his attempt to get rid of corruption the. Shares collapsed, and have, advanced Eightfold. Over the past four years and. The. Market value of bata might be 400 billion dollars, they make. 71. Of the number they make seven, billion. Or some number that's just unfathomable. It's a brand that I didn't, buy because I assumed, at some point that, as China became, a more open. Nation. With more people traveling on the world they would surely leave, that product, which no one can drink. Outside. Of China and and, aspire, to the things that the rest of were like and it hasn't happened and they've been an extraordinary fortune. And, and. The other thing is it was controlled by the Communist. Party and the army and I just felt like that would be a fairly, high level of agency cause I pass Alibaba, at the IPO agency, cost I mean what could be more strong, than to. Know that Ali Baba's, Jack Ma already, took six billion dollars, illicitly. From Yahoo, through. Ali pay so. That. Seemed like it was probably a strike against, them but it's done extremely well in Google you know I haven't I haven't purchased. Their shares even though I'm, extraordinarily. Impressed, with their ability to recruit the best and the brightest you, included and. And. The. The. The the notion, of allowing, allowing, those, here. To. Share and participate, in. Developing. Products. Without a lot of ownership, amongst, age groups or or divisions, so it's extraordinary company, I take my hat off to you I should have bought this years a long time ago but, I'll stay open-minded on, them. You. Know I think I think I'm gonna call that call. That oh no I have a I have something. At. The end here let's go back quickly, I'll. Share with you a couple of the things that I think about as I reflect over investments, courtesy. Of these two gentlemen so. You can look at Charlie Munger's musings. Invert. Invert invert it's I suspect. Most of you and though all of these points because you're your, students. Of investing, but, that invert, is very similar to what Warren said where he said if something's not worth doing at all don't. Do it. Invert. Means go, to where you want to end up and then reason, backwards, the most efficient, way to get there and just don't go of the other places along the way that, tie up most people's, bother. Figure. It out and then work back from the, outcome you desire a, warrant. Charlie, talked once about, this. A very profound they. Owned seven, percent of Freddie Mac which was the largest, mortgage. Insurance, company, government-sponsored, entity, and. And. I, was at the annual meeting for Charlie's company and someone said why did you sell it because a guy, who is actually quite a whiner, he, was he, was whining at Charlie Munger's saying the stock was at forty seven when you sold it it's now seventy, why, did you sell that and should, we think about replacing you, as the investment.

Officer, And Charlie was bit P and he, looked out at this guy waited for a long time and he said and through response to the question why did you sell it he said because. We felt like it, simple. As that it's. Such a powerful answer, it, turns out that there were reasons, they had they, had put. Junk bonds in their portfolio, they had extent they retained mortgages, instead of just securitizing. Them and. And. They. Were going into, subprime. To, sort of generate. Unnatural. Reinvestment. When they should have been patient anyways, all. Those were going on but he basically said. You. Know we spent all of our lifetime, trying. To figure out. Businesses. And and when you have a response, based, on your on your judgment, that, were that you can't actually put your finger on you're. Still supposed to act on it most, people overly. Value, knowledge. Thinking. That it is. It. Is the, the trump card when, beliefs, well informed, I really. What you have to act on and and but basically Charlie said is they, felt uncomfortable. Some. Reason, but just the general development and so, they sold seven billion dollars worth of a stock now most, people will be fired if they operated. With with, what, seemed so thin as a reason, but, you spend your life developing. Judgment, and, then failure, to act on it because you're still waiting for more information, is. Dangerous. The, world is full of 8020, rule and in many instances eighty pronounced enough, it's. Certainly. So. That's one. Warrant. In Charlie, whereas this. Year at the meeting why they didn't do something was quite dangerous to the capital and they said basically, it's because they want to be. Rational. Not brilliant another, firm in the insurance business did something cost them three billion dollars Warren didn't and and, the reason was that the other firm, was, looking for something that would be brilliant. And, Warren. And Charlie. Passed because they just needed the, very simple test. Of being. Irrational. I, I. Think I'm gonna stop. Swoop, asked me to, give one, last thing, which is, my. Own lessons. Learned and, then I say that the first one is compound, interest and that's, a career story, you'll. Start your career out now and, twenty. Years from now it'll depend on those, little steps that you take well, that. Over time add up to big results, and. You'll, see people in business, early on who, take big steps early on and you should. Know that along the way they'll probably fall, along, the side and, and. And staying the course and, building the platform that's, very. Cumulative. Is. Good. Character. You know Buffett says it I think it's true reputation. Takes, a lifetime to build and you can destroy it in a minute so I mean, that's that's, clear and he also says how many people, he finds in his life, who. Spent a lifetime sort, of gaining, wealth and and. Do, so at the risk of the reputation which at the end when they're rich the, only thing they care about is reputation so, just. Just make sure that you recognize if, you give it up you're not going to get it back very easily. Capacity. To do nothing is vastly. Vastly. Underappreciated. But. Slot and lethargy as they say at Berkshire but for me just, just. Not not. Acting, as often as pose I turn over I have a slide I didn't show you last, year our portfolio, Turner was one point eight percent. 1.8%. And. Then. My. Business school professor who sent, me down this journey of. Value. Investing globally. Said. Everybody, should make sure that you have a folly, something, that makes no sense that.

Just Adds enjoyment. Pure and, and. That can't be justified. So. Those are some things I leave you with those are those are from your, courtesy, of what. You learn as you go along there's. A little time left for questions I hope, you have some I'm sorry if I ran late, yep. Yeah. Thank you. So. I'd love to hear Tom more about five, C's and maybe if we could just start. With the last one what. Is a folly, of yours. I'd. Say art probably, my wife and I both like art we. We, like art by artists, who we know we're not we. Don't participate. You. Know I think I think in our, there's. A there's, a component that's that's it's, just inspirational. And we, stay within that rather, than enter. The world of commercial. Art which is what. Draws. Many people to anyways it that would be one thing that's quite enough of, interest. To us and. I'd, say certainly, a following is my tennis game um. Because, the, prospects, of it adding, much value over time is quite low but I'm still quite interested, so those. Are the two. And. Tom I, remember, when speaking, over the phone you also said. About. The importance, of character. Yeah and how. Even, more than let's, say talent. And intellect, yeah, you consider. Character, and culture to be key yeah, was, wondering you know in terms of life experiences. That you draw from inspirations. That you draw from if you could talk, to us a little bit more especially. Because not, only here but a lot of people on the video are, gonna be. Youngsters. Who are looking at your talk for inspiration, so, well. Also. I can say is when you get cultures, right, they. Have a they, have an extraordinary, benefit. And. Nestle, would be the place, where I learned this and. You. Know it was it. Was a business that just had, a shared, vision and and. Had. The ability to align. Decisions. Along what. What. Was. Asked of them as a culture. As. Well as the economic promise, of it I suspect. That that culture. Here, is. Extraordinary, and as I said I was here five. Years ago when I first spoke and. I was with the group after. The presentation. And a, very young person who, found his weight as, so many do here with. The enormous talent. Provided. An answer to a question of a person in his mid to late 40s who just suggested. II was, stumped. And this, very, young person said have you considered the following, and you know, I lose the, room was silent there's are 12 people who I thought oh this kid's gonna kill his you, know legs chopped off and, the. Older guy said. No. But. It's a great idea and. So he said that in front of all of us a, recognizing. That he didn't have that insight. This guy did he, was half his age and he felt perfectly, comfortable applauding. That is a possible, source of a solution it's, a very valuable cultural, thing it does not exist in most companies most. Companies are terribly. Territorial. Over. Over ideas. Very. Loath to shed praise broadly. And, really. Low to extend. A hand to someone else this is an extraordinary, of, character. Of and. One that I would hope is preservable. So. That's a plug. For yourselves but it's the important one and. On, compound, interest I remember, you it, said to me something along the lines of the, returns being so back ended yeah that for the first maybe, decade, or two of your career. You. Didn't get a lot of recognition, I, mean stuff that just comes to you maybe if you could talk to us a little bit of that people, might find that inspiring as well no I I must say I was at the hotel this morning I came upon this, well. That sort of interesting he was a classmate of mine at business school and. He. Didn't start, out owning, the Warriors. But. He ended up owning, the Warriors and and and he's interviewed, in here and he said you know he when, he was 8 or 9 and he came, upon the. First indoor basketball court, he ever had and he said someday may own it but he started, out in business and, it was just, like this, but. You know with. With, the right direction, and. And, and a couple of good breaks and character, that that. Protected. Him from overreaching. Too soon he, ends up with his dream and. I, thought that was quite quite, telling and. I. Was impressed, to see it. But. I think you. Know I think the. Remarkable. Notion. Is that the. Series, of small things add, up over time and can. Receive. Reward. Absolutely. I mean it's, I mean I was with some investors recently. Who had. Over. The past decade, extraordinarily. Sort. Of visible. And dynamic, and and and you, know active, businesses, and they've all at some, level other sort of shot. Them down or restricted, and moved them back he said what what's. The difference how can you still be doing this and you don't even do anything you, know you don't buy stocks you you hold, companies for a long time and, I I sort of gave the same answer it was just you know by just staying to the same thing.

We've. Been able to. I. Think, find, some interesting businesses, that because, of their own culture and character have been able to redeploy. Capital, internally, without worrying about quarterly, numbers that's. Allowed, it to stretch out and deliver, value over time but. You'll see a handful of businesses like that, yes. It's. Age of a business a factor, into, when you decide to invest in something because there's all this talk about getting, into things. Early, and then it's, a very scary aspect. To start off with because a lot of things just be end up being like Wall Street, gimmicks. Or yes and. And is, age a factor, into when you look at investable. Business so. For me I oversee. About, fourteen. Billion dollars and so I don't. Really have the luxury of deploying, that into, businesses, that are really, young. Other than you, and. Amazon. I mean there's a there's this extraordinary. Phenomena, right now. We're. Dynamic, new businesses, are also enjoying. Extraordinary. High valuation, so I have the I have the liquidity and the right to invest in these new businesses, and and haven't. Yet. I'm. I'm, impressed. And I and I see within them something, more than what I have been led. To believe up until recently, we says oh well these are very, technology, businesses it's it's just much more disruptive, more deeply disruptive. But. Sighs usually with keeping out of new companies. But. That's, no that's, no justification here, because your your caps are so large I think the four, leading. Members. Of things have a market, capitalization. So that you have a two, trillion dollars on more. Than two trillion dollars, so I there's, plenty for me to find. So. Also new. You. Know they don't have the the, the. Newest. New, is the kind. Of destroyer. Of, the. Threatened and destroyer of our businesses, in many instances, think about. Jack. Daniel's and suddenly you have bullet. And you have Hudson. Whisking, and the more. The. More difficult the search of discovery, is for something that's new and new the. More the, more its rewarded, today and so across. All of our investments, we actually, are engaged, in, mortal. Warfare. Against. The new, while. At the same time trying to. Interpret, that which made those businesses, which we rely upon once, great. Will. Allow them to continue to stay prey so they have to become new in themselves, and that's what this thing was all about here's, a tobacco. Company which, is the most, problematic economy, in the world coming. Up with a product that's, destined. To. Eliminate. The business which they relied upon for so long one, of the musings that Charlie Munger has which i think is so profound, about. Berkshire, Hathaway, as he said, he. Said, at, some point that, which made. Us great at Berkshire, is most, likely not to be that which will keep us great or allow us to become more great I actually don't have it up there but, I know. I see it's that which made Berkshire, greats right in the middle and, you. Know he's he's, 94. And. Understands. That if you don't. Modify. What's. Gotten you well, served today you run the risk of of. Missing. The next turn. We've. Run over yes you have a question. You. Said you did not have very good experience in the newspaper industry yes, so. What, are your learnings from. That experience, and. How. Do you, suggest. Us to evaluate media, companies, yeah. You. Are a really, is just, an. Excessive. Amount of contentedness. That, the industry, fell into when, they finally, had. All, basically. Merged into single, newspaper, towns. And, they. You. Know I have, a funny view on this um I sort. Of I, sort. Of take. It back to. Almost. The. Time. Of Watergate, when. Newspapers. Played. Such an important role the Washington Post played such an important, role in breaking, open a political. Scandal. That. That the role of newspapers, at that at that moment sort of changed, and they they really.

They, Really. Took. A, turn. Towards, sort of trying to find, the next story the next er along those big headline-grabbing ways, and the, best newspapers. The. Ones that really make money and, that a really part of the community are, those which. Are focused. Intently. On, local. And. And so they, have. Seven. Pictures of the high school football team engaged. On, they, have stories, about who. Was arrested who. Was married who died it's. The stuff of the communities, that really create. But. But. The the. Lure, of. Pulitzer. Prize-winning, kind, of. Expose. Journalism. It, became. Hyper. Charged after. Watergate. And I. Think that that shriveled, this sort of feather the intimate relationship that a paper had with its town and. And the, papers that still exist are those that in the that, they still make some money but they're they're a lot thinner and they and, they focus on on, the area now. Advertising. At you as you better than anyone else would know is. Is. Becoming. A, really, fascinating. Story, of sort, of personal, testimonials. And a personal, search for. Something. That you can friend and then tell others, about and. You. Know that, is very interesting, because, newspapers. As they were historically. Set up as advertising vehicles you know the advertising. Paid. For, the, content. And and. The content, is what drew the eyeballs, that that advertisers, cared about today. You, know the advertising, is very specific. Very purposeful, and, so, the ancillary. Advertising. That arose from just, the presence. Of having content that you wanted to see and you accidentally, saw an advertising, the next to it is is, very, old-fashioned, advertising. These days placed, with the purpose, and, it's. Often, itself, you know it's not it's not collateral and. And. Accordingly. He's has. It's becoming far more effective. Because. They you, know the idea is that. Information. Informs. That. That. You are about to buy a red sweater. Because. Of all of the prior steps you've taken and, you. Know the guy who sells, red sweaters wants to know about that on, time and, so that's a very different world that's very, powerful. And. With that I think we're out of time thank. You so much mr. Russo, thank you pleasure. You.

2018-03-01 20:56

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