Leroi Yu is an HBA and Computer Science dual degree candidate. Upon graduation, he will be joining Ares Management’s Private Equity Group in Los Angeles. Drawing on a passion for all aspects of business and lessons learned both inside and outside the Value Investing course, Leroi looks forward to furthering his knowledge in the area.
When considering leading global brands, it is important to consider management’s capacity to reinvest, to suffer, and to do nothing.
On March 15, Tom Russo, Managing Member of Gardner Russo & Gardner, a Pennsylvania-based investment advisor firm, spoke with Professor George Athanassakos’ value investing class about the company’s investment framework.
“There are precious few companies that enjoy both the opportunity to reinvest and the protection for management that allows them to make the right amount of reinvestment,” said Russo. “I prefer to concentrate our holdings in such companies rather than to mistakenly try to reduce risk by diversifying away from high-conviction holdings to spread the risk amongst other companies.”
The company’s investment philosophy can be traced back to the lessons Russo learned over the years. He shared three ideas to keep in mind for success.
- Capacity to reinvest
For management to succeed, they must be willing and able to reinvest cash flows into opportunities that promise outsized returns. Russo draws on the example of Swatch and its investment into the luxury jewelry space through the acquisition of Harry Winston. By directing its cash flow into opportunities that widen economic moats and business opportunities, Swatch is trading near-term pain for long-term sustainability.
- Capacity to suffer
To make the proper investment decisions, management must be able to suffer rebuke from Wall Street’s sell-side analyst community, shareholder activists, and takeover predators. Drawing on the example of Nestle and its Maggi bouillon cubes in India, companies must have the resilience and conviction to see opportunities through, even if the benefits do not show for many years.
- Capacity to do nothing
Despite the long-term unattractiveness of holding cash, doing nothing may sometimes prove to be the right decision to make. Sitting on the sidelines instead of compromising on quality takes character. It provides optionality and may prove to be beneficial in the long-run.
Finally, Russo told students about the importance of having the right clients. For the fund to be successful, it is important that the clients are aligned on the strategy and that they have the same ability to suffer short-term volatility as the fund and management do.
