MALE SPEAKER: Hello,
and welcome everyone
to another episode of our
Value investing Series.
We have a very special
guest with us today.
So in thinking about
introducing him,
I have to start off with
a series of experiments,
a series of studies
that were done
at Stanford by the
professor Walter
Mischel in 1960s and '70s.
These are also most widely known
as the Stanford Marshmallow
Experiment that you
might have heard of.
Essentially, it
was an experiment.
It was basically a bunch of
studies in which children were
offered a choice between
one small reward provided
immediately, or two small
rewards if they waited
for a short period, which was
about 15 minutes, during which
the tester would leave
the room and then return.
The reward was sometimes
a marshmallow, but often
a cookie or a pretzel.
In followup studies, what
these researchers found
was very surprising.
These children who were able to
wait longer for the preferred
rewards tended to have
better life outcomes
as measured by SAT scores,
educational attainment, body
mass index, and
other life measures.
Now why am I mentioning this?
Our guest today is no
psychology professor.
But he happens to
be a Stanford alum.
And he happens to be a
world famous value investor.
In speaking about his investing
process and philosophy,
you will see parallels
between delayed gratification.
Let me share a quote
from his recent interview
with all of you.
He describes his
process saying, "We
tend to benefit in life when
we sacrifice something today
to gain something tomorrow.
That is true for companies.
That is true for individuals."
His focus, he says,
is on businesses
that have the capacity to
suffer, that is, they can
reinvest their capital
at high rates of return
so that the wealth will
continue to compound
into years into the future.
Thomas Russo, our guest,
is a preeminent investor
of our times who began his
investing journey in 1982
after an encounter
that changed his life.
He was studying law and
business as a graduate student
at Stanford when Warren Buffett
came to address his investment
class.
As Mr. Russo explained
in a recent interview,
he was dazzled by the
speed of Buffett's mind,
his quirky delivery,
and his beguiling
habit of courting everyone from
Bertrand Russell to Yogi Berra
and the wisdom of his
deeply thought ideas.
This inspired him to finding
his own investment vehicle
and starting his value
investing journey.
We are so glad that
he's here in person
to share his experience
and his journey
and his insights
with all of us here.
Thank you for coming.
So without any further
ado, ladies and gentlemen,
please join me in welcoming
the one and only Thomas Russo.
[APPLAUSE]
THOMAS RUSSO: I'm so
pleased to be here.
I actually thought
the setting would
be a much different setting.
I thought we'd be underground
in some catacombs with a group
of people worshipping
an outlawed
faith in Silicon Valley, the
faith of value investing.
But here we are, next
to the free food,
the wonderfully lit
room, great chairs.
So being a zealot in the
investment business today
doesn't bear the marks
that it did 2000 years ago
for religious zealots, I guess.
It's a great honor to be
here, especially at this time.
It's a really good excuse to
get away from the markets, which
is something that's welcome.
Even though I say that, we've
had an unusual period of time
which reaffirms what
[? Surapa ?] described
as this value investing
preference for businesses that
have the capacity to
suffer, because you think
about my last three years,
we've certainly suffered when
compared to the S&P 500, which
has been elevated by sort
of global capital flows.
And we've had businesses
that, right through this,
have been investing in
their strong global brands,
but showing a modest growth
at the reporting level
because they often invest a
portion of their net profits
against future
business prospects.
Now recently, almost a third of
our portfolios in beverages--
and the world is now quite
reaffirmed about the value
of beverage brands through
the noise about the AB InBev
acquisition of SABMiller--
we own both those shares,
and it's helped generate
performance recently
in the face of a
plunging market.
And then I was reminded
of this again today, which
was the results of an
announcement by JT Tobacco
to acquire American Spirit
from Reynolds American Tobacco.
Well, quite
extraordinarily, the price
was almost Silicon Valley-like.
It was 300 times
operating income
for a business-- they paid
$5 billion for a business
that I think had around
$500 million in revenue,
much smaller base of
profits because it's still
investing in its own growth.
But they saw something that they
could take around the world.
And it reaffirms-- within
a business like RJR,
where people often
overlook the investment
because it lacks sizzle-- that
the strength of the brand,
the predictability of cash
flow, and the ability,
most importantly, to reinvest
that cash flow going forward--
leaves it quite valuable.
I'm going to come over here so
I can move some of these around.
I did, in fact, also
welcome the chance
to come up because
I'll talk tomorrow
to the students in Professor
Jack McDonald's class, which
I've done for the
past 25 years, having
graduated from his class.
And it was there that
Buffettt came to our class
and provided some
early insights.
I'll go through a
couple of quick slides.
As an investor, you're always,
at least in the value investing
world, encouraged to
invest for the long term
and let market disruptions
pass you by, hold on.
And I was reminded of
this in June of 2008,
when I was in Africa with
my family on a safari.
And every day we'd go
out to visit the range
and look for animals.
Each one looks more
ferocious than the next.
And every single time,
the guide would say, look,
if you're ever separated from
the group, and you're alone,
and you're being charged
by a lion or anything
else-- a chameleon,
anything that
might come at you-- freeze,
and it'll ignore you,
run right past you.
But if you run,
they'll chase you down.
That was the rule again
and again and again.
Finally we came upon this guy.
And he said that,
that's a Cape Buffalo.
If ever you're alone and
you're separated from the group
and you see one coming
charging at you, run like hell.
And so that happened
in June of 2008,
when the market was
just in free fall.
And at the time, I sort
of felt like maybe we
should run like hell.
We didn't, and we haven't.
It's my belief,
it's been my belief,
that equities are
the preferred form
of investing for one capable
of enduring short-term pain
for long-term gain.
Equities will be the
best way to do that.
And along that
line, I would just
want to make a point about
this other Stanford experiment
that you referred to.
I do believe definitely in
deferral in the investment
world-- as you can see,
a little less as it
comes to marshmallows.
I tend to grab the big
ones and eat them quickly.
But the principle's the same.
In fact, I incorporate
the principle in one
of the early
lessons that Buffett
gave at an annual meeting
of Berkshire, where he said,
you know, really, investing is
as simple as "Aesop's Fable."
It's about the bird in hand
versus the bird in the bush.
The only thing you need to
know-- because you know what
you have-- what you need to
know, which is uncertain,
is what you'll end up with when.
And he says, it's
as easy is that,
and then he says,
it's as hard as that.
I'm in an audience at Google.
And I think I read
that the minutes spent
on YouTube in the last second
quarter versus the prior year
was up 60%, and that's
on a million users.
And I can tell you that if you
keep up that type of growth
rate, it won't take that long.
You'll know what you're going
to have, which is a lot,
and it's going to happen soon.
But in most
businesses you're not
blessed with 60% growth rates.
There's something
much less commanding.
But it is about what
you'll end up with.
And so I think
that's a good emblem.
This I take from one of
our largest holdings,
which is Nestle.
They, like Google,
talk extensively
about corporate
culture, because that
is what you can bank on
when you make an investment.
We own businesses
that are supposed
to reproduce
themselves over time,
and you need a strong culture.
And the head of Nestle's Japan
business once showed this slide
and remarked about
how lovely he thought
that 700-year-old temple was.
And then he said, now, none
of the wood's 700 years old,
but the temple is.
And I thought of that as
sort of an apt metaphor
for what businesses are like.
I mean, none of you will
be at Google at some point,
but Google will hopefully
still be Google.
The timbers are all
changed out here,
but it still stands
for the same thing.
And you'll be a very different
company when you're all gone.
But Google should
still stand, in light
of its context at that
time, as a business
with the same virtues and
values as it is today.
And that corporate
culture is extraordinarily
important to myself because
most of the money that I oversee
is invested through me by
wealthy families, family
offices.
And for them, it helps
a lot to hold a business
for a very long time.
And the only way
you can invest based
on that belief is if you get
the corporate culture right
I came out of Warren Buffett's
visit to my class in 1982
at Stanford Business School
with a couple of sets
of information captured here.
First, the $0.50 dollar bill.
That used to be the
old-fashioned way of thinking
about value investing.
If you buy $0.50 dollar bill,
your margin of safety was quite
great because of the discount.
Your internal rate of return,
however, depended exactly
on when that discount closed.
And if it closed in a year,
you'd make 100% on your money.
If it took 10 years, you'd
make 7% on your money,
and so on through
the Rule of 72.
It's also problematic
because it's taxable.
So in that old model, if
you took that $0.50 dollar
and realized the dollar,
you'd pay 40% tax on that now
because long term gains
have been less favored.
And you have to
redeploy the money
into finding something else.
That didn't seem like
much of a thoughtful way
to conduct affairs
from my perspective,
especially since,
at business school,
Warren gave the class
the primary benefit.
He talked about
the only one thing
that the government gives
you as an investor, which
is the non-taxation
of unrealized gains.
They give you one
other thing, which
is that you can deduct
losses for tax purposes.
But you don't you
want to go there.
You're much better
off finding something
that you could hold so that the
gains that you get over time
are unrealized.
So when he spoke at
our class, Berkshire
traded at $900 a share.
Today it's at $200,000 a share.
It's never paid a dividend.
It's never done anything
except compound.
And it's only because
he's been able to reinvest
at such a high rate internally.
And rather than try to close the
discount, the discount that we
started with, he just
let the intrinsic value
compound and the market price
will track it over time.
It
Warren also said
that there aren't
that many good
businesses in the world.
As an investor you
should select a business
that you find interesting
so you would follow it
and you spend more time with it.
For me, that was
consumer brands.
Early Buffett
investing was sort of
transformed once Berkshire
bought See's Chocolate
in the early '70s.
And I heard from him
early into that exercise,
but he already had realized
that See's gave him the ability
to raise prices regularly,
because the consumer doesn't
believe that there's an adequate
substitute for the brands
that they embrace.
I recognized that once
flying on an airplane,
and the person next to me
ordered a Jack Daniels.
The steward said, sorry, we
just have Jim Beam, and he said,
I'll have water.
I'd rather have
water than the one
that I don't really
identify with.
And that brand
loyalty, by the way,
is what we look for at the
heart of our businesses.
That gives pricing power, that
gives predictability of demand.
In fact, it's that brand
loyalty that, at some point,
you guys are involved with
creating and sustaining
through all of the work
that happens at Google.
But that's the sort
of uber brand value
rather than the
search brand value.
So we can talk
about that later on,
because I'm intrigued by Google.
So what did Warren say?
He said margin of
safety's required.
The $0.50 dollar bill, however,
changed by the time I met him,
because he realized that a
business that can price has
the ability to grow, and that
growth is more powerful than
discounts of inert value.
He said, observe the tax
efficiency of holding.
And then he said,
you're probably
going to have to find managers
who are owner-minded if you're
going to hold for a long time,
because otherwise they'll
steal from you.
So the question is agency
costs, and that's actually
at the heart of the
investment contract
that you have with your
public company managers.
There is a contract that
says, you'll have the use
of my money, my
investors' money,
but you have to treat
it as if it's your own.
You can't prefer your
returns to their returns.
That's very hard to find.
And so in my world, where
I found it to be available
is through
family-controlled companies
where the family exercise
dominion on their own rights
over the management to do
what's right for the next 10
generations of the family.
That's starts to feel
comfortable to me because
of my long-term mindedness.
I like businesses that invest
for the very longest term,
and do so with the owner in
mind rather than management.
The average US public
company, by contrast,
has no family entanglements.
It's purely public.
There's absolutely no
image of a shareholder
when people think
about the contract.
I actually met the CFO
of Coca Cola recently,
and she referred to shareholders
as stakeholders, and I said,
don't you really mean owners?
Because the word
stakeholder-- I mean,
you could be a stakeholder
if you're the community,
if you're this or you're that.
There are all these concepts.
But in business, what you really
want your agents to think about
is the owner at some level.
Public companies
are so far removed
from that it's not even funny.
Really, it's the idea of how do
you make the public company's
money manage its money?
The most efficient way designed
to do that are stock options.
And stock options
have one problem,
which is the only work over
a specific period of time,
after which, if the
prices isn't struck,
they end up being worthless.
So the one thing
public companies
start to spend an awful
lot of time caring
about, way too much, is time.
They need it now.
And in fact, Wall
Street loves companies
that are willing to present
things early on because it
means that they can predict more
clearly what the world's going
to look like than what natural
outcomes ought to allow.
So they can say, General Mills
is going to earn $1.50 this
quarter, and General Mills
will earn $1.50 this quarter.
They won't really earn
it, but they'll report it.
And they'll do that again
and again and again.
And then over time,
by taking steps
that get the outcome,
to meet the target,
to keep the share price up--
because there's no volatility,
it's all predictable-- they
hollow out the franchise.
Just the opposite of
what we're looking for.
We're looking for
businesses that
are willing to completely
thrash the near term in pursuit
of the long term.
But in order to
do that, they have
to have security in one
issue, which is control.
That's where the
family-controlled company
comes into play, because they
can, with their super vote,
defend against the pressures
that normal managements are
willing to assume in
the complicit bargain
that they have with stock
option-driven compensation.
I'll fast forward for a second.
I pulled this from the
Google founding principles.
And right at the heart of
what Google talks about,
and what I think gives
you such endurance,
is this structure, this
third paragraph down,
second sentence. "This
structure will also
make it easier for
our management team
to follow the long-term
innovative approach emphasized
earlier."
They have the
management's back covered,
and they allow, from that
standpoint-- investments have
a very long payback,
but upfront burden
to take place at full
amounts, because it's
my belief that most public
companies, the error
is on under-investment
upfront to make sure
that the results are,
in effect, overstated.
Now I use the term
capacity to suffer.
It's a funny one.
It was partly derived
from another investor
you may have met with
or heard of called
Jean-Marie Eveillard, who runs
SoGen's International Fund.
He was quite an early
international investor.
And at a Columbia
function I was at,
the business school,
somebody asked him
what he looked for in
analysts when he was hiring
to build as investment team.
And without a moment, he
said, the capacity to suffer.
And I thought that was an
appropriate definition.
And the reason he said that
is that it's so rare to find
that in America,
because as a country,
we always think that every
single day should be better
than the prior day.
Actually, there's a
great quote in the book
that I just read, "Work Rules."
And he talks about a guy who
was in a cubicle, and he said,
every day of his life is
worse than the day before.
That's the capacity to suffer.
But in the investment world,
the capacity to suffer
is hard to find.
People expect returns to
come easily, regularly,
and they don't.
And so his recognition
was that you
have to have people
in the investment
business
constitutionally prepared
to have deferred results.
All right.
So if we start out
believing that we're
going to hold something
for a very long time, what
it needs to have is the
capacity to reinvest internally.
For me, I used consumer
brands as the industry
through which I invest because
they tend to be very enduring.
You think about Communist China.
After the veil lifted and
commerce could go back in,
the number one cigarette in
Communist China the next day
was a cigarette that
hadn't been in the country
for 55 years of Communism.
It was the old British
American tobacco
brand called State Express 555.
Hadn't been in the market,
but somehow it was still
in the brains of the consumer.
Same thing with Romania when
the wall went down in Romania.
The number one thing
that the Romanians wanted
was Chesterfield cigarettes.
Well, you can't even
find them anymore.
But that brand endured for 55
years in the consumer psyche.
And what we look
for is the ability
to reinvest behind those brands.
The strength of the
brands tend to allow
for more regular free cash flow
because of the pricing power
that you get.
The likelihood of finding
owner-minded businesses
goes up with consumer
brands because they
tend to have been, over the
life of the company, more
self-funding.
You think about why it is that
most American companies don't
end up with control
shareholders,
because if you're in
a crummy business,
it takes a lot of money to grow.
And you have to raise
additional equity again
and again and again
to fund the growth.
And at the end, if it's a
sufficiently competitive crummy
business, you're going to have
horrible results and no control
shareholder.
The presence of a
business that still
has control held by the family
is an evidence of the fact
that the business is, at its
heart, quite cash generative.
Now it's not enough just
to be cash generative.
What you really want
is to have the capacity
to have that cash that the
mature markets deliver,
in the world of consumer brands,
available for reinvestment
globally where 95% of the
world exists in population,
and where GDPs are
escalating, and where
consumer disposable
income is just growing.
And so we want to have brands
that have relevance abroad,
which gives them the capacity
to reinvest mature market cash
flows into growing markets.
It leads this portfolio
that I oversee
to be primarily European.
That's for a couple reasons.
One, the European managements
aren't nearly so accustomed
to compensation based
on equity options.
And so this notion of
having to do something
quickly-- and fabricate
numbers to make sure
that the Wall Street
analysts are pleased enough
to keep the stock price
high enough for your options
to be worth something--
doesn't exist over there.
They pay people cash.
The brands that exists in
Europe have been abroad more
historically, and hence are
more embedded in the culture.
In India you have
Hindustan Lever.
Well, that's Unilever.
You have Cadbury of India.
That's Cadbury Schweppes.
You have Nestle of India.
They've been around, in
the case of those three,
for at least 50 years.
And their aspirational
character was developed
over that period of time.
And that aspirational
character gives pricing power.
And that pricing power
allows for reinvestment.
So we're looking
for global brands.
We like the developing
emerging markets,
because that's where the newly
formed demand is arising.
That's where the markets
are un-invested in.
And that's where
GDPs are rising.
Everything I'm
telling you, actually,
was more true as a context
two years ago than today.
If you think about the stories
of the current world, collapse
of commodity prices, pulling
back of manufacturing,
China coming back.
So lots of what I've built
into my investment thesis
is sort of in flux.
And it's an interesting time.
But it certainly has
been, for the past 25
years of the course
of my investment
creator, a one-way tailwind,
the opening up of markets
leading to the transparency and
liberalization of societies,
leaving people free to buy
things that they'd long aspired
to, leading our
companies to have a place
to pour back their free
cash flow into meeting
that consumer need as a group.
What else do you need?
And this also favors
international community.
One thing you need to
expand internationally--
if that's where your growth
is going to come from-- you
better have multilingual
and multicultural managers.
Multilingual surfaces
quite quickly.
In this audience,
how many people
here speak more than
three languages?
Good It's rare.
It's really rare
in North America.
It's not at all rare in Europe.
So at Nestle, I think the top
100 people in the management
team speak four languages.
And at Kraft Foods in
Illinois they speak 0.9.
Multicultural.
That's important.
Let me ask somebody
a question here.
How many people-- just
by raising your hand--
how many people have a
favorite cricket player?
See, you're a very
unusual company.
That's what makes Google great.
Nowhere else, if I
ask that question,
will a single hand go up.
1.7 billion people go
to sleep each night
thinking about their
favorite cricket player.
And if you're going to be
effective internationally,
you probably want
to have somebody who
understands that story line.
So the capacity to reinvest
is not democratically shared.
I made light of Kraft.
Indeed, we had and
sold all of our stake
in Kraft because of their
provincial portfolio
and their lack of
natural reinvestment.
They tried to go into China,
they failed, they came out.
They had no people to
develop the market.
They didn't understand it.
And it's a domestic
company, and it's
a company that's made lots
of money selling cheese
and cookies and
meat to Americans.
And America was a
big enough market
that it kept their
ambitions fully staffed.
But they had no capacity
to go internationally.
We want businesses that can.
Nestle, Unilever.
They have the bench strength,
they have the brands,
they have the cash flow,
they have the understanding
of where the puck's going.
Now in order to do
it the right way,
you have to have the
capacity to suffer.
That means that when you
open up a new market,
you're going to have unabsorbed
fixed costs in spades,
and that will burden
current income.
If you're not protected
through major shareholders who
support that long-term vision,
I can assure you-- today
especially so-- you
will have any number
of a dozen different
activists come in by 1% or 2%
of your company
and demand better.
You can do better.
If not, we'll kick you out.
And no management team wants
to do that, especially midway
through an investment cycle.
I'll give you a quick example.
We own shares of
Cadbury Schweppes.
It's a terrific business.
They had three pillars.
They had gum, chocolate,
and hard candy.
Each one of those came from
a different background.
in Each one was dominant
different parts of the world.
Put it all together.
They had great market presence
in parts of the world that
had been massively underserved.
The joy of eating sweet things.
So what do they do?
They decide that they try to
launch the business in China.
And they start out in Hong
Kong, Beijing, and Shanghai.
And they knock the ball
out of the court, everyone
believes it's a good business.
The Chinese line up.
They like it.
They go to 200 of the
next cities in line.
So that takes you down to
cities of a million or more,
but there are 200 of them.
Now the suffering really starts.
Now they're spending
a lot of money.
They have to
introduce the brand,
they have to build
awareness and all the rest.
And they do it
across 200 cities.
Now I heard from the CEO of
the company sort of midstream
through this.
He understood that the
investment spending
was going to just overwhelm the
reported profits out of Hong
Kong, Shanghai, and Beijing.
In fact, they'd show losses
for as long as they could see.
And every year that went by
and they invested like this,
they built net worth because
they converted consumers
who became loyalists and who
had lifetime consumer patterns.
And you can know the upfront
value of a converted customer
addicted to sweet things.
They were midway through the
process, losing a lot of money.
Along comes Nelson Peltz,
knocks on the door and says,
you gotta do better.
The numbers just
aren't advancing.
You have to do something.
Give us some earnings.
So the board and the CEO
went home over the weekend,
came back and said, right.
We think we have China wrong.
That investment work we're
doing in those 200 cities.
We're way out in
front of our skis.
It's just not working.
Let's close it.
Now with that, they
manufactured income
because they stopped
bearing the costs
of investing for the future.
They destroyed wealth,
because all the people
who had bought on board the
brands now no longer could
source them.
And away went the
equity, the goodwill
that they had created through
that investment spending
midstream.
And they lacked the
capacity to suffer,
because when a raider came
and rattled their cage,
they said fine.
We'll do just what you need.
We have a handful
of examples here,
which I'll go through
quite quickly.
I'd say the best
example of a company,
too, that had the
capacity to suffer.
One is inside this room.
You know, you think about
all the kind of projects
that Google incubates,
burdening profit
with an idea, maybe, of where
it'll end up, but in some cases
not even.
That's extraordinarily powerful.
And you have lots to
show as a result of that.
That scale would be a
very interesting one,
because I think you
have an awful lot
to show for the
willingness to suffer.
And Amazon.
Amazon's way out,
even beyond you guys.
I'm not sure that they'll
ever report a profit.
But they certainly have
the capacity to suffer.
So do their shareholders.
Well, of course they
get rewarded for it.
The price has gone up so much.
So the businesses that we'll
look at are more traditional.
Berkshire is the best one.
That's why I learned
this subject.
Warren talks about
it all the time.
But Geico's a great example.
Much like
confectionery in China,
it's expensive, it turns out,
to bring on an auto insured.
And so when Warren
bought controlled Geico,
he asked the CEO why they only
had two million policyholders,
and the CEO said, because
it's too expensive to grow.
Every new policy
we put on the book
loses $250 in the first year.
And ongoing insured make $150
per year of operating profit
for the company.
So you have two million
policyholders making $150 year,
so they were reporting
$300 million of profits.
And if they wanted to grow
a million new policies
the next year--
because as Warren said,
they had the best
business, under-penetrated,
the market should
have more of them.
So why not grow it by a
million policyholders?
What would happen to the
operating income that year?
It would go from
300 to 50 assuming
that the other business
didn't grow at all.
Now no public company can
endure that kind of volatility.
The activists would be
on that thing so quickly.
Inside Berkshire,
it didn't matter.
Warren controls
40%+ of the stock.
He's never told
investors that he's
in the business of
manufacturing reported earnings.
No one get stock options.
He gets paid $100,000 a year.
It's all about owner's
equity, intrinsic value,
and how do you grow that with
certainty as best you can?
Well, no better reinvestment
than to take that $2 million
insured base up because of its
persistency and its low claims,
lack of adverse
selection as they grew.
They had a lot of room.
And by the way, even though the
first year cost, reported loss
of a new insured
was $250 upfront,
the moment they signed up the
net present value, lifetime
value of each insured, $2,000.
That's $150 stretched out
forever, brought back.
Now, so for the
mere inconvenience
of reporting a
$250 loss upfront,
they put on $2,000 of value.
Warren got it.
Today, 14 years later, they
have 11 million policyholders.
And in the annual report
he said to investors,
because he's a fair
partner, if you're
thinking about selling
the business, your shares
in Berkshire, understand that
book value doesn't capture all
that we've got that's good.
And he said, for instance, at
Geico we've added $20 billion
of value since we bought it.
Now that's that $20
billion that comes
from those 9,000 new insured.
And the only way
you get there is
by having the capacity to
let the income statement
bear the burden.
And over that time, they
took their annual ad spending
from $30 million
up to $1 billion.
And you'd all know that,
because watching television
is really a series of Geico
advertisements these days.
Another thing that
Berkshire did was,
the equity index put options.
There's a group
that had $37 billion
worth of equities,
market value equities,
around the world for
different markets.
And whatever the
reason, that group
had to be able to say
to their counterparties
that that $37 billion
was not at risk.
They needed for
their collateral,
whatever the reasons,
to have $37 billion.
And so Warren was
asked to insure
against the potential for that
portfolio to decline in value.
He sold them a put option.
In return, we received
$5.3 billion to invest,
unfettered, for 18 years.
It was non-callable and
it had no collateral
posting requirements, which are
the killers in this business.
So why did Warren get
$5 billion to insure
against the decline of
equities over 18 years
when, likely, the course of
equity values is up over time?
It's because the people
who needed that insurance
had nowhere else to go.
First, Warren had the capital.
He had $50 billion of spare
cash which sort of buttressed
his claims-paying appeal.
Other people who might
take the $5 billion
don't have the capital
balance sheet or the culture
to provide for the
ultimate payment
if the world went to zero
and they owed $37 billion.
Warren has that, and the
culture would honor that.
The other thing, the
more important thing,
was nobody else would
touch this stuff,
because every quarter there is
a mark to market requirement.
And it absolutely
crushes reported profits.
So for example.
After they signed it,
received the $5 billion,
the equity world
markets collapsed
and they had six quarters
in a row of over $1 billion
worth of charges to
the income statement,
some periods as
much as $3 billion,
because global
equities collapsed.
And every time it
collapsed, they'd
have to pass through
the reported profits,
the mark to market.
OK.
So at the end of the
day he had $13 billion
less in earnings
cumulatively over that time.
But he had $5 billion
which he had put to work.
And that's sort of the
last story about Berkshire.
Another way in which you could
see his capacity to suffer
added enormous value was that
during the crisis-- well,
during the period leading up
to the financial crisis of 2007
and 2008, Warren, at
the annual meetings,
always lamented the fact that
he had $50 billion cash hanging
around on which he
was only earning .01%.
And that's the safe return.
That's sort of the federal
treasury bills that are secure.
Since he kept it in cash, he
might as well keep it secure.
But he was only making .01%.
01%.
If he had standard
company practices,
he never would have
kept $50 billion of cash
in overnight money.
He would have gone
out three, 10, 14, 40
years on a bond portfolio and
would have had a 4% yield.
He kept it at .01% because
he didn't trust inflation
or credits to support
having $50 billion
in longer duration investments.
The difference between 4%
and 0.1% on $50 billion
is $2 billion a year.
That's the amount he
suffered by under reporting,
because he kept his money
in liquid treasuries.
That requires a lot of
suffering because $2 billion
is a lot of money,
even to Warren.
Now ironically, to show you
how American companies behave,
at the same time that Warren was
belly aching about only making
.1%, General Electric had taken
$100 billion of their borrowing
and brought it into
commercial paper overnight
to capture those same low rates.
Now it's a different story
for General Electric, though.
You have businesses that have
long-term funding requirements
where you can't responsibly
borrow overnight to meet.
You can do so if your goal
is to manufacture earnings.
And off $100 billion in
the overnight market,
where they might be earning
2%-- they may be paying to 2/10
of 1%, let's say, maybe even
.03% in the commercial paper
market-- they should have been
paying 4%, exactly like Warren.
In their case, they should have
stretched out their liability
structure.
But by taking it all
into commercial paper,
investment bankers assured them
that they could swap them out
at any minute.
They could go back long.
They could go into yen,
any currency they wanted.
It was just a number
after all, wasn't it?
Well, they forgot
one thing, which
is that overnight
markets can shut down.
And when Lehman burst, GE had
$100 billion of overnight money
that they couldn't roll.
Warren, happily, had
$50 billion which
he could use to help them out.
And he gave them the right
to $12 billion of his money
at 12% with hundreds of millions
of shares of call options.
In case the company
did well, he would
have the privilege of making
the equity that they recklessly
threatened by their
non-owner minded ways.
Now they were not at
all unusual in this.
This is what public
companies do.
They bring down the rest of the
cost because it helps flatter.
In GE's case, that was $4
billion of manufactured income.
Now this I would
complain to you about.
However, there's one mega
force on the landscape that's
done one worse than that,
which is the United States
government.
We have taken our borrowing
from $9 trillion to $18 trillion
through QE, most of which
was not invested but was
transferred, to try to stimulate
some kind of economic growth
in the absence of a
Congress that doesn't meet.
And we keep that
money predominantly
in overnight borrowings.
The yield curve
of the US Treasury
is abysmally short term,
and we are massively
understating, when we look
at our own deficit, what
this country has put itself
into, which is $9 trillion
of additional borrowing coming
through at sort of 1, maybe 1,
1.5%.
And the real cost
of that burden will
be very apparent at some point
when rates go, uncontrollably
by us, upwards
beyond our control.
Anyways, I hope
that what, for me,
has been most
educational from the time
I first heard Warren speak
at Stanford to the present--
this notion of how the
capacity to reinvest surfaces
is best illustrated by those
three ideas in Berkshire.
And there have been a
whole series of business
that have done it afterwards.
Nestle is extremely
well-positioned
in the landscape of
what I look at by virtue
of having all these
billion-dollar brands widely
v distributed throughout
the emerging markets,
aspirational, and
available, increasingly,
due to the hard work of
multilingual, multicultural
people delivering
their business.
The company does not hurry.
When I first invested in
the business's shares, 1987,
the CEO then, because of Wall
Street's miserable reaction
to their patience,
said, well, what
is Nestle's planning horizon?
This is the CEO.
And he said, without a flinch,
he said, our planning horizon
is 35 years, but we
tend to break it up
in five-year increments.
Now this is what you
want of a company
if you're thinking long term.
I think American companies
have a 35-minute, not
year, planning horizon.
This graph, I think,
just demonstrates
what it is that we're
about, what we're going for,
which is on the far left, as
you look at low per capita GDP,
and then you move
up to the right,
you go from subsistence to
buying, to buying better,
to buying luxury.
And there are two or
three billion people
in the world sort of at
the far left of 2,700.
I think in China now
today it's 7,000 GDP,
but it's bifurcated badly,
probably 500 million
of less than 1,000.
In India there's half a
billion less than 1,000
in the rural areas.
The country's
probably much higher.
But it's that migration from
subsistence with no commerce,
to commerce, into brands
that we're in the midst of.
And that's what
we invest behind.
The company has the
patience on reinvestment.
If you look at the very
top of this little chart
you'll see in Nespresso.
Very, very top.
It's a business that they
pioneered about 20 years ago.
It took them 15 years-- maybe
it was 25 years, I don't know.
It took them 15 years
before they broke even
on that business.
They lost nothing but money
for the development phase.
And they built it right,
and they tested it.
And along the way,
when other competitors
had wind of what
they were doing,
they came out with products that
were not nearly so competitive,
like Tassimo by Kraft,
and some others who were
more interested in short term.
Nespresso built their
business to last,
and today they do $5
billion of business.
Now it's not an
unblemished record,
because Keurig's
a huge business.
They should have shut them down.
And Starbucks has grown to be an
enormous presence in the coffee
business, and they
probably should
have been more adept at that.
But they still, nonetheless,
had the capacity
to deliver a truly great
business in Nespresso, which is
what these boutiques look like.
Let's think here.
We could go on.
I'll just give you
a quick overview.
Pernod Ricard, great
portfolio of spirits.
Two in particular,
Martel and Chivas,
they acquired through Seagram's.
When they bought it, it
was in the year 2000.
China was going
through a downturn.
There was a company called LVMH
and Diageo, who owned Johnny
Walker and they own Hennessy.
And those were the two largest
brands in China from the west.
At the time they were
about two million cases.
At that time, Diageo said,
OK, China's going into a funk.
We'll just pull out because
we want to protect our income,
our reported profits.
Why spend the money now when
the market's turned down?
We're probably not going to
get a lot of yield from that.
Let's take our brands home,
maybe come back later on.
At that time, Pernod
Ricard had just
acquired Seagram's, and with
it came Chivas, like Johnny
Walker, Markel like Hennessy.
And they said,
well, you know what?
We're a family.
We own the business.
No one can take us out.
We don't have to worry
about reported income.
Why don't we go in and
see what we can do?
Now since then, obviously,
China has recovered.
Chivas and Martel succeed.
They're not the largest Western
imported spirits in China.
Diageo struggles to get
relisted in the country
that they once
commanded but left.
They left for the
wrong reason, which
was maintain that earnings
per share, because why not not
suffer if you don't have to?
Well, they should have stayed.
The long-term prospects
of this business,
however, are not yet scratched.
The white space, looking forward
in their portfolio, in China
there are half a billion
cases of baijiu, local spirits
consumed per year.
All of the premium Western
businesses, in total,
do only four million cases.
So we've got 549 million
cases that we can go after.
And an agitant to this
will be the great growth
in the Chinese tourists.
There'll be over 100 million
tourists this year from China.
As they go to
Europe, they observe.
They're already minded towards
those western trademarks.
And they'll come home
with a couple of bottles
through duty free and
start to sort of serve
as local ambassadors
for the brands.
I think less than 1%
penetration over time
will be a very attractive
platform from which
we will grow these businesses.
In India, if they
weren't the case
that the government has
had such barriers to trade,
we could see that
business even bigger.
I would ask the
question of anybody here
who travels duty free
into or from India,
what two bottles of spirits
does every Indian buy
when they return home?
Yes.
AUDIENCE: I don't
know if it's typical,
but I buy the Glenlivet.
THOMAS RUSSO: Oh,
you're very high end.
AUDIENCE: [INAUDIBLE]
THOMAS RUSSO: Oh,
you're high end.
No, it's Johnnie
Walker Black Label.
The numbers, Black
Label's the big one.
But the Indians consume
125 million cases
of what looks like
scotch, locally made.
Imports are very thin.
And Puerto Rico controls
the market, along with BJ
[? Maya ?].
But when and if--
well, I guess I'd say,
because of what Modi said
yesterday at the SAP Center--
when, not if, free
trade descends,
we will sell so much scotch
whisky, authentic whisky,
into a market that prefers
it over their local brands
that the investments in
Diageo and Pernod Ricard
will just, I think,
be pulled along.
In the meantime,
they're suffering.
They're not
absorbing their costs
because it's expensive to
maintain market presence
and only sell at the very
highest end because of trade
barriers.
Anyways, Pernod,
I think, it stands
where it does because
again and again and again,
like in 2000 with
China, the family
has the ability to out-compete
standard public companies who
worry about stock options
and quarterly numbers
because they're free
to think long term.
And if you sat there and watched
a public company dismember
their premium status
in China, and you said,
but for quarterly earnings
they would've stayed,
and you go in to that void,
it's a terribly attractive
structural advantage.
I think we pick up by sticking
with these businesses.
SABMiller.
I like this slide.
It's now, unfortunately, in
the midst of being taken over,
which is a disappointment
because they
had the right mindset.
They were South
African breweries. .
They were a pariah company.
They started with nothing.
And today they are the
second largest brewery
in the world, maybe
the largest because
of the Chinese operation.
When they invest to
develop the future,
however, look what happens
to the EBITDA margin.
Revenues went up a lot
over this period of time.
This is some time back now.
Revenues went up a lot as
they were pouring money
into developing the markets
throughout Africa that they
had a toehold in, but
recognized at some point
that they were under investing.
They stepped up the
investment massively,
grew revenue, grew volumes.
EBITDA margin plunges.
That's good.
That's the burden
on reported profits
that came from the upfront
development costs of opening up
those markets.
They had the ability to absorb
that because of the control
shareholder group.
And Brown-Forman's the
last one I'll talk about.
It's ironic.
This is how screwed
up America is.
In Brown-Forman's case, what
I call the virtue of family
control, which is the
alignment of interest
for the long term, which means
that they're often treated more
cheaply in the
marketplace because people
worry about corrupt families.
But the irony is that instead
of celebrating family control,
in their proxy
statement, they have
to have a section that
says, "A risk factor is
a substantial majority
of our voting stock
is controlled by members
of the Brown family,
and collectively
they have the ability
to control the outcome of
shareholder votes including
this and that.
We believe that
having a long-term
focused commitment and engaged
shareholder base provides us
the important strategic
advantage, so on and so forth."
However, they flag
it as a risk factor.
I celebrate it as really
one of the great things.
And I first invested in
their company in 1987.
They had made a bunch of
investment banking-driven
acquisitions, all
of which flopped.
And at that point they committed
as a family to do nothing
but grow Jack internationally.
Wall Street despised the shares.
They had sharply declined
when I made the investment.
The company had committed,
at that point on,
to take what their
heritage was and invest
against the future
spending internationally.
At that time-- let
me go-- oh, I'm
going the wrong way-- at that
time, as this shows here,
international markets were
only half a million cases.
This was when I
bought the shares.
Domestic was 3 and 1/2.
And they committed to
growing that business abroad.
Now that meant nothing
but years of burden
on the income statement.
Fast forward to today.
They have to almost 10
million cases internationally.
The US business came back
because bourbon, for reasons
nobody knows, became popular.
So it grew.
But the international one
is the deliberate result
of investment spending.
If you look down
below, in 1987 they
had five markets that had
over 50,000 cases, four
with over 100.
Today they have 41
markets with over 50.
The march towards 50
is very unprofitable.
You have all the fixed costs
of a distribution network,
partnering,
advertising, promotion.
You're not making
a lot of money.
Over 50, you start to
make a lot of money.
I think the next
10 million cases
will be much easier to get
than the past 10 million cases.
During this time-- let me
just take a look back here.
The business that I
first invested in--
if you look down
this list, it says
gross profit of $563 million.
Today they have $2 billion.
Operating capital 182
[INAUDIBLE] $971 million.
They dedicated themselves
to doing nothing but growing
the business.
And they have the voting
control of the family
that allow them to
do it unflinchingly.
When they had left
over cash, they
took it to buy back their
shares, 360 down to 215.
And the EBITDA went
from 200 to 1 billion.
And the share price went from
$3.76 to today, it's $110.
And it's been about
a 13% compound, which
is sort of what you can really
aspire to in public equities,
in companies that don't
have the kind of profile
that Google enjoys.
But this is a hand
very well-played.
Family had a business
that had integrity,
that had a culture
that's extraordinarily
focused on making sure
that nothing that they do
dishonors Jack
Daniels, the heritage.
And they're willing to
tell that story broadly
at the cost of current
income to deliver
long-term wealth to the family.
And so I show it
because it worked.
We have plenty that
haven't worked,
just by the way, where
the spending didn't
sort of yield results.
But one of the things
you have to understand
is that I think businesses
have to have that capacity
to suffer.
And it's true to say that
investment managers have
to have the same capacity.
And so if you look at the
history of my portfolio
returns, you'll see in
1999 we were down 2%.
The Dow was up 27,
the S&P was up 21.
In the following
three months, I think
that both of those indices
were yet again up higher,
and I think I was 10%
down first half of 2000,
and the NASDAQ was
up another 50%.
I had to have the
capacity for my investors
to allow me the right to
underperform by 29 percentage
points if I was going to
deliver the kind of returns
that we have, long term.
And if you look, as a result of
being enabled to be out of step
for that period of
time, we ended up
adding the most value ever
in the subsequent three years
by not having the
same declines that
consumed what looked
like those early Internet
vapor returns that
influenced the market.
I need to have the capacity
be totally out of step
with the market if we're
going to add value long term,
and that year was
a good example.
Now this year I think
I'm down 1% at the top,
and I think the Dow and
the S&P are both down 8%.
So the markets have
become quite volatile.
This is the portfolio.
The names should be kind
of kind of familiar.
Berkshire, Nestle, MasterCard--
brilliant company-- Philip
Morris.
Most of them are international.
Most them are family-controlled.
And I think on that note,
I'll just ask for questions.
AUDIENCE: I have
several questions.
Maybe I'll give everyone
a chance and come back.
THOMAS RUSSO: Let me take
my tie off and settle in.
Fire away.
AUDIENCE: Easy questions.
One thing that stands out in
your portfolio is MasterCard.
It's unlike the other
holdings you have.
It's a strong
consumer brand, not
a family-controlled
business, very asset light.
I think if I look
at the financials,
most of the cash flow
convert into free cash flow.
Not that many opportunities to
reinvest, but a long runway.
So kind of being different
from all the other holdings,
would you maybe
share your thoughts
on how you think about it, and
the factors like this option
in the long run and
things like that affect
MasterCard more
than other things?
THOMAS RUSSO: Yep.
It's a great question.
It's a big holding.
It's really aligned to capture
exactly the same forces
that I'm looking at in the
consumer portfolio, which is
the rise of commerce globally.
And understand
that, at the moment,
85% of the global
commerce is still cash.
And MasterCard set
about to convert that.
And they have some
partners in this process,
and they have the capacity
to suffer along the way.
Not because it's
family-controlled,
you're right.
But they somehow have
gathered a group of investors,
including us, who have been
willing to grant them the right
not to have operating leverage
flatter their statements.
What happened is, when we first
invested, the world collapsed,
the shares plunged in
2010 because of trouble
in domestic debit.
MasterCard's it's all
about global credit.
But the domestic debit business
changed after the Durbin Act,
Dodd-Frank, and the shares
sold down to a modest level.
I met the management team,
and the business is fine.
They're highly exposed to
the growing and developing
markets, which I like.
It wasn't until Ajay
Banga became CEO
that I bought my first share,
having known him at Citibank.
He's an illustrious
globalist, and has
the best Rolodex in the world.
And since he has to
implement this business
through other partners,
generally around the world,
he's a perfect person
for the business.
He also had a
capacity to understand
that his job was to deliver
to his successor a much
stronger company.
That's his view.
And so every year since
he's been at the helm,
the gross dollar
volume of business,
pass-through of their business,
is growing about 13% a year.
It's a very high
fixed-cost business,
so all that advance
suggests a higher margin.
You don't see it.
He's taking that incremental
operating income that
arises from more volume
over a fixed base
and reinvesting it regularly
back into programs.
He has 55 projects that he
started since he was there.
He hires, against your great
demand, PhDs and millennials,
and he's changed the
orientation of the company.
And so they poured back into
the business investments
against the income
statement that
keeps the income
statement low, lower
than it would be if they
just let those advances.
Now, the trick is, they have
partners in this business.
They have partners in
the form of governments.
And n Africa, for
example, the government
wants payment
systems because they
want to be able to disperse
social benefits to the intended
beneficiaries without exposing
them to the horrors of check
cashing locations, which
are surrounded by casinos
and bordellos and people who
are trying to steal their money.
Instead, they drop the money
into biometrically activated
cards or phones as
payment devices.
It's very efficient.
And it gets rid of
all the frictions, 25%
to cash a check
and all that stuff.
It's gone.
Other countries
implement payment systems
because they want to
enhance tax collection.
The Koreans understand
that their people will not
declare taxes honestly, and
so 93% of commerce in Korea,
by mandate, is being done
through payment systems, not
cash.
They just don't
trust their citizens.
And the way you
get around that is
to have a taxable audit that's
part of the MasterCard record.
And so we have all
sorts of products
that are high technology
payment systems using all sorts
of phones and other devices.
And there's just a
general movement.
And since I'm oriented
with the belief
that global commerce
will grow, we
have 85% of that that's in
cash we're going to convert,
a higher base over time.
So it's expensive.
It's gone up from $20 a share to
$90 since I bought it in 2010.
So at $90 it's not as
compellingly undervalued,
but I still think they have
so much work ahead of them
that it's a worthy hold.
AUDIENCE: [INAUDIBLE], is the
capacity to suffer evident
in the fact that MasterCard has
significantly lower margins,
although very nice
margins, than Visa's?
THOMAS RUSSO: But that's because
they're investing so much.
AUDIENCE: So do you
think that's why Visa--
THOMAS RUSSO:
That's the measure.
AUDIENCE: So maybe
the indication
is Visa is not
investing as much?
OK.
THOMAS RUSSO: Yeah.
They have their own problems.
They have to buy Europe.
They don't even have
the full global map yet.
And so they can't invest with
certainty like MasterCard can,
because they know that
if MasterCard comes up
with something, they can
go around the globe just
like that.
They have to stop at the
European gate and say,
can you do this?
They'll say no, yes, maybe.
So it's just not as harmonious.
And I do think that
MasterCard is way outspending.
The history, at least
now-- Visa has a new CEO,
and they're probably altogether
much better at their game.
But that, historically,
could explain the difference.
And I like that, I think,
competitive position that you
see with that lower margin,
because they're investing more.
AUDIENCE: Thank you.
Wonderful presentation.
THOMAS RUSSO: Thank you.
AUDIENCE: Thanks a lot.
I had a question about
controlling the companies.
You said there's a
family controlled factor
that comes into play, and
that helps in basically
investing in the long term.
Do you feel it's exactly the
same kind of control that comes
in with a tiered share class,
where there are some classes
that have a higher
[INAUDIBLE] than some--
THOMAS RUSSO: It's the same.
It's blocking.
It's the thing that allows
you to say to someone
who would like to come
along and ask you to change
your orientation, where the
answer is no, we like it,
and you can't make us,
however that's sourced.
Now there's a lot of
hand-wringing over the fact
that super voting shares mean
that you control without having
the economic interests aligned.
This is a company that
set itself up that way.
It's a young, new company,
and that was the terms
under which they embarked.
And I think it's healthy to
have that kind of stability.
We'll see with time.
But I think it means that
you guys, you people,
can all do exactly what it
is that most inspires you,
and do so without regard
to the possible hot breath
of an activist, because--I mean,
think about how Yahoo is all
congested by virtue of people
coming in insisting they do
this and this and that.
You really can't run a
business in that context.
And you have the right
to be free from that.
And it should allow you
to surface things more
competitively.
Yes.
AUDIENCE: I was curious to
hear if you think that there's
a place for value investing
in technology companies,
because the nature of the
industry is so dynamic.
I'm not sure if you're familiar
with Clayton Christensen's
book, "The Innovator's Dilemma."
A lot of the-- in the cycle
of maturity of tech companies,
they get to a point where
they're almost like incumbents
defending market share
and sort of investing
in financially viable
investments, which
I guess, in the technology
industry, sometimes
are not those which
ultimately capture
the market in the long run.
So I know traditionally
value investing
is reserved for more mature,
predictable, slower moving
types of industries.
So I was just curious to
hear your thoughts on that,
like whether the strength of
a brands like Google or Uber
or something like that could
help those companies persist
in spite of the dynamism.
THOMAS RUSSO: Yeah.
I think it's a great question.
I remember Clayton
Christensen actually unleashed
the sort of excess of 1999.
Going back to that
time, his book
was basically a battle
cry for companies
to be willing to destroy
themselves to succeed.
That was the whole idea.
And the beautiful
image of it was
that you had CEO-to-CEO
businesses, where
the old technology
and everything that
ran the business made
sense CEO to CEO, and down
to the very bottom
of R and D, both
the customer and the
technology company
recognized that the
old ways were horrible.
But they could never get above--
they could ever implement it
because the top, who
had to approve stuff,
was quite comfortable with
the way that things worked.
And there would be an outside
enterprise that would then
engage what they already
knew in house, because it
was impossible to champion
an in-house solution
against the kind of static
top that the disruptions,
typically, that
happened elsewhere--
but they didn't have to-- at
research level, even in those
mature businesses.
The awareness was there.
It just couldn't get
up, and that's culture.
And so ultimately, you've
got to have a culture that's
willing, as it seems this one
is, to source ideas broadly
and don't do so sort of
command control from the top.
That at least gives you
a shot, I think, at it,
because otherwise, the
technology's so fast moving,
you'll quickly obsolete it
unless you've got that culture.
This place may seem to
have that, in which case
you've got the willingness to
destroy what you relied upon
and move into other things.
AUDIENCE: You mentioned
a lot in your discussion
about investing in companies
that have demonstrated
the capacity to invest
for the long haul,
and to suffer, and to really,
like, make investments
where it hurts.
But the question that I come
up with, especially regarding,
say, your Geico
example, is how do you
distinguish companies
that are actually
willing to make hard investments
that are going to pay off
versus ones that are just
chasing after things that
are actually to short-termism?
THOMAS RUSSO: You know, it's
so interesting a question.
In fact, I have a
slide that I rushed by,
and it says, you know, capacity
to suffer is not enough.
And I had Barnes and
Noble, and I had the Nook.
And you think, what?
Now Barnes and Noble's
controlled by Riggio.
So he had control.
So he could do it.
But why would you ever want
to go after you and Apple
on a laptop or a tablet
or a book reader?
What possible
stupidity was that?
Now mind you, along the way they
had a $1 billion for Microsoft
and $600 million from Pearson.
So it wasn't their money.
But wow.
So it's got to be right.
And that's the trick.
That's the only
thing that determines
our returns over time
is-- for instance,
I had a huge position in
newspapers going into 2000,
because I often think about
a measure of whether I want
to invest in business is, how
many dynastic fortunes do you
realize have been made
from this business?
Well, there was no
more dynastic source
of fortune than the newspaper
business, historically.
Every city, the most
prominent people in the city
owned the newspaper.
They controlled politics,
money, and everything else.
And they had been
able to survive
each generation of
technology by incorporating
from print to radio,
radio to TV, TV
to cable, cable
to something else.
And then along
comes the Internet,
and they say no, we
don't want to share
our playground with you.
And it was the most
unbelievable stupid moment
in the history of
capitalism, because they
had learned over the years that
to survive, they had to change.
They had to do exactly what
Clayton Christensen said.
They had to be
willing to kind of go
into these new technologies
that threatened
through exclusive
print revenue stream
for radio, and then for TV.
That was very Christensen-like.
And along comes eBay
and Amazon, and they
say no, because they were
both designed originally
to incorporate a
newspaper platform.
No.
And that cost them dearly,
because the air went out
of that balloon real fast.
And so it's not enough.
And it's not even necessary.
I just find it to
be a place where
we have had some success,
sort of thinking through what
it is that we want.
When we embark upon investing
in businesses that we're
supposed to hold for
a really long time,
I think these
ingredients help keep
me focus on important
and knowable factors.
MALE SPEAKER: With
that, thank you
so much for a great presentation
and wonderful conversations
with us.
Thank you.
THOMAS RUSSO: Pleasure.
