Tom Russo provides insights into investing in global franchise businesses. Tom’s investment philosophy emphasizes return on invested capital, principally through equity investments. He looks for companies with strong cash flow characteristics, where large amounts of “free” cash flow are generated. Portfolio companies tend to have strong balance sheets and a history of producing high rates of return on their assets.

Enjoy the following 75-minute exclusive video.

The following transcript is provided for the convenience and enjoyment of MOI Global members. It has been edited for space and clarity.

MOI Global: It’s a pleasure to welcome legendary investor Tom Russo of Lancaster, Pennsylvania-based Gardner Russo & Gardner.

Tom Russo: I’m here to address some value investing topics which might be of interest to the Manual of Ideas (MOI), touching on my early background, philosophy, and approach, as well as some portfolio companies and maybe certain pitfalls.

Let me start by noting that upon my arrival for this interview, I was offered a cup of Nespresso and a bottle of water. I didn’t tend to worry about whether it was tainted or healthy or whether they would dispose properly of the bottles. The company which owns both of these two happens to be one of my three largest holdings—Nestle— and has been in my portfolio since 1987. It has evolved not only to delight consumers on the high end by investing in upscale coffee, but it has also transformed the bottled water business and done so with an eye toward sustainability and a willingness to argue its case against all of the potential critics calling bottled water an environmentally harmful product. It would claim otherwise.

These are the types of issues I confront daily as an investor – whether consumers will follow a brand like Nestle up into a whole new territory called premium coffee and retain their goodwill for Nestlé’s product even in the face of an assault against the bottled water business, which can be construed by many as being environmentally harmful.

Where did this all begin? I discovered value investing at the Stanford Business School in the early 1980s, when Berkshire chairman and CEO Warren Buffett came to our class. It was taught by Professor Jack McDonald, who was a lone voice in Palo Alto in terms of thinking about investing as though you are acquiring pieces of companies and assessing whether they have an enduring competitive advantage, then coupling these two discoveries into the process of investing regardless of environmental concerns or academic principles potentially in contradiction to the bold assertion that one might simply identify a company with superior economics and a strong culture and would have an investment for the lifetime of the investor.

Warren Buffett is the reason why people like me can today presume they have the trust of investors to attempt to invest for the long haul. He did it and has a lifetime of success to prove it’s possible to consider great businesses and great managements and then align your investor interest with them for the very longest term with disregard to modern finance tools, which have the academic imperator behind them. Buffett stands in contrast to that. It is because of him that people like myself and other value investors can say we too would try to identify similar businesses, maybe in different industries than what Warren’s focused on or different geographies. I chose early on the international markets as a result of the same course where Warren spoke and Professor McDonald said in the early 1980s, “Don’t be provincial. Look abroad.” This idea spelled a huge difference for me through my career.

Value investing is the camp you could say I belong in if you were to categorize investors. This term simply denotes you’re looking to buy a business at some margin of safety which arises because the price pays a sufficient discount from value given. That discount is what you can determine by analyzing the strength of a business through its component parts and then valuing the enterprise. The process involves coming up with a sense of what this business is worth, backing up liabilities, adding in financial assets, deriving a per share value, and comparing it to what you’re paying.

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