by Chris Mayer
At a small, invitation-only investment gathering in New York recently, I had the chance to speak with Tom Russo. He manages the Semper Vic Partners fund, which has returned about 14% annually for more than 30 years. That tops the S&P 500 by more than three percentage points per year.
To appreciate how great a three-percentage-point difference is over 30 years, consider this: $10,000 invested at 7% annually for 30 years is $76,122. But $10,000 invested at 10% annually for 30 years is $174,194.
Despite all his success, Russo is as humble and nice a guy as you could hope to meet. I’ve met him before, and he’s always been generous in sharing what he’s learned.
Russo spoke about one secret of his success that I’m still having a hard time wrapping my head around…
First, a little background: Russo is commonly known as the guy who took Warren Buffett’s principles and applied them to overseas markets. In the early 1980s, this was a novel thing to do.
His focus, in particular, was on companies with powerful brands – or “moats,” as Buffett calls them. So Russo started buying European brands such as Nestlé and Pernod Ricard.
And then he held them… basically forever, or until he couldn’t hold them any longer.
For example, in 1989, Russo began investing in Weetabix, the maker of a rather tasteless cereal, which – for whatever cultural reason – Brits seem to hold as some sort of semi-sacred comfort food.
Anyway, back then, Weetabix traded for less than six British pounds (£) per share. Russo estimated that it was worth at least £13 per share. He wound up owning almost one-fifth of the company.
Eventually, a private-equity group bought Weetabix for £54 per share in 2003. That made Weetabix a nine-bagger for Russo. And he had to sell.
Otherwise, he doesn’t sell – pretty much ever.
And here we get to the mind-blowing part. Russo said his average holding period for his top 10 stocks was probably about 25 years.
Let that sink in. Most people can’t hold a stock for 25 months – or even 25 days – much less 25 years. With that kind of grip, your portfolio doesn’t change much. Russo’s certainly doesn’t.
When asked about how his portfolio hasn’t changed much, Russo told a story. He said he has a friend in Boston who was trying to get into an exclusive country club. Year in and year out, his application was refused. There was a waiting list.
Then, in 2004, the Red Sox won the World Series for the first time since 1918. Suddenly, several spots at the club opened up.
There were all these old guys hanging on to see the Red Sox win the World Series. And when that happened, the old guys finally expired happy.
Well, Russo said his portfolio was a bit like that. Spots only open up when something dies. In fact, he just bought a starter position in Alphabet (Google’s parent company). It was his first new purchase since… 2010!
My goodness. You know I often write about the virtues of buying and holding, patience, and all the rest of it… But Russo has taken it to an extreme.
And he’s super successful. To beat the S&P 500 by three percentage points per year – for more than 30 years – is a hall-of-fame kind of run. Amazing.
I say it again and again, but it’s worth repeating: You have to sit on your stocks and give them time. Don’t look at stock quotes every day. Don’t fret when they don’t go anywhere. Focus on the business.
If the business is good, time is on your side. Hang on.
Engines That Move Markets
But what about technology? Doesn’t changing technology make it harder to hold a stock for so long? I would say yes.
In my book, 100 Baggers, I shared some evidence showing that corporate lifespans have been shrinking:
For example, take a look at the average lifespan of a firm in the S&P 500 index. It is now less than 20 years… The average lifespan was 61 years in 1958. So things have changed a great deal. At the current rate, Innosight estimates 75 percent of the current S&P will be replaced by 2027. Leaving the S&P 500 doesn’t mean the death of the firm. But unless there is a buyout, the S&P usually kicks you out only when you are in trouble – for example, Circuit City, The New York Times, Kodak, or Bear Stearns. Or it kicks you out when you get too small – which is another way of saying you underperformed.
So against that backdrop, we have to be more diligent about making sure we don’t own firms that are about to go the way of buggy-whip makers.
Investors have always had to deal with new industries and new ways of doing things destroying the old ones. A good book to read on this subject is Alasdair Nairn’s Engines That Move Markets: Technology Investing from Railroads to the Internet and Beyond.
He looks at canals, railroads, autos, the telephone, computers, and more. Nairn is an investor himself. He’s the founder of Edinburgh Partners, an independent money management firm. And he worked for Templeton in the 1990s.
So Nairn’s book focuses on things investors will find interesting. How did return on capital change over time? Profit margins? Debt ratios? Stock prices? He gives you the full panorama. (Engines That Move Markets clocks in at 566 dense pages. It’s a big, fat book.)
For example, let’s look at autos. From 1907 to 1910, the number of auto manufacturers in the U.S. rose by more than 600. But over a quarter of those firms failed. The high mortality rate – it increased to about 50% – continued into the 1920s.
But once established, the top firms tended to stick around. “Of the top ten companies in 1915,” Nairn writes, “only three were not in the top category ten years later.” The top 10 consistently made up 80% of the output.
These top 10 produced incredible returns. Starting in 1903, Ford’s stock returned 56% annually for 23 years! Hudson Motor Car Company (from about 1909) did 43% per year for 17 years. And so on…
Ford was the Amazon of its day, a path-breaking business model that grew and grew for years, making its early investors rich. The flip side is that horse-and-carriage stocks did very poorly.
The lesson is simple: Industries with high mortality rates are likely tough to invest in, though the eventual winners produce huge returns. There is a certain logic to this process, which Nairn goes into in great detail.
But suffice it to say here, holding on to stocks for a long time does not mean blindly holding on to stocks for a long time.
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