Tom Russo Not Worried about Berkshire After Buffett’s Exit, And Why Nestle is like Pagoda [Q1 Letter]

Tom Russo of Semper Vic Partners has written extensively about two major characteristics he looks for in the companies he invests in: the capacity to reinvest and the capacity to suffer.

In his May letter to investors, which was obtained by Hedge Fund Alpha, Russo highlighted Nestle, Philip Morris and Berkshire Hathaway, which is in the process of a major change with Warren Buffett's planned exit. Despite that change, Russo isn't worried about Berkshire's future.

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Why Nestle is like a pagoda

In his letter, Russo explained why Nestle is like one of Japan's many pagodas. Recalling an investor gathering almost 35 years ago, Russo said Nestle's then-chief financial officer used the pagoda in a presentation, explaining that the chocolate maker is just like one of these recognizable structures.

Although many of Japan's pagodas are hundreds of years old, they don't contain any aged wood because it's replaced regularly over the years. At this point, most no longer have any of the original wood or fixtures because everything has been replaced — and yet, the culture of the pagoda remains.

In the same way, Nestle has seen dozens of generations of professionals come and go over its 150 years of existence, and all of them contributed in their own ways to strengthening and enduring the values of this enterprise.

"Nestle, today, stands for the virtues of what key attributes we search for, most notably the 'capacity to reinvest' and the 'capacity to suffer,' Russo wrote. "Nestle has a company filled with key attributes… that form the basis of our search for portfolio holdings."

Nestle's capacity to reinvest

He added that Nestle can reinvest because it has a presence in 175 countries and 150-year-old brands that are considered to be must-have products by loyal customers. In fact, Russo believes many of the company's loyal customers are willing to pay more for its products in response to inflation, holding its volumes steady.