Tom Russo of Gardner, Russo & Quinn, returned 12% annually between 1990 and 2016 for his investors.

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He looks for businesses which have two characteristics:

1.Capacity to Reinvest

2.Capacity to Suffer

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Let’s dive into those characteristics

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For a business to compound its intrinsic value over periods of time, it will need to reinvest its Free Cash Flow back into the business. This ability to reinvest and grow requires the business to have a vast TAM( Total Addressable Market). Tom Russo finds that Global Brands possess this characteristic. Brands are able to go into emerging markets. Population growth and increases in consumer disposable income also act in their favor .

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Investing in future value creating projects causes a depression in near term earnings. The business must be able to swallow today’s pain for tomorrow’s gain . Let’s use GEICO as an example. A policy holder is worth $2000 to GEICO. However each new policy losses GEICO $250 in the first year. So if GEICO gains more policy holders , which are clearly valuable, GEICO will still see a decrease in near term earnings.

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When investing for the future you are burdening the present.

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