Latticework 2025 began with Thomas A. Russo, Managing Member of Gardner Russo & Quinn, who called the current investment landscape “as weird as I can ever remember”. He painted a picture of a bifurcated market, where capital allocation seems divorced from traditional economic logic. He noted, for instance, that while Philip Morris (NYSE: PM) announced a $37 million capital project, the same day might see $350 billion allocated to AI-related spending, often financed through unconventional means like options rather than direct equity investment. This environment, fueled by vast sums of government money, creates a challenging backdrop that demands a disciplined, long-term approach rooted in the principles of Buffett and Munger: low turnover, a focus on the non-taxation of unrealized gains, and a search for businesses that possess both the “capacity to reinvest” and the “capacity to suffer”.
The Weetabix Case and the Power of Capital Allocation
To illustrate his core tenets, Tom presented a detailed case study of his firm’s investment in Weetabix, a UK-based cereal company they owned for 21 years. The company was a disciplined operator but had virtually no opportunities for internal reinvestment, as its consumer base was almost exclusively in England. Instead of pursuing value-destructive acquisitions, management simply allowed cash to build on the balance sheet. Over two decades, the investment compounded at 11.5% annually. However, Tom highlighted a crucial lesson: had the family-run company been comfortable using its accumulating cash to repurchase its own stock, the compound annual return would have been closer to 19%.
The “Capacity to Suffer”
Tom’s concept of the “capacity to suffer” is not about investors enduring poor returns, but about a management team’s willingness to absorb short-term earnings pressure to make crucial long-term strategic investments. The ability to do this is often a direct function of a company’s governance and ownership structure.
He provided a powerful negative example with General Mills (NYSE: GIS) and its Yoplait yogurt franchise. When a new competitor, Chobani, emerged, General Mills’ management identified the threat and knew that a $12 million investment could launch a competing product. However, they declined to make the investment because the expense would have jeopardized their ability to meet a near-term earnings pledge. By prioritizing the quarter over the decade, they ceded the market. Chobani (Nasdaq: CHO) went on to become a titan in the yogurt industry, and General Mills eventually sold the withered Yoplait brand at a fraction of its former value.
In stark contrast, Tom praised Alphabet (Nasdaq: GOOGL), which, from its IPO, instituted a dual-class share structure. This was explicitly designed to give its founders the freedom to pursue “moonshot” projects and absorb the associated losses without facing pressure from a short-term-oriented Wall Street. This governance structure institutionalized the capacity to suffer, enabling the long-term investments in areas like Android, cloud computing, and AI that drive the company’s value today.
Investment Ideas in a “Strange” Market
Spirits (a contrarian opportunity): Tom sees a classic contrarian setup in the global spirits industry. The sector faces headwinds, including a US Surgeon General’s warning about alcohol and a general consumer health trend. However, these negatives obscure long-term tailwinds. In China and India alone, 20 million new legal-drinking-age consumers enter the market each year. Storied brands like Jack Daniel’s from Brown-Forman (NYSE: BF.B) and Jameson from Pernod Ricard (OTC: PDRDF) have immense consumer loyalty and global reach. Furthermore, companies are adapting to health trends with non-alcoholic brand extensions, such as Heineken’s (OTC: HEINY) successful Heineken Zero. While the industry over-leveraged in a misguided attempt to gain pricing power over distributors, balance sheets are firming, and companies like Brown-Forman are initiating share buybacks.
Nestlé (a test of patience): The investment case for Nestlé (OTC: NSRGY) is a bet on the company’s ability to navigate challenges and return to its historical operational excellence. The company faces headwinds from the rise of GLP-1 weight-loss drugs, which could dampen food consumption. However, Nestlé is leveraging its formidable R&D capabilities to address this, developing a line of products to restore protein levels for GLP-1 users. The investment thesis rests on the belief that its vast global distribution, iconic brands in emerging markets (like Maggi noodles), and a renewed focus on its four founding pillars—innovation, renovation, communication, and cost management—will allow it to overcome recent underperformance.
Ashtead (a secular consolidator): The thesis for Ashtead Group (LSE: AHT) is a secular, not cyclical, one. The equipment rental industry is undergoing a long-term structural shift away from owned fleets toward leased ones. This trend is driven by increasing regulatory complexity and maintenance requirements, which are pushing small, mom-and-pop operators out of the business. Ashtead, as a major consolidator, acquires these smaller players and improves their efficiency by deploying technology like telematics for fleet management. This creates a long runway for growth as the industry continues to consolidate.
Let’s go deeper.
