Tom Russo's Capacity to Suffer: Investing for Decades
Tom Russo's "capacity to suffer" is a company's ability to accept lower reported profits today in order to invest in something that makes the business far more valuable over the long term, such as building a brand in a new country. Russo, a partner at Gardner Russo & Quinn since 1989, looks for this quality in family-controlled consumer brands and holds them for decades. It is one of the most useful ideas an individual investor can borrow, because it explains why some of the best businesses look temporarily worse just when they are getting stronger.
Where this fits: this is a Learning from the Masters article. Russo's ideas speak most directly to Criterion 2, durable moat, and Criterion 3, aligned management, in the Five Criteria. It sits alongside our guide to the greatest investors of all time.
Who is Tom Russo?
Tom Russo grew up in Janesville, Wisconsin, studied philosophy at Dartmouth and then earned both an MBA and a law degree at Stanford. At Stanford in the early 1980s he attended a class where Warren Buffett spoke, an experience he often cites as a turning point, according to Latticework's profile. He then worked at Ruane, Cunniff, the firm behind the Sequoia Fund, under Bill Ruane.
In 1989 Russo became a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, the firm now called Gardner Russo & Quinn. He manages the Semper Vic Partners fund and individual accounts, as the Graham and Doddsville interview with Columbia Business School describes. His portfolio has long centred on global consumer brands such as Nestlé, Heineken, Brown-Forman and Berkshire Hathaway, often held for decades. He bought Heineken shares as far back as 1986.
What does "capacity to suffer" mean?
Wall Street tends to reward companies that report smooth, predictable earnings growth. That creates a problem. Many of the best long-term investments, such as entering a new country or launching a new brand, cost a lot of money up front and pay off only years later.
Under accounting rules, much of that spending is expensed immediately. Advertising, new sales teams and early losses in a new market all reduce reported profit this year. A management team that fears a falling share price will often avoid these investments, even when they would create enormous value.
A company with a capacity to suffer can ignore that pressure. It is willing to report lower earnings, sometimes for years, while it builds something durable. In the Graham and Doddsville interview, Russo said simply that the quality he looks for in managements is the "capacity to suffer".
Capacity to suffer and capacity to reinvest
Russo pairs the idea with a second one: the capacity to reinvest. A business needs somewhere to put its cash that earns a high return. Global consumer brands often have that runway, because they can take a brand that is proven at home into markets where incomes are rising.
The two ideas work together. Reinvestment opportunities are worthless if management is too nervous about quarterly results to pursue them. Willingness to suffer is worthless without a good place to invest.
Tom Russo's core principles
1. Own brands with global reach
Russo favours consumer brands, such as beer, spirits, food and luxury goods, that people buy again and again. Strong brands can often raise prices over time and travel well across borders. Our guide on how to analyse consumer staples stocks covers what to check in this kind of business.
2. Prefer family-controlled companies
Many of Russo's holdings are controlled by founding families, often through dual-class shares. Brown-Forman, the maker of Jack Daniel's, is a classic example. Russo argues that family control gives management the freedom to invest for the next generation rather than the next quarter.
He also points out that many investors apply a discount to family firms because they fear poor governance. When the family is a good steward, that discount can become an opportunity.
3. Watch for agency costs
Russo pays close attention to whether managers are acting for shareholders or for themselves. Professional managers paid on short-term earnings targets have a reason to cut long-term investment. Owners with their own wealth at stake usually behave differently.
4. Hold for decades
Russo's turnover is famously low. He aims to own great businesses through many cycles, letting the value of reinvestment compound. That demands patience from him and from his clients, a theme also central to Nick Sleep and Nomad.
5. Look for suffering the market misreads
One example Russo has described is E.W. Scripps building the HGTV channel. In the Graham and Doddsville interview he said the company tolerated up to $150 million of cumulative reported operating losses before the channel became highly profitable. Investors who looked only at reported earnings missed the value being built.
Worked example: when lower earnings are good news
Here is a hypothetical example with round numbers.
Company A sells a well-known snack brand at home. It earns $500 million of operating profit and has 100 million shares, so operating profit is $5 per share. The board decides to launch the brand in three large emerging markets.
The plan costs $150 million a year for four years in advertising, distribution and early losses. Nearly all of it is expensed.
Years 1 to 4: operating profit falls to about $350 million, or $3.50 per share. Headlines focus on the 30% drop.
Year 8: the new markets generate $250 million of operating profit on their own, and the home market has grown modestly to $550 million. Total operating profit is $800 million, or $8 per share.
A short-term investor might sell in year 1. A Russo-style investor asks three questions instead.
Is the spending building a lasting asset, such as brand awareness and distribution?
Does management have a record of making similar investments pay off?
Can the balance sheet fund the plan without heavy borrowing or new shares?
If the answers are yes, the dip in reported earnings may be the best time to buy. This is exactly why we look beyond one year of earnings. Our guide to quality of earnings shows how to separate real problems from deliberate investment.
Where the approach struggles
Russo's approach has served him well, but it has real risks for an individual investor.
Not all suffering pays off. Management can use "long-term investment" to excuse projects that never earn a return. You need evidence, not just a good story.
Family control cuts both ways. A family can protect a company from short-term pressure. It can also entrench poor managers or treat minority shareholders unfairly.
Concentration in one sector. Heavy exposure to consumer brands, alcohol and tobacco carries shared risks, such as changing tastes, health regulation and the rise of smaller challenger brands.
Long dry spells. Russo's funds have had difficult periods. Latticework notes that Semper Vic fell about 23% in the first nine months of 2022. Low turnover means you live with the drawdowns.
Admitted mistakes. In the Graham and Doddsville interview Russo described missing warning signs at Diamond Foods, where he had doubts about management but did not act on them.
How we use this in the Five Criteria
Capacity to suffer is not a separate test in our framework. It is a lens for reading Criteria 2 and 3 more intelligently, and a reason to be careful with Criterion 5 when earnings are temporarily depressed.
Russo idea | Five Criteria link | How we apply it |
Capacity to reinvest at high returns | Criterion 1: Great business | ROIC of 15%+ for 5+ years before the investment phase |
Global brands that travel | Criterion 2: Durable moat | Name the moat source (usually intangibles) and check ROIC held through a downturn |
Capacity to suffer; family stewardship | Criterion 3: Aligned management | Meaningful insider ownership; share count flat or falling; clear payoff targets |
Funding investment without strain | Criterion 4: Sound balance sheet | Net debt/EBITDA of 2.0x or less; interest coverage of 5x or more |
Buying when earnings are depressed | Criterion 5: Reasonable price | FCF yield of 5%+ or 25% below conservative intrinsic value, on normalised earnings |
The last row matters most. When a company is deliberately suffering, trailing earnings and free cash flow understate its earning power. We estimate what the business would earn without the investment spending, then test Criterion 5 against that normalised figure. We also check that the underlying business still earns high returns.
Having worked in investor relations, I have seen how hard it is for a management team to defend a profit dip to the market. The companies that do it well explain the spending clearly, set milestones and report progress against them. That transparency is a good sign of genuine capacity to suffer.
Common mistakes when applying Tom Russo's ideas
Accepting every excuse for weak profits. Ask what exactly the money is buying and how you will know if it is working.
Ignoring governance risk in family firms. Read how the family treats minority shareholders, including related-party deals and share classes. Our guide on how to identify great management lists what to check.
Judging on one year of earnings. Look at five to ten years of returns on capital and cash flow, not a single results day.
Selling at the point of maximum suffering. The investment phase is often when the share price is weakest. That is when discipline matters most.
Forgetting price. A wonderful family brand still needs a sensible entry price. Our guide on when a stock is cheap explains how to judge it.
Frequently Asked Questions
What is Tom Russo's "capacity to suffer"? It is a company's willingness to accept lower reported earnings today to fund investments, such as building a brand in new markets, that make the business more valuable over the long term.
Who is Tom Russo? Tom Russo is an American value investor who has been a partner at Gardner Russo & Quinn (formerly Gardner Russo & Gardner) in Lancaster, Pennsylvania, since 1989. He manages the Semper Vic Partners fund.
What stocks does Tom Russo own? He is best known for long-held stakes in global consumer brands such as Nestlé, Heineken and Brown-Forman, plus Berkshire Hathaway. Holdings change over time, so check the firm's latest regulatory filings.
Why does Tom Russo prefer family-controlled companies? He believes family owners are more willing to invest for the long term and ignore short-term earnings pressure, provided they are good stewards who treat outside shareholders fairly.
Your Next Step
Learn how to judge the people running a company in our guide on how to identify great management.
See how brands create lasting advantages in our guide to economic moats.
Decide when to hold through a tough period with our framework on when to sell a stock.
About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.
The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
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