I recently had the opportunity to speak with multibillion dollar hedge-fund manager Tom Russo, whose fund has returned more than 15 percent a year for the past 25 years.
I learned a very important lesson that all investors should keep in mind.
Whenever hearing bad news from the financial media, think for a second: Maybe it could be good news.
The hedge-fund manager is a long-time shareholder of Nestle. The Wall Street Journal had an article about Nestle and the challenges it faced due to rising raw-material costs.
When companies face rising costs, they must pay more for the key ingredients and crucial parts they need. They try their best to raise their prices to offset the increase in costs. However, Nestle’s executive vice president told the Journal: "We have to find ways and means to cope with this [raw-material price rises]. Price increases are one solution, but clearly not the only solution."
This means the company’s goods are so desirable or necessary that the company can increase prices and people will still buy the same amount of the product.
The manager I was talking to is a global value investor and I knew one thing that his firm searches for are companies which have pricing power. I asked what he thought about Nestle’s problems.
Without blinking an eye, he answered that if Nestle is facing rising costs than so are its competitors. In fact, Nestle, being one of the largest food companies, is able to buy its goods at a much lower cost.
So rising coca prices, for example, might even be beneficial to the company.
In 2008 and 2009, many of the well-capitalized companies were able to beat their competitors by buying cheap companies that were in distress, or even by merely staying in business.
Additionally, he said that commodity prices don't stay the same forever.
There are large swings in these commodity prices as anyone who looks at the signs at the gas station knows. Being a global investor, it doesn't concern him if Nestle lowers the guidance for earnings for the next quarter or two. What really matters is how well the company performs in five to 10 years.
The manager almost sounded like he rehearsed the answer multiple times before it was asked. The reason is because it was so embedded in his mind that one temporary problem isn't a cause of concern.
All investors can learn a lesson from this. When the economy is struggling or stocks aren't doing well, it could be a positive thing.
For example, the best time to buy stocks was when the economy was losing close to one million jobs a month in early 2009. Since then, the S&P500 has went up approximately 100 percent.
Ignore the short term and focus on the long term, especially in times of economic stress.
(Disclosure: The author of this article doesn't own stock in Nestle.)
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