(Image Credit, wsj.com)
If you follow this blog regularly, you’ll know that I’m a big fan of The Columbia Business School and their student newsletters.
These newsletters are an awesome resource for value investors. Every newsletter contains a number of interviews with some of the smartest value investors on the planet.
One of my favorite investors and a past student of Columbia is Mario Gabelli.
Mario Gabelli CFA, now managing the biggest investment app Australia has to offer, started his career as an automotive and farm equipment analyst at Loeb Rhodes & Co. In 1977 he founded GAMCO Investors (NYSE: GBL), where he’s currently Chairman and CEO, as well as a portfolio manager and the company’s largest shareholder. GAMCO now manages roughly $36 billion dollars across open and closed-end mutual funds, institutional and private wealth management, and investment partnerships.
So, I think he’s worth listening to!
He was interviewed in the Fall 2011 newsletter. Let’s see what he has to say…
I pulled out some interesting parts on Valuing a Business, dealing with Stock Catalysts* and Risk Aversion.
You can read all the newsletters here, and you can read this specific newsletter, featuring Mario Gabelli, here.
Here is the excerpt, the interviewer is denoted at “G&D”, and Mario Gabelli is denoted as “MG”.
G&D: How did you become interested in investing?
MG: I used to hitch hike from the Bronx and caddy at a country club in Westchester. Later in the afternoon after the market closed the specialists would arrive and talk stocks. The other caddies would go home at 4pm but I would stay and listen to what the specialists were talking about. This was maybe when I was in the 7th grade. I still remember my first stocks, Coca Cola, AT&T, and Beech Aircraft.
G&D: Can you talk a bit about how your approach differs from the Graham or Buffett methodology?
MG: It‘s the same thing. The analysts are trained to gather the data and read it carefully. These days you can get the data faster. We array the data in our format. Project the data and then interpret it. Interpret it in a way that assigns a value and then build in a margin of safety. So everything Graham and Dodd taught in the 1930s is still applicable today.
G&D: What do you say to people who argue that catalysts are usually already priced into companies?
MG: Nonsense. Let‘s say there is a company selling at $10 and you predict it‘s worth $20 based on your analysis. Will the discount narrow between the $10 and $20 so that you can earn your return? Will the company‘s value grow to over $30? Will someone come in and buy it?
At the time in the 1970s if there was that sort of gap we would wonder if someone would come in and fire a ―thunderbolt‖ (a tender offer). So the difference between the current stock value and the intrinsic value would lead to an event to unlock the value. Look at what‘s happened in the last year. Fortune Brands announced that they were breaking up.
G&D: Conversely, if you have an investment thesis about a company and you‘ve held the company for a long time and the catalyst isn‘t coming to pass, how long do you wait?
MG: One of our oldest funds, the asset fund, was incepted in 1985. The turnover is 7%, so that‘s what, a 15 year holding period? As in the movie Waterboy, if the CEO heads for the wrong goal line, we will try to stop him and if they continue to do it, we will sell. Or, if the stock goes above intrinsic value, we will find better options out there
G&D: Could you give an example of a company you like and how you valued it?
MG: If you look at the human population there are about seven billion people. One and a half billion people are too young to drink or don‘t do so for philosophical reasons. My first visit to China was in 1981.
Two things were clear: the culture loves to gamble and loves to drink. The important thing to think about is which companies had pricing power. What companies had businesses that required the least amount of capital expenditures to maintain the brand.
Could the Japanese and Chinese create a vodka and then sell it at a lower price? Would consumers still be willing to spend a certain amount of their income on a particular product? The ideal thing is to find businesses people are loyal to, like alcoholic beverages and coffee.
You have to look at who the customers are and how postponable is the purchase. So if you look at a business like Cable TV,you have subscription revenues that are predictable (albeit with some churn rate) and then you look at what customers are likely to want in the next 10 years, which is probably speed, mobility, video, voice.
Then we try to understand who packages it up best and what can go wrong with the pricing power of that service. And how does this business compare to a company that sells widgets that are hot but who knows how sustainable it is, and based on relative and fundamental analysis, try to come up with an approximate value to put on that business.
G&D: What is it that you‘ve done so well that others can‘t replicate?
MG: A lot of people have replicated what I‘ve done. Chuck Royce has done a terrific job. Henry Kravis has done better than I have in the private world, albeit with some leverage. There‘s clearly a bias towards success by following value investing. I feel like I‘m not working for a living and have the right northern star.
G&D: What are some of the most common errors that you see young analysts [investors] make?
MG: Young analysts – what about me? I still make plenty of errors. We bought Netflix at $40 and sold it at $80. It went to $300.
G&D: What about in terms of assessing the fundamentals of the business?
MG: Sometimes the younger analysts get concerned about Mr. Market and the events of today, the volatility in stocks, especially due to all the new ETFs and high frequency trading and the like. Mr. Market is now more volatile than ever. There were reasons the uptick rule was eliminated.
One of the reasons was because it made it easier for electronic trading. And so, there was a group of highly focused organizations and individuals that wanted to dismember regulatory elements that had reduced volatility to a degree.
So what happened last year with the flash crash was partially the result of that lobbying group having success at changing the rules of the game. So analysts need to look at intrinsic value and realize that the antics of Mr. Market to the fourth power are creating more volatility than they might have otherwise become accustomed to.
G&D: Do you have any advice for novice analysts [investors] who tend to get lost in the weeds with the wealth of information surrounding each company?
MG: Yes, and that is that you cannot study a company without feedback mechanisms and benchmarks. So the key is to start to know an industry extremely well. That gives you a great perspective. For example, we have a conference on the auto parts industry.
Start off by reading everything that‘s happened in the last 20 years in an industry. So you read all the trade info and then you cross check. Then understand how that industry relates to other industries. And then you need to understand the stock. First understand the business and then understand the stock. Those two things don‘t always go in lockstep.
G&D: Is there anything you‘d like to leave our readers with?
MG: Everyone should go shark fishing. When you go shark fishing, you leave a chum line. The sharks smell the chum line and follow it. So if anything breaks the chum line, you don‘t have nearly as much success. So the notion of understanding the first rule of life is important: don‘t lose money.
The best way to learn not to lose money is to lose money. Going through a market like this is a great learning experience, because people realize no matter how smart they are, things change very quickly.
*Stock Catalyst – A stock catalyst is an event that causes the price of a security to move, sometimes significantly.
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