Mario Joseph Gabelli is the chairman and CEO of GAMCO Investors Inc.( Gabelli Asset Management Company Investors), a $30 billion dollar global investment firm headquartered in Rye, New York. Gabelli is a proponent of the Graham–Dodd school of security analysis and pioneered the application of Graham and Dodd’s principles to the security analysis. He is famous for his stock picking abilities based on a variant of “value investing” style of equity investment, he developed and successfully employed.
Gabelli was born in The Bronx on June 19, 1942 and went to Fordham Preparatory School there. He won a scholarship and graduated from Fordham University summa cum laude. Fordham University has renamed its College Of Business Administration to the Gabelli School of Business after a $25 million donation in September 2010. He received his Master of Business Administration degree from Columbia Business School. He is also a CFA charter holder, a highly regarded designation, earned by taking a series of three challenging qualifying exams. At Columbia, he was taught by Roger Murray, noted value investing professor and co-author of the Fifth Edition of Security Analysis, The Graham & Dodd Value Investing Bible.
Investment Management career
Mario Gabelli developed a passion for investing in stocks in his childhood. He bought his first stock when he was just 13 years old. His investing acumen was groomed while he was studying at Columbia business school, the home of Graham & Dodd value investing. Gabelli entered the investment arena as an analyst in 1967 with his employment at Loeb, Rhoades & Company, an investment banking and brokerage firm. In 1976, he opened his own firm called Gabelli & Company, Inc. A year later the company called Gabelli Investors Inc. (subsequently renamed as GAMCO Investors) was created to manage client assets. Since its inception in 1977, GAMCO investors Inc. has generated impressive returns year after year while serving a diverse clientele.
In 1997, when ten Gabelli equity funds averaged a return of 31.7 percent, the best of any U.S. mutual fund group, he was honored by Morningstar, Inc. as the domestic equity fund manager of the year. The Institutional Investor selected him as Money Manager of the Year for its second annual U.S. Investment Management Awards. The award selection is based on performance as well as a survey by U.S. institutions. In 2010, GAMCO returned 28.6% for institutional clients; and since inception in 1977, it has generated annualized returns of 16.3%. On January 10, 2000, Gabelli was inducted into the Barron’s All-Century Team, their list of the most influential mutual fund industry portfolio managers.
Investment Philosophy
Gabelli employs a research driven and value oriented approach to investment analysis. For the analysis of stocks, he implemented the theory of value investing, which he had learnt at Columbia University. He developed a metric of his own known as “private market value” (PMV). His proprietary Private Market Value with a catalyst methodology is a widely used analytical tool for value investors. This valuation metric places greater emphasis on analyzing a company’s cash flows and gives less importance to accounting profits. PMV means the price that a potential buyer would be willing to pay if she was to acquire the entire company, incorporating any synergies and premium for control. This method of valuing a company was extensively used in the analysis of LBO transactions (leveraged buyouts), whereby entire company is taken private by using borrowed funds. The methodology used in calculating PMV is often different from the standard way of measuring the value of public companies.
Mario Gabelli, like other value investors, seeks to identify stocks which are selling at a substantial discount to their private market value making them undervalued by the market. Usually, but not always, these stock are selling at low valuation multiples. This approach to investing, in sharp contrast to “momentum investing” which solely looks at earnings growth, tends to give importance to price as well. Typically, value investors search for growth at a reasonable price. According to them “price” is what they pay and “value” is what they get and the two may not be same at all times. Value investors contend that “growth” maybe mispriced in the market and as such one doesn’t want to buy stocks of growing companies at unjustifiably high prices. At the same time stocks with low price multiples maybe cheap which could simply be as a result of poor or deteriorating fundamentals. Mere fact that a stock is trading at a low valuation multiple does not make it an attractive buying opportunity. In either case spotting a good buying opportunity requires rigorous research and this is what Gabelli is really good at. Stocks with low multiples and high multiples need to be investigated relative to the peer group or the industry to which they belong before concluding whether they are overvalued, undervalued or fairly valued.
A stock which is identified to be relatively undervalued does not automatically qualify as an “immediate buy”. A stock can remain undervalued for years. In order to realize a return from the convergence of price to intrinsic value; the stock must rise in value within a reasonable time frame. When Gabelli considers a stock, he looks for what he calls a “catalyst” that could grab investors’ attention and has the potential to send it higher. A catalyst may take many forms and can be an industry or company specific event. Catalyst can be a regulatory change, industry consolidation, a repurchase of shares, a sale or spin-off of a division, or a change in management. Identification of a catalyst is an important component of the investment decision making process. Undervalued stocks selling well below their private market value and having a catalyst have higher probability of attaining their intrinsic value over time.
Portfolio concentration and Perception of Risk
Gabelli has the history of keeping relatively large positions in a handful of stocks. Furthermore, once a stock is selected for inclusion in the portfolio, he is ready to wait for a much longer period before the stock hits its appraised private market value. According to him, keeping a concentrated portfolio does not increase risk. Risk of an investment is a function of investors’ understanding of the economics underlying a business. If you understand a business, buying the business has less risk. The price that an investor pays is not just for a piece of paper. Essentially, he is paying to buy a strategy. Identification of a reasonably priced company, with a sound business model and a well crafted strategy entails a frame work for a thorough bottom-up research. Gabelli’s PMV with a catalyst methodology provides such a framework for analyzing stocks. Furthermore, stocks trading at a substantial discount to their intrinsic value provide a margin for safety to the investor. This further reduces the potential risk of an investment.
Market efficiency & Value investing
Gabelli’s views regarding market efficiency seem to contradict academics. He does not believe in market efficiency which asserts that market prices of securities reflect all the available information and therefore price of a security always equals its intrinsic value. If that truly was the case there would be no way to make money in the market. He believes that price may not equal intrinsic value at all times and markets present money making opportunities to those who have the ability to conduct thorough bottom-up research on stocks. Bargains can be found by digging deeper. The deeper you dig the better are your chances of spotting companies with good fundamentals yet selling at amazing discounts to their true value.
Gabelli’s approach to investing is very intuitive and appealing. The notion of a “catalyst” is an intelligent and sensible approach to the market. It provides great help to find undervalued stocks that are poised to move. He can be labeled as a value investor with a twist. Like most other value investors, he tries to find undervalued companies, but he also tries very hard to find the ones that aren’t going to stay undervalued very long, the ones with a “catalyst.”
Mario Gabelli has been the subject of feature articles in several financial journals, including Institutional Investor, Business Week, Fortune, Forbes, Changing Times and Money. He is also a member of Barron’s prestigious annual Year-End Roundtable. He is a frequent guest commentator on Financial News Network and Cable News Network and has appeared five times on PBS’s “Wall Street Week with Louis Rukeyser.” He has also contributed articles to investment publications such as The Financial Analysts Handbook.
By Muhammad Raheel