Warren Buffett is the world’s greatest investor. His teachings and investing philosophy has influenced countless numbers of other investors and money managers. A few of these “Buffett Prodigies” have achieved enough success to be managing multi billion dollar portfolios. Buffett stresses value investing as the way to outsized profits. He looks for margin of safety around investments and generally concentrates on large cap names.
Out of these Buffett spawned investing geniuses, one truly rises to the top. Not only does this money manager have nearly $20 billion in assets under management, he clearly credits Buffett’s ideas for his success.
The master investor I am referencing is Mario Gabelli. You may not have heard of him, but he is a true giant in the money management world.
Many pundits consider him the value investor’s value investor. He has successfully combined a value approach with an eye on stock price catalysts. This combination has provided his investors with an average after fee annual return of 12% for the last 26 years. Many hedge funds don’t even have these consistent returns let alone the over a quarter century of consistency. I would venture to say that Gabelli is the most consistent investor, second only to the Oracle of Omaha himself.
Mario clearly gives credit to Buffett for his success. The slogan for his fund is Graham&Dodd + Warren Buffet = Gabelli. Graham & Dodd are known as the fathers of modern portfolio theory.
A Little Personal History on Mario
Mario was born on June 19, 1942 and purchased his first share of stock at just 13 years old. As you can see he was born with a burning passion for the stock market.
In 1977, Gabelli formed his broker dealer company. This company has grown into a diversified financial management firm with nearly $20 billion in assets. Known as GAMCO, this firm is one of the most successful money management companies in history.
What I find most intriguing about Gabelli is the way he is paid. Unlike other founders of large firms back then, he takes no salary, options or other traditional forms of compensation. He is compensated strictly on a fee basis. This means that he simply does not get paid near as much if his fund fails to perform. A risky stance by any measure!
While many other hedge fund managers are now compensated in this manner, it was very unique when he proposed the idea. This payment method has earned Gabelli a personal net worth of over $1.7 billion.
Gabelli’s Investing Process
Gabelli focuses on a company’s free cash flow minus the expenditures needed to grow the business and earnings per share trends.
After whittling down the stock market, he adds something called PMV or private market value into the mix to drill down even deeper into the list of stocks. While it may sound complicated, PMV is the value an informed investor would pay to purchase an asset with similar characteristics. Basically, he looks at the stock purchase the same way that a venture capitalist would evaluate the entire company prior to purchasing the company.
PMV is calculated by a quantifying on and off balance sheet assets, liabilities and free cash flow. While this may sound like standard business valuation tactics, Gabelli throws another twist to make this method his own.
This brilliant idea compares the numbers found by crunching the above metrics to those of similar companies actually sold in the market. This way he gets a clear view of actual market value. I compare this tactic to looking at real estate comparables when listing or shopping for a home.
Further confirmation of the novelty of the idea, the venerable Columbia Business School credits him with creating the concept of PMV. Followers of Buffett are aware of his focus on margin of safety when picking stocks to buy. This tactic provides Gabelli the margin of safety combined with inherent value.
The Secret Sauce: The Final Ingredient
Next Gabelli adds in his secret sauce to the mix to invest in only the best stocks. He calls this secret a price catalyst. The price catalyst can take many forms. It can really be any pending event that will likely push the shares sharply higher.
Gabelli shoots for 50% returns within 24 months on every stock market investment. Once the stock hits the goal, he sells the shares and starts the stock picking process all over again for the newly free capital.
An Overview of Gabelli’s Portfolio
Gamco currently holds 861 stocks. 32 of these stocks are recent additions to this number. The entire portfolio averages a 3% quarter to quarter turnover in stocks.
As you can see from the above graphic from GuruFocus.com, Gabelli concentrates his holdings in the mid the large cap space. There are no stocks that are considered small cap under $1 billion and very few in the mega cap sector of $100 billion to $1 trillion in capitalization.
The sector weightings are illustrated in the following graphic from GuruFocus.com .
A Peak Inside Gabelli’s Portfolio
Now we get to the good stuff, a peak at Gabelli’s Favorite stock buys. Out of the 861 stocks in his portfolio, he has recently mentioned the following names as among his current favorites.
- Navistar International (NYSE:NAV)
This manufacturing company produces commercial and military trucks. Gabelli is betting on an upswing in Europe to supercharge the stock price which he now considers to be undervalued. The European upswing will be the result of the European Central Banks easing measures. Just like what happened in the United States should repeat itself in Europe. This is the catalyst applied to a stock that is undervalued. Right now Gabelli own over 6 million shares of the company. He increased his holdings by 6.56% last quarter in the company.
- International Flavors & Fragrances (NYSE:IFF)
This company creates the flavors and fragrances associated with many food products you are probably familiar with. Gabelli likes this company due to its healthy outlook on its products. There is a powerful trend toward healthy eating and he see’s this as one catalyst that will push shares higher. In June 2014, he increased his holdings by over 20% in this company. This is a company that is everywhere but keeps a low profile in the consumer sector.
- Sony Corporation
Gabelli loves this Japanese electronics giant. He firmly believes that its CEO is on the right track to grow the firm. “I think Shinzo Abe has given the animal spirits to the Japanese,” Gabelli told CNBC’s “Squawk Box.” “This company has a billion shares—a billion shares—at $28. That’s $28 billion.”
He also points toward the pending virtual reality headset and strong Playstation 4 sales as catalysts that will propel this company to continual profits. Gabelli sees Sony as being on the cutting edge for consumer products.
The Key Takeaways
Investors can either follow Gabelli’s buys directly or use his ideas to locate stocks that fit his investment criteria. He looks for stocks that are undervalued based on his Private Market Value formula. Once these stocks are discovered, he then tries to find a price catalyst that will trigger upward price action. This price catalyst can be anything from expected positive earnings, a new invention, or a societal trend that the company is capitalizing on.
He credits Warren Buffett and Graham & Dodd with his investment ideas. Investors who want to trade like Mario Gabelli would be well suited to study the writings of both Graham & Dodd in their seminal book, “Security Analysis” and Buffett’s yearly investor letters.