Invest Like Mario Gabelli

A time proven way to consistently profit in the stock market is to follow in the footsteps of leading investors.  We are very fortunate that a few of these top dogs of the investing world love to share their knowledge with their clients and the public at large.

In addition, stock market giants are required by law to make public their holdings including buys and sells on a quarterly basis.  These filings are widely available for every investor to study for profitable ideas.

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The question becomes who are the best investors to follow?

Rather than looking at the guys who just have one or several years of monster returns, I prefer to study the holdings and methods of true long term players.  Money managers who have been trading stocks for decades with consistent and market beating returns are my teachers.

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I also look for leading investors who have a clearly articulated stock picking strategy.  Not only do I want to know what stocks they have bought or sold, I want to know WHY the decision was made.

Knowing why assists in evaluating my own portfolio and choosing stocks in the same manner as the superstar investor.

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One of my favorite master stock market investors to learn from is Mario Gabelli.  Mario is a down to earth, billionaire money manager who enjoys freely sharing his knowledge with other investors.

His portfolio is nearly $20 billion in assets.  Forbes magazine currently lists him as the 346th wealthiest American with a personal net worth of over $1 billion so his success is not in question.

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I consider him the value investor value investor.  He has successfully combined a value approach while remaining focused on stock price catalysts.

He isn’t the typical hold forever value investor but rather takes an active approach by only purchasing stocks that have strong pending reason to shoot higher.  Mario just doesn’t hope a catalyst comes along to lift the share price, he makes certain that one or more are pending and have strong odds of coming to fruition.

This investing philosophy has provided his investors with an average after fee annual return of 12% for the last 26 years.  Most hedge funds don’t even have these consistent returns let alone the over a quarter century of consistency.

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Mario has his own mentors who have shown him the way in the stock market. He primarily credits the teachings of Warren 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.

Mario’s Background

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 idea by any measure!

Today this is a common way for hedge fund managers to be compensated. However,  it was very unique when he proposed the idea.  This payment method has earned Gabelli a personal net worth of over $1 billion.

Gabelli’s Investing Secret

Gabelli focuses on a company’s free cash flow minus the expenditures needed to grow the business and earnings per share trends.

After carving down the stock market, he adds something called PMV or private market value into the blend 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.

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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 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 Special Sauce: The Final Ingredient

Next Gabelli adds in his special 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.

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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.

 

  1. Navistar International (NYSE:NAV)

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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 recently added shares to his holdings on in the second quarter 2015 and has been consistently adding since 2013.

 

  1. International Flavors & Fragrances (NYSE:IFF)

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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 sees this as one catalyst that will push shares higher. In June 2014, he increased his holdings by over 20% in this company.

Mario just added to his position on June 30th 2015 and has been ramping up his holdings over the last several years.

 

  1. Sony Corporation

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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.”

Mario has been aggressively adding shares to his portfolio over the last six quarters.

A Recap Of Mario Gabelli

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.