Berkshire Ruminations

Thursday, April 26, 2007

Mario Gabelli and Value Investing

I recently got a chance to meet Mario Gabelli, chat with him briefly and attend a lecture he gave to our business school. It was another exciting opportunity for me that I owe to my status as a student at a school with a very generous benefactor, Mr. Harvey Eisen, who routinely helps bring the classroom to the real world.

Some folks might be more familiar with his company, Gamco Investors (GBL), than with Mario Gabelli himself, so let me review why I think he is one of the most important investors to study.

As far as the hall of value investing fame goes, I would say Warren Buffett and Charlie Munger top the list, but Mario Gabelli is not far behind. Like Warren Buffett, Mr. Gabelli is a graduate of Columbia Business School. So naturally he is a strong proponent of the value investing style formalized by Benjamin Graham and David Dodd in the 1930s. He is still active at the school, lectures occasionally and consults with the current value investing professors.

Mr. Gabelli’s innovation is the concept of Private Market Value (PMV). The underlying idea of PMV is that a public company is worth the amount that a private investor would be willing to pay for the company in its entirety were it not public. This is a somewhat more concrete modification of the concept of intrinsic value, for which Graham and Buffett both had more ambiguous definitions.

For instance, Mr. Buffett defines intrinsic value as the present value of all cash that can be taken out of the business over its remaining life. Of course, calculating this can be frustratingly difficult as it relies on important assumptions of future earnings, capital expenditures and various other unknowns. Conversely, PMV can be estimated a little more accurately by garnering an awareness of the private market for businesses. This strategy worked well for Mr. Gabelli as his firm was getting off the ground in the early 1980s, just as the leveraged buyout phenomenon was peaking and public firms were indeed being taken private with some regularity.

But Mr. Gabelli does not settle for only companies that are likely takeover candidates, as this would severely limit his universe of potential investments, especially in a less LBO-friendly environment. Thus, he also looks for a “catalyst” – something that can cause a public firm’s hidden PMV to be unlocked without the need for a buyout. Such things may include a new management or regulatory change.

While Mr. Gabelli rightfully gets the credit for popularizing this idea, one can see the strategy at play in the investments of many investors, including Warren Buffett. Take for example Berkshire’s investment in Coca-Cola in the mid-80s. Mr. Buffett saw an enormously strong brand that had been muted. But there was also a catalyst in the form of new CEO Roberto Goizueta who took over the company with a new strategy. More recent examples might include Berkshire’s investment in Mid-American Energy and PacificCorp, which came immediately after the repeal of the Public Utility Holding Company Act.

So what is value investing these days anyway? I get asked that from time to time, but it can be difficult to answer. The simple answer is that it is a catch-all term to characterize a variety of investing styles, all of which make the supposition that the market oftentimes gets prices wrong. Perhaps it is best to describe modern value investing by what it is not.

Value investors give no credence to charts, moving averages or any technical indicators. This is because, under the assumption that stock prices might be wrong, then so too can the charts. But it is also because value investors focus on fundamentals, whether those fundamentals include financial ratios, market shares or brand value. Note that such fundamentals are not necessarily easily measured or even identified.

Value investors do not worry about trends, and generally avoid “hot” stocks. Buying a stock on momentum and hoping that momentum is sustained is simply too risky. This does not imply that a value investor cannot buy a hot stock, but only that it being hot is not the reason for the value investor’s purchase.

However, value investors always distinguish between value and price. Far too many investors assume price and value are synonymous. They are not. Price is what you pay, value is what you get.

In the end, value investing boils down to the purchase of stocks for less than they are worth. What they are worth boils down to some estimation of value based on factors unrelated to the market or its pricing of the stock. Thus, the value investor does his best to ignore the market entirely until he decides what he feels is the right value of the stock – just as he would be forced to do were the company private – and then makes a decision by comparing this value to the price.

FD: I own shares of Berkshire Hathaway, but have no position in any other company mentioned in this post.


  • What the heck? Why are these guys coming to Mizzou after I've already dropped over $40k (was out-of-state) on a Mizzou MBA? I want a partial refund (only partial b/c of Dorigan).

    You think there is any value left in private equity these days? There is where the next "lowering of credit standards" will become evident - a lot of funds reaching because the obscene amount of cash on hand is burning a hole in their pocket.

    Great site and post - as usual.

    By Blogger Mike, at 26 April, 2007 20:19  

  • I believe a better example of how WEB uses PMV is in his explanation of why he invested in Washington Post.

    By Blogger John Tsai, at 26 April, 2007 21:31  

  • Mike - today I am attending a lecture by Sam Zell, also facilitated by Harvey Eisen.

    By Blogger Andy Kern, at 27 April, 2007 06:12  

  • Nice right up on Gabelli. In the last annual report he gave a nice analysis of Cablevision (cvc). Recently, Cablevision was taken private by the Dolan family at $36.

    nice blog and diefinately great write up

    would really appreciate it if you join my forum


    By Blogger AG, at 03 May, 2007 11:08  

Post a Comment

<< Home