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Continuing the outstanding array of high quality industry speakers this fall, the Wharton Investment
Management Club played host last week to legendary investment icon Mario Gabelli. As Chairman of Gabelli
Asset Management Inc, which includes Gabelli Funds LLC, the advisor to the Gabelli family of mutual
funds, and the money management firm Gabelli Asset Management Company (GAMCO), he is responsible for
almost $30 billion of client assets under management.
Gabelli is known for his entertaining presentations, so his opening statement "I have a problem" left
most people with some trepidation as to what he was going to say. It seems visiting Wharton (Gabelli
is a graduate of Columbia Business School) intimidated Gabelli to the point where he felt like "J. Lo's
new husband on their wedding night." I beg your pardon? How does J. Lo's husband feel? Gabelli explained,
"You know what I'm going to do, but how am I going to make it different?"
Mindless Investing
Fortunately, Gabelli's mind moves fast and he was able to show how he has managed to differentiate
himself to investors over a number of decades. Showing strong insight into the audience's interests,
Gabelli used an example of playing Texas Hold 'Em poker to illustrate how ideas were generated. Despite
showing a fictional hand that naturally ended with him holding a Royal flush, his point was not about
holding the best hand. How do you know what the other guy is going to do? How do you have risk control
in your decisions? His point was that active investment management is not mindless investing (a term he
likes to apply to index managers) and that by observing what's occurring in society - the fact that
ESPN's World Series of Poker can draw over a million viewers - you can capture themes and generate
investment ideas that are going to make money for your clients. That thinking is part of the reason
behind the surge in gaming stocks over the last few years, a surge that Gabelli has been able to
capture for his clients.
Gabelli looks at what he refers to as the "Five Ds" when looking for investment themes. The "deficit":
implications from changes in the trade and fiscal balances; the "dollar": how changes in the dollar
affect individual companies; "dividends": changes in dividend policies and taxation of dividend income;
and "deals": the extent of and motivation behind the level of "lovemaking" between companies (or
"corporate cupid" as Gabelli calls it). The final "D" was the "Democrats." That is obviously no longer
a talking point, however post-election policy implementation does have important company-specific
implications.
So what are some of the themes Gabelli is currently focused on? China, changing demographics, and the
emergence of Hispanic influence in American society are all areas he feels are having a tremendous
impact on potential investment decisions. China is the market you sell to or buy from, but not the
market you compete with. The demographic changes he sees are not just about the aging population. He
cites obesity as a very important driver given the impact it has on consumer needs and access to
healthcare services and pharmaceutical products. "We think that's a wonderful trend," he says with a
wry smile.
How to Get a Job in Investment Management
Gabelli was very clear in giving advice on how we should approach recruiting in what he referred to
as Theory A: "Don't take your talents and go and work for a mutual fund. Go to a hedge fund." As the
audience members who had just spent their summer at venerable firms like Fidelity Investments, T Rowe
Price and American Century reconsidered their options he quickly followed with Theory B: "Who cares?"
Gabelli made it clear that his firm only hired PhDs - and by that he means "poor, hungry and driven."
A large component of the investment philosophy he promotes is in-depth, independent, and company-specific
research. This is not just kicking the tires of companies being researched. This is developing
relationships with them so over time the analyst understands the motives behind management decisions -
a vital element for the research driven element of what Gabelli is offering to customers.
Gabelli's job advice mirrors what he's set out to achieve with his business. "Figure out what you want
to do and how to make money for the customer."
Private Market Value and Graham & Dodd
Similar to one of his heroes, Warren Buffet (see below), Gabelli was a disciple of the investment
approach taught by Graham and Dodd. He shared a clip of a series of lectures he had recorded from his
former Professor at Columbia University in the 1970s discussing the concept of "Private Market Value."
"Was private market value merely intrinsic value dressed up to make it more appealing?" The difference
was that Private Market Value equaled intrinsic value plus a control premium. Valuation of companies
using this concept is now the basis for the way Gabelli researches each stock.
Gabelli also shared with us a clip from one of his favorite movies, The Graduate. In much the same way
as the character played by Dustin Hoffman was searching for what he wanted to do in life when he was
offered the one word advice "plastics", Gabelli feels Graham and Dodds' work served as a Rosetta stone
for those who were trying to figure out what they wanted to do in investing.
Heroes
Gabelli lists as his heroes several names that are all very well known to those that have even the
remotest interest in investing. Peter Lynch - the former Fidelity superstar, and also a Wharton
Graduate (1968), who Gabelli believes brought integrity back into the world of mutual funds; John Bogle -
the founder and former head of The Vanguard Group, who Gabelli credits for introducing choice to investors
through passive /index funds ("introduced mindless investing"); Bill Gates - for many reasons but also
because he is the single largest shareholder of Gabelli; and, of course, Warren Buffet (pronounced as if
you were getting a meal in Las Vegas). Interestingly, he's also quite enamored with Elliot Spitzer, who
Gabelli feels is important in keeping the system honest.
He also couldn't resist an opportunity to look for ideas amongst the audience and encouraged us to let
him know when we find something interesting. "After all," he says, "who else would you want to trust?"
Perhaps that's the line J. Lo's next husband can use.
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