Even as a seventh grader, Mario Gabelli ’67 was intrigued by what makes financial markets tick. While working as a caddy at a country club in Westchester County, New York, he’d often overhear members — many of whom were Wall Street specialists getting in a quick nine holes after market close — talk about stocks. He started building up his own portfolio shortly thereafter.
But it wasn’t until his time at Columbia Business School, where he took value investing professor Roger Murray’s course on securities analysis, that his future career path came into focus. “In the course, we dug into companies’ annual reports and 10-Ks. It was that analytical work that made me say, ‘This is what I want to do,’” he recalls.
Recently, Gabelli shared his insights at the annual “From Graham to Buffett and Beyond” dinner in Omaha, Nebraska, which the Heilbrunn Center for Graham & Dodd Investing has hosted since 2010, and which Mario and Gabelli Funds so generously sponsor. The event happens each year on the cusp of the Berkshire Hathaway shareholder meeting and celebrates the legacy of Warren Buffett, MS ’51, and Benjamin Graham, both seminal figures in value investing philosophy.
We spoke with Gabelli to get his thoughts on how value investing is shifting in light of current events and technological advancements.
CBS: How has the world of value investing changed from the early days of your career?
Mario Gabelli: When you’re doing fundamental research, you need to figure out how a business is driven. How is a company generating revenues, profits, and growth rates? Is the management any good? So that part has not changed.
What has changed is the way information is gathered. Back in the day, individuals like Buffett or Graham would have to go to Washington, D.C., to access microfiche data and fish for information. When I started my firm, you went to the New York Stock Exchange. Fast-forward to today, and we get information in a much different way.
Moving forward, artificial intelligence is going to gather the data much quicker. So the gathering of data and fundamental research is obviously evolving fast. At the same time, some are likely to use chatbots to create some interesting but fake stories. You need to make sure you check your facts and that you know what you're doing.
CBS: What are some of the trends impacting value investing today?
Gabelli: Value investing isn’t focused on short-term market movements. It’s about finding the ignored and unloved companies that nobody covers for whatever reason, with a good business, solid management, and a good price.
But you do need to evaluate new trends as they come up. AI, for example, might accelerate the problem of income inequality. Also, there are food, water, and energy shortages. There’s the way capital is allowed to be allocated on a global basis — the regulatory hurdles and the challenges to the free market’s system of allocation. So you have to figure out how to bridge all that.
There’s also the importance of currency movements to global companies. So, for example, if you examine Warren Buffett’s involvement in Japan, it’s the same reason we have an office in Tokyo: Stocks are cheap, and the yen is 140 to the dollar.
And you have to worry about the geopolitical world. We have offices in Hong Kong and Shanghai — important parts of the world, particularly in light of what Russia did 16 months ago.
So, whatever goes on in 2023, one has to say, “Okay, where are we in the world today, and what are the challenges? How do you protect your capital? And how do you grow your capital on an inflation-adjusted basis in a global marketplace?”
CBS: How can the art of fundamental analysis translate to real-world value for, say, an MBA student?
Gabelli: The skills of fundamental analysis apply beyond value investing. For example, take the recycling industry. When a new MBA joins our research team, I may ask them to follow aluminum can manufacturers. I’ll ask them to read trade magazines to understand the cyclicality and capital expenditure requirements, among other things.
So, in that context, they’re really learning how a business is driven and looking at cyclical sensitivity and globalization. But more importantly, that research skill set allows them to actually run a business or work for private equity or launch a startup, because they are aware of the sources of capital and understand how to communicate to potential investors in their particular language.
CBS: What are some of the most common challenges for young analysts or new entrants into value investing?
Gabelli: From a rookie-analyst point of view, the challenge of the last three years was that they couldn't physically go to see companies. They couldn’t go to events and conferences. For instance, we’ve hosted auto conferences for 46 years in Las Vegas. But these events were virtual for two or three years. Now, we’re back to 90 percent in person and 10 percent virtual, so things are shifting back.
Also during the pandemic, Robinhood surged in popularity. Individuals were sitting at home with nothing to do, so they would trade. And so the notion of short-term trading is embedded in today’s society and younger generations. People liken it to video games and try to play things very quickly. So long-term investing — that’s our style — is not always aligned with the high-frequency trading in the world today.
CBS: Can you elaborate a bit about your own investment philosophy?
Gabelli: Well, it’s not my philosophy. It’s just echoing others’ — but I did add something into the mix. In the mid ’70s, I started a firm, but nobody wanted to own stocks. Businessweek even had a headline, “The Death of Equities.” I had to figure out a way to convince individuals to invest. So I asked, if I found a company that was publicly traded, what would it be worth if somebody could buy the entire company? And I think in terms of private companies, so what is the private market value (PMV)?
And then, because my clients’ time horizon was two or three years — not two or three hours — I looked for what’s called a catalyst. Catalysts can take many forms, like a new product introduction, an industry consolidation, or a sale or spin-off — something that might cause a previously undervalued company to reach its intrinsic value. I trademarked the concept of “private market value with a catalyst,” and that's my fingerprint on value investing.
CBS: What words of wisdom do you have to share with MBA students looking to get involved in the arena of value investing?
Gabelli: Whatever you do, be a “PHD”: passionate, hungry, and driven. If everybody you're going to compete with wants to work from nine to five, you work from five to nine.
And keep your options open. Learn as much as you can. And then figure out how to go out on your own. By the time you’re 35, you should think about starting your own firm.
Watch a video of the 16th Annual Pershing Square Value Investing and Philanthropy Challenge, which was held earlier this year at Columbia Business School: