Mario Gabelli (Trades, Portfolio) is a billionaire investor and founder of GAMCO Investors (GBL). Gabelli is a proponent of the value investing school, citing Graham and Dodd as major contributors to his thought process. He is credited with the invention of the Private Market Value methodology -- the price that an informed strategic buyer would pay for a company in the private market, or the intrinsic value plus some premium. Over the years, Gabelli has conducted many interviews and public appearances, which allows us to put together his views on investment and the markets.
What makes a great value investor?
When asked about the qualities of a great investor in an interview, Gabelli highlighted two things: patience and experience.
“I think one of the elements is patience, secondly you do have to understand that one we buy shares of stock, we’re buying a buying a piece of a business. So what is the business worth? From my point of view, I have an accounting background and a philosophy minor, but then when I went into graduate school, I had finance but in particular security analysis. So I was trained in the Graham and Dodd methodology of valuing a security: you gather the data, that is you look at all the public information. Then we as a firm put it together by arraying it...Now, back around 70-80 years ago you would try to find a company where you had a million shares outstanding selling at $10, but they had cash or receivables of $12. It was basically finding a company in the public markets, below the net current value of their assets - that is very hard to do today, the markets have been reasonably culled. So you then try to find other businesses where you do this work”.
This notion that buying a security is equivalent to becoming an owner in a business is a core belief shared by many prominent value investors, including Warren Buffett (Trades, Portfolio). This is a good mindset because it enables the investor to think in the longer term. It also makes one less likely to fall into the mental trap of buying speculatively, rather than on the basis of value.
“The second thing that is important other than patience, is accumulating knowledge of industries over an extended period of time. So by following the auto industry as I have done over forty years or fifty years, and the farm equipment industry and the entertainment business, you can adopt the change quicker and if the stock market, which we call Mr. Market, comes down...you can see what companies make an interesting opportunity, are they weak enough, and then how much time do you have to hold them.”
There is no substitute for experience. This can be industry-specific experience, which allows one to anticipate trends and changes before they occur, as Gabelli points out. But it can also mean having experience of investing in general. Typically, successful investors are those who have made plenty of mistakes and have been able, or were lucky enough, to weather the consequences and learn from them. In fact, an individual who has posted an impressive record without some accompanying level of adversity is more at risk of a sudden loss than one who has struggled and won.
Disclaimer: The author owns no stocks mentioned.
