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How To Invest Like Mario Gabelli

David Goodboy

Mario Gabelli is the value investor's value investor. 

Using a powerful value plus a catalyst stock-picking methodology that has been described as "Benjamin Graham and David Dodd plus Warren Buffett," his fund GAMCO has returned an average return of nearly 12% a year after fees for the past quarter of a century. These solid and steady returns have made Gabelli a billionaire.

Mario Gabelli's Biography
Born in 1942, Mario Gabelli is said to have bought his first share of stock at age 13. Having a passion for the stock market, he launched his own firm in 1977 as a broker-dealer. The company has since expanded into a diversified financial management company with more than $40 billion in assets. 

  Mario Gabelli  

Interestingly, Gabelli designed his business so that he does not receive a salary, bonus or stock options. Rather, he is compensated by a management fee structure. This pay method, unique at the time, first landed him on the Forbes 400 list of the wealthiest Americans in 2006. In 2011, Forbes estimated his net worth at $1 billion.

Mario Gabelli's Investing Strategy And Big Wins
Gabelli's investing philosophy is built upon principles first articulated in the book "Security Analysis" by Benjamin Graham and David Dodd in 1934. Gabelli then adds Warren Buffett's ideas about valuing a business and taking a large stake in portfolio companies.

He uses a research-driven approach to investing, taking into consideration trends in earnings per share and free cash flow minus the expenditures needed to expand the business.

Next he adds his own ideas of private market value (PMV) and a catalyst. PMV is the value an informed entrepreneur would pay to purchase an asset with similar characteristics. It is determined by a study of assets and liabilities (both on and off the balance sheet) and free cash flow. He then compares these numbers with actual transactions in similar businesses as a reality check. In other words, he focuses on companies that appear to be bargains relative to their PMV. This provides Gabelli with upside plus a wide margin of safety.

After determining the stock is undervalued in relation to its PMV, Gabelli looks for a pending catalyst to bring that value to the surface. He advises that this catalyst can take many forms. Examples would be a company or industry specific event, such as a change in management, a spinoff, regulatory changes or industry consolidation.

The goal of this research is to identify companies that have the potential of 50% return over the next 24 months. Once a particular stock reaches its PMV or if an expected catalyst fails to occur, Gabelli sells the stocks. It's all part of a very regimented process at GAMCO.

Gabelli's value-driven approach to investment doesn't lend itself to big wins or big losses like those experienced by speculators. The long-term consistency of returns surpassing his self-imposed 10% benchmark is what has made this money manager famous.

Mario Gabelli's Portfolio: What's He Holding Now?
GAMCO holds a total of nearly 800 stocks, with the portfolio's three most heavily weighted sectors being industrials, consumer cyclical and consumer defensive. The fund added 41 new names in the first quarter of 2013 and increased its position in 270 stocks. Here's a closer look at GAMCO's largest position increase in this year's first quarter.

GAMCO's Largest First-Quarter Holdings Increases

Gardner Denver (NYSE:GDI)
This engineered industrial machinery company boasts a market cap of just under $4 billion. Shares currently trade at just over $75; the company has a price-to-earnings ratio of 14.6 and a price-to-sales ratio of 1.6. Gardner Denver has had average annual revenue growth of 12.6% over the past decade. 

GAMCO increased its holdings in this company by nearly 3,400% in the quarter, and the fund currently holds a bit more than 1 million shares, representing about 0.5% of its portfolio. Most interestingly, Gardner Denver's management team increased its holdings in the company by 35% in the latest quarter. This is due to the fact that private equity firm KKR & Co. (KKR) agreed to take over the firm for a reported $3.7 billion. Obviously, this was the catalyst Gabelli looks for in his value-driven stock picks.

Action to Take --> Gabelli's research-driven value investing approach has proved to be a powerful long-term investing method. Following in Gabelli's footsteps by combining value investing principals with his PMV concept and an expected catalyst will be certain to improve any long-term investor's bottom line.

Like most big-time money managers, Mario Gabelli operates multiple funds. He is currently bullish on housing, fracking and commercial aviation. In addition to his pure PMV/catalyst approach to investing, I find the premise to the Gabelli Focus Five Fund (GWSVX) most intriguing, not to mention the simplest to replicate for the savvy investor who wants to invest like Gabelli without investing with Gabelli. 

I think of the Focus Five Fund as a collection of high conviction ideas from superstar analysts filtered to represent the Gabelli catalyst/PMV theme. The fund is managed by Dan Miller, who launched the fund as an offshoot to a report in which Miller surveyed top analysts and fund managers for their highest-conviction ideas. The fund uses a similar universe of stock picks then drills down, investing up to 50% of the fund's assets into what Miller names as the top five stocks -- in other words, the best of the best from the top analysts' high-conviction lists.

In order to help limit the number of stocks, Miller applies a four-step process to the high-conviction stock group:

1. Miller has to have a personal interest in owning the company in total

2. There must be clear communication between Miller and the company's management

3. Shares must be trading at 30% to 50% discount to intrinsic value

4. A catalyst to lift shares higher must be projected within 18 months

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