#22 -The Octogenarian

Chapters

00:02 – Demystifying successful investing
10:04 – Private market value strategy
16:03 – Industry knowledge and company analysis
25:35 – Global company visits and insights
34:07 – Research, growth, and personal impact
40:53 – Banking sector and surrogate banks
49:52 – Investment insights and career advice

Transcript

A barely edited AI generated transcript follows:

STEPHEN CLAPHAM: Hi, welcome to the behind the balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of what makes a successful investment or indeed an unsuccessful one. Our goal is to inform, educate and entertain.

DISCLAIMER: We hope you enjoy this and every episode behind the balance sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast which is aired for your education and entertainment. Only nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.

STEPHEN CLAPHAM: Mario Gabelli is the oldest investor I know and one of a handful of highly successful fund managers who are managing money in the 1970s and still do so today.

STEPHEN CLAPHAM: He’s something of a legend. And in this interview, he explains his framework for identifying companies that will generate long term performance. He believes in doing deep industry research, looking at the total supply chain, reading the 10-K S of course, but also reading trade journals and regularly visiting both the companies he invests in and their competitors and suppliers he’s funny, self deprecating and a workaholic.

STEPHEN CLAPHAM: The day after I interviewed him. He was getting on a flight at four in the morning to visit the Genuine Parts investor which started at 7 30 AM in Atlanta, Georgia. This guy is a billionaire and in his eighties, he still loves the markets. He not only manages money but he’s out visiting companies, not just in the US, but in Europe and Asia, he says he looks to recruit phd s like he used to be.

STEPHEN CLAPHAM: But these aren’t doctors of philosophy. PhD Gabelli means poor, hungry and driven. His net worth was put at $1.7 billion by Forbes, but he’s certainly still hungry and driven. My idea behind this podcast was to inspire young people to have a career as an analyst, which has been so rewarding for me. Mario Gabelli started work in 1967 as an analyst and he’s still following Genuine Parts 56 years later. That has to be fun, right? You’re gonna enjoy this one.

STEPHEN CLAPHAM: So Mario, listen, welcome to the podcast. I’m really grateful to you for coming on. I’m really looking forward to our discussion. And what I normally ask people to start with is how did you get into investing now? I know the story, but it’s a fantastic story. Please share it with the listeners.

MARIO GABELLI: Well, it’s a funny story. I grew up in the Bronx New York and somehow I was taken to a golf course called Wing Foot, well known among golfers. And they allowed you to caddy without asking how old you are. And I was like, you know, 12 and the age was 13 when I got to be 13, I swung over to a different golf course in Westchester County, which is just north of New York City called Sunningdale Country Club.

MARIO GABELLI: In fact, the pro was a fellow by the name of Whitey Boy. They had a son, two sons. One is a famous rock star and the other one is John Boyt, the famous actor. So I actually caddied for John Boyt. Well, he was an assistant pro independent of that.

MARIO GABELLI: I would be able to go up because I’d either go by bus or some other transportation like hitchhiking, which was ok at that time. And that, that time period and I would stay late because I total flexibility on my schedule. The other caddies would leave, individuals would come up to play nine holes of golf.

MARIO GABELLI: I would caddy for them and they were specialists on the New York Stock Exchange and they would talk about how they were making money that day. So that’s when I started buying stocks in the probably seventh or eighth grade and started reading the newspapers because you know, that’s you get an evening newspaper that gave you the closing prices.

MARIO GABELLI: So I started buying stocks like beach aircraft, Pepsi Cola I T And T Philadelphia and ready. And that was it. So, during high school, the same thing, college, the same thing.

MARIO GABELLI: But when I went to graduate school and I took a course from a, a fellow by name of Roger Murray, he was the successor of Columbia Business School to Graham and Dodd, I decided I would become a, what they call a security analyst and to do research on stocks. So that’s it not complicated.

SPEAKER 4: And you’re still doing research, how many years later?

MARIO GABELLI: You know, I would like to tell you that I’m one third of the age of the United States, but that would create someone trying to figure out what happened in 17 76. So for your audience, I don’t want to get into that.

MARIO GABELLI: I’ve been doing it for about 60 years, started with a firm called Lobe Roads in 1967 covering the autos, farm equipment and conglomerates and quickly picked up business services and media and entertainment and you know, those are areas in which we have core competence or which we’ve covered.

MARIO GABELLI: The major changes, I would go to Europe in the mid seventies to see all the car companies go to Japan and China in the early eighties. But we never invested until the Berlin Wall came down in November of 1989. Then we said not only do we want to cover companies around the world, but we want to invest in for our clients and that’s it.

SPEAKER 4: But it must have been very unusual for people to go outside the US because the US is a very big market and you’ve got home expertise, why did you have the confidence to do that? Was it because you’d covered the stock for a long time? You, you that built up your comfort level or no, my clients were primarily us based.

MARIO GABELLI: But my research when I was at low brow or William D Witter and when I started my own firm, you know, you want to follow industries. So if you’re following video and entertainment, you know, that’s one thing, another classic example of what we followed is whatever you drink, wherever you drink it, whether wine, water, beer, soda, we would follow it.

MARIO GABELLI: So that would take me to visit companies in Paris, like or Grant met in London. They had hamburgers and they had Guinness and they had the booze and I like that. So we, you know, we cover the industry and we still do. In other words, even though I have an analyst in China, we’re not interested in much in China as we’re interested in what’s going on in media or sports or dynamics like that.

MARIO GABELLI: And so as a result of that, you know, we do have clients that don’t allow us to hedge the currency. So that’s been a challenge because if you bought something with the euro at 1 35 and it’s down to one oh seven, you could be up in, in local currency, but reporting in us dollars to the client has been a challenge.

SPEAKER 4: We’ve had the opposite here. Of course, because some well known investors are trumpeting the fact that they did, ok, in 2022 down, you know, 10 15%.

SPEAKER 4: But of course, they’re mainly on dollar stocks and their real underlying loss has been significantly more. But just before we get on to that, because I wanted to ask you, you studied accounting and philosophy at university college school. I don’t, I never know how Americans pronounce it.

MARIO GABELLI: That’s fine. But what happened was not complicated. I needed to figure out how to be economic and I was making tax returns out for individuals, whether they worked at the UN or whether they had small businesses when I was a freshman in college.

MARIO GABELLI: And so I took accounting and if you took accounting at the school, I went to, you took what I call 32 credits of it and you had a mandatory 24 credits of philosophy, they didn’t have many options, but I got full tuition to that school.

MARIO GABELLI: So, you know, I was able to cobble it together for a variety of sources. And as a result of that, you know, it was a practical decision and what, what, what have you learned from studying philosophy?

SPEAKER 4: How’s that helped you in your business and in life?

MARIO GABELLI: That’s a great question.

MARIO GABELLI: One of the answers would be as follows if I’m in the woods and a tree falls. If no one is there, is there a sound?

MARIO GABELLI: Come on, you know, I’ll never answer that question. I’m still thinking about it.

SPEAKER 4: 65 years later, I’m just, I’m just curious but my elder boy is doing his G CS E S which are the sort of before the final exams. And you do, he’s doing 11 G CS E s and then he is specialized and he will do four A levels and one of the A levels is philosophy and I’m, he’s doing economics. I can help him with that.

SPEAKER 4: But philosophy, I don’t know that I’m gonna be, I’m gonna be much, much just pass on the subject.

MARIO GABELLI: And there are a lot of courses, you know, somebody says to me, I did four years of Latin to help you. Well, it lets you organize structures of paragraph sentences so that you can go from, you know, ABC D as opposed to AD BC as other people do.

SPEAKER 4: Sometimes when they know Latin, I think Latin is a great language to learn.

SPEAKER 4: It really helps you.

SPEAKER 4: It was an important structural process for, for me and listen, you set up your research firm in the 19 seventies close to, to, you know, a really bad time in the market, you set up an institutional research firm. What gave you the confidence to do that have you always been a very confident person?

MARIO GABELLI: Yeah. No, that’s, well, you know, I’m always believe in the freedom of the economy and the free market and, or all the flaws and the rule of law. But what happened was I was at a firm called May of 75. Comes along. That was when commissions changed May Day, they call it. You have the same thing in, on the London Exchange. A few years later, probably in the mid eighties, 85.

MARIO GABELLI: Yeah. And basically, what then happened is that all the research firms went out of business. So I was offered a job at X Y Z. I had a friend of mine running the research department of Goldman Sachs. But when I, I went to see a client in Denver, Colorado, just before I made a decision while I was still at Drexel. Burnham. Drexel had bought William D Witter.

MARIO GABELLI: The guy says to me, what are you doing? Go start your own firm. And I had thought about it and, you know, I tried to raise X dollars. I couldn’t do it, but I started it anyway. I figured the worst that could happen.

MARIO GABELLI: And I had firms like General Motors and others that would pay a $5000 a year to my research.

MARIO GABELLI: And that was a lot of, you know, you need a cash flow to feed the family. So that was it. But I felt stocks were cheap, they got a lot cheaper over the next couple of years. And that’s how we came up with the idea of private market value.

MARIO GABELLI: What would a public, I have to convince individuals that there were organizations and families that had money and that they would take a publicly traded stock that was selling at X and they would buy it because of the. So that would mean what was the private market value of that company? And so we went through that process and identified that and coined that and trademarked that process back in the late 19 seventies.

MARIO GABELLI: So trade Mark private market value PM V with a catalyst and we did it as an economic necessity. I had to convince people to, you know, give us money to invest that presumably would have been a very successful strategy at that time.

SPEAKER 4: I mean, do you think that would be possible today because you know, a lot of the less efficient companies have been acquired by private equity or consolidated multiples are higher today and there’s a lot more money chasing sort of risk and Merger arbitration. If you were doing it today, would you, what would you have done the same thing?

MARIO GABELLI: But going back to the analysis part, you basically started off saying if I was a private equity called leverage buy out at the time?

MARIO GABELLI: Ok. Prior to that in the sixties, it was called bootstrap financing. But if I look at what does a private equity firm do? Whether it’s Blackstone take care are the ones in London or so on. They try to promise their investors a certain rate of return. So when you buy a company, let’s use hypothetically with no cap required, let’s buy the company at the 10 multiple. How much debt can they take on?

MARIO GABELLI: How much cash will the company be able to maintain its or cash flow? Will they be able to grow it?

MARIO GABELLI: And then what valuation can you put on it five years later if you want to sell it to another organization? And how much debt can they put on? And what’s the cost of interest on that period? Clearly, as interest rates go up the present value of what you think you can sell it for does not go up unless they are inflation indexed earnings.

MARIO GABELLI: And so the private market value works in that regard where it has trouble is when you have a company with cash burn selling at multiple revenues. And so we do not attempt to do the, the private market value with companies like that.

SPEAKER 4: You still use that philosophy though.

MARIO GABELLI: Yes, I’m for example, I’m reading a company this morning Monarch Cement, located somewhere in Kansas, Hutchison, Kansas, four million shares. The stocks are 100 and 10, they’ve got 100 and 20 million in cash, which is $30 a share. They do 50 million of and that it’s extremely well run. And what they do is they sell cement.

MARIO GABELLI: And so you try to figure out if I was, another company that wanted to be in that area. Now, why you want to do that is if you put up in of wind towers, you need a lot of cement. If you put up long distance lines for utility distribution and then you have highway infrastructure funds and the government passed through bills that are very important.

MARIO GABELLI: So that’s what we do. I, you know, we within the last 24 hours, I think 20 annual reports have come in. So that’s what I do. I try to, you know, I fast forward them. My a good year tire, for example, was painstakingly detailed. So that took a little longer this morning.

SPEAKER 4: But the the Monarch Cement, I mean, it’s on like six times and you’ve got the Inflation Reduction Act, I mean, what am I missing?

MARIO GABELLI: Not that you just look at the balance sheet, look at Wal To Wolf has been running it forever and the other part is he’s been buying back stocks. So where’s my downside? The problem is he trades 100 shares a day? Ok. So you don’t, it’s not liquid, it’s not appropriate for you know, anyone that is concerned about dynamics to trade it.

MARIO GABELLI: But then talking about the methodology of analysis. How do I look at private market value? Ok. So we ideal world is to look on the ignored and unloved. And those are small cap stocks like Monarch, Monarch has a 400 million as you point out.

MARIO GABELLI: But the multiple, the 50 million of is materially lower than it could be. But that’s not why I looked at it. I’m looking at today, for example, in the United States, there are TV station operators. They’ve been hit hard because of the concerns over an economic contraction.

MARIO GABELLI: But when you look into 2024 you’ll see a tsunami of spending on politics and you’ll see a recovery in automobile spending and you’ll see a recovery in other types of spending. And so if you buy these stocks and an economic contraction that the market’s assuming as an economic contraction, and you say, how bad is bad, how long will it be bad?

MARIO GABELLI: Can this company have a balance sheet and income statement to survive and then how good is good and when will good be good and when will the market discount it? And there’s a lot of whole ways of making money and cyclicals and the small cap and the ones that, that could be taken over? The challenges are always, you know, do I worry about summer in China?

MARIO GABELLI: Do I worry about what’s going on in Belgium? Do I worry about what’s going on in Washington in terms of regulation? Sure. It’s got to be a harder and harder on M and A to predict with clarity, the time frame in which the announced deal and the closing process would take place.

MARIO GABELLI: But you care.

MARIO GABELLI: Oh, I’m my job is to we have several managed accounts. So we try to do two things, judgment and service and on judgment side, that’s why we have the analyst and the portfolio managers on the service side.

MARIO GABELLI: That’s why we have our teammates who, you know, contact clients in periods like last Monday when they had runs on the bank and you have to explain to them and that’s where the accounting comes in where I you dig out has be 1 57 and accounting standard, 1 57 blah, blah, blah.

MARIO GABELLI: It came about because of what happened in 1990 in the bank crisis in the United States and that bank crisis dealt with the Savings And Loan Association. So the accountants passed the rule, Steve that said if you buy a long term asset and you put it into a category called hold to maturity H T M, you don’t have to Mark to market. So they take that was good for the last 12 years.

MARIO GABELLI: But all of a sudden when rates go from 2 to 5, 5% you and your long government trade bonds, the value has come down. And all of a sudden if you picked up first Republic’s annual report and looked at that number which they gave you and it was available that Monday when SI V B had gone bust or whatever, basically, you would see that they had like $4 billion of a $13 billion capital base. And so that was really the counting.

MARIO GABELLI: Well, and so that is how you pick and tie all this data together.

STEPHEN CLAPHAM: If you enjoy this podcast, you’re bound to enjoy our free newsletter on substack. It’s a weekly email on interesting investing topics, visit behind the balance sheet dot com and hit the sign up button while you’re there.

STEPHEN CLAPHAM: You might want to check out our brilliant online investor training school. Hundreds of students have taken our flagship analyst academy course which teaches you everything you need to become a serious equity investor.

STEPHEN CLAPHAM: And if you’re a professional investor, we run a forensic accounting course for institutional clients and soon a cohort based course for serious amateurs, email us at info at behind the balance sheet dot com.

SPEAKER 4: Why is it that people don’t read the 10-K S because that information is there.

SPEAKER 4: You know, I mean, it, it it’s not difficult to read it, right?

MARIO GABELLI: I mean, you know, I, I look the let’s be practical. Individual clients are not gonna read that material. Ok? So therefore owning an ETF for them, if they want to be passive about doing that since 1920 28 when they put these numbers in a bucket, I have the data, I can send it to you five decade.

MARIO GABELLI: It was put together by they went back retroactively and put it together and so on that you could have compounded your assets at about a 10.1%.

MARIO GABELLI: Ok. I think over the next decade, you’re probably because of the rising interest rates which are gonna be embedded longer that you probably assume you can make a six percent. So, you know, an individual investor looking at alternatives for money and liquidity, I, I can live with that.

MARIO GABELLI: But if you’re talking about an active analyst or a portfolio manager, they should read it, that’s their job, that’s what they get paid for.

MARIO GABELLI: And so as a result of that, with the changing of market, you eliminated the uptick rule in the United States, which means they can short the EFS come along, they can hit them, they buy these bundles, they come up with crazy packages, you know where you get doubles, triples P T s but the quantity the Algo and the Momo everyone tries to make money in their, in their own methodology and some are very successful.

MARIO GABELLI: And we try to do the same thing in our methodology. Our methodology is of being at bottom of focused on areas in which we have developed core competencies over an extended period of time.

SPEAKER 4: And how much of that is based on looking at the financials and looking at the internals of the companies and how much of it is based on looking at the industries and the knowledge of the industry. I know you’re a very big reader of, personally, of trade journals.

SPEAKER 4: Just can you talk a little bit about your process? A lot of, people listening to this podcast, a lot of young listeners who are trying to learn their craft and it’d be fantastic if you wouldn’t mind just explaining how you go about looking at a stock.

MARIO GABELLI: That’s a great question. Let’s start off by saying the first thing you have to do to be successful is decide to work from 5 to 9. So everybody else wants to work from 9 to 5. And that is a real cultural shift in the United States recently that convinced people to do that. The second part is you can’t go in and follow one company selling pumps and valves without following the whole ecosystem.

MARIO GABELLI: You cannot follow Warner Brothers Discovery or Netflix by not looking at the content providers and the other companies that are doing it streaming. So what we do is we assign an analyst, for example, we believe that you will have renewable energy or some other form of energy. So sources of energy. So you do transmission, you do a distribution.

MARIO GABELLI: So we send an analyst or team of two now to industry conferences, the electrical E I I OK. We have a guy in London that would cover and the wind companies and they talk but do not, you can’t just do a off So reading the trade magazines, going to conferences, going to see the companies at their headquarters.

MARIO GABELLI: It’s been a little challenging until more recently just to travel because you didn’t know whether you’d get back. You didn’t know what the COVID issues were. But bottom line, that’s the structural way that we believe in and emphasize. Then what you do is you try to get a good management with a good, a good business, good management with a, at a reasonable price. Sometimes you get a good management, a good business.

MARIO GABELLI: The, the price is a little higher where then I don’t have that same margin of safety, but the stock still goes up. But that’s ok. You know, we try to determine, you know, like I’m visiting, I’m going to Atlanta, Georgia tomorrow to visit a company that I first visited in 1967 and I still own the stock line called Genuine Parts.

MARIO GABELLI: They sell parts for the auto after market. Clearly, there’s some concerns that an E V is going to have less parts, but they’ll have different parts. And then in addition to that, the company is going into the distribution of product of parts in Europe and Australia and New Zealand and the world has 1.4 billion cars and they’re getting older.

MARIO GABELLI: And so, you know, they need parts and when you go to get, if your car doesn’t work, you don’t want to wait a week to get the right part, you want it the next day. So then in addition to that the vendors of their parts allow them to return the parts. So you don’t, it’s not like a dress with the seasonality changes and that you have to take a Mark down on your sneakers and move it out, they get paid.

MARIO GABELLI: And secondly, the vendors finance their inventory, so on a non recourse basis.

MARIO GABELLI: And then in addition to that, if I have the parts for a 1954 Chevy or whatever or not a rolls, but you know, a more common car and you don’t want it anymore, they take it back. So, there’s not that risk and the, the, this pricing discipline and so on. So we’ll see the company and they going to sell, distributing parts the same way for industrial activity.

MARIO GABELLI: And you probably have the old idea of, you know, just in time inventory that’s gonna change and restoring to Mexico and resorting to, parts of the countries that shortened the lead time. Like we were seeing a company the other day that had a significant facility in Morocco. Well, you know, they’re in tangier. Well, that’s right across the river.

MARIO GABELLI: So, that’s what we do.

SPEAKER 4: What’s it like when you go and visit a company that you’ve known for all that time, you’ve got more knowledge, understanding history with the business than the chief executive.

MARIO GABELLI: No, not necessarily, but I approach the questions into more detail on gross margins, cost of goods, sold S G N A expenses. The the CEO does know what his competitors are doing. I’m visiting all the competitors. He does know what the board is thinking of strategy because he’s told them the challenge is, are that you have to be very careful when you visit companies to get that.

MARIO GABELLI: You, you know, obviously, if anybody tells you something that’s material, not public, we have to make it public, ok? Because we’ve been following the company for an extended period of time. We do understand certain dynamics, we understand, you know, where is the company thinking five years from now?

MARIO GABELLI: But short term mechanics, those are challenging. For example, I’m not sure I would be aware of all of their suppliers of parts in the case of Genuine Parts where I’m going tomorrow will one of them have a shortage which that company that supplies, that part is private.

MARIO GABELLI: The trades don’t pick up that news, that noise, you know, and the competitors are using a different supplier of that part.

MARIO GABELLI: So there are certain elements that you don’t find out about, but you also have to keep track of these companies that are trying to let’s say, make it clear that they take write offs of goodwill or they take concerns over changes in accounting and they provide data that the next year they tell you, oh, our earnings are a dollar versus 40 cents from a year ago.

MARIO GABELLI: But they don’t tell you, they wrote down 60 cents the year before, you know. So you gotta keep track of data by quarter and our spreadsheets do that. Ok. What are the gross margins for the S G A?

MARIO GABELLI: And then the service business don’t have the same kind of inventories. Our inventory on o as the management learned how to control working capital. This is a new generation of of managers that have not done that.

MARIO GABELLI: And I give you an example, Steve a few years ago when the first oil crisis hit, you would rent the car, the car company would pay for the gas within two years, they gave you the car, but you pay for the gas is extra. So the notion of cost pass throughs and baking it into contracts is new.

MARIO GABELLI: Now the United States as an example, we are probably 20 odd percent of the US is manufacturing today. Whereas in the seventies, it was a much higher percentage, you become more of a service economy. So you have to understand the implications of service costs and how they deal with Capex and cash flow. So it’s it’s OK.

SPEAKER 4: So when you go tomorrow to Genuine Park, just run us through your day. I mean, do you always have the same questions you ask this?

MARIO GABELLI: The company is bringing in investors from across the world and they’re bringing in management from across the world. They start at 7 30 in the morning. So we have to leave at like four o’clock to get on an airplane. Who, who, who, who you’re getting up at four o’clock.

MARIO GABELLI: No, I’m getting up earlier than that. That’s not relevant. The point is you gotta get to the airport by a certain hour to get a certain flight to get, down there and it’s, they, yeah, we’ll, we’ll do it. That, that’s nothing. Why, what’s this?

SPEAKER 4: Well, Mario, look, you know, you’re not a young man, now you’re very wealthy.

MARIO GABELLI: You could afford to fly down tonight and stay in a hotel and, and yeah, but I have other things to do tonight, see other clients and so on. Independent of event. The point is that I used to go to Europe two or three times a year.

MARIO GABELLI: I haven’t been to London since June of last year. Ok. I’ve got to get up there twice, three times between that and going to see companies in Paris and Berlin. And then, you know, Japan, that’s another challenge for us. Ok?

MARIO GABELLI: I have one guy working in Shanghai who’s an analyst that was with me for 20 years and he decided to go, we opened the office there 15 years with a whole bunch of interesting dynamics going, I may not invest in them, but certainly you want to see them. And so Toronto Montreal, I mean, you know, we got a backlog of companies to visit. You cannot worry about personal impact that you shouldn’t be managing money for other people.

SPEAKER 4: Well, that’s very commendable. And I, I, I’m amazed, I’m just amazed I’m laughing because I’m amazed that you still have the will I 4 30 is not that early.

MARIO GABELLI: Come on. If you want to work from 5 to 9, you know, you get up earlier one hour earlier, one day. What’s the difference?

SPEAKER 4: Well, I, I mean, I wouldn’t do that, but I’m not as dedicated. I, I’m not as rich as you.

MARIO GABELLI: So, you know, there is all the money I’m making from Ellie is going to charity anyway. So that’s irrelevant.

SPEAKER 4: But tell me this geographical coverage, just talk a little bit about, you know, where you’ve got boots in the ground and why do you need boots on the ground in an information age?

MARIO GABELLI: First of all, like in Shanghai, I don’t give you Tokyo when we go there. Clearly, I will need somebody that, you know, we tell them, hey, we’ve had the office here since Fukushima were there 12 years or 11 years. And, if I needed to understand the culture of how to ask a question, I, you know, I ask it in advance.

MARIO GABELLI: I, I’m very direct. Sometimes you have to go through a side door. Secondly, they do take you around and they know the traffic patterns and so on. So visit companies. Ok. Clearly, you can rent a car, but I’d like to also understand more about the company and the culture. When we go to Shanghai, the same thing Hong Kong, my analyst has disappeared until recently but let’s take London.

MARIO GABELLI: Ok. You know, we have four or five teammates in London. One covers the health care stocks so we’ll see G S K and the other one will go take me over to Rolls Royce down the block. And you know, whether I go see Vodafone or I go see other companies a because we also are large holders of in the US of what they do. And you know, that’s another, for example, Tim Winter, my utility analyst, he lives in Saint Louis.

MARIO GABELLI: He wouldn’t join me if I had to come to New York or Connecticut. So we opened an office in Saint Louis. He’s been there with us now 15 years and he’s one of the best in covering the water industries like Severn Trent. We have an analyst in London that goes there and I come over and see Liz Garfield whenever you know, I get there again.

MARIO GABELLI: It is what it is. Yeah.

MARIO GABELLI: But the, the advantage of having is there is a little bit of a benefit if you’re seeing companies in the geographic area. So that’s important. Secondly, it’s important if you want to have an individual who has talent, but he doesn’t want to relocate to a geographic area like New York and yet he’s, you know, gets on an airplane and goes to conferences around the world.

MARIO GABELLI: You know, we have an analyst that grew up in the Ukraine and moved to Cleveland and he’s been with me for 20 years and he just came back from Barcelona for a telecom conference. So we do all of that, gather the information array, the information project and interpret and communicate our investment research process is what they call gap.

MARIO GABELLI: It’s areas like telecom where we have historical knowledge like today, a company in Belgium based in London called Liberty Global is buying the balancing of their that they offered €35. I’m gonna say nine years ago today they’re offering 22. What, what’s going on in Belgium’s Evan Miller was the analyst at Lehman Brothers in London back in 1989 or 90 or 88.

MARIO GABELLI: And he’s still with us today and he decided he wanted to cover these companies out of Milan. Ok. So why not?

SPEAKER 4: And how do you communicate? I mean, I know it’s easier.

MARIO GABELLI: Another good question. We start every morning at 7 58 15 New York Times. So the for example, Evan jumped in on the dialogue over what’s going on in Belgium, how many telecom operators there are what Liberty Global is doing there? Why they’re doing it? We speculate on that. Another teammate understands they squeeze out rules in Belgium.

MARIO GABELLI: Or eu and that if they can get 85 95% they can out the balance and on a Merger. So you tie all of that together. Today is an example. We also discussed, you know, several companies that reported earnings. Obviously, our money market team, talked about what the Federal Open Market Committee is gonna do today. At two o’clock, we run 100% us Treasury Fund.

MARIO GABELLI: There’s tax benefits to that. There’s no liquidity issues and you know, the team’s been doing it for 30 years. So they bring us up to date on what they think the rates are gonna do and what the run off is gonna, the fed has got $9 trillion of debt that they’ve up from five, they’re reducing it at 95 month and they just added 300 billion back into the system.

MARIO GABELLI: So, you know, you keep track of all these things and that’s how we communicate. That doesn’t mean it’s a perfect world again. Some of the individuals have not kept up with the passion, what I call the phd attitude. They’re not as passion and hungry and driven as they might have been PRE COVID or really?

SPEAKER 4: Have you noticed that, that there’s been a change in attitude?

MARIO GABELLI: Yeah, there is no question about it.

SPEAKER 4: And that surprises me at your affirm because I would have thought that nobody would get into your firm unless they were pretty hungry.

MARIO GABELLI: No, no, no, no getting in is one thing. Maintaining the function and focus and integrity of the process that is important for our clients, which is judgment and service requires a little more examination and going back to basics, people changed. I mean, I had one analyst. I hired from a state in the United States that probably never had snow.

MARIO GABELLI: After his first winter, I sent them to visit a company in Los Angeles. He decided never to come back.

MARIO GABELLI: He quit.

MARIO GABELLI: You know, come on, you’re dealing with people. Ok. Yeah, everyone is different. We tolerate all, we respect all. However, we also have to be practical.

SPEAKER 4: What, what’s employee turnover like a firm like yours? I imagine you’ve got long time.

MARIO GABELLI: We, we don’t have that. We have maybe three individuals leave us out of about 100 and 80. You know, most of the ones that left recently was because they want be geographically closer to work. They did not want to commute to rye wherever we are.

MARIO GABELLI: Ok. So it’s like saying, you know, the way I wanna work and be able to walk 10 blocks to work as opposed to taking a half hour train ride or something like that. Yeah, that, that would change attitudes about locations for some individuals.

SPEAKER 4: Tell me, I’ve heard you tell this story about when you, you originally set up the firm as an institutional research firm. And obviously research is still the backbone. But when you’re visiting a company, you said that the company director, the chief executive gave you a chat. Can you tell that story?

MARIO GABELLI: Because I think, you know, you got too good a story. Memory. What happened was the following. I covered the auto industry so I cover all the parts, companies, shock absorbers, exhaust systems, blah, blah, whatever was popular in the 19 seventies and sixties.

MARIO GABELLI: I go to Toronto, I visited a guy by public company. I’m thinking about his stock and he says to me about 45 minutes into the interview, Mario, stop, you know more about the Canadian Auto market than I can tell you anymore. Ok.

MARIO GABELLI: Then he says to me, Mario, tell me about your business. So I tell him, here’s what I’m doing. I’m doing my research, I’m sending out reports. He says you’re gonna fail. I said, Jack, why do you say that? He opens the drawer? Pulls out his check for 100,000 us?

MARIO GABELLI: He said you forgot to ask for the order. Remember the 11th commandment? If you don’t ask, you don’t get. So as a result of that Steve, that was the story that he became my first client.

MARIO GABELLI: It was three weeks later.

MARIO GABELLI: And then when I started, it must have been like October. I said, January late January and the company was a very successful distributor of auto parts and they had the license to distribute X Y Z shock absorbers and, and stuff like that, which I was following the American company that made that stuff. So, you know, that was an incrementally value added visit.

SPEAKER 4: Well, did you get, it was a good stock idea as well. You are, you were happy with 100,000.

MARIO GABELLI: Yeah, we made a lot of money. His grandson worked for me for a while and went back to Toronto and we try to keep in touch even with all the challenges.

SPEAKER 4: What made him trust you? It was $100,000 back.

MARIO GABELLI: No, no, because I would ask all of the probing questions for an extended period of time. He knew what I was doing. I would send him copies of my research for it, you know, and when I was either at low bros or William, the wit of the analysts were permitted to have private accounts.

MARIO GABELLI: So I would have private accounts even though most of the other analysts may not have been so interested in it. So I would talk to these individuals over an extended period of time about dynamics going on in the market, what’s going on with the oil shocks, you know, and I knew about a lot of data on automobile consumption, parts, cars on the road, trends, pricing.

MARIO GABELLI: And we would exchange data as well as me learning more about what’s going on in western Canada, Canadian Auto or whatever is going on at competitors.

SPEAKER 4: So that’s why, he came up with that, a database and knowledge and how, then did you grow the money management side of the business you carried on doing research or?

MARIO GABELLI: Yeah. No, no, I still do that. I, I, my wife reads, I read, five annual reports and she reads one book so she will read five books a week and I’ll read 20 annual reports or something.

MARIO GABELLI: It is what it is. That’s why I’m, I’m having trouble thinking about the, the way to answer your question, which I will in a minute about what book to recommend.

SPEAKER 4: But the one thing you do is you do, you’ve been doing an auto conference for almost 50 years and various other conferences have been going on forever. Who attends those?

MARIO GABELLI: Ok. That, that’s a good question. Let’s do it the following way. I had to give a speech in Las Vegas to an auto industry group, the automotive warehouse distributors or whatever. And it was in 1972 or three or four.

MARIO GABELLI: And I said to them, the biggest problem we have is not the availability of oil. I think that’ll be resolved itself. It just a higher price for you to have as a cost of capital because inflation is gonna pick up and you guys are gonna have to communicate with Wall Street.

MARIO GABELLI: So because of that, I started hosting a meeting in Las Vegas because the industry would go there So 46 years later, the industry goes there at the end of October, early November and we always host our meetings there.

MARIO GABELLI: We started the same thing with us part suppliers, the Boeing and Airbus. So we have a conference now, maybe 35 36 years. So instead of just going to Farmborough, going to Paris air shows, you know, we have our conference that’s generally in New York, it’s generally in September.

MARIO GABELLI: We do one on pump valve and motors. We do it on recycling companies. For example. Why is aluminum important in the world in which we worry about plastics in the world. Why?

MARIO GABELLI: Then we do one on media and entertainment. Then we do one on the specialty chemicals which we just said last week. And then the, the one that is coming up about 30 years ago, Alice Roder was at Morgan Stanley. She hosted a dinner the night before a Buffett’s annual meeting.

MARIO GABELLI: I would get invited by her. Warren would show up. She writes a book called X Y Z on Warren Buffett. He says, he says I’m not doing this anymore. I call him up. I say Warren, my nickel. Your guest list, Mario, I’m not doing it.

MARIO GABELLI: I said, ok, Warren, how about Columbia’s guest list? And my nickel. He said, great. So we for the last 17 years Columbia Business School, Warren went in quotes on the grave. They bring the guest in on a Friday night. So we have a conference. Ok.

MARIO GABELLI: But that morning we bring in three or four local companies like Lindsay And Belmont, which meant central irrigation equipment and so on. And then two or three others come in and we talk about those companies and then that evening we have four or 500 individuals show up at the dinner. Four or 500.

MARIO GABELLI: Yeah, those are co yeah, they pay a dollar. Colombia gets $4. I pay a certain amount for the food. I pay for everything and Colombia gets the, the money that they charge.

SPEAKER 4: Oh, I see. All right. So they, they pay quite a lot, I imagine.

MARIO GABELLI: What do you get there? So, it’s not as, you know, $50. You know, if you pay somebody £50 today it’s probably, what you would have paid five years ago. 25.

SPEAKER 4: Yeah. Well, I mean, food prices here are, are rocketing, rocketing up.

MARIO GABELLI: I, I agree we’ve got a food crisis, energy crisis, water crisis. And obviously now we’ve got a little bank issues.

SPEAKER 4: What did you make of? So, I should just explain because this will, will go out in a few weeks that we’re recording this the week after Silicon Valley Bank has been rescued. What, what do you make of that? And you’ve seen this, how many times have you seen bank cycle bank failures?

MARIO GABELLI: I mean, it’s quite common in the States, the, in the late sixties, the Chemical bank, somebody who tried to take it over.

MARIO GABELLI: You had some problems in the early seventies in the United States. In the mid seventies, you had Republic Bank, Canada, Illinois Bank Bank companies went bust in the late eighties. You had the, all the savings and loans and the, O OS, you had something else. Oh, 89, you had the, the Lehmans and the Bears as, and today you’re just going back to the cycle.

MARIO GABELLI: It was a, a long period of time in which deposits were lazy. They didn’t care whether they earned 1% they just leave the money at the banks. The banks then said we can earn net interest margin spread by going out and we don’t have to worry about the accounting.

MARIO GABELLI: And so you have those challenges. I would thought that the problems would be private equity. You know, the late eighties, you also had the loan obligations. You know, I thought it would be private credit, shadow banking, all these loans that are being made by non-regulated entities. I still think that’s going to be a problem.

SPEAKER 4: Well, I mean, this is an end, right? I mean, this is just the beginning.

MARIO GABELLI: Look from my end, I’m not an expert on this. I think that, the notion of a quarter of a million, a million dollars, what happened is that if you go back to see the movie a wonderful life with Stewart 1946. I, I happen to know these because I follow the movie industry. Basically, it showed you what happens when a run on the bank.

MARIO GABELLI: So the bank crisis of the 19 thirties, you had people pee up trying to get their money out today. A guy sits on his desk and the button that says I want my money back. Ok? So the new run on the bank, it just happens. And as a result of that, if you had X dollars in a bank and somebody says you’re not guaranteed, you’re gonna be payroll.

MARIO GABELLI: All of a sudden you wake up and say, look, I had a good relationship with S A B B but I want my money back. So I think for the short term they did a bail out how that works out over time. I don’t know. And I just kinda think about Hamilton and Alexander that created some challenges back 250 years ago.

MARIO GABELLI: Look, JP Morgan, the crisis you had so many bank crisis.

MARIO GABELLI: I think the financial times just or someone just wrote down the list starting. Mackey wrote the book in 18 53 of the sion are great. I forget the year.

MARIO GABELLI: You know the, look at the South China Sea bubble, the blah, blah, blah, you always get these bubbles. And that’s the good news about the capitalistic system.

MARIO GABELLI: The problem.

SPEAKER 4: You don’t have any banks, do you? Because if I look at your top, no way out there.

MARIO GABELLI: When you look at my portfolios, you’ll see that I am a big believer in custodial banks, State Street and Bank Of New York are two of our biggest holdings. And I started buying those in the late 67 2008 when no crisis was. I said this the these custody banks will do Ok.

MARIO GABELLI: But you also have to realize that they do own kind of surrogate banks like American Express, I own the clients Berkshire, it’s not a surrogate.

MARIO GABELLI: And we do have a few shares of some of the banks that were local. For example, the migration of individuals from the northern part of the United States to the south out the banks that are down there would be attractive to regional banks to buy the Florida Georgia Banks. Ok. So we look at several of those but it’s not, you know, the, if you’re talking about a three or 4% holdings of, of 5% of banks, it’s a lot.

MARIO GABELLI: But the States are the they’re overwhelmed by Bank Of New York and State Street.

MARIO GABELLI: And why are those safe?

MARIO GABELLI: You know, because if you are worried about, I’m not worried about anything. But let’s assume I was concerned about a return of capital as opposed to return on capital, having your money in a brokerage firm, you’re only secured up to a certain amount. If you have your money on margin, it becomes cross collateralized with the assets.

MARIO GABELLI: So you don’t want to have a margin account. You want to have an account where you’re delivering the assets to a bank that those assets are not co mingle with the bank’s assets. So they call custodial assets. And so we use them for our mutual funds.

MARIO GABELLI: We use State Street and we know the quality of the service. We know that doesn’t mean they don’t make mistakes in terms of making acquisitions or over paying or maybe underpaying for something that they should have bought earlier. But on balance, my assets are segregated. So there’s, I don’t want to use another 30 shades of green.

MARIO GABELLI: I don’t wanna say.

SPEAKER 4: So you’re buying, you’re, you’re, you’re buying those, but you’re not taking a risk on the capital because they’re basically, they’re basically, they, they provide a judgment and service and clearly, we like that aspect of them.

MARIO GABELLI: One of them like Bank Of New York has got a 50 billion market cap. So at some point, we figured they would also be the subject of someone’s love making that’s kind of on hold for the next time period.

SPEAKER 4: At the moment, I wanted to ask you because when I was looking through your website, you’re described as a cio value and there’s also a cio growth and I’ve never seen that distinction before. And I’ve always thought of sort of growth and value being two sides of the same coin. Why do you have to, is it because you need a different mindset to invest in growth? Is that the reason do it?

MARIO GABELLI: Another way if you are a general in the military, what you want to do is give ribbons out.

MARIO GABELLI: So Howard Ward has been running our growth team for 30 years. He’s done a fantastic job.

MARIO GABELLI: Ryan, for example, runs our gold team was a barrister. He sold his wig, his robe and he went to work for Montague as a self site analyst. He’s been doing it for us now for 32 years. So he covers the gold stocks. We have a team that does convertibles. We have somebody else that does some minor fixed income.

MARIO GABELLI: I have two individuals, Kevin Dreyer and Chris Co cio s with me in the value side of the house. Ok? And the reason for that is a kind of a the board asked what if I am walking down the street and somebody shoots me? I said, you know, such is life. But that’s to plan for the notion of continuation of judgment.

MARIO GABELLI: That’s why that part of the business makes sense to continue the the notion of running the business. We just created the CEO office and we will the board knows just in case something happens. So who’s gonna run the business for until they figure out what they wanna do so you have to be practical in these decisions.

SPEAKER 4: So what what? So my real question is OK. So I look at me, is it value or is it growth?

MARIO GABELLI: When I do as I started the conversation earlier, my private market value with a catalyst which is the basis of our value team, you can’t do that with companies like OK, unless you’re looking at doing financial engineering and the splitting off the company and doing three or four subsets that clearly when you have a you cannot do private market value on a company with $800 billion of market cap.

MARIO GABELLI: You can’t do it on the, on Microsoft, even though they have parts that, you know, they’re gonna buy Activision, they’re gonna compete with Sony. But then you look at the Sony and Sony has 1.3 billion shares and the stock is selling at a 90 you know, you got a $1200 billion market cap. Can they split it up?

MARIO GABELLI: Can we look at the sum of the parts there? How much is music? Then you have comps with regards to Spotify, paying them, you have a universal music. You have Warner Music in New York, which we just visited. And so then you have obviously all of the playstation and then you have a game pass and so you can start seeing what’s going on in that part of the world.

MARIO GABELLI: You wanna have growth, you want a good management, you wanna have a good business with a good values. So sometimes you can blow that line and your observation is totally accurate. You know, clearly it’s gonna be very hard to put Microsoft in the value camp. Some people do that. Not by not, not the way we look at it. Ok?

SPEAKER 4: But on the growth side of the office, do they look at stocks in a different way?

MARIO GABELLI: Oh, yeah, they’re looking at a totally different Howard has basically looking at the growth of the addressable market, the growth of the company’s market share. How do they allocate capital? How does the balance sheet look? He tends not to look at start ups? Ok.

MARIO GABELLI: With his cash burn for three years then in between that are like in London, Sarah was in London office, she would look at exact sciences which is colonoscopy and other things that they got cash burn and you know, for three years, but they have enough cash not to have to raise cash to fund the the time to get the cash break even.

MARIO GABELLI: So that could either be a growth or value play when the stock dropped to $45 you know, I bought and right, so you do get a bit of a crossover. Well, you know, we take a very practical approach.

MARIO GABELLI: We had Scott’s Miracle grow which got crushed by its cannabis exposure. But we knew it because it was also a lawn and garden and lawn and garden in the United States in the spring of 2022 was terrible because of weather conditions. But they have an entrenched brand.

MARIO GABELLI: The stock dropped from 100 and 50 to 45 or 50. And, you know, if we said that we can buy it in the value side.

SPEAKER 4: Funny, the London Value Investor Conference, which I shouldn’t advertise since they won’t give me a free ticket.

MARIO GABELLI: But they, you know, Jonathan, they should throw, throw pedals on the floor for you.

SPEAKER 4: But I mean, I think it’s perfectly reasonable to give me a free ticket if I’m going to write about it.

MARIO GABELLI: But anyway, they want to, there’s a various types of people in the world that are very practical. They call them Scotch and Geneva.

SPEAKER 4: But anyway, so I, I, I, I’m debating whether to go and I shouldn’t publicize. So we’ll edit the name of the nameless conference. But Jonathan Boyer presented, he’s presented several ideas, but he presented Scott’s last year and it looks quite an interesting company to me. I don’t know the share price.

MARIO GABELLI: It hasn’t, it’s been pretty weak, but I got out of 40 who got bounced back to 80 and it’s probably in the, in the seventies today. I, I don’t have the current price in front of me. I don’t have a machine, machine.

MARIO GABELLI: But the bottom line, those are the kinds of things that one keeps on their radar screen because if you follow the company once it’s located in Long Island and moved out to Ohio, the guy I would visit was, was here. You see, you know, the change taking place. I did not, I don’t buy three dimensional printing until now.

MARIO GABELLI: I don’t buy cannabis. You know, There’s certain things that we’re unlikely to hold for our clients, you know, too much easy competition. It’s not worth it. No barriers to entry, blah, blah, blah.

SPEAKER 4: Do you think value is back? David Einhorn was over in London a few months ago trying to raise capital. He’s up 36%. Net last year.

SPEAKER 4: Now’s your day in the sun again, isn’t it?

MARIO GABELLI: Yeah, look, I mean, in 1999 buffet stock was $42,000. People thought value was dead dot com was in, they booed him. He had to advertise literally in his annual report, you’re not happy with me. Here’s my phone number. I’ll buy your stock. Ok. In 1975 we had the same problem at Columbia Business School.

MARIO GABELLI: Value investing 72 at the 50. So Wall Street goes through cycles in which you have different dynamics. I’m not saying value ever left. I think the consultants looked on value as leaving your clients buying a business that’s run well at a reasonable price and you hold it for a period of time in the United States.

MARIO GABELLI: They’re gonna try to change this through. But if you own the stock over a year, you’re paying a 23.8% tax. If you own it under a year, you’re paying a 37 plus whatever your state and local taxes are. That’s why everybody wants to move to Zook.

SPEAKER 4: But there’s no Texas.

MARIO GABELLI: So a friend of mine that I, we know, I know we got but, in order to exit the United States though, you got problems. Puerto is probably the best case right now in the US.

SPEAKER 4: But I mean, I said to my friend, I said, what are you going to do in?

MARIO GABELLI: You go to Zurich but you, you know, you can, you can go to Zurich, which is only a 25 minute drive or something like that.

SPEAKER 4: Yeah, but I mean, what do you do in Zurich? I mean, Zurich, you know, civilized city.

MARIO GABELLI: But, you know, I live in London, you know, I know, I know you go down to the place you live in New York. What’s the place at the bottom of Portugal? It’s called.

SPEAKER 4: So tell me, what book are you going to recommend to my listeners?

MARIO GABELLI: Well, I’m a bad guy.

MARIO GABELLI: I don’t want you to pay for it. I want you to go back and get three years of annual reports on Berkshire Hathaway. It’s online, you get it for nothing. Just read the chairman’s letters about how he approaches the world. Ok. And that is a very good insight into how someone invests money and has done it for 40 years, 50 years.

MARIO GABELLI: What year are we in? 60 years? And from my point of view, if I wanted to read a book, I will send everyone a copy of Merger Masters, which we wrote that deals with arbitrage and the art of arbitrage. All of them have been extraordinarily successful investors.

MARIO GABELLI: And what did they do? And how do they treat arbitrage? Arbitrage is financial engineering, but under it is the M and A, it’s called Merger masters, but I, I, I will not recommend it. I will send it. I cannot have anyone buy something that, you know, I had some fingerprints on.

MARIO GABELLI: But the one that I always recommended for the last 50 years or 40 years since 1966 Graham and Dodd’s book on security analysis. Ok.

MARIO GABELLI: And you know, just understand one aspect of the investing world and that aspect deals with fundamental investing and you’re buying a piece of land, you’re buying a stock, you’re buying a piece of a company that because you’re buying share and how does that hand? What do they do over the next 10 to 20 years? And which ones are going to be around?

SPEAKER 4: Well, listen, I mean, it’s so much fun and interesting talking to you. I really, you’re so kind, I’ll have to buy you a beer at the, well, I’m really, I’m really annoyed because you’ve been in London and you haven’t, you haven’t called me up because we were going to have a beer and wait.

MARIO GABELLI: Hold on, hold on, hold on.

MARIO GABELLI: I came into London. I landed at eight o’clock one night to see the office to see my team in June.

MARIO GABELLI: I went to see Christopher Mills. I saw two companies that morning and then we left at one o’clock to go some other part of the world.

MARIO GABELLI: So sorry about that. It was in absentia.

STEPHEN CLAPHAM: Next time you have to stay a bit longer.

MARIO GABELLI: And we will cheers. Thank you very much.

SPEAKER 4: Thank you so much.

STEPHEN CLAPHAM: As I said at the beginning, my original idea behind this podcast was to inspire young people to have a career as an analyst that has been so rewarding for me personally, it transpired, the quality of some of my guests as interest, a lot of professional investors. And the show is a big following in that community.

STEPHEN CLAPHAM: The fact that Mario Gabelli started work in 1967 as an auto analyst and he is still following Genuine Parts 56 years later, just amazes me more. So he’s getting up in the middle of the night in his eighties. So he doesn’t miss their capital market day. If you’re a young person wondering about a career in finance, I hope this inspires you. If you’re a professional investor, maybe you need to work harder.

Thank you for listening.