Legendary investor Mario Gabelli relishes his time spent on 10-Ks and 10-Qs and researching industry trends, executive management teams and catalysts that could trigger upside stock movements in overlooked and unloved companies.
Gabelli, chairman and chief executive officer of Gabelli Funds, the firm he founded in 1977, has remained committed to this active value investing style that aims to keep the firm ahead of the curve.
"You always pick up something that's changed" and then the question becomes how "you take advantage of them."
That formula has proved successful for Gabelli, 81, and his $30.7 billion firm, which has produced a compound annual growth rate in institutional AUM of 14.1% over a 45-year investment period. Pensions & Investments caught up with Gabelli in August at his Greenwich, Conn., office to talk about the future of Gabelli Funds. In this Part 2 of the Face to Face, he discloses how he finds his best ideas and his plans to "give money away" to the next generation of investors and trailblazers. Questions and answers have been edited for style, conciseness and clarity.
A: No comment. I cannot talk about my own company. It is publicly traded. What happened was the following, in 1977, when I started the firm, some individuals gave me some money. I couldn't raise a hundred thousand dollars. Fast forward, we added teammates. Wall Street's culture was to buy and sell a book, whether it was Goldman Sach or any of those. And somebody went public, whether it was Merrill or someone else, and I said to my partners, "Listen, I'm not a big fan of going public, but I think it's not inappropriate for you to have a public valuation on your company."
So we basically still publicly trade, but we are trying to figure out the best and most efficient way to stay in a public form that our stock is priced in the public markets. But some of the reporting requirements are not as onerous like Sarbanes-Oxley Section 202, the possibility that we'd have to document how much carbon was consumed by our teammates and how much carbon was consumed by our vendors. And I like Gary Gensler, he's done terrific. And his brother was a money manager at T. Rowe Price. He's terrific and he's doing the right things, and he's what Adam Smith wanted for the free market system. But it added a lot of cost and time, and we didn't want to do it. So we were publicly traded, but deregistered.
A: Again, like you asked before, what are the advantages of an ETF? There's a section of the code that allows an ETF to take appreciated securities, and give it to something called an authorized participant when somebody buys or sells and get rid of ... they eliminate taxes. They defer taxes. So if you buy an ETF at $10, they can buy and sell and you don't get dividends. You get some dividends, but you don't get a return of capital. So your basis, 10 years from now, is going to be $10, which is very helpful.
They're basically reducing the amount of money going to the government. But ETFs under this 852(b)(6) code, ETFs and open-end funds can do the same thing. But the practical part is for me to give a company like Aerojet Rocketdyne, that cost us $8, which is being taken over by L3Harris at $58, I can give it out of a mutual fund to somebody redeeming. I can't do it because Merrill Lynch will take it. And so the playing field is unfair. So we said, well, for half of our clients and the mutual funds are taxable. And so to be fair to those taxable clients, what we're going to do is start ETFs. There's a big tax advantage.
Secondly, column A, column B, every money manager who has over $100 million has to file a 13F every 45 days. So whatever we do is in a public domain. Third, anytime we own over 5% of a company, for whatever reason, we file a 13D, and people think we're activists.
There are a lot of benefits to being an ETF... There's no negative to having it semi-transparent or non-transparent.
But more importantly, we're not charging any fees and paying 100% of the expenses on our ETFs. It's zero cost to everyone. And so as a result of that, we'll keep that up for a period of time.
The problem is getting shelf space. I can have the best tomato sauce. Unless I get it on a shelf space in the center aisle, I'm not going to sell it.So that's the rationale behind it. We have different teammates that do this. We understand the mechanics. And basically, this is a long journey. Over the next 20 or 30 years, we'll figure out how to try to get the regulators to be more fair and level the playing field between ETF only, and help the Main Street investors do the tax advantage that the ETFs have.
A: We have a company called ScottsMiracle-Gro. And we followed Scotts forever because I used to use the product on my lawn. And basically, they have great distribution, a great product, great consumer brand, and they got into the manufacturing equipment for infrastructure support. And they were supplying products for the cannabis industry. You get into some of these things indirectly, so you have to be aware of the dynamics.
Meanwhile, that business has collapsed. The stock has dropped. And so we're looking at, what do they do if they don't have Hawthorne (a Scotts subsidiary for cannabis growers)? What is the value of the business? So that's how you get ideas by change.
A: I've known Warren Buffett now since 1970 or so, when he owned a company in New York that I followed called Pinkerton's Plus. And Charlie Munger's like 99 and Warren's 93. We host a conference, on Friday night, before the annual meeting, and we pay for it, and Columbia Business School gets the benefit. We have 500 people show up. And one of the questions invariably, somebody asks us, Charlie, Warren, what's your succession plan? So they know that they have the two individuals now that have been identified.
I have a very strong team in the investment process. Doug Jamieson is helping run the business. So the question is, the business plan for succession and the investment side put in place? So if I'm walking on 42nd and 3rd and somebody hits me from behind, the plan is in place.
A: No, I don't think there's any need for that. That's just a lot of ... Come on. We're a small company. I have two co-CEOs, and Doug Jamieson is the co-CEO.
I got that idea from the founder of Warner Brothers, Steve Ross, back 40 or 50 years ago. And companies have done that successfully over the years, co-chairmen, co-CEOs. Basically, I got it also from a guy by the name of Napoleon. He would just put ribbons on people during the war. Those are important. You got to tell someone they're doing a good job. And that's it.
A: I was very fortunate. I grew up in the Bronx. And we would get coupons to buy food during the Second World War. And then I learned to start a business because I wanted to buy comic books, and I couldn't ask for money. And the comic books had the cover stripped off and you'd buy a 10-cent comic book for nickel or less. And so I figured out ways to make money when I was 6, 7 years old. You were allowed to go into the streets. Today, you can't do that.
So I actually started shining shoes, got an old Army box. And we had subways, elevated, so people would get off and that was it. So I did all of that for a long period of time.And I went to the right high school and right college and right university and graduate school. And so I'm a product of a lot of schools in the New York City environment.
A: Well, I'm working to give money away. And I am looking to do it efficiently because when you start a business, you're doing it efficiently. So I'm trying to give money, everything I own. I took Warren Buffett's giving pledge. I like Warren. I like Bill (Gates). I like a lot of the other individuals that have accomplished that. But I have to be efficient. Just like when I start a business, I have to watch and pay the payroll and make the checks and pay the bills.
So we are looking initially at taking education, particularly for first generation, and looking at those opportunities to help them cut the costs. A great university needs financing. It needs facilities. It needs professors.
So we'd try to endow chairs like we've done in recently at Case Western and other places around the country. And basically try to figure out students. How do we help students get scholarships? And how do they get out of this lobster trap, Hotel California, easy to check in, difficult to check out, of tuition.
How much do they owe? OK, it's $1.6 trillion. And the student loan is a challenge. It was like the Venus flytrap. It's stuck. So how do the universities give to first-gen scholarships? How do they subsidize the payments and yet allow them to feel that they're being competitive and can get into the school? Those are the things we think about.
My gift giving, however, through the Giving Pledge, is going to be primarily domestic. A lot of the other individuals are smarter and more global than I am and try to help parts of the world, which I would do, but I don't know how to do that efficiency. And we're learning, but still, our primary purpose is that. So I come to work 24/7 to earn money to give it away.
