If you want better than average returns you have to be different from everyone else. I’m poorly paraphrasing Howard Marks, but it’s true.
Behaving better than everyone else, buying when valuations are low, having a longer holding period, and becoming an expert are all simple ways to be different. Simple, but not easy.
Mario Gabelli has this figured out. He shared his investing philosophy in a recent interview:
The notion of what I do is fairly simple. I buy a good business that I hold for an extended period of time to defer paying a cash tax on the sale of that asset.
Not very many people have their philosophy distilled into so few words, which is a lesson by itself. He hits on three keys that drive his returns – good businesses, longer time period, and deferred taxes.
His “extended period of time” comes to an average holding period of about 16 years. That’s about 15 years longer than the average investor. Being different – more patient with a long-term holding period – from the average investor is one reason for Gabelli’s success.
The other reason is due to his process. Essentially, he first looks for businesses that meet his two simple principles:
- A company less hampered by an inflationary environment
- A predictable business model
Inflation is the bain of most businesses, but a few perform better than others. First, they can raise prices more easily than most – called pricing power. Second, they are less capital intensive than most.
Gabelli prefers the subscription business model over a business built around one-off purchases. He gives the example of selling one razor blade for a dollar versus selling a subscription of razorblades for life. The latter offers more predictability from a consistent monthly revenue stream.
But it doesn’t have to be a traditional subscription model to qualify. Businesses selling strong brands operate under a pseudo-subscription model because of the built-in awareness and trust.
Think of the products that you buy on a regular basis. Which ones have you been buying the longest? For example, I buy Tide and Crest. I’ll continue to buy both until cloths become self-cleaning and my teeth fall out. So basically, both have a pseudo-subscription model even though I don’t buy detergent or toothpaste every month. As long as I trust the brand, I’ll continue to buy it regularly. That trust, across many consumers, brings consistency and predictability to revenues.
If a company gets through his first two filters, he digs deeper into valuation:
What is a company worth? How do you value the business? And so we looked at it from the point of view of what would pay for the business if you could buy 100%.
He wants to figure out the amount needed to take a public traded company private. He calls it private market value or:
Intrinsic value – that is the present value of the future stream – plus the takeout premium.
The “takeout premium” adds to his margin of safety that exists in the spread between price and value. Then he looks for anything that might widen that margin like a catalyst or growth in value.
Much like Tom Russo, Gabelli’s process has led him into specific industries that produce compounding machines in the beverage (wine, water, beer, and soda), food, and entertainment (movie and tv content) industries.
Though, Gabelli starts with an industry-wide view and drills down from there. This gives him the expertise to identify the low-cost operators, best management, suppliers, and helps him identify trends and opportunities that the average person won’t find flipping through pages of Valueline or Moody’s.
I think it’s safe to say his industry expertise would never be possible without his long term philosophy. Neither would his above average returns.