The way the Bronx-born Gabelli, 72, won the poker game is telling, though. After reading a couple books, learning the mechanics from guys in the office and practicing online, he sat down with players including Janus Fund's Bill Gross and pros Johnny Chan and Jennifer Harma and realized his strategy would be simple. Calculating that the people around him were Type-A and would all
try to kill each other, he'd just sit back and let them crash.
In his business, too, Gabelli's a shrewd calculator of the odds. Since founding what was originally Gabelli & Co. in 1976, he's excelled at ferreting out cheap stocks that often went on to become far more valuable when a merger or other kind of corporate restructuring came along.
The investor's oldest charge, the Gabelli Asset Fund (GABAX), has delivered a 12.4 percent annualized return since its 1986 inception; that compares with 10.4 percent for the S&P 500. In the last 15 years the fund has beaten 91 percent of its peers in Morningstar’s large-cap blend category.
Bloomberg.com spoke with Gabelli, now a resident of Greenwich, Connecticut, about what he’s learned from his decades of experience.
In your experience what is the biggest mistake investors are prone to make?
Chasing fads. In the 1960s, it was bowling alleys. In the 1970s, the Nifty Fifty. The 1980s, leveraged buyouts. In 1999, people would buy only technology, media and telecom — the TMT stocks. Today it’s a combination of new social media and biotech stocks.
Notwithstanding that, if you hold certain cash-generating companies and you buy at a reasonable price, you're going to make more than you will in Treasury bills. The mistake is not staying focused on that. If I’m an individual investor and I have $100,000 I want to invest in the next five to 10 years, I'd have no problem doing what Warren Buffett recommends — buy an S&P 500 index fund. You're going to earn 5 percent to 7 percent over the next 10 years. The 10-year government bond is yielding only 2.3 percent, so you could earn five percentage points higher.
Aside from not chasing fads, how can people become better long-term investors?
We as a country should teach individuals about finance. Show everyone the notion of compound interest. If I put $1,000 a year away at age 20 and I earn 4 percent, 6 percent, 8 percent, what will I have at age 65? Show them the virtue of putting twenty bucks a week away instead of getting that extra latte at Starbucks or a pack of cigarettes. A pack of cigarettes is 11 bucks in New York City. Cut out one pack of cigarettes and one latte, that is $20 a week, that’s $1,000 a year. What will that become in 45 years and will you really miss the latte and the cigarettes? Teach fundamentals like that.
So it’s not just chasing investment performance but being a saver?
If you put money in the bank or in Treasuries you are going to earn 2.3 percent and you're not maintaining purchasing power. What happens if there’s inflation? If you put money in a box and prices go up faster than your income, you’ve got a problem. Because that subway in New York City used to be a nickel and now a MetroCard for a ride is two and half bucks. You have to protect yourself and the best way to do that is to have a basket of stocks.
Getting back to fads, is there any investment trend you missed and think, “Why didn’t I do that one?”
When Google went public, I bid a dollar below the auction price, and I only changed my bid a little bit afterwards. You always have those mistakes. You never see them in the results. I think we’ve done an outstanding job. Could we have done better? Absolutely. Like Ted Williams, he batted 400 and he made out three out of five times. We are making mistakes all the time. Every day.
Where do you think the most interesting opportunities are today?
We always act like the consulting firm McKinsey and try to find not where [the opportunities are] tomorrow but over the next 10 years. One trend is the aging of the population and the aging of infrastructure. When we talk infrastructure not only are we talking the obvious ones like bridges, but avionics -- planes and airports -- or railcars that don’t meet today’s safety standards. In the next 20 years you will see more aircraft to replace our aging fleet and more aircraft to expand the fleet. According to Boeing, over the next 20 years 35,930 new aircraft will be needed.
What aviation companies do you like?
We like Kaman [KAMN], a tiny company based in Connecticut. We own a large piece of it, like 25 or 30 million shares, and it sells at about $40. They have a tapered roller bearing that goes on these planes that is self-lubricating. It provides a longer lasting product that doesn’t have to be repaired.
You've also got the companies that are bigger than that, like Precision Castparts [PCP], that make a lot of the forging and castings that go onto airplane equipment. We’ve owned it for 10 years. Then we obviously have engine companies -- Rolls Royce [RR:LN], United Technologies [UTX].
On a personal note, from what I read, your hobbies are --
My hobbies are very simple. I read annual reports. By the way, I read them in hard copy. I cannot read them online. I like to mark them up as I am turning pages.
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