Investment advice: What to do in a euphoric market? 10 tips from Wall Street’s ‘Super Mario’

Nothing replaces investment experience. Plus, while patience is key, you have to be aggressive when the time is right for success.

These are the tips for investing in the success of “Super Mario” Wall Street. Legendary investor Mario Gabelli says patience and experience are the two most important qualities that make a good investor.

“The experience can be industry specific, allowing trends and changes to be anticipated before they happen. Or it can be an investment experience in general, ”says billionaire investor and founder of GAMCO Investors (GBL), well known for inventing the Private Market Value methodology.

Gabelli also says that successful investors are the ones who make a lot of mistakes, but who have the capacity to learn from them.

“As a rule, successful investors are those who made many mistakes and were able, or were fortunate enough, to bear the consequences and learn from them,” he said in a statement. interview with a financial website.

“An individual who has posted an impressive record without some level of adversity is more at risk of losing suddenly than one who has struggled and won,” he says.

Gabelli, whose investment approach is a mix of the strategies followed by Warren Buffett and Benjamin Graham, has reached the league of investment greats by ensuring that his fund, GAMCO, delivers a constant average return of almost 12% per year for the quarter of a century.

Investment philosophy
Born in 1942, Gabelli has been passionate about the stock market from a young age and is said to have bought his first shares at the age of 13. He started his own business in 1977 as a broker. Since then, the company has come a long way and has grown into a diversified financial management company with over $ 40 billion in assets.

Gabelli uses a research-driven approach to investing and considers earnings per share and free cash flow minus the expenses needed to grow the business as key metrics in valuing a business.

“A rigorous assessment of fundamentals, focusing on balance sheet, earnings and free cash flow” is very essential for an investor to study while looking for companies in which to invest, he says.

Gabelli used his own theory of private market value (PMV) in his approach to investing. 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 (on and off balance sheet) and free cash flow.

He then compares his research results with actual transactions at similar companies for a reality check. Thus, it focuses on companies that appear to be doing good deals compared to their PMV, which gives it a great advantage and a wide margin of safety.

After finding a stock that is undervalued against its PMV, Gabelli looks for a pending catalyst to justify his conclusions. A catalyst represents the further upside potential for an investor doing the analysis.

“What would be the element [the catalyst] who would help reduce the gap between private market value and the share price? A catalyst can take many forms and can be an industry or company specific event. The catalysts can be a regulatory change, an industry consolidation, a share buyback, a sale or split of a division, or a change in management, ”he says.

Gabelli says the goal of her research is to identify companies that have the potential to generate a 50% return in two years. If a particular stock reaches its PMV or if an expected catalyst does not occur, it is best to sell that stock.

Think like a business owner

Gabelli says buying a stock is like owning the business because it allows you to think longer term. It also makes investors less likely to fall into the mental trap of buying speculatively rather than on the basis of value.

“We don’t buy a piece of paper when we buy stocks. We buy a business. Think like an owner, ”he says.

It is important to accumulate knowledge about industries over a long period of time and it can help investors adapt quickly to changes if the market suddenly collapses.

The investment advice Gabelli shared is considered very valuable for investors to make good investment decisions.

  • Study the financial data carefully: Investors need to look at the details of a company’s balance sheet, collect data, and interpret it wisely. You have to have a bottom-up approach to stock picking and try to know the private market value of a company.

  • Find a safety margin: Investors should try to find out the margin of safety to buy a business at a certain price. When investors buy assets with a margin of safety, they can make a mistake and still do well as investors. In order to determine a safety margin, we can ask ourselves three questions:

1.How much is it worth now?

2. What will it be worth in 5 years?

3.How far can the price go?

“You approach stocks like they’re part of a business that you want to buy at a discount. Why am I buying it? Because I have a safety margin. Value investing works because it is based on the notion of buying something for less than it’s worth. The value investor has the best of both worlds: upside potential and the comfort of owning a business with a margin of safety, ”said Gabelli.

  • Invest in companies with real economic value: Investors should focus on activities that improve people’s lives because it is much safer to invest in companies that can create real economic value. Choosing an industry that creates economic value is not enough. You also have to choose the right company and buy the shares at a good price.

  • Money is king: Most investors lose sight of the importance of cash. The only unforgivable sin in business is running out of money.

“When an informed industrialist evaluates a company with a view to a purchase, he will not give much weight to the declared book value. What this sophisticated industrialist wants to know is: how much money is this company making today and how much will he have to invest in this company to maintain or develop this cash flow in the future ” , Gabelli said.

  • Look for sound management: It is very important for investors to choose well run companies. “We think an average management running an above average franchise will do an average job,” he says.

  • Don’t invest in companies you are unsure of: Some businesses cannot be valued with a reasonable degree of certainty. A great quality of investing is that investors can simply put a decision on the “hard pile” and move on. There is no premium for hyperactivity in investing, but there is a penalty.

“If investors are patient, but aggressive when the time is right, then they can ‘take a big hit’ just when the situation is most beneficial and the odds are substantially in their favor,” said Gabelli.

  • Understand a business before investing: If investors understand a business, buying that business involves less risk. “The risk comes from not knowing what you are doing. Risk is not a number and certainly risk is not a number that defines volatility. Volatility is certainly ‘a’ risk, but it’s not the only risk, ”he says.

  • Be prepared for market fluctuations: You can always have an opportunity to buy above and below intrinsic values, if you can spot the right opportunity. “Prices in the market will inevitably move rapidly and unpredictably up and down. The markets are far from being wise in the short term, ”says Gabelli.

  • Don’t try to predict short-term price movements: The price and value are often different, because the market is not wise and the prices offered to buyers and sellers are hugely short-term. Investors should not try to predict these short term price swings, as they are fixed in the short term by a herd of very emotional and psychologically handicapped investors.

“Quality is quality, and just because the market allows you to buy a company’s stock well below its intrinsic value, it doesn’t change the underlying value,” he says.

  • Best time to invest: The best time to buy financial assets is when other investors are afraid. Most of the profits from investing are made during downturns and the trick is to have enough money to invest in such times. The best investors have money on hand for tough times and avoid using it in the euphoric part of a business cycle.

“If you stay focused on buying assets at a margin of safety over intrinsic value, money will naturally tend to be available to invest when a period of market euphoria ends and good times come to an end. business will appear, ”he said.

  • Avoid too many risks: Different investors have different emotional temperaments. If someone is having trouble sleeping due to their level of investment risk, they have too much risk in the portfolio. “Always keep your wallet and your risks at your own comfortable sleeping point,” he says.

(Disclaimer: this article is based on various interviews and speeches by Mario Gabelli)

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