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A Useful Investing-Perspective from a Great Investor You Might Never Have Heard Of

Warren Buffett is one of the most successful and well-known investors of our generation and there’s plenty of great lessons we can learn from him. But, there are many other less-famous but still very successful investors who are also worth studying and I would like to point out one whom you might never have heard about: Mario Gabelli.

The great investor

Gabelli is the founder of Gabelli Asset Management, now known as GAMCO Investors. From 1977 to 2012, GAMCO had delivered phenomenal compounded annualised returns of 15.8% net of fees. In other words, every $1,000 invested with GAMCO back in 1977 would have become more than $169,000 by 2012.

Gabelli generally has a long time horizon with his investments and he invests with a strategy that involves him trying to determine the private market value (PMV) of a public-listed company. The PMV of a company is the price  that an informed businessman from the same industry would pay for the firm in a complete takeover.

The ins-and-outs of value

When investors calculate the intrinsic value of a company, they’d generally sum up all of the firm’s estimated future cash flows and discount it back to today. That estimated future cash flow in turn rests heavily on the capabilities of the firm’s existing managerial team. For an informed buyer looking at the same company as an acquisition target, the value he would come up with can be higher (that difference in value is known as the “control premium”). That’s because the buyer would be able to effect positive changes to the firm after the acquisition and hence enhance the firm’s ability to generate cash flows. This is how the PMV of a firm might differ from the normal interpretation of “intrinsic value” for most investors.

It is important to note that an investor who is investing based on the PMV of a firm would only invest if the company’s market price is trading significantly below its PMV. In other words, investors who utilize the PMV of a firm are also value investors at heart who would only invest when there’s a large margin of safety available.

How PMV can work in real life

We can use commodities trader Olam International Ltd (SGX: O32) as an example of how we can think about a company using the PMV lens.

As retail investors, when we try to value Olam, we would take into account the firm’s future growth potential and its current earnings power. But for major shareholders like Temasek Holdings (the sovereign wealth fund is the leader of a consortium of investors which currently control more than four-fifths of Olam), it can very likely ascribe a higher value to Olam because it has influence over how the firm is run.

If Temasek, for some reason or another, does not agree with what Olam’s current management is doing, it has the power to appoint a new management team to turnaround the company’s operations. So, an investor who is utilizing the PMV lens would be analysing Olam from Temasek’s viewpoint, and not that of a retail investor.

Foolish Summary

Gabelli has an interesting and useful way to invest because the thought process guides investors to focus on the business itself when investing. It also forces the investor to look at the operational aspects of the business, where the risks are, and how he might change current operations if he is really in charge of the company.

There’s also an important aspect to how Gabelli invests – and that is he would always insist upon a margin of safety. This is important for investors to note as the margin of safety is the fundamental building block of all intelligent investing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own shares in the companies mention above