Graham & Doddsville Fall 2011

8/9/2019 Graham & Doddsville Fall 2011

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Leon “Lee” Cooperman

„67, CFA, began his post-business school career in

1967 with Goldman Sachs.

In addition to holding a

number of key positions

within the firm, Mr. Coop-

erman was founder,

Chairman and Chief Ex-

ecutive Officer of Gold-

man‟s Asset Managementdivision. In 1991, he left

the firm to launch Omega

Advisors, Inc., a value-

oriented hedge fund whichnow manages roughly $5.5

billion. Mr. Cooperman

earned his B.A. in Science

from Hunter College and

his M.B.A. from Columbia

Business School. Mr. Co-

operman and his wife are

signatories of Warren Buf-

fett‟s “Giving Pledge”. (Continued on page 2)

Lee Cooperman

— “Buying

Straw Hats in

the Winter”

Marty Whitman — “Business Skill

Critical to Investment Success”

Mr. Whitman founded

the predecessor to the

Third Avenue Funds in

1986 and M.J. Whitman, a

full service broker-dealer

affiliated with Third Ave-

nue in 1974. He has man-aged the flagship Third

Avenue Value Fund since

its inception in 1990 and

was Third Avenue‟s Chief

Investment Officer from

its founding through Janu-

ary 2010.(Continued on page 20)

Fall 2011Issue XIII

Editors

Anna BaghdasaryanMBA 2012

Joseph JaspanMBA 2012

Mike DeBartolo, CFAMBA 2013

Jay Hedstrom, CFAMBA 2013

Jake LubelMBA 2013

Inside this issue:

Interview:Leon Cooperman

p1

Interview:Mario Gabelli

p1

Interview:Marty Whitman

p1

Alumni Profile p25

Student Write-up: GLDD

p29

Student Write-

up: MSGp31

Leon Cooperman

Visit us at:www.grahamanddodd.com

www0.gsb.columbia.edu/students/

organizations/cima/

Graham & DoddsvilleAn investment newsletter from the students of Columbia Business School

Mario Gabelli „67, CFA,

started his career as an

automotive and farm

equipment analyst at

Loeb Rhodes & Co. In

1977 he foundedGAMCO Investors

(NYSE: GBL), where heis currently Chairman

and CEO, as well as a

portfolio manager and

the company‟s largest

shareholder. GAMCO

now manages roughly

$36 billion dollars across

open and closed-end mu-

tual funds, institutionaland private wealth man-

agement, and invest-

ment partnerships. Mr.

Gabelli earned his B.S.

from Fordham Univer-

Mario Gabelli

Mario Gabelli — “Think Like an

Owner”

sity and his M.B.A. from

Columbia Business School.(Continued on page 12)

Marty Whitman

http://www.grahamanddodd.com/http://www.grahamanddodd.com/http://www0.gsb.columbia.edu/students/organizations/cima/http://www0.gsb.columbia.edu/students/organizations/cima/http://www0.gsb.columbia.edu/students/organizations/cima/http://www0.gsb.columbia.edu/students/organizations/cima/http://www0.gsb.columbia.edu/students/organizations/cima/http://www0.gsb.columbia.edu/students/organizations/cima/http://www.grahamanddodd.com/


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We are pleased to presentyou with Issue XIII of Gra-ham & Doddsville, Columbia

Business School‘s student-led investment newsletter,co-sponsored by the Heil-brunn Center for Graham &Dodd Investing and the Co-lumbia Student InvestmentManagement Association.

This issue features a trio oflegendary value investors,who honored us with theirtime and sage advice. Onething became crystal clear:

there is no single ―right‖way to practice value invest-ing. Each successful valueinvestor adapts the practiceto his or her own style,although Graham & Doddand their famous disciplesremain an inspiration to somany of us.

Welcome Back to Graham & Doddsville

Page 2

We start off this issue withLee Cooperman ‗67, foun-

der, Chairman and CEO of

Omega Advisors, Inc. Mr.Cooperman reflects on thepath of his incredibly suc-cessful career, describeshow his firm constructs itsportfolio, and outlines thetheses behind a few of histop investment ideas.

We also had the privilege ofspeaking with Gabelli AssetManagement (GAMCO In-vestors) founder, Chairman

and CEO Mario Gabelli,well-known value investorand alum of Columbia Busi-ness School‘s class of 1967.

Mr. Gabelli provides hisapproach to security analy-sis and discusses his interestin BEAM, National Fuel Gasand The Madison SquareGarden Company.

Our third interview is withveteran value investor MartyWhitman, Third Avenue

Management‘s Chairman andPortfolio Manager, and anAdjunct Professor of Dis-tress Value Investing at Co-lumbia Business School. Mr.Whitman shares his thoughtson some compelling areas ofinvestment opportunity, dis-cusses his approach to com-pany valuation and describessome of his firm‘s most suc-

cessful investments.

Please feel free to contact usif you have comments orideas about the newsletter.We hope you enjoy readingGraham & Doddsville as muchas we enjoy putting it to-gether!

- Editors, Graham & Doddsville

Pictured: Bruce Greenwald,named the ―Guru to WallStreet‘s Gurus,‖ at the Colum-bia Student Investment Man-agement Conference in Febru-

ary 2011.

G&D: After graduatingfrom Columbia BusinessSchool, you began your verysuccessful career at Gold-man. What drew you to thesell-side following business

school?

LC: Something that Ishould mention, before ad-dressing my time at Colum-

bia and Goldman, was mydecision to not pursue adental education. This wasthe most difficult decision Ihad made in my life up tothat point. Back in 1963, ifyou completed your under-graduate major and minor inthree years, you couldcount your first year of den-

(Cooperman from page 1) tal or medical school to-ward your fourth year ofcollege and receive a sepa-rate degree. I finished myscience major in the sum-mer of 1963, which enabledme to enroll in dentalschool. After being in den-tal school for about eightdays, I wasn‘t sure that was

the direction I wanted togo. This became quite atraumatic situation. I had to

go to the dean of the dentalschool and tell him I wantedto matriculate back into theundergraduate school tocomplete my fourth under-graduate year unencum-bered. The dean put me ona great guilt trip, telling methat I had deprived the 101st applicant of a dental educa-

tion, that the school wouldbe losing revenues for thenext four years and that Icouldn‘t possibly know what

I wanted to do after eightdays. The only person whoreally appreciated the signifi-cance of my decision wasthe dean of Hunter College.I went back to Hunter and,since I had finished my ma-

jor during the summer, took10 elective courses in eco-

nomics and received 10 A‘s.That furthered my interestin business. Upon gradua-tion I went to work forXerox up in Rochester, NYas a quality control engi-

neer.

After about 15 months I

(Continued on page 3)

Investor Warren Buffett re-

ceives a gift from students on aHeilbrunn-sponsored trip in

March 2008.


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management that we weremaking a mistake not being

in the asset managementbusiness. The firm, being abrokerage house, wasstrongly opposed to whatthey considered competingwith their client base. Everybrokerage firm at the timewas largely in this business.Once Salomon Brothers andsome others announcedtheir launching of an assetmanagement business, Gold-man leadership asked me toestablish one of their own. Ileft research at that timeand became Chairman andCEO of Goldman Sachs

Asset Management.

This was the beginning ofmy exit from the firm. Theywanted to capture as manyassets as possible becausethey wanted to build thebusiness to a scale thatwould be relevant to a firmlike Goldman Sachs. On the

other hand, my motivationwas the proper perform-ance of the assets in mycontrol. I realized after ashort time I didn‘t want to

be on the road every week,introducing a new productand sourcing new funds. Iwanted to spend my timevisiting companies and find-ing new mispriced stocks. Iwanted to manage money insuch a way that my interests

and the clients‘ interestswere 100% aligned. I didnot want to build a big busi-ness like Goldman Sachswanted me to. I have thehighest respect for Gold-man, but it was the firm‘s

reluctance to go into thehedge fund business that led

to me start Omega.

Page 3Issue XIII

Lee Cooperman

My last day at Goldman was

November 30

th

, 1991 and Istarted Omega the verynext day. Over the pasttwenty years I‘ve been rais-

ing the money, hiring thepeople, running the moneyand setting up the infra-structure. It‘s kind of been

non-stop. I‘m getting older

but I‘m still handling it okay.

G&D: Did anyone or anyinvesting class at ColumbiaBusiness School have a par-ticularly significant influence

on you?

LC: Yes, there was oneperson who had a profoundinfluence on me. I evenhave a letter he sent me in1977 hanging on my wall.His name was RogerMurray, Benjamin Graham‘s

successor as the professorof security analysis at Co-lumbia and, in fact, a subse-

quent editor of the bookSecurity Analysis. MarioGabelli, a very dear friend ofmine, also studied underhim and would probably saythe same thing. As ourvalue investing professor, heshowed a great deal of ex-citement for the subjectmatter. I would also sayWarren Buffett influencedme tremendously. I‘m an

expert in his writings and

his views. Finally, Grahamand Dodd influenced me aswell. Their book Security Analysis is sitting right there

on my shelf.

G&D: How has your ap-proach to investing changed


“… there was one

person who had a

profound influence

on me. I even have

a letter he sent me

in 1977 hanging on

my wall. His name

was Roger Murray,

Benjamin Graham‟s

successor as the pro-

fessor of security

analysis at Columbia

and, in fact, a subse-

quent editor of the

book Security Analy-

sis.”

decided I wanted to get an

MBA to advance my creden-tials. I wanted to stay in theNew York area and I wasinterested in finance, soColumbia was a natural fit.With great modesty, Iwould say that I was an at-tractive package coming outof Columbia BusinessSchool. I was Beta GammaSigma, had straight A‘s, a 6

month old child and was aserious person. Wall Streetwas hiring with abandon, alot of which had to do withthe market cycle. I wasinterviewing in 1966, whichwas a year in which themarket was peaking, thoughno one knew that. I ac-cepted an offer with Gold-man Sachs, which at thetime was not what it wouldbecome a decade or twolater. This was fortunatebecause I was able to con-tribute, in a small way, to

the firm‘s later success.

I got my MBA on January31, 1967. I had a six monthold child and I had nomoney in the bank so I wasnot in the position to takethe obligatory trip to Hawaiior Australia. I started as ananalyst at Goldman the nextday. I then spent close to25 glorious years with the

firm.

I had a number of differentroles in the company. Forexample I was made Partnerin charge of research in1976 and, at the same time,I was Chairman of the firm‘s

investment policy commit-tee. For a number of years,I had been telling Goldman

(Continued from page 2)


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Page 4

Lee Cooperman

buy something that we thinkhas a better risk/reward

ratio. Finally, the fourthreason we sell something iswhen our market outlookchanges. Since I don‘t tend

to buy and sell market fu-tures to an appreciable de-gree, to effect this macro-driven repositioning, I haveto sell specific securities.

So I would say the big

change is my willingness tosell. This is very difficult fora value investor because if,

for example, you liked FordMotor at $20, you shouldlike it more at $18 and evenmore at $15. But there aretimes when the market hasfigured out what‘s going on

before you, the fundamen-talist, have figured it out.Let‘s face it, although not

perfect, the stock market isone of the better leading

indicators. Some people arewary of the information thestock market is impartingbecause, they would say, ithas priced in 10 out of thelast 7 recessions. In myopinion, however, that‘s a

better record than mosteconomists.

G&D: What about the defacto value investing mottothat if something you‘ve

liked goes down, buy moreand, if it falls further, justbuy more?

LC: Well, there are thosetimes when you‘ve made a

fundamental mistake – you‘ve misjudged the com-

pany‘s competitive position,

you‘ve misjudged the econ-

omy, you‘ve misjudged the

stock market. I think you just can‘t afford to say, ―I

know more than the mar-

ket‖. Of course, it dependson the company. There arecertain things you can bestubborn on such as whenyou have a big dividendyield, a big discount to bookvalue, an extremely lowvaluation. But I think, gen-erally, you have to respectthe stock market. If youdon‘t, you‘re going to get

wiped out.

G&D: How do you per-sonally think about valua-tion? What types of tech-niques do you use?

LC: There are a lot of dif-ferent approaches. We usethe dividend discount model


since 1991?

LC: Not in an appreciablefashion. The bulk of ourportfolio is long-term ori-ented bets. We do a cer-tain amount of trading - aquarter of our portfolioturns over more actively. Ithink the major change wasa result of the drubbingmost of us took in 2008. Idid not do a good job ofcontrolling losses. I in-vested a certain amount ofresponsibility in my associ-ates and they showed, in theend, an inability to sell. Sonow I‘m more willing to sell

when things don‘t look like

they‘re going in the right

direction.

I would sell a security forone of four reasons. Thefirst reason is the highestquality reason. That iswhen you buy something

with a price objective.When it appreciates to thatprice objective, and youthink it‘s fully valued, you

sell it. The second reason iswhen, based on calls to ourcompanies, their competi-tors and their suppliers,things are not moving alongthe originally anticipatedlines so you get out beforeyou get murdered. It is veryhard in this market, which is

choppy and not really goinganywhere, to make up forbig losses so you have tosell before you get creamed.A third reason we sell iswhen we find an idea that‘s

more attractive than theidea we‘re acting on already.

So we‘ll sell something to


“… there are timeswhen the market

has figured out

what‟s going on

before you, the

fundamentalist,

have figured it out.

Let‟s face it,

although not

perfect, the stock

market is one of the

better leading

indicators.”

Pictured: Benjamin Graham,

father of value investing.


5/34

Page 5Issue XIII

Columbia Business School is a

leading resource for invest-

ment management profession-

als and the only Ivy League

business school in New York

City. The School, where value

investing originated, is consis-

tently ranked among the top

programs for finance in the

world.

Lee Cooperman

there‘s some combination of

return-on-equity, growth

rate, P/E ratio, dividendyield, and asset value thatmakes you act. We have adiversified group here look-ing for attractive ideas, anddifferent industries get capi-talized in different ways. Ifyou want to be a broad-based investor you have tobe willing to embrace differ-ent approaches. For exam-ple, although we are value-orientated investors typi-

cally looking at the tradi-tional valuation metrics, wedo have a technology analystwho is studying things likerate-of-change and followingCitrix Systems and Apple,which we own.

G&D: What are the char-

acteristics of a business thatyou‘d want to own for along period of time?

LC: To me, it‘s free cash

flow sine qua non becausethat gives you the ability tointelligently redeploy yourmoney. If you don‘t have

the free cash flow, you don‘t

have anything. Number twois a business that has a moataround it, where it‘s com-

petitively insulated to somelarge degree. There arevery few businesses thatactually have a monopolyposition today. Quality of,and incentives for, manage-ment are also very impor-tant. We look at manage-ment ownership to seewhether their interests arealigned with the sharehold-ers‘ interests and we look

for their compensation lev-els to be reasonable. The

compensation levels in cor-porate America are ridicu-lous in my opinion, and thisis a big problem today.Hedge fund guys are over-paid but the good newsabout that is, you don‘t

make the money unless youmake the money for theinvestor. In corporateAmerica, you‘re being paid

to fail. A lot of times, guysare kicked out of companies

and they leave with $10,$15 or $20 million checks,which I think is ridiculous.

Back to free cash flow; Iwould obviously weigh-inthe growth of the companytoo. I would love to own acompany that has great in-


to identify undervalued

stocks as a screen. Essen-tially, I know what the finan-cial statistics are for the S&Pand as a value investor, I‘m

looking for more but for less.I‘m looking for more growth

at a lower multiple. I‘m

looking for more yield ver-sus what I can get from theS&P. Or, I‘m looking for

more asset value.

I‘d say a theme that runs

throughout a lot of ourportfolio holdings is theconcept of public marketvalue versus private marketvalue. About 95% of pub-licly traded companies havetwo values. One is the auc-tion market value, which isthe price you and I wouldpay for one hundred sharesof a company. The other isthe so-called private marketvalue, which is the price astrategic or financial inves-

tor would pay for the entirebusiness. So one of theapproaches I take is to lookfor a stock in the publicmarket that is selling at asignificant discount to pri-vate market value where Ican identify catalysts for apotential change. In the lastyear we had four take-oversin the portfolio.

We try to find some set of

statistics that motivate us toact. The analogy I have al-ways used is that when yougo into the beer section ofthe supermarket, you see 25different brands of beer.There‘s something that

makes you reach for oneparticular brew. In the par-lance of the stock market,


“I know what the

financial statistics

are for the S&P and

I‟m looking for more

but for less. I‟m

looking for more

growth at a lower

multiple. I‟m looking

for more yield versus

what I can get from

the S&P. Or I‟m

looking for more

asset value.”


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Page 6

Lee Cooperman

how you construct yourportfolio?

LC: My portfolio construc-tion is some combination oftop-down and bottoms-up.We try to make money forour investors in a number ofdifferent ways. Stocks arehigh risk financial assets andshort term bonds and cashare low risk financial assets.First, we spend a great dealof time trying to figure outwhether the market is goingup or going down because

that will determine both thepredominant performanceof our portfolio and howmuch exposure we want tohave to risky assets. Thesecond way we try to makemoney is looking for theundervalued asset class.We look at governmentbonds versus corporatebonds versus high yieldbonds. We think aboutbonds versus stocks,

whether in the U.S. or inEurope. We‘re trying to

look for the straw hats inthe winter. In the winter,people don‘t buy straw hats

so they‘re on sale. We‘re

basically looking for what‘s

on sale. In 1993, we made agreat deal of money in non-dollar bonds because wemade a play on interestrates that was very right. In1995 through 1997, we

made a great deal of moneyin the debt of Brazil, Turkeyand other emerging mar-kets. In 2002, we made alot of money in high yieldbonds, and the same is truefor 2009 and 2010. Sowe‘re looking for the right

asset class. Any study you‘ll

read on portfolio returns

will tell you that being in theright asset class is moreimportant than being in any

individual stock in any oneyear. Third, which is thebread and butter businesswhere I spend the bulk ofmy time, is looking for un-dervalued stocks on thelong side. I have a veryvalue-oriented approach.Fourth, which has not beenparticularly productive forus, is finding overvaluedstocks on the short side.Finally, we take 2-3% of our

capital and invest in macrostrategies. We might belong or short the dollar, wemight be long or short acommodity.

It‘s a small part of what we

do but I like the macrostrategies. The returns arenot necessarily correlatedto equities and at times youget a trend of opportunitythat you can capitalize on.

In my own opinion, the nextbig trended opportunity – though we haven‘t put the

trade on just yet – is beingshort U.S. governmentbonds. They don‘t belong at

2%. They‘re just way too

low. Historically, the tenyear U.S. government bondyield has tracked nominalGDP. If you think we‘re in a

world of 2-3% real growthand 2-3% inflation or poten-

tially more, that would giveyou nominal GDP of 4-6%.So if the ten year govern-ment bond yield was in thatrange of 4-6% that wouldnot be unusual.

I would also add that, overthe years, our portfolio has


vestment opportunities inwhich it‘s investing a lot of

cash. I just want to makesure the money is investedwisely. A company has anumber of uses for freecash flow. Managementcould choose to reinvest inthe business through capitalexpenditures, buy otherbusinesses, reduce debtloads, or pay out dividends.I just want to make suremanagement is channelingtheir cash into the right

opportunities.

Corporate America hasbeen very busy, particularlyin 2008, buying back stock.Most of them have notknown what they‘re doing.

There‘s been a large amount

of money wasted. I gave apresentation at the ValueInvesting Congress in 2007where I said a lot of compa-nies were mispricing what

they were buying. I washighly critical and providedmany examples of this de-velopment.

Analysts tend to be cheer-leaders for corporate repur-chase programs. In myview, these programs onlymake sense under one con-dition – the company is buy-ing back shares that aresignificantly undervalued.

Most management teamshave demonstrated the totalinability to understand whattheir businesses are worth.They‘re buying back shares

when the stock is up, andhave no courage to buywhen the stock is down.

G&D: Can you talk about


“The next big

trended opportunity

will be being short

U.S. government

bonds. They don‟t

belong at 2%. His-

torically, the ten

year U.S. govern-

ment bond yield hastracked nominal

GDP...So if the ten

year government

bond yield was in

that range of 4-6%

that would not be

unusual.”


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Page 7Volume I, Issue 2

Lee Cooperman

frustration over the lack ofeconomic opportunity, par-ticularly by the youth, is

understandable. People arelooking for a scapegoat. Ihad hoped that Obamawould move more to thecenter and soften his anti-wealth and anti-businessstance. He doesn‘t seem

capable of doing that and hiselection underscores theunrest I‘m referring to. The

largest country in the freeworld chose as its leader a48-year-old man who was a

community organizer andhad never worked in thebusiness world. His elec-tion was a clear result of thefrustration of the populace.

G&D: Is your techniquefor shorting mostly valua-tion driven?

LC: It‘s valuation driven or

it‘s driven by a belief that

the company‘s competitive

position is in the process ofchanging. But if you look atthe sources of our returns,short selling has not been animportant part. The bulk ofour returns have come fromundervalued equities on thelong side.

G&D: What have youlearned from the marketcollapses of 2000-2001 or2008-2009?

LC: We made money in2000 and 2001 because westuck with value. You onlygot creamed if you werebuying these 100x revenuestechnology companies. So itwas really 2008 that was arough patch for us and itwas very simple. We mis-

judged the significance ofLehman. As I mentioned,2008 was transformative for

me because, at the time, Iallowed my people to holdonto their positions when Ishould‘ve started kicking

them out well before wegot into the hole. Onething nice about the invest-ment business is that, eventhough I‘m 68, I continue to

learn. You learn somethingevery month and everyquarter.

G&D: Could you describethe process your team goesthrough to generate invest-ment ideas at the companylevel?

LC: When I hire an analyst,we put together a FactSetuniverse of companies thatare within their sphere ofexpertise and those are thecompanies they follow. Imonitor and judge their

performance by how wellthey do penetrating theopportunities that ‗Mr. Mar-

ket‘ has presented. The

way it works is that theanalyst proposes an idea.The stock selection commit-tee, which consists of fouror five senior people at thefirm, and me, dispose anddebate the idea. This proc-ess represents about 75% ofthe activity of the firm.

For example, this afternoon,we‘re discussing an apparelcompany that my analyst isstrongly recommending webuy. He submitted his re-port for our review thisafternoon. I ask these ana-lysts, who are experts inparticular areas, to find


on average been 70% netlong, though right now

we‘re about 80% net long.We tend to be more in-vested than most hedgefunds.

G&D: So you‘re optimistic

about the general outlookfor the market?

LC: We‘re more optimistic

than most. We don‘t be-lieve that we‘re going into a

recession but rather an en-

vironment of slow growth.We don‘t think we‘re an-

other Japan. That‘s our

opinion as well as JeffImmelt‘s and Warren Buf-

fett‘s. Recent auto sales and

recent chain store salessuggest a decent economicenvironment. I also assumethat the ECB will do forEuropean financial institu-tions what the Fed did forU.S. institutions. In the end,

they have no choice and Ithink they‘ll do it. They

need to ring-fence Greecethough, and make sure themess doesn‘t spread to

Spain and Italy.

One of the biggest concernsI have is social unrest. Thelabor force in Americagrows 1% per annum. Pro-ductivity of the labor forcegrows 2% per annum. So

you need 3% growth tokeep the unemploymentrate flat and we‘re not

growing at that rate. Theglobal unrest and globaldemonstrations – ―OccupyWall Street,‖ the demon-

strations in Zuccotti Park,the Arab Spring, are allabout unemployment. The


Page 7Issue XIII

Pictured: Glenn Greenberg at theSecurity Analysis 75th Anniver-sary Symposium (Fall 2009), withBruce Berkowitz (left) and Tom

Russo (right).


8/34

Page 8 “The next big trended opportunity will be being short U.S. government

Lee Cooperman

of the day, they have a pipe-line of products already in

place that could probablylast several years and theygenerate something like $15-$20 billion a year in free

cash flow on top of $80billion in cash and market-able securities. No rational

person would criticize Jobsbut I will criticize the com-

pany for their financial man-agement. There is no basisfor sitting on $80 billion incash and not paying a divi-dend and not buying backstock. They‘re projecting,

in my opinion, temporarysuccess. They‘re saying we

don‘t know where the busi-

ness is heading long termand we want to have thisfinancial powerhouse. I‘m

told by people close to Jobsthat he wanted to do a con-tent acquisition, such asDisney if it had not been inthe theme park business.Regrettably, for the worldand for him, he‘s not around

to execute that ambition.

I think Apple will do fine fora few years and we‘ll have

to see after that. Rightnow, the major plus in Ap-ple is the valuation. Itseems ridiculously low for a

company growing at its rate.Based on all of the checkingI do, the users of the equip-ment at corporations aremaking purchasing decisionsand the users all want iPads.They have a phenomenallyhigh market share of agrowing business that hasvery high profit margins. I‘m

sure one day, Apple willhave issues but for the nextfew years it looks like clear

sailing. Jobs left behind afinancial powerhouse.Maybe one change thatcould be constructive is thebetter use of their cash. Soyou think eclectically. Applehas no dividend and no re-purchase program but they


things that are going to out-

perform the market. Later,we‘ll have a meeting aboutthe New York Stock Ex-change, which the associ-ated analyst is also recom-mending. Periodically, we‘ll

operate with a shorter termtimeframe because we thinkwe‘ve developed some in-

formation that other peopledon‘t have and we want to

act on it before it becomescommonly known.

G&D: How do you evalu-ate management teamsprior to making an invest-ment?

LC: Benjamin Graham, inThe Intelligent Investor , saidyou evaluate managementtwice in the decision-makingprocess. Once, through theface-to-face interrogation.You ask them questions andthey respond and you make

a judgment about the qualityof their responses. In addi-tion, the quality of manage-ment also manifests itself inthe numbers: in ROE(absolute and relative tocompetitors), return ontotal capital, growth rate,industry position, trend ofmarket share, and profitmargins.

G&D: Regarding the im-

portance of management,with the unfortunate passingof Steve Jobs, how do yousee Apple - one of yourfavored picks - impactedgoing forward?

LC: You can‘t replace a guy

like Steve Jobs. At the end


“To me, „value‟

means the value

proposition that is

being offered. A lot

of companies

Warren Buffett

owns would not be

considered value in

the classical sense.

A company can be

growing at an

extremely high rate

but happens to be

trading at a very

reasonable

multiple. Or that

same company can

be giving you your

return through a fat

dividend.”

Pictured: Heilbrunn CenterDirector Louisa SereneSchneider at the CSIMAconference in February2011. Louisa leads the Heil-brunn Center with much

skill and grace.


9/34

Page 9Issue XIII

Lee Cooperman

be in the best growth com-panies but had no regard for

what they paid. They didn‘tcare if they paid 60x or 70xearnings. During the even-tual recession which fol-lowed a surge in interestrates, the prices of thesestocks declined 50% ormore. The multiples wereall wrong. Their philosophywas ―only the right stock at

any price‖ whereas my phi-

losophy is ―any stock or

bond at the right price.‖

G&D: It would be great ifwe could discuss a couple ofspecific stocks that you findcompelling today.

LC: Well, I like KKR Finan-cial (ticker: KFN), wherethe debt management armhas the ingredients that Ilook for. Right now theirdividend yield is 9.75% in aworld of zero interest rates and the dividend is covered

twice by earnings. Theyearn about $1.50-1.60 pershare and they‘re only pay-

ing $0.72, so they can growthe business over time. Thereal book value is some-where around $10 and thestock is $7.75. So I‘m buy-

ing something 20% belowbook, yielding in the high 9%range – which is competitivewith the equity market‘s

return annually, with moti-

vated management that owna decent amount of stock ina decent business. KKRFinancial is a mezzaninelender and they have theadvantage of being on theKKR platform, which sees alot of interesting deals.

Another one I like is SallieMae (ticker: SLM). Roughly

81% of their loans are guar-anteed by the U.S. govern-ment and the bulk of theremaining loans are co-signed by the student‘s par-

ent. So I think the quality ofthese assets is not bad. Ithink they‘ll earn $1.80 this

year and the stock is $13,so half of the market multi-ple. The yield is about 3.5%and they‘re buying back 5%

of their stock annuallythrough the repurchaseprogram and we think theassets are worth $20 pershare. The company is aconsolidator of FELP loans.FELP loans are shrinkingpart of all bank balancesheets and therefore willslowly be sold as they‘re not

worth the effort to hold.Sallie Mae is one of the fewnatural buyers in the marketand is able to achieve attrac-tive double digit IRR‘s on

these purchases. In addi-tion, the ―sins‖ of Sallie

Mae‘s past are burning off

quickly. The amount of―non-standard‖ credit en-tering repayment is drop-ping very quickly. 2010 had$572 million enter repay-ment, 2011 has $320 mil-lion, and next year only$112 million. With 40-50%loss ratio on these ―non-standard‖ loans, credit at

SLM will naturally improve.The company is shareholderfriendly. As the FELP port-folio generates cash, weexpect the company tocomplete the previouslyannounced $300 millionrepurchase program this


generate gobs of free cash

flow and they‘re in the rightbusiness.

G&D: Many in the valueinvesting community saythat Apple is not a true―value‖ stock. How would

you respond?

LC: I think their definitionof ―value‖ has to be broad-

ened. It‘s not just about

trading below book value.To me, ―value‖ means the

value proposition that is beingoffered. A lot of companiesWarren Buffett owns wouldnot be considered value inthe classical sense. A com-pany can be growing at anextremely high rate but hap-pens to be trading at a veryreasonable multiple. Orthat same company can begiving you your returnthrough a fat dividend. Myanalyst thinks Apple can

earn $40 per share nextyear, which is 9.4x earnings.When this was printed, theS&P was at 11x earnings. Sois Apple a growth companyor is it a good value propo-sition?

What you want is somecombination of financialstatistics that yell, ―Buy me.‖

It could be an unusually highgrowth rate at a proper

multiple or it could be areturn upfront with modestgrowth. I‘m very eclectic as

an investor. In the ‗70s, the

dominant investing institu-tion was JP Morgan U.S.Trust, which espoused aphilosophy of the ―nifty

fifty‖. They only wanted to


“What you want is

some combination

of financial

statistics that yell,

“Buy me.” It

could be an

unusually high

growth rate at a

proper multiple or

it could be a

return upfront

with modest

growth. I‟m very

eclectic as an

investor … my

philosophy is “any

stock or bond at

the right price.”


10/34

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Lee Cooperman

past 24 months. It is ahighly regulated business,

and as it gets more regu-lated, it means that thecosts of entering these busi-nesses increase. Utilizationwill continue to increasewith demographics and withhealthcare reform, we willlikely see more people com-ing into the system. In spiteof pricing pressure, marginsare still very attractive. Thenew management is shiftingits focus on creating share-holder value in the nearterm, rightsizing cost struc-

ture, improving profitability,selling non-core assets and

buying back stock. Multiplenew product cycles arecoming in core franchises(stents, defibrillators,women‘s health), that will

drive 500+ bps of operatingmargin improvement in thenext few years.

We also like Transocean(ticker: RIG). The stock iscurrently around $50 andwe believe there is signifi-cant upside to it. RIG istrading at a very low P/E, P/CF, and EV/EBITDA multi-ples, and at a substantialdiscount to NAV and Tangi-ble BV. The offshore drill-ing market is fast improving,especially in the ultra-deepwater where RIG has thelargest fleet. The overhangof legal issues from the 2010BP ―Macondo‖ disaster may

start to be resolved overthe next six months. RIG

has a $3.16 dividend (6.7%current yield) that we be-lieve is sustainable for years,so investors are being paidto wait. Long-term con-tracts on its deepwater fleetwill recover most construc-tion costs and reduce thebasic risk of RIG‘s business.

RIG‘s 2011 EPS reflects low

―revenue efficiency‖: con-

tracted rigs are out of ser-vice for replacement of

Blow-Out Preventers. Thisprocess will continuethrough 2011 but then end,so ―revenue efficiency‖ will

return to historical 90%+level, from 82% now. ManyWall Street analysts don‘t

have higher ―revenue effi-


year, and repurchase $500

million in 2012. As financialinstitutions struggle for as-set growth, SLM could be-come a nice niche acquisi-tion target for any largebank over the next severalyears in the low $20s range.

G&D: Could you walk usthrough other ideas thatyou find interesting today?

I also like Boston Scientific(ticker: BSX). The companygenerates $1 billion a yearin free cash flow, so you‘re

getting a free cash flow yieldof about 17-18%. They justachieved an investmentgrade credit rating sothey‘re now in a position to

take that cash flow and buyback stock or do tuck-inacquisitions to accelerategrowth. Management seemsvery motivated to follow-through. Of course, the

opportunity to buy cheaplyis a result of their deal fromhell, that being the acquisi-tion of Guidant for nearly$30 billion. Now we thinkthey‘re on the way back.

Due to the past issues, in-vestors seem unwilling tolook at the value of thebusiness objectively. Oldmanagement is gone. BSX‘s

private market value ismuch greater than public

market valuation. Financialbuyers could easily pay$9.50/share. If the companywas broken up and sold offin pieces or if a strategicbuyer were to step in, BSXcould fetch $13/per sharebased on public comps ortransactions done in the


“BSX‟s private

market value is

much greater than

public market

valuation. Financial

buyers could easily

pay $9.50/share. If

the company was

broken up and sold

off in pieces or if a

strategic buyer were

to step in, BSX

could fetch $13/per

share based on

public comps or

transactions done in

the past 24

months.”

Bruce Greenwald holds theRobert Heilbrunn Professor-ship of Finance and AssetManagement at ColumbiaBusiness School and is theacademic Director of theHeilbrunn Center for Gra-

ham & Dodd Investing. Pro-fessor Greenwald is an au-thority on value investingwith additional expertise inproductivity and the econom-

ics of information.


11/34

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Lee Cooperman

You come to work with atotal commitment to theclients‘ interests or you go

to work in a different indus-

try.

G&D: What are the mostcommon errors that yousee analysts make?

LC: Misjudging a company‘s

competitive position wouldbe one. Making valuation

judgments that are wrong isanother. Then there aremacro mistakes, such asunderestimating the degreeof discontent with the banksfollowing the credit crisis,which is leading to highercapital charges and an inabil-ity for their earnings togrow. In every sector it‘s

different. In technology,you may have overestimatedthe company‘s competitive

position and underestimatedthe competitive threat fromsomebody else. You can‘t

standardize the error.

G&D: Any parting words

of wisdom for our readers?

LC: The best advice I can

give anyone is exemplifiedby the following AndrewCarnegie quote: ―Here lies

a man who was wise enoughto bring into his service menwho knew more than he.‖

Always try to surroundyourself with the very bestpeople. Don‘t feel threat-

ened by good people. Youshould feel that having them

around is to your advantage.Lastly, no matter how richyou become, arrogance is

not a luxury you can afford.

G&D: Thank you very

much, Mr. Cooperman.

ciency‖ in their projections.

We believe consensus 2012EPS could rise by $1.00-$1.50.

G&D: Which personalattribute has contributedthe most to your successover the years?

LC: I would attribute mysuccess to hard work, sur-rounding myself with goodpeople, and a fair amount ofluck. I remind my team ofthis proverb often: ―Every

morning in Africa, a gazellewakes up; it knows it mustrun faster than the fastestlion or it will be killed.Every morning a lion wakesup; it knows it must outrunthe slowest gazelle or it willstarve to death. It doesn‘t

matter whether you are alion or a gazelle. When thesun comes up, you‘d better

be running.‖ In the parlance

of my business, I like to putthis proverb in my ownterms. There are roughly10,000 mutual funds thatwill manage your money for1% or less and there areroughly 10,000 hedge fundsthat have the audacity to askfor 1-2% management feesand 20% of the profits. Ourclients have a right to ex-pect more because they‘re

paying more. So what that

means is that when the mar-ket‘s high, I have to figure

out how I can get hedgedand when the market‘s low,

I have to figure out how Ican get leveraged to theopportunity. You‘re con-

stantly on the balls of yourfeet. There‘s no relaxing.


“It doesn‟t matter

whether you are a

lion or a gazelle.

When the sun

comes up, you‟d

better be

running… Always

try to surroundyourself with the

very best people.

Don‟t feel

threatened by

good people. You

should feel that

having them

around is to your

advantage.

Lastly, no matter

how rich you

become,

arrogance is not a

luxury you can

afford. ”


12/34

Page 12

Mario Gabelli

G&D: How did you be-come interested in invest-

ing?

MG: I used to hitch hikefrom the Bronx and caddyat a country club in West-chester. Later in the after-

noon after themarket closed the specialistswould arrive and talkstocks. The other caddieswould go home at 4pm but Iwould stay and listen towhat the specialists were

talking about. This wasmaybe when I was in the 7th grade. I still remember myfirst stocks, Coca Cola,

AT&T, and Beech Aircraft.

G&D: Can you bridge usfrom those days to business

school?

MG: I was always passion-ately involved in the marketand would go into high

school and read the TheWall Street Journal and Busi-ness Week religiously.When I went to college atFordham I had some greatprofessors teaching financebut it wasn‘t until I had Pro-

fessor Roger Murray at Co-lumbia that I saw the sun,the moon and the stars alignthemselves and knew thiswas what I wanted to do.Reading Graham and Dodd

helped me to learn the me-chanics for how to evaluatestocks. Their approach tostock analysis and valuation

made a lot of sense.

G&D: How would youdescribe your approach toinvesting and how it has

(Continued from page 1) evolved over the years?

MG: I left Columbia on a

Friday and joined Loeb,Rhoades & Co. next Mon-day, not taking the 3 months

off like a lot of people donow. I inherited the indus-tries followed by MichaelSteinhardt who had left thatday. Steinhardt went on tostart one of the most suc-cessful hedge funds. So Icovered farm equipment,conglomerates, auto parts

and automotive.Sometime around 1969, oneof the analysts who covered

the broadcast and entertain-ment industries left to starthis own firm and I walkedinto my boss‘s office and

said ―I quit.‖ He said,

―Why, you‘re doing well?‖

And I said, ―I want to cover

the broadcast industry.‖

And he said, ―Fine, you got

it.‖ Why did I do that? I

knew if I followed ABC,NBC, and CBS, which were

in New York, I could con-vince everyone that I shouldfollow the movie industry. Iknew this because theywere the program supplierswhich would get me to LA.Growing up in the Bronxyou don‘t get a lot of op-

portunities to go to LA.I later left Loeb, Rhoadesand went to William D.Witter which merged withDrexel and 90 days later I

started an institutional re-search firm. This was in1977, and at that time themarket had been at 1,000and started recovering butthen quickly declined. Thekey question was how was Igoing to convince individualsand corporations and pen-sion plans that they couldmake money in the stock

market?

At the time, there was a lotof inflation. If you had prop-erty, plant and equipment,the replacement cost wassignificantly higher thanwhat you paid for it. Inter-est expense was 12% to15%, and taxes were notpredictable. So we came upwith the idea: what is thevalue of the business ifsomeone is trying to take itprivate? We figured out

what was the value of thebusiness today, what itwould likely be worth fiveyears hence and how wouldone finance it. So we cameup with the notion of pri-vate market value and wedid this because we were


“It wasn‟t until I had

Professor Roger

Murray at Columbia

that I saw the sun,

the moon and thestars align

themselves and knew

[investment

management] was

what I wanted to

do.”


13/34

Page 13Issue XIII

Mario Gabelli

rigorous discussion todaywith the analyst covering

Apple. I love Apple‘s prod-ucts, and the company sellsat about $400 per share andthey‘ve had great numbers

but it‘s hard for me to see

how financial engineering ora takeover with a catalysthelps to surface increasedvalue for them, and that‘s

how we look at companies.

G&D: What do you say topeople who argue that cata-lysts are usually already

priced into companies?

MG: Nonsense. Let‘s say

there is a company selling at$10 and you predict it‘s

worth $20 based on youranalysis. Will the discountnarrow between the $10and $20 so that you canearn your return? Will thecompany‘s value grow to

over $30? Will someonecome in and buy it? At the

time in the 1970s if therewas that sort of gap wewould wonder if someonewould come in and fire a―thunderbolt‖ (a tender

offer). So the differencebetween the current stockvalue and the intrinsic valuewould lead to an event tounlock the value. Look atwhat‘s happened in the last

year. Fortune Brands an-nounced that they were

breaking up.

G&D: We remember yourecommending it on CNBCabout two years ago whenthe stock was trading at

about $20.

MG: Well the reason for

that was not complicated.We are a touchy feely or-

ganization so I drink bour-bon. It‘s a business we‘vebeen tracking for a longtime and the value wasthere. Nowadays, Sara Leeis splitting into two parts,Kraft is splitting into twoparts, and there are somany other examples. Whyare all of these companiessplitting up? They do sobecause it is a more taxefficient way to let the valuesurface and allow someoneto buy pieces. But the keyis seeing that value ahead oftime and knowing the piecesahead of time so that youcan take advantage of it.For example, would Pepsisplit the company in twoparts so that its snack busi-ness and its beverages busi-ness can reach a higher pub-licly traded value? WouldCVS do it? There are a lotof candidates that you could

identify.

A catalyst could be as sim-ple as a new product intro-duction. We have beenfollowing coffee for 40 yearsand coffee wasn‘t growing.

And then all of a sudden itwas November 1989, theBerlin Wall came down andit really helped open theglobal marketplace. A lot ofthe western companies

flocked to the Eastern Euro-pean and CIS countries tosell their products, includingcoffee. And more recentlyyou had single serve coffeeintroduced in a number ofcountries. Another exam-ple is oil and gas and shale


trying to convince individu-

als and institutions that thiswas a great time to buystocks. We wrote a re-port on a company calledHoudaille, and if I recallcorrectly, the stock wasaround $26 or $28 andHenry Kravis came aroundand bought the stock atabout $39 or somethinglike that and I took out anad in the Wall Street Journal .I said, ―to my friends at

Houdaille and KKR, thanksfor surfacing the values inthe market.‖ So that was

in 1979 and that‘s how I

got to meet Henry.

G&D: Can you talk a bitabout how your approachdiffers from the Graham or

Buffett methodology?

MG: It‘s the same thing.

The analysts are trained togather the data and read it

carefully. These days youcan get the data faster.We array the data in ourformat. Project the dataand then interpret it. In-terpret it in a way thatassigns a value and thenbuild in a margin of safety.So everything Graham andDodd taught in the 1930s

is still applicable today.

G&D: Would you say

that your methodologyworks better for some

industries than others?

MG: Of course. How doyou value Facebook orhow do you buy Applewith an almost $400 billionmarket cap? We had a


“A catalyst could be

as simple as a new

product

introduction. We

have been following

coffee for 40 years

and coffee wasn‟t

growing. And then

all of a sudden it

was November

1989, the Berlin

Wall came down

and it really helped

open the global

marketplace. ...

more recently you

had single servecoffee introduced in

a number of

countries. Another

example is oil and

gas and shale

drilling. So a

catalyst can take

many forms.”


14/34

Page 14

Mario Gabelli

sumers still be willing tospend a certain amount of

their income on a particularproduct?

The ideal thing is to findbusinesses people are loyalto, like alcoholic beveragesand coffee. You have tolook at who the customersare and how postponable isthe purchase. So if you lookat a business like Cable TV,

you have subscription reve-nues that are predictable(albeit with some churnrate) and then you look at

what customers are likely towant in the next 10 years,which is probably speed,mobility, video, voice. Thenwe try to understand whopackages it up best and whatcan go wrong with the pric-ing power of that service.And how does this business

compare to a company thatsells widgets that are hot

but who knows how sus-tainable it is, and based onrelative and fundamentalanalysis, try to come upwith an approximate value

to put on that business.

G&D: Was it throughsimilar analysis that you

found Fortune Brands?

We look at the pricingpower of an industry, suchas distilled spirits. Theglobal distilled spirits busi-ness is about $250 billion.We know the growth ratefor distilled spirits in eachsector (vodka, scotch, te-quila, etc.). Then we look atthe companies consolidat-ing, such as Pernod in Paris,Diageo, Anheuser Busch,etc. We follow the industryglobally, and we have ananalyst in New York who‘s

a Columbia Business School

alum as well as one inShanghai who is followingindustries in which we havea core competency, such asbeverages. So we werefollowing Fortune Brandsand we watched what thecompany was doing and thechanges in management.We could see the potentialfor Bourbon. It wasn‘t be-

cause we liked Jessica Simp-son and Dukes of Hazard.

We were seeing what all ofthe other businesses in For-tune Brands were doing,how management was allo-cating cash, what the under-lying value was and what allthe catalysts were. Wewere buying the stock.


drilling. So a catalyst can

take many forms.

G&D: Conversely, if youhave an investment thesisabout a company and you‘ve

held the company for a longtime and the catalyst isn‘t

coming to pass, how long do

you wait?

MG: One of our oldestfunds, the asset fund, wasincepted in 1985. The turn-over is 7%, so that‘s what, a

15 year holding period? Asin the movie Waterboy , if theCEO heads for the wronggoal line, we will try to stophim and if they continue todo it, we will sell. Or, if thestock goes above intrinsicvalue, we will find better

options out there.

G&D: Could you give anexample of a company you

like and how you valued it?

MG: If you look at thehuman population there areabout seven billion people.One and a half billion peopleare too young to drink ordon‘t do so for philosophi-

cal reasons. My first visit toChina was in 1981. Twothings were clear: the cul-ture loves to gamble andloves to drink. The impor-tant thing to think about is

which companies had pricingpower. What companieshad businesses that requiredthe least amount of capitalexpenditures to maintainthe brand. Could the Japa-nese and Chinese create avodka and then sell it at alower price? Would con-


“The ideal thing is

to find businesses

people are loyal to

like alcoholic

beverages and

coffee. You have to

look at who the

customers are and

how postponable is

the purchase.”


15/34

Page 15Issue XIII

Mario Gabelli

BEAM ticker, is probablybetween $80-$85. Kevin

Dreyer, Associate PortfolioManager of Gabelli AssetFund, has done the work onthis and we think the com-pany is going to be takenover. There are lots of en-tities that could do it andBourbon is a $6 billion cate-gory. The only thing thatbothers me is when I watchBoardwalk Empire and―prohibition‖. The other

concern is sin taxes.

G&D: What do you thinkof Fortune‘s other business,

the Fortune Brands Home &Security business, that is sotied to the housing industry?How do you approach and

value that business?

MG: There are 90 millionsingle family houses in theUnited States. Starting in2001 and 2002, Alan Green-span really wanted to get

the economy going and low-ered interest rates. Every-one was being sold on theidea they should own ahome, and so we built about1.6 to 1.8 million homes peryear and everyone benefit-ted from that and in 2007

that bubble collapsed. Nowwe are building about500,000 homes per year.Eventually we will go back

to the normalized amount

of 1 million per year or so.

So back to Fortune Brands – they have the Moen brandof bathroom and kitchenproducts. With Moen yougo into Home Depot andpay maybe $200 for a fau-cet. They also have cabi-

nets, which can be very ex-pensive and postponable in

terms of remodeling andalso things like windows,which you probably don‘t

replace unless they break.So we look at these busi-nesses and believe youreally need housing to pickup in order for them to dowell because most peoplecan put off upgrading theirexisting home needs. Welook at what the earningspower of the company is at500,000 new homes peryear. What about1,000,000? Then we look atanother of their businesses:Master Lock. What is theearnings power for eachbusiness, what will the earn-ings power be in five yearsunder a good environmentor a bad environment andwhether there is a margin ofsafety. Can these busi-nesses survive in another

economic contraction?

The stock started tradingthe other day at $11.10 on155 million shares so it‘s

about a $1.7 billion marketcap with about $500 millionin debt so you‘re paying

around $2 billion and you‘ve

got about $285 million ofbase EBITDA. The earningswould nearly triple if we getback to 1,000,000 homes.EBITDA could reach $500

million.

G&D: Could you talkabout a few other stocks

you like?

MG: When we went pub-lic in 1999, the hot groups


Then Bill Ackman came

along and purchased 11% ofthe company, and we knewhe was going to push themover the goal line. Theythen announced the split.So now the underlying valueof the individual businesses

has surfaced.

We look at what will hap-pen on a reasonably predict-able basis over the next fiveyears, we look at the cashflows, we look at the multi-ple we are paying todaybased on enterprise value

and EBITDA, and try toevaluate the person that willrun the business. We meetwith the management andwe look at various competi-tors and we believe fiveyears from now the distilledbusiness of Fortune Brands,now traded under the


“We meet with the

management and we

look at various com- petitors and we be-

lieve five years from

now the distilled busi-

ness of Fortune

Brands (ticker:

BEAM) is probably

between $80-$85.”

Pictured; Professor

Roger Murray and in-

vestor Robert Heil-

brunn with their wives,

Agnes Murray and

Harriet Heilbrunn.


16/34

Page 16

Mario Gabelli

pay to buy it? What is thepipeline worth? What is

their midstream businessworth? What are some oftheir oil holdings in Califor-nia worth? And their rawland? New technologycomes along and instead ofdrilling vertically down inthe Marcellus area 10,000feet below the surface, youhave other options. If youput a well down, it costsabout $3 million. If insteadyou went down and thendrill laterally it costs about$5 million. And then hy-draulic fracking is in the mix.And fracking unlocks hugeamounts of oil and gas.Now, over the next tenyears, who knows whathappens with the price of oiland gas? But the companyhas land in an area of theworld that everyone wantsbecause of shale. They‘ve

got a midstream businessthat they can transform into

an MLP and monetize. Theyalso have an oil businessthey could sell. So we tryto find the value of the busi-ness over the next tenyears. If gas ever goes to $6over that time we make aton of money, and if yourIRR is 25% to 35% and youown the mineral rights asopposed to leasing, you do

very well.

G&D: Is there anothercompany that you would

like to tell us about?

Another company is righthere in New York City.Cablevision spun off Madi-son Square Garden. Thereare 75 million shares of

MSG and it‘s trading in the

low $20s and there is no

debt and they have $300million in cash. They areputting their cash towardsrefurbishing the MSG arena.So when I look at the CableNetwork associated withthe company, we put a valueon it, and when we do that,we see we are getting twosports teams for free: TheKnicks and The Rangers.There are always super richpeople who want to buysports teams. I think youcould buy those teams for$20 per share, and so thequestion is should we ownthis company to participatein that upside? Now, thequestions are: is there goingto be an NBA season this

year? We don‘t know.

G&D: Isn‘t there also an

issue with the controlling

family?

MG: They are owned bythe Dolans. I am friendswith the Dolans. We votedagainst Chuck Dolan‘s com-

pany going private fouryears ago at $36 a sharebecause we thought therewere hidden assets and thatthe deal was leaving toomuch on the table for ourclients. They ended up spin-ning off Cablevision andMadison Square Garden and

AMC Cable. Chuck Dolan‘sson Jimmy is doing a better

job running MSG and is be-coming more shareholderfriendly and he won‘t sell.

This is a keeper for him.

G&D: So do you in general


were AOL, Yahoo, and

other dot-coms. Westarted a utility fund. Aswe looked around at theutility world, it was some-what in shambles. Enronwent out and said to theutility world, ―You are all

dumb: you‘ve got to go

global, you‘ve got to diver-

sify, and you‘ve got to do

acquisitions.‖ Bottom line,

if you went back and lookedat utilities, they were rate-of -return regulated. If infla-tion was going to stay at 2%or 3%, they were going todo well. A company in Buf-falo called National FuelGas, which we like today,was a business that soldhome heating gas. Theyhave 750,000 customers. Itgets cold in Buffalo, so it‘s a

reason to stay in business.About 80 years ago, theyhad the McKinsey of theirtime recommend that they

go out and buy land. Sothey bought a million acresin land mostly from WestVirginia to New York. Andperiodically they would goand drill down and put agathering system in and getgas. Then when the wellwas depleted they woulduse it to store gas. It was anice little company, paying agrowing dividend, etc. Fastforward to now, it is trading

around $55, with 83 millionshares and $4.6 billion mar-ket cap with about $900million debt. Some of thequestions we ask to under-stand and evaluate the busi-ness are the following:What is the utility worthand what would someone


“We‟re owners and

we know how to

think like owners. If

you have 80% of the

vote and 3% of the

economics that

bothers us unless it‟s

something like the

14th generation of a

family .”


17/34

Page 17Issue XIII

Mario Gabelli

creating. Now if you goback to ten years ago, theonly card company wecould follow was AmericanExpress. We owned it andstill own it. More recentlyMasterCard and Visa wentpublic and Discover spunout. So now we have fourcompanies we can look atand we are certainly inter-ested in the digital wallet.Can AXP adapt quickly?

Time will tell.

G&D: You have a historyof waging proxy battles withsome management teams.What are you looking for ina management teams andwhat makes you advocate

for change?

MG: If you entrustmoney to us, we want tomake a return and also actlike surrogate owners.Sometimes management

teams will go in the wrongdirection. Starting in about1987, we issued a MagnaCarta of shareholder rightsand what we would vote forand against for our share-holders. We said, if you tryto put in a poison pill, wewould vote against it. If it‘s

already in there, we can live

with it.

G&D: In the case of a

company like Myers Indus-tries, where you‘ve tried to

advocate for change formany years, what do you

do?

MG: In the case of Myers,I started as an auto analystand I would go to Ohio re-ligiously to visit with them,

so we knew the company.They tried to go privatewith Goldman Sachs a fewyears ago. So we looked atthem and told them not tomake any more deals andthey sort of pushed back.They pushed the owner‘s

son off the board. So wesaid, ―Our clients own 10%,

we should get some boardseats.‖ And then during

that period, Bear Stearnswent bust and Lehman col-lapsed, and the money mar-

kets shut down. We ranout of juice in that instance.Are we going to go back?We haven‘t made a decision

yet. Our clients now own15% and there are two orthree other institutions thathave been patient and mayget involved. Why not addanother director who can

add some value?

G&D: To what do you

credit your success?

MG: I do credit a lot toColumbia and to RogerMurray, my value investing

professor.

G&D: What is it thatyou‘ve done so well that

others can‘t replicate?

MG: A lot of people havereplicated what I‘ve done.

Chuck Royce has done aterrific job. Henry Kravishas done better than I havein the private world, albeitwith some leverage.There‘s clearly a bias to-

wards success by followingvalue investing. I feel likeI‘m not working for a living


like those companies thattend to have high insider

ownership?

MG: Well, GAMCO In-vestors did go public, and Ihave 98% of the vote. Sowe can‘t preach against A/B

shares. We‘re owners and

we know how to think likeowners. If you have 80% ofthe vote and 3% of the eco-nomics that bothers usunless it‘s something like the

14th generation of a family.But it‘s hard to paint with

one broad brush – it de-

pends on the shareholder.

G&D: You have had along interest in AmericanExpress? What do youthink of the competitorsVisa and MasterCard? Doyou see long term threats

to those companies?

MG: Of course. There‘salways a threat. When Istarted in the broadcastindustry, there was verylittle spent on capital expen-ditures. You could focus onsome high growth cyclicalcompany with great cashgeneration and to buy a TVstation in a major marketyou paid 12 or 13 timescash flow. Today a trade

just took place at 7 or 8

times cash flow. To buy amajor market newspaperyou were paying 25 timesback in the day, and that‘s if

you could even get one.Now they are trading at fivetimes cash flow due to tech-nological change. SonyWalkman had the only gamein town and they stopped


“If you entrust

money to us, we

want to make a

return and also act

like surrogate

owners. Sometimes

management teams

will go in the wrong

direction. Starting

in about 1987, we

issued a Magna

Carta of

shareholder rights

and what we wouldvote for and against

for our

shareholders.”


18/34

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Mario Gabelli

wise become accustomed

to.

G&D: Do you have anyadvice for novice analystswho tend to get lost in theweeds with the wealth ofinformation surrounding

each company?

MG: Yes, and that is thatyou cannot study a companywithout feedback mecha-nisms and benchmarks. Sothe key is to start by getting

to know an industry ex-tremely well. That givesyou a great perspective.

For example, we have aconference on the autoparts industry. Start off byreading everything that‘s

happened in the last 20years in an industry. So youread all the trade info andthen you cross check. Thenunderstand how that indus-

try relates to other indus-tries. And then you need to

understand the stock. Firstunderstand the business andthen understand the stock.Those two things don‘t al-

ways go in lockstep.

G&D: When you came toColumbia last year, you pro-vided handouts of Sara Lee.What do you think of their

businesses now?

MG: Sara Lee is a com-pany with many products.The CEO, Brenda Barnesparachuted in a few yearsago and started looking atthe company and trimmingit down and selling variousbusinesses such as Hanes-brands. We knew the foodbusiness because we have ateam that does health andwellness and then we alsofollow consumer productscompanies so we knew wellthe businesses they were

involved with. And as weare closely following thecompany, they came up withthe single serve coffee,which really took off inEurope. Then I tried somepersonally, and it was soeasy. Just look at the cate-gories they are in. Wewatched the company andslowly but surely we‘re add-

ing to it at times where wecould get the appropriate

margin of safety. Now wesee the company being splitup in two parts and thenonce they split, the questionis will one company be sold,or will both be sold? So at$16.70, I‘m still in the camp

that I can make 30% on the


and have the right northern

star.

G&D: What are some ofthe most common errorsthat you see young analysts

make?

MG: Young analysts – what about me? I still makeplenty of errors. Webought Netflix at $40 andsold it at $80. It went to

$300.

G&D: What about interms of assessing the fun-

damentals of the business?

MG: Sometimes theyounger analysts get con-cerned about Mr. Marketand the events of today, thevolatility in stocks, especiallydue to all the new ETFs andhigh frequency trading andthe like. Mr. Market is nowmore volatile than ever.

There were reasons theuptick rule was eliminated.One of the reasons wasbecause it made it easier forelectronic trading. And so,there was a group of highlyfocused organizations andindividuals that wanted todismember regulatory ele-ments that had reducedvolatility to a degree. Sowhat happened last yearwith the flash crash was

partially the result of thatlobbying group having suc-cess at changing the rules ofthe game. So analysts needto look at intrinsic value andrealize that the antics of Mr.Market to the fourth powerare creating more volatilitythan they might have other-


“You cannot study

a company without

feedback

mechanisms and

benchmarks. So the

key is to start by

getting to know an

industry extremely

well. That gives

you a great

perspective. “

Pictured: Panelists MarioGabelli ‘67, Charles Brandes,

Jan Hummel, and David Win-ters at the ―From Graham toBuffett and Beyond‖ Omaha

Dinner in April 2011.


19/34

Page 19Issue XIII

Mario Gabelli

a $130 million market cap.Because we run a micro cap

fund we can own it thereand also in separate ac-counts for our privatewealth management clients.So we start buying thestock. It went from $11 to$40 in a year. It thendropped back to $28, andnow we own about 7% of

the company for our clients.We have an analyst whograduated from ColumbiaBusiness School within thelast few years following the

company. Now, for the last40 years I‘ve been reading

Variety and Billboard and Automotive News and FarmIncome Journal and all sortsof other things that give youan idea of what‘s going on

around the world. The hardpart is to connect all the

dots. In World War II, howdid the allies find out where

the German V-1 bomb basewas? An intelligence analystwas reading the social pa-pers and he was wonderingwhy all these German gen-erals were going to this lo-cation in the middle of no-where? And he figured outthat‘s where they were

making the bombs and send-ing them to England. Sogather the data, array thedata, and then figure out the

valuation techniques.

G&D: Is there anythingyou‘d like to leave our read-

ers with?

MG: Everyone should goshark fishing. When you goshark fishing, you leave achum line. The sharks smellthe chum line and follow it.So if anything breaks thechum line, you don‘t have

nearly as much success. So

the notion of understandingthe first rule of life is impor-tant: don‘t lose money. The

best way to learn not tolose money is to losemoney. Going through amarket like this is a greatlearning experience, becausepeople realize no matterhow smart they are, things

change very quickly.

G&D: Thank you for

speaking with us, Mr.Gabelli.

upside and I think that‘s OK.

G&D: Is there anythingyou wished you knew whenyou were getting started inthe asset management busi-

ness?

MG: Even though I couldmake money for my clientsin 1976, I probably struc-tured my business in thewrong way. I should havebeen in the hedge fundworld. You can‘t be in the

business of ignoring overpriced securities; you needto be able to short them. Ialso don‘t think I‘d ever

have gone public. The bur-dens of regulation are too

great.

G&D: What books orpublications should aspiring

investors be reading?

MG: I read annual reportsand reading them constantlyis simply the best way tolearn about businesses. Forexample, I got an annualreport of a company inRacine, Wisconsin. Thecompany is Twin Disc. Ihadn‘t seen the company in

a long time but was justcurious about them. Andthen all of a sudden I no-ticed they are producing atransmission dedicated to

fracking. Meanwhile, I hadbeen sensitized to the dy-namics of shale because ofNational Fuel Gas, and hereI see a company producing acritical component. Thestock was at $11. Theyhave approximately 12 mil-lion shares, and at the time


“So the notion of

understanding the

first rule of life is

important: don‟t lose

money. The best

way to learn not to

lose money is to lose

money. Going

through a market

like this is a great

learning experience,

because people

realize no matter

how smart they are,

things change very

quickly.”

“Everyone should go

shark fishing. When

you go shark fishing,

you leave a chum

line. The sharks

smell the chum line

and follow it. So if

anything breaks the

chum line, you don‟t

have nearly as much

success.


20/34

Page 20

Marty Whitman

G&D: What about anydifferences?

I don‘t think we can identify

high quality securities atdiscount prices unless welook at things not only aspassive investors, but alsofrom the point of view ofthe corporations, manage-ments, and creditors. Soinstead of primacy of theincome account, we ap-praise companies and man-agements in terms of theircapabilities as operators.We look at managementteams as investors and welook at management as fi-nanciers. Between thosethings we have a balancedapproach.

Graham and Dodd placedgreat emphasis on dividends.In general, companies havethree uses of cash. Theycan expand assets, reduceliabilities, or distribute funds

to shareholders. The distri-bution of funds to share-holders, with one exception,always has to be a residualfrom the company‘s point of

view. This distribution caneither take the form ofstock buybacks or dividends.Both have their advantagesand disadvantages. Grahamand Dodd had a preferencefor dividends; we think buy-backs can be a much more

judicious use of cash someof the time. The one ex-ception to dividends tostockholders being the re-sidual is where a regularincrease in dividends im-proves the company‘s ac-

cess to capital markets com-pared to the access they

would otherwise have. Thisavails itself to certain types

of institutions – a good ex-ample is integrated electricutilities companies.

G&D: How do you thinkabout valuation? What met-rics do you tend to focuson?

MW: Earnings are very,very overrated. We canlook at the four ways cor-porate value is created.One is cash flow from op-erations available for secu-rity holders, which is rela-tively rare. The second isearnings, with earnings beingdefined as creating wealthwhile consuming cash. Be-lieve it or not, it‘s what

most corporations and gov-ernments do. In order tohave earnings in the longterm, you have to remaincredit worthy and you haveto have access to capital

markets to meet cash short-falls. The third element ofcreating corporate value isresource conversion, whichcan be massive changes inassets, massive changes inliabilities, and changes ofcontrol. This includesmergers and acquisitions,take-privates, LBOs, MBOs,spinoffs. This is a very im-portant element. Thefourth element is having

super attractive access tocapital markets. Let‘s say

you own some income-producing real estate. Hav-ing access to long-term non-recourse debt to finance70% or more of your project, that‘s a value creator.


Mr. Whitman graduated

from Syracuse Univer-sity and holds a masters

degree in Economics

from The New School

For Social Research.

Mr. Whitman is Adjunct

Professor of Distressed

Value Investing at Co-

lumbia Business School.

G&D: Can you talk aboutyour approach and how itcompares to the classicG&D approach?

MW: Graham and Dodd,in my mind, had three greatcontributions to investing.The first is the focus ondistinguishing between mar-ket price and intrinsic value.This is very important sincemodern capital theory as-sumes a price efficiency andignores intrinsic value. Sec-ond, they preached the im-portance of basing decisions

on solid facts. They did thisin the 1960s, which wasbefore companies wereforced to disclose every-thing they have to disclosetoday. Everything about aninvestment decision shouldbe based on the facts youknow and how reliable thefacts are. It is much easierto do this type of work to-day than it was when theywere doing it. The third

great contribution of Gra-ham and Dodd, in my mind,was their idea of investingwith a margin of safety.Everything we do at ThirdAvenue is based aroundthese tenets of the Grahamand Dodd method.


“I don‟t think we

can identify high

quality securities at

discount prices

unless we look at

things not only as

passive investors,

but also from the

point of view of the

corporations and

managements. So

instead of primacy

of the income ac-

count, we appraise

companies and

managements in

terms of their capa-

bilities as opera-

tors.”


21/34

Page 21Issue XIII

Marty Whitman

Graham and Dodd, we arenot as concerned with past

earnings growth.

Taking the balance sheet atface value is often mislead-ing. For example, let‘s take

a mutual fund managementcompany. Assets undermanagement, where persis-tent, have a ready marketvalue even through they arenot a balance sheet asset.There are a lot of liabilitiesthat have equity characteris-tics. Take deferred incometaxes for a going concern.Since the company is goingto reinvest cash savingswhen they aren‘t paying

taxes in assets which giverise to tax deductions, thisaccount is really more likeequity than a liability.

G&D: In the past you havecriticized how people useGAAP. Could you explainthese criticisms to our read-

ers?

MW: I have criticized howpeople use GAAP, includingGraham and Dodd, whothought it was so importantto find true earnings. GAAPis essential, but it misleadsyou as an analyst in somerespects. Cash accounting,which is not GAAP, alsomisleads because it doesn‘t

give you any measure of

wealth creation. GAAPmisleads because it focuseson wealth creation and bur-ies cash accounting. It isrules based, not principlesbased. However, GAAP iscritical in the USA becauseit is the only objectivebenchmark you have. Our

portfolio has a lot of finan-cials, income-producing real

estate, and a lot of privateequity. With these invest-ments IFRS tends to bemore useful than GAAP.Under IFRS, income produc-ing real estate assets arecarried at appraised value.

G&D: Can you talk aboutone of your favorite newinvestment ideas?

MW: Cheung Kong Hold-ings, an enormously suc-cessful private equity andreal estate developmentcompany, has a net assetvalue of around HK$140per share. It is the world‘s

largest container port op-erator with facilitiesthroughout the world, otherthan the United States. Itsreal estate operations arecentered in Hong Kong andmainland China. CheungKong, through its 50%-

owned subsidiary HutchisonWhampoa, has interests in aleading integrated oil com-pany in Canada; is one ofthe largest retail store op-erators in Europe andmainland China; and also hasextensive interests in tele-phonic communication invarious countries; as well asutility operations in theUnited Kingdom. The stockcratered recently due to

fears in Hong Kong regard-ing the company‘s huge

presence in Europe in portsand retail. There has been alot of panic selling. One ofthe things about the HongKong stock market is that itis dominated by ―short term


We look at hurdle rates inmost of our common stockinvestments. We want toget in at a substantial dis-count to readily ascertain-able net asset value. Wewant at least a 25% dis-count. We don‘t go into

these types of situationsunless we think there arevery good prospects that,over the next 3-7 years, thecompany can increase itsnet asset value by no lessthan 10% per annum com-pounded. We are moreconscious of growth inreadily ascertainable netasset value than we are inearnings per share. This isunlike Graham and Doddwho said value is created byoperations. I don‘t think

that‘s real in today‘s world,

in the 21st century.

G&D: What about some

other differences betweenthe Graham & Dodd ap-proach and your approach?

MW: Graham and Doddloved net-nets. When theyinvested in them, all they didwas look at classified bal-ance sheets. In my opinion,there are real limits to look-ing at companies like theseso far as there are no cata-lysts. Graham and Dodd

wrote about the unimpor-tance of the balance sheet.From our point of view, ifyou want to predict futureearnings, one of the toolsyou will use is ROE. Wedon‘t believe that you can

just pay attention to pastearnings trends. Unlike


“GAAP is essential,

but it misleads you

as an analyst in

some respects. Cash

accounting, which is

not GAAP, also mis-

leads because it

doesn‟t give you any

measure of wealth

creation. GAAP mis-

leads because it fo-

cuses on wealth

creation and buriescash accounting. It

is rules based, not

principles based..”


22/34

Page 22Issue XIII

Marty Whitman

ing that period, net assetvalues, after adding back

dividends, have increased bymore than 15% per yearcompounded. Results for2011 will be very strong.2012 may be a year of mod-erate recession.

G&D: Can you talk aboutthe characteristics of someof your most successful in-vestments?

MW: Some of my bestinvestments have been incompanies that were goingthrough Chapter 11. K-mart was a good example,back in 2003. The first thingwe did was buy out a lot oftrade claims from creditors.Then we kept averagingdown and we went on theofficial creditors committee.It was there that we metEddie Lampert, who asked ifwe would join him in thereorganization, which we

did. Eddie ran everything.To find these types ofhomeruns we really needgood partners. We aregood investors, but notgreat managers.

Unfortunately he‘s tied up

with troubles at Sears now.I think Sears is toast. Eddieis very skilled, but I think itwill be very hard to turnthis thing around. The com-

pany has a nice cash posi-tion now from realizing thevalue of the company‘s real

estate. I don‘t know what‘s

left. I have the greatestrespect for Eddie, and ifanyone can pull this off, it‘s

he. I‘m not as close to the

situation as I used to be, as

we sold our position a whileago and I don‘t really follow

the company anymore.

G&D: Can you talk aboutyour investment in Brook-field Asset Management(BAM)?

MW: Brookfield has a netasset value of around $40,through it trades near $29per share. It has ownershipin a large number of Class Aoffice buildings in Manhat-tan, Toronto, Calgary andWashington, D.C. Equallyimportant are its hydroelec-tric investments in Canada,the U.S. and Brazil. Brook-field controls GeneralGrowth Properties and hashuge infrastructure, realestate and agricultural in-vestments in Brazil and Aus-tralia. Finally, Brookfield isthe general partner in highlysuccessful hedge fund in-vestments.

G&D: How do you thinkabout the macro when youinvest?

MW: I think the reasonthat such a high percentageof our holdings are in theFar East is that the regionhas better prospects forNAV growth than any otherpart of the world. For us,the key investment criteria

are a super strong financialposition, buying at a dis-count, and getting compre-hensive disclosure so wecan understand the business.I think these things are rela-tively easy to find, but figur-ing out the macro is very


-ism.‖ I like to say that Hong

Kong traders ―don‘t like tobuy green bananas.‖

G&D: Can you go througha few other holdings?

MW: Sure thing. AppliedMaterials, near $11, sellsaround 10x earnings. It hasan extremely strong financialposition. It is the world‘s

leading producer of chipmanufacturing equipmentand, through a China-locatedsubsidiary, a leading manufac-turer of solar panels.

Capital Southwest trades at$84, yet has a net asset valuearound $140. Investor AB,which trades at 125 SwedishKrona on the Swedish StockExchange, has a net assetvalue of around 189. Bothare investment companieswith extremely favorablelong-term records for grow-

ing net asset value and divi-dends.

Last, I want to mention HangLung Group and Wheelock &Company. Hang Lung is theholding company for theleading developer of shop-ping centers in secondarycities in mainland China, fol-lowing its huge success inbuilding and operating twoshopping centers in Shanghai.

Wheelock is a holding com-pany for a huge private eq-uity and real estate devel-oper. Both common stockssell at substantial discountsfrom net asset value. ThirdAvenue has been invested inCheung Kong, Hang Lung andWheelock since 2005. Dur-


“For us, the key in-

vestment criteria

are a super strong

financial position,

buying at a dis-

count, and getting

comprehensive dis-

closure so we can

understand the

business.”


23/34

Page 23Issue XIII

Marty Whitman

MW: We like to go wherethere are readily ascertain-

able asset values at a hugediscount. ‗Readily ascertain-able‘ is not rocket science – it includes income-producing real estate, secu-rities and private equity. Ilike technology companies.Microsoft (MSFT), Intel(INTC) and AVX (AVX) arecompanies that have cashwell in excess of book li-abilities. These are veryprofitable businesses gener-ating a lot of cash, and theyhave large cash balances. Assuch, I feel confident thatthey will

Documents

Graham & Doddsville Fall 2011