There are plenty of companies in India that Warren Buffett could focus on: Mario Gabelli, Gamco Asset Management

In an interview with ET Now’s Tanvir Gill, hours before the Berkshire Hathaway AGM at Omaha, Mario Joseph Gabelli, CEO, Gamco Asset Management, talks about what he expects to hear from Buffett, his investments, India as an investment destination and more.

Edited excerpts:

What do you expect to hear from Mr Buffett?

Every year there are certain things that people want to talk about. For example, his succession. Well, Ajit Jain was announced as being the number two. But the things that are new are the following: the multiple of companies that he might want to buy entirely, will they be sustainable? What multiple of EBITDA was he thinking about five years from now? Now, that is important because if interest rates rise on the 10-year bond above 3%, what impact does that have on valuations, that is what I would like to hear.

The second thing is Warren Buffett all of a sudden allowing things that he would not do in the past, like buying Apple. Is it a technology or business or consumer products company? Why would he want to buy airlines? He had said in the past, you want to become a millionaire, start with a billion and buy an airline because you will lose your money. So why is he doing that now? Then, obviously there are certain things going on with regards to corporate taxes, regulation that he will be commenting on.

I have read a piece where you said how you want to hear from him about the future of cable television. You want to hear about healthcare cost. Is that also what you are expecting?

I do not think Buffett is going to talk about cable television and I do not know if he cares about that. Todd and Ted run his public money. Ted has been very important in doing some work in the broadcasting area. Todd has been very important also. Todd and Ted are buying in that and they are the two other investment gurus that he has.

The interesting part about their investment philosophy is that their investment arm has just now invested in Teva which is an Israel-based pharmaceutical company in generics business. So, when you are talking about healthcare cost coming down, that is the generics market the focus is on. Do you hope to hear something more from him regarding whether he is excited about that space?

That is a very good question because Warren Buffett in the past said that medical cost in United States are rising. They have become like “tapeworm” in your body eating away at the American system.

So, he and Jamie Dimon who is the head of the JPMorgan and Jeff Bezos who heads up Amazon have come together to look at healthcare. How they are going to address this is going to be a question that will be asked tomorrow. which I did not point out.

And the reason I asked you this question is essentially because in India we have some great generic pharma companies which are supplying to the US. I was just wondering when will Mr Buffett look at India and look at the opportunities there. He is sitting on $135 billion. When is he going to make his next purchase?

I assume that one has to bring it to his attention and that will happen and then clearly your comment about generics and Teva. There are plenty of companies in India that he should focus on.

Right now, the world is squarely focussed on interest rates being a big risk for the current market environment. This has been a 10-year bull market and everybody is worried about what will lead to the tipping point, what will essentially cause the tipping point for the markets to come off. They are fearing a correction which has not quite come yet.

Yes but the volatility in the market is the “old normal.” In other words, we always had that. It has only been the unusual since the last 12 to 18 months. Until February of 2018, the US markets were not volatile. From my point of view, the price could be too high, speculation could become rampant. There could be a geopolitical dynamic but if interest rates go too high, if there is a tariff war, then people are uncomfortable with it. So, it is the loss of confidence that you can expect and that can happen at any time. From my point of view, if interest rates are at 3.5-4% on the 10-year US bond, that is not so bad.

That may be bad because may be three years back, when the yield hit 3%, world markets went into a tizzy. But we have not quite seen the same reaction right now, which just tells you that may be the markets have taken this on board.

The US treasury bill for six months is almost 2%. The German bonds and the Japanese equivalency are still not positive. We have to make some adjustments.

Janet Yellen and her successor Jay have put in $4 trillion or $10 trillion on a global basis that they were withdrawing. So, that is going to happen and the question is do we have enough economic stimulation to provide growth while this is going on? So, it is a work in progress. You have to continue to think about the details of how that works to see how it works out. I am reasonably comfortable.

You are reasonably comfortable but how do you see the road ahead on rates? So far the pace of hikes has been very measured and well documented. Given what is happening with oil price and core inflation also picking up and the whole outlook on rates changes just marginally so, would that make you a bit nervous if rates were to go up faster?

With established countries growing at 2% or 3% and the rest of the world at 5-6% and India even faster in the short term, if you put it all together, what happens to the inflation part of the revenue stream? Will companies be able to pass along price and will that have an impact on their multiples?

If rates go up too fast, it is a problem but it is not only rates, it is how fast that they take money out of the system that is important. They put in a lot of money 10 years ago and now they are pulling it back.

Draghi has to do it in Europe at some point, we are doing it in United States and that is what we look at. In other words, monetary policy was a tailwind, now it is a headwind and fiscal policy and economy has to be supplying the balance.

We have that in the United States and we have it in Europe. With all other problems, the Russian tariffs, the Chinese tariffs, those are issues that we have to work our way through.

How serious are those issues? I was hearing you earlier this morning and you were talking about geopolitical risks always being on the market’s mind. It is either North Korea and the United States, it is Russia and the United States, it is the Middle East there are always geopolitical issues to contest with.

I agree. When I was in school, we used to say go under your desk to practice, in case there is a nuclear bomb exploding. We always have these risks. We hope we survive as a country, as a world. but that would be a surprise on the downside.

Other than geopolitical risks, what risk do you foresee that can really derail the markets from here?

A loss of confidence in the political system. If the 10-year bond goes up too high, it would cause some concerns but you also have a new money flowing into the stock market through a vehicle that is untested, electronically traded funds.

You do not know what investors and their surrogates will do. When they withdraw the money and the money comes out of the same stocks that I like, I will like that as I like to buy stocks cheaper.

Mr Buffett loves the ETFs. He says go the passive way. Where does that leave hedge fund managers? Where does that leave active fund managers?

Mr Buffett is a historian of economics and returns. He looks at the United States over the last 110 years and said if you are in the United States in the year 1900 we had wars, we had inflation, depression, crazy presidents, good presidents and the market grew 6%-7%.

Over the next 20 or 30 years, GDP in real terms in the United States 2.5% inflation higher, margins maintained. So, if you bought an ETF you would have made 6%, 7%, 8%, 9% but more importantly if inflation ever took up overtime, the pricing power of your assets would be preserved. That is why for the individual investor who really does not know who says long term buy an index, but we think if you bought an index in the United States like an S&P 500 you make 6%, 7%, 8%. But for the last 40 years, we have compound the clients 60% with no leverage.

So do you have disagreements with Mr Buffett on this?

No, we are both on the same side. With certain investors, buying an ETF is appropriate.

So, it is the profile of the investor.

If you are not in the market and you are psychologically buying when things are hot and selling when things are bad, you are better off just holding an ETF.

Coming from emerging markets, we have seen how active fund managers have been able to take advantage of market inefficiencies to outperform the index by big margins. Do you think that it is also a case of measuring the profile or the point in the market cycle that an economy is in?

Well there is an element of that but on the other side, I am not as comfortable about the markets we are talking about. I am looking at the US capital markets and I cannot address the Indian markets.

Personally I have put money in India by buying a mutual fund, the First India fund and I have colleagues who grew up in Delhi, Mumbai, Kolkata and we have individuals who work for us in different parts of the world.

For my point in view, it is really about how can you handle your money as an investor when you see the markets going down and when the markets go up, you get more excited and you really have to have a steady course over a period of time. Now India’s economy is probably 3.5% of the $85 trillion and that is terrific growth. Modi is doing the terrific job, we hope to put it together and it is wonderful.

Do you hope to invest more in India?

Here is what we do, we do not invest in Germany, we do not invest in Russia, we do not invest in Italy, we do not in India. We buy companies that we like with businesses that we like. For example, if you drink anything in the world -- wine, water, beer, soda -- we follow those companies. We like countries that have a rising disposable income.

We buy Kingfisher and we buy a beer company in China, we buy a scotch manufacturer. That is what we look at on a global basis because they have pricing power and they raise prices, if inflation goes up. Has the consumer money? Where will they put their money to work and that is what we like there.

For India and other emerging markets, oil is a worry. Do you think oil pricing moving higher from here is a concern?

There are 1.2 billion cars on the road in the world. The average car gets 25 miles on the gallon. For example, in the United States, we have 250 million vehicles who consume 140 million gallons of gasoline.

If it goes up 30 cents a gallon ,we are taking a lot of the money out of the system. In the United States they have technology called fracking and you have solar, you have wind but on balance, it takes money out from the consumer. It would be a drag on the economy but not as bad as serving countries that are importing a lot more their oil.

There are a lot of theories going round but my point of view is the equilibrium, based on what people said is it is probably $60 to $65 US, not Brent.

So roughly that is the range that you see on oil.

But now there is this problem in Iran. Any disruption in supply from Iran or Venezuela always creates a challenge.

Isn’t it the hardest market to predict?

Everything is difficult and that is why we get overworked and we are overpaid and we intent to stay that way.

Let us talk about the sectors that you love? You you love media companies. How do you see the opportunity in the media space going forward because digitisation is clearly the next big wave for content creation?

The United States has 330 million people and the world has 7.5 billion mobile phones. The smart phone is now over 4.5 billion people. The notion of digital communication is helping everyone to the degree that content can be produced in Bollywood and distributed around the world.

That is attractive to the degree that a company like Eros that has a lot of library. I have wireless telephones and I need speed with cable. So we cover those industries globally. When I look at Viacom, they have a company called Paramount but they also have distribution in Argentina, England and India.

They own these operations. This is terrific asset. What is going to happen in next 20 years is that in certain countries like China, the number of movies that come in the country are capped. you want them to open that up, because we own the content so we like everything to do with that.

Over the last few years the profile of emerging markets as an asset class has evolved. Many believe that they are becoming a class of their own which is comparable to how developed markets look like may be two decades back?

Yes, I agree..

How do you profile India and China because they re the high growth markets within EMs?, India from being an oil importing nation is a bit of macro worry. But given the given the growth prospects of India and China, how do you profile them within the EM pack?

Look the individuals. Look at the banks that are privately owned and those that are publicly owned in India. Look at their growth rate versus the ones that are in part state owned. We do not do that, so we are not saying we want to invest in India, we want to invest in intellectual properties, we want to invest in content, distribution. Do we want to own a satellite distribution company in India? Do we want to own a cable company? Do we want to own wireless company and that is when we look at overtime and the fact that it is an emerging markets where each 1% change in disposable income, we pay attention to. But that is not our strength.

How you see investors in a market like this being able to generate alpha?

If I am 10 years old and I grow up to become 20, I would have increased my age by 100%. In emerging market, right growth rate could be seen if you find the right companies. But you could find the right companies in developed markets. We like small companies because no one else follows them.

We are not buying a basket of Indian stocks, we are buying specific companies.

We are buying them in China specific companies and that is what we did and we are what they call stock pickers.

We are value buyers and we have been doing it for 50 years. We are going to do it for another 50 years.

How hard is it to find value in the current market?

It is not complicated, it is complicated to buy a lot of money to work. Like Buffett has a liquid a public portfolio of US 200 billion. So for him to buy all the little companies that I buy and they cannot do it. We have over 5% of 120 companies in the United States and we follow them, we talk to the management, we talk to the competitors and we go to meetings everywhere in the world for them.

What would you say to the people who are saying generating supernormal returns or above average returns is getting harder for the market?

I agree. In the markets over the next next 10 years, if you buy a global index fund like Morgan Stanley or an S&P 500, you are going to make 7%, 8%, 9%. So to the degree that we compounded it 60 or 50.3%, I do not think we can do that over the next 30 years. But we are still going to be able to outperform that market because we are looking in places where the world is not looking.

At the conference you said pray for a 40% correction. Do you see that coming by anytime?

Dow Jones is the market and it is at 25000. 40% down is 10,000 to 15,000. You know it could happen. I would be rich if I knew when.

Every time there is a hint of a correction, everybody starts comparing the fall to 2008. It is almost like 2008 markets forever.

In 1893, there was a big correction in United States, there was one in 1907, 1990, 1929-1930, 1937 and in 1957 you had a problem. In 1961, then in 1970, 1971, 1972, 1973 it was terrible. I have been there through all of these markets.

So, 2008 looks like just another story.

That it is. You have to constrain the financial system, the free market world, for some time. You have to put an electronic fence around some of the issues.