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Mario Gabelli sees another 'pocket' like the '87 crash ahead — he just doesn't know when

  • The market has no margin of safety, but it is OK, Mario Gabelli said.
  • However, investors need to be prepared for "one of those pockets" like the 1987 "Black Monday" crash and 2010 "flash crash," he warned.
  • He said those crashes were both due to the mechanics of the market.

The U.S. stock market has no margin of safety, but it is OK, billionaire value investor Mario Gabelli told CNBC on Friday.

However, investors should be prepared for a big drop at some point, reminiscent of the 1987 "Black Monday" crash and the 2010 "flash crash" — which were both a result of market mechanics, he warned.

"You're going to have one of those pockets. I can't tell you when or what triggers it, but that's why you have to be prepared," the chairman and CEO of Gamco Investors said in an interview with "Power Lunch."

While he doesn't know what the cause may be, Gabelli noted that the May 2010 crash "was a tiny sample of what could occur in the future because of the untested ETFs, the untested flash trading, the untested absence of a buffer known as specialist."

Meanwhile, in 1987, Gabelli said he made a lot of money because he figured out the drop was brought on more by market mechanics than by economic reasons — namely portfolio insurance that had investors running for the doors once the market started to slide.

Overall, he anticipates that over the next five to 10 years, ETFs will make 5 or 7 percent.

"The dynamics of reg. reform, tax reform, everything, it's in process and it will take a while," he said.

Gabelli anticipates "OK" earnings, which he believes will be better in 2018.

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