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The New Leucadia



March 17, 2014 – Comments (0) | RELATED TICKERS: JEF

Board: Leucadia National Corp.

Author: ultimatespinach

If anyone stuck with me this long, I welcome thoughts and feedback. A lot of this is trying to extrapolate the quality of management during an unknown transition period to determine whether promised value is likely to be borne out at a higher rate than currently assigned by the market, so it feels like trying to read the tea leaves more than drilling into quantitative data. Obviously this position will have a significant impact on my investment performance, and I want to be sure I expose myself to contrary views and critical thinking from all available avenues.

I finally had an opportunity to do much of the reading gameguru suggested in his helpful background post. To anyone seeking to research the new Leucadia, I recommend clicking on the above link as a starting point.

As a result of this research, I did opt to open a position last week. I have a portfolio of individual stocks that is divided equally, more or less, between growth and value. My value jockeys are, in order of total allocation, Bruce Flatt and his team at Brookfield, Warren Buffett and Charlie Munger at Berkshire, Tom Gayner at Markel, the Tisch family at Loews, David Einhorn at Greenlight and, now, Rich Handler and Brian Friedman at the new Leucadia or the old Jefferies, however you care to look at it. I also hold Bruce Berkowitz of Fairholme in a separate retirement portfolio of mutual funds in an allocation that would currently fall between Einhorn and Handler/Friedman.

I made this decision despite rather than because of the Handler/Friedman communications gameguru linked. I found the Insight letters an admirable attempt to be transparent and forthcoming without actually being either. I don't think communication is these guys' strong suit. In this as in so many other areas, Buffett looks like Willie Mays and everybody else like Albie Pearson. Buffett lets Fortune's Carol Loomis edit his letters. Maybe these other guys should take a hint and let a professional look at theirs before they go out.

The Handler/Friedman letters are full of preachy, general conclusions but almost totally lacking in the specifics from which these conclusions apparently derive. There's also no humor of any kind, aside from the assertion that not being 34 years old anymore is "a bummer." This is not a stylistic issue from my point of view. A large part of wisdom is tied up in appreciating the absurdities and contradictions all around us, and true humility consists to a great extent of the ability to recognize one's own haplessness in attempting to deal with them. In this area, Buffett and Munger are head-and-shoulders above the rest, but I would put Handler and Friedman next-to-last on the list of the jockeys I now hold, ahead of only the equally humorless and even less edifying James Tisch. I found this passage representative:

The fact that this organization celebrating its golden anniversary is populated with employee-partners in their 20’s, 30’s, 40’s, 50’s and 60’s means that we have the best of all worlds: true experience and raw optimistic energy. Our goal is to keep both of these balanced because, when we do, we will hit our goal of being the best firm in our industry: institutionalized, yet entrepreneurial; seasoned, yet ambitious; conservative, yet aggressive; defensive when necessary, yet offensive opportunistically; conservatively capitalized, yet willing to partner and support; cautious, yet creative; humble, yet confident. These are all aspirations that, more so now than ever in our 50-year history, are well within our reach and will differentiate us from much of our competition.

How will this differentiate them from their competition? Doesn't every firm of any size have employees in a similar age range? Doesn't every firm strive for these things, which is to say, the best of all possible worlds? Isn't this just a list of the usual platitudes?

I was confused by the comparison in the investor presentation of Jefferies and Leucadia over the years based on book value. I suspect this is because of my college dropout-worthy math skills. Leucadia increased book value per share at a greater rate than Jefferies in all but one year from 1990 through 2012, sometimes by quite a lot ($27.67 in 2012 compared to $16.90 for Jefferies), yet Jefferies' compound annual growth rate over that 22-year span is greater, 14.2 percent to 12.4 percent. I'm guessing this apparent contradiction is because of the respective starting points, which the chart in the presentation doesn't specify, or perhaps other obvious factors I haven't taken into account, but they would help out their dimmer readers by making such things clearer.

So I hope they get better at the communication thing as they do more of it.

I had two main reasons for opening a position anyway. One is bad news. I like bad news. Investing on bad news has worked well for me in the past and appeals to my contrarian nature. Between the plant closing at National Beef, the federal fraud conviction for the former Jefferies trader in Connecticut and the $25 million settlement of criminal and civil charges related to the failure to supervise mortgage bond traders, I thought it was a good week to get a good price point. The stock is trading below book value and moved a little further below on these reports.

The second is the variety the new Leucadia brings to the value side of my portfolio. In striving to hold dissimilar assets, one of my least favorite things about it became a strength -- the investment banking operation.

The bull market has inflated the growth side of my portfolio to a slightly greater percentage than the value side, so I was looking to add to the value side. Because I hold fewer positions on the value side, each is substantial on a relative basis. The only one cheap enough to be tempting to build further is Loews. Unfortunately, Loews has its own warts, including an insurance operation with a history of poor stewardship and more exposure than I'd like in oil and gas.

Against this backdrop, letting in a little financial engineering and estimating the booster shot Leucadia capital would give it might diversify my port a bit and drop its correlation quotient slightly.

The motley collection of businesses the previous managers accumulated minus the ones recently divested seems fine overall -- the car dealerships and mortgage servicing business better than fine, the beef processing business a little less than fine based on current margins. I'm not sure how much they'll matter as time goes on under the new leadership. There will be new directions and perhaps further divestitures down the road.

I had one other reason that shouldn't carry much weight for anyone who has never invested in blood substitutes. I once made a particular blood substitute an idiotically high percentage of my investments, caught up in a dream of FDA approval and early retirement. Blood substitutes are the holy grail of emergency medicine. Find one that works and many, many emergency cases, from the battlefield to the victims of violent crime, will have a chance to survive until they reach a medical facility. Alas, none has worked yet. Needless to say, I lost a great deal -- well, not a great deal objectively, but a great deal to me -- on my investment. Sangart, yet another outfit on the quest for this holy grail, had soaked up a bunch of Leucadia capital over the years with nothing to show for it. The new Leucadia has cut it loose. I mourn another failed quest, but applaud the investment decision.

For those considering the new Leucadia, I also watched the Motley Fool One roundtable on it, which I found helpful. I'm not a member, but during this recruitment period, you can get access to these roundtables (on Amazon, Valeant Pharmaceuticals, Leucadia and Berkshire) by reading a pitch or two. Here's the link I used, which may or may not work for you:

Now that I own a position in Leucadia, I hope to follow the company more closely and come to understand both it and its principal officers much better. Thanks again to gameguru for providing good starting points for research. Dissent welcome.

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