Leucadia National - Consistently Ahead of the Curve

Everyone has heard the theory that no investor can expect to consistently beat the market over the long term; the stock market today is simply too efficient. Of course, in most cases this sentiment is correct; it is exceedingly difficult to be on the right side of the market year after year. However, there are exceptions to every rule and one exception to this investment adage is Leucadia National Corp. (LUK). To be fair, LUK does not outpace the market every year, but over the long haul its performance is undeniable. From 1979 through the end of 2007, this diversified holding company has returned a gaudy 26.2% per year versus an annualized 9.8% return on the S&P 500. Yet, there is relatively little buzz about LUK and also fairly little information available about the company—but this is certainly a story that should be told.



The key to Leucadia’s success has to be the talented men that steer the strategic vision of the company: Ian Cumming and Joseph Steinberg. These two gentlemen have successfully navigated the ups and the downs over the last few decades always with a firm grip on macroeconomic trends. For example, as they describe in their annual letter to shareholders, after observing the simultaneous rise of population and standard of living in Asia (China and India in particular), Cumming and Steinberg sensed opportunity. Realizing that infrastructure expansion in these regions would surely be necessary to foster further growth, they invested in copper and steel mining operations. As they surmised, global demand for basic materials ramped up in a big way—with prices following suit—and now their investments are paying off. This is just one demonstration of the fundamentally sound and profitable vision of these two leaders. Their management style is to find and exploit under-appreciated value in the marketplace, and in my opinion it is an approach that is part science and part art.

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Transcript of the Ruane, Cunniff & Goldfarb Investor Day 2008

May 16, 2008 – St. Regis Hotel, New York City

Bob Goldfarb:

Good morning, and welcome to our Investor Day. We're going to follow the same format that we have in recent years, which means that the day is going to consist strictly of questions and answers, and we'll take questions until 12:30. We have to vacate the room by one o'clock, but we'll be around between 12:30 and one o'clock to meet you and respond to any questions that you might still have for us.

There is one restriction I'm going to ask. If there are any journalists or Internet bloggers in attendance, we ask that this meeting be off the record. We prepare a transcript of the meeting for our clients and shareholders, and we prefer that all of our shareholders and clients receive the transcript at the same time and in full.

Before we begin taking your questions, I'd like to introduce our team. On my far left is Greg Steinmetz. Next to Greg is Jon Brandt, then David Poppe, who is President of our firm and co-manager of Sequoia. Rick Cunniff is on my right. As most of you know, he's our co-founder. To his right is Greg Alexander and to Greg's right is Joe Quinones, who runs the operations side of our firm as well as that of Sequoia.

Finally, I'd like to introduce the rest of our team who are seated in the front of the room on my left and to your right. In alphabetical order, they are Girish Bhakoo, Andy Ewert, John Harris, Jake Hennemuth, Arman Kline, Trevor Magyar, Tom Mialkos, Terence Paré, and Chase Sheridan. I'd also like to introduce Jon Gross who is our Director of Client Services. With that, we're ready for your questions.

Question:

I noticed that you trimmed your stake in Wal-Mart and increased it in Target. I was wondering if you might talk about Target, its position and why you like it so much.

David Poppe:

What I would say is we bought most of the Target before we sold any Wal-Mart. Sequoia still holds Wal-Mart.

Interestingly, I think if you look over the last seven years since 2001, Wal-Mart and Target have almost identical EPS growth rates. I think going forward, both are likely to have pretty good EPS growth rates. Right now, Wal-Mart might be a little bit better positioned in that its business is more oriented to food, commodities and staples.



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TRANSCRIPT & VIDEO: Warren Buffett Tells CNBC Treasury "Did Exactly the Right Thing" on Fannie/Freddie

In a live interview this morning on CNBC's Squawk Box, Warren Buffett told our Becky Quick that Treasury Secretary Henry Paulson "did exactly the right thing" when the government took control of Fannie Mae and Freddie Mac over the weekend.

Here are a video clip and transcript of the entire on-air telephone coversation.

Becky Quick: Mr. Buffett, thank you for joining us this morning. I want to get your thoughts on this plan for Fannie Mae and Freddie Mac.

Warren Buffett: Well, I think the Secretary (Paulson) did exactly the right thing. I don't think there was an alternative that was anywhere close to this one in terms of calming the markets, in terms of providing an ongoing function for the two that makes any change less abrupt, the changes that are going to occur with the two companies. So I couldn't, I wouldn't have changed anything in the plan myself.

Entire transcript and Video

Vanguard Chairman John Brennan Commentary on Investing: Lost decade, found perspective

A few months ago, The Wall Street Journal ran a front-page story with the headline "Stocks Tarnished by 'Lost Decade.'" The article noted that the stock market was trading at the same level that it had been nine years previous and suggested that the prospect of a decade with no (or negative) returns for equities is quite real.

This is startling, perhaps, but also true.

After the dizzying tech-fueled run-up of the late 1990s, the broad U.S. stock market peaked in 2000. Since then, we've had some steep downs, ups—and downs. The market briefly reached new highs in October 2007 but retreated from those levels in the fallout from the subprime lending crisis.

Over the next year or so, as we draw closer to the ten-year anniversary of the market's 2000 high-point, the ten-year return figures for stocks and stock funds are likely to remain modest—even if the market produces respectable returns until then. Simply put, the market's peak is casting a long shadow.


Sources: Bloomberg, Vanguard.
Note: Data through June 23, 2008.

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Walter Schloss: Benjamin Graham and Security Analysis: A Reminiscence

Ben Graham was an original thinker as well as a clear thinker. He had high ethical standards and was modest and unassuming. He was one of a kind. I worked for him for nearly 10 years as a security analyst.

In re-reading the preface to the first edition of Security Analysis, I am impressed all over again with Ben’s views. I quote . . . “[W]e are concerned chiefly with concepts, methods, standards, principles, and above all with logical reasoning. We have stressed theory not for itself alone but for its value in practice. We have tried to avoid prescribing standards which are too stringent to follow or technical methods which are more trouble than they are worth.”

Security Analysis says it all. It is up to analysts and investors to put Ben’s ideas into practice.

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Get Ready for Rising Prices

by David Dreman

The markets, the dollar and commodity prices have all plunged and then rebounded. Financials are still falling. Economic news both in the U.S. and abroad continues to get worse. How do you chart a course in all this? Through all the smoke, and the cacophony of distressed voices on the financial battlefield, I find several things you can sensibly do.

Before you do any of them, you need to recognize the dilemma that the Federal Reserve and the Administration find themselves in—and are powerless to resolve. As investors are painfully aware, banks, investment banking firms and Fannie Mae and Freddie Mac (which have almost become penny stocks) are still drowning in seemingly endless pools of bad mortgages. Despite ample borrowings from an indulgent Fed, banks are far less liquid than when the crisis began. As loan defaults continue, they’re going to have to write down their portfolios even more, further impairing their capital and shrinking their stock prices. They’re reaching a point where they can’t raise new funds without badly diluting current shareholders. Thus the input of new funds by the Fed hasn’t lowered rates for mortgages or raised the financial institutions’ liquidity.

Consumers are trapped by stagnant wages, depleted savings and falling house prices. They’re slipping behind on their mortgage and home loan payments, and their spending is being squeezed harder than in more than a generation. So the Fed and the Treasury have no choice but to keep interest rates low until the current liquidity problems are under control. Not to do so would result in a steep recession and the threat of a financial panic. Yet keeping rates down risks damage to the economy from the highest inflation since the 1978–81 period, when prices rose at an average of 11% a year. That’s the Fed’s dilemma.

The July Consumer Price Index was 5.6% higher than a year earlier, the Producer Price Index 9.8% higher. Import prices, thanks to a weak dollar and expensive oil, are 21.6% above a year ago, the largest one-year increase since the index began in 1982. Optimists predict that energy, raw material, commodity and import prices, the strongest forces behind rising inflation, are likely to reverse direction and drop significantly. Wishful thinking. The world is short of oil, and the appetite for it keeps growing at almost double the rate of new discoveries. There hasn’t been a year since 1984 when new finds outstripped consumption. Even if a recession slows down oil use in the U.S. and Europe, demand will still increase in China, India and the Middle East. Rapid industrialization in those regions will continue to drive up commodity prices.


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Wintergreen Fund Semi-annual Report

The last six months have been filled with volatile worldwide financial markets that have kept all investors on their toes. The apparent freefall of some securities is providing huge buying opportunities for value investors, but at the same time the daily market fluctuations are somewhat bewildering to investors as we navigate turbulent market conditions. Wintergreen Fund has been affected by this volatile market: the Fund’s performance for the first six months of 2008 was (11.86%) only slightly better than the Standard & Poor’s 500 Composite Index at (11.91%). The market has not discriminated between high-quality and low-quality companies; virtually every stock has declined. Generally, markets reward solid, stable companies, but this year even the best companies have suffered. The movement from easy credit to little or no available credit has restricted normal business operations and slowed down speculation. We believe companies with the following three characteristics are great long-term destinations for investor capital, even though the short-term quotations are less than favorable: solid businesses that generate cash; businesses with pricing power; and businesses with rational management who create value for their shareholders.

A favorite story of mine as a child was “The Little Engine That Could” by Watty Piper. In this story, a long train needed help to get over a large mountain. Various railroad engines that had the capacity to move the train refused to help. They said the job was too big and difficult for them, and the mountain was too steep. The engines that were designed to haul heavy freight would not attempt to move the huge train. Eventually a small engine that didn’t appear to have the necessary get-up-and-go was asked for assistance and that small engine agreed to try to help the large train. Using all of its power and repeating ‘I think I can, I think I can’, the small engine got the freight train up to the top of the mountain. As the train went down the tracks on the far side of the mountain to deliver toys and treats to the children who had been waiting, the little engine repeated the phrase, ‘I thought I could, I thought I could’.

In this global market that looks too big for anyone or anything to bring it back to a more stable environment, I think that solid analysis of companies and careful accumulation of underpriced stocks has the potential to yield great rewards. Like the little engine that put its head down and worked at its assignment, the pursuit of fundamental research coupled with an appreciation of the consistency of human behavior should identify the securities that I believe will survive and thrive in the future. Now is the time when some of these companies are on sale. Although no one knows precisely when, it is inevitable that these wild bargain prices will at some point in time come to a close. When that happens, and with the benefit of 20-20 hindsight, many investors will wish they had accumulated a bigger stake in these bargain companies.

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