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Charlie Tian

Leucadia National: the Next Berkshire Hathaway?

May 03, 2007 | About:

As value investors and Buffett followers, you may have regretted that you did not buy Berkshire stock when you first heard about it. Above all, it is up about 13 times since 1990, 380 times since 1980. Berkshire is still considered undervalued among value communities. No question, Berkshire is always a good investment. However, with Berkshire ’s size and too much money in hands, even Warren Buffett is having difficulties finding the investments that have material impact on his returns.

Many of us may not be old enough to buy Berkshire when it was small anyways. Value investors do not try to buy the next Wal-Mart or Microsoft. But an interesting question to value investors: can we buy the next Berkshire Hathaway?

Finding the next Berkshire Hathaway ought to be easier than finding the next Microsoft. We do not need to predict the technology trends; we should only look at the companies that already have a long term record with value investing philosophies.

Following this line, we turn to Leucadia National (LUK). Leucadia has already been called Miniature Berkshire among investing communities. It has been managed by Chairman Ian Cumming and President Joseph Steinberg since the company was founded 30 years ago. By the way, Ian Cumming is in GuruFocus List of Gurus. This team has achieved an average return on equity 20.8% during the past 29 years, which is slightly lower than Berkshire ’s 21.4%. If you visit the website of Leucadia (http://www.leucadia.com/), you will like what you see; it is even cheaper than that of Berkshire Hathaway (http://www.berkshirehathaway.com/).

Leucadia stocks have outperformed Berkshire during the past 3, 5, 10 and 20 years as well. If you are old enough and had invested $1000 in Leucadia when it went public in 1978, those shares would worth $2.8 million without counting dividends, averaging 33% a year. With this humongous return, Leucadia has a market cap of $6.7 billion, which puts it into mid cap category.

Like Berkshire Hathaway, Leucadia National also runs an equity portfolio. As of Dec. 31, 2006 , the portfolio consists of 8 stocks. The largest holding is Eastman Chemical Co. (EMN), which accounts for 83% of portfolio.

How did Leucadia achieve this giant return? This is what Ian Cumming and Joseph Steinberg wrote in their shareholder letters: “We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe are there. From time to time, we sell parts of these operations when prices available in the market reach what we believe to be advantageous levels.”

Leucadia ‘s “Rules of the Road”:

1. Don’t overpay, no matter what the madding crowd is up to.

2. Buy companies that make products and services that people need and want and provide them as cheaply as possible with consistently high quality. Lower cost and higher quality is a relentless and never-ending task.

3. Earnings sheltered by NOLs are more valuable than earnings that are taxed!

4. Compensate employees for performance and expect hard work and honesty in return.

5. Don’t overpay!

Don’t overpay! Does that sound familiar?

Disclosure: Charlie Tian owns LUK in his portfolio.

About the author:

Charlie Tian
Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.5/5 (34 votes)


Evan - 12 years ago    Report SPAM
Anyone know when the next Q-report is coming out?
Gurufocus premium member - 12 years ago
It was May 9 in 2006, should be quite close.

Joyb - 11 years ago    Report SPAM
i'm just trying to learn about all this stuff! thanks
Buffetteer17 premium member - 11 years ago
The next Berkshire Hathaway is...

The next Microsoft is...

The next Walmart is...

Berkshire Hathaway



Danielw - 11 years ago    Report SPAM

I own LEAPS on Brookfield Asset Management and believe that it is the closest thing to putting your money in the hands of a great capital allocator (at a young age) who is focused on buidling up a core of long-life, cash-flow producing assets that will get more and more valuable over time.

For me, this is 3 times a good bet because I'm bullish on the industries they're focused on (power, infrastructure, and property), I like the way they're making money in them from a bottoms up perspective, and I have a great deal of respect for the management team. And of course the price is cheap, as anything financial-related has been sold off.

Barren Wuffett
Barren Wuffett - 11 years ago    Report SPAM
I own LUK and BAM within the self-managed portion of my 401k plan. These are both great long-term holdings with excellent management and consistent long-term performance. And they fit well in a 401k.

I am really keeping my eye on LUK in 2008, mostly for it's holdings in Fortescue Metals, a huge iron ore upstart in Australia. I think iron ore is going to be very interesting commodity in the near future...........
AAbsolute - 11 years ago    Report SPAM
Ian and Joe seem to finally be at a loss for a clear view of the future. It sounds like they are ready to retire when you read closely. I'm a fan of both of them and learned not to tread to closely as they sued the heck out of me a few years back when I was earning money in their back yard. They taught me a whole bunch and I admire them and hope to be 10% as successful. Happy retirement fella's. JC
Evan - 11 years ago    Report SPAM
Why do you say they are close to retirement?

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