Leucadia National Corporation

Leucadia was run by two high-quality capital allocators, known for their ability to find value-oriented investment opportunities in distressed companies. Ian Cumming and Joseph Steinberg were able to compound the equity of Leucadia during a period of over 20 years, at rate of around 20% per annum. Due to the nature of the corporate strategy, earnings are very lumpy from year-to-year and assets change very rapidly.

Preferred investment attributes that the Leucadia management looks for:

Letters to Shareholders from Leucadia Annual Reports

Letter 2004
“Our investment philosophy is bimodal, either we invest in high returning opportunities or have the money in the bank or under our mattresses.

In the past, we have described what we do as buying assets that are out of favor and, therefore, cheap or disheveled in one way or another which makes them inexpensive. We then work very hard at improving their performance until they are the most efficient and productive in their market segment. But for now there are too many indiscriminant investors competing for the same opportunities.”

[…]

“We plan to continue to search for undervalued or out-of-favor assets that we can buy and improve. The pickings are slim, but our enthusiasm is unabated. If we run out of ideas or steam we will let you know and develop a plan to return money to our shareholders.”

2006 Letter
“This anemic return is the result of what we do. Investing for the long-term and fixing troubled companies results in lumpy outcomes. Over the long-term, however, we are pleased with the results and happy to have participated in the walth created for our shareholders.”

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 an 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!”

2008 Letter
“Our approach to real estate is strictly tactical, we pay cash and expect high returns and usually get them. In the current recession we have mothballed almost everything. When the sun returns and drives out the gloom we will proceed. Over the past several years we have invested our excess cash with various outside managers with a view towards receiving a good return and hoping to uncover investment opportunities. We were disappointed with the results. The returns were not good and we did not uncover
investment opportunities. With few exceptions, our fund investments were not immune to the market upheaval experienced in 2008, but the overall return since inception was minus .5%. It could have been worse. For the most part, we do not intend to continue this activity.”

[…]

“Most of our assets are tied to a recovery in the world’s economy and when the world’s economy gets back on track we expect our assets will rise in value and price. In the meantime we continue to pay our overhead costs and interest on our long term debt, the earliest maturity of which is in 2013. Fortunately banks are not breathing down our necks looking for us to repay debt. We have time on our side for the world to right itself, but it will not be easy. In the current recessionary environment, earnings from our operating businesses and investments do not presently cover our overhead and interest. We have cash, liquid investments and securities and other assets that we expect to turn into cash that should carry us through these difficult times. We are energetically cutting costs. We have talented managers and employees working hard every day. We will all do our best.
Out of prudence we have a pessimistic view as to when this recession will end. To think otherwise would be to gamble about the beginnings of good times whereas by imagining a bleak future we will most likely survive for the good times to arrive. “Fortress Leucadia” is a draconian look into the future and a basis for defensive planning. It assumes we will not make any more investments, continue watching our expenses, keep only assets that are promising and slowly turn everything into cash which will be used first to retire or pay down debt, while always maintaining at least $500 million in cash or liquid assets. That is the theory. The reality is we will continue to look for companies to buy, but only consider companies that earn money, have a bright future and are durable! In these troubled times there are sure to be good opportunities for investment and we will remain on the hunt. We can recognize a good deal when we see one and will strive to execute. We intend to resist what we consider “financial bets.””

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