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leucadia 2008 letter from chairman


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interesting comments about the various outside mangers and future outlook ....



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.


Fortress Leucadia

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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These guys are very candid and straightforward. Just the way I like top managers to be. What surprised me most is their shift to quality businesses comment near the end of the letter. That's so far not been their main investment style.


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!


The more I see comments from different value investors about their 2008 experience, the more I think that, when they'll look back to this period, what will have changed a little bit in their perspective is that yes, building an ark rely on the price paid, but also on the solidity of the business itself and if you don't realize that and you fool yourself, you might be in trouble when it will rains a lot. I mean, you have a truly good margin of safety if you paid cheap, but also if time is on your side regarding the intrinsic value of the business! When you think a company is worth more dead than alive, that's good if:


a) the business will be dead soon so the liquidation value proceeds will pay off


b) if the business remain alive for some time, at least it's assets value will not decrease so much over time that your margin of safety will be gone.


Now back to Leucadia:


Leucadia lost more than half of their book value in 2008! That's significant. Part of this problem is because their theme (emerging countries growth) is right (to me), but lumpy, and actually we're not on the ugly part of the cycle. They are overleveraged, but fortunately their debt maturities begin in a few years, so they have some time to pull the water out of the ship and fill the holes. Shareholders can hope to not be diluted, but I don't have a crystal ball so we'll see.


They seem to be quite motivated to the task and care about Leucadia. That's a good sign. I like them. Buying Leucadia is to buy assets that are managed by great investors. You want to have these assets at a good price, sit on your chair and then let some great value investors build them to increase their value over time. I think it will require some patience to see the sunny sky again with Leucadia, but I'm confident that patience will reward their shareholders.


I keep my shares (and then some).




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"Leucadia lost more than half of their book value in 2008"


This is a misleading statement. $1.8 billion of the loss was almost entirely a tax asset. If you exclude it in 2008 you must exclude it in every year before as well. You can't lose what you never had or what is usually in the footnotes. A more accurate statement would be that they lost 25% of their book value (850 million or 1-2.6b/3.45b) which is still scary but far less than the loss in the S&P 500.

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Leucadia has a small interest in a German investment LP called Heliad although it is possible that they might want to get rid of this stake (given their remarks regarding external managers of the company`s capital).


They are extremely cheap with 25 mln EUR in (net) cash on the company level and a 10 mln receivable from a portfolio sale. If you compare that with a market cap of 17 mln. EUR you get their investment portfolio for less than zero. I personally like their investments which are valued at 28 mln by the company.


The problem is corp gov, the company is an LP, their managers get 3,5% of the net worth of the company and 20% of the profits which seems far too high. It would be very smart to do a buyback which will probably be started in a few months (see their presentations and AGM-proposals) although that would be a negative for the managing partner (less fees).


Looks like a cigar butt with a possible near term catalyst. This thing is very very thinly traded but nevertheless it was also written up by VIC so you might take a look over there.

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