Leucadia National - 2012 Letter to Shareholders

The end of an era at Leucadia National was announced late last year and made official earlier this year when shareholders voted in favor of a merger with Jefferies, a leading mid-sized investment bank.  Alas, the long-time duo at Leucadia's helm recently penned their final letter to shareholders.  Warren Buffett's annual letter is the gold standard in the corporate world, but Ian Cumming and Joseph Steinberg's co-written communication is not far behind.

This year's piece strives to do two things: make the case that the new incarnation of the company will be a success, and recap what's happened over the past three and a half decades.  Cumming and Steinberg met Rich Handler, Jefferies' CEO and the incoming chief executive of Leucadia, more than 25 years ago, and have been doing business with him ever since.  Jefferies returned an exemplary 22% per year for the 23 years ending in 2012.  Importantly, not only did Jefferies survive the recent financial crisis, it flourished, using the upheaval as an opportunity to almost triple revenues between 2008 and 2011.  Put simply, Jefferies is in sure hands, and it’s likely that Leucadia is too.

Rather than merely discussing the year that was, though, the CEO and President recap their 35-year run, which investors would be wise to read.  Starting at a small firm, ironically named Carl Marks, they navigated booms and busts, invested in a wide range of businesses, suffered some failures and hard luck, enjoyed some great good fortune and came through it all far ahead of where they were at the beginning.

Leucadia's future will almost certainly not be as dazzling as its past.  There's an unfortunate Catch-22 in investing: every year of above average gains makes it more difficult to outperform the market in the future, because increased size shrinks the number of potential investments.  In 1979, Leucadia's book value was $22 million; by the end of 2012, it had grown to $6.8 billion (and now stands at $9.8 billion).  Cumming and Steinberg note that good investments have become harder to find these past few years, but blame increased competition from hedge funds and private equity, rather than the constraints of being an elephant.

Still, there's a good chance that Leucadia 2.0 will be able to outperform the market for years to come, though by a narrower margin.  Handler and number-two Brian Friedman will likely continue their very fine work at Jefferies, and Leucadia's handful of long-serving senior executives, minus only the retired Ian Cumming, remain on board.  It's worth noting that Leucadia has successfully navigated the pitfalls of global investing, rather than focusing only on the US.  This brings many risks, but also greatly increases the pool of possible investments, which should somewhat counteract the "Elephants-can't-dance" problem.  Now may not be a bad time to buy, either, since Leucadia's share price is trading at less than book value.

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