It is axiomatic to many people that Berkshire Hathaway/Buffett is the gold standard of investing that should be emulated by anyone who considers themselves an investor. The Buffett style of investment in its current form is not a strategy I would follow because I don’t think the risk/reward is sufficiently evident due to my limited skill set. I’ve written articles on companies like Owens & Minor, Walmart, Immucor, and Bank of Internet that I think fall into a vague characterization of the modern Buffett investment style. Note that I never took a position in any of those stocks due to a mix of price and not being able to use my competitive advantage as a miniscule investor.
When Buffett talks about hiring successors to manage the investment portfolio, he has repeatedly mentioned that he isn’t interested in teaching a new dog old tricks. Identifying a company with a sustainable competitive advantage that is obscured by transient negative events is not easy. There are quantitative ways to measure a competitive advantage such as a high ROIC over a long period of time, but this is backwards looking and only part of the picture. The key to successfully investing in this modern Buffett style is to master the qualitative aspect that the competitive advantage will still exist going forward. This requires a mix of industry knowledge, a strong grasp of business history, and being able to conceive of unknown unknowns or lack there of (soda and chewing gum). This is hard in terms of intellectual capacity, but I think it gives a lot of people the psychological comfort even if they aren’t good at it. It is much easier to hold onto Coke in a bear market than most stocks, or at least this idea makes intuitive sense to me. It also gives people comfort to hold a stock with Buffett's seal of approval. Of course, the easiest thing to do would be to purchase any stock that he discloses a position in, but this is increasingly harder as Buffett shies away from buying parts of public companies and he lowers his desired return on stock market purchases.
To switch gears, Leucadia is a company that occasionally gets touted as a mini-Berkshire, which I think is a shallow comparison, but is worth paying attention to because they are equally skilled investors. The investment styles both fall under the ambiguous and large umbrella of value investing, but diverge markedly in execution. Leucadia invests in a lot of private deals that require a lot of patience, which is similar to some of what Berkshire has done. The difference is that Leucadia very actively manages these investments, going through the various paperwork and processes for things such as mines, gasification projects, real estate developments, and casinos. While they have had duds, most of their investments end up generating huge returns. The returns would not have existed if Leucadia didn’t play an active role in generating them.
When you look at the real estate section of Leucadia's annual letter to get an idea of their style or their investment portfolio, you see that they buy whatever is ugly and cheap at the time, and then wait. In the case of real estate they are patient and use no debt, which has been a recipe for success. They have invested in a range of public companies over the years ranging from insurance to semiconductors and software. They’ve taken a long term view on US energy policy and are investing in gasification plants to turn fossil fuels into cleaner forms of fuel. They purchased a copper mine in its greenfield stage and brought it all the way into production when its previous owner didn’t want to deal with the hassle of various government approvals and permits. In the past and in the future, the only way to invest alongside Leucadia in these projects is to invest in Leucadia.
I think the Lecuadia flavored value investing strategy is a lot more attractive than Berkshire’s current strategy because it can generate greater returns. The problem is that as a small investor, Lecuadia’s strategy is not entirely possible to replicate due to their application of managerial competence. The philosophy is worth paying attention to though, even though it is not exactly unique (excluding the fact that it has been successfully adhered to over a long period of time). They want cheap and beaten down stocks/companies/situations, but safe enough that they can simply wait out the bad times. I don’t think this is limited to the rare high quality net-net stock, but those do present the most obvious example of this strategy. I mistakenly thought that Seahawk Drilling was a stock that fell into this category. Changes in leadership at distressed companies, such as Supervalu, can indicate a turnaround of a distressed asset with better management, although I'd venture Leucadia would take exception to the debt load.
At the same time, a buy and hold Buffett style of investing can work well for someone who doesn’t have the psychological wherewithal to confront the volatility of the Leucadia approach. Instead of lacking the psychological mettle to invest in the Coke’s and Walmart’s of the world, most people lack the intellectual capacity to identify and invest in the Coke’s and Walmart’s at a price that will result in strong compounded returns and minimal downside risk. It's increasingly difficult to invest alongside Buffett at similar prices in public companies because he is investing in fewer of these situations.
The irony of Berkshire vs. Lecuadia is that the current Berkshire investment strategy is not easy to replicate with certainty. The belief that one can do so is predicated on the assumption that people attempting to mirror the current Berkshire approach are actually mirroring it. The reality is that most people are just pretending to do so as a psychological cushion to justify a poor margin of safety from either a lack of meaningful evidence or laziness to identify truly undervalued securities (I always feel like a sucker when I click on links to article with titles that include Berkshire and Buffett in it and they turn out to be about overpriced and shitty companies, but I think this indicative of a lot of people's attempts to mirror Buffett's approach even if it is hyperbolic). From an intellectual and epistemological standpoint, the Leucadia approach is much easier to replicate, but one must successfully reverse engineer and understand their process. Their process is easier to replicate than Buffett's with situations in which neither are involved, so it is worth studying for those looking spend a lot of time on their stock selection. It is not unique, but it is another perspective a deep value margin of safety type of investment framework, which I believe is easy to replicate assuming you have the psychological mettle. Leucadia's most recent shareholder letter is out and they have letters going back a few years on their website. The suggestion that they are worth reading is not exactly novel, but it is worth repeating.
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