These days there seems to be some ambiguity about where the market is headed. Although many signs point upward, some major ones point south - way south. What can investors do to protect their investments in a down swing? The solution may be simpler than you think.
Whether you are a beginning investor, or a seasoned investing veteran, finding a safe place to invest your money with decent returns can be tough, especially if the market outlook isn't great.
Holding A Solution
One easy solution is to park your money in a mutual or hedge fund, but these funds often have loads and MERs. Luckily, there is an even easier (and cheaper) alternative to these types of funds... holding companies. These are companies listed on public exchanges that aim to generate returns by investing in other companies in the hope of steady cash flows from operations and/or capital gains.
Not only do holding companies behave just like diversified funds, you get mutual fund-like management and diversification benefits all without any loads and MERs.
Holding companies have the flexibility to invest in just about any company they choose without experiencing the regulatory scrutiny faced by funds. Also, they don't charge upfront fees. A holding company may also take an active role in managing its subsidiaries by placing internal individuals in management roles or a subsidiary's board. This helps to maximize synergies between the holding company and subsidiaries.
Although purchasing stock in a holding company is a great way to get professional money management on the cheap, not all of them are created equal.
Depending on the investing style of management, and the type of investments holding companies make, these stocks can differ substantially. A few of my favorite holding companies include Berkshire Hathaway Inc. (NYSE: BRK.A), Apollo Investment Corp. (Nasdaq: AINV), and Leucadia National Corp. (NYSE: LUK).
Berkshire Hathaway - I'm sure Berkshire Hathaway is on most investor's "top-10" lists, and for good reason. The company mainly invests in insurance and non-cyclical consumer goods. Under the guidance of Warren Buffett and Charlie Munger, it has had impressive returns using a value investing philosophy by purchasing perceived under valued stocks. Since the beginning of 2003, BRK stock has returned more then 78%, and about 20% on a yearly basis since Buffett took over as CEO more then 30 years ago.
Apollo Investments - This company is a relatively new player on the seen, and unlike Berkshire it doesn't focus on equity ownership. The majority of AINV's investments are in debt securities, primarily in the subordinated and senior loans markets. Only about 13% of its capital allocated to equity. Management's intent is to provide holders of AINV with a steady stream of cash flow from its debt portfolio and capital appreciation. Since AINV first IPO'd in the middle of 2004, it has returned over 50% in capital appreciation alone. Add to that the steady increase in quarterly dividends, and AINV has proved to be winner thus far.
Leucadia National - Finally, there is Leucadia National, which also employs a value investing strategy similar to Berkshire. LUK primarily owns private companies operating in the manufacturing, gaming, real estate and medical development industries. Some refer to Leucadia as the next Berkshire Hathaway, alluding to management's investing style the potential future returns from holding onto LUK stock. (For another take on this holding company, see Stephen Brown's Berkshire For The Bourgeois.)
Stay Up When the Market is Down
By investing in any one of these companies, you get the benefits of professional money management, with the potential returns of holding common stock. But, professional money management becomes even more important in a down market.
During the tech-bubble of the '90s, both Berkshire and Leucadia were able to create value.
At the height of the bubble in the early stages of 2000 to about three years later, the Nasdaq lost over 74%, and the DJIA lost more then 22% of their value. However, over the same period, both BRK.A and LUK were able to return more then 34% and 48% respectively.
Because holding companies, even in a down market, are capable of producing long run returns, these are investment possibilities that people should seriously consider. Without the upfront fees (less brokerage fees of course), and virtually unrestricted professional management, holding companies make a very attractive investment.
And The Winner is...
Out of these three holding companies, my top pick is Leucadia. Under the guidance of Ian Cumming and Joseph Steinberg, LUK has shown incredible returns. Since the beginning of 2003, LUK has returned over 180%, and grown it's NAV per share by almost 6% over the TTM. Even further, revenues (restated) are up about 25% during 2006, 82% in 2005, and 56% in 2004. With this incredible top line growth, the bottom line is sure to come around.
With strong historical performance, solid management, and good future prospects, I think LUK is a long-term winner. That said, I would wait for a dip below $33 before you fill a buy order. With a current P/E of about 64-times and PSR of over 10-times, this stock is currently a little pricey.
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