Berkshire For The Bourgeois (LUK)

By Stephen Brown | May 11, 2007 AAA

Investors have a plethora of reasons to invest directly in Berkshire Hathaway (NYSE: BRK.A, BRK.B). The No.1 reason, of course, is Warren Buffett's unrivaled investing acumen. Problem is, ponying up $109,000 for a class A share or even $3,600 for a class B share can be both prohibitive and daunting.

Fortunately, a worthwhile alternative exists - Leucadia National (NYSE: LUK), a company complimented in some circles as a petite version of Berkshire.

The Same But Different
Leucadia, like Berkshire, more closely resembles an investment company than an operating one. Its diversified holdings are engaged in a variety of businesses, including manufacturing, real estate, gambling, winery, timber, medical devises and banking.

The similarity even extends to cyberspace, where Leucadia's website (http://www.leucadia.com/) mimics Berkshire's (http://www.berkshirehathaway.com/). It's austere - plain black and white text - homepage allows easy access to sundry financial reports and very "Buffett-esque" annual shareholders' letters, which are filled with self-deprecation, humor and homilies.

The resemblance becomes more uncanny when the Berkshire of yesterday is compared with the Leucadia of today.

Back in the late 1970s and early 1980s, when Buffett was posting 45% average annual returns, Berkshire owned only a handful of companies and a small coterie of publicly traded stocks. Leucadia's equity portfolio of today comprises a mere eight issues: Eastman Chemical Co. (NYSE: EMN) being the largest, followed by International Assets Holdings (Nasdaq: IAAC) and the recently added Winn-Dixie Stores (Nasdaq: WINN).

Such concentration has enabled Leucadia exectuives Ian Cumming and Joseph Steinberg to post an average annual return of 20.8% over the past 29 years, slightly lower than Berkshire's 21.4%.

But since 1990, Leucadia has outperformed Berkshire, with the outperformance growing more pronounced as the time frames become more contemporary. For the past 10 years, Berkshire stock has appreciated at an average annual rate of 10.6% while Leucadia's has appreciated at a 12.7% average annual rate. Over the past five years, Leucadia's stock has appreciated at a 20.4% rate versus Berkshire's 9.5% average annual rate.

A Great Investor, But...
Buffett is inarguably the greatest living investor, but Berkshire tips the beams with a belt-busting $42 billion cash account, a $165 billion market cap, and a $66,000 per-share book value. As of December 31, 2006, Berkshire claimed ownership in 41 publicly traded companies, complemented by complete or supermajority ownership in 46 more. That's a lot of girth.

In comparison, Leucadia weighs in with $1.9 billion in cash, a $7.2 billion market cap, and a book value of $18 a share. It's smaller size means it's naturally more nimble, allowing it to access small-cap value stocks - which are proven to offer superior risk-adjusted returns over time. Such investments now fly under Berkshire's radar. To noticeably impact its bottom line, Berkshire is forced to buy in $5 billion- to $20-billion chunks.

Stock price is another Leucadia advantage. I like the fact management keeps the stock affordable with stock splits, so less capitalized investors can buy in round lots. (I also like the 25-cent annual dividend.)

I realize many investors applaud Berkshire for its stand against stock splits; I'm not one of them. To aggregate accurate value you need diversity of opinion, independence and decentralization. Berkshire's high stock price prevents wide diversity of opinion (many small investors are unable to directly invest, or even short) and many of the owners are institutions and long-time wealthy shareholders (who tend to congregate at the same conferences and seminars, which often reaffirm prevailing opinion).

Buffett is brilliant, to be sure, as his track record aptly proves, but investing is about the future, and Leucadia's future could arguably be more promising than Berkshire's.

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