May 18, 2005  Selective notes from Sequoia meeting on May 13 and Leucadia on May 17, 2005


The following are hardly complete transcripts of the meetings. These are merely sections or quotes, that I found interesting.
Sequoia Fund (SEQUX)

1. “Meeting is off the record. The intent is honesty and to say what is on our mind.”

2. Recommended Charlie Munger’s book, “Poor Charlies Almanack”

3. You don’t have to be making an investment all the time. You don’t always have to do something. Prudence might tell you to sit and wait.

4. Compared Walmart and Costco. They described that they like both companies. They mentioned that Walmart is more shareholder friendly. They described that Walmart is managed in a way that they look at shareholder return. I checked insider ownership of both companies. Walmart is over 40% owned by insiders, whereas Costco is owned less than 1% by insiders.

Leucadia National Corporation (LUK)

As I started compiling these notes, I received a telephone call from Albert Meyer of . Albert is negative on Leucadia. I really know very little about the company, other than they are widely respected in the investment community. There appears to be a cult following on the words and principals of Leucadia’s President and Chairman. Joseph S. Steinberg is the President, and Ian M. Cumming is the Chairman. I thoroughly enjoy my readings of Al Meyer, and was intrigued that he felt LUK ( 36.84) was overvalued. You would have to read his lengthy and proprietary research to find all of his reasons. Here is an article which Al linked to me after our conversation.

The article linked above discusses White Mountain ( a LUK holding) and Olympus Re. I am not certain who it is, but either Mr. Steinberg or Mr. Cumming is a director of Olympus Re (see LUK 2004 annual report page 7).

The following are notes from the meeting, and at times I will put my view or perhaps Al’s comments as I discussed LUK with him this morning.

1. LUK mentioned that investing is getting back to basics. Like so many of the value investors we mention on this site, as well as our own research, there is a fundamental thesis on interpreting and dissecting financial statements.

2. This next session was hilarious. Mr. Steinberg was asked about MCI/Worldcom. He said, ” crappy company, bad management and insane directors”. He said, “Verizon has more cash flow than they do sense.”

3. Mission of the company is to increase shareholder net worth and to create wealth.

4. Mr. Cumming mentioned that hedge fund money is absurd. Mr. Steinberg mentioned that companies are being flipped by hedge funds, and there is no economic value being created. He indicated that companies that aren’t passing their value tests, are still selling for crazy prices. The hedge funds are buying from hedge funds, selling to hedge funds, etc, etc. It sounds like a bubble and the Greater Fool Theory. Mr. Cumming thinks this will all stop when sellers of these companies are no longer there.

5. LUK was questioned as to why there have been no share repurchases over the last 3 years. Mr. Cumming mentioned, “one of us thinks LUK is over-valued. Later in the meeting, Mr. Cumming went onto discuss how he sold shares to fund his sons business. I looked at insider activity and noticed that Mr. Steinberg sold $19M in December 2004, whereas Mr. Cumming sold $49.5M in December 2004.

6. I asked about expected dilution via stock options. I asked if one could ever interpret that the stock options issued being a form of performance based reward. I asked if one could use an analogy of a hedge fund, which charges 2% management, and 20% of profits (AKA 2/20)? There response was that they certainly do not consider the option awards to be a shareholder unfriendly situation. They mentioned that the ultimate cost was immaterial. They mentioned that the dilution is less than 1% every two years.

7. I asked how one would value LUK. I mentioned that I would like both of their opinions, since Mr. Cumming already mentioned that one of them feels that LUK is considered to be overvalued. I asked if they had a favorite metric for valuing the company. They did not give a clear answer, probably because there probably really is no clear answer. So much of investing is subjective and interpretive. With that said, Mr. Steinberg gave what I thought at the time was an excellent answer. He said the price of LUK should be at “book value plus a multiple” He mentioned to make sure you adjust for the Wiltel Net Operating Loss. I asked him to define “multiple” and he would not define it (and I fully respect that answer).

I mentioned this to Al Meyer. Please keep in mind, that my understanding of LUK is very limited. Al mentioned that the investments of LUK is marked to market. He mentioned that some of the real estate is not marked to market, but that many of the investments, such as White Mountain are marked to market. Hence, book value would approximate carrying value, and good or bad, book value would always be achieved. With that said, I have not verified what Al mentioned. I would need to really research this. Al also mentioned that LUK has previously hinted that there could be an asset impairment charge on Wiltel in the near future.

I have not verified any of the above. Mr. Meyer did bring to my attention that Wiltel is not marked to market, as it is not a public company.

8. LUK mentioned that the tax carryover from Wiltel would be intact even if they sold off Wintel. After the meeting, I asked Jeff Storey, CEO of Wintel if this was an accurate statement. Both Mr. Storey and his legal team who accompanied him, agreed with the comment. I mentioned this to Al Meyer. Al mentioned to refer to page 30 of his March 21, 2005 report on LUK. Mr. Meyer questions the value of the NOL. For one, he questions if the NOL will ever be able to offset the income generated. He also questions the future use of the NOL based on tax rules. He sites a Barron’s article from February 14, 2005. Basically, the writer of the article felt (according to Mr. Meyer) that the most that could ever be used in annual offset of Net Income, could be $43M annually.

9. Mr. Steinberg mentioned the fixed income market. He mentioned that no one is adjusting for risks. He said, “credit swaps are a joke.”

As a side note, my gut of LUK is one of caring management and one that does look to protect and enhance shareholder value. Mr. Meyer, whom I respect, has a different view. Mr. Meyer has thoroughly researched LUK, whereas my research was skimming the 10K, recent 10Q, all during the meeting. In other words, my knowledge of LUK is minimal at best. I hope to look closer at the company as time goes on. LUK is currently trading in the $35 range, of course, if LUK becomes a teenager (without a split), my research will become more vital.