I don’t think I’ve ever written a word about Charles Mizrahi, but he’s been around for a while as a respected value stock picker with at least one newsletter under his name … and he’s got a teaser ad out now that’s getting the attention of Gumshoe readers, so I thought it an opportune time to have a look.
Mizrahi puts out the Hidden Values Alert, which has been covered with kind words by Hulbert from time to time and which reportedly follows Warren Buffett’s wisdom almost to the letter, but this pitch is for his Inevitable Wealth Portfolio, which I haven’t ever heard of before.
Sounds like a similar advisory, though perhaps not focused on smaller companies as Hidden Values is … the same basic strategy of buying value-priced “bulletproof” stocks seems to be the order of the day. Oddly enough, this letter is far more expensive than Hidden Values Alert (Hidden Values is about $200/year, Inevitable Wealth is more like $200/month), and has done significantly worse over the last year. (Hidden Values Alert has been tracked for five years and has beaten the market with less risk, Inevitable Wealth has been tracked for just a year and has underperformed the market with more risk, all according to Hulbert — not a fair comparison yet, but an interesting anomaly.)
But really, it’s tough to argue with a patient value investing strategy — at least for me, since it’s similar to what I try to do with my own money. Not that it will outperform the market all the time, but buying great companies at good prices and letting them compound their earnings (or maybe even their dividends) has certainly been a safe and effective strategy for decades. With the possible exception of this most recent decade, when it seems that nothing was “safe” and little was “effective” (present company excepted, of course).
And if you’re going to come out and tease that you’ve found the “next Berkshire Hathaway,” well, I’m going to stand up and pay attention.
It’s an old strategy, of course — newsletters have been promising to find the next Warren Buffett for as long as there have been teaser ads. In fact, one of the very first teasers covered here at Stock Gumshoe, way back in the glory days of 2007, was for Louis Navellier, of all people, promising that he’d found the company that might be Berkshire’s successor (that one was for Brookfield Asset Management, a copmany that I also like but that has been beaten by both Berkshire Hathaway and the S&P 500 in the interim). Other “next Berkshires” have been touted and teased through the years by many pundits, including Markel, Loews, Biglari Holdings, Eddie Lampert’s Sears and several others.
Why? Well, because getting in early with Warren Buffett in the 1960s, when he was a brand new, unproven investment manager, made a bunch of folks really, really rich. And they were small-time folks, just like you and I and our neighbors, so the romance of finding that fabulous investors is incredibly compelling, probably we all secretly want to lock eyes with the next wunderkind CEO, hop on his coattails, and ride to glory on that one decision.
So that’s the most compelling part of this ad from Mizrahi — the stories of a few ordinary Omaha families who put a couple thousand dollars in Buffett’s care 50+ years ago and now have $100 million+ family fortunes. Or, if you’re motivated more by fear than by greed, the story of Don Keogh, who has certainly made something impressive of himself but who famously decided not to invest his young family’s college funds with Buffett and regrets it to this day. (Of course, no one ever went back and checked on the record of the other thousands of startup investment partnerships that were active at the time, or figured out how — other than luck and proximity — these people chose Buffett over the other folks, long since forgotten by time and poor performance, who would have been happy to manage their money).
So that image — turning $5,000 into $100 million — gets you all revved up, as planned, with a lust to buy the next Berkshire Hathaway … who is it?
Well, Mizrahi’s ad gives us a few clues as to who he thinks it will be:
“Introducing… The next Berkshire Hathaway.
“I’m about to reveal the details of a company that looks remarkably similar to what Berkshire Hathaway looked like 40 years ago when they were making huge double digit returns…
“It’s kept pace with Berkshire’s performance over the last three decades … and over the last ten years, it’s actually been outperforming Berkshire by a wide margin.
“In fact, the ‘Next Berkshire Hathaway’ is so impressive that the company actually has a number of joint venture investments with Berkshire Hathaway and counts Warren Buffett as one of its fans.
“And keep in mind … Warren Buffett does very few joint ventures with other companies.
“So this great company actually comes with Warren Buffett’s very own Seal of Approval.”
Oooh, Buffett’s Seal of Approval! I gotta get me one of those. Wonder if it can balance a ball on its nose?
And we get some more clues to feed into the Thinkolator:
“It’s a company with a proven, history of success over more than three decades still run by the same two men that started the company back in the late 1970s. And its investment strategy has held up – and made investors money – in both good times and bad. (I know I don’t need to tell you how important that is at this very moment.)
- This company focuses on buying well-managed companies…
- They buy them below their intrinsic value…
- They diversify their holdings…
- The stock is trading for just a little more than three times earnings…making it an absolute steal. In fact, the stock price is right now trading at book value.”
A bit mushy, eh? Don’t worry, Mizrahi throws us a few more clues … such as that it has $1.1 billion in cash on the balance sheet, and that the two principals have their “skin in the game” with big insider ownership.
And we’re told that this company’s much smaller size (4% of Berkshire Hathaway’s $178 billion market cap) means they have much more opportunity to compound wealth — and yes, it’s true that even Warren Buffett has noted that the huge size of his investment portfolio limits his options … he can’t, for example, buy and undervalued $500 million company and expect it to move the needle of his overall performance.
So that’s enough to fire up the Thinkolator, which is still a bit grouchy after sitting under a snow-covered tarp for a few days … so let me ladle in those clues, let it churn for a few moments, and yes, there we have it! This is … Leucadia National Corp. (LUK).
Leucadia is in some ways modeled on Berkshire Hathaway, from their big focus on the insurance business to their history in the textile industry to their extremely bare-bones website (a site that, like Berkshire’s, appears to be modeled on a middle school project from 1999). Leucadia’s founders, Ian Cumming and Joseph Steinberg, are a lot more media-averse than Buffett, though, and don’t do much to get attention the way he does (or perhaps it’s just that no one asks them, I dunno).
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The founders did get the current iteration of Leucadia rolling in the late 1970s, though the company had been around for decades before that — there’s an interesting history of the firm here if you’re interested. They do have a large stake in the firm, roughly 20% between them, though both have also done some insider selling this year (at prices about $10 higher than the shares are now, for whatever that’s worth).
Incidentally, there’s also a big value investor holding the shares, Bruce Berkowitz’s Fairholme funds — and despite the beating his funds have taken lately, he does make value investors hearts go pitter-pat with his concentrated and sometimes contrarian calls … and he’s had some spectacular performance in the past.
And yes, Leucadia has had at least one formal joint venture with Berkshire Hathaway, a commercial lender that they cofounded called Berkadia — Berkadia still exists, and I presume it’s probably still owned by the founders, it’s not big enough to be a Berkshire line-item but is fairly substantial for Leucadia. I don’t know if there’s a “seal of approval” from Buffett, but Leucadia is certainly the kind of company he admires … if only because they admire him.
It’s worth noting that Leucadia is far more risk-hungry and concentrated than Berkshire Hathaway is these days — the stock is taking a bit of a hit today because of their large holding in Jefferies (JEF) stock, they own about 27% of that investment banking group and recently increased the position, and JEF is being hurt by worries about SEC probes and Euro exposure (the company has tried to downplay those worries and the stock recovered much of the early morning panic selling today, I have no idea what’s on Jefferies’ books but the stock certainly — like many investment bankers — looks cheap now).
And that’s not their only concentrated holding — Leucadia also owns a big chunk (about a quarter of the shares, according to their statement of more than 10 million direct shares held) of Mueller Industries (MLI), the pipe and plumbing manufacturer, and they’ve been adding to that position recently, too.
LUK does trade at a discount to book value at the moment, though with huge concentrated positions that book value is going to fluctuate a lot — book value is reported quarterly, but JEF, to name one of their big holdings, is down substantially since the end of June. LUK next reports … tomorrow, so that book value number is as stale as you can possibly make it. Likewise, much of their earnings comes from sales of assets or other big transactions, so there’s really no predictable earnings-based valuation you can assign to the shares — much like with Berkshire Hathaway, the PE is fairly meaningless so don’t get too excited about the low number for trailing PE (and there isn’t a forecast PE, the company is tight enough with info and unforecast-able that it discourages analysts).
I have always kind of liked Leucadia, but if memory serves I’ve never felt comfortable enough with my valuation to buy the shares — I do know for sure that I don’t own them now and won’t buy them for at least three days per my trading rules, but pending the numbers they release tomorrow the valuation does look pretty compelling and the Jefferies stake could work out to be a huge winner if they’re right about the company not being in a meaningful crisis. I’ll admit to being tempted this time around, though this is the first glance I’ve taken at LUK in many months. If you want a “buy” argument for LUK shares, there was a decent one over at Investopedia a couple weeks ago.
I might also note that I bought additional Berkshire shares a bit over a month ago, as I told the Irregulars at the time, and I personally think that buying Berkshire at close to book value is a far lower-risk “no brainer” than buying LUK. Of course, LUK could also double far more easily than Berkshire if things break their way.
Oh, and if this is going to be the “next Berkshire Hathaway” it will have to be because the company is relatively smaller ($6 billion market cap) and nimbler, not because you’re catching it’s founding investors early in the game — both Ian Cumming and Joseph Steinberg are far closer to retirement age than Warren Buffett was in the 1960s (they’re now in their late-60s/early 70s, I think), so they’re close to having the same kind of succession concerns as Berkshire Hathaway (and, given their secretive nature and heavily concentrated holdings, perhaps bigger succession concerns).
So is this the “next Berkshire?” Prefer a different one in that long list of pretenders to the throne? Let us know with a comment below.
And if you’ve ever tried either of Mizrahi’s newsletters your fellow investors would love to know what you thought — you can review Hidden Values Alert here or Inevitable Wealth Portfolio here if you’ve ever subscribed. Thank you!
Full disclosure: Your friendly neighborhood Gumshoe owns shares of Berkshire Hathaway and Markel. I won’t trade any stock mentioned above for at least three days.