Leucadia: Why Do I Own This Dog?

| About: Leucadia National (LUK)

There's little reason for me to own Leucadia (NYSE:LUK) stock given these metrics. It's hardly a cheap cash machine at today's prices. So why am I still long?

A few years back, Fortune magazine referred to Leucadia National as a mini-Berkshire. Fortune added that, like Berkshire's Buffet and Munger, LUK's top two execs, Ian Cumming and Joe Steinberg, seek uncommon values, write "folsky shareholder letters" and own meaningful amounts of the company. Their website is as basic and stripped down as you can imagine. In the 2006 Letters from the Chairman and President (.pdf), they list five "Rules of the Road" guiding their investment decisions. Of those five, two of them are "don't overpay."

Cumming and Steinberg are extraordinarily versatile investors, and have succeeded in real estate, medical devices, plastics, wineries, finance, telecom, energy, insurance and travel. They'll buy when everyone else hates a business or a sector. Their track record is tremendous, as Leucadia's stock compounded from 1979-2006 at 24.9%. When they took LUK over, it had negative equity of $7.6 million. Today, equity is around $4 billion.

None of this is to brag about my stockpicking (did I mention PTSI and the 35% loss I'm wearing?) or to pump up my position. I also have a couple "rules of the road" which are (in no particular order):

1) Numbers don't tell the whole story
2) Management matters

If you look at a company today and it's firing on all cylinders, the price probably reflects it. Nothing against AAPL or its tremendous product line, but what are the odds its prospects aren't fully priced in?

As to the importance of management, there are a number of conventional ways to gauge incentives and effectiveness (ROA, turns, ownership, pay structure). Really digging into the quality of this or that manager is hard. For a Board of Directors, hiring a celebrity CEO can make for a nice pop in the stock, but it's the days, weeks, years after that moment that count. I like to know their track record and how clever they were in configuring a pay package. I get nervous if I can't easily grasp their pay package in one reading.

Oh, and don't overpay.

Disclosure: Author is long LUK