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Thursday, May 24, 2012

Inventory Creation

After a weekend of great weather and great baseball I sat down at the computer this morning and began to check on the world. I had a laugh out loud moment when I read the early headlines. It seems stock futures were up this morning because G8 leaders said they want to keep Greece in the Euro. To me this is like saying you want Uncle Harold to stay at Sunday dinner after he’s borrowed money from everyone and vomited your 20 year old scotch into the mashed potatoes. The other bullish news is that global governments want to favor growth over austerity. I think that’s very nice of them but question if that is practical. I favor an Orioles-Cubs World Series every year too but we do not always get what we want.

The stock market has been in a steady downtrend these past few weeks and we have approached the 10% level that indicates the possibility of an inventory creation event in progress. My approach to the markets, and especially my time frame, allow me the comfort of viewing market declines a positive  event. Although my account may experience quotational losses for a period of time I view these time periods a chance to buy more assets and decent businesses at a cheap price.

As long as I am confident that what I own is safe and cheap I don’t really care too much what the market does over the 5 to ten years I intend to own them. If things get too richly priced I will sell them. If they decline and become cheap, I will buy them. In the interim I read a lot of books, watch a lot of baseball and search for other stocks that fit my criteria or offer a longshot opportunity with a high risk reward. Oddly enough this approach of buying low and selling high seems to work as well, if not better, than most of the complex trading strategies I have run across over the years.

When I checked for new inventory this morning I ran one of my basic market decline screens. I looked for stocks that had dropped more than the market in the past few months, were in the S&P 500 and had fallen below tangible book value. The name that really stood out on the list was Leucadia National (LUK). The shares have declined are back to just under tangible book value. This is a stock that I have owned and followed for years and I am excited about the opportunity to buy it on the cheap once again.

This is an incredible collection of businesses. The company is involved in natural gas, coal gasification, Liquid natural gas, beef processing, wine, real estate, casinos, biotech, plastics and timber. They also own large stakes in several public companies includiung Jeffries (JEF) and Mueller Industries (MLI). Since 1978 the mangers of the company, Ian Cumming and Joseph Steinberg, have grown book value by 18.5% annually. They are distressed and vulture investors who attempt to buy out of favor companies and hold them until they improve. If you understand why they bought the Biloxi Hard Rock casino after Katrina and partnered with Berkshire Hathaway in a mortgage servicing and commercial mortgage origination company in 2009 you start to understand how these guys approach business.

I can give you a lot of reason to own this stock. You have a collection of businesses bought on the cheap with brilliant management. You also have a collection of businesses that will respond positively if all the global money printing does lead to a high inflation rate in the future as some fear may happen.  At 90% of tangible book the stock is not only a solid buy on its own merits, it may proof to be an inflation hedge for your portfolio.

I do not have the room here to break down all the business they own and their corporate strategy. Go to the bare bones website at for a better overview of the company. While you are the read the past thirty years of annual reports and shareholder letter for an MBA in opportunistic, patient vulture investing.

Most of this was orginally published on Real

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