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Index funds are great. Outperforming the S&P 500 head-to-head is very difficult. Buying only large American companies and expecting to earn more than an index fund is hard. The rule books and college professors say to keep some money overseas for diversification. I agree — some of the best companies in the world are not domiciled in the U.S. The part most investors don’t under stand is what to do with safe money. Unlike college endowments and pension pools, we humans grow older and die. You don’t want to see your life savings drop 50% in your golden years.
We manage many portfolios that hold between 20 and 40 positions. We can easily allocate 20% of a portfolio to four bonds, such as Occidental Petro leum, Cleveland-Cliffs, Murphy Oil, and Mercury General. When purchased, many of these issues yielded north of 6% (though rates have since come down).
The odds of not getting back every penny are quite slim — not zero, but slim. Why buy a bond fund holding hundreds of bonds? You don’t know what you own, and you may not like what you see.
Municipal bonds are even safer. Laws governing municipal entities generally require treasurers to invest in gov-Financial information is public and can be requested by law. No state has ever gone under (not counting Puerto Rico). So you can buy a handful of municipal bonds. You can cherry-pick maturity, issuer, and yield. The Vanguard Intermediate California Tax-Exempt Fund holds a few billion dollars in Puerto Rican bonds. Who signed up for that? Why not simply buy a few school district issues? The same is true for stocks. If you want to hold individual stocks, hold a few. If you do a good job, one may be come a large percentage of your portfolio. |
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We’ve tinkered with precious metals for a long time. We’ve had more good luck than bad, but we’ve lost money from time to time. The challenge was that many metals were stuck in the doldrums for about a decade. If you invested in silver or platinum, you had to watch most everything else rise while you held what felt like dead money.
This has changed recently. Precious metals — and the companies that mine them — have taken off. There are a few we wish we still held, such as Harmony Gold. We bought Harmony ten years ago at $2.32; it’s now $24.16. We bought Cameco (uranium) at $11.11; it’s now trading at $126.
As I’ve always pointed out, the miners are where you want to be — if you can correctly guess the direction of the metal. |
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The funny thing about investment management is how poorly investors manage their cash. They’ll brag about the hot stock they own or how much their home has appreciated, yet they keep bank assets yielding next to nothing.
People buy certificates of deposit and don’t go far enough out in maturity. In 2022, you could buy long er-dated CDs yielding over 5%. That deal is gone. Investors were also going ga-ga over a government backed inflation bond yielding 9%. But it was capped at $10,000, and now it yields about 4%. You could have locked in a corporate bond at 7% — and you’d still be earning 7%.
Longer-dated municipal bonds not only out-yield CDs, they’re tax-advantaged. Do you hear about this in the financial press or on CNBC? No. The pundits aren’t focused on it.
I found a municipal bond issued by the hospital where my daughter Emily was born. For some reason, it was non-rated. It yielded over 5%. For high earners, the taxable-equivalent yield was over 8%.
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| Have you experimented with ChatGPT? It’s a godsend for a financial analyst. You can ask why a stock is down, and it gives you a reason in seconds. That used to take me hours. I asked Chat about some high-yield municipal bonds, and it provided information on the solvency of the underlying entities almost instantly. That, too, would have taken hours in the past. Of course, ChatGPT is simply aggregating and summarizing publicly available information. I tried to use it to dig into risky private credit — but as the name implies, it’s private. Still, I asked it to show me the holdings of a large private credit fund, and there they were. Almost all the names were unfamiliar to me. |
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Our Bayer position has finally risen. The Monsanto lawsuits drove the stock down to the point where the market was assigning essentially zero value to Monsanto. If any of you use pesticides or herbicides on your lawns and gardens, I suggest gloves — maybe even a Hazmat suit. “-ide” is Latin for death. By definition, Monsanto already warned you.
The key with Bayer was dollar-cost averaging — we bought more shares as the stock kept declining. We’re profitable on the lower purchases, though not yet on the original ones.
A stock I don’t discuss often is Jardine Matheson. Jardine is an old-line Asian conglomerate. It controls Hongkong Land (one of the largest landowners in Hong Kong), owns Mandarin Oriental Hotels, and operates IKEA, Starbucks, and 7-Eleven in Hong Kong and across parts of Asia.
We originally bought it in 2008 but sold during the financial crisis. We bought again in 2019 — and then nothing good happened for years. There were the 2019 protests, the pandemic in 2020, and China tightening its grip on Hong Kong. The dividend yield ran between 4% and 5% annually, which adds up over time. When we purchased shares, the stock traded at roughly a 50% discount to its equity value. Our patience has been rewarded. We now have a solid profit and some meaningful diversification in Asia.
We purchased Subaru at the end of 2024. It’s the first pure-play auto manufacturer I’ve ever owned. The company has a market cap of about $15.4 billion and net cash (cash minus debt) of roughly $11 billion. That’s inexpensive.
Subaru was beaten down because it was slow to embrace electric vehicles. It is now producing EVs, and I believe the stock can continue to perform well as investors recognize both its valuation and its transition from gas-powered vehicles.
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Leucadia may be the second most successful conglomerate you’ve never heard of.
The company was formed in 1978 when two Harvard MBAs, Joe Steinberg and Ian Cumming, took control of an old financial company called Talcott. From 1978 until Leucadia merged with Jefferies in 2012, the stock compounded at 25.7% annually. Equity grew from negative $22.9 million to $6.76 billion.
Mr. Steinberg was kind enough to mail me copy number 676 of a 750-copy production run of Leucadia’s annual reports, along with letters from the likes of Warren Buffett and Carl Icahn.
Some of the investments you may recognize include Pine Ridge Wine (now owned by publicly traded Crimson, where Mr. Steinberg still serves on the board), National Beef out of Kansas City, Colonial Penn Insurance, Enron (before it went bankrupt), and the Hard Rock Café in Biloxi, Mississippi.
They also operated internationally in places such as Russia (Pepsi bottling), Argentina (insurance), and Bolivia and El Salvador (electricity generation). Importantly, they exited many of these investments before conditions deteriorated. Sometimes not holding for the long term is a very good thing.
In the mid-1990s, Leucadia invested in a gold mining company called MK Gold. That was when you wanted exposure to precious metals — gold averaged $388 an ounce in 1996. I also remember when Buffett bought silver in 1997 at an average price of $4.50. Now you know why I follow these guys — they’re the best. Don’t tell me you bought gold at $4,000 and expect me to get excited.
One of Leucadia’s finest investments was Fortescue Metals in Perth, Australia. I’ve visited Perth twice — a lovely city. Andrew Forrest needed capital, and Leucadia purchased 9.99% of the company. They then structured a $100 million bond that paid a 4% royalty on iron ore sales. Ingenious.
Fortescue went on to build a rail line to a port to ship iron ore to China. When I was in Perth, I remember some locals weren’t too fond of Mr. Forrest — some thing about the local soccer club.
Mr. Forrest later turned around and offered another 4% royalty bond to a different investor, effectively diluting Leucadia’s income stream. As Steinberg noted in his letters, Forrest bit the hand that fed him.
Leucadia also had a knack for property development. Through HomeFed, they developed housing in San Diego. They owned a 15-acre parcel behind Union Station in Washington, D.C., held a small interest in the Rockefeller Building, and were in volved in dozens of other projects. Leucadia had the ability to move in and out of properties quickly and profitably.
During the financial crisis of 2008–2009, Leucadia partnered with Berkshire Hathaway to form Berkadia, a loan-servicing business.
Unlike Buffett at Berkshire, Steinberg and Cumming rarely spoke to the press, so there’s less written about them. Steinberg is still alive; Cumming has passed away. Cumming attended the University of Kansas a few years before my parents matriculated there.
Leucadia merged with Jefferies in 2012, and the stock has performed reasonably well since. Years ago, when interest rates were near rock bottom, I purchased Leucadia bonds for clients. The bonds yielded about 3% — which, at the time, was still better than what banks were offering.
What I find most interesting about Leucadia is how much of their success stemmed from being smaller and nimble. As an individual investor, you also have the ability to move in and out of smaller opportunities. Leucadia frequently bought into companies whose bonds were in bankruptcy. That’s harder for an individual investor — but not impossible. |
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I’ve started a new podcast called Conversations in Capital. My first interview was with Cliff Cain of Pulsar Helium. Pulsar has discovered a helium deposit in northern Minnesota. Helium is used in everything from defense systems to hospitals to children’s balloons.
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holmesosborne@holmesosborne.com
| Osborne Global is a registered investment advisor with the states of California and Missouri and may only transact business with residents of those states, or residents of other states where otherwise legally subject to exemption or exclusion from registration requirements. Registration with the Securities and Exchange Commission does not imply a certain level or skill or training. |
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