It Is OK To Be “Unlovable”

To Our Clients:

Just a short year ago (almost to the day) the financial markets were spiraling out of control. Oil had plummeted to scary levels, the stock market had suffered a major correction, hedge funds and long-only investors were bleeding and facing redemptions, the leveraged loan market had screeched to a halt, and the Fed was afraid to even utter the words “interest rate increase” for fear the wheels would completely fall off the cart. What a difference a year makes.

For us, the year-ago period marked the final exclamation point on a relatively choppy/painful period for Jefferies (and coincidentally a few of the other major operating businesses within our parent company, Leucadia). Basically, we had suffered a period of about 18 months (on and off) during which more seemed to go wrong than right. We all know that when momentum goes the wrong way, it picks up speed and the fun stops.

As they have done in the past during challenging times, our team was on top of our issues and we proactively addressed almost all of our problems. While we needed the time to prove it, we were fairly confident we would once again be well positioned to add value for our stakeholders. As is the way of nature, that moment is exactly when an oversimplified and pre-determined article was published in a major business newspaper declaring that Leucadia (and our largest operating business Jefferies) was simply “No Longer Lovable.” The article ended with the words, “there are few reasons to believe the new Leucadia will capture its old glory anytime soon.” We lived with the story, including all the stock graphs pointing sharply in the wrong direction, which were side by side with pictures of management who supposedly was pretty decent for decades, but had been smacked hard on the head by the stupidity stick.

As one should guess and is often the case, the article marked the bottom of those challenges and, since the day it was published, Jefferies and virtually all of our other businesses have performed well and Leucadia’s stock is up over 60%. The point of this letter is not to declare a victory—we all have much more work to do and things can change again in an instant. The point is also not to complain about the media who love a good (i.e., negative) story. Everyone who runs a company or manages money is a “big boy or girl,” and we all know media coverage goes with the territory. The point of this note is that we would like to share with each of you our thoughts on the mood swings of operating in a volatile world because, as we see it, the only thing for certain is that these sudden and severe swings will remain the norm and not the exception.

Our Observations On Being “Unlovable”

1. If you aren’t constantly trying to improve, evolve, adapt, and grow, you will not make it in business because every good competitor is stretching to do these things every day. That said, you cannot do all of these important things without taking calculated risk and even if you are the best risk taker on the planet, sometimes you will get it wrong and you will find yourself being “unlovable” for a period. This is necessary if you want to win long term. By the way, if you ask anyone who is truly successful, they will tell you that they have had many “unlovable” periods throughout their career and if they did not, they never would have built something special.
2. It is always OK to be “unlovable” as long as you don’t get a margin call. Your company’s capital structure must be secure and conservative. Your overnight funding and liquidity must always be smart (never rely on short term unsecured lines to finance long term assets). A slightly reduced ROE is a small price to pay for excess liquidity. Diversification is important and one should never put too many eggs in a single basket. If you are managing money, it is all about duration of capital and it is always preferable to sacrifice fees for an increased runway to outlast the times you find yourself “unlovable.”
3. When you find yourself in an “unlovable” period, that is when you find out what your culture and team are all about. Do they point fingers? Do they abandon ship? Do they whisper, “I told them so?” Or do they roll up their sleeves, work even harder, and help make the tough decisions and find smart compromises with the goal of finding the path to be “lovable” once again. Everyone is with you when you are “lovable.” The best operating and investment companies truly shine when they are actually “unlovable” because that is when their people truly distinguish themselves.
4. Being “unlovable” is very personal. Whether you are running a company or investing in them, bad results over a period of time can be very unsettling, embarrassing, and humiliating. We are all human beings and for those of us in these positions, we know it is not about the money, power, or glory. It is about pride and not letting the people you care about down. That is why it is so important to have a strong foundation of family and friends that you can always rely on no matter how much you may “stink” lately at work. To family and true friends, regardless of your missteps or failures, you are always “lovable.”
5. Then there are those times in the cycle when everything you and your company does is working well and success and great results are free flowing from every part of your organization. These are the times when you are exceptionally “lovable” from a business and professional perspective. What the reporters who write silly headlines really don’t understand is that this is truly the most dangerous time and it is generally when investors should be on alert and someone should be firing off the warning flares. When you are too “lovable” and everyone is telling you so, that is the time that arrogance can rear its ugly head and spread around an organization like a parasite. People stop challenging senior management, people focus on victory laps versus doubling down on hard work and innovation, and people get relaxed, sloppy, or believe their own press. The very best leaders and companies realize this slippery slope and while they allow their people to celebrate their successes, they never dwell on them for too long.

Thank you for reading our perspective on being “unloved.” Our goal here is to share our experiences in a manner that hopefully many of you can relate to and reflect upon as you see the eventual ups and downs in your world. It is a very long race and one of the things that has made Jefferies (and Leucadia) successful over the decades is that even when we are going through an “unlovable period,” our clients have always stood by us. Our promise to each of you is that we will always do the same.

With Appreciation (and love),

Rich and Brian