giofranchi

For the purpose of creating an initial, timely supply of Class B shares, we currently intend to issue the Class B shares through a pro rata dividend on the Class A shares at a rate of ten (10) Class B shares for each Class A share outstanding. Shareholders should note that the proposed issuance of Class B shares in the form of a stock dividend will not mean that a shareholder of the Company will be diluted, nor will his or her voting power be minimized. Page 3 of PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON NOVEMBER 2, 2012 I have read all your objections, and they are well thought and expressed, still I just don’t see the difference between what Mr. Biglari is doing and, for instance, what Mr. Loeb is doing at Third Point and what Mr. Ackman is doing at Pershing Square. Or what Mr. Ichan has done for the last 40 years. Is Mr. Loeb an activist? Yes. Does Mr. Loeb operate on a value basis? Yes. Is he willing to bet big on a single idea? Well, to be an activist investor you are compelled to do so (YHOO). Is Mr. Loeb friendly and fair? Hardly… Ask Yahoo’s management (actually, ex-management!). Is Mr. Loeb very well remunerated? Yes. Has Mr. Loeb achieved great results since inception in 1996? Of course. Exactly the same could be said regarding Mr. Ackman. And what about Mr. Ichan? Though I cannot claim to have studied Mr. Ichan’s career in depth, I am sure he is one of the greatest american investors, he has always pushed for changes within companies that were destroying value, and, because of that, he has never been associated with the word ‘friendly’. Furthermore, Ichan Enterprises is very much concentrated in just a handful of big ideas (9). So, just one more question, if you please, then I won’t bother you anymore! I promise! ;D Do this board generally thinks poorly about activists? Thank you, giofranchi

I have read “Do Business With People You Trust”. I liked it and I agree. The problem here, though, is not how Mr. Biglari communicates. Imo, he communicates very well, he is very exhaustive in his letters, and expresses his thoughts with much clarity. The problem is he is not believed… “Pay attention to what he does, not what he says!” is the most frequent warning. I guess people think he is just plain dishonest. And I just have a hard time to accept that a person, who could manage and grow a very good business for a very long time, and who has a lot of skin in the game, is so “stupid” to behave dishonestly. giofranchi

Well, it is obvious that I have not expressed my thought properly… And for that I apologize! I had already said that Mr. Biglari has evident weaknesses: he clearly is opinionated and arrogant, and those weaknesses lead him to behave poorly with his employees, shareholders, board of directors, associates, colleagues, etc.. That is a big minus, no doubt about it! And I clearly know that Mr. Watsa is the exact opposite! As you have rightly pointed out. That’s why my firm has a huge position in FFH, and a small position in BH. What I was trying to say, though, is a completely different thing. I was remarking that, after you have examined all the facts and you have reached some conclusions, you must posses the will to stick to your ideas, even if people don’t agree with you for a very long time, at least until new facts are brought to light, which disprove your thesis. That’s the meaning I gave to “insensitive”: not to be blind or deaf, but to show a strong will. That’s also why I made the comparison with Mr. Watsa: because Mr. Watsa possesses one of the strongest will I know of! I really hope now I have clarified what I meant. Regarding Mr. Biglari, I know that the way he treats his team and shareholders will have a negative impact on BH financial results. But he looks to me like a hedge fund manager with a lot of his savings in the fund: as of last July 4, 2012, Mr. Biglari personally owned 10,073 shares (and he keeps on buying), while the Lion Fund owned 98,339 shares. So I just don’t see how it could be possible that he doesn’t really care to maximize value per share… Maybe, his weaknesses will prevent him from maximizing value per share as much as he could have, given his capabilities as a businessman and investor. But, to say that he will on purpose fail to maximize value per share, seems an exaggeration to me! I tend to think of it this way: BH has the potential to be an outstanding business: it has permanent capital, it controls a very dependable business that generates a lot of new cash, and it has the capabilities to invest wherever it makes the most sense. Whereas, “to thrive at the expense of shareholders” is notoriously a poor business: it almost always ends badly. Why should Mr. Biglari, who by the way is a significant shareholder and is increasing his stake in the company, choose the second alternative? BH is a much better business than a hedge fund, even a successful one: just because Mr. Biglari pretends to be remunerated like a hedge fund manager, does it mean that BH can not be a worthwhile investment? Parsad, I am just asking. Maybe you have known Mr. Biglari personally for a long time, and you know many things that I ignore. So, your opinion will be greatly appreciated! Thank you, giofranchi

Greg, if and when increase in equity value per share falters (Mr. Biglari won’t be able to go on creating value) for whatever reason, I will part ways with Mr. Biglari. I hope that moment will be as far in the future as possible! giofranchi

bargainman, I understand what you say, and basically I already knew that. Anyway, the truth is I couldn’t care less about the “next Buffett” persona. I know from the start that any person I decide to partner with has his or her strengths and his or her weaknesses. I am fine with that, no problem. Is Mr. Biglari opinionated and arrogant? Well, those are his weaknesses. The question is: given his strengths, can those weaknesses be tolerated? Or are they likely to significantly hinder future financial performance? In my experience, a lot of very successful businessmen are opinionated and arrogant… Mr. Biglari isn’t the first, and won’t certainly be the last! Luckily, I don’t have to live with them, I just have to do business with them, and make sure that they go on performing well. I’d rather rely on the opinionated and the arrogant, than on the superficial (see, for instance, the Cracker Barrel management) and the ignorant (look almost wherever you want in the business world…). Also the 'supremely insensitive to criticism' thing should be put into context: for instance, do you think Mr. Watsa could be able to invest the way he does, if he weren’t 'supremely insensitive to criticism'? 'Supremely insensitive to criticism' might mean that you have a strong reliance in your work and analysis and that you are able to back it with an iron will. And that is exactly what I look for in the people I decide to partner with. Finally, on the compensation front, I admit I would have liked a 10% hurdle better than the actual 6% hurdle. But that is not a sufficient reason to dismiss a business that I understand and like, a very capable management, and a fair price. Because those three are the things we are all looking for, and they are not easy to find at all! giofranchi

Maybe… but if I look at page 4 of the most recent 10-q (Q3 2012), I find that total equity on July 6, 2011 was $275,206,000, while on July 4, 2012 it was $332,186,000, a $56,980,000 increase, which is 20,7% of total equity value on July 6, 2011. Pay for performance is fine with me! It is exactly what I do every day at my firm too. If and when increase in equity value falters, then it will be an entirely different situation. But my guess is, if that really comes to pass, it will be for entirely different reasons than Mr. Biglari’s compensation… giofranchi

The valuation of BH goes along the same line as the valuation of LRE. Mr. Biglari, just like Mr. Brindle, is compounding at 20% per annum. If he can go on outperforming, 1,3xBV is absolutely not a high price to pay. BRK was trading at 1,3xBV in the ‘70s, and it is almost trading at that level even today. So, a person, who had invested in BRK at 1,3xBV in the ’70, would have achieved a compounded annual return equal to the CAGR in BRK’s book value per share. The real question is: will Mr. Biglari go on outperforming for a very long time? Imo: 1) He has a proven track record, 2) He is still very young and is very driven, 3) BH’s capital is still relatively small, 4) Control value investing is the way to go, 5) Selling franchises of a fast food business is a wonderful way to keep generating cash. giofranchi

That's all speculative. I was delighted when LRE sold at +(-) 10% over/under book value during the first four years after their IPO as we continued to load up. It's been hard to keep buying in the last couple of years as they have traded up to a range of 1.4 to 1.6 times book value. But it still looks like a better relative value than just about anything else out there, considering the quality of the business, not to mention other things like no corporate taxes on their profits. A US company would have to have a pretax ROE of 25% or better to do as well as LRE's 19% return without LRE's being subject to taxation of profits. Of course, at 1,4x – 1,6x you are paying for growth… And I would very much prefer to receive growth for free instead! But I guess the problem with paying for growth is that growth is “speculative”. You can almost never be sure it will really be there. And, if it fails to materialize, then you have paid for nothing! So, it is very easy to get killed, if you bet on growth… Quality, imo, is how certain future growth can be. If you think that Mr. Brindle can go on compounding for the next 20 years, like he did during the last 26 years, than I agree that LRE is very good value even at the current price. giofranchi

Well, I guess it depends on the sustainability of that 19%+ per year normalized return on equity… If it is really sustainable for many years into the future, then I buy LRE today at 1,4x, like FrankArabia wrote, and I expect it to be trading still at 1,4x ten years from now. In the meantime I’d have achieved a compounded annual return of 19%+. Clearly the market is expecting declining ROE in the future! So, if ROE stays at the level you expect for a very long time, the market is wrong about LRE today. As an aside, it would be quite easy to use Professor Penman formula for valuing equity, to calculate which ROE the market is factoring in for LRE in the future. giofranchi

Yeah! If you really think that 19% is sustainable going forward, then LRE at the current price is a steal! Which are, in your opinion, the reasons why the market is so wrong about LRE? Is it because the market prices LRE as if it were just another insurance company? Although outstanding, maybe a 6-year track record is not long enough to convince the market that LRE is really different? Thank you, giofranchi

I don’t understand why you all are so hard and negative on Mr. Sardar Biglari. Personally, I think he is a very shrewd businessman. He has structured BH exactly the way I have structured my firm, sometimes I marvel because what he says and writes about BH applies so well to the way I also try to manage my firm! There is a difference, though: despite being just a little older than me, he has already amassed a lot of resources, was able to get control of a business much bigger and much more profitable than mine (fast food vs. civil engineering), and is able to acquire stakes in public companies large enough to make him the controlling shareholder! And good for him! Given the current environment, I like control value investing very much. If I could, I would do it too! It helps mitigate market risk very effectively. Ok, while trying to get control of something, you certainly may run the risk of looking unfriendly or not being very funny… But that’s simply how it works: have you ever thought that Mr. Carl Ichan is a friendly person?! I don’t think so. But is he a great investor? Of course! Mr. Sardar Biglari has already proven himself, is still very young, and I wish him to go on compounding capital at satisfying rates of return for a very long time. giofranchi

With the reinvested dividends and share buybacks, it's grown to a huge overweight, even measured by the standards of a focused portfolio, but its normalized owner earnings yield is still about 13%, and they continue to lever up their returns while dialing down the volatility of those returns through sidecars. Every year I go through this debate with myself: "Why do you have most of your eggs in this basket?" Answer: " Why did Warren's high school pinball machine partner buy Berkshire in the 1960's and never sell a single share?" twacowfca, if we assume a ROE of 15% for the next two years (less than the average 19% achieved in the past), we assume a required return of 10% (a 10% interest rate), and from year three on we assume that ROE falls to 10%, not exceeding our required minimum return, then we can use Professor Penman formula for valuing equity: (1) the book value + (2) the value from short-term earnings (next two years) + (3) the value of subsequent speculative growth, where we are completely disregarding (3) (value of speculative growth = 0). It follows that LRE’s value of equity is $12,64, while today it is trading at $10,57: a margin of safety of 16,3%, with pretty conservative assumptions. Do you think LRE could be valued that way? Or you just use normalized owner earnings yield? Thank you, giofranchi

Good idea! I will surely follow your advice! giofranchi

Well, maybe you are right… Generally, though, I genuinely admire Mr. Charles Gave as a man of great financial learning. I think his ideas are always very well researched and expressed. Of course, you could disagree with his conclusions… but I find it difficult not to enjoy his all-encompassing knowledge. giofranchi

txitxo, my greatest contention with the whole Euro project is that FIRST you do what you have written, then, IF AND ONLY IF you have been successful in doing so, you establish a common currency. A common currency is the easy part, all the rest is what really matters and what is really difficult to implement. Start with the easy part, in the hope that the hard part will follow?!?! So much (southern) European… And never a good idea!! As far as Mr. Charles Gave is concerned, I think his thesis has merits. He affirms that France will be the last domino to fall, and also the one most dangerous to the Euro survival. Why disagree? France is actually in very bad shape and is behaving like a socialistic country of the past, scaring businesses away. If you find yourself in a hole, stop digging?! Well, it seems in France they have decided to do the exact opposite! It gets worse: the IMF forecasts Debt/GDP for France exceeding 200% by 2040, even assuming “radical restructurings”. Radical restructurings that won’t occur, unless a crisis unfolds… giofranchi

"The Grand Disconnect between slipping global economies and robust equities, driven by never-ending monetary and fiscal stimuli, is profoundly unhealthy— and a reconnection is inevitable. Of course, there is that slim, remote, inconsequential, trivial probability that our forecast of deleveraging, of continuing global economic weakness and of recession is dead wrong, and that all the government stimuli and other forces will revive economies enough to justify current investor enthusiasm. We doubt it, however, as a review of the current state of worldwide economic affairs suggests." Gary Shilling, October 2012 giofranchi insight-1012b.pdf

For anyone who might be interested. giofranchi Daily+10.8.12.pdf

L is a holding of mine. And I find the interview with Jim Tisch and Joe Rosenberg to be a good one. So, thank you for posting! giofranchi

S&P500 Shiller P/E at 23, with all the western world engulfed in debt, just because Central Banks are printing money as never before… I think that, if we go back in history, very few times the markets had been less efficient than they are today. Time will tell. giofranchi

Thorp’s original fund, Princeton Newport Partners, ran for 19 years (November 1969 to December 1988) and had an average annualized compounded gross return of 19.1 percent (15.1 percent after fees). It is not return, but rather the extraordinary consistency of return, that sets Thorp apart. Princeton Newport Partners compiled a track record of 227 winning months and only 3 losing months (all under 1 percent) – an extraordinary 98.7 percent winning percentage. To calculate the probability of this achievement if markets were efficient, we make the simplifying assumption that the average win and average loss were equal. (This is a very conservative assumption since, in fact, Thorp’s average win was significantly higher, which implies that the probability of Thorp achieving his win percentage by chance will be even lower than the estimate we derive.) Given the assumption that the average win and loss are about equal, the probability of any single trader achieving 227 winning months (or better) out of 230 is equivalent to the probability of getting 227 or more heads in 230 coin tosses, which is approximately equal to an infinitesimally small 1 out of 1 x e63. Even if we assume 1 billion traders, which is a deliberate exaggeration, the odds of getting at least one track record equivalent to or better than Thorp’s would still be less than 1 out of 1 x e62. To put this in context, the odds of randomly selecting a specific atom in the earth would be about a trillion times better. (The estimated number of atoms in the earth is 1 x e50) There are two ways of looking at these results: 1. Boy, Thorp was unbelievably lucky! 2. The efficient market hypothesis is wrong. “Hedge Fund Market Wizards” by Jack D. Schwager giofranchi

Not at all! In 2007 I got worried and I shifted my firm’s investment into 4 stocks: KO, PG, JNJ and XOM. In 2008 they performed better than the market, but they were down nonetheless. One of the lessons of 2008 for me is that “macro” (and I want to stress the fact that all I am trying to assess is the level of market risk to which my investments are exposed, nothing more), instead of being useless 100% of the time, is useless 90% of the time. The rest 10% of the time, and precisely during a secular bear market in stocks when general prices are artificially inflated, I prefer to be aware of market risk, than to ignore it altogether. I think the only problem with a lot of good value investors in 2008 (Mr. Bill Miller, Mr. Richard Pzena, etc.) was that they went on STUBBORNLY IGNORING market risk. Even Mr. Buffett made a mistake, investing in COP. As he has openly admitted! I don’t think some very deep knowledge of macro facts is needed. All is needed can be found in the Wall Street Journal or in the Financial Times. It is just that most people choose to completely ignore it! Imo, they are right 90% of the time, but wrong the rest 10%. giofranchi

If only for the quotes from Epictetus, imo it is a worthwhile reading! giofranchi TheRoom_TheNewStoics.pdf

For anyone who might be interested. giofranchi 552_eva10.5.12na.pdf

Guess we all share the same problem… As I have already pointed out in a previous thread (started by tombgrt), I have found audiobooks to be very helpful! I guess I will never again read a textbook, while sitting at my desk! Because now I can do it while driving, walking, exercising at the gym, etc.. It is amazing how fast I can finish a book today! So, at work I can concentrate on 10-ks, 10-qs, documents published by the companies I follow, various papers, etc.. giofranchi

For anyone who might be interested. giofranchi Popular_Delusions.pdf