Parsad

Thanks Twa! But it's really the group of people we have on here that makes it. You take a look at that post by "collegeinvestor" and see how helpful people are, and you know we have a good, polite group of boardmembers. Cheers!

There are alot of strange things under GAAP accounting. Over time, the more financial statements you read, the more amazed you'll be by all the stupid things you see and the stuff people get away with. Enjoy the board! Cheers!

Don't worry about the questions. It's how we all learned. In regards to the increase in depreciation...yes it is directly correlated to the increase in PPE. Cheers!

Wednesday April 21st - Evening Fairfax Financial Shareholder's Dinner Our annual Fairfax Financial Shareholder's Dinner is coming up again. Last year, Francis Chou of the Chou Funds came...Francis has been at all of our dinners! Fairfax Financial sent Sam Mitchell, Brian Bradstreet & Wayne Cadwallader. It was an amazing opportunity to ask questions and listen to answers from some of the best investors in North America. Joe Badali's 156 Front Street West Toronto, Ontario Drinks: 6:30pm Dinner: 7:00pm Q & A: 8:00pm-9:30pm RSVP: sanjeevparsad@shaw.ca Admission: $5/head with all proceeds going to the "Crohn's Colitis Foundation of Canada" in memory of Jo Ann Butler (Corner Market Capital Corporation will match all admissions). Please let me know if you are coming, so we can make appropriate preparations with Joe Badali's. So far, we have attending: Sanjeev P. Alnesh M. Andrew C. Paul R. Tarn C. Frank F. William D. Greg D. Mayur K. Stephen K. Alex K. Wayne P. William M. Ken R. Norm R. Keith S. Bryan S. Nicholas S. Bob T. Glen V. Martin V. Thanks very much! Cheers!

Hi Daniel, Just wondering if you could do me a favor. I've been receiving emails from friends and other SNS shareholders who have noticed the huge amount of garbage being spewed on the Yahoo SNS board about me. I have no idea who SNS Supertramp is, nor do I want anything to do with that person. I have nothing to do with Steak'n Shake other than as a shareholder. I run a very small fund in the U.S. and one in Canada, as well as this message board. I noticed that you use this board and that one. Could you please exclude me from any discussion you have with some of the people on there. I would hope you could do that as a member of this board. I wouldn't have asked, but I noticed that you are including me in some of your posts as well, and I thought I would just set the record straight. You've written a book on Berkshire, and as a word of advice as a fellow boardmember, you are probably better off not interacting with many of the nutjobs on that message board. I don't know any of the other people on there, other than Randall Tidd (Tiddman) who posts on there on occasion, so I thought I would ask you. Thanks very much! Sanjeev

sold half, it has the least margin of safety of all the things I own. We sold a third yesterday when our LT gains rate kicked in. It just made up way too much of the portfolio. We have no problem holding the rest at this point...it's a cash cow and it will go up moderately depending on what Sardar does going forward. It is not priced cheap, but it is not overvalued either. Cheers!

Yup, that's correct. You can find other ways to avoid the taxes, but there is always the chance that the IRS or CRA will deny you the way you treated the income. We would rather play well within the rules, than run the risk of our partners getting reassessments years later. If you could control the emotions of the average investor and get them to invest only when markets are down, then naturally that would be to their benefit. Unfortunately, human psychology doesn't work that way and investors often want to invest after big runs in markets. The cost of doing that is they may be purchasing some unrealized gains. The corollary is that some investors who buy when the fund is down, may be benefitting from unrealized losses that actually discount their shares. Partners should contribute to their accounts somewhat regularly (monthly, semi-annually, bi-annually). That will eliminate some of that bias over time. Cheers!

I'm sure many believe he's a perennial bear, but his commentary is excellent. Cheers! http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/income-still-rules-amid-credit-fears/article1508803/

Thanks very much! Cheers!

That's pretty darn good! I know Francis uses Citibank, and they charge something like 0.2-0.25%, and he's got over a billion dollars and hundreds of investors. I can understand such a low rate for a huge book of business like that, but I'm surprised by how low Commonwealth's number is for less than $10 in AUM. How late was the NAV report on a few occasions? Because we have only 15 days to file from month end, and we need everything provided to us usually in the first week of each month to file on time. Also, do they handle funds outside of Ontario? We file in BC, so I don't know if they do that. If you don't know, that's ok and I can call them. Thanks! Cheers!

I pay 0.2% administration (and that includes everything) on the first $10m, going down to 0.15% on the next and down to 0.1% after $20m. Other fees include $100 per investor annual maintenance and $50 per investor transaction. My fund's audit is only $4,000 per annum. On a fund of $10m+, I pay less than 30bps and do nothing. Hi Returnonmycapital, You use Commonwealth correct? A few questions: - The 0.2% is just for administration...doesn't include brokerage, legal, audit, tax preparation and mailings right? - How do you find their services? - Do they mail out your annual reports as well? - What about filing and reporting of new subscriptions to provincial securities regulators? - How do your partners find their services? - Are you happy with them? - Any problems with them doing the books? Thanks! Cheers!

could you give an example in NAV terms? For example, income from March 1st to March 31st: 10 Partners each have $100K invested: Dividends $10K Interest $10K ST Gains $20K LT Gains $50K Unrealized Gains $100K Simply divide the income totals by 10 and allocate. April 1st...new partner puts in $100K...distributable income is now divided by 11 partners. Does not partake in any of the previous income except for the unrealized gains when realized. Yes, NAV is inflated by unrealized gains, but it does not impact investor unless realized or fund liquidated. Over a long-period of time, the effect is relatively negligible. Cheers!

yeah - not my area of expertise. However, I am still pretty sure what I said is correct. just some quick googling - refer to page 355 & 356 of US Regulation of Hedge Funds Yeah Watsa, if you read the 3rd paragraph from the bottom of the page, it talks about what I was saying. It can create serious problems in how you track the income for your other partners. Also, once elected, you cannot opt out...thus your tax basis is changed forever as long as the partnership operates. Cheers!

Parsad where did you raise most of your assets from? Who are your clients? For the U.S. fund which is domiciled in the U.S., they are all U.S. citizens and accredited investors. For the Canadian fund which is domiciled in Canada, they are all Canadian citizens and qualify for exemptions under our offering. Cheers!

Does this monthly calculation not drive up your audit costs for under $10M Funds? Why not do it like a Mutual Fund and if you buy on April 1st or December 1st, you get the same amount of distributable income, short-term, long-terms gains on or around December 15th. The GP usually advises the investor coming in of the tax issues and the GP can always provide a fair deal for the LP, and all partners, by adjusting the NAV when a new LP comes in. This view is from a small fund perspective as costs are key. Hi James, The increased cost for the audit is minimal, as we receive statements from the broker monthly and the auditor still has to go through each statement and journal entry. Also, we are at the point now where we get money into the fund almost monthly...you never say no because when you do need the capital, it usually stops coming in at that point...so we incur the small increased cost of the audit if it means capital flows into the fund a bit more regularly. It's also more convenient for existing partners and new partners when depositing, and we have no lock-up so if there are redemptions, partners can receive their funds easier also. Cheers!

Parsad and other managers, What is the annual cost (as a % of your net asset size) of audit, legal, book-keeping and accounting for your fund? If you can share the approximate fund size also (for example, a range like $1-3M would be ok if you don't want to share the exact fund size), that would be very useful to me and perhaps others. We will be under 0.8% with $3M in assets (this year) and under 0.5% with $5M in assets for audit, legal, book-keeping, accounting, mailings, and tax preparation. I think we can get it down to about 0.3-0.35% with $7.5M under management. Of course, there are certain shareholder initiatives we will be involved with from time to time, and the expenses will elevate slightly when we are involved in those activities. Cheers!

I am not a CPA, but the one who advised me said it (section 754) can be used for a basis difference related to stocks as well. I just looked up actual internal revenue code, it reads "basis of partnership property shall be adjusted..." and refers to "partnership property." I'm assuming marketable securities are included. Be careful Watsa. I don't think that is correct. Also, just because the partnership has the clause in the agreement, doesn't mean the IRS will view the nature of the income in that way. You could be creating a future tax problem for your partners if you exercise the clause and the application is incorrect. Simplest way is usually the best way to go. Cheers!

Parsad, A current co-worker and I always assume we will start a partnership one day in the future, so naturally I'm a bit curious in the process (capital raising, how they are set up, fees, etc). Do you guys outsource all your back-office stuff (redemptions, deposits, distributions, statement mailings, NAV calculations, keeping track of partnership interests, etc.) If so I'm curious what the ballpark fees would be for that back-office stuff would be, for say a $3 -10 million partnership fund. Do the folks you use charge a percentage of AUM for this service? Was your prime broker very helpful regarding the process of capital raising, suggestions for which firms to use for back-office support in your area, etc.)? Ugh! Capital raising is the hard part. It's rare if you can get off the ground and have the capital at hand right away. Be prepared to work on the side and live off your savings for at the very minimum of two years. We had verbal commitments of $2.5M, but only $400K materialized once we had the LP set up. And the money will come from the least expected places. Forget about friends and family...they know you, so there is a natural bias that you are starting the damn thing. They'll give you money, but very small amounts. You have to keep costs low. Alnesh is a CPA with a Masters in Science and Tax, so we save money by him doing the accounting. Our costs for the fund are limited to prime broker, audit, legal and mailings. You are talking to the back-end support. I do all the statements, administrative work, mailings, discussion with legal counsel, contact with brokerage, and a good chunk of the contact with the auditors. We are now finally getting of size where we feel comfortable to outsource some of the book-keeping work. Probably in the next year at some point. The one tip I can give is find a partner that complements your abilities...preferrably somebody with an accounting background, if you are handling the investment side. I've seen alot of funds start up and go cheap with the brokerage, but hire a high-end administrative company. Even after they ask for my opinion on which broker to use (and I always tell them The Desai Group at Morgan Stanley Smith Barney), they still don't believe me and go with someone like Interactive Brokers and Michael J. Liccar for administrative stuff. You can save alot of money for your partners by doing alot of this stuff yourself. The Desai Group can do some of the back-end office stuff like cut checks, client contact, etc. Alot of times, fund managers get so wrapped up in the glamor of the investment side, they aren't willing to do the dirty work and handle administrative chores. It will be your fund, and you ultimately decide how efficiently you want to run it. I just went through the process of setting one up over the last 6 months. The documents we used for the limited partnership allow the general partner to make "special allocations" of realized gains/losses in situations where there is a large basis difference. In addition, the partnership may make a Section 754 election for a basis adjustment. Isn't section 754 election only for depreciable assets? How can you use that to offset gains from equities or fixed income instruments? Basically, with all of the tax implications, corporate law implications, and security (the partnership interests are considered securities, and you are considered to be selling them) and investment adviser law implications, its near impossible to do this without seeking professional advice. Agree wholeheartedly! You need to do it right...but as Prem told me...just start, whatever you have...just start and build a track record! Cheers!

Sanj... I'm not sure I understand you. As far as I understand, NAV is calculated by taking the LP assets (say stock holding values at the given entering day) minus liabilities. However, those stock values may include large unrealized gains (with their inherent tax obligations), so a new investor's NAV will include those. No? On the other hand, had he entered AFTER the fund realized the large gain, his NAV would have been lower (because of the tax paid). No? Yes, that's correct. But they will only inherit any unrealized and realized gains from the date of their ownership, as existing gains have already been allocated. That was what I referred to in the second part of the answer in the following post. The manager can try and offset gains by losses, realize gains gradually over time, or the investor can average in over time if they believe there will be large realized gains at some point. But there is no certainty in the last choice, since the timing of the gains is completely dependent on the manager. That's part of the risk of investing an investment fund. Investors by their very nature usually buy into funds when they have topped, rather than invest when the funds are near the bottom with few unrealized gains. Cheers!

Sorry Dual_bid, the other portion of your question applying to how to avoid such situations: Unfortunately, if your investment manager is at all successful, you are going to face some realized gains at some point. Investment managers naturally need to try and offset some of their realized gains by losses in other investments if they can, to reduce the amount of realized income that passes through to partners. You can reduce this as a manager, but you can't completely avoid it. Some managers will sell stock between funds to realize losses in a fund that has realized gains. This is common practice for many mutual funds, hedge funds, etc. You can sell positions gradually over time, rather than in one lump-sum, so that the gains are distributed over a period of time. From the investor's standpoint, averaging into the fund may be the better choice if the fund has a large amount of unrealized gains that is likely to be realized. The problem is that the investor may not be able to figure this out easily, and there is no guarantee when those gains were to be realized. Averaging in could actually end up working against you if you are wrong on the timing. Cheers!

Partnerships are flow-through vehicles. Tax is not paid by the partnership, but flows through directly to the partners with their allocation of dividends, interest, long-term and short-term capital gains. The partnership needs to recalculate the NAV after each new contribution or redemption. The allocation of income (realized and unrealized) is also calculated for all partners at the same time. We do our calculation each month. So all of the income is distributed at the end of each month. If a partner joins say April 1st, then they do not receive any portion of the gains realized or unrealized from the previous month. They would only receive their proportional income from April 1st onwards during their holding period. I haven't read the audited financials for many funds, in particular their full monthly accounting statements, so I can't say how others are doing it...I can only speak for our fund. Cheers!

I believe that Berkshire and Buffet provide a tremendous amount of confidence to the customers of their businesses, especially the general public. Makes me wonder how confident the average Fremont policyholder would feel knowing that their home is now insured by "some burger chain". Probably the same as National Indemnity and National Fire & Marine Insurance clients felt buying their insurance from a broken down textile company in 1967. There is no single argument that you can provide that would justify changing the name, since Berkshire did it all under the same conditions. Some SNS investors are solely trying to justify the decision, when there is none present. This was a mistake...if it passes, Sardar can move on like after every other challenge he faced. If it doesn't, then we'll know why and hopefully it will make him an even better CEO. Cheers!

I'm not sure about that, it seems to me that Parsad is completely against any change? In general, I think the name change is a waste of time and money. I'm absolutely dead set against naming the company after Sardar...or any other shareholder for that matter! I love the Steak'n Shake name, the brand and the business. If they've got the money, there is no reason why anyone wouldn't sell to them. If they decide they can't fathom being owned by a restaurant business, then do you really want to acquire a company and it's manager who believe that? People sell to Berkshire because Buffett is there and their business has a permanent home. They couldn't care less if the company was called Nebraska Furniture Mart, See's Candy, Blue Chip Stamps or Geico. And the owners Berkshire attracts couldn't care less what products they are selling, only that their life's work is treated with the same respect they showed it. Cheers!

I think one of the key motivations was that if he is going to try to go hostile and acquire companies in businesses outside of restaurants, Steak N Shake Company does not help. Remember - if he is going hostile he is relying on shareholders of the opposing company siding with him versus current management. So it was pretty easy for guys on Bloomberg to say - 'What the heck does a fast food chain know about insurance?' Opposing management teams can use that kind of argument to deride his efforts (especially if he is trying to use stock in the transaction) Now, I know some of you will argue that Buffett has stuck with the Berkshire name, and Prem has stuck with the Fairfax name -- but these names are pretty vague in their nature (similar to Altria) whereas the Steak N Shake Company is not. My guess is that as a value investor, Biglari wont want to overpay for acquisitions. So I doubt he is going to be open to constantly raising prices when he bids on potential targets, as a result -- he is going to need to get rid of everything else that an opposing management team can use against him and the Steak N Shake name for the holding company is one of them. Now what name should it be? I think that is up in the air, but the name needs to change. Wait a sec...didn't he just get control of Steak'n Shake through a restaurant company called Western Sizzlin? Didn't John Linnartz sell his investment advisory business to Western Sizzlin? Didn't Sardar try and get control of ITEX Corporation through the same restaurant company? How big a problem is it really! I've been the biggest cheerleader Sardar has outside of Phil Cooley and his mother. Heck, we added a separate board for his endeavors. Both WEST and SNS were huge holdings for us in our funds, corporate and personal accounts. We are still incredibly high on his future. But let's call a spade a spade...there was no need for the name change. It costs money, it wastes time, it serves as a lightning rod for other CEO's to avoid selling to him, and it has no impact on intrinsic value whatsoever. Cheers!

Former CEO of AIG, Hank Greenberg, has sold his shares to UBS. Cheers! http://www.cnbc.com/id/35980381