NBL0303

David Sokol still being wrongly maligned by some. David Sokol began his conversation with Warren Buffett about Lubrizol by saying, "I own shares in this company, Berkshire may want to take a look at it." It is unfortunate and unfair what happened to David Sokol in this affair.

Do you do them 1 for 1, meaning short one warrant for every one share of common owned?

In the view of Buffett and Munger, it is not a "bad" investment simply because it has gone down. Every great investment in history has gone down. Likewise, it would not make it necessarily a "good" investment simply if it went up on paper. Enron did that for a while too right. The only point is that on a website inspired by Buffett and Munger, you can be free from thinking you made a mistake on this simply because it has gone down in market value. You are right or wrong based on the quality of your reasoning and not short-term market movements, and maybe not even one-off long-term outcomes from a given investment.

Thanks Gregmal - I've also learned from this discussion and appreciate your thoughts. The Broken yoyo that you well describe I think it an important part of investing. If you are investing in a company on the sum-of-the-parts but the parts change in value - then your calculus must necessarily change. If you are investing because you think the revenues of the company are nearly certain to grow and leverage the fixed costs much more thereby making the company much more operationally profitable - but that doesn't happen - then your thesis is not playing out. There are tons of examples of this. I think this is an important part of investing well is understanding this dynamic in one's own thinking. I would say that something as a value investor that I do not recognize as part of the Broken yoyo effect is what happens in the market in the short-run. What I mean is this - if I'm investing in the company because i expect the SSS to improve - and the SSS improves - then regardless of what happens to the stock in the market - that is not necessarily the Broken yoyo effect that you are describing - at least in my investing framework it is not. And this is what makes investing challenging, but also rewarding. We are trying to take advantage of inefficient wrinkles in the market - so sometimes the market makes it seem like it is a Broken yo-yo because you invest in the company and then it goes down or sideways - but that, to me, is not necessarily indicative that the underlying value you see or saw in it is actually there. It could be an inefficient wrinkle in the market that is materializing or expanding or whatever. Not sure if I'm articulating this well. I guess I'm trying to describe a skill of accurately distinguishing what is a true Broken yoyo versus what is a Broken Market. I'm not saying any of that does not comport with what you were saying about the Broken yoyo effect or anything - I was trying to analyze that effect in light of my own investment framework. Anyway, I appreciate the discussion.

Absolutely guilty as charged! To quote something I heard Charlie Munger say a long time ago, "I'm not predicting and I'm not trading...I'm investing." I am indeed not a trader. And even in my field of investing, there are indeed much better investors out there. Nevertheless, I try to learn and engage in worthwhile discussions anywhere I can and this company has certainly generated some interesting ones. This website is called the Corner of Berkshire and Fairfax - I always assume that meant people who invested according to the principles espoused by Warren Buffett, Charlie Munger and Prem Watsa. One insight about catalyst driven investing from Warren and Charlie is that if a catalyst is obvious it is probably priced in. "You pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values." As Howard Marks would say, you need not only to identify a catalyst to get outsized returns without undue risk, but you must identify a second-level thinking catalyst - where most participants in the market think something about the catalyst or lack of a catalyst but they are actually missing something about it. The vulgar language aside about Biglari Holdings, I do share the sentiment about management of the company. I think one of the questions I have about Parsad and others investments in this company that is led in a largely reprehensible fashion relates to this kind of catalyst driven investing that some seemed to be engaged in with this stock. I think because I've written about this company on this site, I've had a number of messages from people who have purchased this stock beginning late in 2020, because though the price was a bit higher than the $50 per share that Parsad purchased it at, for catalyst driven traders - the massive amount of insider purchasing late in the year seemed to be a potential catalyst. Some people have said the buying itself was a catalyst and others thought the buying signified an underlying catalyst that management knew about and was buying. I'm not at all agreeing with these purchases, but for catalyst driven traders - as Gregmal was advocating for - I could see why they believe that is significant. Though the price is higher, this is a separate potential catalyst - just like Gregmal thought the vaccine was a broad market catalyst. As for purchasing at $50 per share, management is such a risk with this company, that I think proper investment thinking had to wrestle with that thinking at $50 per share as well as $150 per share and if its ever at $250 per share or anything else. The company is cheap for a reason and an investor may just be buying it based on that cheapness, but management risk is an inherent part of the investment no matter how cheap the purchase price. So from that perspective, I don't think Parsad's simple matter of investing in it at $50 per share regardless of management would do it for me. Also, at the end of the quarter, after buying out the $150 million in debt for $100 million booking a $50 million gain, and Cracker Barrel's price going from $50 per share or so to $170 per share (and Biglari buying more shares of it at $60 per share or so, though it was a relatively minor amount compared to what they already held) and with the buybacks adding significant book value per share since they were buying at a large discount to book value, I believe that tangible book value per share is actually cheaper now at $150 per share than it was when Parsad purchased it at $50 per share. The other point in Gregmal's post is congratulating him for buying a company that you would never touch because of f***stick Sardar. I share that sentiment about the management of the company - but that perhaps means it was not a great investment even though it turned out well. There were plenty of other great companies to purchase at times during the last year. Viacom a relatively safe investment at $12 per share, now at close to $100 and dozens of others like that. If Sardar is that bad then he perhaps presents such a risk to the company that it is not good to invest in it at any price. Just celebrating an investment because it went up is results-oriented thinking - which runs completely counter to the Buffett/Munger framework of thought. These weren't "free benjamins" if there was a lot of management risk embedded in the company, even if it worked out. If one had that much confidence in the vaccine and in a recovery, one could have just made a leveraged investment on the S&P 500 and avoided company-specific risk, or leveraged investments on those sector ETFs that would have also avoided company specific risk that is inherently embedded in investing in an individual stock like Biglari Holdings. There is so much results-oriented thinking running through the worlds of investing and speculating now. Many people made lots of money on Gamestock, do adherents of the way of Buffett/Munger/Watsa believe those were sound decisions simply because they worked out in the short-run for the people that purchased those securities? Buying at X and then selling at 2X or even 5X actually does not make it a sound investment, necessarily. At least according to the principles of these investors who lead the companies honored in the name of this great site.

The time to own it was 12 months ago when I bought it for $50! ;D And I was out by $120...that takes care of management risk! Cheers! How do you know what the right price for this management risk was? Why $120 and not $100 or $150? This is not a cheeky question, I think this is a challenging consideration as it relates to this company. If there is management risk at this level, it is difficult to calculate how to factor that in where to sell it at or whether to buy it at all. An investor told me recently they were more comfortable with the management risk of this company now - even though the price is higher than the 2020 lows - because late in the year the company/Lion Fund II purchased so many Biglari Holdings shares. And the other day another Form 4 was filed and they purchased more shares bringing their recent total purchases to over $15 million I think. If Sardar's plan is just to screw everyone out of all the money - then these purchases are dumb as they deprive him of money that he could swindle to himself. The point being, he is having the company buy all of these shares for a reason - and according to this argument - that maybe makes the management risk more tolerable. All of the Biglari Holdings/Lion Fund purchases of Biglari Holdings own stock the last few years - also make his incentive payments nearly entirely bound to the share price of Biglari Holdings - so the straightest line path for him to make significant sums in the near future is to drive the price of the stock up - if he can. I'm not saying this argument is accurate but I am saying I can understand why investors are more comfortable holding it now when the company has recently been purchasing all of these shares on the open market, versus last year at a lower price but when the company was not buying it - which could add to the risk that he had other schemes to appropriate money to himself that did not involve driving the share price of Biglari Holdings higher. I just think these are interesting questions and am curious if you had thoughts.

I agree with you Parsad that it is a good idea, especially given the issues Steak n Shake had, but you have to admit that press release is kind of funny in an over-the-top kind of way right?

This press release is hilarious, there may be a little bit of good Steak n Shake news in it, but it is such sort of obvious marketing/hype and even the language in some places is so over-the-top it strongly resembles a press release from a dictator. "Leader so and so played golf yesterday and shot a 18-hole score of 21 shots, breaking his own previous world record of 22" kind of thing. It's interesting that the company put this out because they ordinarily do not press releases or seek media attention. I suppose there is some kind of reason they are seeking attention now. https://www.prnewswire.com/news-releases/steak-n-shake-opening-45-restaurants-301242857.html

Does anyone have any insight into the Joint Venture press release for the development of power? Is that just basically a dressed-up way of saying, they are doing this joint venture with a Chinese company so they can do business in China - is that what is going on with that?

His compensation is not setup that way, so until that changes, I don't see it being a highly plausible outcome. And it would not make any sense for why he has repurchased (personally and even more so through Biglari Holdings/Lion Fund II) so many shares after he already had control. That is a $100 million or so that he can't "steal" or find some way to appropriate to himself.

By uninvestable I simply mean a company/stock that one would not invest in at any price. I think that is many people's decision on this company - that they would not invest a dollar in it at any price - and I certainly respect that decision and it may prove to be the best decision regarding this company. But I do not think that anyone is valuing it without including those G&A/corporate expenses. If you mean that sometimes people use short-hand and say "The operating businesses are worth X" meanwhile the "market cap is only 1/2 of X" - plus the company has these investments - then yes, I'm sure some people discuss the investment in that fashion without explicitly writing out something like the following: "the corporate expenses, including the $8.4 million services/administrative/boondoggle fees, usually total around $10 million per year - those must be valued and deducted from any valuation of the company and its constituent businesses." While it would be tedious to write that out - I think that all people who value this company are all-too-aware that these expenses must be considered in the valuation. With that said, I'm not really sure very many people are valuing the company at all - which probably goes back to the uninvestable point. How many investors read the annual report/10Qs/13F-HRs and develop some kind of valuation of the company? I would guess it is only a handful of investors.

Who is arguing that? There is not a single person on here who is not aware that these expenses and all of the other corporate governance issues are extremely relevant to the valuation of it and at best cause a substantial discount to the intrinsic value of the enterprise and at worst make the company uninvestable. If there is someone on this board who reads this that thinks that those expenses are not relevant to the valuation of the company - then please correct me and post something to that effect - I'd be interested in knowing why. I have never seen someone argue that. The question is, is the company completely investable because of these expenses, the incentive agreement, the corporate governance issues, and the inability to trust management or is there some price for the company's shares/market cap that makes the company a worthwhile investment factoring in a large Biglari discount for all of these issues/expenses? Like Parsad last year bought shares evidently because he thought the price/value gap got too large and for him I guess it is not uninvestable at any price. For nearly everyone else, I surmise that they would not invest in Biglari Holdings at any perceived price/value gap.

Apart from the question of whether or not he is incentivized to make the share price of Biglari Holdings valuable, there are of course all sorts of questions though about his judgement, increased exposure to Steak n Shake, the discount the has to be applied for his incentive allocation payments he gets if the share price does soar, and as someone mentioned the valuation discount of the $8.4 million services contract plus the $900k salary even if he does not does get incentive payments because the share price of Biglari Holdings has gone up a lot. But on the question of incentives and whether he is financially bound up with the share price of Biglari Holdings - I think that he clearly is. I guess this is what I think is interesting about it - he has spent a ton of his own money buying shares the last few years and has had the company itself buy multiple hundreds of millions worth of shares - something like $100 million of open market purchases AFTER he already acquired voting control via the large tender. Yes, he can have a comfortable lifestyle from funding it through the company - but I don't think he can get "filthy rich" if the stock of the company doesn't do well. Spending so much money on buying those shares ties himself to the company's stock price to a much greater degree. If he were only interested in making sure he was getting filthy rich even if the stock price went down and stayed down forever, then he would't have spent those hundreds of millions buying shares back - he would have kept in the company so he could swindle it. I'm not arguing that makes this a good investment or even that he is not a crook or something - I'm just saying that is what makes this situation interesting. He is the ego-maniac who has set himself up with the company paying for his lifestyle. Yet, he has also bound himself to the share price of Biglari Holdings more than most management of public companies by far. He also has by far the most to gain from the share price of Biglari Holdings going up significantly. Even if he is a nefarious actor, probably the most straight-forward way for him to get the most amount of money is to try to get the share price of Biglari Holdings up significantly.

Indeed. You certainly have to pay the piper with this one. As everyone knows. That is a major downside worthy of a significant discount or perhaps making it investable completely. With every investment, though, there is some kind of piper to pay. In the form of a high valuation or some such similar dynamic. With this one, Sardar's actions and compensation are so noxious to so many people that they can't even imagine investing. Those aspects of him stick out so viscerally to investors, especially value investors, especially value investors who were initially lured with the language of Buffett and partnership with shareholders. On the other hand, while Sardar Biglari will make more money from the success of this enterprise than other shareholders, and is funding his lifestyle off of the company to some extent, he also has completely tied his own financial life to the shares of the company. He has never sold a share, has consistently purchased shares, and as he said apparently at a recent annual meeting - has nearly his entire net worth tied to the long-term share price of Biglari Holdings. That is a lot more than many public company CEOs can say. He has also had Biglari Holdings itself, through the Lion Funds, buy massive amounts of the stock back. This has even further tied his own future incentive payments to the share price of Biglari Holdings. So on one hand, an investor has to live with the $8.4 million in expenses for running the fund, plus $1 million salary, plus potentially large incentive payments. On the other hand, you do have a situation in which Sardar Biglari is massively incentivized for the price of Biglari Holdings shares to be worth more. Understanding both sides of that dynamic is interesting.

Agree with most of your thoughts - except you are using the market cap that includes all of the shares that Biglari Holdings owns in itself in the Lion Funds yet you are excluding the value of those share when you say "The Lion Fund minus the BH shares." There are two approaches to this, in my view, either one makes sense. One is to exclude the "self-owned BH shares" from the market cap and exclude their value from the value of BH/Lion Fund's investments. Or, to include all of those self-owned shares in the market cap and then also include them in the value of BH's investments. The post above includes those shares in the market cap but excludes their value in the investments. I do not think that is consistent or an accurate view of this. The market cap, if you exclude those BH self-owned shares, is about half of the figure in your post.