BH - Biglari Holdings

[Zorrofan]

Gio,

 

Your posts are always most interesting. And you seem to be able to separate emotion from your decision making process - not always easy!!  So I am truly confused by your stance with this company.  i ask this to provoke discussion not discord - how do you reconcile your stance on creating shareholder value with the egregious compensation paid to management of this company?

 

cheers

Zorro

 

Hi Zorro,

let me just ask: how do you look at Mr. Biglari’s compensation?

a) A cost that unfortunately is not cut to the bone

b) Some sort of ominous sign Mr. Biglari is not a great entrepreneur and therefore is going to make big business mistakes in the not too distant future

If the answer is a), I agree with you. And what can I say? As long as BVPS keeps growing handsomely, I will just pretend I don’t know it could grow even faster! ;)

If the answer is b), what can I tell you? As I have already said, I will deal with the evidence as it comes. My crystal ball is definitely broken! ;)

 

I am reading and interesting book: [amazonsearch]Compelling People, The Hidden Qualities That Make Us Influential[/amazonsearch]

The authors suggest the two most important things we communicate to other people, and that they use to judge us, are: STRENGTH and WARMTH. Really compelling people are those who know how to convey both an impression of being strong and an impression of being warm.

Other two findings imo are interesting:

1) Strength and warmth tend to be mutually exclusive… even from a biological point of view: strength is associated with testosterone, warmth with oxytocin: high levels of testosterone and high levels of oxytocin in our bodies are mutually exclusive

2) The Halo Effect: people tend to think that those who are very strong should also be very warm, and vice versa.

Of course, 1) is nature, 2) is only a bias.

I have found many people on this thread believe 2) in reverse: because Mr. Biglari is so poor at conveying warmth, he should also lack strength… well, imo also 2) in reverse is nothing but a bias. ;)

 

Gio

 

Gio,

 

Many thanks for your reply and your patience!!  I do not dispute Biglari's ability to invest but I am in the "A" camp.  I would rather he grew rich with me, rather than through the compensation structure he has put in place.  I recall many years ago WEB told a story in one of his shareholder letter about dealing with (IIRC) Rose Blumkin.  If I can recall the story correctly, she survived the Nazi occupation and when she came to America her standard of choosing who to conduct business with was based on "would they have hidden me from the Nazis?" The moral being choose to conduct business with people of high character.  I am very undecided so I will likely watch and wish you well with this one....

 

;D

 

cheers

Zorro

[giofranchi]

When looking at Biglari, I am reminded of this WEB quote.

 

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.” –Warren Buffett

 

I think there is a misconception about what I try to do while investing my firm’s capital.

I look for great entrepreneurs, not great managers.

When I hire someone, I look for a great manager; when I invest, I look for a great entrepreneur.

I think the difference is huge.

 

Gio

 

[zarley]

When looking at Biglari, I am reminded of this WEB quote.

 

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.” –Warren Buffett

 

I think there is a misconception about what I try to do while investing my firm’s capital.

I look for great entrepreneurs, not great managers.

When I hire someone, I look for a great manager; when I invest, I look for a great entrepreneur.

I think the difference is huge.

 

Gio

 

What a curious non sequitur.  The issue isn't a balancing of his entrepreneurial ability vs. his management ability, it's a question of trust and integrity.  People view him as lacking personal integrity and see the name thing and the compensation issue as examples of why they don't trust him.  From that view, it's a question of why do you choose to do business with someone you don't trust. 

 

It seems that you either believe that people have misunderstood Biglari's motivations and actions, and that he's done nothing to make you feel you can't trust him, or you feel like even though he has questionable character, his other skills will make BH, as an investment vehicle, so profitable that it won't matter if he's skimming a little extra for himself off the top in the process.

[giofranchi]

What a curious non sequitur.  The issue isn't a balancing of his entrepreneurial ability vs. his management ability, it's a question of trust and integrity.  People view him as lacking personal integrity and see the name thing and the compensation issue as examples of why they don't trust him.  From that view, it's a question of why do you choose to do business with someone you don't trust. 

 

It seems that you either believe that people have misunderstood Biglari's motivations and actions, and that he's done nothing to make you feel you can't trust him, or you feel like even though he has questionable character, his other skills will make BH, as an investment vehicle, so profitable that it won't matter if he's skimming a little extra for himself off the top in the process.

 

Ok, so let me try to explain what I mean a little more clearly:

 

I think what Mr. Buffett means is this: do they understand they are stewards of other people’s capital? Do they accept this responsibility seriously?

 

I know a lot of CEOs and a lot of entrepreneurs: practically without any exception entrepreneurs’ chief interest is capital allocation, while CEOs’ chief interest is… something else!

 

Most CEOs have not started their career as capital allocators, otherwise they all would be entrepreneurs!, instead they were technicians, designers, sales and marketing representatives, PR representatives, etc.. They were extremely good at what they did, and sometimes go on thinking that, once they have become CEOs, the success of the business they run still solely depends on their abilities as technicians, designers, sales and marketing, or PR representatives, etc.. This ego-centric view of the business they run has two fundamental flaws:

1) It is incompatible with the idea they view themselves as stewards of other people’s capital

2) It is false

 

Just yesterday, for instance, I met with the CEO of a large engineering firm based in Milan. We talked for an hour, and she was all about this project over here, that project over there, a lot of technicalities, all very interesting things… but the subject of capital allocation she simply never brought up, not even once. Well, you know what? I wouldn’t be interested to invest in her company.

 

When you deal with entrepreneurs, instead, everything changes. They know their most important activity is capital allocation. Therefore:

a) In a private company they view themselves as stewards of their own capital

b) In a public company they view themselves as stewards of other people’s capital

Of course, depending on past results, some ask to be paid less, others to be paid more… But there can be no misunderstanding about what their first and most important responsibility is.

 

What are then the risks with entrepreneurs? I see two basically:

First: they start underperforming: look at Mr. Dell, for instance, and the outcome for shareholders was not a favorable one... But at the beginning of this discussion I have said:

If Mr. Biglari's business judgment and choices in the future are of the same very high quality as the ones he has made in the past until now

Second: some entrepreneurs might be truly dishonest people. Of course, I don’t think Mr. Biglari is dishonest. Full of himself and arrogant? Maybe yes. Dishonest? Absolutely not! ;)

 

Gio

 

[ragu]

Do you think this guy's trustworthy? (and why?)

 

watchwoord,

 

Couple of questions (that I have asked earlier on this board):

 

a. Which set of people have invested with Sardar the longest?

 

b. What have the overwhelming majority in that set done with respect to their investment with Sardar since the compensation plan was announced?

The implications of the answers to these 2 questions should help those that are on the fence re. Sardar.

 

 

Best,

Ragu

[ragnarisapirate]

Do you think this guy's trustworthy? (and why?)

 

watchwoord,

 

Couple of questions (that I have asked earlier on this board):

 

a. Which set of people have invested with Sardar the longest?

 

b. What have the overwhelming majority in that set done with respect to their investment with Sardar since the compensation plan was announced?

The implications of the answers to these 2 questions should help those that are on the fence re. Sardar.

 

 

Best,

Ragu

 

I assume that you are referring to the lion fund partners, no?

 

Something to consider- they are likely paying his compensation 2x for the shares of BH that they own via the lion fund, once for the hedge fund style agreement at BH, then again when they pay his management fee at the lion fund.

 

Of course, there could be some agreement that isn't public that remedies this- after all, hedge funds are generally more secretive than a public company. For example, he doesn't charge the LF partners a fee or anything for the portion of the LF that is invested in BH. That would actually seem pretty fair to them.

 

 

If this is not the case, I would begin to question if they are getting that great of a deal many think. That said, Sardar is generally excellent in what he does. No one here can say that he is a bad investor.

 

If there are any current Lion Fund partners out there, I would love to talk with you about this.

[Saidal]

I'd be interested in seeing the Lion Fund LP letters as well. Does anyone have PDFs of previous year letters?

[ragu]

I assume that you are referring to the lion fund partners, no?

 

Jeff,

 

I am.

 

 

Something to consider- they are likely paying his compensation 2x for the shares of BH that they own via the lion fund, once for the hedge fund style agreement at BH, then again when they pay his management fee at the lion fund.

 

That's right. And yet, oddly enough, they stuck with him.

 

Of course, there could be some agreement that isn't public that remedies this

 

There wasn't. Sardar confirmed at the AM a couple of years back that the LF partners were effectively being charged twice.

 

What do Sardar's longest standing partners know about his integrity that cause them to take a stand different from the public shareholders that were disillusioned by the incentive agreement?

 

Best,

Ragu

 

 

[giofranchi]

I have bought more yesterday at $409.

 

Gio

[giofranchi]

This is heretical but I'll say it anyways.

 

shalab, if applied to Mr. Biglari, that is not heretical… it is just unrealistic. And to be realistic is all that truly matters in investing… Mr. Biglari somehow arises strong feelings… whenever Mr. Biglari is concerned, most people fail to be realistic…

 

That’s why my agenda is to take the evidence as it comes: when results (measured in BVPS growth) deteriorate, I will start questioning Mr. Biglari’s conduct and business acumen… until then I will let the numbers speak for themselves.

 

Gio

 

[rayfinkle]

https://www.sec.gov/Archives/edgar/data/93859/000092189514001546/s307428035_07142014.htm

[giofranchi]

I was just responding to Ragu on why investors are not leaving Lion Fund even though they are charged twice.

 

I know... but I don't think it is the right answer... I think investors in the Lion Fund since inception have made a lot of money... despite Mr. Biglari's peculiarities... that's why imo they are not leaving even though they are charged twice...

 

Of course, I might be wrong. ;)

 

Gio

[giofranchi]

https://www.sec.gov/Archives/edgar/data/93859/000092189514001546/s307428035_07142014.htm

 

Does anyone know when it will be completed?

 

Thanks,

 

Gio

[rayfinkle]

Geo no news yet on that.

[giofranchi]

Geo no news yet on that.

 

Ok, thank you!

I have made money before with this kind of offering... and I look foreward to making money again! ;)

 

Gio

[rayfinkle]

Geo no news yet on that.

 

Ok, thank you!

I have made money before with this kind of offering... and I look foreward to making money again! ;)

 

Gio

 

Looking back at the prior rights offering:

-The first S-3 was published on 2/5/13

-there were five total amendments published, with the final one being on 8/20/13

-Amendment three released (7/19/13) released the size of the offering in $$$ but not the max unit price

-Amendment 4 (8/16) increased the offering amount slightly (~$5M) and disclosed the offering price of $265/share and set the cutoff for holders of record at 8/27/13

-The transaction occurred in September 2013

-Following this timeline suggests an early 2015 timing, with the date

 

I'll compare the final 2013 prospectus with this latest version to see what variances exist. Geo--PM me your email address pls.

[wachtwoord]

Geo--PM me your email address pls.

 

Ahahahahahah!!!!... As if my e-mail were top-secret...  ;D ;D

 

g.franchi

AT

agenziamilanostrutture

DOT

it

 

Cheers,

 

Gio

 

No but this page is freely accessible so posting it here like this will result in you getting more spam. I suggest you make it less readable or remove it ;)

[giofranchi]

No but this page is freely accessible so posting it here like this will result in you getting more spam. I suggest you make it less readable or remove it ;)

 

Well, I guess you are right! And I am removing it... ;)

 

Gio

[giofranchi]

Gio  - while you may certainly be rational in your evaluation of BH, (wo)man is not a rational animal. In my mental model, two forces are at play here - a great story and inertia.

 

Biglari was a great story and still is to a great extent. Kudos to Biglari to build it up and play it that way.

 

Hi Shalab!

I have not said I am rational… Instead, I have just said I will take the evidence as it comes… To be rational, and to take the evidence as it comes, are very different things: the former requires much self-control and clearness of thought… The latter requires only the ability to read numbers…

So, where is the catch? Well usually, if you wait for performance to be evident, you might run the risk of losing money (if and when that performance disappoints). But here is where valuation comes into play: today BH’s market capitalization is a low enough multiple of BV that, even if Mr. Biglari starts making unsound business decisions, I don’t believe it will contract much further… Therefore, BH’s stock price actually gives us the luxury to wait for that evidence… In other words, expectations already are that Mr. Biglari is going to make mistakes in the future.

 

BTW - I am looking forward to "Gio Holdings" to be listed  ;D.

 

Ahahahahah!!! Thank you! But I am not that ambitious… I love what I do… Wouldn’t do anything else… I am lucky enough to be financially independent… I have compounded my firm’s capital at 20% annual for the last 3 years, and this year I am up 10%... Despite my "ex" very large investment in LRE, that has cost me money this year… I know I probably won’t succeed in keeping up such a good performance for long… But I also believe I can do sufficiently well, even without other people’s money… My shareholders are my family… Why should I welcome the headache to accept others?

 

Cheers,

 

Gio

 

[peter1234]

I learn a lot from Gio and everyone's thoughtful comments on this board. If Gio was running money, we might never have heard of him.

 

;D

[giofranchi]

Thank you Peter! Too kind of you! But I understand what shalab means.

Yet, once again, let’s try to be rational:

First: as an entrepreneur I run businesses which require very little or no capital at all… therefore, if I were to receive more capital trough an IPO of my company, I sincerely wouldn’t know how to use it…

Second: as an investor I simply don’t think my track record is good enough to manage other people’s money…

So basically, besides the fact I don’t welcome the headache a public company would bring, which is true, I also don’t think the business proposition I could offer is interesting enough. ;)

 

Gio

 

[cobafdek]

 

So basically, besides the fact I don’t welcome the headache a public company would bring, which is true, I also don’t think the business proposition I could offer is interesting enough. ;)

 

Gio

 

 

I would pay to get regular Gio-style commentary in partnership or shareholder letters, written in that authentic inimitable Gio prose.  That would be a refreshing change from the fake wannabe-Buffett-knockoff BH letters.  For now, I am grateful to get Gio commentary for free here, even if there were no emoticons!

[giofranchi]

I would pay to get regular Gio-style commentary in partnership or shareholder letters, written in that authentic inimitable Gio prose. 

 

Ahahahah!!! Hey, it is really too flattering! And I don’t deserve that! Anyway, thank you so much! :)

 

Cheers,

 

Gio

 

[bargainman]

just  for kicks, here is my future prediction for an acquisition by Bigs ;0)

 

http://us.bulgari.com

[rkbabang]

just  for kicks, here is my future prediction for an acquisition by Bigs ;0)

 

http://us.bulgari.com

 

Accompanied by a slight name change, of course, for which he will charge a substantial fee.