BH - Biglari Holdings

[giofranchi]

Once again, this is not rational.

I have repeated over and over again that I look for 2 things:

1) a great entrepreneur

2) a business that gives him/her steady and safe fcf

And I have always said that I require BOTH.

When Brindle resigned, Lancashire was no longer what I look for. Period.

 

The real take away, that evidently you have missed, is this one:

Notwithstanding all the work and hours I had put into the effort of understanding Lancashire, as soon as it was no longer what I look for, I sold.

 

I never said my judgment is infallible… Far from me! But the truth is this: if I have 7 Lancashire, in which my judgment proves to be flawed and each time I lose the money I lost in Lancashire, then I have 3 investments in which, instead, my judgment proves to be right, results overall will be very satisfactory indeed.

 

If the biggest (only?) risk in your investment process is that you are sometimes wrong when judging people, why would you a) invest in somebody who is highly controversial in the first place and b) work yourself into a position where all you do is defend the guy? Wouldn't the inverse process be much safer? Only invest in the most reputable businessmen and always try to find reasons to knock them of their pedestal.

 

Now, tell me of another thread where an investment is more attacked than BH… Not easy to find, right? The reason I read every post of detractors’ is exactly because I want to be aware of every possible risk!

Then, let’s put it this way: if you find the home of your dreams, in the neighborhood of your dreams, in the city of your dreams… and someone shouts: “Move away… because 10 years, 3 months, 2 weeks, and 3 days from now an asteroid is destined to hit you!!”… and you don’t decide to move to a home that you like far less, in a neighborhood that you like far less, in a city that you like far less… who is behaving irrationally?

 

Gio

 

[giofranchi]

Gio, sorry to say but you are the master of platitudes.

 

Tom,

I don’t understand… You have already expressed very well your thoughts about what I write in my posts… I guess everyone on this board already knows that you think I write platitudes… Why do you go on repeating and underlying that concept? Probably, but it is only a guess, you do so because you care to let also new members know…?! ;D ;D

 

Gio

 

[giofranchi]

You speak of rationality and LRE in the same sentence?  :o Lancashire suddenly ceased what it was because Brindle left? How much of an impact do you think exactly Brindle had those last few months/years with the exact same team, operations and culture in place? If you think Brindle was worth a 30% premium (you bought at +- 800 GBX yet don't buy now) I simply don't know what magical powers you think Brindle brought to the table! LRE is simply a good insurer with great corporate culture that is likely to do very well for quite some time.

 

Maybe… But the simple fact is that I am not sure… I run two businesses… And my idea of the difference I make in their performances is much more than… 30%… Unless, of course, you meant 30%… annual!! ;D ;D

You surely know Lancashire much better than I do, and you might be positive about what you have just said…

Let’s say that, when I invest in businesses through the stock market, I like to be redundant in the quality of what I look for: why should I accept only 2), if I can get somewhere else both 1) and 2)?

 

Of course, answer my question only if it is not too big a platitude for you!! ;)

 

Gio

 

[giofranchi]

Selling a 25% portfolio stake at far lower prices the same morning the CEO announces his retirement doesn't sound rational to me.

 

Remember that I average down… You don’t know my cost… And yet you judge… I am not saying I didn’t lose money. I have always admitted I lost money.

 

I am up 11% this year. After compounding my firm’s equity at a CAGR of 20% for the last three years.

 

Despite the fact I write platitudes, results are not that bad… ;)

 

Gio

 

[giofranchi]

Gio, have you met mr. Raina? He is a great compounder, very intelligent and very young! He also talks in terms we value guys appreciate.

 

If I say I have no idea what you are talking about… sounds like another platitude? ;D ;D

 

Gio

 

[writser]

Once again, this is not rational.

I have repeated over and over again that I look for 2 things:

1) a great entrepreneur

2) a business that gives him/her steady and safe fcf

And I have always said that I require BOTH.

When Brindle resigned, Lancashire was no longer what I look for. Period.

 

The real take away, that evidently you have missed, is this one:

Notwithstanding all the work and hours I had put into the effort of understanding Lancashire, as soon as it was no longer what I look for, I sold.

 

I didn't miss that. I said it was a consistent approach - but not rational. Every business is worth a price, with or without a great CEO at the helm. You value Lancashire at a couple of billion with mr. Brindle but at zero without him. Such a black-and-white approach will lead you to make stupid decisions like selling a 25% portfolio stake in a single morning regardless of price. What your costs were or if you averaged down doesn't matter: I hope you even made money. I just think the thought process is flawed. Your past results are irrelevant in that context. I didn't judge the results.

 

The comparison with a dream house doesn't make sense to me. You are saying you would buy that regardless of the asteroid risk because you love it, right? That doesn't make it a good investment though !! If you are looking to buy real estate solely to make money you'd be impersonal about its location and if several contractors warn you the foundations might be rotten you'd rather buy something else. Especially if your previous mansion just collapsed :) .

[giofranchi]

I didn't miss that. I said it was a consistent approach - but not rational. Every business is worth a price, with or without a great CEO at the helm. You value Lancashire at a couple of billion with mr. Brindle but at zero without him. Such a black-and-white approach will lead you to make stupid decisions like selling a 25% portfolio stake in a single morning. What your costs were or if you averaged down doesn't matter: I hope that you even made money. I just think the thought process is flawed. Your past results are also irrelevant in that context.

 

writser,

it clearly is not so… I simply found a better place for my capital… what I think might turn out to be a better place… As I have always said, I might be wrong!

I ask you the same question I have asked Tom:

 

why should I accept only 2), if I can get somewhere else both 1) and 2)?

 

Of course my past results are not irrelevant at all… because my thought process hasn’t changed! ;)

 

The comparison with a dream house doesn't make sense to me. You are saying you would buy that regardless of the asteroid risk because you love it, right? That doesn't make it a good investment though. I hope that is not the way you consider your stock picks. If you are looking to buy real estate solely to make money you'd be impersonal about its location and if people from the neighbourhood warn you the foundations are rotten you'd rather buy something else.

 

Well, not only I read every post by detractors… if you have noticed, I also try to answer as many as I can… because the process of writing the answers to those posts helps me very much to understand if they are prophesizing an asteroid, or are true warnings about rotten foundations… I hope this answer is plain enough to let you understand which conclusion I have reached till now. ;)

 

Gio

 

[writser]

it clearly is not so… I simply found a better place for my capital… what I think might turn out to be a better place… As I have always said, I might be wrong!

 

Back in April you mentioned you suddenly had a boatload of cash and no good ideas. You also said that you wouldn't buy back Lancashire at that point - regardless of price. As far as I am concerned that is not "finding a better place for your capital". It is also not a case of "why accepting only 2) when you can get 1) and 2) somewhere else".  I would call that "dumping a huge position at any price".

[Charlie]

I always thought that the real reason Gio gets comfortable with Biglari is because as an Italian he was used to Berlusconi.  ;)

[giofranchi]

writser,

the problem is you are judging a thought process… without knowing it!

So, now let me try to summarize it as best as I can:

 

I buy businesses to hold them as long as possible.

 

I run two businesses every day.

 

This activity doesn’t let me jump in and out of stocks frequently.

 

I wouldn’t be able to muster the required confidence, and therefore I would make many mistakes.

 

If you buy and hold, to get satisfactory results, you must choose well.

 

JNJ, KO, WMT, etc. most probably won’t do.

 

My idea of choosing well is small to medium caps, with still great potential for growth.

 

They are risky: LRE is no JNJ, KO, WMT… LRE was founded the year I founded my company…

 

Then, how to reduce the risk? Two ways:

a) To be always very conscious about the price I pay

b) To require also an outstanding owner/manager

 

In fact, I require 1), 2), and 3): an outstanding owner/manger, steady and safe fcf, a good price.

 

If I’d invest in JNJ, KO, WMT, 1) would clearly not be a requisite.

 

Adding that requisite, and concentrating on small to medium caps, which are inherently riskier, I hope to achieve better results, running almost the same level of risk.

 

I am not saying my thought process is good for you, or anyone else. There are plenty of ways you certainly might do much better! And, probably, if I quit running my businesses, and I concentrate only on trading, I might become richer, faster!… But I love what I do. Some additional percentage points at the end of the year are no good reasons for a change…

 

Gio

 

[giofranchi]

it clearly is not so… I simply found a better place for my capital… what I think might turn out to be a better place… As I have always said, I might be wrong!

 

Back in April you mentioned you suddenly had a boatload of cash and no good ideas. You also said that you wouldn't buy back Lancashire at that point - regardless of price. As far as I am concerned that is not "finding a better place for your capital". It is also not a case of "why accepting only 2) when you can get 1) and 2) somewhere else".  I would call that "dumping a huge position at any price".

 

Almost the very same day I sold LRE, I also bought LMCA, GLRE, TPRE, and more ALS. ;)

 

They might not have been great ideas, because 3) was not truly a bargain price… Yet, I preferred GLRE at 1.2 x BVPS with Einhorn to LRE at 1.4 x BVPS without Brindle… Is that so difficult to understand? ???

 

Gio

 

[giofranchi]

I always thought that the real reason Gio gets comfortable with Biglari is because as an Italian he was used to Berlusconi.  ;)

 

Berlusconi had done exceptionally well for his shareholders, while he ran his companies… When he became a politician, two things happened:

1) He wasn’t able to do almost any good to his country

2) His companies’ performance started disappointing

Evidently, in politics those who predict asteroids win! ;)

 

Gio

 

[premfan]

Hello Gio,

 

You seem like a great businessman and a rational investor.  Hence I don't see why you seek approval and validation in your approach. Continue compounding and living the dream. Forcing people to see the world in your view is a recipe for argument and useless semantics.  If your desire is to be a teacher or future investment guru then results speak louder than words. I would encourage you to build a public track record. This would satisfy your urge to preach your thoughts ( via shareholder letters).

 

It seems to me the context of the majority of your posts is teaching. You enjoy explaining your investment process. I bet you would write brilliant shareholder letters. Maybe investigate how to get in the public domain. This would build you credibility and a platform to teach to your followers.

 

premfan

[cobafdek]

 

Gio, sorry to say but you are the master of platitudes.

 

Platitudes?  Perhaps.  But platitudes embedded within 24-carat prose are no longer platitudes. 

 

In a similar vein, emoticons are generally annoying.  Yet, somehow, when wielded by Gio, they are no longer annoying.  It all adds up to what is Gio-style.

 

I, too, look forward to shareholder letters by Gio.

 

I can't tell who is winning this debate.  All I know is I don't want it to end.  Keep it up everyone, and pass some more popcorn.

[txitxo]

  Come on, guys, lay off Gio. I think that the strategy he is following is quite rational.

 

  Most people here will agree that no matter how many copies of Security Analysis are sold every year, there is only a small fraction of investors in the world who can consistently generate alpha during long periods of time. And only a handful of those can work the magic with very large amounts of money. Look at what Buffett has done when looking for successors. He could have hired a small army of smart, highly rational people out of college, and then train them to invest using his style for 20 years. But that does not work. Great investors are born, not taught, and their skill is extremely scarce.

 

  Gio's approach is to carefully identify a subset of them, the so called owners-managers, and then make sure, after thorough analysis, that the vehicles they use (their companies) are not too expensive. That's a very solid investing approach, almost guaranteed to significantly beat the market in the long term with a fraction of the work (and the distress) required by other methods. Gio says that he just  behaves like a businessman, etc. That's his story, but in the end, what the numbers say is that he is buying consistent, diversified, long term alpha at cheap prices.

 

It therefore makes sense, using his framework, to sell when Brindle retires. Independently of how expensive or cheap the company is, there is no guarantee the new team will produce the same long term returns.

 

    Regarding BH, yes, Biglari is likely to keep generating significant alpha in the future. But his long term track record indicates that most of that overperformance will go to his pocket, and not the shareholders'...

 

 

 

 

 

 

[link01]

Hello Gio,

 

You seem like a great businessman and a rational investor.  Hence I don't see why you seek approval and validation in your approach. Continue compounding and living the dream. Forcing people to see the world in your view is a recipe for argument and useless semantics.  If your desire is to be a teacher or future investment guru then results speak louder than words. I would encourage you to build a public track record. This would satisfy your urge to preach your thoughts ( via shareholder letters).

 

It seems to me the context of the majority of your posts is teaching. You enjoy explaining your investment process. I bet you would write brilliant shareholder letters. Maybe investigate how to get in the public domain. This would build you credibility and a platform to teach to your followers.

 

premfan

no doubt that whenever gio gets actively involved in a thread it elicits a lot of interest! that's especially true when its a stock he has a position in & conviction in (actually, does gio ever have a stock position he doesn't also have conviction in?). his passion, generosity, & unfailing gentlemanly conduct is contagious. look at how the lre thread has all but dried up & withered since he sold & lost interest, despite the oft brilliant commentary from twa.

 

I don't get the same impression at all that gio seeks approval or validation or is interested in forcing people to share his world view. I think he just genuinely enjoys & seeks to learn from the debate between different & often diametrically opposed viewpoints.

[writser]

it clearly is not so… I simply found a better place for my capital… what I think might turn out to be a better place… As I have always said, I might be wrong!

 

Back in April you mentioned you suddenly had a boatload of cash and no good ideas. You also said that you wouldn't buy back Lancashire at that point - regardless of price. As far as I am concerned that is not "finding a better place for your capital". It is also not a case of "why accepting only 2) when you can get 1) and 2) somewhere else".  I would call that "dumping a huge position at any price".

 

Almost the very same day I sold LRE, I also bought LMCA, GLRE, TPRE, and more ALS. ;)

 

They might not have been great ideas, because 3) was not truly a bargain price… Yet, I preferred GLRE at 1.2 x BVPS with Einhorn to LRE at 1.4 x BVPS without Brindle… Is that so difficult to understand? ???

 

Gio

 

That would be completely understandable. But then why do you first tell us you don't know what to do with your boatloads of cash? And why tell us you won't buy back Lancashire at any price? Today you make it sound as if you swapped into something else based upon a conscious relative valuation. That's not the impression I got at the time. Guess I am wrong :) . Cheers.

[Parsad]

  Come on, guys, lay off Gio. I think that the strategy he is following is quite rational.

 

 

I don't think people are trying to specifically pick on Gio.

 

What you have is an investment manager who did everything he could in his early days to mimick Buffett...right down to the font and spacing used in the Berkshire annual reports.  Every thing he said and did sounded right!

 

Then when he began his foray using a public vehicle to acquire other businesses, once again, the prose, deeds, conduct were identical.

 

Then something started to unravel and the chinks in the armor began to appear.  Not a simple collapse in ethics, but massive breaches to install compensation plans, get control at all costs, and burnish a name rather than the reputation!  At this point, those sucked into the vortex began arguing that he never said he was Buffett. 

 

Gio, along with Ragu, and a handful of others are defenders of the faith.  Nothing wrong with that and completely entitled to say what they believe.  But then there are a number of others, including myself but I really don't care at this point unlike in the past, who can't swallow the chopped liver the defenders are feeding us. 

 

So no one is picking on Gio...they just don't like what he is feeding us!  Cheers!   

[shalab]

I love Gio - looking forward to him listing his company in OTC  ;D. He is ethical and honest and is investing his company's money.

 

Ragu also seems to be a decent value investor and shares his opinions openly - he has link to his blog in his profile.

 

Biglari is another animal altogether(IMHO) - his maneuvers should be added to 'financial shenanigans' - he has been very clever in how he played the game.

 

  Come on, guys, lay off Gio. I think that the strategy he is following is quite rational.

 

 

I don't think people are trying to specifically pick on Gio.

 

What you have is an investment manager who did everything he could in his early days to mimick Buffett...right down to the font and spacing used in the Berkshire annual reports.  Every thing he said and did sounded right!

 

Then when he began his foray using a public vehicle to acquire other businesses, once again, the prose, deeds, conduct were identical.

 

Then something started to unravel and the chinks in the armor began to appear.  Not a simple collapse in ethics, but massive breaches to install compensation plans, get control at all costs, and burnish a name rather than the reputation!  At this point, those sucked into the vortex began arguing that he never said he was Buffett. 

 

Gio, along with Ragu, and a handful of others are defenders of the faith.  Nothing wrong with that and completely entitled to say what they believe.  But then there are a number of others, including myself but I really don't care at this point unlike in the past, who can't swallow the chopped liver the defenders are feeding us. 

 

So no one is picking on Gio...they just don't like what he is feeding us!  Cheers! 

[QLEAP]

 

All may be true, but I have so rarely seen someone so passionate in the defense of a CEO.

Just trying to figure out why. Ultimately this will all sort itself out via SEC fillings and BH events.

 

This is fast becoming about as useful a thread as the one on Sears or the one on LVLT.

 

Well, Ragu has definitely put his money where his mouth is (I believe >50% of his portfolio is in BH) and he is in it for the long haul.

 

My last word on this thread (and not directed at you Myth):

 

what I find disconcerting is that there are folks on this thread who believed Chad Wasilenkoff was the second coming of Buffett just a year earlier ignoring the excessive compensation, share price destruction yada yada yada. Yet they are out here on this thread pontificating on Sardar/BH with no position in the stock. Why not throw water on your burning house before you help your neighbor?

 

Besides, BH has fared much much better than FTP. We will just have to wait and see how well he does.

 

PS: No position in BH and I have mixed feelings about Sardar

[bargainman]

edit: oh, & if biglari continues with these rights offerings below book value its going to take some adjustments to calc bh's real growth in bvps when attempting to plot his scorecard on that metric. I thought it was interesting that he said he'll continue to make use of rights offerings at least until he's able to push thru a shareholder vote for a dual class of stock, tho I don't remember where I read that at this time

 

My guess is that he will continue to do rights offerings so he can get more of the company when he has the capital at a lower price. Makes perfect sense - IMO.

 

 

 

Well, to calculate BVPS I simply use the number of shares in the first page of the 10-K filing. Just like Biglari himself has suggested to do. That number has increased from 2010 to 2013, and, if Biglari keeps making use of these rights offerings, it will get larger and larger.

 

Gio

 

I don't quite understand this logic. In particular doesn't each rights offering actually reduce book value per share? For each share he is issuing, he is only getting 250/420 worth of the value into book which by default means it should be reducing book value per share is that not correct? What does his compensation say about adjustments for these sorts of rights offerings? Do you know?

[giofranchi]

Hello Gio,

 

You seem like a great businessman and a rational investor.  Hence I don't see why you seek approval and validation in your approach. Continue compounding and living the dream. Forcing people to see the world in your view is a recipe for argument and useless semantics.  If your desire is to be a teacher or future investment guru then results speak louder than words. I would encourage you to build a public track record. This would satisfy your urge to preach your thoughts ( via shareholder letters).

 

It seems to me the context of the majority of your posts is teaching. You enjoy explaining your investment process. I bet you would write brilliant shareholder letters. Maybe investigate how to get in the public domain. This would build you credibility and a platform to teach to your followers.

 

premfan

no doubt that whenever gio gets actively involved in a thread it elicits a lot of interest! that's especially true when its a stock he has a position in & conviction in (actually, does gio ever have a stock position he doesn't also have conviction in?). his passion, generosity, & unfailing gentlemanly conduct is contagious. look at how the lre thread has all but dried up & withered since he sold & lost interest, despite the oft brilliant commentary from twa.

 

I don't get the same impression at all that gio seeks approval or validation or is interested in forcing people to share his world view. I think he just genuinely enjoys & seeks to learn from the debate between different & often diametrically opposed viewpoints.

 

Reading makes a full Man, Meditation a profound Man, discourse a clear Man

--Ben Franklin

 

This is the only reason why I like contributing to the board so much: because I have found out that the process of a) writing about an investment thesis of mine, b) receiving feedbacks from many people around the world, with different cultural and working backgrounds, and c) reasoning about their responses and answering back, is a great way to get “clearness” of mind, and therefore conviction about an investment opportunity.

 

Besides this, I really don’t care about approval and validation, I don’t care about public fame or a public track-record, I certainly don’t care about forcing the way I see the world on anyone (I even doubt there is a “way” I look at the world…), and of course I couldn’t care less about teaching platitudes to anyone!! ;)

 

All I care for:

1) To live many joyful moments with the people I love

2) To compound my capital at 15% annual for the next 45 years

 

PS

I must admit I also find arguing with people who disagree with me… until they finally agree with me… to be much fun!! ;D ;D ;D

 

Gio

 

[giofranchi]

And why tell us you won't buy back Lancashire at any price?

 

The Master’s Eye will do more Work than both his Hands

--Ben Franklin

 

This might be another platitude… Actually, also Ben was accused by his detractors to be the master of platitudes… at least one thing we have in common!! ;)

 

Of course, for the JNJ, KO, WMT of the world that quote might not be true anymore…

Anyway, I think it is clear by now the companies I look at are still much younger, much smaller, and much riskier (of course, they also have imo the possibility of growing much faster).

Therefore, both if you look for downside protection, someone who knows all the risks and stirs the boat away from them, and if you look for future success, someone who knows all the opportunities for growth and stirs the boat towards them, I think you'd better demand a very capable and reliable “Master” at the helm.

 

Unfortunately, our knowledge of public companies is somewhat limited. And the only way we could judge a “Master” is by what he has achieved in the past… I know what Mr. Brindle has accomplished since he founded LRE and in the years before its founding… while I know nothing about Mr. Maloney...

 

Gio

 

[giofranchi]

I don't quite understand this logic. In particular doesn't each rights offering actually reduce book value per share? For each share he is issuing, he is only getting 250/420 worth of the value into book which by default means it should be reducing book value per share is that not correct? What does his compensation say about adjustments for these sorts of rights offerings? Do you know?

 

Sorry, what I meant is this:

 

Each rights offering increases the number of shares outstanding. Yet, in my calculation of a 21% CAGR in BVPS over the last three years I have already considered their dilutive effect and a larger number of shares outstanding at the end of 2013 than at the end of 2010.

 

I don’t know exactly how these rights offerings will effect Biglari’s compensation. Maybe Ragu does and might shed some light on this topic.

 

Gio

 

[wachtwoord]

Selling LRE: selling to swap into something else, or selling because you think the market price is above the value is rational. Selling at any price is not. There is a inherent value to any business and selling with for example 99% discount to that is irrational (except if you know of an investment with an even larger discount).