BH - Biglari Holdings

[Liberty]

A Former Enron Chairman Is Selling His Texas Mansion For $14 Million

 

Ok, then it is rational to think Biglari would choose to end up like the ex chairman of Enron… worth some millions, when instead he could be worth hundreds of millions; permanently cut off from business, when instead he could be leading a thriving and successful enterprise…  ::)

 

As I have said: bad business.

 

Gio

 

Nobody chooses to be disgraced, yet in the end, many still are. Nobody does something bad thinking that it won't work or that they'll get caught (in fact, they often convince themselves it isn't even bad in the first place). They all think they can get away with it.

[giofranchi]

Nobody chooses to be disgraced, yet in the end, many still are. Nobody does something bad thinking that it won't work or that they'll get caught (in fact, they often convince themselves it isn't even bad in the first place). They all think they can get away with it.

 

This doesn’t mean it isn’t bad business. It simply means those who choose it don’t recognize it is bad business. That's why imo you are undervaluing Biglari. Instead, I think he recognizes good business from bad.

 

Gio

 

[Liberty]

Nobody chooses to be disgraced, yet in the end, many still are. Nobody does something bad thinking that it won't work or that they'll get caught (in fact, they often convince themselves it isn't even bad in the first place). They all think they can get away with it.

 

This doesn’t mean it isn’t bad business. It simply means those who choose it don’t recognize it is bad business. That's why imo you are undervaluing Biglari. Instead, I think he recognizes good business from bad.

 

Gio

 

What I'm saying is I don't care how good he is at business because I don't trust him. And as others have pointed out, it's not because he's good at enriching himself that you, as a minority shareholder, will benefit.

[giofranchi]

What I'm saying is I don't care how good he is at business because I don't trust him. And as others have pointed out, it's not because he's good at enriching himself that you, as a minority shareholder, will benefit.

 

Ok Liberty,

I must admit I am exhausted…

 

Therefore, last time:

I think he recognizes that over the long term he will be much richer if he builds a successful and thriving enterprise, than if he steals the money and runs away. Are the fundamentals in place for him to build a successful and thriving enterprise? I firmly believe they are. If they weren’t, I could agree with you: the kind of selfish short-term goal everyone accuses him of might be a much more plausible threat. But for what I have seen, BH is too good a business (in fact, much better than BRK in its first years!), and Biglari too good an entrepreneur, to undersell himself like that.

We will see.

 

Gio

 

[Liberty]

Ok Liberty,

I must admit I am exhausted…

 

Therefore, last time:

I think he recognizes that over the long term he will be much richer if he builds a successful and thriving enterprise, than if he steals the money and runs away. Are the fundamentals in place for him to build a successful and thriving enterprise? I firmly believe they are. If they weren’t, I could agree with you: the kind of selfish short-term goal everyone accuses him of might be a much more plausible threat. But for what I have seen, BH is too good a business (in fact, much better than BRK in its first years!), and Biglari too good an entrepreneur, to undersell himself like that.

We will see.

 

Gio

 

Hey, I'm not fond of these discussions either, and I don't mean to be picking up the baton from others who have been challenging you, but I just think it's kind of a straw man to only see two scenarios: Either he's a totally rational player, a kind of uber-Munger, or he's a total crook who will abscond in the middle of the night with the loot.

 

I think the reality is probably somewhere in the middle. He seems to like to structure most things to advantage himself over his shareholders (look at all the stuff with his fund), he seems to be ready to say certain things to convince others, and once he's got his way, he doesn't think twice about going against his word, he seems to have a big ego (putting his name everywhere, drawing obvious comparisons between himself and Buffett on purpose, etc) and drink his own koolaid, which can be a sign of danger, etc. A lot of his early fans, who know him best, feel betrayed and are now his biggest detractors (ie. Sanjeev).

 

All that's enough for me to not even care too much what the business is (and the notion that unsavory individuals can only be found in businesses with bad fundamentals is also flawed, IMO), there are other places where I can put my money where I don't have to wonder this much about management.

[Hielko]

You say that he too good of an entrepreneur to go for short term gains that damage his long-term ability to generate wealth, but what exactly do you think he has been doing the past years? To me it seems that he already has damaged his ability to complete successful activist campaigns and his ability to raise money, and for what? Some BS royalties so that the company can use his name? That's a fine example of a short-term gain (at the expense of shareholders) that is damaging the long-term viability of the business!

[Kraven]

I would like to make a plea.  Can we call for a humanitarian cease fire on some of the threads that are going lately?  They are killing me.

[Liberty]

I would like to make a plea.  Can we call for a humanitarian cease fire on some of the threads that are going lately?  They are killing me.

 

http://www.uwpgroup.co.uk/wp-content/uploads/2013/10/watching-a-lot-of-tv.jpg

[Kraven]

I would like to make a plea.  Can we call for a humanitarian cease fire on some of the threads that are going lately?  They are killing me.

 

http://www.uwpgroup.co.uk/wp-content/uploads/2013/10/watching-a-lot-of-tv.jpg

 

It is all very horrorshow.

[premfan]

I would like to make a plea.  Can we call for a humanitarian cease fire on some of the threads that are going lately?  They are killing me.

 

http://www.uwpgroup.co.uk/wp-content/uploads/2013/10/watching-a-lot-of-tv.jpg

 

Haha!  +++++ infinity!

[txitxo]

I agree with the critics of Biglari, as I said in my posting:

 

  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'...

 

I really think you are undervaluing Biglari. Tell me of a single person who has become and stayed extremely rich robbing his/her shareholders… To rob your own shareholders simply is not good business… Therefore, you are undervaluing Biglari. Instead, I think:

1) He will become and stay extremely rich,

2) He knows what’s good business, and what’s not,

3) He will become and stay extremely rich, because he knows what’s good business, and will act accordingly.

 

On the other hand, I also think the fact you don’t like his character and behavior is not a predictive attribute:

Someone brought him up, therefore let’s talk a bit about Berlusconi! Could you imagine a bigger assh… than Berlusconi?! He is circa 80 and was accused of having had sex with a girl not yet 18 years old…! No, even Biglari cannot hold a candle to Berlusconi, when it comes to building for oneself an ill reputation and a bad public image! And don’t even think of comparing Berlusconi’s bloated ego to Biglari’s… Biglari might think he is the king of BH… Berlusconi thought he was the new king of Italy! Talk about orders of magnitude!

Yet, Berlusconi has become and stayed extremely rich… because he knows what’s good business, and has acted accordingly. Needless to say the share prices of his companies have done very well through the years! ;)

 

Finally, also my own experience in business makes me somehow disbelieve your conclusion about Biglari: I have already had many business partners, some were friendly and kind, others were aggressive and arrogant. Everyone of them, with no exception at all, has proven to be reliable, when things were good and easy, instead has proven to be much less reliable, when things went south. That’s why I put much more weight on the owner/manager’s abilities to stir the boat away from any possible danger and towards any opportunity for profitable growth, than on his/her peculiarities of character.

 

Gio

 

 

  Gio, Biglari can screw 18-year old donkeys, put a golden statue of himself in the bathroom of every joint  BH owns, and behave as extravagantly/disgustingly as he wants, and nothing of that will make me think he is a bad investment partner.

 

  The reason I would never invest with him is the 2 & 20:

 

http://www.restfinance.com/Restaurant-Finance-Across-America/September-2013/Biglaris-Compensation-End-Around/

 

  As he gets more and more of the company, he will keep squeezing the rest of the shareholders. 

 

  Remember that if Warren Buffett had used a 2 & 20 compensation scheme, he would have beaten the market by only 3%:

 

http://blogs.reuters.com/breakingviews/2011/03/01/imagine-berkshire-hathaway-as-a-hedge-fund/

 

Biglari is no Buffett, so BH may end performing not much better than an index fund in the long term. Vale la pena?

 

 

 

[bargainman]

 

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

 

Also, threads like this one suck away attention from the actually interesting threads (for example all the Japan ideas that west has been posting).

 

writser,

the easiest solution is that you stop reading what I post… isn’t it? If it bothers you so much, why questioning my “thought process” and saying it is “flawed”…?! I really don’t understand! It is you who started talking about this… not me!

 

...

 

The same goes for this whole thread: bears are the great majority of posters. Yet, this is the only critique they are able to find: Biglari is a liar and a thief. If that is the only weak spot bears find, in what otherwise I think is a great investment, what do you expect investors in BH to do, except trying to understand if Biglari truly is a liar and a thief?! Not only… It is not enough for the bears to have accused Biglari of being a liar and a thief once… Somehow, and this is another thing I don’t understand…, those very same bears feel compelled to communicate how much Biglari is a liar and a thief again… and after some weeks once again… and so on and on… It really is puzzling!

 

If you are not interested in BH, just leave this thread alone.

 

Gio

 

 

I have pasted two quotes Of yours Together.  You said in the past that you like hearing the opinions of people around the world so here is one point of view.  On the one hand you have said that someone can stop reading your posts if they wish... on the other hand you have said that you will try to reply to every post of every detractor.  In North America at least, this could be perceived as 'needing to have the last word on everything'.  There are certainly a number of comedy sketches on this topic, and it is certainly perceived to be a less than desirable trait in a person. 

 

Gio, my belief is that you are replying to every post so that you can learn, but the reality is it feels like you must make your point and be heard, And you will not let anybody make a negative point without trying to refute it.  Now you always seem to do it with impeccable politeness which is why I think many posters are not reacting negatively to you as they have to some others.  But I would encourage you not to reply to every post of every detractor.  Just accept what they have to say and add it to your pros and cons list on this investment.

 

I am curious what percentage this investment is of your portfolio these days?  With the passion that people are debating this investment, I would guess that it would be a very large holding, but I am not sure that it is for you.  Although I know that Ragu has professed to have something like 40% of his portfolio in it.

[Parsad]

The reason I would never invest with him is the 2 & 20:

 

http://www.restfinance.com/Restaurant-Finance-Across-America/September-2013/Biglaris-Compensation-End-Around/

 

I don't think he is using 2 & 20...it's 6% hurdle and 25% of the profits above the hurdle.  Cheers!

[giofranchi]

Bargainman,

I understand what you are saying about my way of posting, and I am sorry.

Like Mith had already suggested, I will try to answer less often.

 

BH is a 12.5% position in my portfolio.

 

Cheers,

 

Gio

[AtlCDore]

Gio,

 

Off-topic question for you.  From my limited time on the board, I get the sense that you look to invest in "owner-operator", holding company types of companies.  Do you have any investments in this space in Europe?  I got to believe that the opportunity set there is much greater in the US and Canada.

 

Sorry if this has been discussed in another topic/forum and I am rehashing.

 

Best,

 

AtlCDore

[valueyoda]

Hal Trust, listed in the Netherlands, is an excellent owner-operator.

[ukvalueinvestment]

There is a separate threat on a Belgian company called Tessenderloo that looks very interesting.

[AtlCDore]

Hal Trust, listed in the Netherlands, is an excellent owner-operator.

 

Wow.  You bring up a name from the past that I completely forgotten.  Didn't they own a stub BIL Investments that traded in the Bahamas?

 

This might be an interesting thread if there isn't one already.

 

Thanks,

 

AtlCDore

[rjstc]

Hal Trust, listed in the Netherlands, is an excellent owner-operator.

 

Wow.  You bring up a name from the past that I completely forgotten.  Didn't they own a stub BIL Investments that traded in the Bahamas?

 

This might be an interesting thread if there isn't one already.

 

Thanks,

 

Agree. Thanks for bringing up valueyoda.

 

AtlCDore

[txitxo]

The reason I would never invest with him is the 2 & 20:

 

http://www.restfinance.com/Restaurant-Finance-Across-America/September-2013/Biglaris-Compensation-End-Around/

 

I don't think he is using 2 & 20...it's 6% hurdle and 25% of the profits above the hurdle.  Cheers!

 

  You are right; I remembered "hedge fund" from reading the article and I assumed 2&20. In any case, if he can remove the 10M compensation limit, his  scheme would only return an annualised 1% more to shareholders than a 2&20 statistically.  I did a quick simulation and a 15% raw return is turned into 9.1% with a 2&20 and into 10.2% with Biglari's approach. For 20%, Buffett-like returns, you get 13.3% and 14.2% respectively. But he gets paid based on BV, not on actual performance, I don't know how much leeway he has to manipulate the BV.

[rayfinkle]

The reason I would never invest with him is the 2 & 20:

 

http://www.restfinance.com/Restaurant-Finance-Across-America/September-2013/Biglaris-Compensation-End-Around/

 

I don't think he is using 2 & 20...it's 6% hurdle and 25% of the profits above the hurdle.  Cheers!

 

  You are right; I remembered "hedge fund" from reading the article and I assumed 2&20. In any case, if he can remove the 10M compensation limit, his  scheme would only return an annualised 1% more to shareholders than a 2&20 statistically.  I did a quick simulation and a 15% raw return is turned into 9.1% with a 2&20 and into 10.2% with Biglari's approach. For 20%, Buffett-like returns, you get 13.3% and 14.2% respectively. But he gets payed based on BV, not on actual performance, I don't know how much leeway he has to manipulate the BV.

 

a lot!

[giofranchi]

The reason I would never invest with him is the 2 & 20:

 

http://www.restfinance.com/Restaurant-Finance-Across-America/September-2013/Biglaris-Compensation-End-Around/

 

I don't think he is using 2 & 20...it's 6% hurdle and 25% of the profits above the hurdle.  Cheers!

 

  You are right; I remembered "hedge fund" from reading the article and I assumed 2&20. In any case, if he can remove the 10M compensation limit, his  scheme would only return an annualised 1% more to shareholders than a 2&20 statistically.  I did a quick simulation and a 15% raw return is turned into 9.1% with a 2&20 and into 10.2% with Biglari's approach. For 20%, Buffett-like returns, you get 13.3% and 14.2% respectively. But he gets payed based on BV, not on actual performance, I don't know how much leeway he has to manipulate the BV.

 

a lot!

 

txitxo,

what do you mean exactly by "he gets paid based on BV, not on actual performance"? Increase in BV is not actual performance?... Of course, I am assuming he is not cooking the books... Yeah!... I know... Like a lot of other people have told me, I might be too naive...!!

 

Anyway, I am not worried about the compensation plan for now. Like I have always said, I will take the evidence as it comes: during the last 3 years BVPS has increased at a very satisfactory CAGR, and I don't see why such a good performance couldn't be sustained in the future. But, if and when increase in BVPS should start to disappoint, and the reason could be clearly tied to Biglari's compensation, I will surely reevaluate my thesis about BH.

 

Btw, Einhorn and Loeb have been doing very well for their investors for almost 20 years now... Even without the use of insurance float, or fcf from wholly owned businesses... Think about the potential now they are putting together float, and should they start purchasing whole businesses too!

 

Cheers,

 

Gio

[Hielko]

You don't have to cook the books to increase book value at an above average rate. There is simply a big difference between trying to grow IV at the highest rate possible, or trying to grow BV at the highest rate possible.

 

[giofranchi]

You don't have to cook the books to increase book value at an above average rate. There is simply a big difference between trying to grow IV at the highest rate possible, or trying to grow BV at the highest rate possible.

 

Ok, let's talk for once about something different than the way Biglari treats his shareholders: what would have you done differently from an operating and a capital allocation point of view?

Do you think Biglari has made some serious mistakes during the last 5 years?

 

Gio

[ragu]

Ok, I'm going to try to model this out based on Ragu's previous posts as to why he will stop the compensation package [...]

 

racemize,

 

I truly appreciate your keeping an open mind about this.

 

To reiterate, I believe the incentive agreement will be rescinded in time because of my subjective assessment of Sardar's character.

 

However, I also believe you can't make the argument that Sardar wants the best deal for himself and claim this is a forever plan.

 

Here's how I think about it, with a couple of assumptions thrown in:

 

Let's say that x denotes the book value of BH at any year-end and that y represents the value of Sardar's stake in BH at that same point.

 

I'll assume that Sardar increases BV by 15%, before incentive compensation calculations, in that 1 year from that point of time.

 

If the incentive agreement stands, Sardar will be entitled to an incentive compensation of 2.25% of x (25% * (15%-6%) * x).

 

However, if the incentive agreement were rescinded, I'd expect that the price/book multiple afforded BH will rise in fairly short order. My estimate of that increase is 20%. Book value at the end of year would be 1.15 * y (having advanced 15% for the year).

In that event, the increase in Sardar's net worth from his work at BH for the year will be .23*y (.2 * 1.15 *y).

 

 

If Sardar always chooses the best outcome for himself, there comes a point in time when the increase in net worth from the higher price/book multiple outstrips the incentive compensation that he would have received (ignoring taxes for the sake of simplicity. If we didn't, we'd reach this point in time sooner).

 

i.e. (.23*y) > (2.25% * x)

 

y > 9.78% * x

 

So, mathematically, the point when it makes rational sense for Sardar to rescind the incentive agreement (if he were only acting in his own self-interest) will be reached when the value of his stake in BH gets to be more than 9.8% of BH's book value.

 

A quick model based on current ownership and book value and the assumption of 15% increase in book value per share annually, suggests that 2022 (8 years from now) is when this point will be reached.

 

Best,

Ragu