BH - Biglari Holdings

[ragu]

The answer can be found in oddball's quote:

 

No, it can't. If that were true and given Sardar's track record, the AUM at the Lion Fund would be many, many multiples of what it actually is.

 

The reality is that Sardar simply can't sell his story. See the failures to raise capital at Western even when he was offering capital back on the first 30% of on any losses and not being able to meet a relatively "conservative" (Sardar's words) goal of increasing AUM by $10 million via fresh capital for the Lion Fund when the incentive agreement was proposed.

 

"When you have eliminated the impossible, whatever remains, however improbable, must be the truth." - Sherlock Holmes

 

As per Cooley, the vast majority of the money in the Lion Fund comes locally from San Antonio. These are folks that have known Sardar for a very long time.

 

It's no surprise to me that they stick with him. It's also no surprise why: Their assessment is that he is trustworthy. I agree.

 

Best,

Ragu

 

 

 

[RichardGibbons]

It's no surprise to me that they stick with him. It's also no surprise why: Their assessment is that he is trustworthy. I agree.

 

Funny, I can't think of that many people in the investing space who have done more to prove themselves untrustworthy.  This is my opinion from a while back, and he's really done nothing to change it.

 

http://www.fool.com/investing/value/2010/05/11/biglari-proves-buffett-right.aspx

[peter1234]

It's no surprise to me that they stick with him. It's also no surprise why: Their assessment is that he is trustworthy. I agree.

 

Funny, I can't think of that many people in the investing space who have done more to prove themselves untrustworthy.  This is my opinion from a while back, and he's really done nothing to change it.

 

http://www.fool.com/investing/value/2010/05/11/biglari-proves-buffett-right.aspx

 

Thanks for linking your older post.

 

This man certainly polarizes.

 

I guess we will see what his returns will be medium to long term.

;)

[ragu]

Funny, I can't think of that many people in the investing space who have done more to prove themselves untrustworthy. 

 

The opportunity cost of being wrong about Sardar's integrity will likely be too high. Even for above-average value investors.

 

The biggest flaw in your article is the assumption that this compensation plan is forever. It's not.

 

And, book value on a per-share basis will grow at a decent clip even for the time that the plan is in place.

 

Best,

Ragu

[racemize]

The biggest flaw in your article is the assumption that this compensation plan is forever. It's not.

 

Perhaps you mean, you believe it is not?  It seems very, very hard to state that as a fact.  Is there any evidence other than your belief that that is true?

[ERICOPOLY]

The biggest flaw in your article is the assumption that this compensation plan is forever. It's not.

 

Perhaps you mean, you believe it is not?  It seems very, very hard to state that as a fact.  Is there any evidence other than your belief that that is true?

 

Yes, there is evidence that the current compensation plan is only temporary.  Just look at history... you just wait a period of time, and then Sardar hikes his compensation.  So you see, the current compensation plan will only be temporary.  His past history has shown it to be the case.

[racemize]

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 (Ragu, please correct anything that you disagree with):

 

Let's make up something with easy numbers.  Let's say I invest in a company and own 10% of that company, and it is worth $1 million dollars,  and is selling at book value (I will assume it sells at book value from here out) so:

 

day 1: market cap $1 million, and I own $100,000 of it.

 

Ok, I use a 5% hurdle and 25% of book value growth, and I grow at 25% per annum, every year, like clock work.  The payout to me is 25%-5%*25% = 5% of book value, and the company grows value by 20%.  So:

 

year 1: proforma book value is $1.25 million, except that I take $50,000 as compensation, and repurchase the shares at book, resulting in:

 

$1.2 million value, and I own $100,000*1.2+5%*$1,200,000 = $170,000

 

This continues for a while until "control day":

 

year 2: $1,440,000.00 $264,000 18.33%

year 3: $1,728,000.00 $388,800 22.50%

year 4: $2,073,600.00 $552,960 26.67%

year 5: $2,488,320.00 $767,232 30.83%

year 6: $2,985,984.00 $1,045,094 35.00%

year 7: $3,583,180.80 $1,403,412 39.17%

year 8: $4,299,816.96 $1,863,254 43.33%

year 9: $5,159,780.35 $2,450,896 47.50%

year 10: $6,191,736.42 $3,199,064 51.67%

 

Ok, we've now gotten to the point where I own more than half the shares, and I have control of the company.  Now, I must choose between keeping the compensation arrangement, or losing it.

 

If I keep the arrangement, then my $3,199,064 grows by 20% and I get 5% of the $6,191,736, which is:

$7,430,083.71 $4,148,463 55.83%

 

If I do not, then my portion ($3,199,064) grows by 25%, but presumably I get no further compensation?  This result is, for me:

$3,199,064 * 1.25 = $3,998,830

 

Thus, if I look out for my own interest, why do I choose not to continue the arrangement?  I believe this has been your argument, but I am perhaps not understanding it. 

 

The bottom line here, is that 5% of book value is always greater than the additional 5% I would have gotten from my own portion of the company's growth, unless the price to book exceeds some threshold value, depending on time horizon.

 

 

[giofranchi]

Funny, I can't think of that many people in the investing space who have done more to prove themselves untrustworthy.  This is my opinion from a while back, and he's really done nothing to change it.

 

http://www.fool.com/investing/value/2010/05/11/biglari-proves-buffett-right.aspx

 

Richard,

Thank you for posting your article, I hadn’t read it before.

 

My answer is simply that I am not concerned at all about the compensation plan: since 2010 BH’s BVPS has grown at a CAGR of circa 21% (from $200 per share at 2010 year end, to $355 per share at 2013 year end), after all incentives were paid. And he has achieved such a result concentrating on his 2 or 3 best ideas… do you still think he should be indexing?! ???

 

I also invest in GLRE and TPRE, which have compensation plans much similar to BH. Instead, I don’t own neither LUK, nor BAM, nor SHLD, which you suggested. Evidently enough, I think there are many aspects of a business much more important than a compensation plan… And I have no problem at all to pay up for performance.

 

Once again, I am not saying I think I am more rational than other people about BH… I am just saying I will take the evidence as it comes: during the time since you wrote your article the evidence has been overwhelmingly in favor of Mr. Biglari. ;)

 

Gio

 

[racemize]

Ok, I did some more calculations, messing with the P/B, and assuming all of the compensation is used to buy back stock at the given P/B. 

 

At 1 P/B, it never makes sense, until it is equal at 100% of ownership.

At 1.1 P/B, 97% ownership is the breakeven

At 1.2 P/B, 89%

At 1.3 P/B, 80%

At 1.4 P/B, 75%

At 1.5 P/B, 70%

At 1.6 P/B, 67%

At 1.7 P/B, 61%

At 1.8 P/B, 59%

At 1.9 P/B, 56%

At 2 P/B, 54%

 

Of note, all of these take 20+ years to hit, pretty much.  In fact, it is almost always between 21 and 22 years.

 

Note that it is getting late, so there is some chance I didn't do these formula right.

 

 

 

 

[giofranchi]

Ok, I use a 5% hurdle

 

Joel,

why have you used a 5% hurdle, when in fact it is 6%?

 

Anyway, I don’t understand what’s the point in making this kind of calculation… You know what’s my greatest hope? That I continue paying a lot of money to Mr. Biglari, Mr. Einhorn, and Mr. Loeb for the next 3 or 4 decades!! ;)

 

Cheers,

 

Gio

 

[racemize]

Ok, I use a 5% hurdle

 

Joel,

why have you used a 5% hurdle, when in fact it is 6%?

 

Anyway, I don’t understand what’s the point in making this kind of calculation… You know what’s my greatest hope? That I continue paying a lot of money to Mr. Biglari, Mr. Einhorn, and Mr. Loeb for the next 3 or 4 decades!! ;)

 

Cheers,

 

Gio

 

I used 5% to make the numbers round, it should be the same result effectively. 

 

The point is that Ragu has repeatedly stated that it is rational for BH to remove the incentive, but never spelled it out.  I was attempting to use his implied logic to show whether or not it was in his interest.  See:

 

The biggest flaw in your article is the assumption that this compensation plan is forever. It's not.

 

Perhaps you mean, you believe it is not?  It seems very, very hard to state that as a fact.  Is there any evidence other than your belief that that is true?

 

 

 

 

[giofranchi]

The point is that Ragu has repeatedly stated that it is rational for BH to remove the incentive, but never spelled it out.  I was attempting to use his implied logic to show whether or not it was in his interest. 

 

Mmm… I think the logic is different… As you get richer, you start feeling things more under your control, and you grow older… even an aggressive character like Mr. Biglari’s inevitably changes and begins to recognize the importance of the intangible advantages a more relaxed and easy going reputation might bring. :)

 

Gio

 

[racemize]

The point is that Ragu has repeatedly stated that it is rational for BH to remove the incentive, but never spelled it out.  I was attempting to use his implied logic to show whether or not it was in his interest. 

 

Mmm… I think the logic is different… As you get richer, you start feeling things more under your control, and you grow older… even an aggressive character like Mr. Biglari’s inevitably changes and begins to recognize the importance of the intangible advantages a more relaxed and easy going reputation might bring. :)

 

Gio

 

Ragu has previously stated that it is the rational thing to do, and has to with cash flows, so I'm trying to figure it out.  With regard to your explanation, while possible, I don't think it would be possible to make the direct statement of fact that the compensation scheme will end in such a case--it would require to know the state of Mr. Biglari's mind in the future, a feat that I'm fairly sure no one can perform, with certainty, even Biglari himself.

[dcollon]

BIGLARI HOLDINGS

 

NEWS RELEASE

 

 

 

SAN ANTONIO, TX, July 21, 2014 — Biglari Holdings Inc. (NYSE: BH) (“Biglari Holdings” or the “Company”) today announced the terms of a new offering of transferable subscription rights (the “Rights Offering”). Pursuant to the Rights Offering, the Company will distribute one transferable subscription right (“Right”) for each share of its common stock to shareholders of record at the close of business on August 19, 2014.

 

Every five (5) Rights will entitle a shareholder to subscribe for one share of common stock at a price of $250.00 in cash per share. The Rights (excluding oversubscription privileges) will be transferable and are expected to be admitted for trading on the New York Stock Exchange (the “NYSE”) (NYSE: BH RT) during the course of the Rights Offering. The subscription period will commence on August 19, 2014 (the record date) and terminate on September 12, 2014 (the expiration date), unless the Rights Offering is extended.

 

Shareholders on the record date who fully exercise the Rights distributed to them will also be entitled to subscribe for and purchase additional shares of common stock not purchased by other Rights holders through their basic subscription privileges. The maximum number of shares that a shareholder may purchase under this oversubscription privilege is equal to the number of shares such shareholder purchased under its basic subscription privilege, subject to pro-rata allotment. A shareholder will be entitled to exercise the oversubscription privilege only if he or she is a shareholder on the record date and exercises the basic subscription privilege in full.

 

Only Rights aggregated to purchase whole shares of common stock are exercisable.  Fractional shares will not be issued and exercises of Rights will be rounded down.  Shareholders must aggregate Rights in multiples of five (5) Rights to purchase shares of common stock they desire and are entitled to purchase in the Rights Offering.  The Company will not issue fractional Rights or cash in lieu of fractional shares underlying Rights.

 

The Rights are expected to trade “when issued” on the NYSE beginning on August 14, 2014, and shares of common stock of the Company are expected to trade “ex-Rights” on August 15, 2014. The Rights are expected to begin trading for normal settlement on the NYSE on or about August 21, 2014 and continue through the opening of trading on the expiration date.

 

The Company expects to mail subscription certificates evidencing the Rights and a copy of the prospectus for the Rights Offering to record date shareholders beginning on or about August 20, 2014.

 

This announcement does not constitute an offer to sell or the solicitation of an offer to buy these securities, nor shall there be any offer or sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. The Rights Offering will be made only by means of a prospectus. A copy of the prospectus, when available, may be obtained from the information agent, Alliance Advisors LLC, at (855) 976-3332.

[RichardGibbons]

The opportunity cost of being wrong about Sardar's integrity will likely be too high. Even for above-average value investors.

 

That could end up being true.  That said, I'll never have any regrets in not investing on someone whose integrity seems questionable.

 

The biggest flaw in your article is the assumption that this compensation plan is forever. It's not.

I haven't seen any evidence of this.  I suspect this is a faith thing with you.

 

And, book value on a per-share basis will grow at a decent clip even for the time that the plan is in place.

 

Maybe.  And if it only grows at a mediocre rate, you can take solace in the fact that Biglari is at least getting rich.

 

All that said, you likely know more about the company than me.  To me, it's uninvestable, so I haven't spent much time on it since he lied to shareholders, started taking the company from them, and entrenched himself using the whole name-licensing thing.  So I could easily be missing something.

[RichardGibbons]

My answer is simply that I am not concerned at all about the compensation plan: since 2010 BH’s BVPS has grown at a CAGR of circa 21% (from $200 per share at 2010 year end, to $355 per share at 2013 year end), after all incentives were paid. And he has achieved such a result concentrating on his 2 or 3 best ideas… do you still think he should be indexing?! ???

 

The indexing thing was kind of tongue in cheek.  If I were him, I wouldn't be indexing, because a) it would be boring and b) high variance is great for him since he has a "heads I win, tails shareholders lose" compensation plan.

 

For me, the growth in Book Value argument isn't that interesting, because anything multiplied by zero is zero.  So, if I don't believe I can trust the manager to operate in a largely ethical way, then I'd rather not take the chance of having a great 20 year run, followed by a zero.

 

The evidence isn't overwhelmingly in Sardar's favor since 2010.  For instance, the share price has grossly under performed the S&P 500.  The corporations he is trying to acquire are recognizing that he's trying to screw them, and are fighting back, etc.  I think he's made his job harder by being a jerk.  I think the evidence is at best neutral.  But as I said above, I don't follow the company closely, so probably I'm missing something.

 

The thing I find interesting is that you like investing in jockeys (a strategy I like a lot), but you don't seem to give the integrity of the jockey that much weight.  I'm curious if it affects your outcomes significantly.  I'm not sure if it will, or not.

[giofranchi]

b) high variance is great for him since he has a "heads I win, tails shareholders lose" compensation plan.

 

Richard,

I truly think this is not rational… the faster BVPS grows, the more money Mr. Biglari will make… He might be extremely conscious about his business acumen, and sometimes arrogant, and he might charge his shareholders a lot for his services as a manager and capital allocator… but that doesn’t mean his own interests aren’t aligned with shareholders’… It is evident they are!

 

So, if I don't believe I can trust the manager to operate in a largely ethical way, then I'd rather not take the chance of having a great 20 year run, followed by a zero.

 

With this I am not sure I understand what's exactly that you mean…

 

The evidence isn't overwhelmingly in Sardar's favor since 2010.  For instance, the share price has grossly under performed the S&P 500. 

 

As for the stock price… well, we are value investors, aren’t we? We want to look at and pay attention to business results, not stock price fluctuations, right?… At least that’s what we like to say! ;)

 

The corporations he is trying to acquire are recognizing that he's trying to screw them, and are fighting back, etc. 

 

This again is not rational… the evidence until now is that every company Mr. Biglari put his hands on became much more profitable than it was before. Of course, it might change in the future, and, as I have often repeated, I will take the evidence as it comes.

 

The thing I find interesting is that you like investing in jockeys (a strategy I like a lot), but you don't seem to give the integrity of the jockey that much weight.  I'm curious if it affects your outcomes significantly.  I'm not sure if it will, or not.

 

I look for outstanding entrepreneurs, when I invest… I am not looking for “someone to hire”… They are two totally different things. Entrepreneurs and managers: they are two totally different breeds. And looking for outstanding entrepreneurs, I want to see a great track record, I want to understand what they are going to do, and I want them to explain it clearly to shareholders, I want to understand why their great track records might be sustained in the future for many years to come, and I want them to be at the helm of a business which generates steady and predictable cash flow. And, of course, I want them to be large owners of the companies they have built (Mr. Biglari through the LF is a large owner of BH, and he invests at least 30% of his incentive in BH).

 

Character traits, instead, are treacherous… I cannot base an investment on character traits… Think of it this way: lots of men discover only after many years of marriage they actually didn’t know their spouses possessed some truly unbearable “character traits”! And vice versa, of course!

You think you can assess Mr. Biglari’s integrity, calling him a liar and a thief, because he achieves hedge-fund results (I mean, the top 0.1% of hedge funds!), and asks to be paid like a hedge fund manager?!… Well, I don’t think you can.

 

Gio

 

 

 

[rayfinkle]

The corporations he is trying to acquire are recognizing that he's trying to screw them, and are fighting back, etc. 

 

To be more precise here: the managers (and members of the boards) of the corporations he is trying to acquire are recognizing that their lives will get harder under Biglari. This is a case where it seems likely that the interests of the managers (less work, more comp.) of target companies are not aligned with the interests of the shareholders (generating more quality cash flow from the same asset base--and/or great incremental returns on new capital). It could be the case that managers are acting out of self-preservation and not shareholder interest.

 

After meeting Biglari and following the company closely (very word of every SEC doc & other publication) here's where I've come out:

1) Biglari is a talented investor;

2) Biglari understands the levers that unlock value in certain industries (most proven in restaurants) and knows how to pull them;

3) Biglari is extremely arrogant / cocky; this seems to hinder his ability to execute on some of his acquisition/investment strategy;

4) Biglari cares a lot about getting extremely rich;

5) Biglari cares a lot about getting control (board is full of cronies, comp. plan promotes his increased ownership of the company)

 

...and here are my (current, subject to change) conclusions based on the above observations. Note, they rely on the premise that Biglari can be all of the things described above at once...and that doesn't necessarily suggest bad investing outcomes.

1) In most scenarios Biglari will get richer than me (a shareholder).

2) Given that the businesses he runs improve (either one-time due to right-sizing operations or ongoing), and that will help both him and investors (him more)

3) He already has control of the company, even if he personally doesn't own 51%.

4) I am not capable of making character judgments based on reading SEC docs. His letters say the right things, he unleashes operating cash, and he rewards himself nicely for that.

 

Finally--and oh man did this go longer than I had intended--being an asshole and elbowing out certain shareholders seems to have gotten other managers rich. John Malone is one example (and no, I'm not intending to compare the two). Cable Cowboy covers story after story about how Malone wrestled control through opaque corporate structuring maneuvers that strategically siphoned the best assets into subsidiaries that he had a higher probability of understanding/controlling than the predecessor structures. Here's the quote (emphasis added).

 

Oddly, it was Ted Turner who forced Malone to sit up and take notice that he was lagging behind his peers in personal wealth. One day, ribbing his friend, Turner told Malone, "Gee, John, I'm getting rich and Bob's getting rich. And the only one that's not getting rich is you." " Turner's words stung more than Malone cared to admit. Though he made a decent salary, Malone had no big stock options or equity in TCI-less than 1 percent as late as 1990-and he had never asked for any. As he looked around in the cable industry, a lot of his contemporaries were accumulating vast wealth and he wasn't. And in his mind, he was working harder, contributing more. And if Ted and the rest of the group had made this their benchmark of success, then Malone would show how quickly he could set new records, much as he had done with the discus back at Hopkins.

 

"Up until then I had been more focused on TCI. I was going to have the biggest and best company," Malone said later. "And it was making Bob very rich. And Bob wasn't reciprocating. And that was just Bob. He would never do anything unless you pushed him into a decision. That's what created Liberty. It was a little schemey. Very tax-efficient. And it worked."

 

The terms, largely structured by Malone himself, defied understanding by mere mortals. Indeed, the structure of the deal-outlined in a 345-page prospectus-was so Byzantine, it seemed almost designed to obfuscate. Through something called an exchange offer, TCI shareholders would get a special rights offering-one right to buy one Liberty share for every 200 shares of TCI they owned. It was a privilege, not an obligation, and each of these rights, in turn, allowed an investor to swap in 16 shares of TCI stock for a single share of Liberty Media. It seemed like such a lopsided offer: 16 shares of TCI for just 1 share of Liberty? That valued Liberty at about $300 a share, for a total market value of more than $600 million by Malone's reckoning. How could that be, analysts asked, given that Liberty posted a loss on revenue of a mere $52 million for the pro forma nine months? No one on Wall Street expected the stock to trade up to $300 anytime soon. Liberty issued $625 million in preferred stock to parent TCI; the preferred represented more than half of the capitalization of Liberty. "If you're a TCI shareholder, pass on the swap," advised a columnist in Forbes. "If you're considering buying Liberty now that it is trading on a when-issued basis o-t-c [over the counter], don't chase it." 's Doubters found the whole idea of Liberty a dubious proposition: TCI's shareholders were being asked to pay up to acquire ownership of a company whose sole assets they already owned, before TCI spun the properties into Liberty. Moreover, it wasn't as if Liberty was an operating company with a strong stream of revenue; its portfolio consisted mostly of passive minority stakes in cable channels controlled by other companies. At first, not even Magness wanted to participate. "First, it's cats and dogs, and they'll never understand or value it," he told Malone one day.19 "So much the better for shareholders who do understand it," Malone replied, "because the assets are undervalued at the moment." He told Magness he should invest as much as possible in the Liberty offering. "You ought to do it because it's a life raft," he told Magness. When Magness questioned why it would be spun out, Malone told him, "You don't lash the life raft to the deck of the ship to try and float the ship. The whole idea of a life raft is you set it afloat, and at least you've got something if you hit an iceberg." z" Moreover, Liberty did not have a high-risk profile, whereas if TCI hit the iceberg, it could be a serious collapse, given its high debt leverage. Malone transferred to Liberty roughly 15 percent of TCI's market value in assets he considered speculative. TCI hung on to Turner Broadcasting System and Discovery Communications. After its spin-off from TCI, which had $3.8 billion in sales in 1991, Liberty would have interests in a sliver of TCI cable systems representing about 650,000 subscribers and would own stakes in 26 other entities, including TCI's 50 percent of American Movie Classics, 17 percent of BET, 30 percent of QVC, 16 percent of the Family Channel, and interests in 14 regional sports networks. Malone, president of TCI, would become chairman of Liberty. Though Magness eventually bought in, he never believed that Liberty would amount to much. He was wrong: Liberty would build more wealth for both men, and build it far more rapidly than TCI had ever managed to deliver. Most TCI shareholders refused to participate; for them, the deal seemed a little lopsided, and the explanation for it was all too complicated. It was safer to just sit this one out. Their timidity was key to Malone's effort to build a much bigger Liberty stake for himself, for under the terms he devised, the fewer shareholders who participated in the Liberty deal, the more equity each of them would hold in the new company. While fewer than half of TCI's shareholders took part in the Liberty spin-off, Malone bet as heavily as he possibly could and commanded a disproportionately larger share of the equity being handed out: 20 percent of all Liberty shares and 40 percent voting control. Yet to get it, he would reduce his TCI holdings by more than one-third. Malone got 8.7 percent of Liberty shares in return, three times more than he would have been able to claim had all shareholders participated. Malone paid $25.6 million to exercise the options he was given in lieu of salary, but to the chagrin of critics, he had put up only $100,000 in cash, which he got by selling 6,250 QVC shares back to Liberty. Malone gave the company a $25.5 million note for the rest of the stock. He later paid off part of the debt to Liberty in TCI stock. By the end of the maneuvers, Malone owned 20 percent of Liberty's class B supervoting stock, giving him roughly 40 percent of the shareholder votes at Liberty. Over the next two years he did more financial engineering, splitting Liberty's stock multiple times-first, 20 for 1, then 4 for 1, and then 2 for 1. His aim: to increase the number of shares available for use as currency in acquisitions and to lower the stock price he had initially, intentionally kept high so more individual investors could afford to buy in. During the preceding 15 years, Malone had enjoyed a reputation of being one of the lowest-paid, best-performing chief executives in corporate America. No one would ever again consider him underpaid. In 1991, TCI paid him just $300,000; Liberty, nothing. Estimated value of Malone's compensation in stock options that year: $26 million. In crafting the Liberty spin-off, Malone had kicked on the financial machinery inside his razor-focused mind, and structured a highly complex, all but incomprehensible deal aimed at meeting his main goals: to mollify regulators, to ensure TCI's continued growth, and to feather his own nest.

 

 

 

[rayfinkle]

Sorry--that quote was from "Cable Cowboy" chapter 6

[RichardGibbons]

b) high variance is great for him since he has a "heads I win, tails shareholders lose" compensation plan.

I truly think this is not rational… the faster BVPS grows, the more money Mr. Biglari will make… He might be extremely conscious about his business acumen, and sometimes arrogant, and he might charge his shareholders a lot for his services as a manager and capital allocator… but that doesn’t mean his own interests aren’t aligned with shareholders’… It is evident they are!

 

Yeah, you're right, he does have a high water mark.

 

[Actually, to edit, the case where he isn't aligned with you is the Fairfax hedging scenario.  Watsa believed that hedging was the right strategy, and did it.  Biglari is incented not to do such a strategy -- even if he believes that it's the best strategy for shareholders -- because it impacts his income.  Incentives are tricky, which is why there is value in working with someone who you can trust to act in shareholders' best interests, not their own.]

 

That said, your last sentence is wrong.  I was trying to avoid a long discussion about this.  But to summarize:

 

1. He bought a small fraction of a company, then began taking over your company using money that is rightfully the shareholders'.  This isn't in the shareholders' best interests.

2. He renamed the company and added a licensing fee if he's ever terminated, so as to solidify his control and get paid for failure.  This is not in the shareholders' best interests.

3. He did this while lying to shareholders about what he was planning to do.  He could have simply stayed silent.  Instead, he decided that acting deceitfully was the best way to manipulate shareholders to doing what he wanted.  This is not in shareholders' best interests.

4. He is issuing rights, which will both cost you money in issuance costs, and accelerate the time it takes for the company to get big enough that its returns fall.  This is not in shareholders' best interests (though it makes Biglari's paydays bigger.  Coincidence, I guess.)

 

So, if I don't believe I can trust the manager to operate in a largely ethical way, then I'd rather not take the chance of having a great 20 year run, followed by a zero.

 

With this I am not sure I understand what's exactly that you mean…

 

Anything multiplied by zero is zero.  So, if he makes you 25% this year, 25% next year, 25% for the next ten years, then you lose -100% because he does some unethical thing that costs shareholders, then your outcome is zero, despite the good years.

 

As for the stock price… well, we are value investors, aren’t we? We want to look at and pay attention to business results, not stock price fluctuations, right?… At least that’s what we like to say! ;)

 

Fair point, on the other hand, he's also running a holding company during a huge bull market.  And your statement was that the evidence was overwhelmingly in his favour.  Many investors consider share price the most important piece of evidence about performance.  So, it seemed a bit much to say "overwhelmingly" when I would bet that the average investor would say that is overwhelming evidence of the opposite. (That said, you and I are perhaps not average investors. :) )

 

The corporations he is trying to acquire are recognizing that he's trying to screw them, and are fighting back, etc. 

 

This again is not rational… the evidence until now is that every company Mr. Biglari put his hands on became much more profitable than it was before. Of course, it might change in the future, and, as I have often repeated, I will take the evidence as it comes.

 

I haven't spent a lot of time looking at it, and don't want to.  That said pretty well every company coming out of the great recession is more profitable than it was before.  Welcome to low interest rates, rising employment, and an improving economy.

 

I look for outstanding entrepreneurs, when I invest… I am not looking for “someone to hire”… They are two totally different things. Entrepreneurs and managers: they are two totally different breeds. And looking for outstanding entrepreneurs, I want to see a great track record, I want to understand what they are going to do, and I want them to explain it clearly to shareholders, I want to understand why their great track records might be sustained in the future for many years to come, and I want them to be at the helm of a business which generates steady and predictable cash flow. And, of course, I want them to be large owners of the companies they have built (Mr. Biglari through the LF is a large owner of BH, and he invests at least 30% of his incentive in BH).

 

Character traits, instead, are treacherous… I cannot base an investment on character traits… Think of it this way: lots of men discover only after many years of marriage they actually didn’t know their spouses possessed some truly unbearable “character traits”! And vice versa, of course!

 

Yeah, this is interesting to me, because I wouldn't invest in a Kozlowsli or Jeff Skilling company, despite the fact that they had great records.  Maybe that isn't rational, though I think there's something to be said for the argument.  I would guess that there's a correlation between people taking advantage of shareholders in small ways, and taking advantage of them in large ways.  Also, I think there's other options, like Watsa and Buffett that I'd prefer.

 

You think you can assess Mr. Biglari’s integrity, calling him a liar and a thief, because he achieves hedge-fund results (I mean, the top 0.1% of hedge funds!), and asks to be paid like a hedge fund manager?!… Well, I don’t think you can.

 

Yeah, I don't think you can either.  Luckily I didn't say that.  I believe hedge fund managers wanting to be paid like hedge fund managers does not imply that they lack integrity, are liars, thieves, kick small animals, eat orphans for breakfast, like Justin Bieber etc.

 

 

[ItsAValueTrap]

Finally--and oh man did this go longer than I had intended--being an asshole and elbowing out certain shareholders seems to have gotten other managers rich. John Malone is one example (and no, I'm not intending to compare the two). Cable Cowboy covers story after story about how Malone wrestled control through opaque corporate structuring maneuvers that strategically siphoned the best assets into subsidiaries that he had a higher probability of understanding/controlling than the predecessor structures. Here's the quote (emphasis added).

 

In Malone's case, investors were presented a choice.  Unfortunately for them, they were defaulted into the bad choice and nudged in that direction.  But... at least they had a choice.  With Biglari, shareholders aren't getting a say in these special deals, the corporate aircraft (including a G650 which is the hottest corporate jet you can get), etc. etc.

 

Sometimes things don't end so well with that type of management.  They might go on to do something really screwed up.  If you own a basket of these things, perhaps shareholder return will be mediocre once you factor in all of the blow ups.

[giofranchi]

[Actually, to edit, the case where he isn't aligned with you is the Fairfax hedging scenario.  Watsa believed that hedging was the right strategy, and did it.  Biglari is incented not to do such a strategy -- even if he believes that it's the best strategy for shareholders -- because it impacts his income.  Incentives are tricky, which is why there is value in working with someone who you can trust to act in shareholders' best interests, not their own.]

 

So, now Mr. Biglari is also accused to be short term oriented, and not to think for the long term good of BH… Because, if he believed hedging were a good strategy to maximize BVPS over the long term, and if he were long term oriented, why shouldn’t he be hedging?! The higher BVPS over the long term, the richer he’ll be! No... he doesn’t hedge, because BH’s operating businesses are the best hedges anyone can find: probably, fast-food franchising does better in a recession than during economic prosperity.

 

1. He bought a small fraction of a company, then began taking over your company using money that is rightfully the shareholders'.  This isn't in the shareholders' best interests.

2. He renamed the company and added a licensing fee if he's ever terminated, so as to solidify his control and get paid for failure.  This is not in the shareholders' best interests.

3. He did this while lying to shareholders about what he was planning to do.  He could have simply stayed silent.  Instead, he decided that acting deceitfully was the best way to manipulate shareholders to doing what he wanted.  This is not in shareholders' best interests.

4. He is issuing rights, which will both cost you money in issuance costs, and accelerate the time it takes for the company to get big enough that its returns fall.  This is not in shareholders' best interests (though it makes Biglari's paydays bigger.  Coincidence, I guess.)

 

1. What do you mean “using money that is rightfully the shareholders’”?… Money he made the shareholders pay him for his services, and that you don’t think he deserved?… Clearly, I don’t understand this compensation problem…

2. Yeah… Control is a problem… But the fact is I want him to have full control over BH as soon as possible! I know what it is like to run a company without full control, I know what is like to run a company with full control: if you want great results, go for the latter all the times! Another way to get full control, for instance, is to introduce a second class of super voting shares… and that is also a much criticized practice by detractors… who evidently have never run a business in their whole life!

3. Lying… I guess because in the beginning he said he would not be paid for his services… right? Is that what you mean? Well, those shareholders he “lied” to went on to make a lot of money! Then they could have cashed in anytime they wanted and said goodbye! If those are the consequences of “lying”, well then lie to me all the time, please! Anyway, I might agree with you: that was a mistake… made by a very young entrepreneur, who had never run a public company in his life before, and who found himself all of a sudden with lots of responsibilities… Let me ask you: do you still remember what you were doing, and which kind of responsibilities fell upon you, when little over 30 years old? Are you sure, if you had been in Mr. Biglari’s shoes, you would have made no mistakes?

4. I made money the first time he issued rights, I am quite convinced I will make money this time again.

 

Anything multiplied by zero is zero.  So, if he makes you 25% this year, 25% next year, 25% for the next ten years, then you lose -100% because he does some unethical thing that costs shareholders, then your outcome is zero, despite the good years.

 

Then, I had understood well… But I don’t see why in year 21, after 20 years of great performance, of building a very successful company, all of a sudden he should dream of making “some unethical thing” that wholly destroys the work of a lifetime… Maybe I simply don’t get it, but do you think it would be rational? ???

 

I haven't spent a lot of time looking at it, and don't want to.  That said pretty well every company coming out of the great recession is more profitable than it was before.  Welcome to low interest rates, rising employment, and an improving economy.

 

I really don’t see what low interests, rising employment, and an improving economy (doubtful!!) might have anything to do with improving same stores traffic, or with getting new and very profitable franchising agreements… Richard, do you run a company? Has the “improving economy” done anything for you the last three years? Not for me!! ;)

 

Yeah, this is interesting to me, because I wouldn't invest in a Kozlowsli or Jeff Skilling company, despite the fact that they had great records.  Maybe that isn't rational, though I think there's something to be said for the argument.  I would guess that there's a correlation between people taking advantage of shareholders in small ways, and taking advantage of them in large ways.  Also, I think there's other options, like Watsa and Buffett that I'd prefer.

 

I think you didn’t invested with Mr. Kozlowsli nor Mr. Skilling because you didn’t understand what they were doing… you couldn’t answer these questions:

a) How much of their success was luck?

b) What things have they done to achieve success?

c) Can they replicate those things going forward?

d) Which are the possible obstacles that might arise going forward?

e) Are they aware of those potential problems?

f) How could they deal with those problems?

g) Etc.

I would say the inability to answer those questions in Mr. Kozlowsli’s and Mr. Skilling’s cases is the true reason why you and I didn’t invest in their businesses. At least, I am sure that is the reason as far as I am concerned! Can I answer those questions in BH’s case? I think I can. :)

 

Gio

 

[Parsad]

Gio,

 

Respectfully, I believe you and others will do nothing but find excuse after excuse for Sardar's behavior.  I don't even bother with these debates anymore, because there will always be a subset of people who say I harbor past grudges, just as there will always be people who will justify any conduct if it makes them a buck!

 

I've been involved with a company recently, where the CEO has been a disgrace in terms of self-entitlement and he constantly blames others for his failures, both in terms of the company's operations and his own compensation.  The only reason people ignore Sardar's failures in corporate governance, compensation and ethics is because he has been successful on the company operational side. 

 

That success gives him the opportunity to write his own check, while shareholder's gleefully ignore other troubling symptoms.  But that's ok if you guys want to ignore those symptoms or lapses...just let go of the charade of excusing his behavior and simply embrace the fact that you want to make a buck regardless of the CEO's ethics.  There's no shame in that...but forget about trying to explain to us over and over how his conduct is misunderstood. 

 

I invested in SED International...I knew Sham had not properly disclosed certain charges against him, but I still bought shares because I thought they were cheap...but I'm not going to sit and argue on the SED thread on how great his ethical conduct is.  If you think Biglari Holdings is a good investment or is cheap...great!  But stop the BS...and please stop calling him Mr. Biglari...it's driving me nuts!  ;D 

 

He's not Buffett, he's not Watsa, he's not even Mohnish Pabrai!  You can take what those three say to the bank.  You can't bank on what Biglari says!  Cheers! 

[Parsad]

Biglari Holdings aircrafts...fractional and non-fractional.  Cheers!

 

http://registry.faa.gov/aircraftinquiry/Name_Results.aspx?Nametxt=BIGLARI&sort_option=5&PageNo=1

[giofranchi]

Gio,

 

Respectfully, I believe you and others will do nothing but find excuse after excuse for Sardar's behavior.  I don't even bother with these debates anymore, because there will always be a subset of people who say I harbor past grudges, just as there will always be people who will justify any conduct if it makes them a buck!

 

I've been involved with a company recently, where the CEO has been a disgrace in terms of self-entitlement and he constantly blames others for his failures, both in terms of the company's operations and his own compensation.  The only reason people ignore Sardar's failures in corporate governance, compensation and ethics is because he has been successful on the company operational side. 

 

That success gives him the opportunity to write his own check, while shareholder's gleefully ignore other troubling symptoms.  But that's ok if you guys want to ignore those symptoms or lapses...just let go of the charade of excusing his behavior and simply embrace the fact that you want to make a buck regardless of the CEO's ethics.  There's no shame in that...but forget about trying to explain to us over and over how his conduct is misunderstood. 

 

I invested in SED International...I knew Sham had not properly disclosed certain charges against him, but I still bought shares because I thought they were cheap...but I'm not going to sit and argue on the SED thread on how great his ethical conduct is.  If you think Biglari Holdings is a good investment or is cheap...great!  But stop the BS...and please stop calling him Mr. Biglari...it's driving me nuts!  ;D 

 

He's not Buffett, he's not Watsa, he's not even Mohnish Pabrai!  You can take what those three say to the bank.  You can't bank on what Biglari says!  Cheers!

 

;D ;D ;D

 

Sanjeev,

I call everyone Mr./Mrs. + his/her surname… Ahahahah!!!!

 

Ok, then, I will stop it here…

 

Just want to point out that my idea is more general. It goes beyond the discussion about BH. And it is simply this: try to base an investment on whose “words could be taken to the bank”, and whose words instead cannot, and you won’t be right much more often than if you flip a coin. Try, instead, to base an investment answering those questions from a) to f) in my last post, and you might end up doing a bit better than if you flip a coin. ;)

 

When you try to judge people’s character, simply too many subjective things get in the way… And it is extremely difficult to think and judge rationally. Instead, when you try to judge the quality of a business, the actions and the decisions taken by management (instead of their character), things stay on a much more impersonal level. And that imo leads to better choices.

 

Cheers,

 

Gio