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Buying The Next Legend Of Holding Companies Before He Becomes More Famous And A Lot Richer

August 04, 2014 | About:

One of the traits I have found to be common between politicians and people running publicly traded businesses is that they all seem to love to appear on camera and hear themselves talk. I have always wondered how someone with that much responsibility finds the time to make constant television appearances and how much value those appearances create for their alleged employers, the taxpayers or shareholders. I am quite sure the answer is that the taxpayers and shareholder reap the kind of benefits that most of the self-promotion obsessed, so-called leaders do. After all, even if a television appearance by a CEO causes the share price of a business to go up a few points, does it actually add any real intrinsic value to the business? Is it not supposed to be the function of these people to be adding real value to the business for the sole benefit of the shareholders? I think so.

Most people around had never heard of Warren Buffett (Trades, Portfolio) while he was building his record as possibly the most successful investor in history. We was so consumed with building his holding company, Berkshire Hathaway (BRK.A, BRK.B), into the investment behemoth it has become that he didn’t have a great deal of time for self-promotion and television appearances that did nothing to increase the intrinsic value of the business. He did not go out in public and brag about what Berkshire was doing and nobody really seemed to ask very often. He just maintained his low profile existence in Omaha, Nebraska and built an investment portfolio of astonishing value beneath the veneer of what had originally been a textile manufacturer.

One of the keys to Mr. Buffet’s success was that, early on, he recognized the hidden value in the “float” of insurance stocks. In particular, he recognized this enormous value hidden in the balance sheets of property and casualty insurers. Mr. Buffett describes the benefit of the “float” as essentially using other people’s money to invest for you own benefit without have to pay interest. He also realized that with life insurance, the payment of benefits was an eventual, absolute certainty but with property and casualty insurance, effectively risk analysis in the underwriting process could actually generate additional profits for the business.

Property and casualty insurance businesses became the real foundation of the former textile manufacturer and provided much of the cash flow that allowed the building of the Berkshire Hathaway financial empire.

That was then; this is now. Peter Lynch always claimed the average investor should be able to outperform the market as it was easier for them to deploy the smaller amounts of capital they had available than it was to deploy the massive sums in the hands of a fund manager. I agree with Mr. Lynch wholeheartedly on this point. Therefore, I think it will be almost impossible for Mr. Buffet to continue expanding the book value of Berkshire Hathaway in the future at anywhere near the blistering pace of the past. Investors who would like to experience the kind of performance delivered in the past by the likes of a Warren Buffett (Trades, Portfolio) or Peter Lynch are faced with the difficult task of finding someone just beginning a similar process who also is likely to be successful endeavor.

Have I Performed The Difficult Task For You?

I tend to be an “old-school” type of personality. I always expect strong effort; but I demand exceptional results. I once had a very talented employee who could meet the required performance of their job function with very little effort; simply because the person was quite gifted with natural talent, ability and intelligence. However, the relationship did not work out well because they could not understand that I was paying them to bring their full capacity to bear each and every day not for simply meeting the minimum requirements of the function to which they were assigned.

I think CEO’s who have a great deal of time available for public appearances might be meeting the minimum requirements of their position but they are not delivering the absolute best possible effort and results of which they are capable to the direct benefit of their bosses, the shareholders. Even worse, I doubt very many of them would be appreciative of a phone call from a shareholder pointing that out to them,

Because of my views regarding CEO behavior and focus, I found it very refreshing and quite interesting when I ran across this quote:

“Although we cheerfully will discuss our investment philosophy and operating catechism as we believe it necessary to clarify expectations for [our shareholders], we will not telegraph our interests in specific publicly traded companies, our rationale, or our plans. Outside of regulatory requirements, we will not air our investment ideas, particularly in a world of investment competitors. We leave the yammering to others.”

This is obviously not a statement by a CEO who is looking to curry favor or future invitations to appear on television from the media. It is certainly the statement of a CEO who is very focused on performing his job to the best of his ability without any unnecessary distraction. This is exactly the kind of focus and drive that I look for in my employees. But is there any talent behind all of that drive?

Suppose this same CEO has delivered annualized returns on shareholder equity of 17.9% from the end of 2009 through the end of 2013? That certainly sounds interesting; but, is he building a business with any size? The answer is that the business is not large yet, but it looks to be heading in that direction. Since the end of 2009 shareholder equity has risen from $291.9 million to $564.46 million at the end of 2013 and the business has just put a key piece of Warren Buffett (Trades, Portfolio)’s approach in place that will allow the journey to progress even more effectively.

Who Is This CEO And What Is The Business?

The CEO I have been describing is Sadar Biglari and the holding company he is in the process of building is Biglari Holdings, Incorporated (BH). As just one example of how driven and talented Mr. Biglari truly is, when he took over as Chairman of the Board and CEO of the Steak & Shake casual dining chain in 2009, it was said to be losing $100,000/day. By 2010, the chain was reported to be earning a profit of over $100,000/day! Now that, my friends, is certainly bringing together an exceptional combination of drive and desire; coupled with enormous talent and ability.

At the end of 2013, Biglari Holdings had five operating businesses: Steak & Shake, Western Sizzlin, Biglari Design, Inc., Maxim (the men’s magazine) and Biglari Real Estate Development Corporation. Because of the way the overall business is structured as a holding company, the cash flow from any of these businesses can be applied wherever they are believed to provide the best value to the shareholders.

However, there was still one glaring gap in the Biglari portfolio that Mr. Biglari had tried, unsuccessfully, to fill in 2009. It was also a gap that would not be forgotten by this focused and driven leader. He wanted to own a property and casualty insurance business and for the exact same reasons Warren Buffett (Trades, Portfolio) likes them. On October 11, 2010, Biglari announced plans to acquire Fremont Michigan Insuracorp, Inc. to fill the property and casualty insurance gap in their holdings. The deal was never finalized. Acquisition deals are like buses, if you miss one, just wait a while and another will come along.

That view was proven correct on March 19th of this year when Biglari acquired P&C insurer First Guard Insurance Company. Now, a new and critical piece of the necessary structure has been put in place to provide a cheap source of capital that can be deployed for the general business purpose of benefiting the shareholders of Biglari Holdings. The float of this new acquisition will essentially become a permanent and interest free loan as long as the float remains stable or grows.

Is Sadar Biglari The Next Warren Buffet?

Simply put, no. He is just the first Sadar Biglari. However, he is obviously smart enough to know how to emulate the best investor of all-time. A good friend and mentor once told me that if you see others who have what you want, ask them how they acquired it and copy what they did. It might not work every time but it can certainly tip the odds in your favor and Sadar Biglari obviously knows a good idea when he sees one. Given his previous success without this newly added source for cheap capital, it becomes fairly easy to see how the growth path could now be placed on steroids.

But as those who read my work on a regular basis know, I always like to get something a little extra when I am opening new positions and Mr. Biglari has been kind enough to accommodate that requirement for all of us. On July 21st, Biglari Holdings announced a Rights Offering for existing shareholders. Under the terms of this offering, shareholders of record, as of August 19, 2014, will be granted the right, but not the obligation, to purchase one share of the company for every 5 shares they own at a price of $250/share (this represents a discount of 40.78% to the current price of $422.18). In addition, those shareholders who execute their full allocation will also be granted the opportunity to purchase an equal number of shares at the same price from the pool of allocated shares that remains from shareholders who do not take advantage of the rights offering. That is truly a sweet deal for existing shareholders.

However, those of us who see the coming benefits of owning a piece of this business for the long term but do not yet own the shares, can simply buy the shares before August 19th and acquire more shares through the rights offering. The way the math works on this entry would be that buying five shares at the current price and one more through the rights offering would provide us with a 6.8% discount to the current market price for the 6 shares we would end up owning. If there are shares available in the pool from shareholders who choose to not participate in the offering, we will be able to buy 2 additional shares at the discounted price of $250/share. This would reduce our average share price to $372.99 and provide a discount of 11.65% for our average cost compared to the current market price

Final Thoughts And Actionable Conclusions

So, we have a CEO who shuns the spotlight in favor of quietly creating shareholder value. We have a track record of pretty astonishing results. A CEO who will walk away from the wrong deal to wait for the right one, even when he wants it badly. A business designed to grow through accretive acquisitions and a method for acquiring new capital for funding the growth very cheaply. And, last, but certainly not least, we have the opportunity to enter the position at an attractive discount of up to 11.65%.

I do not presume to tell others how they should allocate their own capital; but I know what I look for when allocating my own. Biglari delivers on just about every point.

About the author:

Ken McGaha
Ken McGaha has been managing his own investment portfolios for over 20 years. On July 20, 2012 he launched the Self-Made Millionaire Tracking Portfolio with a portion of his capital as an aid to teach younger members of his extended family how he built his own investment portfolios and maintains them today.

Ken's Self-Made Millionaire website now has subscribers in at least 13 countries and the Self-Made Millionaire Tracking Portfolio has delivered a 28.36% annualized rate of return on capital between July 20, 2012 and June 21, 2014.

In late December of 2013, Ken added the Maggie's Money Mountain Tracking Portfolio to his website to show young investors with limited capital how he would invest and trade an account with $4,500 in order to grow it at a compounded rate of 12% annually. From December 30, 2013 through June 21, 2014, this account has produced an actual return of 26.05%.

Visit Ken McGaha's Website


Rating: 2.0/5 (5 votes)

Voters:

Comments

frankk
Frankk premium member - 3 months ago

Hi, interesting article. What is the reason for the "Rights Offering"?

Ken McGaha
Ken McGaha premium member - 3 months ago

A rights offering structured in this manner raises cash while providing existing shareholders with a tax-deferred "dividend" though the opportunity to purchase shares at a discount to the market. It is a pretty slick way to create a win/win for the business and the shareholders.

The fact they are raising capital might also provide a hint that the company is looking at a deal and wants some cash to execute it.

Excellent question!

Best regards and better profits,

Ken

pravchaw
Pravchaw premium member - 3 months ago

I think there is the issue of performance fees that Sardar Biglari takes from BH. Apparently he skims off a chunk of any increase in book value of the company to his personal account. I recall reading that somewhere and deciding to stay away. This is decidely un-buffet like beheavious.

batbeer2
Batbeer2 premium member - 3 months ago

Yeah....

- The guy pays himself millions for managing a relatively small company. Last year Biglari took home an amount that exceeded Buffett's total cummulative compensation at Berkshire.

He takes a bonus of 25% of book value increase. Now he's issuing shares so he's shoveling around more capital.

- At an annual meeting he called a shareholder a schmuck.

- He has a photo of himself in his restaurants.

This guy is very clearly enriching himself at the expense of minority shareholders. With that compensation packege in place, you are never gong to see BH grow as fast or as large as Berkshire.

Any indication that he's smart is just another reason to stay away.

Ken McGaha
Ken McGaha premium member - 3 months ago

The fees he charges are in line with what any hedge fund manager charges and Biglari Holdings is essentially a hedge fund. If I can hire someone who doubles the share price every 4 or 5 years, I am not really concerned with their compensation. I would rather pay a CEO 20% of a 20% return than 10% of a 15% return any day.

Best regards and better profits,

Ken McGaha

asawhneyy
Asawhneyy - 3 months ago

He is no Buffet, I rather invest with Watsa or Steel partners.

AlbertaSunwapta
AlbertaSunwapta - 3 months ago

I've never looked into it. What's the firm's return since inception, IPO, takeover or over whatever time since the day that investors could have accessed his skills?

batbeer2
Batbeer2 premium member - 3 months ago

>> I would rather pay a CEO 20% of a 20% return than 10% of a 15% return any day.

With incentives structured like that, you get the risk and the manager gets the reward.

Heck, I would be happy to manage your money under those terms. I'll even agree to a 15% hurdle rate if you think that helps. I'd simply buy Berkshire stock and load that with 3x leverage. Every other decade you'd go bust but meanwhile I'd be harvesting the equivalent of owning the stock direct without investing a penny myself. Just to keep up appearances, I'd plow back 10% of my annual bonus into "our" fund. Over time you'd find I'm the largest shareholder of "our" fund..... all of which would mean precisely nothing.

Of course I'd let a friend set up half a dozen leveraged funds and LLC's etc. The leverage would be applied indirectly. All you'd see is the assets; a pristine balance sheet.

I'm a dumb Dutchman and I can figure it out. Biglari is a sophisticated money manager from NYC. You better believe he has figured out much better ways of doing it than I've just described.

As for performance.....

I don't know about the share price but the per-share book value of BH has not been growing at an impressive rate. Off the top of my head, DJCO, Berkshire, Loews and for that matter Seaboard have done better. If Biglari's goal is to grow per-share book value then his performance has been less than impressive.

Of course, that's after fees so if you add back 25% you get an IRR that is more nearly noteworthy. This to me indicates he does have some skill. Then again, he has a huge incentive to overstate reported book value so there's some danger there.

Chrisneedscash
Chrisneedscash - 3 months ago
You won't really be buying at a 11% discount because the stock will be expected to drop in price by a similar amount after the shares trade ex rights. For a person who wants to initiate a completely new position, it may be better to buy on that dip as the newly created shares dilute the existing ones, as the stock will probably gain some ground after that.
Ken McGaha
Ken McGaha premium member - 3 months ago

Batbeer,

If you had any credentials that provided a track record of market beating returns, it might be an interesting proposal. I have a Tracking Portfolio that I trade in public on my website that has produced in excess of 25% annualized over the last two years based upon my own analysis work. I am happy to trust my analysis when it comes to investment selection.

I have always found that the investments that tend to produce the best long-term results for me are the ones that encounter the most visceral reactions when they are presented. The comments regarding Biglari have really boosted my expectations for this one.

Best regards and better profits,

Ken

augustabound
Augustabound - 3 months ago

There's lots of ways to make money in the markets but hitching my wagon to someone of questionable character isn't one of them for me.

You obviously sleep well at night investing with him, I wouldn't.

But that's what makes a market.

Everybody on the internet has market beating returns by the way and two years in an incredibly short time frame to be bragging about.

Ken McGaha
Ken McGaha premium member - 3 months ago

Augustabound,

I think before you imply that someone is presenting misleading figures regarding investment returns, you should check you facts more closely. Every trade I have made in my public Tracking Portfolio was documented at the time it was made and can be verified with hard copies of brokerage statements. While I have only been trading this particular account on a website in public view for two years, I have been investing over my lifetime with quite satisfactory results.

In the future, prior to posting written messages that question the validity of a statement of fact made by another, I would suggest you exercise more care in establishing the basis for your accusation. Yo are correct that different views and opinions are what create profit opportunities in the market. Making a public inferrence that someone is making fasle statements is going a bit further than simply a difference of opinion and highly inappropriate unless you have something with which to support it.

augustabound
Augustabound - 3 months ago

Your writing is eloquent but if you read my comment it was not an accusation but a mere observation of my years studying markets and as a relative lurker on different forums, blogs etc. You challenged a poster to quote his results or "credentials" because your results are apparently superior, so obviously your are correct in your assessment of Sardar Biglari and he is not?

Many bloggers profited from Japanese net nets in 2012 but Mohnish Pabrai (Trades, Portfolio) barely broke even. These anonymous bloggers are obviously much superior investors than Mr Pabrai and must be deemed correct in all future investments.

I have no way to vallidate your claims, the internet is far from evidence for anything nor do I care (respectfully). Any further comments of performance may be construed as an attack on your integrity and performance. I shall refrain.

I do of course wish you well but as far as Biglari goes, or Bigliar as he's been called, we disagree. His modus operadi is his enrichment and any shareholders enrichment is not of his concern, they are pawns in his game and merely along for the ride in my opinion.

He reminds me of a common Mohnish Pabrai (Trades, Portfolio) quote, "Heads I win, tails I don't lose much". But replace tails with "I also win".

You are correct in your statement about wild disagreement over securities being profitable but you forgot the other half. They can also end in disaster and a total loss of capital. I'm not willing to speculate on him.

I am far from a blind Buffett follower but the filter explained in the Snowball is at the forefront in all my initial analysis now. "What are the odds that this business could be subject to any kind of catastrophe risk?" If there's any chance, Buffett stops thinking about it and just passes.

I pass.

kstein
Kstein premium member - 3 months ago

Biglari shuns the spotlight so much, that he changed the name of the company to Biglari Holdings.

Also, not real impressed with BH's 2009-present returns. Rising tide, ships.......

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