Wednesday, August 11, 2010

Defending the Undefendable.

Sardar Biglari has been the subject of great fire from all fronts as of late. The legislature in Michigan made a law which was basically tailored by the management of Freemont Insuracorp; to save a single job and keep Biglari from buying existing (and willing) shareholders out. Mario Gabelli is rallying his troops against a compensation package that is similar to his own. Journalists are publishing 1/2 truths and negative spin about Biglari (which is often the case in the Indy Star). Even my level headed message board buddies are going against Biglari.

I will say that I am against the proposed pay package as it stands. As I have said before, I, as a stockholder of Biglari Holdings, feel poorer today than the day before the proposed package was announced, mainly because I never thought that Biglari would sandbag his performance in a huge way over compensation. I do like the philosophy of the package. Making him buy and hold on to stock is good. Tying compensation to increases in book value (which will have adjustments made for acquisitions and stock issuance) is good. Not paying him if he screws up and wrecks the company is good.

I certainly understand how shareholders and many former shareholders feel that they were misled by Biglari. From what I can gather, it seems that they feel he changed the rules mid-game to suite himself. With that said, I don't think that this is a fair characterization, there is certainly a lot of smoke, but in my mind, no fire.

It is my personal opinion that Biglari was the victim of a facade that he did not make. The guy never really spoke publicly about being just like Warren Buffett. The Lion Fund letters (which many will tell you read similarly to Buffett) were never intended to be passed around in the manner that they were and in the history of his activism, he did and said what needed to be to get the job accomplished- shareholders always benefited. When bashing execs for excessive compensation, it was due to the piss poor results they produced. As far as I can tell, Biglari never intentionally misled or lied about anything. I could be wrong, but, the case simply has not been put out in a convincing manner. I think that often times, the anonymity that the internet gives us, lets us make much more rash statements about other people, without fully thinking that we are talking about other people, who have reasons for doing the things that they do.

Biglari turned Steak 'n Shake around, and did so in the greatest economic contraction that I (and probably you) have lived through. Had he not, someone else would probably would have (and he has said that), but, the fact of the matter is that he did it. Not me, not you, not some other hedge fund manager. As a shareholder, I think he should be compensated for that.

In regard to his own comparisons to Buffett, having been at numerous WEST and SNS/BH meetings, he has always tried to downplay similarities to Buffett. I have heard him say thing to the effect of "we have to be a little different than Warren". It does seem that the contrasts have occurred more so in recent times (for obvious reasons!). Look at the guys at Leucadia, Berkshire, and Fairfax- they are all pretty different. Graham, Lampert, and Fisher (the younger) are/were all value guys, and were quite different too, value investment should probably be viewed as a big tent, with few people being sheltered, rather than a small, select club. Warren Buffett isn't even Warren Buffett anymore, most likely due to the amount of capital he controls. In the 60s, there is no way in Hell that he would have invested in anything similar to Goldman, if there would of been a mortgage meltdown.

When researching a company, I argue, that it is important to do a lot of research on management, whereas, Ben Graham, would have never done such a thing... in this case, it probably wouldn't of mattered, because he probably would have also sold before the compensation package came out. That said, I would be shocked if 5% of the people that thought Biglari was the next Buffett actually asked him what his personal views on his own compensation were. As the saying goes, it is a lot easier to find out how many teeth are in a horses mouth by simply going up to the horse and counting. BH is a good lesson in counting for yourself, rather than relying on the news, blogs, or boards... Hence, the disclosure that I give at the end of every article (let me say it again... DO YOUR OWN RESEARCH!).

Oh wait a minute... Biglari HAS stated his views on compensation, he believes in paying for performance! Which is exactly what the pay package that is being voted on in the coming weeks does. If he grows the company at 20% a year (in book value) he will be compensated in one of the higher percentiles of restaurant chains of similar size. Which he would deserve and deliver great value to shareholders.

Did I get this one wrong? Yeah, I did... While I did well with the stock, did the necessary analysis of the track record of management(s), and the business, I made a big misjudgment as to what would happen after the turnaround. I never would have guessed that SNS was going to turn into what is basically a publicly traded hedge fund, which happens to operate a greasy burger chain. But at least when the facts, or rather, the perceived facts changed, I was able to take a look at them, change my mind, not get angry, sell off the bulk of my shares (for greener pastures), and learn from the situation. It isn't like this is a personal matter, it is business. The same way that the market doesn't care about you as much as you would like, sometimes, management doesn't either. One of the conclusions that I draw from this experience is that the concept of a "margin of safety" is all important.

I don't really guess that any of this building up should come as a surprise. People love a good story, one of my favorite books, called The Life of Pi, is more or less about that sort of thing. We naturally want for people to be like us and are drawn to similarities that we have with them, often to the detriment of making progress. In this case, I think that people took Biglari's stances on things like: reading about Warren Buffett, value investing, being shareholder friendly, and paying for performance, to meaning that he was the next Warren Buffett. A lot of optimism in this matter may have cost people a great deal of money.

With that said, if I were to only throw my money at 1 stock and not touch it until I retire, it would without a doubt be Biglari Holdings, I like most all of the things that Biglari has done with the companies he has been involved with, I like how he is invested in Red Robin (and Sonic), and, he will probably be at the company until I can withdraw from my retirement accounts, so, it seems like a good fit. If the price/value ratio gets right again, I will be happy to buy more shares... but, I will have to take into account the pay package that in my mind, instantly eroded a significant chunk of intrinsic value of the company, despite getting a hedge fund on the cheap.

I feel bad for Biglari in this, I really do; being the savior of the value investing community, then being the whipping boy must suck. It is lonely at the top.

Disclosure: Long BH and RRGB. This is not advice in any way, shape, or form. Always do your own research before doing anything I think, talk, or write about.


PlanMaestro said...

Jeff, I loved your post even though the compensation is too high and the shareholders do have a right to revolt. Do I contradict myself?

jeff said...

thanks for reading!

I don't think that you contradict yourself, or, really, anything I say. I mainly like the philosophy behind the agreement, rather than the amount of compensation.

Without a doubt, shareholders have the right to turn on him, I just wish that it wouldn't of taken on the personal tone that it did...

PlanMaestro said...

Well said

Eric said...

A new chapter to the classic book by Walter Block.

"Chapter 33: The Biglari"

Block's book is an excellent read btw if you haven't read it.

jeff said...

I have read Blocks book, and thought it was really well thought out, despite not being able to get behind ALL of it ;)

Anyway, that's awesome that you posted that, I figured it was obscure enough that I didn't know if anyone would get the reference! :)

Eric said...

Thanks, I just read it about a month ago, so it was fresh in my mind. Yeah, definitely one of those books that makes you think about things in a different way even if you end up not agreeing 100%.