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As many here know, Jacob McDonough is the author of the book "Capital Allocation: The Financials of a New England Textile Mill 1955 - 1985" and a frequent commentator on Berkshire.

In a recent article, he makes the case that Biglari Holdings (BH) is selling below liquidation value, even though the performance of the business (not the stock) has been satisfactory over the last 15 odd years.

He compares it to purchase of Berkshire Hathaway stock by Mr. Buffett from 1962 to 1965, although the reasons BH's price is depressed are very different from the reasons Berkshire stock was depressed when Mr. Buffett started buying it. One possible reason, which if I recall correctly was discussed on the old TMF board on Berkshire Hathaway, is that the market thinks Mr. Biglari is a wolf in sheep's clothing.

Nevertheless, Mr. McDonough makes compelling case for BH (though he is not claiming that BH stock's results will mimic BRK's stock results going forward).


"Based on the Class A shares of stock, BH has $1,121 of investments per share against a stock price of $968 per share. Even though the company owns valuable operating businesses as subsidiaries, BH is trading below the value of its portfolio of stocks alone. BH has a book value of $2,105 per share, so the company is selling for 46% of book value. Pretax operating earnings per share amounted to $138 in 2023, so even if you ignore all of their cash and investments, BH is trading for less than 7 times pretax earnings of wholly-owned businesses.

This situation made me think back to the early days of Berkshire Hathaway. The stock price of Berkshire compounded at a rate of 29.2% from 1962 to 1985. Where exactly did the returns of Berkshire come from? The book value of Berkshire compounded at 19.3% per year over this time period. When Warren Buffett first invested, Berkshire was trading for 37% of book value. By 1985, Berkshire’s valuation was up to 166% of book value. I calculate that this multiple expansion added returns of 6.7% per year over this 23 year period. Share repurchases can probably account for the 3.2% of returns that are leftover. Basically, Buffett was able to leverage discounted capital, and turn it into equity capital that was fully valued. I am not saying that Biglari Holdings will match the results of Berkshire. I only use this example to illustrate how a low valuation can be a form of leverage if multiple expansion ever occurs. As the case with Berkshire showed, the leverage can be meaningful."

https://mcdinvestments.substack.com/p/biglari-hold...

Thoughts welcome.

I first heard about this company in 2012-13. The next berkshire, great capital allocator etc... and i stayed well away. The guy is arrogant and his compensation was more hedge fund like than buffett like. Pulling up a chart, glad i did.

Its the same reason I wont touch Boston Omaha as well. The thesis in both is you rely on them being great capital allocators but their compensation looks too one sided in my opinion

I was very interested a few years ago until I read about his taking photos on magazine with models etc..
though he is buying a lot of BH stock recently . I think he just bought $2m of stock recently and now own 60% of the company

I would gladly invest with Madoff and Sam Bank Friedman before investing in Biglari Holdings.

Run by the king of crooks. Absolute 100% scum. No that is an insult to scum.

I would gladly invest with Madoff and Sam Bank Friedman before investing in Biglari Holdings.

Run by the king of crooks. Absolute 100% scum. No that is an insult to scum.

Wow, that's quite the statement. As someone who has never heard of the guy, I'd appreciate it if someone could explain why people hold such a negative view of him. Thanks in advance.

Thanks for all the responses. I fully agree with the sentiment about Mr. Biglari. However, the market recognizes that too. As noted in my thread above, this is one reason for the stock selling for less than liquidation value of the business. In fact, this may be the primary reason.

However, Mr. McDonough's analysis suggests that BH is very cheap even after accounting for all the payments to Mr. Biglari. In fact, selling, general, and administrative expenses are lower now than before Mr. Biglari took over, even though the company has purchased more businesses since then.

From the article:

"BH is run in an extremely efficient manner. This is a low cost operation, even after factoring in the pay for the CEO. Just compare the company before Sardar Biglari took over until now. Selling, general, and administrative costs amounted to $77 million in 2023. This includes marketing expenses. In 2008, SG&A costs totaled $79.1 million. Back in 2008, the company was just Steak n Shake. Today, BH still owns Steak n Shake and has all of the SG&A costs of that business, combined with multiple insurance companies, oil companies, Maxim magazine, and another restaurant chain. BH also manages a large investment portfolio. Despite the growth in the scale of operations, as well as the inflation that has occurred since 2008, BH has lower SG&A costs today than it had in 2008 even after factoring in all of the CEO’s pay. This is an efficient, low cost operation."

As Jim says, at a price, everything is a buy.:-)

I haven't purchased the stock yet, but I'm considering starting a very small position.

There is no price at which this is a good buy. Because.

You can never make a good deal with a crook. He will find a way to screw you.

He is the very epitome of shareholder rapist. The distilled essence of crookedness I have seen on wall street in my 24 year investing career and analyzing companies and managers.

Fortunately, my spidey sense flagged me the very first time I read his shareholder letter. I noted it and followed his progress.

I even have a name for this - "getting Biglaried".

This is a long saga. If you are interested in, you want to read up on this at Corner of Fairfax and Berkshire forum.

Thank you very much, Maharg. I will definitely do that. I appreciate you pointing me to that board.

Sounds like the 'voting machine' part has made up their minds!

2 Things:


1. If it makes you feel like a slime ball, stay away. Some things are not worth it. There's lots of ways to make money.

2. I miss Jim and hope he's on the mend.

My initial reaction is to put in too hard pile but I must admit his letters resonate with me and exhibit sound capital allocation decisions.

https://www.biglariholdings.com/letters.htm

I am tempted.

As Jim says, at a price, everything is a buy.:-)

My saying is more that "there is a price for everything".
Not everything is a buy at/below that price...some things are uninvestable.

To rephrase the quote that Mr Buffett included in the recent annual letter:
Never deal with a rascal. Even the fact that you know in advance that he's a rascal and plan accordingly won't prevent him from cheating you.

I don't know much about Mr Biglari, but what little I've read does not immediately inspire confidence. Overpaying yourself is at least an above-board way to take advantage of minority shareholders; moving assets around between entities to enrich yourself, as he may have done, is another league. Pretty typical in France, but in the US you can do better.

Snip from some random blog from 2017

"Sardar Biglari’s total pay package as CEO of Biglari Holdings, the parent company of Steak ‘n Shake, is technically just $900,000. That’s relatively low. It’s also not his entire pay package. Biglari Holdings also paid $31.6 million in incentives to Biglari Capital, an investment fund in which Biglari is the sole owner. Biglari Capital makes investments for Biglari Holdings, which then pays Biglari Capital an incentive based on the value of those investments — similar to what a private-equity firm would earn from its investors.
...
In 2010, Biglari proposed a payment incentive that would pay him like a private-equity manager: an incentive equal to 25 percent of the increase in his company’s book value, over a 6 percent “hurdle.” So his investments would have to increase in value by more than 6 percent for him to earn an incentive.
Shareholders revolted. A cap was placed on his potential pay package. Then, in 2013, Biglari bought back Biglari Capital, for $1.7 million. Many of Biglari Holdings’ investments were then transferred to Biglari Capital. And Biglari Holdings agreed to pay Biglari Capital the incentive fee that shareholders rejected in 2010, but without any such cap. "

I have no idea what the entire story is, nor the degree to which the above is a factual summary.


Jim

I miss Jim and hope he's on the mend.

Thanks for the kind wishes.
I still feel like crap, but nothing life threatening.

Worst part is I was staying at a fancy place on vacation...what a waste of money! Everybody knows I'm cheap.

Jim

Thanks for the kind wishes.
I still feel like crap, but nothing life threatening.

Worst part is I was staying at a fancy place on vacation...what a waste of money! Everybody knows I'm cheap.

Jim


Get well.

I figured it was only a matter of time and I finally caught food poisoning or something similar while in Munich on vacation. After sleeping for a day and resting another, I decided it was best to come home early and rest. The hotel was very helpful. Thankfully it was at a hotel and not on a plane.

My initial reaction is to put in too hard pile but I must admit his letters resonate with me and exhibit sound capital allocation decisions.

https://www.biglariholdings.com/letters.htm

I am tempted.

That is precisely the tactic he used.

He copied Buffett to such an extent that he used the same font, plagiarized language, saying exactly what value investors would want to hear and he drew a segment of the Buffett followers. The company ticker is BH (does it remind you of another company?) He is smart and hardworking. No doubt. But a crook.

I am a nuanced kind of guy. Even between the major political parties, I am 60% one side and 40% other side on many issues. Even efficient market hypothesis I am half way between value investors and indexers.

But in this instance, the evidence is so overwhelming that it is easy to put things in clear black and white.

When investing in a company and evaluating management my scale is Buffett/Mark Leonard on one side and Biglari at the other end of spectrum.

I love this board and its members and it is immensely helpful to me over I dont how long (20 years?). I dont share much (shame on me), but this is one area I have done my work and can offer my opinion.

Prem Watsa at Fairfax is a total Buffett imitator too but...

I suppose we should close out this off topic discussion but I will offer a few thoughts on it first.

There are a lot of reasons to be critical of how Sardar treated the existing shareholders when he took over Steak n Shake. There is a big difference between having someone change the deal on you and coming around many years later and knowing the deal. On the "crook" front I will just point out that this is an SEC regulated, Deloitte & Touche audited company operating in the US legal system. I don't think they have a good or independent board of directors but it is not exactly easy to "do fraud" and steal in this framework. Again, I understand how you would feel if you were an early "believer" that thought this young punk was the second coming of Warren E. Buffett and Steak n Shake was just as shitty as New England textile mills and they were going to have the same origin story and the same birthday and the same website and the same Annual Report design and Sardar was going to do it all for free and you were in on the ground floor.

A lot of time has passed since Sardar pushed through his pay package. A shareholder coming to the company today knows the deal (or should). Sardar will be paid above his $900k salary for performance only. There are zero equity issuances or stock options. Many years pass where Sardar is not paid more than his base salary because the company was below the high water mark, didn't exceed the 6% hurdle rate, or both.

The common stockholder that is going to be screwed and stolen from owns the exact same security that Sardar and his family have (almost) their entire net worth in and a large portion of his future compensation will be tied to the performance of the common shares of his company.

Fairfax India has a similar compensation structure, the incentive fee is based on book value but shareholders can't spend book value so there is a disconnect between how the shareholders are doing and how the manager fees accrue when the shares trade at a large discount to book value for an extended period of time.

Boston Omaha of course also has a similar fee structure.

The comp. structure of Biglari Holdings for incentive bonuses is 25% of the gains above a 6% hurdle rate (not annually compounding if not met) above the previous high water mark. The comp. scheme is the same for the securities held though the hedge funds (Lion Funds) and the operating companies at the holding company level. There is no incentive to shuffle assets between the two in order to earn fees. Both are the same.

There are many valid criticisms of this fee arrangement and the independence of the board of directors (who basically own no stock). But a potential shareholder today knows the terms going in. I understand how angry it would make someone who had the deal changed on them. I know quite a few people who feel / felt that way.

Much of the other "lore" on what a scammer he is stemmed from policies he put in place to get and keep control of the company. The name licensing fee was just a novel poison pill. No money was paid. The license scheme was terminated. He has control of the company (using the company's money - he does not personally own a controlling voting interest, his hedge fund with company capital does).

His hedge funds are well below their high water marks and a lot of money will have to be made before he earns incentive reallocations there. The operating company results have improved enough to pay him a bonus for year-end 2023, which he was just paid.

He has continued to buy common shares for the hedge fund, which the company owns a high 80's percent of. This buying is basically the only liquidity in the stock and the shares are very difficult to buy and sell. The A-shares can go for a week or more without trading. 72% of the A-shares are owned by the Lion Fund & Biglari Capital (the GP).

https://www.dataroma.com/m/ins/ins.php?t=y&&sym=BH...

If he is going to commit a bunch of fraud on the common shareholders, he sure owns a lot of that security himself.

Like I said earlier - this is an easy pass for 99% of all investors. That is the only reason it is routinely available at less than a $215 million valuation.

There is a difference between calling someone a crook and saying they committed fraud.

I have a very poor opinion of anyone who can condone Biglari's behavior. Says a lot about that person's ethics.

There is a difference between calling someone a crook and saying they committed fraud.

I have a very poor opinion of anyone who can condone Biglari's behavior. Says a lot about that person's ethics.

I'm not condoning his behavior or recommending an investment in the stock. I get it, you hate the guy. That is literally the consensus.

Great to see you back. Sorry about still feeling like a carp, plus the fancy place and all.

;)

A lot of time has passed since Sardar pushed through his pay package. A shareholder coming to the company today knows the deal (or should). Sardar will be paid above his $900k salary for performance only. There are zero equity issuances or stock options...

One might argue that his hedge-fund-like compensation scheme is considerably worse than his having been granted a big pile of stock options. It is evergreen, ratcheting away a huge chunk of all future gains, over and over and over. It's a bit like a pre-contracted fresh set of options guaranteed every year forever.

If (if) he doesn't do anything like that again, then yes, it's rather like simply buying into a high fee hedge fund with your eyes open. But the future is not yet written, so that may be uncertain. Remember the story of the scorpion and the frog : )

I haven't read the details of how he happened to sell the BC "business" to BH for $4.2m and then buy it back again for $1.7m. Nice work if you can get it! (Business in quotes because I kinda gathered the activity of the BC business was to do his day job of allocating capital??). At least it's simpler to understand than the management comp at Brookfield.

Jim

I haven't read the details of how he happened to sell the BC "business" to BH for $4.2m and then buy it back again for $1.7m

He sold the Biglari Capital business (the GP of the Lion Fund 1 & 2 hedge funds) to Biglari Holdings for $1. It was later sold back to him.

The compensation package is very large and will even pay incentive compensation for what I would consider mediocrity (a 7% return on equity each year would trigger some bonus payment since it exceeds the 6% hurdle). And since the 6% hurdle doesn't compound above the high water mark annually, eventually it will be surpassed even with savings account interest.

He sold the Biglari Capital business (the GP of the Lion Fund 1 & 2 hedge funds) to Biglari Holdings for $1. It was later sold back to him.

OK.
Again, I don't know the saga and haven't read the disclosures, just peering cursorily into the mass of things written about it.
I found a web site that said he had sold it to Biglari Holdings for $4.2m in 2010, before (as we both noted) buying it back. (in 2013 for $1.7m)
e.g., Forbes
https://www.forbes.com/sites/antoinegara/2015/10/2...

One sweet part of the saga is the tender offer at (you guessed it) $420 a share.

Jim

I found a web site that said he had sold it to Biglari Holdings for $4.2m in 2010, before (as we both noted) buying it back. (in 2013 for $1.7m)

Yeah, basically Biglari Capital, as the GP, also contained his entire net worth at the time - the GP's share of the Lion Funds from all of the performance allocations since he started those funds. The GP was sold for $1 but the capital account was transferred to the Holding company at its balance that day.

"Pursuant to the Stock Purchase Agreement, Mr. Biglari sold all of the shares of Biglari Capital to the Company for a purchase price of $1.00 plus (i) an amount equal to Biglari Capital’s adjusted capital balance in its capacity as general partner of the Lion Fund, and (ii) an amount equal to the total incentive reallocation allocable to Biglari Capital for the period from January 1, 2010 through April 30, 2010, less any distributions in respect of such amounts previously received by Mr. Biglari. The payments set forth in clauses (i) and (ii) total $4,107."

The narrative that resulted from stuff like that Forbes articles makes it seem like he sold a thing to the company for $4.2m and bought that same thing back for $1.7m and that is not accurate. But it fits nicely with the popular opinion.

And when they sell Biglari Capital back to him the company recognizes a gain on sale of $1.6m.

"For 2013 we recorded Gain on sale of Biglari Capital Corp. of $1,597"

On proceeds received of $1.699m.

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