What a letter. I'm going to make two quick criticisms below, but by no means are they the only two to be made.
1. I'm going to assume that the vast majority of financial assets in the Lion Fund are in the form of BH stock. If this is so, then the limited partners in the lion fund pay BCC (Biglari) 25% of profits above a 5% hurdle to own something, BH, that they can buy for a small brokerage commission (8 dollars) in the stock market thereby foregoing the 25% incentive bonus to Biglari.
I don't think this point should be downplayed. It is the reason that he has to incorporate the same percentage bonus applicable to all of BH when the Lion Fund is folded because otherwise the Lion Fund has no reason for being. Because, again, if he doesn't, the limited partners in the Lion Fund will just liquidate their share in the fund and use the proceeds to buy BH stock. BTW doing so will depress the price of BH stock. So limited partners in the Lion Fund: the limited Partner that sells the Lion Fund first and waits to buy last into BH will get the best chance at the best deal.
2. the Straw Man in the room:
I'm going to keep this short and simple. Biglari's letter rails against executive stock options etc. He builds this egregious practice up as the 800 pound gorilla to be knocked down by his unorthodox, non conforming, and unconventional logic, but it isn't an 800 pound gorilla after all, it's a STRAW MAN.
There is nothing wrong with stock options per se, and Mr. Buffett would agree. What is wrong with stock options, as commonly used, is the strike price being set too low (usually at the present market price). Mr. Biglari, there is nothing that would prevent the comp committee at BH from pricing long dated executive options well out of the money so that you would have to actually add value above and beyond what already existed for those options to pay off for yourself. Nothing. Nothing!
There are many other compensation arrangements Mr. Biglari. Not just the present and pervasive wrong way or your way. Even I have offered up a few suggestions, and I'm not that smart. Go read Alice Shroeders blog on compensation for Berkshire managers. Are you affraid to sit in front of an intelligent investor to be asked to justify your compensation at the end of every year? How do you think Mr. Buffett would react to your proposal if BH were part of Berkshire? How do you think he would react to your recent letter?
That's it for now, and I remind you, the BH shareholder, of all the time spent reading through Warren Buffett's partnership letters and Berkshire Hathaway chairman's letters poking big fat holes in his logic. That silly unconventional Warren with his wrong Buffett logic.
I'm selling the small amount of shares I did buy yesterday because there is no chance in hell this type of illogic produces a successful long term performance, and I haven't the energy to vote in the circus of this thing. Get the share price cheaper and vote Biglari out. You are not losing someone that can compound at high rates. And did i read that right? The Lion Fund is only 50 million. Biglari has still not filed the financial statements with the SEC. We still don't know the average annual returns by year and by the size of the fund through that year. Again, does anyone know Mr. Bigs long term results? I suppose we can ex out the Bull Sh iit WEST transaction with SNS money used to bail that failed investment out and the one hit wonder at SNS itself given that he really started buying at 17 pre reverse split and it was near depression conditions that allowed all investors to buy all stocks at much lower prices, assuming you had the cash. Takes some smarts to have the cash, but doesn't take much smarts to buy and make big returns when stocks are in free fall. Brawn not brains I say.
I am dahdumbo and this is dahdumbo investing.
Dahdumboguru, please do not give up on this capitalallocationmaestro. He is a human blackswan, but in a good way. Perhaps I can help change your mind. In my absence from internetmessage boards, I have completed seven valueinvestment books (BUY THEM), learned algebra, and begun employing wonder device called checklist, of which I learned in popularmagazine. Given the esoteric nature of algebra and checklist, I believe I can deliver exceptional results to investors in my commonstockinvestmentprogram. I now share my work on Biglariguru incentive proposal.
Form 424B3 filed on SECEDGARwebsite on 5 March says that expected return on Western Sizzlin franchiseoperation, asset-light template of Biglariguru, is 18.78%. As a check on number (CHECK done as part of CHECKlist; CHECKmate, Klarman - my next book will be huge!) we compare this to 14% subordinated debt. Now only a shareholder unfriendly meanie would issue sub debt at highercoupon rate than market for personal enrichment. Biglariguru is not that, as his recent impassioned letter posted as pdf to BH website tells us. We can therefore conclude that 14% cost of debt is correct and that 4.78% is equity premium. 5.00-4.78 has positive value, so we are already getting a bargain!
Let us go further. Biglari 25% incentive over 5% hurdlerate and 18.78% equity cost mean that equityshareholders will really benefit to tune of [(18.78/.75)-5] = 20.04%. That beats Berkshire 20.03% average compounding of bookvalue by .01%. Bargains continue! But no need to stop now with checklist. We know that Biglariguru is paid a reasonable $900,000 annualsalary. As WarrenEBuffet makes just $100,000, we can cocnclude Big Larry will compound bookvalue 9 times faster than Omaha capitalallocators!
We cannot go wrong with this valueinvestment, dahdumbo.
Buy BH common. BUY MY BOOKS.
I think he wrote the letter in part because the stock is falling like a rock, down >20% in a few days since he dropped the comp bomb. Despite all of his talk about book value and long term, he has been very interested in propping up the stock price, so he can use it for rights offerigs and takeovers.
Obviously some big shareholders are selling so they are not too happy. You can fool all of the people some of the time, and some of the people all of the time, but...
Simply put... Buffett believed in doing what was right for his shareholders and didn't receive options, restricted stock or a performance fee over a hurdle. He got rich the same way his shareholders did. I sold my shares and $360 and have no regrets there are many other great partners to invest with.