maxprogram

I don't see how this could be considered insider trading at all. (Though it does initially look suspicious, and would think it's reasonable for the SEC to at least check into it.) Again, to me it's just the same as if Berkshire bought shares up to 4.9% of the company (knowing they would eventually acquire it) and then announcing a deal. It seems pretty simple to me, without knowing any of the "behind the scenes" information: Sokol found LZ through Citi, he realized it was a good, cheap company. So he put an order in to buy shares (order got only a partial fill, so he sold the small lot for tax purposes). Either at the same time or later he reasoned LZ may be a good acquisition candidate for Berkshire (seems reasonable, as he has brought deals to Buffett before -- both accepted and rejected). In 2011 he put in another order for LZ shares. They were cheap, and likely to go up over time, so he brought up the idea with Buffett. Sokol talks with LZ about the acquisition also. Buffett initially turns the idea down, but eventually changes his mind after Sokol's meeting with the CEO and further insights into the company. It may have been "close to the line" which Buffett doesn't like, but I don't see any trading on inside information anywhere here.

Sure doesn't seem like insider trading to me. Just the same as if Berkshire itself loaded up on stock, then made an offer. However, regardless of legality, it does look bad on the surface which is obviously why Buffett felt he should come out with it up front. Also maybe behind the scenes Sokol may have been less than up front about it to Buffett -- if he had kept Buffett up to date about his purchases/position, I don't see how this could come up as a problem now. Li Lu owned a lot of BYD stock before Berkshire announce the 10% position (which rocketed the stock up) and that wasn't a problem.

Trying to determine Biglari's exact amount of economic ownership of BH. He owns 4,521 shares directly, or 0.3%. The Lion Fund owns 203,357 shares, of which Biglari Holdings owns 100,387. The remaining 102,970 shares are the look-through shares held by the other Lion Fund partners. Biglari is one of these partners but I'm unsure of the percentage he owns. (I would guess it's less than a third of them, or 34,000 shares.) Any help is appreciated.

One of my problems with Sears is that even if Lampert doesn't allocated internal capital to the poor returning Sears/Kmart domestic stores (and tries to funnel it to the better operations), he is essentially doing so in large amounts through share buybacks. Bruce Berkowitz summed it up perfectly while trying to pitch the long case on CNBC recently: "...when I look at the revenues of the company, given the number of shares that have been bought back, if you look at revenues per share it has not been going down, it has been flat." I am usually a big fan of buybacks but not when the overall value of the business is declining. The buybacks have maintained revenue and profit on a per share basis. So really, the buybacks are a stealth form of capital investment, just like when a retailer plows money into new stores to maintain sales. Except, in this case it could be argued it's even worse because the money is going back into depreciated, dilapidated assets. How much the actual company's value is declining or if it's declining at all is a matter of debate. As you can see I lean toward the "declining" side. Had Buffett, in the early '70s, plowed the textile mill's excess cash flow into buybacks even when Berkshire's stock was cheap the company would be a fraction of the size it is now. For Henry Singleton at Teledyne it worked perfectly in the '70s because he had bought a lot of great, growing businesses in the '60s with inflated stock. It was like he was reinvesting "capital" back into the businesses at a high ROIC even if they didn't need any physical assets.

Thought everyone may be interested in this recent article on Steak n Shake. (it is under a paywall on IBJ so I will just include some relevant selections.) As you can see I have a vested interest in posting it, but it provides some more color of Biglari's relationship with franchisees and his management of the company. New rules rile Steak n Shake franchisees Cory Schouten February 5, 2011 Franchise owners of Steak n Shake restaurants are revolting against parent company Biglari Holdings Inc. just as the chain plans a nationwide expansion fueled by franchising. Entrepreneurs representing 55 of the chain’s 70 franchised locations have teamed up to challenge a move by the company to impose standardized menus and pricing. For more than 70 years, Steak n Shake franchise offering documents allowed customization to address varying real estate, product and labor costs and regional customer tastes. But the chain changed course late in 2010, notifying franchisees of a new policy requiring uniform menus, pricing and promotions. The company sent default notices to several restaurant owners—including the chain’s original franchisee, Stuller Inc. of Illinois, which opened its first Steak n Shake restaurant in 1939 and now owns five locations. Stuller responded with a federal lawsuit in Illinois that claims the chain is trying to boost its overall sales at the expense of franchisees’ profit margins. Steak n Shake earns royalties from franchisees based on overall sales, not on the profitability of those sales. Stuller says in court filings that implementing the uniform pricing year-round would hit its bottom line by $913,000. . . . “I don’t understand how a business that wants to grow through franchising could have such an adversarial relationship with its franchisees,” said Mark Gratkowski, a former director of operations for Steak n Shake who owns three stores in Alabama and Florida. “If we work together, we could fix all of this.” Franchising focus Biglari Holdings CEO Sardar Biglari did not respond to interview requests by phone or e-mail. But his 2010 letter to shareholders suggests he understands the importance of franchising. “Steak n Shake’s future lies in franchising,” wrote Biglari, 33. “It is a fiery growth engine, the kind of business we like to own: one that does not require enormous sums of cash to generate annuity-like cash flow.” The Steak n Shake brand has the potential for 1,000 stores but it won’t happen without good relationships between franchisees and the corporate office, said Max Olson, a Salt Lake City money manager who follows the company but does not currently own shares. The bottom line, Olson says, is both sides have to win. “For franchised restaurants, it’s a balancing act between both uniformity and fostering an entrepreneurial culture,” Olson wrote in an e-mail. “One of the things that made chains like McDonald’s so successful in the past was their willingness to let franchisees experiment with new menu offerings and more efficient procedures. Ray Kroc was very good at striking this balance.” Eager for innovation Franchisees have embraced promotions such as 4 meals under $4 and a half-price happy hour for milkshakes, said Gary Reinwald Sr., a former Steak n Shake executive who owns two locations in Knoxville, Tenn., and is president of the newly formed One Voice Franchise Association. The promotions helped the chain boost a years-long streak of declining same-store sales and post a profit of $28 million in 2010, more than triple that of 2009. But Steak n Shake—apparently buoyed by its successes—last year unleashed a slew of new promotions and menu offerings that complicated the operation of the restaurants without adding to the bottom line, Reinwald says. Reinwald hasn’t sold a single Carolina Slaw Dog in either of his restaurants, and the Wisconsin Buttery Burgers aren’t doing much better. Year-round coupons mean fewer customers are paying full price for anything. And the mandate that he sell a sweet tea for 99 cents just makes no sense in a state where all tea is sweet and customers don’t scoff at paying a bit more for such a refreshing beverage. . . . “Now, a franchisee can open an efficient, beautiful unit for about $1.5 million,” Biglari wrote in his 2010 letter. “My projection is that revenues emanating from each unit will doubtless surpass the $1.5 million mark, which combined with our current operating margin would yield an attractive return on investment for the franchisee.” At least one franchisee is unimpressed. The new restaurant design is an inefficient and breakdown-prone mess, said Doug Knipp, who opened one three months ago in Pikeville, Ky.—against his better judgment—after the chain refused to let him build the tried-and-true format. The fryer has broken down twice. The doors fell off the freezer. The flooring already needs to be replaced, and the cheap dining-room furniture won’t be far behind, he said. And it’s not a contractor issue: Steak n Shake cut too many corners on materials. “We got a cheaper product to get the price down, but along the way it ended up not being cheaper when you add in all the costs of having to repair it,” said Knipp, who also owns 17 Kentucky Fried Chicken restaurants in Ohio, Kentucky and West Virginia. “They should have built the first one themselves.” . . . “I love my brand. I love our heritage. I love the idea of taking Steak n Shake national,” Knipp said. “We’ve got the brand to do it. The main concern we have is there’s no ‘we’. It’s being run like a dictatorship.” Relationship sours Relations with the home office soured after Biglari took over in 2008 and began treating franchisees like employees, not partners, Gratkowski said. Gratkowski was Steak n Shake’s director of operations before he left the then-Indianapolis-based company in 2006, and became a Steak n Shake franchisee in 2007. He spent $4.5 million to acquire land and build three restaurants, in Mobile, Ala. and Pensacola, Fla. “He has no self-control, and will go ballistic if you push the wrong button,” Gratkowski said of Biglari. “If you don’t do it his way, you’re fired. He really doesn’t care about Steak n Shake any more than it produces cash float for him to invest.” . . . Gratkowski can’t understand why Biglari—if he sees franchisees as so important to Steak n Shake’s future—won’t even find time to engage in a dialogue. “The growth potential through franchising is still unlimited for Steak n Shake,” he said. “We could help if he wasn’t such a jerk.”•

Why would any batter concerned with having a good average even think about swinging at a pitch that looks like it could be a wicked screwball? Ah, but in investing your batting "average" means little. If you invested in 3 of these type of opportunities and 2 of them became worthless while the third returned 5x, you'd have done well. Don't know if that will be the case with these Chinese small-caps, but Buffett knows this well re: his basket bet on South Korean equities.

Shiller's figure does not include inflation -- he notes that in the 100 years ending 1990, earnings grew at a real rate of 1.5%. He is simply extrapolating current earnings 1.5% annually for 10 years, then putting 15x multiple on it. So with "normal" inflation returns of probably 4-5%. With higher inflation, lower profit margins, lower GDP growth, etc., real earnings growth could easily be less than 1.5%. (Some negative real growth occurrences, listed below:) 10 years ending / Annual decline in real earnings 1933 / -5.2% 1946 / -3.8% 1960 / -0.3% 1975 / -1.3% 1986 / -2.6% 1991 / -3.4% 2009 / -1.9% Certainly there are individual companies and industries now that may be great prospects regardless of the market -- but there will be headwinds from economic growth and overall valuations. So if someone can beat the index by 5%/year, it may mean 10% returns as opposed to 20-25% if had been starting in 1982.

A sad case study of terrible capital allocation and overpaid executives: http://techcrunch.com/2010/11/11/yahoo-decline/ Nothing but a complete transfer of wealth from shareholders to executives and other tech companies who were smart/lucky enough to benefit. The Paul Graham essay is also a good read.

+1

And an article from Carol Loomis with a few more details: http://money.cnn.com/2010/10/25/news/todd_combs_berkshire.fortune/index.htm

It's hard to come to a conclusion off a one-day price movement. As Ben Graham said, "In the short run, the market is a voting machine. In the long run, it is a weighing machine." The same could be said about every value investor who didn't purchase tech stocks between '95 and '00. They were wrong until they were right. Give it 3 years or so, and if thats still the case, judge all you want.

A - downside 20%, upside 100%, confidence 90% B - downside 80%, upside 600%, confidence 70% C - downside 50%, upside 300%, confidence 75% How one should actually allocate capital to these three examples depends on the person and the portfolio (managing your own vs. other people's money). The Kelly Criterion can be adjusted for multiple investments at a time -- it just makes for a more complicated model. Here are the Kelly allocations for the above 3 investments at the same time: A - 8% B - 67% C - 25% In reality, there is some chance of every investment losing 100%, so in this case Kelly would say to put 99% and never 100% into all investments. This is all theoretical, and obviously in practice it's much different with many more variables to consider.

I think this exemplifies the problems Biglari may face going forward. Right now, Fremont's executives are probably scrambling to do whatever they can to see this doesn't go through. Right or wrong, it doesn't matter -- these are the kinds of things (like getting local politicians involved) that Biglari will likely see again in the future. Speaking only about the Fremont deal, he also may have been able to get it cheaper than $29 if he tried using a little finesse and been a tad more patient.

Another option for those with smaller portfolios are puts on TLT. The problem is, the expirations don't go out that far. The January-12 puts (15 months out) that are far OTM are probably cheap for a good reason -- rates would likely take longer to move up significantly. But you never know. Here are some of the returns for the TLT puts with an $80 strike (annualized cost of protection is 1.9% for strike of 5.3% yield): Bond yield Gain on $1,000 ----------- ---------- 4.0% Total loss 5.0% Total loss 5.5% $ 0 (break even) 6.0% $ 2,809 7.0% $ 7,547 10.0% $17,080 15.0% $24,858 20.0% $28,524 Also, TLT is for 20+ year treasuries but its current average maturity is 28.1 years so yield is closer to the 30-yr bond. The cost is cheaper the further OTM you go (54 basis points annually for strike of 8.7% yield) but I have a hard time believing we will see those yields within 15 months time. If you can get them, those 5-yr CMS look like some pretty cheap insurance for a cost of only 6 basis points a year.

This may be so, but I think most of the business (Ackman says it will be called Howard Hughes Co. though I don't think that is set in stone) will remain in real estate development for some time. I think Ackman/Brookfield may use the Spinco as another real-estate-related investment "vehicle" similar to FUR. The problem with valuing the the Spinco is the difficulty of putting a value on the big development properties (South St. Seaport, Ward Centers, etc.). Depending on how the developments play out over the next few years each property could be worth anywhere from a little to a whole lot. For example, the South St. Seaport is on the books for $2.9 million. That is for 11 acres of prime underutilized NYC real estate. With some redevelopment that could be worth more than $1bb. So it depends on how the Spinco trades when GGP emerges, but it could be worth anywhere from $4 to $8+/share.

I did a fair amount of research on Famous Dave's about a year ago, bought shares at $5.7 and sold them in April @ $9.4. It is a good chain, they had some problems in the downturn but have for the most part righted the ship. Mostly a franchisor (hence the good return on capital), but over the past ~18 months their franchisees haven't been doing well. I haven't followed their recent results since my sale, but I still think even at these prices the stock is one of the cheapest restaurants. Below is a writeup I did for SumZero in October 2009: --------------------- Famous Dave’s is a small restaurant chain with 176 locations around the US. They are primarily a franchisor, with 74% of units franchised. Dave’s is a casual diner that serves primarily barbeque: ribs, steak, fish & chicken. The average customer check is $14, which is about average for casual diners, and lower than most other barbeque & steak restaurants. Dave’s has won countless awards for both food quality and customer satisfaction. (I can personally attest to the ribs and catfish platter.) One of their specialties is catering, and in 2008 off-premise sales accounted for 32% of revenue. They were ranked #1 franchisor in the full-service restaurant category in 2008 by Entrepreneur magazine. Because of this franchise model – where DAVE takes around 4.9% of annual sales – they have a very high incremental return on capital, especially in recent years. Average unit volume for franchises is $2.9mm, or about $500 per square foot. Pre-tax return on capital is 21%, but this will continue to rise as new growth comes from the franchise base (if you look at invested capital, it is only up slightly over the last 6 years). On a normalized basis, DAVE should earn $13mm/year in operating income (EBITDA-Maintenance CapEx). Possible Risks 1. Macro risk – The restaurant industry is shrinking (2.1% below steady-state in August), not only with the economy but as consumers continue to spend more of their “food expenditures” elsewhere. In other words, for any restaurant to just maintain current sales, they must be taking share from their competitors. For Dave’s, I believe this is very possible, but if the economy gets significantly worse it could be a problem. They were in violation of their debt covenants in Q408 and Q109, due to write-offs from closed franchise units. But they have been paying off debt recently and this should mitigate the risk. High inflation is also a risk – but with DAVE, I think you’ll be relatively better off because of the larger portion of profits that come from no-capital franchising. 2. Franchise risk – Tied to the macro risks listed above. Most franchisees rely on credit, and their ROC after franchise fees is not stellar. So if the economy gets significantly worse, the franchise relationship becomes win/lose, as DAVE makes money and their franchisees don’t. This could inevitably lead to closed franchise units, as occurred for the Atlanta locations in 2008. 3. Capital allocation risk – From what I’ve seen, management is great at running the restaurant operations and growing the Famous Dave’s brand. However, they have made some poor capital allocation decisions in the past with regard to share repurchases (you can see this well looking at growth in BV/share over the years). The main reason for this, I believe, is the fact that executive bonuses are tied directly to growth in EPS. So the incentives are in favor of higher profits, but without regard to capital costs or the cost of share repurchases. The new CEO seems to be more focused on operations, so that is a positive. Valuation Despite the above risks, I believe that Famous Dave’s is a great buy under $6/share. (Yes, it was a much better buy earlier this year when it traded under a conservative estimate of liquidation value.) With normalized operating income around $13mm (which represents a steady restaurant base of 46 owned and 130 franchised units), at a 9x multiple this puts enterprise value at $117mm. Subtract about $20mm in net debt, and you have an equity value of $97mm or $10.5/share. There have been 10 franchise units opened YTD, and 3 more planned before year-end. Each new franchise location adds an average of around $140k in profit per year, with very little incremental capital needed. There are commitments for 100+ new units, to be rolled out over a period of 8 years. If Dave’s can grow profits at 4% per year through both new units and higher profits per unit, the value per share should be $14-16.

I don't think Sears is a terrible investment, it does have downside protection -- just not much upside in my opinion. Selling puts is probably a good way to play it if you want to. RE: declining cash flow. Here are some figures: 2009 2008 2007 Sales change -5.8% -7.8% -4.4% EBITDA margin 3.6% 3.4% 5.1% NI+D/A margin 2.8% 2.3% 3.8% CapEx % sales -0.8% -1.1% -1.1% W/C % sales* 0.3% 0.3% 0.2% ===== ===== ===== Net FCF margin 2.3% 1.6% 2.9% * Decline in working capital assuming it goes down at the same level as sales. With minimal capex to maintain the stores (probably a good decision because even with spending they couldn't compete), sales will continue to decline. The only way FCF won't decline with it is if they cut expenses faster. Expenses are already cut to the bone, and any further as a % of sales would further send sales down. Take the Kmart stores. I did the numbers a while back (don't have them handy) but Kmart EBITDAR (op. income before D&A and rent) was somewhere around $10 to $15 per square foot. A normal retailer like Walmart or TGT would never be able to remain a going concern on that figure because maintenance capex and rent would be much higher. Kmart is only still around because they have very little capex and very cheap rent (like $4/sqft vs. $12+ for market). The best thing they can do is close the stores and if able to under lease agreement sublease the property at market. But that also isn't easy in this economy.

Well if that's the case, then there you go. "Contract" may not be the right term, but here is the quote from the 10K mentioning it: "In October 2007, CME entered into a five-year cooperation agreement with Transport Television and Audio-Video Center, or TTAVC, an entity affiliated with the Ministry of Transport of the People’s Republic of China, to be the sole strategic alliance partner in the establishment of a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. The cooperation agreement also gave CME exclusive rights to display advertisements on the system. In November 2007, TTAVC issued a notice regarding the facilitation of implementation of the system contemplated under the cooperation agreement to municipalities, provinces and transportation enterprises in China. CME believes its status as the sole strategic alliance partner designated by TTAVC and the exclusive rights to display advertisements on the system has facilitated its historical expansion and is expected to continue to provide them with a competitive advantage in the future." The above seems relatively straightforward, but it's still hard to determine exactly what it means without scuttlebutt. That brings up another risk beside fraud -- as mentioned previously it's a completely different culture and unless you're familiar with it things can be misinterpreted.

The problem I have with investing in Sears (used to be a shareholder) is that the real estate is certainly valuable at market price, but is almost worthless in its current state with the stores on it. For Sears, you have (1) Sears Canada (doing well); (2) Consumer brands (would do well if they could be sold off or distributed in other stores); (3) Internet (could be worth up to $1bb alone); and (4) Domestic Sears & Kmart. Just 1 - 3 could be worth $6bb alone. Subtract debt and pension liabilities, your left with about $2bb (i'm doing this quickly so my estimates may be rough). Current market cap is $7bb, so you would have to think the Domestic Sears & Kmart operations were worth a minimum of $5bb, but probably much more if you want a margin of safety. If you're looking for a 40% margin of safety Sears/Kmart would have to be worth about $10bb. They are still producing free cash flow, but it is declining, and I think the speed of the decline may increase. Even using fairly optimistic assumptions I don't think the value of this free cash is worth more than $6bb. That is the value of Sears as a retailer, but what about the real estate? They own around 85mm square feet of space, plus some very advantageous long-term Kmart leases. If this real estate was sold off piecemeal or as a REIT at market value, then it would likely go for over $10bb and Sears would be a bargain. Otherwise, it doesn't matter how valuable the real estate is because there is an underperfoming store on top of it paying far below market rent. The only way to realize the value would be to liquidate most of the stores (most Sears, and all Kmarts). This would mean laying-off 200,000+ employees and a lot of headache. Won't happen anytime soon but it may over time, possibly taking 10+ years to finally get the true real estate value. If shares went back down to $30-40 and Lampert bought out most of the minority shareholders, it might look good regardless. Too hard for me to figure out.

You certainly can't rule it out. But you can't be "sure" that any company is not a fraud, so in that case you should never invest in equities. (Unless you personally are the owner and manager.) It would be extremely difficult (though not impossible) to completely falsify the financial statements RE: high earnings, cash on the balance sheet, etc. CCME's competitive advantage -- which allows it to earn these high returns / high growth -- is the contract they have with the government. Now, how long that advantage will last is the question. This is where the element of fraud could come up: bribery, shady deals behind the scenes, use your imagination. But again it would be hard to completely misreport the figures. The investment from Starr also lowers the risk of fraud. One thing to note is that -- assuming the current 5 year contract with the gov't is legitimate -- the earnings they receive from the contract over the next 2 years plus current cash provides good downside protection at todays price. So if for some reason the contract ends in 2012 and isn't renewed, you won't lose a lot unless management does something else stupid.

I believe the $100M rule only applies to long public US equities/options (including ADRs that trade on US exchanges). So if all your US-traded holdings are under $100M, you wouldn't file a 13F. Li probably has most of his fund in equities traded on foreign exchanges.

I doubt anyone would be willing to put up that much up front money to own a steak n shake and loans can definitely improve those numbers. This is correct. Probably little or no franchisees (for any restaurant chain) will start a new location without a fairly hefty loan. They are franchise specific loans and are very common. The franchise agreement itself is usually fairly strict in terms of the financial requirements for the franchisee (i.e. high net worth, business experience, etc.). The parent company (SNS in this case) may help them get the loan, where the lender knows the restaurant brand/franchise well and is comfortable with the risk. I know GE Capital is a big provider of these loans (ST and LT) as during the liquidity crisis in Q408 they stopped providing financing for McDonalds franchises which was a huge problem. Regarding SNS, franchise returns will be fairly low, but definitely not 3-5% low. It's tough to use the SNS corporate numbers to extrapolate individual franchise margins. Profits before SG&A (after food costs, wages, other operating costs) are about 23% of sales which is a little higher than typical restaurants. This comes to ~$354k per location. Franchise fees are around 4.5% of sales, so you have about $286k left to pay a little marketing (corporate does most of this), property maintenance, and debt interest, the rest is your salary and profit. Like any restaurant, definitely not a great business, but you can make a fairly good return on equity if your a good operator.

Maybe the discrepancy here is that -- yes, when flat-out purchasing a call, the intrinsic value of the underlying equity should be a major input into the decision. But, options themselves have value regardless of the underlying which can be exploited just like equities. One example: In the recently updated edition of Security Analysis, David Abrams (Klarman protege) discusses his realization that options arbitrage is another form of value investing. He lays out an "options box" where you buy a call and sell a put at strike $x, then sell a call and buy a put at strike $y. The value of this box remains fixed -- I think it's $5 in the example. If option prices are not in line, you can buy the "box" for say $4.50, guaranteeing a 50 cent profit, regardless of underlying equity.

I have to give credits to one of my very good friend. I've pulled the plug in 2008, but this friend of mine never had to pull the plug, because several years ago it tooks him just a few minutes to size what was wrong about Sardar Biglari and never put a dime with him and it took me approximately 2 years. Well, that was clearly a mistake even without the benefit of hindsight. SNS up 300%+ since 2008, WEST up more than 2x. Biglari or not, both companies (especially SNS in 08) were cheap and Biglari happened to do a great job turning them around. I'm no fan of his new comp agreement, but that doesn't invalidate everything he did previously. I'm curious, what did your friend see that was so "wrong" about Sardar 2 years ago, when he was running WEST?

On the contrary, the Apple "system" of Device (be it iPod, iPhone, iPad) & Distribution (iTunes & app store) does currently have a fairly large moat. For users, the switching costs are fairly high if they have already purchased music/video/apps for their current device. I think Apple will eventually need to open up their system a bit and make it more modular but right now the barriers to entry remain high. Technology-wise, Microsoft's Zune was about up to par with the iPod when it came out -- but they were unable to put a dent in Apple's sales for the reasons stated above.