ragu

This was the last of my questions to Sardar. I figured I'd get a "no comments" in response. I didn't, thankfully for you:). I don't know ITEX, so please keep that in mind as you read what I believe he said: He is pleased with the results of the tender because he believes ITEX is undervalued, but he does not agree with the reasons behind the tender offer. BH and/ its subsidiaries still hold all of their shares and, as a result, they now own a higher percentage of ITEX than before. He said that he'd spoken to Steven White about the compensation arrangement at ITEX. The gist of it was that Sardar would not support White unless there was a shareholder vote on the compensation proposal. In the absence of a shareholder vote, this was akin to corporate looting. HTH, Ragu

Frozen Tundra, I'll be working on compiling my notes from the meeting once I am back in India. I am undecided about where my notes are going to be posted, but if it is in the public domain, I'll be sure to post a link to it here. Best, Ragu

ragnarisapirate, FWIW, BH management is on record, around the middle of last year, stating that they didn't believe BH was overvalued at around $400/sh then. Best, Ragu

Hi Buckeye, Not at all. I am just glad I get to go this time around. I loved it the the one time I went to an annual meeting where the Chairman and Vice-Chairman answered questions for 5 1/2 hours. And, meeting like-minded people is always nice. Best, Ragu

I understand this was a little tongue in cheek, but it looks a few on the board still do. And I'll get to meet some of them too. Best, Ragu

I will be attending this year's meeting. If there are other fellow board members attending and would like to meet up, please respond to this thread or send me a message. Looking forward to seeing some of the folks from this board! Best, Ragu

Chennai, India.

Because, as I've tried to show with some of my posts on this thread, reason dictates it. And, Sardar is nothing if not rational. Of course, in my subjective opinion, Sardar is no cheat either, but you don't have to share this opinion in order to arrive at the conclusion about the incentive agreement. Best, Ragu

maxprogram, Keyword being usually. This is an unusual enough plan that additional thought is warranted. Actually, what is unquestionably true is that it is not in Sardar's best interests to propose a plan that dents BH's long-term intrinsic value, let alone one that is substantial. I'd be happy to hear reasoned arguments otherwise. Ultimately, this transaction boils down to the evaluation of the following two things: a. The cash flows that represent the performance fees of the Lion Fund (that Biglari gave up) b. The cash flows that represent the incentive payments to Biglari (that BH shareholders pay) For this transaction to be neutral/advantageous to BH shareholders, the present value of (a) must at the very least be the equal of (b). The conditions governing (a) and (b) are roughly similar (25% payout with a 5% hurdle rate for the Lion Fund vs. 6% for Sardar). Now, BH's equity is many times the size of the Lion Fund's limited partner interests. So, as of today, (b) will be much higher than (a). This will likely remain true for as long as there are payments to Sardar under this scheme. Therefore, in order for the present value of (a) to catch up (and exceed) that of (b), the payments to Sardar under this incentive agreement need to end. And, in time, they will. Best, Ragu

The incentive agreement will be rescinded, thereby ending the payments to Sardar. BH will, of course, continue to be entitled to the incentive fees based on the performance of the Lion Fund. Best, Ragu

I didn't say it was. Since the discussion centered around Buffett's assertion of "float = equity" while valuing Berkshire's insurance operations, I'd presumed the post I was responding to was considering a similar, albeit hypothetical, situation at Fairfax (i.e. costless float forever). The reason why Fairfax's investments/share work out to 3.6 times book is because of the additional interest bearing debt component. You could make the argument that investments/share would represent an upper bound (i.e. aggressive estimate) on the IV of Fairfax's insurance operations if there were no debt and costless float forever was highly probable. Best, Ragu

However, Fairfax has a third source of funding for the investments i.e. interest bearing debt that needs to be accounted for. Best, Ragu

racemize, I don't expect that he'd give back any money that has already been paid him and my apologies for a hint that wasn't quite right. Here's another one and I'll try not to goof up this time: Currently, Sardar's personal stake in BH is small enough (9263 shares that the market values at about $3.75 million) that the amount of incentive payment he receives is meaningful relative to the value of the shares he holds. Over time however, this equation will be reversed and the value of BH stock that Sardar holds will become increasingly dominant relative to the amount of incentive compensation he receives. At the risk of channeling Charlie again, we'll ask the most important question of them all: And then what? Best, Ragu

link, Heh. I just think the incentive agreement is a puzzle worth solving. Nope. In fact, the holding of BH stock through the Lion Fund makes me uncomfortable. Best, Ragu

ragnarisapirate, No disrespect was intended in my original reply. Here's a hint regarding the assumption that I believe will be shown to be incorrect: Never say never. Best, Ragu

rijk, Many thanks for posting this. Much, much appreciated. Indeed, with the most insightful being this gem (pg. 9): Best, Ragu

Hi Eric, Since you ask so nicely :), here goes: Sardar sold something of value to BH - The Lion Fund. He took something of value from BH and, by extension, BH’s shareholders – the new incentive compensation. However, in taking something of value from BH, he also agreed to buy shares of BH with half those proceeds, thereby increasing his stake in the entity that would be paying him. In effect, Sardar was both a buyer and a seller in the Lion Fund transaction. As far as the transaction goes, there are three possible outcomes: a. It is fair on both parties. b. It is favourable to the buyer i.e. BH shareholders, Sardar being an increasingly large one of those, at the expense of the seller Sardar, erstwhile owner of the Lion Fund. c. It is favourable to the seller i.e. Sardar, erstwhile owner of the Lion Fund, at the expense of BH shareholders, Sardar being an increasingly large one of those. If you’d like to make the assessment of what outcome is most probable, the question worth asking is: what outcome would Sardar most prefer? Alternatively, to channel Charlie (or Jacobi if you’d like to give credit where it’s due), we could “Invert, always invert” and ask: what outcome would Sardar least desire? If your subjective assessment of Sardar leads you to conclude that he is on the side of BH shareholders, the answer is obvious. It’s © . If you make the argument (and I don’t) that Sardar works completely in his self-interest, what's the answer? That’s right. It’s © again. And it’s because of the reinvestment requirement which virtually guarantees that the value of BH’s stock will have the greatest impact on Sardar’s net worth over time. So, irrespective of which side of the subjective fence you are on, the argument that Sardar, as a result of this transaction, willfully engineered a long-term impairment to IV doesn’t hold, let alone one that’s as high as 25%. And if there wasn’t a material impairment to IV, I can see only one scenario that causes it to be so. And that scenario implies that a fundamental, albeit implicit, assumption that the detractors make about the incentive agreement is invalid. Best, Ragu

ragnarisapirate, Firstly, apologies for the really late response to this. I'd meant to respond earlier. Re. the impairment to IV as a result of Sardar's compensation arrangement, reason dictates that the most fundamental assumption in your (and all the detractors') valuation, albeit implicit, is incorrect. The future will show it. Best, Ragu

The following disclosure from a preliminary proxy statement pertaining to the special shareholder meeting to vote on the incentive agreement might help clarify: HTH, Ragu

As per the most recent BH shareholder letter, one of Sardar's stated goals is to compound per-share IV at 15% p.a. over the next decade. It's the first time I've actually seen Sardar mention a number in this regard, so it might be worth paying attention to it. Best, Ragu

They do have an extensive reach. It's a pity that the quality of their reasoning as it relates to Biglari's candidacy (they did have the good sense to recommend a NO on the proposed poison pill), based on what I've seen from CBRL's press release, is not commensurate with the size of their influence. Best, Ragu

I published a letter to the CEO of Cracker Barrel on my blog. There has been some discussion of CBRL in here, so I thought folks might be interested in reading. Link to letter is here. Best, Ragu

This isn't critical, but reported book value increased by the amount you cite. The adjusted book value (accounting for BH's investments in the LF and LF's holdings in BH that are recorded as Treasury stock) that is a fairer reflection of economic reality rose by 9.6%. Best, Ragu

Couple of things: 1. Unrealized gains/losses won't make it to reported earnings. They will make their way through to book value though, which is what the incentive payments are based on. 2. The incentive payment is calculated at the end of each fiscal year and paid annually. I suspect you may be thinking of the payment for last year, which was pro-rated based on the change in book value for the last quarter of last year, consequent to the vote to approve the compensation. Disclosure: I am a BH shareholder. Best, Ragu

Couple of questions: 1. If you'd recommend one text for understanding Indian accounting standards, what would it be? 2. What's the investment that you consider your biggest mistake and what were the lessons from that mistake? Best, Ragu