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Repost2: A Parable About How One Man's Reputation Came To Ruin


omagh
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[originally posted by farnamstreet; original lost due to 2xWordPress hacks;recovered from Google]

(a few modifications were made to the original for readability)

 

Around 2007, a fictional man named Big Liar, discovered a company, Takhomasak, on the stock exchange that was largely populated with inept management, but otherwise rich in all the bounty.

 

Big Liar thought he could correct the misfortunes of Takhomasak, so he communicated in writing with the owners intentionally evoking comparisons with a wealthy and well respected citizen named Yoda. Big Liar told the shareholders he was smart, full of integrity, and had all the tools necessary to do the job. Not only that, he wanted to do the job in the right way--The way everyone wished corporate america worked.

 

He exposed the virtues of his idol, Yoda, and explained to shareholders his thoughts in detail: He would do whatever it took to turn around Takhomasak, even forgoing stock options and extra renumeration to do so. After all, as a large shareholder, he planned to make money with shareholders, not off them. He stated, "When the share price rises, we will reap our rewards."

 

The owners of Takhomasak were thrilled that someone of such integrity and promise had come to rescue their company. The owners were citizens of GullibleLand and, true to their namesake, they were rather easily persuaded by the smooth talking Big Liar.

 

They quickly voted Big Liar into power. Not long after warning flags started to show. No longer was Big Liar content with a just board seat, now he wanted to run the company. At first he took a fairly small salary, yet still something in the top 10%, of all citizens in GullibleLand. He certainly wasn't hurting. Not to mention as the share-price of Takhomasak improved, Big Liar was given a lot of compensation by his other business partners for his hard work.

 

As the performance of the company began to improve, Big Liar realized he was not making enough money. No longer content to merely make money with shareholders, he quickly escalated his salary to a level in the top 1% of GullibleLand. The owners, looking at the operating performance of their company, decided to over-look this compensation change and rationalized that, hey, ok, we can give him this one.

 

Not much time passed before Big Liar grew tired of going to work everyday for a company called Takhomasak. He reasoned that since he had invested so much time and effort into the company, its name should change as a tribute to him. In choosing a new name he once again looked towards his idol, Yoda, who ran Be Helpful and intentionally invoked comparisons when he proposed the new company should be called Big Head.

 

The shareholders of Big Head--the very shareholders that had elected Big Liar to the company in the first place--began to grow wary and sensed a disturbance in the force. Big Liar was supposed to be different and unlike the other schmucks yet, increasingly, he was behaving as if he were one of them.

 

Looking around, Big Liar, soon found examples of people who made more money than him and his greed started to get the best of him every so slowly. Despite the words he had written, not two years ago, Big Liar realized he could make even more money off the owners of the Big Head. After all, it was now his company. So ever so slightly he started to trade his beliefs for more and more money. After all, the money was quite the seductrice. Like any addict, he thought it would be easy to stop once he tasted the pleasures of the seductrice. Yet her siren song was too strong for him to overcome.

 

Despite personally owning less then 2% of the company, Big Liar claimed, at the shareholders meeting, that he would be "CEO until he dies" which seemed a little peculiar at the time given that he didn't really own that much of the company. The company's owners walked away feeling amiss but couldn't quite put their finger on it.

 

Big Liar's slippery slope continued when he decided to implement a compensation arrangement that was heavily in his favor. Big Liar proposed this to the shareholders and it was the straw that broke the camels back. They realized that Big Liar, was in fact, a big liar. No longer did they trust his word. Instead they viewed everything with healthy skepticism. Big Liar lost their trust. But Big Liar didn't care, no, he had his company, and his millions, and since he was somewhat smart, he knew he would likely do well. Shareholders tried to send Big Liar a message but this was lost on him as he was blinded by the strong pull of the siren song. As time went on Big Liar used his ever growing fortune to acquire more and more of Big Head's stock.

 

...

 

In the end Big Liar gained a fortune but lost his reputation. It's not clear how the story ends, but one thing is clear: once you lose your reputation you can almost never have it back.

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Also as a follow-up to these archived posts:

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2331.0

 

 

After following Biglari's career since 2003 and investing in SNS shortly after he started his position, I sold all my shares today -- disappointed but a bit wiser.  In retrospect it's much easier to see clearly now that Biglari was a smooth talking Buffett wannabe charlatan who lacks integrity, especially in his shareholder communications concerning executive compensation.  So sad. He could have been a contender....

 

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omagh,

 

Many, many thanks to you. I really like your determination and your character on this. If this board get shut down again, even if it's many times, I'll always be your cheerleader on this!

 

Keep up your good work!

 

In retrospect it's much easier to see clearly now that Biglari was a smooth talking Buffett wannabe charlatan who lacks integrity, especially in his shareholder communications concerning executive compensation.

 

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.

 

Kudos to him! I owe him a bottle of wine.

 

Cheers!

 

P.S.: While Fairfax case over the last few years is a gem of learning, Sardar is one too. Very different story, but as worthwile as a lesson for any student of value investing.

 

P.P.S.: I hope that SNS shareholders will vote no on his plan to legally put his fingers deeply into the shareholder's pocket.

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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?

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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.

 

 

I'm curious, what did your friend see that was so "wrong" about Sardar 2 years ago, when he was running WEST?

 

This is what I wanted to know. Very curious.

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Well, that was clearly a mistake even without the benefit of hindsight.

 

No. First, most of the proceeds went to FFH. I've not compared their relative performance, but anyway secondly even if I would have made more money with these stocks, I have investment principles and do not want to compromise them. Someone could have said that it would have been a brighter idea to buy Nortel than Berkshire in the tech bubble period, and then just sell just before it begun to tank, but if you get into that "what if" game, your investment framework will begin to show some cracks. What is important is to clearly define where you are competent and, more importantly where you are not competent..., what you want, and more importantly what you don't want and then keep your discipline.

 

I do not want to invest and partner with managers that I don't trust and/or don't like and don't take the rear view mirror to check what I could have earned if I would have not respected that invesment criteria.

 

Regarding what my friend said, he told me that in private, so I'll keep that confidential. When someone trust me, I try to do my best to deserve that trust. Suffice to say that he's been faster than me on Sardar Biglari.

 

My friend 1 - Partner 0 (just kidding)  :)

 

Cheers!

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Well, that was clearly a mistake even without the benefit of hindsight.

 

No. First, most of the proceeds went to FFH. I've not compared their relative performance, but anyway secondly even if I would have made more money with these stocks, I have investment principles and do not want to compromise them. Someone could have said that it would have been a brighter idea to buy Nortel than Berkshire in the tech bubble period, and then just sell just before it begun to tank, but if you get into that "what if" game, your investment framework will begin to show some cracks. What is important is to clearly define where you are competent and, more importantly where you are not competent..., what you want, and more importantly what you don't want and then keep your discipline.

 

I do not want to invest and partner with managers that I don't trust and/or don't like and don't take the rear view mirror to check what I could have earned if I would have not respected that invesment criteria.

 

Regarding what my friend said, he told me that in private, so I'll keep that confidential. When someone trust me, I try to do my best to deserve that trust. Suffice to say that he's been faster than me on Sardar Biglari.

 

My friend 1 - Partner 0 (just kidding)  :)

 

Cheers!

 

Nice advice Partner. Discipline is key!

 

Some words from Charlie Munger:

"The last idea I want to give to you…..is that this is not the highest form that a civilization can reach. The highest form a civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another. That’s the way an operating room works at the Mayo Clinic. So never forget, when you’re a lawyer, that you may be rewarded for selling this stuff but you don’t have to buy. What you want in your own life is a seamless web of deserved trust. And so if your proposed marriage contract has 47 pages, my suggestion is you not enter."

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