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BH 2nd Q 2010 Results


Parsad
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As expected, BH is now earning somewhere around $5-6M a quarter net or $20-22M annually.  That would be 7.3% return on equity  without doing anything.  Throw in a modest gain (same 7.3% after tax) on the $80M in capital available for investments and you have another $6M in earnings...or about $28M a year.  That would be a 9.2% earnings yield in total.  That would give Sardar a present compensation level of about $2.5-3M without doing anything significant to increase shareholder value.  I would be much happier to see a hurdle of 10% and a 15% incentive allocation above the hurdle, but I don't think they would entertain such an idea.  Cheers!

 

http://finance.yahoo.com/news/Biglari-Holdings-Inc-News-prnews-364171439.html?x=0&.v=1

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How common is a hurdle rate for hedge funds?  I've seen Pabrai discuss his 6% hurdle, a la the Buffett partnership, but otherwise how common is it? Maybe it depends on the how much "skin in the game" a manager has. (Pabrai already had seed money from a business sale to start his fund.) What is Sardar's personal (rather than controlled) ownership in BH?

 

 

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Hurdle rates are relatively common in hedge funds.  Most of the time, the funds are structured in a "1 & 20" or "2 & 20" fashion...meaning a 1% management fee and a 20% incentive allocation above a fixed hurdle.  There are a number of hedge funds now that operate solely on an incentive allocation above a fixed hurdle...I know of at least fifteen in the U.S. and two in Canada.  I would say that about half are young managers who saw Mohnish set up his fund like the Buffett Partnership and followed suit...so they don't have much personal capital at this stage in their career.  I'm not entirely sure what Sardar's personal stake in BH would be, but I'm fairly certain it is less than 1%.  Cheers!    

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BH equity growth is not very impressive for the past six months when compared to the general stock market. On April 14th, the equity was 302 million compared to 292 million equity on Sept 30th 2009. The growth rate for six months is 3.4%. The annual rate is 6.3% taking into account two extra weeks of April.

 

Year over year there was about 1.7% dilution in shares. If the compensation is based on per share basis, the result(s) aren't that impressive.

 

cheers!

Shalab

 

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BH equity growth is not very impressive for the past six months when compared to the general stock market. On April 14th, the equity was 302 million compared to 292 million equity on Sept 30th 2009. The growth rate for six months is 3.4%. The annual rate is 6.3% taking into account two extra weeks of April.

 

 

shalab, your comparison is not really fair at this point in the game. sardar has only been at the helm for a little over a year. the turn around he accomplished in such a short time was remarkable by any standard, imo. but the biz (sns) still has a ways to go before its hitting on all cylanders. not only that, but sb had many legacy issues to deal with from previous mngts long, painfully incompetant tenure.

 

you also fail to note that sns under sb is now generating free cash flow well above its reported, GAAP earnings. but its only the GAAP earnings which impact reported shareholders equity, especially in the short run.

 

i know alot of people are some where between disappointed & outraged at sardars compensation blindside where he proposes to take a 25% cut of book value growth above a pathetically low hurdle rate of 5%. i'm one of those. when i bought in to sns shortly after sb became chairman/ceo i thought i had found a stock that i could hold for (almost) ever.... a rare compounding machine run by an honest, talented operator & capital allocator. that comp scheme was a bolt from the blue, right between the eyes. a total game changer. i cant recall ever being so shocked & disappointed. especially as someone who prefers one decision stocks that can be held for a long, time bought at a decent price. i prefer those over ostensibly cheaper stocks trading at a temporary large discount but which perhaps lack a sustainable abilty to earn high returns over time, & therefore begs to be sold when the valuation gap closes. its just a particular quirk of mine. but i see no need to view sardars record of other accomplishments in a diminished light as aresult

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Ditto for Berkshire but Berkshire had a huge stock portfolio that also improved.

 

Berkshire's book value grew because of the acquisition of Burlington Northern and the $14.8 billion of goodwill added to its balance sheet -- rather than due to its stock portfolio during the six month period you cite.    A big acquisition tends to make BRK's book value appear to grow rapidly during the period that the acquisition is added to the balance sheet.  This is because BRK issued shares at way above book value to pay for it and the value of these new shares were added to shareholders' equity.  When you issue new shares at multiples of book, book value per share increases but economic value may not have. (even Buffett has said that he paid a full price for BNSF -- though of course Buffett's track record says that he gave up less value than he got.)

 

wabuffo

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shalab, your comparison is not really fair at this point in the game. sardar has only been at the helm for a little over a year. the turn around he accomplished in such a short time was remarkable by any standard, imo. but the biz (sns) still has a ways to go before its hitting on all cylanders.

 

I am not making any judgment - just pointing out the facts. Agree, the turnaround was done well in a very difficult environment. He deserves kudos for that!

 

That said, the last six months at SNS were significantly better compared to the same period a year ago. Ditto for Berkshire but Berkshire had a huge stock portfolio that also improved.

 

cheers!

 

 

 

Shalab, it should be mentioned that a BIG piece of berkshire's book value growth this year has been due to a sharp reversal of the non-cash accounting hit brk took in 2008- early 09 on their derivative positions...yet another poignant commentary on the perils of looking at data in isolation from the bigger picture: context does matter. but you're preaching to the choir. web is cut from a unique & rarefied cloth, the likes of which we might never see again in our life time. it was my 1st stock, & my largest & longest held for 15 yrs up until 2005. and if brk was about 100 bil smaller i'd still be be on that train.

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BRK book value grew by 3.98% from Q3 to Q4 2009 - part of this came from BNI share appreciation but still...

 

 

 

there's no question that its a minor miracle web can continue growing brk's compounded book val in excess of a few percentage points per year over the sp500 at brk's present size. and over a 5-10-15 year time frame that really adds up. it could also be argued that over the last 10 yrs brk's intrisic val per share has grown faster than its book val per share because of the relative preponderance of whole co purchases web has made at fairly attractive prices for cash, exchanging a 1-2% earnings yield (cash) for a 8-12% earnings yield. thats evident in the periodic tables in brk's annual reports showing a side by side comparison of brk's book val growth from the 70's to the present with its earnings per share growth. over the last 10 yrs earnings per share have been growing at a better than 20% clip, while book val (and investments per share) has slown from the + 20% in the earlier yrs to 8-10% if memory serves.

 

but still, brk book val will gyrate with the general ebb & flow of the markets over the short term, given its large exposure to stocks....thus the quarter ending jun 30 is like to show a reduction in book val, for what its worth. of more interest will be its operating earnings per share & its see-thru earnings (what ever happened to those tabes that web used to publish now & then?). 

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