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Biglairi Holdings


Kuhndan
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I'm curious, a number of folks here on the board appear to have had some experience with Biglairi. Initially it appears there was considerable hope that he would be the second coming of Warren Buffett and was then disappointed with the compensation package. Given what the company has done since the compensation debacle, have any of you changed your mind that it might be worth a second look? I'll admit, I've been a buyer for some time and particularly recently. I'm interested in any thoughts pro or con. Thanks.

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Fool me once, shame on you.  Fool me twice, shame on me! 

 

We won't be buying unless something terrible happens and the stock plummets.  Then we would buy enough so that we could run a proxy against him!  ;D  Cheers!

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Fool me once, shame on you.  Fool me twice, shame on me! 

 

We won't be buying unless something terrible happens and the stock plummets.  Then we would buy enough so that we could run a proxy against him!   ;D  Cheers!

 

Damn I know who not to piss off lol

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I'm ambivalent on his ethics, but I don't see a reason for stockpickers to purchase the stock at this price. The restaurant operations are not particularly cheap, and BH's cost of capital isn't particularly low.

 

Rabbit,

 

Would you explain why BH’s cost of capital isn't particularly low?  The concept of cost of capital has always eluded me.  When we are referring to debt it is easily calculated, but what is the cost of capital for a company that is not using debt to finance operations?  Certainly the debentures paid to the Western stockholders were expensive, but what if BH does not intend to issue debt?  Perhaps your explanation will shed some light on this concept for me.

 

Thanks,

 

woltac

 

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Would you explain why BH’s cost of capital isn't particularly low?  The concept of cost of capital has always eluded me.  When we are referring to debt it is easily calculated, but what is the cost of capital for a company that is not using debt to finance operations?  Certainly the debentures paid to the Western stockholders were expensive, but what if BH does not intend to issue debt?  Perhaps your explanation will shed some light on this concept for me.

 

Wikipedia has a pretty good entry on this...

http://en.wikipedia.org/wiki/Cost_of_capital

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Thanks bargainman,

 

It seems even wikipedia has trouble with the equity portion of the cost of capital.  Here is what they have to say:

 

The cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity. It is commonly equated using the CAPM formula (below), although articles such as Stulz 1995 question the validity of using a local CAPM versus an international CAPM- also considering whether markets are fully integrated or segmented (if fully integrated, there would be no need for a local CAPM).

 

So basically this is a theoretical number that cannot be calculated with any specificity.  The company has no idea what their shareholders require as a return.  If the return is high they will have one set of shareholders and if it is low there will be a different set of shareholders.  I understood the concept this way but was sure I was missing something. Perhaps I am still missing something.  

 

woltac

 

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So basically this is a theoretical number that cannot be calculated with any specificity.  The company has no idea what their shareholders require as a return.  If the return is high they will have one set of shareholders and if it is low there will be a different set of shareholders.  I understood the concept this way but was sure I was missing something. Perhaps I am still missing something.  

 

woltac

 

 

Woltac, I didn't mean to be so cryptic. I was referring primarily to the "obligations under leases"  and the discounted operating leases. At the current price, and without a significant source of low cost leverage, you need an optimistic view of future ROA.

 

Regarding cost of equity, while difficult to calculate, it is a cost that comes to bear when you issue more shares. The discussions about valuation may be theoretical but it is real cost.

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Thanks Rabbit,

 

That makes sense; the lease payments are similar to debt.  I started reading Value Investing by Bruce Greenwald and he uses the cost of equity capital in a lot of his calculations.  The calculations are very clean in the book, but I think they may be little harder to apply in practice.  Substituting my expected return on the investment may be the answer. 

 

Woltac

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The schools are still selling this cost of equity concept.  It's never made any sense to once they get past: "there's also a cost to equity"....after that, like Munger, I think they went bonkers.  I tell you how i think they went bonkers in a second (if I can keep your attention that long).

 

First, here are some choice quotes from Munger on this subject:

 

Obviously, consideration of costs is key, including opportunity costs. Of course capital isn’t free. It’s easy to figure out your cost of borrowing, but theorists went bonkers on the cost of equity capital. They say that if you’re generating a 100% return on capital, then you shouldn’t invest in something that generates an 80% return on capital. It’s crazy.

 

If you take the best text in economics by Mankinaw, he says intelligent people make decisions based on opportunity costs — in other words, it’s your alternatives that matter. That’s how we make all of our decisions. The rest of the world has gone off on some kick — there’s even a cost of equity capital. A perfectly amazing mental malfunction.

 

So, I think these two quotes -- if the ideas contained within them were synthesized -- do a good job of explaining the idea as it should be understood -- irrespective of how it is widely taught. 

 

Here's what I would -- given I'm only taking a few minutes on this, perhaps changes can be added.

 

1) Equity does have a cost

2) We assume that all businesses last forever and stay the same for purposes of this example

3) Equity's cost can only be determined by comparing what equity could achieve in a variety of businesses (actually, assume we could order, from best to worst, those businesses with the highest unlevered returns on equity (where equity also happens to equal tangible investment). 

3)  So done, we take all our equity and put it in the highest returning vehicle.

4)  So, it happened that, in this case, we were able to invest all our equity into the very best business. But, after a year, the business found that it did not have need for the equity left over at the end of the year and returned to us the excess that it couldn't keep investing at its "highest return in the world on equity" level.

5)  That equity should then be invested into the second candidate on our list and so on, and so forth.  I think this is what Munger means about oppotunity costs with respect to any sort of "cost" one could logically apply to a business as "its cost of equity".

 

That is, if your equity is invested in a business that's in the middle of the list, you should get it into a business at the top of the list....the longer you take to make the move is how you would measure your opportunity cost.

I mean, if every equity dollar has been invested on our long list rated businesses we will eventually get to the last and worst business.  But, if this business still turns any profit, it is worth putting in some equity (assuming that alternatives aren't available -- bonds, cash paying more than the roe on the business, etc. etc.)

 

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