The Ideas Report For Serious Investors

Those of our readers who have followed the evolution of Steak n Shake (SNS) over the past couple of years know that the company has made huge strides in terms of stabilizing operations and creating value for shareholders. Whereas the previous management team almost ran Steak n Shake into the ground, new chairman Sardar Biglari quickly restored the company's fiscal health, ensuring that Steak n Shake will be around for a long time to come. Not least, Steak n Shake's stock price has enjoyed a renaissance of sorts after languishing for years under the old management.

Despite all the positives that Sardar Biglari's involvement has brought to Steak n Shake, the Indianapolis Business Journal (IBJ) has published an article that can hardly be described as anything other than a hatchet job. In the article, Cory Schouten writes:

"Biglari in June persuaded the board to transform Steak n Shake into a holding company for a diverse range of investments and give Biglari sole discretion over asset allocation. The board’s vote essentially allowed the hedge-fund owner to use the publicly traded company as a personal investment vehicle."

"The unanimous vote came after Biglari, the board chairman, managed to push out every board member unwilling to give him dictatorial authority over Steak n Shake despite his relatively modest ownership stake."

"Personal investment vehicle"? "Dictatorial authority"? This language might be more appropriately used to describe the state of Steak n Shake under previous management. Biglari's words -- and, more importantly, actions -- have made it clear that his paramount goal is maximizing long-term value for all Steak n Shake shareholders. Biglari's authority could be described as "dictatorial," but so could every CEO's authority. The question is whether such authority is used for the benefit or detriment of shareholders. In Biglari's case, the business results and stock price of Steak n Shake speak volumes.

The IBJ article also stokes fears about Steak n Shake relocating to Biglari's hometown of San Antonio, Texas, implying that jobs and capital investment might be lost in Indianapolis. We have no problem with a hometown paper looking out for its town, but in this case the IBJ is far off-base. Steak n Shake "The Restaurant Company" will continue to be based in Indianapolis. Meanwhile, Steak n Shake "The Holding Company" will operate out of San Antonio, Texas, likely with a very lean holding company staff.

The inability of organizations such as the IBJ to distinguish between Steak n Shake "The Restaurant Company" and Steak n Shake "The Holding Company" is precisely why Steak n Shake "The Holding Company" will be renamed Biglari Holdings. Listen up, confused IBJ readers: The restaurant business will continue to be called Steak n Shake.

The reader comments posted on the IBJ website show just how destructive it can be in the fast-paced online age when misleading or outright wrong information is spread by a supposedly authoritative voice. Writes IBJ reader Mike,

"This is an unexpected turn of events. I frequent Steak n Shake for many reasons, but mostly b/c of the local headquarters. I for one will not go as often (or ever) if most of the local corporate jobs are moved."

Adds IBJ reader Joe,

"when did we...decide to let sleazeball Iranian refugees (from the Shah's regime no less)purchase/own good 'ol 'Merkan companies and run 'em into the ground...my guess is his family has millions in Swiss bank accounts they've been living off of for years (used to work with one of these Iranian ex-pats years ago and had he was the sleaziest 'businessman' I ever met!)"

Another IBJ reader who calls himself Indy Observer takes a more lighthearted approach to spreading baseless rumors:

"Any truth to the rumor that the Steakburger is being renamed the Big Lari Burger?"

On second thought, that last one could actually catch on. Give it a few decades, by which time Biglari Holdings may well be another stock with a six-figure price tag and tens of thousands of happy shareholders attending each annual meeting. At that time, "Big Lari Burger" just may become a no-brainer name for a burger that will be enjoyed by droves of happy shareholders.

Disclosure: No position.

Posted by manualofideas at 09:04 PM | Permalink | Comments (0)

By Nadav Manham

I just blogged that Pepsi isn't running a Super Bowl ad.  But guess who just did?  Here's what the CEO had to say (here too).

Why would this internet company decide to advertise on T.V.?  The opportunity cost relative to advertising on the internet is not high, as the company already gets a lot of free advertising there.  Plus the Super Bowl audience likely allows the company to reach more internet naifs/future users at lower cost than any other way of spending ad money.

It's also interesting that the product being advertised is in many ways the product that least needs it:  plain old search, which is a monopoly enjoys high market share. 

I really liked the ad; it was minimalist, easy to understand, and moving in a kind of mystical way--"look at the power of search technology to expand your knowledge and change your life."  Does anyone associate Yahoo search or Bing with any of that?  That's one component of the moat.

The author of this post is president of Elera Advisors LLC, an investment advisory company focused on value-oriented manager selection. Mr. Manham is a Manual of Ideas contributor and editor of The Investor's Consigliere. 

Posted by manualofideas at 11:41 AM | Permalink | Comments (0)

The following are links to hedge fund manager interviews posted on the website Hedgefundnews.com. The interviews were conducted between 1995 and 2004.

• John B. Kleinheinz, Kleinheinz Capital Partners - January 2004
  
• John Paulson, Paulson & Co. - July 2003
  
• Russell Abrams, Titan Capital Group - April 2003
  
• John Muresianu, Lyceum Capital - January 2003
  
• Robert P. Rotella, Rotella Capital Management - June 2002
  
• Alexander J. Roepers, Atlantic Investment Management - April 2002
  
• Ernst von Olnhausen, Robert Vicas, Double V - October 2001
  
• Raj Gupta, Epoch Funds - July 2001
  
• Michael Rome, Lazard Frères - April 2001
  
• Brian Stark, Michael Roth, Staro Asset Management - January 2001
  
• Thomas M. O'Neill, Navigator Asset Management - October 2000
  
• Gregg D. Groechel, American Express - July 2000
  
• Marc J. Gabelli, Gabelli Asset Management - April 2000
  
• Fabien Pictet, Fabien Pictet & Partners Ltd. - January 2000
  
• Errol M. Rudman, Rudman Partners, L.P.-October 1999
  
• Morris Mark, Mark Asset Management-July 1999
  
• Stephen Edwards, Magus Capital Management Ltd.-April 1999
  
• Sanford Grossman, Quantitative Financial Strategies-Jan. 1999
  
• George Hall, Clinton Group-July 1998
  
• Charles Schaffran, Alliance-April 1998
  
• Wayne Cooperman, Ricky Sandler, Fusion Partners-January 1998
  
• Stacy Ruchlamer, The Consumer Fund, L.P.- October 1997
  
• Geoffrey L Symonds, Trace Global Opportunities Fund-July 1997
  
• Raj Rajaratnam, The Galleon Group-April 1997
  
• Charles Davidson, Joseph Jacobs and Shaiy Pilpel, Wexford Management LLC-January 1997
  
• John Armitage and William Bollinger, Egerton Capital Limited-November 1995
  
• Gerald R. Jordan, Jr., Hellman, Jordan Management-July 1995
  
• Michael Sofaer, Sofaer Capital Inc. -May 1995
  

Posted by manualofideas at 08:15 PM | Permalink | Comments (0)

Canadian value investor Vito Maida, founder of Patient Capital Management and former Prem Watsa protege, discusses his strategy and market outlook in this interview with the Financial Post.

If video fails to load, click here to watch.

If video fails to load, click here to watch.

Here is how Patient Capital describes the firm's investment philosophy:

PCM's investment philosophy is based on long-term absolute value. The objective of the investment philosophy is to focus on the preservation of capital while earning superior rates of return. PCM attempts to meet these objectives by purchasing only those securities that meet very strict criteria for value and quality. PCM's mandates allow for substantial cash balances to accumulate if securities cannot be found that meet its very high standards. Investments are only considered in companies that have a long history of operation and are in stable businesses that PCM can analyze and understand with a high degree of certainty.

PCM’s portfolios are constructed entirely on a bottom up basis. Each investment is analyzed through a very independent and rigorous analytical approach. Reliance on external research is minimal. Historical annual reports are analyzed to determine balance sheet strength, sustainability of cash flows and profitability. A very important component of the analytical process is an assessment of the company’s accounting policies. In depth interviews are often conducted with company management in order to assess future strategy and competitive position. In addition, a considerable amount of time is spent attempting to estimate “intrinsic value” through the use of discounted cash flow models and traditional valuation measures such as price/earnings ratios and price/book ratios.

New investments are only purchased if PCM’s criteria for high quality fundamental characteristics such as superior returns on capital, substantial free cash flow and low debt are present as well as a security price that is trading at a substantial discount to PCM’s estimated intrinsic value.

Although PCM’s investment horizon is five to ten years we will exit an investment for any one or more of the following reasons:

• The security price reaches our targeted sale price;
• Significant management changes occur;
• A dramatic change in strategic direction is undertaken;
• Increased debt levels are incurred;
• Adverse changes in accounting policies are implemented.

We believe that our investment philosophy is very different from virtually every other Canadian value manager. Because our clients do not require us to be fully invested we do not have to compromise our standards for quality and price in order to meet a fully invested mandate. Other value mangers that must remain fully invested must by definition practice “relative value investing.” In addition, PCM portfolios are concentrated and will hold a maximum of twenty securities.

(Thanks to Corner of Berkshire and Fairfax for the interview link.)

Posted by manualofideas at 03:47 PM | Permalink | Comments (0)

On January 12, 2010, Google announced that the company would re-evaluate its approach to doing business in China after the discovery of cyber attacks that appeared to target human rights activists.  While Google did not directly accuse the Chinese government of complicity in the attack, the company clearly stated that it is no longer willing to censor search results.  At a time when nearly every major company in the United States is trying to expand opportunities in China, Google has decided to buck the trend with a very controversial move that could result in a major setback for the business.  What could Google’s executives have been thinking when they made a decision that was sure to cause a political uproar?

Richard L. Brandt’s latest book, Inside Larry & Sergey’s Brain, presents a portrait of Larry Page and Sergey Brin that helps the reader understand what may have motivated the company to initially enter China by accepting some level of censorship.  Although the book was published prior to Google’s recent announcement, we can draw some important insights regarding the way Google’s founders think about the issue of doing business in China.  Perhaps more importantly, the book also allows the reader to glimpse into the psyche of the founders and draw some conclusions regarding entrepreneurship in general.  For anyone investing in early stage companies, the insights are invaluable.

Mr. Brandt’s book is not as well known as  Googled:  The End of the World as We Know It which we reviewed in November.  However, one can argue that Mr. Brandt succeeds in providing a more vivid background of both founders and he also makes a better effort to draw links between their core values and a number of decisions that were made which may appear “crazy” at first but actually led to Google’s stunning success.  It is easy to see in retrospect how conventional thinking could have destroyed Google’s ambitions at several points during the  early years.  The fact that Mr. Brin and Mr. Page stuck to their core values made all the difference.

Can Idealism Coexist with Good Business Sense?

Google’s idealism is hardly a well kept secret.  In fact, the idealism of the founders has often been mocked as disingenuous by outside observers.  However, Mr. Brandt clearly shows how Mr. Brin and Mr. Page kept Google on course with an idealistic view of the world that ultimately provided the differentiation required to succeed.

Perhaps the most important example was Google’s insistence to not permit advertisers to purchase ranking in search results and to keep all advertisements clearly distinct from search results.  Google could have easily maximized short term profitability in the early years by taking a less idealistic approach (as all their competitors did).  It must have been incredibly tempting to do so.  The founders did not come from wealthy families and were facing pressure to produce profits.  However, ultimately the decision to consider the needs of the search user first trumped short term profitability but led to the trust required for the company to gain traction in numerous other initiatives.

Pros and Cons of Entering China

Google’s founders struggled with the question of censorship for several years before deciding to accept restrictions in exchange for being permitted to enter China.  Mr. Brandt’s chapter on China asserts that the founders never lost sight of their determination to contribute to positive change within Chinese society.  The question was whether engagement, even with restrictions, could improve the free exchange of information within the country.  Google was the first search engine to insist on at least notifying users if the results of a query were censored.  This fact alone helped to expose the actions of government to restrict the information citizens are permitted to see.

It is difficult to maintain cynicism regarding Google’s intentions for China after the company announced a willingness to exit the country if the government continues to require censorship.  While some subsequent statements made by Google’s CEO Eric Schmidt appeared to soften Google’s stance to some extent, the company seems committed to follow through on the statements made on January 12.  At this point in time, the decision seems likely to cost Google some profits but so did the earlier decision to refuse to allow advertisers to influence search ranking.  Google may be making a long term profit maximizing move if the new policy builds trust in China and the government eventually is forced to back down.

Genius, Hard Work, and Entrepreneurship

Sergey Brin and Larry Page have IQs that are obviously off the charts.  They were also willing to work extremely hard and found a way to start Google with very little capital.  They started out of a garage and used second hand and improvised furniture.  They were able to secure venture capital funding and attracted other talented people to join the company.

But while IQ, hard work, and guts are required elements associated with any successful startup, these attributes alone are not sufficient to ensure success.  Silicon Valley’s history is full of startups that failed despite all of the wonderful qualities that Mr. Brin and Mr. Page brought to Google.  What made Google such a stunning success is what may have been initially viewed by outsiders as insanity on the part of the founders.  However, the unconventional thinking that failed to maximize profitability in the short run directly led to Google’s stunning rise.

Controversy Will Continue

Google will continue to be controversial in the future.  We recently asked whether Google’s recent re-pricing of employee stock options meant that the company’s “Don’t Be Evil” pledge does not apply to stockholders.  Apple CEO Steve Jobs recently declared that Google’s “Don’t Be Evil” mantra is “bullshit”.  Google is often accused of expanding well beyond search particularly with its emphasis on offering applications for cloud computing.  Will the company use dominance over search to gain unfair advantage in new ventures?

Mr. Brandt provides an important service to those who are interested in moving past simplistic sound bites and gaining a better understanding of what makes Sergey Brin and Larry Page tick.  One gets the distinct sense that these men will be rocking the boat in the technology world for decades to come.

The author of this post is a private investor and writer focused on applying value investing techniques to find securities trading well below intrinsic business value. He is a Manual of Ideas contributor and editor of The Rational Walk.

Disclosure:  The author of this book review does not have a position in Google. Richard L. Brandt provided The Rational Walk with a copy of his book.

Posted by manualofideas at 12:09 PM | Permalink | Comments (0)

Here are some recent letters that you may find worthwhile:

• Chuck Akre: Akre Capital Management Q4 letter
• Christopher Begg, Ben Favazza: East Coast Q4 letter 
• Bruce Berkowitz: Fairholme annual letter
  
• Sardar Biglari: 2009 Steak n Shake chairman's letter
  
• John Burbank: Writeup on gold investment thesis 
• Kevin Byun: Denali Investors Q4 letter
• Carr, Coates and Phillips: Oak Value Fund Q4 letter
• McLane Cover: Mistral Capital Partners December letter
  
• David Einhorn: Greenlight Capital Q4 letter 
• Ori Eyal: Emerging Value Capital Management letter
  
• Bill Gates:2010 Bill & Melinda Gates Foundation 2010 letter
• Jeremy Grantham: GMO Q4 letter
• Bill Gross: February commentary, "The Ring of Fire" 
• Robert Hagstrom: "Who's afraid of a sideways market?"
• John Hussman: Latest weekly comment
• Tomas Jelf: Prologue Capital December 2009 letter
  
• Jonathan Lourie: Cheyne Capital 2010 newsletter
  
• Howard Marks: Latest memo, "Tell Me I'm Wrong"
• Angus Murray: 2010 market outlook for precious metals
• Richard Perry: 2009 annual letter 
• Jay Petschek: Corsair Capital Q4 letter 
• Eric Sprott: December letter, "Is it all just a ponzi scheme?"
  
• Whitney Tilson: T2 Partners annual letter
• Pruitt, Miller and Koster: Chanticleer Advisors annual letter
  

Posted by manualofideas at 12:00 AM | Permalink | Comments (0)

The blog My Investing Notebook has posted Bill Ackman's presentation on Kraft (KFT), dated February 3rd. The slides provide a good overview of the businesses of Kraft and Cadbury. Ackman also shares a valuation analysis of the combined company, not surprisingly suggesting that the stock should earn a strong return over the next couple of years.

While we like the presentation, we would take some of the assertions with a grain of salt, particularly Ackman's claims regarding merger synergies, potential margin expansion, and a "good" price paid for Cadbury.

Somehow investors always seem to believe there is room for margin expansion. Needless to say, margins don't always expand.

The following classic Buffett quotation may ultimately prove prescient with regard to Kraft/Cadbury: "In some mergers there truly are synergies - though often times the acquirer pays too much for them - but at other times the cost and revenue benefits that are projected prove illusory. Of one thing, however, be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked."

Posted by manualofideas at 05:49 PM | Permalink | Comments (0)

Posted by manualofideas at 01:23 PM | Permalink | Comments (0)

In the following interview, Bruce Berkowitz of The Fairholme Fund discusses his recent sale of Pfizer, which had been Fairholme's largest holding through most of 2009.

Berkowitz also opines on the issue of tax rates in the pharmaceutical industry and says that effective tax rates have been too low for too long. The implication is that this could change, potentially depressing earnings -- or at least slowing earnings growth -- across the industry.

Finally, Berkowitz suggests that Fairholme is moving away from a defensive posture toward a more offensive stance in terms of picking investments. Underlying the more aggressive posture is Berkowitz's view that the financial crisis is essentially over and that we are now in recovery mode.

Posted by manualofideas at 05:54 PM | Permalink | Comments (0)

Posted by manualofideas at 05:52 PM | Permalink | Comments (0)