TI{E LION FUND, L.P.

To the Partners of The Lion Fund, L'P':

ouroverallperformancein2014wasminusT.2o/o.overthelastl5years,TheLionFundhas

achieved a rate of return of 167o compounded annually'

My business partner Phil Coolev and I started from z3ro,.t-o-i:I

billion

j;il#il;J;;iil;th

?lltlf ::::"*i:t".:itl1

for
controtled businesses employing over 23,000 people" 'not badl:f^
'^-^:-:-rifei" San Antonio w:,111b:':.':,o1:::.:'i:i::il:::s

;'#i#fffiffi;i*;'d;uu'"a
oYl^:0,*it""::*::
and investments: J: T"d
ilil'#,":t "r'"u"t;".ss
",Tii-':1"-":lv*?:l
to design an enterprise
mind
to
come
po.o,
quickly
Buffett
:
walton,
il.?"".il;

ilk;;;n"r,

1 - -a-:L--+^l
+^
Much of our success to date can be attributed to
;;.d by,h" gnyrrlr-'al. our old-fash io ned ideal
app
the owner-manasers of that era thousht
;T$l.J:"'r".?#becau;"",ffid;;" ;;iaild-b-"t becauseenterprises
.- __, :mind
with our partners in -:-l
entrepreneurially as capitalists. We are driven to developing
to advance wealth'

that fits our skill

#ffi;

T.:

tli::P:Lil

J/---/-

2014' it

evaluating our performance in

Based on the facing page displaying the metric for
negative absolute performance, and compared to the
appears that wealth retreaii.,A=ft", uil, we f,ad

founding The Lion Fund' We concentrate on

S&P, it was the worst relative performance since my
will produce unacceptable absolute results'
relative results U."uu.", oter time, poor relativ" nu-b"'
by their market price changing
However. we do not measure the progress of our investments

rll : p"1toTul': 91pp{?l:]::,*"J-:'3::::::

r
""0 as"*r,,It"
thim in their entiretv. Naturallv, had we owned
we
owned
if
own,
*"
;;ril""ff;il,i;;rl."rr.,
r
L^ considered
- ^--rl
a
be ^^-^:l^--,{
the Fund's portfolio, TLF could
iil;"";i;i"rr""i",tr"* companies in pleased
with the pt?gt:::
"conglomerate," and for 20l4we would be
::"11',t::::1,t::::;',:""1T3
of improvement in annual
is not iy means
progress
of business

during;;;;;;;;. ri"rr''., pil

;;;
#;##;"
;ffi;;;;""""""*"r

assessment

G',c.-^

-.-r -,^l--^
^f future cash
^^-L
value of
on the present
cash flows. Rather, it is uased
'e
- UVer
;. '---r-,--:=-:=>-*aT^-;^^
Dtnqrlss:
tlme'
business value, we created-WealtTl.

fl^.".
on
flows' f\-

the basis of gfowth in

idea
must converge. we focus on the growth of business value with the
ultimately reflect it, thereupon producing a satisfactory return'

If near-term stock price

changes were the key criterion in measuring performance, then one

oppoirunity to invest with a famous Midwesterner, Warren Buffett'

would have missed the greatest
-Buffett
took control of Berkshire in 1965. In the calendar Vear e1di19 ]n1!:
As you may know, Mr.
negative returns for five- and
in absolute and in relative results
b"r'r..n,r" il"in"*iv *gistered
six-year intervals.

\=::\

Returns are displayed as follows for both Berkshire and the S&P.

Berkshire's Stock Performance vs. the S&P 500Index

Annual Percentage Change
Stock Price

(l)

S&P

500lndex

(2)

Relative Results

(r)-(2)

(4.6)

3.9

(8.5)

80.5

t4.6

65.9
(r 0.8)

8.1

18.9

(2.s)

(14.8)
(26.4)

(48.7)

12.3

(22.3)
(34.7)

37.2

2.5

(0.8)%

3.3Yo

(4.1)%

(4.6)%

21.80h

(26.4)%

using per-share book value as an understated

Evaluating Berkshire's intrinsic value record
proxy for intrinsic value
an investor would calculate over the same time period a gain of llLYo.
Over an extended period of time, undoubtedly total stock return is the best barometer, even though
evaluations spanning as long as five or ten years can be distorted by high or low prices at the
,,bBginning or end of the measurement period. For Berkshire, from the time Buffett took control on .,.
10, 1965 through December 31,2014, he produced an average annual return of nearly' 2V" I
hli/u,
7
/'versus about I Q%forthe S&P.

lt is important to review the trend of our outperformance on rolling five- and ten-year bases.
over which
we have repeatedly stated
{7Five year is the absolule minimum period
- increase in
' performance should be reviewed, and with the passage of time the performance figures

tl

the decade
averaging ten years (and counting!)
validity. Because we have long-term partners
you
presented
is
that
can
determine
for
so
then
test is presented for review. A series of calculations
yourself which period is most consequential for evaluation. Since our inception, there have been
eleven five-year and six ten-year spans-

S-year Average Annual Return

2000-04

lO-year Average Annual Return

TLF

s&P

2000-09

17.501o

(0.e)%

0.5

2001-10

16.5

1.4

TLF

S&P

19.7"/o

(2.3)%

2001-0s

14.6

2002-06

14.8

6.2

2002-rr

t2.8

2.9

2003-07

19.9

r2.8

2003-12

5.0

71

2004-08

6.8

(2.2)

2004-13

16.0

7.4

200s-09

15.4

0.4

2005-14

14.2

7;7

2006-10

18.6

2007-ll
2t0E-t2

| 1.0

z.J
(0.2)

0.3

1.7

2009-r3
201 0-l 4

25.9

18.0

l3.0

15.5

Last year I wrote to you, "The reason we believe a five-year time horizon is the absolute
minimum by which to judge results is that performance can be significantly distorted by starting and
ending dates. For instance, during the five years that ended with 2012, the S&P generated a return of
i\i2$;;um. However a shift of one y"ur - excluding the dismal year of 2008 but.including the filr
the average S&P annual retum. . .jumped to I 8%. Should an investor
robusi performance of 20 | 3
conclude with a five-year test when one interval produces a paltry 1.7% annual return, but a shift of
one year produces a retum that is over 1000% higher? Arguably, five years can be too short to
evaluate Conclusively performance results." The same logic can be applied to excluding TLF's
outperformance of 2009 but including its underperformance of 2014. A shift of one year reduces
of g.r{[j!Lb" bi-"d,
,N average annual returns from 25.9Yo to l3Yo. Obviously, calculations
/'
dates.
terminal
initial
or
of
[I fuuo.iUly or unfavorably, based on a selection

lI

'.---..-

gut I also, in our Partnership Guidelines, initially laid out in the 2002 Annual Rep-ort and
reproduced every year since then, said that you should "Judge our results aeaiqqlhe5'f;ftS-O0 . oYt

over a period of no less than five years. Make sure not to evaluate us on a yearly basts
benchmark
because I can say with conviction that we will have years in which we trail the benchmark, perhaps

substantially. So, our policy of measuring performance in no way promises excellent results it merely ensures objective assessment. If we fail the five-year test, we will find a new
naturally
line of work, and evin I should find someone else to manage my money. The only caveat to such a
provision: Should the five year period encompass a speculative bull market hurting our relative
performance; we'll address this issue when we cross it." It is clearly time to address it so that I keep
my job!

tu-[
uyz

Doubtless, TLF's relative outperformance in 2008-09 caused the Fund subsequently to

underperform, as compared to the robust bull run of the S&P. But we will never abandon a sound and
can become distorted around
.p.!'oven strategy simply to outrun an index in the short run. Results
$arfet disloJJions, e.g.,1974-75 and 2008-09. In fact, our six-year annual return is 19.7% versus
17.2o/o for the S&P. Our basic idea is to concentrate capital into stocks of businesses with the belief
that such a portfolio will generate higher retums over time with a lesser investment risk than will a
diversified itock portfolio. (As a side note: Out of the approximate 14,000 stocks that trade in the
U.S.. over 50%o fail to beat the S&P over a five year period. The S&P is no pushover.) Our objective
is to earn your appreciation through capital appreciation.
Today, I believe that low overall price/value ratio of the portfolio has positioned us more
favorably than at any time in the last five years for a desirable reward/risk profile with excellent
profit potential vis-i-vis the S&P. My confidence in TLF's future is backed by financial commitment
in thaf at the end of the year I personally added $8.5 million to my account in TLF. In Matthew 6:21
Jesus said: "For where your treasure is, there will your heart be also." My treasure and heart are in
TLF.
**{<

L-<:7
-rY

'

Whut is rather commonplace in the U.S. system that we find most damning is the pursuit of
short-term performl;gc+{he undue emphasis on near-term stock price has caused firms to issue

Wedffi#gs-guidance, which to ui is the{qQrsj-&rm of co{pofAte*eovem'ancd..Business _is

fundamentally unpredictable and uncertain. The tffconcern is that after making public a specific
ft. This
commitment to Wall Street, managers may begin to engage in 991gj4
its
fogm
on
of
because
n
Shake
of
Steak
phenomenon occurred with prior management
.ret{Ht
the long-term
one pursued at the expense of maximizing

EPS growth of l5Vo per

economic value of the enterprise. [n the end, this flawed concept almost bankrupted the restaurant
results

year

chain. Thus, the real issue is that managers will engage in false, misleading, or fraudulent reporting
corporate governance al its worst.

But it is not just corporate America that is to blame for the aforementioned craven behavior.
The investment managers who preside over other people's assets are also engaging in short-term
conduct, reinforcing the appalling, atrocious problem. After all, many investment managers suffer
from their own govemance failures with their own faulty investnnent performance and high fees.
Although there are a number of high quality companies who behave honorably, the trend in shortterm sub-standard thinking and reliance on third parties to direct corporate action are quite alarming.
Our reaction to the troubling behavior of corporate America and Wall Street is to ignore that which
we find to be illogical, irrational and invalid. We continue to exercise rationality and thereby exploit
the opportunity gaps created by the shortcomings of others.
Accounting & Audit

KPMG LLP performed all tax accounting for the partnership in 2014. North Street Global
Fund Services LLC handled all the reporting for the Fund. Deloitte LLP audited the Fund's
financials. All three firms performed their tasks in a timely, productive manner'
Prime Broker
We are changing brokers and custodians from M.S. Howells & Co. to J.P. Morgan Chase &
Co. We have been pleased with the services of M.S. Howells, but we are now at a size that requires a
far larger organization to handle our account.

We are eager to see you at the annual meeting to be held Friday, April 24 at the Dominion
Country Club.

April 18,2015

Sardar Biglari, CFA

Chairman of the Board