If you don’t read annual reports regularly, I can understand why; they often can be boring, cumbersome to read — full of technical accounting / legal terminology — with an overwhelming amount of information.

However, I highly recommend you read Berkshire Hathaway’s Annual Report, and do so carefully.

Not only is it full of investing advice, wisdom and insights — mostly within Buffett’s letter, contained within the report. The holding company is also a window into the broader economy, public policy and can be used as a proxy for trends across a variety of industries.

Moreover, the way it is structured and the language & style in which it is written, makes it relatively simple — dare I say entertaining — to read.

Let the weekend reading begin: http://www.berkshirehathaway.com/2013ar/2013ar.pdf

I stumbled across a great list of quotes by Jeff Bezos. I copied a few below. I especially like number three – the attitude of a true entrepreneur and capitalist.

1. “All businesses need to be young forever. If your customer base ages with you, you’re Woolworth’s.”

2. “There are two kinds of companies: Those that work to try to charge more and those that work to charge less. We will be the second.”

3. “Your margin is my opportunity.”

4. “If you only do things where you know the answer in advance, your company goes away.”

5. “We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.”

6. “I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

7. “If you’re not stubborn, you’ll give up on experiments too soon. And if you’re not flexible, you’ll pound your head against the wall and you won’t see a different solution to a problem you’re trying to solve.”

To read the rest, please visit the original article here

Hilarious. However it might be deemed offensive to some: www.youtube.com/watch?v=HkvYvk8vxuw&sns=em

  • Value stocks are about as exciting as watching grass grow. But have you ever noticed just how much your grass grows in a week? — Christopher Browne
  • Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and, almost invariably, abandon it at precisely the wrong time — David Dreman
  • If the job has been correctly done when a common stock is purchased, the time to sell it is almost never — Philip Fisher
  • Investing is simple, but not easy — Warren Buffet
  • Nothing is so permanent as a temporary government program — Milton Friedman
  • Success is the ability to go from one failure to another with no loss of enthusiasm — Winston Churchill
  • All intelligent investing is value investing – to acquire more than you are paying for.  Investing is where you find a few great companies and then sit on your ass — Charlie Munger
  • It is hard to make predictions, especially about the future — Yogi Berra
  • In theory there is no difference between theory and practice. In practice there is — Yogi Berra
  • I don’t read economic forecasts. I don’t read the funny papers — Warren Buffet
  • Risk means that more things could happen that will happen — Elroy Dimson
  • Simplicity is the ultimate form of sophistication — Leonardo da Vinci
  • I like to say, “Experience is what you got when you didn’t get what you wanted.” good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk — Howard Marks
  • We are busy surviving, herding, fixating on what just happened, and being overconfident! — Joel Greenblatt
  • Yes, risk-taking is inherently failure-prone. Otherwise, it would be called sure-thing taking — Tim McMahon
  • The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum! — Warren Buffet
  • The most powerful force in the universe is compound interest — Albert Einstein
  • Not everything that can be counted counts, and not everything that counts can be counted — Albert Einstein
  • We attracted a lot of market timers and asset allocators. I don’t need those … amateurs in my fund — Martin Whitman
  • The stock market is filled with individuals who know the price of everything, but the value of nothing — Philip Fisher
  • A government big enough to give you everything you want is strong enough to take everything you have — Thomas Jefferson
  • Get your facts first, and then you can distort them as much as you please — Mark Twain
  • If it moves, tax it; if it keeps moving, regulate it; and if it stops moving, subsidize it — Ronald Reagan
  • In the financial world it tends to be misleading to state, “There is no free lunch.” Rather the more meaningful comment is, “Somebody has to pay for lunch” — Marty Whitman
  • Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market — Warren Buffet
  • Price is what you pay; value is what you get — Charlie Munger
  • It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price –Warren Buffet
  • Do not suffer interim losses, relish and appreciate them — Seth Klarman
  • Be indifferent if you lose your short term clients, remember they are your own worst enemy — Seth Klarman
  • Be focused on process and not outcome — Seth Klarman
  • One of the biggest challenges in investing is that the opportunity set available today is not the complete opportunity set that should be considered. Limiting your opportunity set to the one immediately at hand would be like limiting your spouse to the students you met in high school — Seth Klarman
  • Investors frequently benefit from making decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. The time other investors spend delving into the last unanswered detail may cost them the chance to buy into situations at prices so low they offer a margin of safety despite the incomplete information — Seth Klarman
  • It sounds crazy but in times of turmoil in the market, I’ve felt serenity in knowing that if I checked and rechecked my work, one plus one still equals two regardless of where the stock trades after I bought it — Seth Klarman
  • We are not so brazen as to believe that we can perfectly calibrate valuation; determining risk and return for any investment remains an art not an exact science — Seth Klarman
  • What if I am wrong? Any rational investment plan has to start with that question — Peter L. Bernstein
  • The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts — Bertrand Russell
  • For some players, luck itself is an art — Paul Newman in Scorsese’s “Color of Money”
  • “You only live once” is also an equally compelling reason not to do something — Aaron Karo
  • There are decades when nothing happens; and there are weeks when decades happen — Lenin
  • Discounted cash flow to us is sort of like the Hubble telescope – you turn it a fraction of an inch and you’re in a different galaxy. There are just so many variables in this kind of analysis – that’s not for us — Curtis Jenson
  • A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world — Seth Klarman
  • Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values — George Soros
  • A speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware — Keynes
  • It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change — Charles Darwin
  • For every one of our failures, we had spreadsheets that looked awesome — Scott Cook, founder of Intuit
  • I am a great believer in luck, and I find the harder I work, the more I have of it — Thomas Jefferson
  • Everyone has a plan until they get hit — Mike Tyson
  • These days, impossible things seem to happen all the time — James Grant
  • I can calculate the motions of the heavenly bodies, but not the madness of people — Isaac Newton
  • There will be ample opportunity to debate the origins of this problem. Now is the time to solve it — George Bush
  • What the wise man does in the beginning, the fool does in the end — Warren Buffett
  • The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell — Sir John Templeton
  • We make a living by what we get…but we make a life by what we give — Winston Churchill
  • Down cycles are not fun. But they form the basis for enormous future profitability — Steve Schwarzman
  • A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty — Winston Churchill
  • When the tide goes out, you get to see who’s swimming naked. PIMCO has had its bathing suit on for a long time — Bill Gross
  • If you can keep your wits about you while all others are losing theirs, and blaming you. . . . The world will be yours and everything in it, what’s more, you’ll be a man, my son — Rudyard Kipling
  • Almost all good businesses engage in ‘pain today, gain tomorrow’ activities — Charlie Munger
  • A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success — Charlie Munger
  • In investment management today, everybody wants not only to win, but to have a yearly outcome path that never diverges very much from a standard path except on the upside. Well, that is a very artificial, crazy construct. That’s the equivalent in investment management to the custom of binding the feet of Chinese women — Charlie Munger
  • Before you speak, Listen. Before you write, Think. Before you spend, Earn. Before you invest, Investigate. Before you criticize, Wait. Before you pray, Forgive. Before you quit, Try. Before you retire, Save. Before you die, Give — William Ward
  • You can either have cheap stocks or you can have good news, but you can’t have both — Joe Rosenberg
  • You never know the value of liquidity until you need it and don’t have access to it — Bob Rodriguez
  • Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient — Seth Klarman
  • Respect the elders. Teach the young. Cooperate with the pack. Play when you can. Hunt when you must. Rest in between. Share your affections. Voice your feelings. Leave your mark! — Del Goetz
  • I do not think you can trust bankers to control themselves. They are like heroin addicts — Charlie Munger
  • You want to beat the S&P 500? Buy 500 stocks and sell the airlines — Tom Gayner
  • Believe you can and you are half way there — Roosevelt
  • A delay allows people to have less psychology and more orderly behavior — Donald Yacktman
  • There is only so long you can hold the beach ball under water — Donald Yacktman
  • We will and have willingly made decisions that negatively impact short-term performance when we think we can improve our long-term returns and lower risk — Vulcan Value Partners
  • Finding patterns is easy in any kind of data-rich environment; that’s what mediocre gamblers do. The key is in determining whether the patterns represent signal or noise — Nate Silver
  • I believe I do much better for the time being by first copying some good things than by working without that foundation — Vincent van Gogh
  • Is my mind still open? Does this data somehow make me think of new ideas? Think of new approaches? Think of things that I hadn’t thought of in the past? — Sherlock Holmes
  • Sometimes all it takes is a tiny shift in perspective to see something familiar in a totally new light — Dan Brown (The Lost Symbol)
  • Most people can’t think, most of the remainder won’t think, the small fraction who do think can’t do it very well. The extremely tiny fraction who think regularly, accurately, creatively and without self delusion; in the long run these are the only people who count — Rob Heinlein
  • The value of a thing sometimes lies not in what one attains with it, but in what one pays for it – what it costs us — Friedrich Nietzsche
  • Does the logic connect? What are the range of probably outcomes? You want to figure out what those probabilities are and ideally be the House. It’s fine to gamble, as long as you’re the House. Also, listen to critical feedback, particularly from friends. Generally they will be thinking it but they won’t tell you — Elon Musk
  • A man who does not read good books has no advantage over the man who can’t read them — Mark Twain
  • Popular opinion is the greatest lie in the world — Thomas Carlyle
  • We are trying to make new and interesting mistakes, not the same stupid ones over and over again — Jeffrey Bronchick
  • What we care about is value. We want to create value for our shareholders. And I think the best way to create value is to have a very long view, so that’s what we do. So when we have the opportunity to expand into an area we think is going to have long-term value, we do it. We don’t have to worry about the impact on earnings. So it makes a different kind of organization — John Malone
  • Their judgment was based more on wishful thinking than on a sound calculation of probabilities; for the usual thing among men is that when they want something they will, without any reflection, leave that to hope, while they will employ the full force of reason in rejecting what they find unpalatable — Thucydides, in History of the Peloponnesian War
  • There is nothing wrong with changing a plan when the situation has changed — Seneca
  • The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function — F. Scott Fitzgerald
  • Life’s tragedy is that we get old too soon and wise too late — Ben Franklin
  • All human evil comes from a single cause, man’s inability to sit still in a room — Blaise Pascal
  • A thoughtful investment process contemplates both probability and payoffs and carefully considers where the consensus — as revealed by a price — may be wrong. Even though there are also some important features that make investing different than, say, a casino or the track, the basic idea is the same: you want the positive expected value on your side — Michael Mauboussin
  • Individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome — Robert Rubin

I’ve painfully been an investor in Cambium Learning (ticker symbol: ABCD) for the last few years. I was a legacy shareholder of Voyager Learning in 2009 before it merged with Cambium. Due to the small size of the company and the very small float, luckily this was only a small PA investment.

Cambium is a publisher of educational materials for the K-12 education market.

I first got interested in the stock of Voyager as a special situation when the proposed merger with Cambium created an interesting dynamic: overcapitalized Voyager had the majority of its market cap in cash (~$60 MM on a $100 MM mkt cap) while privately-held, debt-laden Cambium had $170 MM in net debt equivalent to seven times its EBITDA.

Both businesses were of similar size with ~$100 MM in revenues each and with complementary business lines and overlapping markets. The sales synergies and Op-Ex savings of the combined company would, in theory, make the pro-forma numbers look great — around $200 MM in revenues and close to $50 MM in EBITDA.

The plan after the merger was to keep the capital structure somewhat levered with pro-forma net debt of ~$150 MM (around 3 times EBITDA of the combined company) which meant the deal had excess cash that would be paid out as a dividend to existing Voyager shareholders.

The interesting parts of the story, however, were the merger terms and structure: Voyager shareholders were given an offer of $6.50 per share (total shares outstanding of ~30 MM) to be paid in cash or in NewCo shares on a 1:1 basis. The stock, post-announcement, remained trading at $3.60 — a discount reflecting the fact that the cash offer was limited to $65 MM equivalent to a maximum of $2.20 per share with the remainder to be paid in fractional shares of NewCo.

The math worked beautifully for Voyager holders like myself — shareholders who elected the cash offer got 2/3 of their investment back in cash, a security for contingent value rights on tax refunds that were estimated to be worth $0.90 per share, and 2/3 NewCo shares per Voyager share for a business that would be generating on a pro-forma / per-share basis around $0.64 cents in cash earnings when considering NOLs and synergies.

The thesis for the combined business, was that the K-12 education market, composed mainly of public local school districts, was a very fragmented 5-billion-dollar a year business with no clear market leader — ripe for growth and consolidation. Management was planning on rolling up the industry with bite size bolt-on acquisitions.

The hair on the story was that districts across the country were facing severe fiscal shortfalls due to the economic crisis; this was somewhat offset by generous federal programs that were put in place to aid strained state and local budgets.

The event / special sit thesis played out as expected and turned out to be very profitable — I received $2.20 in cash, a CVR with value and new shares that weeks and months later traded between $3.00 and $4.00 post merger. All in all, it turned out to be around $5.40 in realized value off a $3.60 investment. Nothing earth shattering, but reasonable return with very good IRR.

I wish my involvement had stopped there. I unfortunately met with management and fell in love with the business plan / story; a sad victim of thesis creep.

The idea sounded so compelling: post-merger ABCD was trading at $3.00 and it didn’t seem that far fetched that management could execute their growth plan and drive profitability to the $1.00+ in cash EPS over the next few years. They had just made a small acquisition in the $5 MM range that would have a 18 month payback. So they had already started…

Fast forward 4 years. Long story short, state and local budgets continued deteriorating and federal programs got cut. The education publishing market has essentially shrunk, hasn’t consolidated and new competition has emerged. Structural and technological changes have impacted the legacy print / publishing assets permanently impairing them; somewhat offset by growth in their high-margin, digital divisions. The forecasted pro-forma economics they touted happened, but they held for about 18 months and then plummeted as revenues fell of a cliff.

Management got really lucky and refinanced debt maturities way out to February of 2017 — although debt isn’t cheap at 10%. Despite the deteriorating fundamentals, the business has remained marginally profitable through cost-cuts.

It has not been a fun process to watch given that the business is an extremely seasonal and lumpy with contracts that need to be renewed on a regular basis (dynamics are changing, however, as a larger proportion of the business transitions into digital).

It has been hard to judge to what extent the deterioration is permanent vs. transitional. The stock has gone from the 3.00 dollar level to trade all the way down to 70 cents as a defacto long-term option on the survival of the company. The bonds in the meantime have held steady as cash on the balance sheet has been growing and also a sign that somewhere in the middle of this whole mess a few investors still believe there are some good assets that are profitable and growing.

The company’s largest shareholder with close to 70% of the stock is a private equity shop called Veronis Suhler Stevenson (VSS). Since the merger, they have twice made fresh equity infusions at much higher prices — demonstrating commitment to the company, albeit with very bad timing.

The company recently replaced the entire management team, and has reset option grants at much lower strike prices ~$1.40 for the people who were “promoted” from within, and is continuing with the restructuring of its cost structure.

Cambium has been buying back stock instead of retiring debt and a former director of the board that manages a small fund, Foxhill Capital Partners, has resigned citing his belief that VSS is taking advantage of minority shareholders by slowly acquiring the company in a stealth fashion (resignation letter below). I do see his point, and I would be very upset if VSS — who needs to soon harvest and return capital for the fund that holds Cambium shares — attempts to screw shareholders, like myself, who would rather see the company achieve anything resembling a turnaround before selling.

I figure that if the company can stabilize EBITDA at $25 MM with a reasonable rate of growth going forward — which seems doable — the stock can recover above $2.00 closer to $3.00.

Either way, I think the recent market action on the stock could be a sign that something big is on the horizon. I wish I had the emotional wherewithal to actually increase my position and take advantage of this speculation. I feel the odds are pretty good that ABCD gets bought out sometime soon.

I would love to hear people’s thoughts. Am I being stubborn here? I am sure I’ve fallen victim to dozens of behavioral pitfalls, it’d be fun to try to identify all of them.

 

Neil Weiner
c/o Foxhill Capital Partners, LLC
12 Roszel Road, Suite C101
Princeton, NJ 08540

August 14, 2013

Board of Directors
Cambium Learning Group, Inc.
17855 North Dallas Parkway, Suite 400 Dallas, Texas 75287

Gentlemen:

I hereby submit my resignation as a director of Cambium Learning Group, Inc. (the “Company”), effective immediately, as a result of my fundamental disagreement with the actions (or lack thereof) taken by members of the Board of Directors (the “Board”), that I believe are designed to benefit the Company’s largest stockholder, Veronis Suhler Stevenson (“Veronis”), at the expense of the Company’s minority stockholders.

As you are aware, I was appointed to this Board in 2009 in connection with the merger between the Company and Voyager Learning Company. As one of three specifically designated independent directors on the board of directors of a company with a majority stockholder, I viewed my role as a director with added importance. During my tenure, I invested a significant amount of time and effort establishing a turnaround plan for the Company and was a dedicated Audit Committee Chairman and member of the Compensation Committee. I also advocated for better capital allocation in order to maximize stockholder value. For example, given the Company’s sizable cash balance, a more prudent strategy would have been to de-leverage the Company and retire high interest debt trading at a discount, thereby benefiting all stockholders equally. However, the Board chose to continue to pursue a share buyback program, the primary benefit of which was to increase Veronis’ ownership stake to approximately 68% of the Company. I am concerned that Veronis may take advantage of the Company’s share repurchase program and the Company’s depressed stock price as a way to acquire the Company at a significant discount. I believe the Company’s current market price does not represent the “fair” value of the Company and, I am opposed to an attempt by any party to acquire the Company at less than fair value.

It is my strong belief that the directors of any public company should be receptive to and welcome other points of view on the board. This ensures a system of checks and balances that prevents any individual or group of directors from taking action that is contrary to the best interests of all stockholders. As the second largest minority stockholder of the Company and the only independent director on the Board with a significant ownership interest, I believe I was able to uniquely represent and protect the interests of the Company’s minority stockholders during my tenure. Unfortunately, in light of the actions taken by this Board that I believe are designed to benefit the Company’s majority stockholder while ignoring the Company’s minority stockholders, I believeI am now powerless to continue to serve as a steward for the interests of stockholders in accordance with my fiduciary duties. My decision to tender my resignation is not an easy one. But, I am left with no choice. I cannot in good conscience remain a part of a board of directors that appears to be failing to protect the interests of minority stockholders.

I believe this Board needs truly independent directors with “skin in the game” so that the interests of all stockholders are adequately represented. With my resignation, it is my hope that I have impressed upon stockholders an urgent need to question whose interests this Board is truly looking out for. It is therefore with great reluctance that I must now step down from the Board. Notwithstanding my resignation from the Board, I will remain a significant stockholder of the Company and will continue to advocate for the best interest of all stockholders.

Sincerely,
/s/ Neil Weiner
Neil Weiner

A must read: A Financial Markets Perspective

Latest Howard Marks memo:

The Role of Confidence

Over the weekend I submitted a writeup for ACTG on VIC.

I can’t share it here as they’ve recently started enforcing a policy that prohibits posting ideas on multiple sites in an effort to keep the club exclusive.

However, here is a presentation I made at the Vail VALUEx conference a couple weeks ago.  Note, this is without question a controversial idea and that is what makes it interesting.  ACTG is universally hated and vilified not unlike a tobacco company.