Archive for November, 2009

One of my favorite macro indicators is the long-term Dow:gold ratio. Rolph Winkler of Reuters blog Contingent Capital did the heavy lifting last week to produce a chart of the Dow Jones Industrial Average priced in gold per ounce since 1900:

The Dow:gold ratio is not everyone’s cup of tea. Paul Kedorosky likens it to measuring yo-yos in meerkats, but says it’s “semi-useful.” I agree. Several semi-useful observations that can be made from the chart include:

  1. Gold has outperformed the DJIA from the late 1990s to the present. In the late 1990s the Dow was more expensive in gold than it had ever been in the preceding 100 years.
  2. In 2009, the gold trade is getting long in the tooth. Most of the really big gains in gold have already been made. It’s no longer obviously cheap relative to equities, however
  3. …it’s probably not over yet. The Dow:gold ratio has traditionally bottomed at a point significantly lower than we have seen this time around. This might suggest that it still has a ways to fall before it reaches the nadir. For the bottom to come in, either gold has to go up, equities have to come down, or some combination of both has to occur. My guess is the latter, however, this is not the only view out there. For example, in the Buttonwood’s notebook column of the Economist, Buttonwood asks, “Is gold the next bubble?

WHAT are the preconditions for a bubble? Perhaps there are four: easy credit conditions, a significant trend-breaking event, the lack of plausible valuation measures and an appealing story.

Gold fulfils most of these conditions. One can argue about the credit conditions; lending is still weak but crucially interest rates are low. That helps given that gold has no yield; in effect, the opportunity cost of holding gold has disappeared. The event that changed minds was the credit crunch, which caused a partial loss of faith in banks. Gold has no valuation issues (no yield or earnings); since people hold it as a store of value, it can be worth whatever they want it to be worth. And it has a plausible backstory; spendthrift governments are monetising their deficits like the Weimar Republic before them.

…whereas one can say, based on historic valuation measures, that Wall Street is currently 40% overvalued, one can make no such bold statement on gold.The next stage of a bubble would be broad-based public interest.

One thing clear to me from the chart is that buying equities from the late 1990s to the present was like running up the down escalator. It was fun, but it wasn’t the easiest way to get to the top. Standing still on the up escalator was an easier ride. This was the point of my Buffett on gold post last week. The change in the Dow:gold ratio for the period 1964 to 1979 makes it clear why Buffett was bested by gold over that period. The change in the ratio for the period from the early 1980s through to the late 1990s, combined with Buffett’s otherworldly ability to identify undervalued equities, also explains the lollapalooza gains made by Berkshire Hathaway during that period. It might also suggest that at some stage in the near future equities will again be the up escalator, but not quite yet, for the reasons below.

In an inflationary environment a business must keep increasing the price of its goods or services just to keep its margins static, and any reinvestment in plant and machinery must be undertaken at increasingly higher prices. If it can’t increase its prices or it doesn’t earn enough to keep up with its maintenance capital expenditure, then it will shrink and risks falling behind any competitor that can. In other words, it has to run up the down escalator, and if it can’t run faster than the escalator, then it’s going backwards. Businesses with no pricing power and low returns-on-equity will therefore suffer in an inflationary environment. While it is true that a business with pricing power and high return-on-equity is better able to protect itself somewhat from inflation, it is not true that inflation is good for this business either. Since I (and, I suspect, most investors) can’t prospectively pick one from the other, perhaps stepping onto the up escalator in such times is not such a bad idea. All gold does is sit there, yes, but it can’t be printed, so it tends to appreciate against the dollar as the dollar is debauched.

Has the dollar been debauched? The Austrian economist in me thinks so. Einhorn, John Paulson, Rogers and Buffett’s commentary on US fiscal and monetary policy can’t all be wrong. Keeping interest rates too low for too long and printing too much money – what Buffett describes as “Greenback emissions” – will result in inflation measurable in the CPI in the not too distant future. (As an aside, I think there is inflation now, but because it’s not running through the CPI yet it doesn’t exist according to the orthodox view, which also happens to be the one in power, and on both sides of politics, for that matter).

What can we deduce from the foregoing? If gold does as it has done in past cycles, it should do well for the foreseeable future. That has to be tempered by the fact that the gold price has run a long way, both in dollar terms and in comparison to equities (as measured against the DJIA). Gold could have a big reversal – in the mid-1970s the DJIA rallied significantly against gold before sinking to its long-term bottom – before it continues onto historical highs. In this regard, Jim Rogers’ recent commentary is instructive [via The Globe and Mail]:

Jim Rogers: I don’t ever like to buy something making all time highs however I’m not selling my gold. Gold is going to go much higher in the course of the bull market. Doesn’t mean it can’t go down 20 per cent next year but during the course of the bull market it is going to go much higher it is certainly not a bubble yet.

Jim you are typically a contrarian investor. If everyone is buying, shouldn’t you be selling?

Jim Rogers : Yes, I should be selling at the top, but I don’t think this is the top. Gold, if you adjust it for its old highs, adjust it for inflation back in 1980, gold should be over $2000 an ounce right now. In my view, in this bull market in commodities gold will make all new highs adjust for inflation.

When will gold hit 2k?

Jim Rogers: I wish I was that smart. You should watch TheStreet.com. They know everything.

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The Economist has an article, High-speed slide, which discusses a recent study by Grant Thornton about the disappearance of the initial public offering (IPO) market in the U.S., and, in particular, the death of the small IPO. In the October 2009 study, Market structure is causing the IPO crisis, authors David Weild and Edward Kim argue that the recent paucity of U.S. IPOs is a result of the “market structure” failing the IPO, rather than a cyclical downturn. That may seem unlikely at first blush, but the data are compelling:

The first six months of 2009 represents the worst IPO market in 40 years. Given that the size of the U.S. economy, in real GDP terms, is over 3x what it was 40 years ago, this is a remarkable and frightening state of affairs. Only 12 companies went public in the United States in the first half of 2009, and only eight of them were U.S. companies. The trend that disfavors small IPOs and small companies has continued. The median IPO in the first half of 2009 was $135 million in size. This contrasts to 20 years ago when it was common for Wall Street to do $10 million IPOs and have them succeed.

The implication, say the authors of the study, is that the market is closed to most small companies:

From 1991 to 1997 nearly 80% of the IPOs were smaller than $50 million. By 2000 the number of sub-$50 million IPOs had declined to only 20% of the market. The market for underwritten IPOs, given its current structure, is closed to 80% of the companies that need it.

From page 8 the study, a graph showing the decline in the number of small IPOs (<$50M) relative to large IPOs ($50M+):

The Economist points out that the “50 or so” new companies to list this year is just “one-seventh of the level needed to offset the average annual loss of listed companies in recent years.”

The study discusses a number of possible causes of the decline, including the introduction of low-cost brokerages and new regulations and legislation. From page 4 of the study, a graph showing the decline in the number of IPOs and the timing of regulatory changes:

The Economist focuses on the impact of low-cost brokerages:

An accidental victim of this technological revolution, the report says, was the ecosystem that helped bring small firms to market and then nourished them once there. “It’s a bargain-basement market today,” says David Weild, a co-author of the report. “You get what you pay for, and that’s nothing but trade execution.”

The “high-frequency” traders who have come to dominate stockmarkets with their computer-driven strategies pay less attention to small firms, preferring to jump in and out of larger, more liquid shares. Institutional investors, wary of being stuck in an illiquid part of the market, are increasingly following them.

Another factor is the near-evaporation of research on small firms, which has been undone by the rise of passive index investing and by rules that banned the use of investment-banking revenues to subsidise analysts. With less funding to go around, analysts are increasingly concentrating on large, frequently traded shares, says Larry Tabb of TABB Group, a consultancy. The centre of gravity in research has shifted to “buy-side” firms, like hedge funds, which do not generally disseminate their work.

The authors of the study point to other regulatory and legislative acts, including the “order precedence rule,” commonly known as the “Manning Rule” after a legal case against Charles Schwab, the Gramm-Leach-Bliley Act, which saw the end of the Glass-Steagall Act of 1933 and formally allowed the combination of commercial banks, securities firms and insurance companies, Regulation Fair Disclosure, which devalued stock research, and the Global Settlement ruling, which has made research coverage tougher for issuers to secure. Sarbannes-Oxley was simply the final nail in the coffin.

The authors suggest two changes to reinvigorate the market, neither of which I find particularly palatable. They are the establishment of a new market segment without automated trade execution but with fixed trading commissions used to fund research and looser rules governing institutional investment in pre-IPO companies. These are band-aids that won’t get to the root cause of the problem. If the regulatory and legislative changes backfired on the U.S. IPO market, as the authors claim, perhaps winding back some that legislation would help it. The list of regulation and legislation detailed in the appendix of the study, stretching over the last three pages, is enough to choke a donkey. SarbOx has not received its fair share of the blame, possibly because the market was already an ex-market by 2002, the year Sarbannes-Oxley was enacted. The authors write that SarbOx was “a bit of a red herring” because “[online] brokerage and decimalization were significantly more damaging to the IPO market.” That’s all well and good, but it’s also plain that – bubble years aside – the smaller end of the market has further declined since the enactment of SarbOx. SarbOx has created an enormous regulatory and compliance burden on listed companies, and the corollary is not true: Fraud is as endemic as ever, and people still lose money to sheisters. The additional SarbOx regulatory burden cannot do anything other than reduce the number of companies for which being public is a worthwhile exercise. Smaller companies will incur proportionately higher costs in meeting the burden than their larger brethren and that means the additional regulatory burden will only ever be observable at the margin – the smaller end of the market. If we wish to see the IPO market back in health, we need to reduce the regulatory burden on all companies.


The net effect of the decline in listings is striking (via BusinessWire):

The number of U.S. listed companies has fallen by more than 22 percent since 1991, or 53 percent when calculating in inflation-adjusted GDP growth. In contrast, exchanges in Asia are adding new listings faster than GDP growth rates.

According to the study, 360 new listings per year — a number not approached since 2000 — are required by the United States simply to replace the number of listed companies that are lost every year. Moreover, 520 new listings per year are needed to grow the U.S. listed markets roughly in line with GDP growth. In reality, the U.S. has averaged fewer than 166 IPOs per year since 2001, with only 54 in 2008.

Hat tip Jules.

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The Official Activist Investing Blog has published its list of activist investments for October:

Ticker Company Investor
ADPT Adaptec Inc. Steel Partners
ARGL.OB Argyle Security, Inc. Mezzanine Management
ASCMA Ascent Media GAMCO Investors
ASPM Aspect Medical Systems Covidien plc
BARE Bare Escentuals Sandler Capital Management
BASI Bioanalytical Systems Inc Thomas Harenburg
BLDR Builders FirstSource Inc. Stadium Capital Management
BLUD Immucor Inc. VA Partners
COHM.PK Coachmen Industries Inc. GAMCO Investors
DVD Dover Motorsports Marathon Partners
FFHS First Franklin Corp Lenox Wealth Management, Inc
FMMH.OB Fremont Michigan Insuracorp Inc. Steak & Shake Co
GMXR GMX Resources Centennial Energy Partners
GRNB Green Bankshares, Inc. Scott Niswonger
HPOL Harris Interactive Inc. Mill Road Capital
IMMR Immersion Corp Ramius Capital
IPCS iPCS, Inc. Greywolf Capital Management
ITP Intertape Polymer Group Inc. KSA Capital Management
KANA.OB Kana Software KVO Capital Management
LDIS Leadis Technology Inc Dialectic Capital Management
LM Legg Mason Inc. Nelson Peltz
MEG Media General Inc. GAMCO Investors
MGYR Magyar Bancorp Inc. Financial Edge Fund
MYE Myers Industries, Inc. GAMCO Investors
OPTV OpenTV Corp Kudelski SA
PLFE Presidential Life Corp Herbert Kurz
RSG Republic Services inc Cascade Investment
RUBO Rubios Restaurant Alex Meruelo
SURG Synergetics USA Inc Steven Becker
TBTC.OB Table Trac Inc. Doucet Asset Management
TGY Tremisis Energy Acquisition Corp Bulldog Investors
TMEN.PK Thermoenergy Corp Quercus Trust
TRMA Trico Marine Kistefos AS
VII Vicon Industries Inc. Anita Zucker
VXGN.OB VaxGen Inc. Steven Bronson
XOHO.OB XO Holdings Inc. Carl Icahn
YORW The York Water Co. GAMCO Investors

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The superb Abnormal Returns has a post “Investing by the seat of their pants,” which, among other things, discusses William Bernstein’s conjecture that “only a tiny fraction, 1 in 1000, investors have the skills to become truly competent investors.”  In the preface of his new book, Bernstein suggests four abilities successful investors must enjoy (via Information Processing):

First, they must possess an interest in the process. It is no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work.

Second, investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics. Sadly, as one financial columnist explained to me more than a decade ago, fractions are a stretch for 90 percent of the population.

Third, investors need a firm grasp of financial history, from the South Sea Bubble to the Great Depression. Alas, as we shall soon see, this is something that even professionals have real trouble with.

Even if investors possess all three of these abilities, it will all be for naught if they do not have a fourth one: the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it. “ Stay the course ” : It sounds so easy when uttered at high tide. Unfortunately, when the water recedes, it is not. I expect no more than 10 percent of the population passes muster on each of the above counts. This suggests that as few as one person in ten thousand (10 percent to the fourth power) has the full skill set. Perhaps I am being overly pessimistic. After all, these four abilities may not be entirely independent: if someone is smart enough, it is also more likely he or she will be interested in finance and be driven to delve into financial history.

But even the most optimistic assumptions — increase the odds at any of the four steps to 30 percent and link them — suggests that no more than a few percent of the population is qualified to manage their own money. And even with the requisite skill set, more than a little moxie is involved. This last requirement — the ability to deploy what legendary investor Charley Ellis calls “ the emotional game ” — is completely independent of the other three; Wall Street is littered with the bones of those who knew just what to do, but could not bring themselves to do it.

Bernstein’s is an interesting thought experiment. Steve Hsu at Information Processing, after considering the abilities identified by Bernstein, categorizes them as follows:

…the right interests (history, finance theory, markets — relatively easily acquired, as these subjects are fascinating), personality factors (discipline, controlled risk taking, decisiveness — not so easily acquired, but can be improved over time) and intelligence (not easily acquired, but perhaps the threshold isn’t that high at 90th percentile).

Bernstein’s list and Hsu’s categorization of it feels right. Whether it winnows the universe of competent investors down to 1 in 10,000 is open to debate, but I think few would have a genuine quibble with the content of the list. The only other element that I would suggest – and it is possible that it’s already captured within Bernstein’s list as “emotional discipline” – is the ability to think and act counterintuitively.

There are many examples of strategies that are counterintuitive and produce above-market returns. Value is a counterintuitive strategy. Glamour feels like a better bet than value, but studies have shown over and over again that value outperforms glamour or momentum. Tangible asset value – liquidation value investing or low price-to-book value investing – is counterintuitive even to practitioners within the value school, who predominantly seek Buffett-style earnings and growth. The counterintuitive element is that companies within the lowest price-to-book quintile – not, by any means, earnings machines – tend to grow earnings faster than companies in the highest price-to-book quintile, a phenomenon that value investors recognize as “mean reversion”.  Even with the liquidation value investment world itself, the counterintuitive strategy – buying loss-making net nets – outperforms the intuitive one – buying net nets with positive earnings.

This suggests to me that the ability to understand a concept from an intellectual standpoint is a necessary but insufficient condition for competent investing. One must also be able to suspend instinct or intuition or disbelief and follow intellect through to action. That seems to me to be a rare trait, but one that I believe can be developed. Is it possible that, if one follows a counterintuitive strategy for long enough and succeeds with it, it becomes intuitive? I think so, but I’d like to see what you think too.


I knew I was asking for it when I wrote the panglossian, “I think few would have a genuine quibble with the content of the list.” An astute reader has a quibble, and I’m embarrassed to say that I think he’s right:

I flatly deny Bernstein’s assertion that “investors need more than a bit of math horsepower.” I cite the highest authority:

1. Ben Graham explicitly warned against “calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra.” Indeed, “whenever [calculus] is brought in, or higher algebra, you could take it as a warning signal that the operator is trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment.”

2. “If calculus were required,” Buffett has said, “I’d have to go back to delivering papers. I’ve never seen any need for algebra … It’s true that you have to divide by the number of shares outstanding, so division is required. If you were going out to buy a farm or an apartment house or a dry cleaning establishment, I really don’t think you’d have to take someone along to do calculus.”

3. Elsewhere, Buffett has said “read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them.”

4. In one of his books, Peter Lynch recounts at length that the mathematical stuff he learnt in MBA-School were hindrances rather than helps, and that “the arts/philosophy side” (or words to that effect) of his education have stood him in much better stead. Indeed, I recall Lynch saying something like “all the maths you need to invest competently you learnt in primary school.”

5. The “Ben Graham, Meet Ludwig von Mises” paper you cited a while back discusses the Austrian conception of value, markets and entrepreneurial discovery. None of these things rely upon maths, probability or stats. But they do, I think, hinge upon the ability to think unpopular or contrarian thoughts — like adherence to the Austrian School!

Mind you, I’ve never liked Bernstein and indeed have long thought that he does far more harm than good. This assertion is but one in a long list of silly things he’s said over the years. In short, not only is mathematics NOT a necessary condition of successful investment; it may be a sufficient condition of investment failure.

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TSR Inc (NASDAQ:TSRI) is an interesting play at a discount to liquidation value and an ongoing cash flow positive business. At its $2.10 close yesterday, the stock has a market capitalization of $8.5M. I estimate the liquidation value to be around 26% higher at $2.65. 26% is not a huge upside, but in this instance I would not regard liquidation value as the upside. Rather, here it is the worst case scenario. TSRI has generated positive cashflow from operating activities over the last four years, growing it from around $1m per annum in 2006 to around $1.6M in 2009. The growth in its operating cash flow is encouraging, though I’ve got no particular view on TSRI’s business – contract computer programming – or the prospects for that business. It’s a consulting-type business, which means that in tough times its fixed overhead should be quite low, and it can trim its sails for the business conditions. In better times, it should be able to readily expand, although I suspect its competition will seek to do the same, pushing up salaries by competing for consultants and thereby keeping margins static. In summary, TSRI seems to have a good, ongoing, cash-generative operating business that should survive the current general malaise. It might even do a little better in the good times. If I’m wrong, as Walter Schloss would say:

We can always liquidate it and get our money back.

About TSRI

According to the 10K:

TSR, Inc. (the “Company”) is primarily engaged in the business of providing contract computer programming services to its clients. The Company provides its clients with technical computer personnel to supplement their in-house information technology (“IT”) capabilities. The Company’s clients for its contract computer programming services consist primarily of Fortune 1000 companies with significant technology budgets. In the year ended May 31, 2009, the Company provided IT staffing services to approximately 80 clients.

The Company was incorporated in Delaware in 1969.


The Company provides contract computer programming services in the New York metropolitan area, New England, and the Mid-Atlantic region. The Company provides its services principally through offices located in New York, New York, Edison, New Jersey and Long Island, New York. The Company does not currently intend to open additional offices. Due to the continuing impact of the current economic environment, the Company has reversed its plan of hiring additional account executives and technical recruiters in its existing offices to address increased competition and to promote revenue growth. As of May 31, 2009, the Company employed 9 persons who are responsible for recruiting technical personnel and 10 persons who are account executives. As of May 31, 2008 the Company had employed 14 technical personnel recruiters and 16 account executives.

A primer on Contract Computer Programming Services

Also from the 10K:


The Company’s contract computer programming services involve the provision of technical staff to clients to meet the specialized requirements of their IT operations. The technical personnel provided by the Company generally supplement the in-house capabilities of the Company’s clients. The Company’s approach is to make available to its clients a broad range of technical personnel to meet their requirements rather than focusing on specific specialized areas. The Company has staffing capabilities in the areas of mainframe and mid-range computer operations, personal computers and client-server support, internet and e-commerce operations, voice and data communications (including local and wide area networks) and help desk support. The Company’s services provide clients with flexibility in staffing their day-to-day operations, as well as special projects, on a short-term or long-term basis.

The Company provides technical employees for projects, which usually range from three months to one year. Generally, clients may terminate projects at any time. Staffing services are provided at the client’s facility and are billed primarily on an hourly basis based on the actual hours worked by technical personnel provided by the Company and with reimbursement for out-of-pocket expenses. The Company pays its technical personnel on a semi-monthly basis and invoices its clients, not less frequently than monthly.

The Company’s success is dependent upon, among other things, its ability to attract and retain qualified professional computer personnel. The Company believes that there is significant competition for software professionals with the skills and experience necessary to perform the services offered by the Company. Although the Company generally has been successful in attracting employees with the skills needed to fulfill customer engagements, demand for qualified professionals conversant with certain technologies may outstrip supply as new and additional skills are required to keep pace with evolving computer technology or as competition for technical personnel increase. Increasing demand for qualified personnel could also result in increased expenses to hire and retain qualified technical personnel and could adversely affect the Company’s profit margins.

In the past few years, an increasing number of companies are using or are considering using low cost offshore outsourcing centers, particularly in India, to perform technology related work and projects. This trend has contributed to the decline in domestic IT staffing revenue. There can be no assurance that this trend will not continue to adversely impact the Company’s IT staffing revenue.

The value proposition

TSRI’s annual cash from operating activities has grown from $0.96M in 2006 to $1.63M in 2009. That growth is encouraging, but I’ve got no idea how sustainable it is. TSRI’s balance sheet is very liquid and it holds no debt (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

TSRI SummaryThe catalyst

There are no obvious catalysts in the stock other than a general turnaround in business conditions, which might lead to the company restarting its stock buy-back or its dividend. The company has previously repurchased stock, but the buy-back was suspended earlier in the year. It was also previously paying a dividend, but that was suspended in the second quarter and is yet to be restarted. Restarting the dividend would be an obvious positive catalyst for this stock.


As I mention above, I’ve got no special insight into TSRI’s business or its prospects. I believe it to be a reasonably low risk bet that the company can muddle through the downturn and do better in a few years’ time. At its $2.10 close yesterday, it’s trading at around 80% of $2.65 per share liquidating value, most of which is in cash and equivalents and other liquid current assets. Add to that the positive cash flow from operating activities in the amount of $1.63M for the last year, which has grown from just under $1M in 2006, and TSRI looks like a reasonable prospect. If it can continue to grow the cash from operations, it should do well over the next few years. If it doesn’t, the discount to liquidation value provides some downside protection. I’m going to add it to the Greenbackd Portfolio.

TSRI closed yesterday at $2.10.

The S&P500 Index closed yesterday at 1,098.51.

[Full Disclosure: I hold TSRI. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Convera Corporation (NASDAQ:CNVR) is a liquidation play. The stock closed yesterday at $0.221. The company estimates the value of the distributions to be in the range of $0.37 to $0.45 per share.


According to the 14(c) information statement:

The board approved the plan of dissolution on May 29, 2009. The liquidation will not be put to a shareholder vote as “the affirmative vote of holders of a majority of all outstanding shares of our Class A Common Stock is required. In order to approve the election of directors, the affirmative vote of a plurality of all outstanding shares of our Class A Common Stock is required. As of the close of business on September 22, 2009, the Record Date for the approval of the above matters, there were 53,501,183 shares of our Class A Common Stock issued and outstanding, which shares are entitled to one vote per share. Holders of our Class A Common Stock which represented a majority of the voting power of our outstanding capital stock as of the Record Date, have executed a written consent in favor of the actions described above and have delivered it to us on September 22, 2009, the Consent Date. Therefore, no other consents will be solicited in connection with this Information Statement.


From the information statement:

We plan to distribute $10,000,000 shortly after the closing of the Merger, with the remaining $4,000,000 to be distributed in $2,000,000 increments at six months and 12 months after the closing of the Merger, subject to possible holdbacks for potential liabilities and on-going expenses deemed necessary by our board of directors in its sole discretion.

The present value of this cash distribution, assuming a discount rate of 10%, is estimated at $0.26 per share.


Hempstead assessed the value indication associated with a one-third equity interest in VSW based upon the discounted cash flows methodology. Specifically, under a discounted cash flows methodology, the value of a company’s stock is determined by discounting to present value the expected returns that accrue to holders of such equity. Projected cash flows for VSW were based upon projected financial data prepared by our management. Estimated cash flows to equity holders were discounted to present value based upon a range of discount rates, from 25% to 35%. This range of discount rates is reflective of the required rates of return on later-stage venture capital investments. The resultant value indications for the VSW component of the transaction, on a per-Convera share basis, are as follows:


Based upon the above analyses, the value indications for the cash and VSW stock to be received by our stockholders in exchange for their current Convera shares are within a range of $0.37 to $0.45 per Convera share.


The trading price of the VSW stock is an unknown, but the $0.26 in cash distributions offer some protection at yesterday’s close of $0.221. Buying up to say $0.23 means getting paid $0.03 to hold a free option on the VSW stock, which, according to Hempstead, the financial consultant providing the fairness opinion, could be worth between $0.11 and $0.19 per share. It’s very thinly traded at this price, so good luck getting set, but it’s worth buying if you can get a reasonable line of stock. I’m going to add it to the Greenbackd Portfolio at yesterday’s close.

CNVR closed yesterday at $0.221.

The S&P500 closed yesterday at 1,093.01.

Hat tip to Sean.

[Full Disclosure:  We do not have a holding in CNVR. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Warren Buffett’s position on gold is well known, if a little difficult to fathom. This is from Buffett’s appearance on CNBC’s Squawk Box on March 9, 2009, but could have been taken from any of his commentary over the last fifty years:

BECKY: OK. I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year. This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?

BUFFETT: I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.

Then there’s this comment from Buffett on the relative performance of Berkshire Hathway book value and an ounce of gold over fifteen years in the 1979 letter to shareholders:

One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.

Fifteen years of blood, sweat and tears from the greatest investor in the world and he just breaks even with gold, which “just sits there and eats insurance and storage and a few things like that.” And still he recommends avoiding gold.

For tis the sport to have the enginer
Hoist with his owne petar.

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