About Me

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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Tuesday, January 31, 2017

... And out of the Blue, I was Quoted in the NYT

Maybe it's a slow news day and not much going on, but I was quoted in the NYT the other day about the Park Slope Food Coop and its recent controversy surrounding the pension for its employees.

What the NYT actually quoted was a line from one of three letters I'd written to the board and the coop newspaper. The letters were about the poor returns in the pension fund and the need for the fund to articulate and disclose its investment process and strategy, as well as concerns over management, transparency and governance.

The quote in the NYT was specifically about one of the two trustees of the pension, George Haywood, a former Lehman partner who'd started his own investment mgmt firm many years ago.

He was also a coop member who since the 1990's managed the pension as part of his workshift (all members of the coop have to work 2 hours, 45 minutes / month). Under his mgmt, returns were under whelming.

I thought it would be fun to include links to the full letters and where applicable call out portions that are relevant and important to investors in general.

I conclude as well with a personal letter I wrote to George Haywood's lawyer, Gary M., with the hope that he would forward it along.

So as to not bury the lede, not long after I wrote the private letter to George, and after years of questionable management of the coop pension with potential violations of ERISA laws, Haywood quit the coop and was named a director at Fannie Mae.


LETTER 1, from September 1, 2016, was written in reference to three things ...

1) erroneously reported information about the coop revenues and gross profit
2) a graphic about the pension performance that was wrong,
3) a graphic depicting the impact of a pension shortfall illustrated as cheese on a pizza and coffee beans

... at the time, the issues with poor returns on the pension were just coming to light. I'd hoped these paragraphs - the last three of the letter - would resonate most with readers:

"I get that many people have limited experience with financial presentations but everyone—from infants to addicts—knows how to make decisions about preferences. The business of investment management is quite simply a concentrated version of the types of decisions made by everyone, all the time, such as what fruit, shoes or glasses to buy, etc.

The point is, it’s far better to present such information fully and with appropriate context than to promote the continued infantilization of people’s attitudes about finance with pizza pies and coffee beans.

The idea that “it’s too complicated, leave it to us” is a part of the fabric of institutional finance that unnecessarily enriches a few at the expense of many, due simply to ignorance and complacency. Every opportunity to break that cycle should be taken."


LETTER 2, September 29, 2016. At this point, a small but loud faction is pushing the pension to go all passive. Obviously, that's viewed as "most prudent" these days. I was just asking for someone to please articulate investment strategy. This is the full letter.

"To the Editor: 

I have been following the debate regarding the pension plan and its investment performance with a little concern and a lot of bemusement.

My concern is primarily around the unnecessary risk created by the managers of the plan for maintaining a concentrated investment portfolio without disclosing an investment plan or strategy. If the pension trustees would articulate its process and how each investment fits into that process, it could better assess the reasons for its underperformance, i.e. whether it’s from a flawed process or a flawed execution, and adjust as necessary.

My bemusement is from learning that the co-trustee of the plan, George Haywood, is a high-profile beltway-insider, with close ties to President Obama. I am curious why and how we have a relationship with him? It certainly isn’t because there’s a dearth of financial acumen in New York City and it smells like the kind of relationship where the due diligence begins and ends with “you should invest with so and so, s/he’s very good.”

Giving money without proper oversight to someone held in high regard by others but who cannot articulate reasons for success or failure is a terrible way to do business. We wouldn’t buy cheese, produce, vegetables or proteins that way. Nobody should invest that way."


LETTER 3, November 10, 2016, was written after I attended a general meeting, where I learned two things ...

1) the short list of highly speculative companies the coop owned
2) how little most coop members understood about the pension in general

... it was one last plea for them to define the investment process and strategy (believing that they actually had one).

"To the Editor

The goal of managing a pension of any size is to match future cash needs with future cash flows.

Presently, more than 1/3 of the Coop’s assets are obligated against those future needs, which are funded by Coop sales and by the investment performance of the plan.

As detailed in last night’s meeting, the plan invests in companies that are not about future cash flows but about a bonanza or bust payoff; it buys speculative stocks at a low price and hopes the price will grow if a future event happens.

However, no one knows the future. If they did, and knew with certainty that the bonanza would happen, these stocks would already trade at higher prices. The uncertainty keeps VirnetX trading at a fraction of the value of its now six-year old patent infringement lawsuit against AAPL, etc. These unknowns exist for all companies.

Knowing how the trustees define a good company and what has been their “batting average” on selecting the right ones would be incredibly helpful in gauging their effectiveness, far better than simply quarterly or annual returns.

If the trustees have a good process for selecting the right companies, and a track record for doing it well, then it’s just a matter of following that process and practicing patience. But if they can’t define the process, then we have no information, just the emotional whipsaw of the stock market.

Joe, who is one trustee, is an incredible asset to the Coop and he does so much with his heart in the right place and concern for all the stakeholders but—I speak here as a professional investment manager—I fear he is at the edge of his competence when it comes to investing. (Search “krill oil boom” and you’ll know what I’m talking about). That is not a good place to be with other people’s money and a terrible place to be for someone acting as a fiduciary.

George, the other trustee, and supposedly a capable and experienced biotech investor, should be able to explain and articulate his stock selection methods, process and expectations. That he hasn’t is completely unfair to Joe, who is left to explain why he “believes” these companies “will be great”, absent any fact, like a politician in an election cycle. It is also unfair to the stakeholders in the plan, and the Coop itself, for whom he creates risk.

The alternative approach pitched by Hessney is the widely accepted process of the moment. I’ve never been one for widely accepted processes and I believe there are better solutions for investing capital. But without a well thought out and well articulated investment policy statement that defines the processes by which the trustees make their selections, they are creating risk to the Coop. 

Randomness is a most unjust way to treat our capital and our employees."


Then I gave up writing letters to the board.

But I wrote one last letter to George Haywood via his lawyer Gary M. whose name & address I found on his SEC filings. I was told it was forwarded along.

The letter had two purposes ...

1) I wanted to meet him. He's not the typical coop member.
2) I got a sense that George didn't really know what was going on, and that the other trustee stubbornly wasn't asking for his help.

... here's portions of that letter.

Dear Gary –

I write to you in your capacity as George Haywood’s attorney on SEC filings to request that you please facilitate an introduction between us and also to relay information that I believe is important so that he can help a mutual associate.

The genesis of this letter is that we are both members of the Park Slope Food Coop. I realize this is a tenuous – perhaps absurd - connection for an introduction but it also the basis for the more critical information described below.

About the introduction ... Last November I started my own investment management firm, Long Cast Advisers, which makes concentrated investments in well researched small / micro-cap securities. We apply the same fundamental analysis I used while working for 15 years as a sell side analyst. With just a year under our belt returns are +25%. We are off to a good start.

I would like an introduction to ask for his advice and counsel on building an investment management firm. I have always found it helpful - and an enormous privilege - talking with experts like him who have experience and success in areas that interest and engage me. I would be most grateful for that opportunity.

About the information to be relayed ... Mr Haywood is one of two trustees on the PSFC pension plan. The plan, which is invested in many of the same companies as Mr Haywood, has been underperforming the major indices for the last two years.

Some members of the coop have engaged in an organized effort to highlight the underperformance, increase the plan’s disclosure and consider a change in strategy. (I am not a member of this group, though I agree that more transparency is always a good thing).


The key factor here is managing the task of a fiduciary while limiting risk. Based on what little I know about the plan, it appears that there is insufficient oversight in its administration, in the management of its assets, in the nature of its investments, and in its underwhelming performance. With an organized group planning to highlight these risks in order to implement its agenda, I fear a negative impact on the coop and perhaps even the trustees of the plan.

I have suggested to Joe several times that the plan should have a detailed policy statement that explains why and how it makes investment decisions so that in the absence of returns, the stakeholders can at least be assured that it is following a proven strategy, is invested wisely and always with prudent due diligence.

I have also told Joe that the plan should have quarterly or semi-annual letters discussing the why’s and how’s of performance with a look towards future expectations, the kind of memo that every Hedge Fund or Investment Manager worth their salt shares with clients. I would imagine Mr. Haywood already makes these available to his clients.

I am certain others with more experience in this area could provide additional counsel on how to better manage these risks, both seen and unseen.

I’m not sure how much of this has gotten to Mr. Haywood. Perhaps I am speaking out of line but I would rather be wrong for the right reasons than allow incaution to prevail. Mr. Haywood should know what is going on and I urge him help Joe so he is not alone in dealing with this. It is sad and unfair for Joe to work so hard for the coop with his heart in the right place to be discredited on this account.

George never responded to my request for advice and counsel on starting an investment mgmt firm but as mentioned, he's left behind a mess at the coop pension to become a director at FNMA.

-- END --


Thursday, January 5, 2017

$ARIS Proxy Battle Comes to Its Expected Conclusion

Park City Capital filed this proxy today, a "concession" speech of sorts at the $ARIS annual meeting. It reads like a "last say" on the (unnecessary) proxy battle they brought and thankfully lost.

A few comments about the letter worth pulling out:

They wrote: "... I haven’t spoken with any shareholder that would be disappointed with receiving $8 to $10 per share in the next six months."

Who did they speak to? I did not speak with them (if you have nothing nice to say ...). Other shareholders told me they reached out to Park City and the calls went unreturned.

They wrote: "... we believe that our efforts have helped raise the profile of ARI in the investment community and its stock price. If we go away and ARI’s stock no longer gets the benefit of this premium, we believe there would be significant downside in ARI’s stock price."

This proxy battle robbed investors of about $250k in the costs to fight it, yet they tout the benefits this battle? That's crazy talk. It's like a crime wave raising the profile of a neighborhood.

The stock price will go down if they dump 1M shares onto the market. If they sell as mindlessly as they ran this battle, it will be a tough few months for shareholders, but I don't see how that benefits anyone.

They wrote: "Despite Roy Olivier and Will Luden telling me on multiple occasions that they would immediately accept an $8 per share offer, they have communicated to shareholders and independent proxy advisory firms a plan that they believe could result in a $15 stock price over the next five years."

Did the CEO really say this? I don't know. In an ideal world, a CEO spends zero time talking about its stock price and even less time thinking about it. Why think about things you can't control? Nobody knows the future, but we know what drives future share value, which falls into two general buckets:

1. management's ability to deploy capital in a way that generates usefulness for its customers in order to grow cash flow and profitability

2. the multiple investors are willing to pay for that cash flow and profitability, which itself is a reflection of the trust and confidence in its sustainability and growth.

If the CEO focuses on maximizing usefulness to its customers, and that results in growing cash flow and profitability, then investors will have more confidence in the company's sustainability and growth, and the stock price will go higher. He should do that and not talk about the stock price five years out.

I did not attend the meeting b/c travelling to Milwaukee in January just feels wrong. I know its a beautiful city - perhaps even underrated - with a nice new museum and some interesting neighborhoods. I've been there in January, I've been there in late winter, I've been there in summer. I prefer the latter, but I'll take late winter, when it's cold, but bright and sunny and you could sense the coming thaw and hope in the air.

In January, it just doesn't seem there is much hope yet. Just. More. Winter.

Happily, the winter of this costly proxy battle is over. Now the  company can get back to launching its new platform and the CEO can focus on taking steps to lower churn, grow the number of subscribers, the EBITDA per subscriber and generally getting back to the business of making the customers fat and happy. That will resolve all issues with the stock price today and in five years.

-- END --