Keeping a Casual Eye on ASUR, Part II

As I mentioned in a previous post ("Keeping a Casual Eye on ASUR"), I closed out my positions in Asure Software (Nasdaq: ASUR) at .25, but I planned to keep a casual eye on the stock to see

if Red Oak succeeds in unlocking some shareholder value here. If so, it might be worth considering piggybacking on their next venture in micro cap shareholder activism.

Red Oak and other current ASUR shareholders just suffered a setback: after the close yesterday, ASUR management announced that the firm had lost its trial against its former law firm, and was liable for nearly $5 million in damages, attorney's fees, and interest. If that judgment stands, that would wipe out half of the cash on ASUR's balance sheet. The stock dropped 20% on this news, in response to which a commenter on the company's Yahoo! Finance message board wrote,

1. Warrent Buffett: "You should invest in a business that even a fool can run, because someday a fool will."

2. Now, I understand why Warrent Buffett doesn't like cigar butts anymore.

3. Why this pending lawsuit is not on the 10K?

The litigation actually was mentioned in the company's 10-K, but, to be honest, I didn't pay enough attention to it. I lucked out with the verdict being released now versus last month, when I still held the stock. I wonder if this verdict was a surprise to Red Oak Partners as well. I am going to e-mail David Sandberg at Red Oak now and ask him. I'll update this post with his answer if he is kind enough to respond.

Office 2010: The Movie

Hat tip: The Atlantic's James Fallows. Fallows writes,

Thirty seconds in is the part that makes it all worthwhile to me.

Which is an allusion to this humorous anecdote from his brief stint at Microsoft. Enjoy:

A Visitor From Redmond, WA

A few days ago, this blog's Feedjit widget showed that a visitor from Redmond, WA (home of Microsoft's headquarters) clicked on this post, "Algebra Challenge". Seeing that, I wondered if someone an interviewer at Microsoft was binging math questions for the company's notorious interview questions¹. I happen to have middling math skills myself, but I think this could be an decent interview question, as long as the interviewer just asked the interviewee how he would solve the problem, instead of requiring him to actually solve it (since, the arithmetic is messy, andas commenter J.K. noted in that thread, the actual formula is heavily rounded). The key insight here would be to recognize that the problem can be stated and solved as a system of three equations.

This raises a question I've wondered about in the past, which is to what extent these sorts of questions actually measure intelligence. Maybe it doesn't even matter though, if the questions test for a similarly valuable attribute other than intelligence.

Consider, for example, a couple of word problems I remember from tests I had to take as part of the application process for jobs in the past. Without digging up the exact text of the two word problems this was the gist of them: The first asked how many of each type of coin you would have if you had a certain amount of money in change; the second asked how far apart two individuals would be if one walked so far in one direction and then so far to the left, and the other did the exact opposite. I remember these two word problems for two reasons: I know I got them right, and I know that my getting them right wasn't a reflection of my intelligence or math aptitude. I got the problems right because I had seen them before.

I knew that the first problem could be solved with elementary algebra (using 25x for a quarter, 10x for a dime, and so on), and the second one could be solved with elementary geometry (adding the hypotenuses of the two resulting right triangles). Although these questions didn't measure my intelligence or math aptitude, my getting them right did demonstrate something else: that I had paid attention in math class, or perhaps that I had studied this stuff relatively recently while preparing for a standardized test needed for a graduate degree. So getting those problems right demonstrated either intelligence/aptitude, conscientiousness, or ambition, or some combination of those attributes; and whichever of these attributes a test-taker had would reflect well on him, as far as the employer was concerned.


¹I was reminded of this by a conference call I had today with an ABD finance Ph.D. who is doing some consulting for me and one of my web developers. My finance consultant created an algorithm for me, and he was going over it with one of my web developers. My finance consultant assumed that my web developer, who has a bachelors degree in computer science, would have had all the math background necessary to understand the algorithm. My web developer noted that he had a minor in math, in addition to his comp sci degree, but he just wasn't familiar with a particular function the finance consultant specified (an infimum function). I hadn't heard of the function before either, and if a comp sci major/math minor hasn't heard of it, I guess a question based on that function wouldn't be a good one for a Microsoft interviewer.

Joel Greeblatt's New Back-Tested Results

A few days ago, I (and everyone else, I assume, whose e-mail address was on file at Greenblatt's Magic Formula website) received an e-mail announcing that Greenblatt's Formula Investing venture had released new back-tested results for the Magic Formula over the last ten years. Here are the results. The first number that jumped out at me was the positive double-digit return in 2007, which seemed surprising given the negative performance of my Magic Formula stocks that year. A glance at the first disclosure offered a partial explanation. From the Formula Investing site:

The results of the model portfolio performance:

• Reflect the strategy of buying an equity portfolio of 24 top-ranked US listed equities that are within the 20% largest companies, as measured by market capitalization. As of June 30, 2009, these companies would have market capitalizations of approximately $890 million or greater.

Well, limiting one's portfolio to names of $890 million or greater would certainly have kept you from micro cap Magic Formula stocks such as these two¹:



Why, one might ask, would someone have bought micro cap Magic Formula stocks in the first place? Greenblatt's book² suggested two reasons:

1) The back-tested results for the all-cap version of the Magic Formula, which included micro-cap stocks, were higher than those of the larger cap version: 30.8% per year, on average, versus 22.9% for the larger cap version.

2) The worst one-year return for the all-cap version was -4% (in 2002) versus -25.3% for the larger cap version (also in 2002).

Recently though, as I noted in a previous post, Greenblatt raised the minimum market cap on the screener on his Magic Formula site from $1 million to $50 million. It's too bad he refused to explain why he did this during his recent Q&A with GuruFocus readers. My guess is that Greenblatt back-tested the numbers for all-cap portfolios since his book was published and found those numbers were uglier than he expected.

¹Another simple modification to the Magic Formula would also have eliminated these two names: including a requirement that each company have positive earnings in each of its previous four quarters. Neither of these companies were consistently profitable; each had one windfall quarter in the last four, and in both cases the windfall was from a one-time legal settlement. I knew this at the time, but (perhaps I over-thought this) I assumed that the inclusion of these sorts of speculative stocks was the reason for the higher back-tested returns of the all-cap portfolios. Perhaps it was.

²See pages 56 and 61, respectively, of The Little Book that Beats the Market.

Update on VBDG

In a post in March ("Applying the Altman Z-Score Model to a Non-Manufacturing Company"), I mentioned a company called Vertical Branding (at the time it was on the OTC BB; now it's on the Pink Sheets: VBDG.PK). I noted at the time that the Altman Z-Score model predicted bankruptcy for the firm and that when I had shared this information with the folks on the Investor Hub message board for the stock, I had gotten the Enemy of the People treatment. Since then, in addition to getting kicked to the Pink Sheets for not filing its financial statements, the stock has dropped 50%.

A few days after that March post I was indefinitely banned from Investor Hub's VBDG message board. The moderator who banned me was the plaid-shirted fellow holding the fish in the photo below (the photo comes from his moderator profile on Investors Hub).

Update: I didn't note this at the time, but this fellow happens to be Matt Brown, the lead site administrator of Investors Hub, who was recently indicted on criminal securities fraud charges, and remains free on a $50,000 bond posted by his father.



This illustrates one challenge in managing stock message boards. You need some form of moderation to minimize spam and other comments that detract from a board, but when you give the authority to moderate to an individual, such as the fellow pictured above, you are forced to rely on his assessments, and if your moderator's assessments aren't objective¹, you risk losing informative posts. I believe there is a better way to moderate stock message boards, but that will be a subject of a future post.

¹E.g., perhaps he is long the stock and is biased against bearish posts?

The Top Earning Degrees

A CNN Money article today lists the most lucrative undergraduate degrees (see the graphic above) and notes that, unsurprisingly, they all require math skills. A couple of thoughts on this. First, take a look at the first and third highest-paying degrees (petroleum and mining engineering, respectively). I've argued in the past for the economic benefits of facilitating more domestic natural resources production (e.g., here and here). One of the benefits I've noted is that natural resources extraction tends to create a lot of high-paying blue collar jobs. As this CNN article notes, it also creates high-paying professional jobs, which is another benefit.

Consider the benefits to California, for example, if it dropped its opposition to expanding offshore drilling. For one thing, it might improve the state's environment by reducing natural oil seepage. It would also generate much-needed royalty revenue for the state (in fact, the state could capture that revenue up front by issuing revenue bonds backed by those future royalty income streams). In addition, how many jobs would it create for petroleum engineers and oil rig workers? Couldn't California use the additional net tax payers and potential home buyers these workers would represent?

Another thought: given that the fifteen most lucrative college majors require math aptitude, does it make sense that the SAT has reduced the relative weight of its math section in the total SAT score from one half to one third (by adding an equal-weighed essay section to the math and verbal sections)?

An Undiscovered Gem from Barron's?

Visiting Yahoo! Finance, I saw an article headline from Barron's that intrigued me, "The Best Bank You've Never Heard Of". I was hoping the article might be about some great micro cap bank I'd never heard of, but guessed it would be about a mid cap bank I already knew about, e.g., maybe Hudson City. I guessed wrong though: the bank was the mega cap multinational Santander. Is this is the sort of 'undiscovered gem' readers can expect from Barron's?

This article is my most recent reminder of why I don't read Barron's regularly. The second most recent reminder was this article back in May, which was listed under the "headlines" tab at the time for a stock I own, U.S. Energy Corp (USEG). At the time, this article wasn't available online, so I went to Barnes & Noble and looked for it in the dead tree edition of Barron's. Here was the one sentence that mentioned USEG,

Companies like Cameco (ticker: CCJ), BHP Billiton (BHP), Rio Tinto (RTP) and U.S. Energy (USEG) mine and/or trade uranium, although its value contribution to their shares is overshadowed by the many more popular metals these firms also trade.

Reading that, I thought: Is it too much to expect a Barron's writer to know at least as much about this company as me? U.S. Energy Corp. neither mines nor trades uranium, and, in fact, sold most of its uranium assets to Uranium One two years ago, as I have noted on this blog.

Barron's benefits from the inertia of its brand and of its readership. When I got out of college, I worked for a few months at a tiny, over-the-counter investment bank/brokerage in Manhattan where I was supposed to read Barron's every weekend. So I did. I'd read Alan Ableson's column, which was a little like Louis Rukeyser in print, and then I'd slog through the rest of it. I soon figured out that we weren't actually expected to learn anything useful from Barron's; we were supposed to read it because the affluent investors we were calling on read it, and they might mention something from the most recent issue and expect us to be familiar with it.

When journalists lament the decline of the print business, they ought to consider that the Google- and Craig's List-powered disruption of the advertising model isn't the only reason for print's decline; so is the decline of journalism itself. A lot of what passes for journalism today simply isn't worth paying for in any medium.