It's an easy time of the year to become reflective, kids are going back to school and life begins the school rhythm. My oldest starts school again today and it's had me thinking about schooling and maximizing the school experience all weekend.
I never liked school. In elementary and middle school I'd sit by the window and look out at passing traffic while day dreaming about escaping to do something, anything else. High school wasn't much different. I went to college because that was the expectation. I never buckled down and maximize my schooling in the traditional sense. What's interesting is neither did my brothers, we all did about average and yet all found our footing in life. This is contrary to what society and what teachers might lead you to believe, and anyone less than an A student is a failure in life and will be flipping burgers at Wendy's.
There are a lot of very important things taught in the classroom. But there's a lot that's never taught either. I put together a few things I believe were crucial for my own development and they're things I want to pass onto my own boys as they get older. These aren't universal truths, but rather things I've experienced that I value and I want my kids to value. I've written this as a way to capture my thoughts. I didn't write it in the corny "letter to my kids format" because my kids will never read this. Instead I'm hoping someone out there might find some of the lessons I learned to be useful. I also realize that most students feel they are too smart for advice because they already know everything. And those of us who've learned these lessons wish we would have listened when we were younger. But that's the experience of growing up.
Blaze your own path
If you do the same things as everyone else you'll get the same results as everyone else. You'll also be competing with everyone else for a few scarce positions. If you want different results you need to do something different.
The brutal reality is that very few people are "the best" at anything, sports, academics, business, whatever. But we have a system where everyone tries to work hard to be the best. The end result is a field of people all competing against each other, and if you aren't leaps and bounds better than everyone else the results will be disappointing.
They don't teach you in school that there are other ways to achieve the things you want outside of the traditional path. I'd consider that standard advice is to do well in school, go to a good college, get a good job, put your head down and work hard then get promoted. For some this path works well, but for everyone who isn't the best, or the cream of the crop you'll never reach your maximum potential waiting for someone else to promote you or recognize you.
Look for alternative paths to where you want to go. You need to think creatively, but the results are rewarding. Some of this can be by doing things others aren't doing.
In high school one of my younger brothers approached me about learning how to play guitar. I played and he wanted to play too. I recommended against the guitar and that he play bass instead. My reasoning was that everyone learns to play guitar and you need to be excellent to do anything with it. Whereas there is always a shortage of good bass players. My brother took my advice and a few years later I was watching him perform on The Tonight Show amongst other TV appearances. He is a very good bassist, but not the best, but there is such a demand for bass players that he was able to achieve things most guitar players could only dream of. By choosing his own path he was able to tour the US and Europe on someone else's dime and get paid for the experience. But music isn't forever, and he talked his way into a sales job and from there into a computer programming job, which is impressive given his Psychology degree and music related work experience.
My own career path is a set of twists and turns that couldn't be predicted ahead of time. I've created some roles for myself and fallen into others. But interestingly enough I've only ever received one promotion, a minor one that was inconsequential. I've created my own path and leap frogged others who are working their way up the ladder.
I love talking to entrepreneurs about how they got started and why they got started. Not surprisingly many successful entrepreneurs almost fell into starting a company. Some became extremely successful by taking chances and doing things others didn't want to do. This is how you find an alternative route, you do the work, do it well, and do things others aren't interested in doing.
Ability to execute, not credentials
Popular culture has left us with the impression that a graduate from Harvard will be able to open a door at any company in the US whereas a graduate from a community college will be destined to low level white collar jobs the rest of their career. My dad had an expression "it's not where you go to college, but what you do with it." It's an expression I've seen lived out as I've grown older.
A related story is a good friend was hired for a job a few years after college designing bridges. One of his co-workers at the time was someone he knew from college. The co-worker spent a considerable amount of time working for straight-A grades in college and graduated with a 4.00. My friend did not, yet they were sitting side by side making the exact same of money doing the exact same thing. My friend could execute, but he didn't have the grades, it didn't matter.
Credentials and a great resume can open doors, but the ability to execute once at the job is what keeps you there. It's the ability to execute and complete tasks that opens bigger and better doors. An employer might care about education for the first job because that's the only information they have to work from. But three or four jobs later it's how you'd done in those jobs that matters. If a company is evaluating a student with proven experience verses a straight-A student with no experience the student with experience will be chosen every time.
My first job out of college hammered home this point. It was at a start-up here in Pittsburgh. The company hired based on experience, not on education. This was something of an eye-opener as I had just come out of college where the college institution led us to believe that grades and college performance mattered. This company only cared about what value people could provide, and the more value employees provided the more the company overlooked issues individuals had. There were a number of high performing employees without college degrees. And there was one individual who proved this entire point over and over.
This employee was one of the best in the world at his given specialty, he's written books on the topic and hosted conferences. He also had some personal failings that were quite epic. From drinking too much and throwing up in the backseat of the CEO's car to sending out resignation emails when drunk in the middle of the night. The company's response was always the same. There'd be an apology email from the CEO for the employee's behavior and promises that it'd never happen again. He provided so much value to the company that they were able to overlook and accommodate behavior that wouldn't be tolerated anywhere else.
Value people
For some in their blind quest for accolades and success trample the very people who help them achieve their goals. The result is the person's success isn't remembered, but rather how much of a jerk they were.
Very few achieve anything on their own without anyone else's help. It's how you treat people that's remembered, not what you achieve.
In sales books there are typically chapters written about how to handle "gatekeepers." These are receptionists and executive assistants who answer the phone and email for deal makers. Most sales literature includes some combination of tricks, brute force and outright lies to get past gatekeepers to the deal maker. But here's the thing. The gatekeeper is a real person showing up to work each day trying to do their job. You can't blame them for trying to shut down people trying to shove their way through.
I've found a different tactic works wonders, treat the gatekeeper like a real person who is essentially an advisor to the dealmaker. This approach doesn't use lying, or brute force. Instead by working with them they start to work for you instead and will sell to the dealmaker on your behalf.
One tactic that's worked well for myself is to always put myself in the other party's shoes. I try to imagine myself on the other end of whatever I'm engaged in. How would I view myself? When I can view a situation from all sides it helps me make decisions that aren't one-sided. Awareness of how other parties feel and act is important, with this perspective I've been able to make headway numerous times where if I was just focused on myself I would have just been shutdown.
But it's not just people who you work with who need to be valued, value personal relationships even more. Success, co-workers, and accolades won't love you back, and when times get tough they won't be there to help you out. But family and good friends will. Relationships that are built on a solid foundation will last even when there's a storm. Relationships like this require work, they're tough, sometimes uncomfortable or inconvenient, but they pay off in the long term. Don't ignore family and friends as you journey down your path.
I've witnessed something that remains somewhat of a mystery to me, but don't let it happen to you. It's people who ignore their kids in their pursuit of their careers. Yet once a career is over some of the only people left in their life their ignored kids. It's short term thinking. Don't burn bridges today for investments that will pay off in the future. Spouses, kids and close friends, but especially kids will pay dividends for years and decades, invest in them now instead of putting off the investment for some other time.
Contentment is a key to life
No matter what you achieve, or what you don't achieve you'll never be satisfied if you're not content. Discontent is a thief that steals joy from your life. Without contentment you will always be chasing something else.
If we look deep into our souls very few of us are truly content with our position or what we have. Some justify this discontent saying it's what fuels the fire that drives us. The problem is that fire can become an uncontrolled raging inferno that will never be quenched.
I think the key to contentment is thankfulness. Instead of looking ahead at what we want to happen we should look around and be thankful for where we are. If you're reading this you're alive, that's a great starting point for being thankful. A thankful attitude breeds contentment. Thankfulness also breeds optimism. If you are always looking for reasons why something isn't up to your expectations you'll never be content.
Contentment is a bit of a paradox. I'd wager that most think if they had unlimited money they'd be content because they could do anything they wanted. But that's not how it works. There are people with very little who are content, and others with more money than they could ever use who are discontent. Contentment is an attitude, not something that can be achieved materially.
If you want to see lack of contentment visit an airport. Most everyone is complaining about something or unhappy about some part of the experience. There are very few who are thankful that they get to fly across the world in a comfortable tube verses riding on a steamship, a cramped train or in a car. How many travelers are thankful that they air travel enables them to do whatever lies at their destination?
Conclusion
These are the lessons and traits I am hoping to instill in my kids (I have three boys). Instead of telling them to "get good grades" at the start of the year these are the lessons I want them to learn. They're timeless, they're just as important in elementary school as they are in college or mid-career. And they are all attitudes that work in any environment. They're also how I measure success. It will be nice if one of my kids is a high performing individual, but if they are never happy and always chasing the next thing while trampling people in their path I'll consider myself a failure. But if my kids embodies these attitudes I'll be satisfied regardless of what they do in life.
Looking for value in the overlooked margins of the market.
Oddball Stocks Podcast Episode 1
This past Friday I was supposed to be a guest on the Benzinga PreMarket show. It turned out the show is revising their format and my spot was cancelled. I had prepared some remarks for the show and instead of letting them go to waste I decided I might as well record them and turn them into a podcast. What follows is my first attempt at a solo podcast. I'm hoping to improve the format and production value going forward.
Is the *new* Solitron a worthy investment?
It's fitting personally that investment changing news about Solitron Devices (SODI) hit the wire while I'm on vacation at the beach. When I think of Solitron I can't help but associate the company with the beach. It was three years ago in June that my wife and I flew down to West Palm for a beach getaway with a short break away from the beach for Solitron's first annual meeting in 20 years.
If I'm honest with myself then Solitron Devices would be considered a hotel stock for small value investors. It seems like anyone who's ever looked for value in small and micro cap stocks has either looked at or owned the stock over the past decade. The stock has at times been a net-net, an activist target and at one point in ancient history a high flying growth stock. If you can believe it Solitron was the Tesla of the 1960s.
The company designs and manufactures integrated chips and components for satellites and military applications. The company was a stock market darling before they spiraled out of control and into bankruptcy in the 1990s. It didn't help that their manufacturing process poisoned the soil leaving an EPA disaster in their wake. In the 90s the company restructured, established a plan to pay for their environmental sins and continued to manufacture specialized chips.
They operated in obscurity for years, so much obscurity that after the financial crisis the company traded for less than their NCAV. One could in theory liquidate the company at firesale prices and end up with a sizable gain. There was only one problem. The company's CEO, Shevach Saraf stood in the way.
Saraf was one of those people who was enamored with titles. He was the CEO/CFO/COO/Chairman and whatever else he could fit on a nameplate. He was also stubborn to a fault and it was his way or the highway when it came to Solitron. Saraf was appointed CEO during the company's restructuring and served in that role until recently. The man appeared to be insufferable to work for. At one point all of the titles he accumulated belonged to other employees, but one by one they quit and he took them for himself.
The allure of the company was that it had a considerable amount of cash and securities sitting idle on their balance sheet. This alone was enticing, but their core business operations weren't bad either. Almost any investor could day dream about a scenario where the cash was returned to shareholders and the business sold for a gain. Outside of outright fraud there weren't any scenarios were shareholders did poorly. The problem was Saraf, the company's largest shareholder and head executive-everything wanted none of it. Instead of returning cash to shareholders net income was hoarded on the balance sheet as Treasury securities. Annual reports were marked with language indicating that the company wasn't certain if it could ever turn a profit in the future and there was an outside chance it might disappear into the night. Saraf was a classic sandbagger. He'd proclaim doom and then easily surpass his proclaimed dire circumstances. He paid himself handsomely and owned a substantial amount of stock. Enough that any attempt to outvote him would be difficult.
I began writing about the company hoping to shed light on an undervalued situation. Eventually I realized that the only way to create value was to do something myself. I helped organize shareholders and bring attention to the company all while pushing them to hold an annual meeting. The unstated goal of the annual meeting was that with an annual meeting an eventual proxy battle to oust insiders could happen. Without a meeting there could be no proxy battle, and without a proxy battle no change. In 2013 we succeeded and shareholders had their first meeting and in some ways the rest is history.
Once the company held a meeting activists and proxy battles followed and culminated last week with the company filing an 8-K announcing Saraf's departure from the company. But if that wasn't enough the company is buying out his shares. This removes the largest stumbling block to value while at the same time returning cash to investors. The Board is now firmly under control of activist investors and the CEO is Tim Eriksen, the hedge fund manager who mounted a successful proxy fight last year.
The question is whether Solitron post-stubborn CEO is worth an investment or not. To decide let's walk through the adjusted balance sheet after the transaction.
Before the transaction the company had $6.48m in securities and $507k in cash on their balance sheet amongst other assets. The company is debt free and liabilities consist of accounts payable and accrued expenses. Let's presume that their cash is needed for ongoing operations and their investment securities (treasuries) are excess and can be used to fund their transformation.
The first thing the company did was repurchase all of Saraf's shares at $3.91 per share. The company spent $1.3m repurchasing 331k shares. This reduces the number of shares outstanding from 2.2m to 1.9m for a more than 10% reduction in shares at less than book value. This action alone is highly value accretive itself. The second action taken was to repurchase all of Saraf's outstanding options for 290k shares for slightly less than $1m, paying $3.43 per option. This buyback removed the options overhang and reduced the fully diluted share count.
Both of these actions are shareholder friend, the company used $2.3m worth of excess cash to eliminate Saraf's share holding and his option position. This is the type of thing value investors dream of, a company using their cash to repurchase shares below book value. While value was created for investors it also eliminated the company's largest shareholder.
Beyond the initial $2.3m share and option repurchase the rest of the buyout can be framed within the context that the buyout expenses were necessary to get rid of a stumbling block for shareholder value. The company paid $410k in severance costs, $45k for health insurance, $18k to transfer ownership of the company car to Saraf, $96k for earned vacation time and other incidentals such as his cell phone.
In total the company is paying $2.859m to rid Solitron of Saraf, with the bulk of the company's expense being spent towards repurchasing shares and options. The company is also reimbursing Eriksen Capital $110k for their proxy fight last year. I know some shareholders antsy about a repayment such as this, but in my mind paying $110k to unlock value is very cheap. If shareholders could unlock value other management-trap companies for $110k we'd all be a LOT richer.
Once the agreement is executed the company's equity will drop from $11.36m to $8.391m, which is $4.41 per share. At current prices post transaction the company is trading for 89% of book value, which is cheap in light of recent facts.
One negative is the company has started to report negative earnings. We could speculate all we want, but it's possible that the earnings drop was the catalyst that pushed Saraf out the door. Until recently the company had steady revenue and earnings, and suddenly with activists onboard the company's results took a nose dive. Was this Saraf trying to payback shareholders with bad results? As a one-man executive and selling machine it's possible. But if that were the case his plan backfired badly.
At current prices investors have the ability to purchase $4.41 for $4.01 with an activist investor as CEO and shareholder friendly Directors. The company still has about $3m in excess cash that can be returned to shareholders as a buyback or a dividend and a core business that had a history of earning above average returns. The best course of action would be for Eriksen to negotiate a sale to a private buyer at an above market price. It isn't unreasonable to presume that the core company might be worth $5-6 per share plus the additional $1.50 per share in excess cash. I don't think it's a stretch to say the company is worth 50% more than current prices if not more.
Most readers will brush this writeup off saying that "a 50% gain isn't big enough" but I don't know many other investments that are controlled by activist investors with an upside of 50% or more. Even if it takes Eriksen two years to realize value with Solitron it's still a very respectable 25% a year return.
If you're looking for a cheap investment with a catalyst look no further than Solitron Devices.
Disclosure: Long SODI
If I'm honest with myself then Solitron Devices would be considered a hotel stock for small value investors. It seems like anyone who's ever looked for value in small and micro cap stocks has either looked at or owned the stock over the past decade. The stock has at times been a net-net, an activist target and at one point in ancient history a high flying growth stock. If you can believe it Solitron was the Tesla of the 1960s.
The company designs and manufactures integrated chips and components for satellites and military applications. The company was a stock market darling before they spiraled out of control and into bankruptcy in the 1990s. It didn't help that their manufacturing process poisoned the soil leaving an EPA disaster in their wake. In the 90s the company restructured, established a plan to pay for their environmental sins and continued to manufacture specialized chips.
They operated in obscurity for years, so much obscurity that after the financial crisis the company traded for less than their NCAV. One could in theory liquidate the company at firesale prices and end up with a sizable gain. There was only one problem. The company's CEO, Shevach Saraf stood in the way.
Saraf was one of those people who was enamored with titles. He was the CEO/CFO/COO/Chairman and whatever else he could fit on a nameplate. He was also stubborn to a fault and it was his way or the highway when it came to Solitron. Saraf was appointed CEO during the company's restructuring and served in that role until recently. The man appeared to be insufferable to work for. At one point all of the titles he accumulated belonged to other employees, but one by one they quit and he took them for himself.
The allure of the company was that it had a considerable amount of cash and securities sitting idle on their balance sheet. This alone was enticing, but their core business operations weren't bad either. Almost any investor could day dream about a scenario where the cash was returned to shareholders and the business sold for a gain. Outside of outright fraud there weren't any scenarios were shareholders did poorly. The problem was Saraf, the company's largest shareholder and head executive-everything wanted none of it. Instead of returning cash to shareholders net income was hoarded on the balance sheet as Treasury securities. Annual reports were marked with language indicating that the company wasn't certain if it could ever turn a profit in the future and there was an outside chance it might disappear into the night. Saraf was a classic sandbagger. He'd proclaim doom and then easily surpass his proclaimed dire circumstances. He paid himself handsomely and owned a substantial amount of stock. Enough that any attempt to outvote him would be difficult.
I began writing about the company hoping to shed light on an undervalued situation. Eventually I realized that the only way to create value was to do something myself. I helped organize shareholders and bring attention to the company all while pushing them to hold an annual meeting. The unstated goal of the annual meeting was that with an annual meeting an eventual proxy battle to oust insiders could happen. Without a meeting there could be no proxy battle, and without a proxy battle no change. In 2013 we succeeded and shareholders had their first meeting and in some ways the rest is history.
Once the company held a meeting activists and proxy battles followed and culminated last week with the company filing an 8-K announcing Saraf's departure from the company. But if that wasn't enough the company is buying out his shares. This removes the largest stumbling block to value while at the same time returning cash to investors. The Board is now firmly under control of activist investors and the CEO is Tim Eriksen, the hedge fund manager who mounted a successful proxy fight last year.
The question is whether Solitron post-stubborn CEO is worth an investment or not. To decide let's walk through the adjusted balance sheet after the transaction.
Before the transaction the company had $6.48m in securities and $507k in cash on their balance sheet amongst other assets. The company is debt free and liabilities consist of accounts payable and accrued expenses. Let's presume that their cash is needed for ongoing operations and their investment securities (treasuries) are excess and can be used to fund their transformation.
The first thing the company did was repurchase all of Saraf's shares at $3.91 per share. The company spent $1.3m repurchasing 331k shares. This reduces the number of shares outstanding from 2.2m to 1.9m for a more than 10% reduction in shares at less than book value. This action alone is highly value accretive itself. The second action taken was to repurchase all of Saraf's outstanding options for 290k shares for slightly less than $1m, paying $3.43 per option. This buyback removed the options overhang and reduced the fully diluted share count.
Both of these actions are shareholder friend, the company used $2.3m worth of excess cash to eliminate Saraf's share holding and his option position. This is the type of thing value investors dream of, a company using their cash to repurchase shares below book value. While value was created for investors it also eliminated the company's largest shareholder.
Beyond the initial $2.3m share and option repurchase the rest of the buyout can be framed within the context that the buyout expenses were necessary to get rid of a stumbling block for shareholder value. The company paid $410k in severance costs, $45k for health insurance, $18k to transfer ownership of the company car to Saraf, $96k for earned vacation time and other incidentals such as his cell phone.
In total the company is paying $2.859m to rid Solitron of Saraf, with the bulk of the company's expense being spent towards repurchasing shares and options. The company is also reimbursing Eriksen Capital $110k for their proxy fight last year. I know some shareholders antsy about a repayment such as this, but in my mind paying $110k to unlock value is very cheap. If shareholders could unlock value other management-trap companies for $110k we'd all be a LOT richer.
Once the agreement is executed the company's equity will drop from $11.36m to $8.391m, which is $4.41 per share. At current prices post transaction the company is trading for 89% of book value, which is cheap in light of recent facts.
One negative is the company has started to report negative earnings. We could speculate all we want, but it's possible that the earnings drop was the catalyst that pushed Saraf out the door. Until recently the company had steady revenue and earnings, and suddenly with activists onboard the company's results took a nose dive. Was this Saraf trying to payback shareholders with bad results? As a one-man executive and selling machine it's possible. But if that were the case his plan backfired badly.
At current prices investors have the ability to purchase $4.41 for $4.01 with an activist investor as CEO and shareholder friendly Directors. The company still has about $3m in excess cash that can be returned to shareholders as a buyback or a dividend and a core business that had a history of earning above average returns. The best course of action would be for Eriksen to negotiate a sale to a private buyer at an above market price. It isn't unreasonable to presume that the core company might be worth $5-6 per share plus the additional $1.50 per share in excess cash. I don't think it's a stretch to say the company is worth 50% more than current prices if not more.
Most readers will brush this writeup off saying that "a 50% gain isn't big enough" but I don't know many other investments that are controlled by activist investors with an upside of 50% or more. Even if it takes Eriksen two years to realize value with Solitron it's still a very respectable 25% a year return.
If you're looking for a cheap investment with a catalyst look no further than Solitron Devices.
Disclosure: Long SODI
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