The Valeant saga is probably a long way from a resolution. Anyone that says they know how it will end is either delusional or looking to influence the stock. That being said, there are a few lessons to be gleaned:
Last week NY hedge fund manager John Paulson took a lot of grief for his record $400 million gift to Harvard University, his business school alma mater. Personally, I admire Mr. Paulson for supporting higher education. It is a noble gesture. He could have spent that cash on private jets or his own third world island nation. But Mr. Paulson made a glaring mistake: he gave his money to a school that does not need, and does not deserve, that money–and the $200 million or so he’ll save on taxes would do America and the state of New York more good than Harvard University.
[note: a slightly different version of this post originally appeared on my Yahoo! Finance contributor page]
I’m a sports fan, but I don’t plan on watching the Final Four this weekend. Sure, the players are inspiring and the games are usually exciting and dramatic. I just can’t bring myself to tune in to a bunch of unpaid employees generating billions for one of the most corrupt rackets in the world, the NCAA. But–as regular readers of this blog know all too well by now–my distaste for so-called amateur athletics pales next to the utter disgust I feel for our broader system of higher education.
Talk about an industry desperately in need of disruption.
Last fall, I blogged about possible ways to disrupt and improve our vastly overpriced and underachieving higher education system. One of my bright ideas went as follows:
[T]here’s no reason [Harvard] shouldn’t build more campuses in other locations, increasing enrollment even more. If its product is so great, why not scale it out?
Fast forward to this week when I opened the latest Barron’s and discovered that Harvard’s biggest rival is already doing just that:
Yale University has done something that no other Ivy League school has attempted: built a new version of itself halfway around the world, in Singapore.
I believe we’ve got things backwards in this country when it comes to higher education. In my opinion, a university’s reputation shouldn’t be based on how exclusive and expensive it is–that is, how much it costs and how few young people it educates. I think we should reverse that equation and judge our elite institutions by how many quality educations they provide, and at what value. Yale’s experiment in Singapore is a good first step in the right direction (even if it is in China), but it’s not addressing the biggest problem in higher education today:
It costs too damn much!
I glanced at a recent issue of the Stanford alumni magazine the other day. It featured an interview with former school president Gerhard Casper and an excerpt from his book on “addressing the challenges of higher education.” The piece was underwhelming, to put it mildly. There was the usual pabulum about school rankings, measuring outcomes, and fostering diversity. But there wasn’t a single word about the biggest problem facing higher education today:
It costs too damn much!
Our nation’s universities, public and private, have crushed an entire generation with debt. All told, young adults owe more than a trillion dollars in student loans. That’s a huge drag on our economic growth. And where is all that borrowed money going (besides the Wall Street banks that underwrite many of the loans)? It’s propping up one of the most backwards and wasteful industries in the world: academia.
[Note: this piece was also posted at Seeking Alpha]
For most of my thirty years in the investment business, I’ve been skeptical of closed-end investment funds. Then I flew to Dallas and shared a plate of barbecue with Gary Martin, the personable, soon-to-be-retired president of Capital Southwest Corporation (CSWC). Martin was in a good mood during our lunch meeting, and not just because it was a Friday. As he described the company’s history and its current outlook, he had the relaxed, calmly confident look of an executive with nothing to hide, sell, or prove.
“We let our numbers speak for us,” he said.
Those numbers are quite persuasive. Since Cap Southwest’s initial IPO raised $15 million in 1961, it has quietly grown 13 percent a year by buying into well-managed private companies and holding onto them for long periods of time, even after many of them go public. Like Martin and his fellow executives at Capital Southwest, the businesses they invest in are not flashy. They make things like industrial lubricants (Rectorseal), farm equipment (Alamo Group), and copper wire (Encore). They also make a lot of money, which Capital Southwest frequently shares with its stockholders. Last year, it passed along a capital gains distribution of $17.59 per share. CSWC is also surprisingly undervalued. As Philip Mause persuasively documented several months ago, the stock trades at a significant discount to the company’s net asset value.
But none of these factors explain why I set aside my longtime doubts about CEF’s and bought $3 million worth of CSWC shortly after my lunch with Gary Martin. The real reason I’m long on Capital Southwest is that familiar refrain from the real estate industry: location, location, location. Or, to be more specific, Texas, Texas, Texas.
Austrian economist Joseph Schumpeter coined the term “creative destruction” to describe the positive impact of business failure on free market economies. It’s a simple concept. As better ideas for products or services emerge, old ones dies out. The classic example is the automobile coming on the scene and displacing horses and buggies. More recently, the internet has been a very creative destroyer. From retailers to travel agents to media companies of all types, it’s been steadily remaking just about every industry out there.
But often the companies and industries ripe for creative destruction aren’t as obvious as video rental shops or horse-drawn carriages–and they use their social and political connections to hold out far longer than they have any right to. That’s definitely the case in two sectors right now: real estate and higher education.