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Wednesday, June 30, 2010

Charter v Public Schools: Education Reform Now And Hedge Fund Managers

Perhaps you have received your Education Reform Now brochure in the mail. Or, you have attended a charter school rally and heard how awful public schools are, and how all kids need to be in a wonderful charter school, where you can enjoy a perfect education environment (if, it seems from recent data, you are white and academically above average intelligence, or have no Special Needs/IEP).

I'm posting this article so that all of you readers can see the connections that Eva Moskowitz has to private money, and then you can decide on your own about whether or not charter schools are good or bad by reading the articles published in other blogs and websites. (take a look at Charter School Scandals)

Full disclosure: I am no fan of Joe Williams. Six or so years ago Lydia Segal (pictured at right), Joe and I talked about Lydia's book "Battling Corruption In America's Public Schools" at breakfast, and after this I often contacted Joe about doing a story for the Daily News on Principals out of control, kids being harmed, money disappearing. Joe would not do the articles. Then, when it was too late to help the people - parents, students, teachers - who needed their stories to be told, Joe wrote a book, "Cheating Our Kids: How Politics and Greed Ruin Education" (dont pay more than $1.73, if you decide to order this book). It's like being a reporter in a war zone and not reporting the person who shot the wrong guy.

Attack of the hedge-fund managers
by Maisie McAdoo, New York Teacher, Jun 3, 2010

Why do they care about schools? It’s all about money
Who paid for the recent mass mailing of the glossy flier attacking the UFT? In two words: hedge funds.

In the corner of the back page of the flier is the note “Paid for by Education Reform Now” and a Manhattan return address.

Education Reform Now is an arm of Democrats for Education Reform, started by former Daily News education reporter Joe Williams and boasting a board of major hedge-fund managers. Education Reform Now also promotes charter schools, mayoral control of schools and school choice (including vouchers for private and parochial schools) in New York, Michigan, Rhode Island and several other states.

But what they have is a business plan, not an education plan.

Who’s who?
John Petry, a partner at Gotham Capital Management, chairs the board of Education Reform Now. Petry’s Gotham Capital LLC, founded in 1985 with $7 million from junk-bond king Michael Milken, is a privately owned hedge fund that manages investments for wealthy clients, investing in equities as well as spin-offs, restructuring and takeovers.

The other board members are Sidney Hawkins Gargiulo of Hawkshaw Capital, founded in 2002 by a former Lehman Brothers analyst; John Sabat of SAC Capital, a Stamford, Conn.-based private investment firm; and Brian Zied of Maverick Capital, a Dallas-based investment advisor managing hedge funds and private investment funds.

Tracing their philanthropic interests leads quickly to New York City’s charter schools. Petry and Gotham Capital founder Joel Greenblatt fund Eva Moskowitz’s Harlem Success Charter Network and paid her $371,000 salary in her startup year. Goldblatt is chairman of Harlem Success’ board as well as chair of two of her individual schools. Petry sits on the boards of the Harlem Success Charter Network plus two schools. SAC Capital’s Sabat is a board member of two Harlem Success schools, Hawkshaw’s Gargiulo is a member of another, and Maverick Capital founder Steve Galbraith chairs yet another. [Greenblatt worked with J.Ezra Merkin at Gotham Captial, 1985-1988]

Education Reform Now spearheaded a $2 million media campaign this spring to try to lift the New York State charter cap without reforms. Its chapter in Milwaukee is lobbying for a mayoral takeover of the Milwaukee schools and for the survival of that city’s school voucher program. And the group recently campaigned for a slate of school board candidates in Buffalo pushing a charter school agenda.

The money trail
The latest public filing available for Education Reform Now shows it received contributions and grants of $1.3 million in 2008, up from $173,500 the year before. (Without doubt, the level of donations has skyrocketed since then.) The filing does not list the group’s benefactors, but one is the Robertson Foundation, the private foundation of Julian Robertson, the founder of the Tiger Management hedge fund.

The Robertson Foundation, which has assets in excess of $1 billion, gave away $71 million in 2008, including $250,000 to Education Reform Now, $1 million to the Achievement First charter network, $2 million to KIPP charters, $3 million to the New York City Center for Charter School Excellence, $7.1 million to Teach for America and $200,000 to the New Teacher Project, along with large grants to conservative churches.

In the process, hedge fund executives have become, in the words of The New York Times, “perhaps the first significant political counterweight” to teacher unions.

Why do they care?
Hedge funds follow different investment strategies, but one thing that unites them is the absence of virtually any public information about them. Hedge funds are open only to select investors who can put up sizeable funds, and they are exempt from many financial regulations. The latest best guess is that they manage more than $2 trillion in assets exclusively for wealthy investors.

What gets hedge fund managers involved in charter schools and school reform? “Charter schools appeal to the maverick instincts of many who run hedge funds,” speculates one blog post on The New York Times website.

By tapping into this instinct, Williams has helped make charters the “hot cause,” in his words, for hedge funds. He has harnessed their anti-regulatory instincts to oppose teacher unions and advocate for private management of public schools.

The hedge funds are perverting charter schools for the purpose of attempting to privatize public education. There is already close to $2 billion in public funds in the charter school system in New York State, and the hedge funds are angling to control a chunk of that money.

The political agenda
Democrats for Education Reform is part of a Wall Street effort to influence the Democratic Party. Williams and his colleagues see trade unions, a traditional backbone of the party and defender of workers’ rights, as bureaucratic stumbling blocks to the privatizing reforms they advocate.

What’s wrong with the picture is that it excludes most teachers’ views about how to fix public schools.

Comments on the petition website of Education Reform Now didn’t exactly parrot its suggested message. One person replied, “Workers organize themselves to protect themselves from folks like you. Playing politics with teachers is what hurts the kids, not seniority.” And another: “Please, even I know it takes years to become a good teacher. Removing experienced teachers so that you can save inexpensive teachers is not going to help.”

Maybe Education Reform Now could direct some hedge fund money to prevent layoffs instead of exploiting teachers’ fears about losing their jobs to further its own political agenda.

Here's more on Joel Greenblatt:

The Joel Greenblatt Way : Grow Rich "Not Trying Very Hard"
By Brian Zen,

Would you like to earn 30% a year and turn $11,000 into $1 million in 17 years while "not trying very hard"?

If you would, I urge you to start by making a mere $20 purchase of "The Little Book That Beats The Market" by Joel Greenblatt. In the book, you will find a "magic formula" and the operating steps towards your millions.

The beauty of the magic formula is that it can be summarized in one sentence. Are you ready?

The Formula Is Simple

The magic formula says: Stick to buying "good" companies (those with a high return on tangible capital) at "cheap" prices (when you can get a high earnings yield).

That's it! The keyword here is "stick to". Based on an extensive study by Greenblatt, a dummy computer, armed with the magic formula, can more than double the market's average annual return, with very low risk and volatility. And the best of all is that it can be accomplished by "not trying very hard", as Greenblatt says, if you use his website: to pick what to buy. As to when to sell, the harder half of the investing game, Greenblatt suggested a one-year holding period as a mechanical selling rule. The idea is to remove the uncertainties and difficulties involved with selling. "I am terrible at selling myself," reflected Greenblatt, "For the formula, both the one-year and the two-year holding periods worked quite well. I picked the one year period. I call it the 'Not-Trying-Very-Hard' Model. (Audience laughed.) My mantra is to keep things simple."

The magic formula elegantly captured the essence of value investing with an astounding back-tested performance record, which is drawing huge crowds into bookstores all over the country. Even Warren Buffett joined the party recently to congratulate Greenblatt on his work. "Terrific book," Buffett said, "Buying great businesses at cheap prices. Doesn't it seem so simple?"

Simple? Yes. Easy? No. Imagine a group of smokers gathering around a Zen Master trying to learn the oriental secrets of inner peace and longevity. The Master said, "By simply following my teaching, I can add 10 years to your life span with a guarantee!" The smokers opened their eyes to the size of quarter dollar coins. The Master said, "I distilled my formula into two words. Are you listening? Two words: Stop smoking!" Immediately, the gleam in the smokers' eyes started to fade away.

The magic formula for wealth is just like the magic formula for health above, "simple but not easy," as Warren Buffett puts it.

The Execution Is Hard

Here comes the bad news. It is difficult for emotional human beings to execute a strict formula with patience and persistence. In a recent talk at a New York Barnes & Noble bookstore, Joel Greenblatt warned a crowd of about 300 fans seeking his autograph, "The magic formula is not that magic because it can underperform for a number of years in a row. Most people quit something that doesn't work for one or two years. It is tough to stick with a formula. And even if you would stick with it, you customers won't, especially after it failed to work for two years. Not many professionals and individuals can pull it off."

Yes, the results of the formula are amazing over a long period of time. But...there are still 1, 2 and even 3 year periods when the formula doesn't work at all! Most people just don't have the patience or the discipline to stick to it through the tough periods. And for those who do, the reward over the long term could be substantial.

Why Disclose The Secrets?

"Why disclose your internal secret formula that worked so well? Will it continue to work after the book hits the best-selling list?" an investor asked.

Joel Greenblatt answered he is not worried at all that, if the secret is disclosed, it would lose the magic. In fact, he is still making a good living using the strategies discussed in his first book, "You Can Be A Stock Market Genius". Besides, strategies based on ROA, ROE, enterprise value, and low P/E have already been out there for centuries. Yet they continue to work well. So will the magic formula.

More importantly, to use the magic formula, investors need faith, patience and discipline. In other words, the "real" secret is not in the book itself. The real secret lies in the execution of it. The key question here is: How can an average person successfully execute a simple strategy by cultivating patience and discipline? It is a question that puzzled the oriental Zen Masters for thousands of years. As a hobby, I run research workshops at discussing self-cultivation techniques for investors. I know first hand how hard it is to make patience and discipline as widespread as gambling and day trading.

Cheap Alone Works

Numerous studies in the past proved that buying cheap works. Joel Greenblatt has found the buying the good ones among the cheap is even better. After being Buffettized, Greenblatt now prefers the good over the cheap. But interestingly, a study by DrKW Marcro Research found that cheap alone works just as well. DrKW's study shows that the return on tangible capital (ROTC) measure of goodness seems to bring little to the party in the UK and the USA. In all the regions except Japan, the returns are higher by simply using a pure earnings yield (EY) filter instead of a combined ranking of cheapness and goodness. In general, DrKW finds that it pays to buy on the cheap. Just as Greenblatt pointed out, the good old low P/E strategy continues to work after the secret was disclosed a long time ago.

While return on tangible capital (ROTC) didn't seem to add much value to performance when the cheapness was ranked using EBIT/EV, the return on assets (ROA) measure of goodness did add a lot when the earnings yield (EY=E/P) was used as a ranking of cheapness. The DrKW study added credibility to Greenblatt's finding that EBIT/EV is a better measure than E/P.

In fact, Benjamin Graham's classic cigar butt strategy places less emphasis on the measures of goodness and quality. Let's face it, finding a good company on the cheap is not easy these days after the run away success of the Warren Buffett way. So superinvestors like Eddie Lampert switched to a strategy to buy a bad business (Kmart) at a dirt cheap price and get involved personally.

Cheap And Good Works Better

On the other hand, DrKW study confirmed Greenblatt's finding that the ROTC measure of goodness prevented the massive underperformance that occurred with the pure cheap strategy and reduced portfolio volatility to a certain extent.

In his book, Greenblatt suggests that a strategy using a standard earnings yield (E/P) and return on assets (ROA) should give results that closely mimic those of his own preferred formula. DrKW's study has found that, in general, the E/P and ROA strategy works with only slightly lower returns than the magic formula. This confirms that cheap and good is quite robust for the long term.

In his talk at Barnes & Noble, Joel Greenblatt mentioned that return on equity (ROE) and return on assets (ROA) also worked very well based on his study. But he thinks return on tangible capital employed is the best measure of goodness, which is confirmed by the DrKW study.

The bottom line is, if you buy good companies, good things tend happen more frequently.

You Don't Need Spreadsheets To Make Money

When I asked him about whether he uses spreadsheet models to value businesses. Mr. Greenblatt answered, "I really don't know how to build spreadsheet models. But the good news is that you don't need spreadsheets to make money." This echoes what Warren Buffett says that you don't even need a calculator to value a business. To Joel Greenblatt, using valuation spreadsheets might mean something on the border of "trying too hard".

I also asked Mr. Greenblatt about his filing practices. He said: "I don't keep a specific filling system for the stocks I follow. But analysts at Gotham Capital do."
Unlike Buffett who keeps physical copies of annual reports of the companies he tracks, Greenblatt doesn't keep the old annual reports.

"The most important thing is to know the value of a business and buy a lot cheaper," said Greenblatt. It seems there are many ways to value a business. Greenblatt seems to be waiting for something to hit him hard as a real bargain rather than keeping precise paper trails of valuation numbers.

Among all the various types of superinvestors around the world, there are those who focus on what is simple and basic. With great admiration, I call them the Zenway Superinvestors who stick to simple and ancient mental math and apply common sense with basic Zen principles of focus, patience and self discipline, wasting the least amount of energy and motion in nonessential activities.

Would Institutions Use The Formula?

Some suspect that the magic formula may not tango with the money management institutions. If you are a client of a hedge fund, would you be willing to pay an annual management fee of 2% on your assets plus 25% of the return to hire a hedge fund manager hitting a few computer buttons all day long following a simple formula without doing much independent thinking? This reason alone would probably prevent a widespread adoption of the magic formula investing by large institutions. How can the institutional money managers afford to let you know that they are using a dummy computer to run your money?

In response to a question about whether Gotham Capital plans to launch a mutual fund employing the magic formula, Joel Greenblatt answered: "If the magic formula fund is from me, not at the moment. If it is from someone else, I am not aware of it."

Joel Greenblatt further commented, "The Little Book was written for people who don't know how to value a business. In that regard, a good analyst can add value to the formula."

Superinvestor Digest (SiD) is a research-driven newsletter focused on generating and recognizing the best ideas from the best investors around the world. Unlike interview-driven newsletters, SiD works to distill and synthesize the vast library of value investing into a set of practices, processes, and frameworks that are easier to implement. By cutting out the fat, SiD lays out the best of the best in practical investment analysis to save valuable time for the future generations of superinvestors. For more information, please visit:

Joe Williams went to The Milwaukee Sentinal after leaving New York City, and started a push for Mayoral control there, leaving Katy Venskus to run things when he left:

Who’s Pulling the MPS Takeover Strings?
Wall Street hedge fund managers find a toehold in Wisconsin

By Lisa Kaiser,, Feb. 9, 2010

National pro-privatization organizations led by former Milwaukee Journal Sentinel education reporter Joe Williams and backed by Wall Street hedge fund managers are emerging as a driving force behind the mayoral takeover of the Milwaukee Public Schools (MPS).

Williams is the executive director of the affiliated groups named Democrats for Education Reform (DFER) and Education Reform Now (ERN), based in New York City. ERN has a nine-month-old chapter in Wisconsin, and DFER has branches in Wisconsin, Colorado, Michigan, Missouri and New Jersey.
Katy Venskus
The Wisconsin state director of both groups, Katy Venskus, has been lobbying in support of the pro-mayoral takeover Senate Bill 405, authored by state Sen. Lena Taylor and state Rep. Pedro Colon.

Venskus also has organized a group of Milwaukee business leaders—including Julia Taylor of the Greater Milwaukee Committee, Tim Sheehy of the Metropolitan Milwaukee Association of Commerce and Tim Sullivan of Bucyrus International—to push for a mayor-appointed superintendent of MPS with enhanced executive powers.

But behind the public lobbying is a national network of pro-privatization elites working to radically change—some would say destroy—public education as we know it. While the pro-privatizers traditionally have been conservative Republicans and religious school supporters who back taxpayer-funded voucher schools, this group of pro-privatizers is made up mainly of conservative Democrats who see an enhanced role for the free market in public education in the form of vouchers, charter schools and mayor-led districts.

Teacher Bob Peterson, an editor of Rethinking Schools and a leader in the 28-member Coalition to Stop the MPS Takeover, said it’s “really frightening” that the pro-privatization forces have gained power within the Democratic Party.

“Democrats for Education Reform obviously have lined up with what I would call a market approach to solving social problems,” Peterson said. “As a teacher, I know that the marketplace hasn’t treated my kids very well in terms of their parents’ jobs and housing and health care. For me to think that the marketplace is going to have these solutions for education—I’m extremely skeptical.”

Milwaukee state Rep. Tamara Grigsby, who with state Sen. Spencer Coggs has authored an alternative MPS reform bill, said she is concerned that groups such as DFER and ERN are putting private interests ahead of the public good.

“Unfortunately, these so-called education reform groups are simply a veiled attempt at continuing the privatization of public education in Milwaukee,” Grigsby said. “In truth, these groups have spent more time talking about the ‘corporate role in education,’ rather than ways to improve public education itself.”

Wall Street’s Link to Education Reforms

While Wisconsinites may not be aware of the Wall Street link to a local issue like mayoral control of MPS, the New York press has begun to examine the links between hedge fund managers and Williams’ groups.

The boards of directors of both DFER and ERN are flush with Wall Street hedge fund managers who are affiliated with the New York charter school movement.

The four-person Education Reform Now board is made up of businessmen from the hedge funds Hawkshaw Capital, Gotham Capital, SAC Capital and Maverick Capital.

The board of Democrats for Education Reform also shows links between the charter school movement and “hedge fund heavies,” as TheNew York Times put it. Five of the seven board members are investors who serve on the boards of charter schools in New York. One of the charter schools, KIPP Academy, is a national network of 82 public schools in 19 states. The majority of DFER’s PAC donors are private investors.

As Williams gushed about charter schools to The New York Times, “If you’re at a hedge fund, this is definitely the hot cause.”

Lobbying for Mayoral Takeover and Voucher Schools

But Williams’ hedge-fund-friendly groups aren’t just focused on New York charter schools and the Mayor Michael Bloomberg-led public schools. The groups also are involved in the push to change the governance of MPS and the survival of the taxpayer-backed school voucher program.

Lobbyist Venskus, the Wisconsin state director of Education Reform Now Advocacy and the Democrats for Education Reform Wisconsin, is a former staffer to pro-voucher state Sen. Jeff Plale (D-South Milwaukee). Venskus is based in Oconomowoc and says she splits her time between Milwaukee and Madison.

“We don’t actually have an office,” Venskus said. “It’s just me right now.”

Indeed—its Dec. 16, 2009, letter to legislators backing the pro-takeover bill authored by state Sen. Lena Taylor and state Rep. Pedro Colon, features no address or phone number, just the ERN logo. Venskus herself signed the letter, identifying herself as “Democrats for Education Reform Wisconsin” without disclosing that she is a paid lobbyist for ERN, which sent the letter.

But ERN has also gotten involved in voucher school reforms. Prior to its efforts to build support for the takeover, ERN lobbied on the portions of the state budget that deal with voucher and charter schools. ERN spent $30,600 on those efforts, according to the GAB’s Web site, representing 222 hours of work on the matter. Venskus was also employed by Susan Mitchell’s pro-voucher organization, School Choice Wisconsin, to work on voucher and charter issues in the budget.

Venskus said that ERN “worked closely” with Marquette University’s Howard Fuller on the budget items. (Voucher champion Fuller has donated to the Democrats for Education Reform PAC, and serves on the board of the Education Equality Project with ex-Milwaukeean Williams.)

Stop the MPS Takeover’s Peterson said he had expected the voucher supporters to back the mayoral takeover.

“It’s clear that the voucher people are not interested in a democratically elected school board,” Peterson said. “They know that the majority sentiment in the city is for supporting the public schools. People are critical of public schools, but they know that it’s an established institution that can serve kids and there’s some public accountability.”

Rep. Grigsby was skeptical of ERN’s true motivations.

“The same special interests lobbying for Education Reform Now are those with strong ties to School Choice Wisconsin and MMAC,” she said. “I do not mean to paint all voucher advocates with the same brush, but if improving Milwaukee Public Schools was such a priority, then they should have worked with those of us committed to doing just that in the state budget. Instead, these groups were completely silent on MPS until the potential mayoral takeover became an issue.”

More Charters In the City?

Venskus said that the ERN Milwaukee coalition that signed the December letter to legislators has not taken a stand on issues such as charters and vouchers, although the national organization supports them.

“I do think there is a possibility to increase the number of high-quality charters in the city of Milwaukee with the governance change,” Venskus said. “One of the things we hope will happen is that the city will get more aggressive about seeking top-notch charter operators, finding them locally, but also recruiting from the national operators who do a good job. There are lots of folks who have looked at coming to Wisconsin, but our charter climate, particularly for independent charters, is not terribly welcoming.”

When asked if the charter allies on the board of DFER would have a financial stake in a mayoral takeover of MPS, Venskus responded, “It’s sort of an extrapolation to get there…That’s not why we’re pursuing it.”

Venskus said she can’t predict how the competing reform measures will fare in the state Legislature.

“If we can get everyone to get off of their political soapboxes and get in a room and figure out how to do this, I think we can get something done,” Venskus said.

And is Venskus herself on a soapbox?

“Umm… I’d rather not try to answer that,” she said.