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Eddie Lampert: An Olympic High Jumper?

January 05, 2006

By Brian Zen, Enlightened Investor Digest

Can Eddie Lampert jump over the Sears/Kmart seven-foot bar and one day take the torch from his hero Warren Buffett? Nobody knows. But there are some interesting parallels between the two.

Warren Buffett vs. Eddie Lampert

Buffett and Lampert both refuse to talk to Wall Street analysts and provide quarterly earning guidance. Both control about half of their company. Both made a name for themselves while relatively young. Buffett pays himself a symbolic pocket change of $100,000. Lampert goes further by paying himself nothing. (We will soon see the proxy disclosure about his expense reimbursements.) Buffett writes to shareholders yearly. Lampert again goes the extra mile to write to his shareholders quarterly. And both write amazing well.

One difference is that Buffett talks to media occasionally and lectures extensively to various student groups. But Lampert is quite tight lipped. As one of the shrewdest value investors in the world, Lampert rarely talks to the media about his investment philosophies and methods. Fortunately, in his September quarterly letter to shareholders, when expressing uneasy feelings towards the soothsayers and fortune-tellers of the Sears/Kmart merger, he touched upon his investment approach and gave his investors a few lessons:

  • Be a long-term value investor. The key words here are "long-term" and "value".
  • Constantly on the lookout for situations in which the conventional wisdom of the commentators and "experts" is incomplete. Eddie gave his favorite example: The view that Kmart would neither emerge from bankruptcy nor survive its first Christmas as a new company in 2003 - has turned out to be only "conventional" and not at all "wisdom."
  • Be an avid reader of books, newspapers, and magazines.
  • Approach much of what is written and said with an appropriate amount of healthy skepticism. I guess Lampert belongs to the selective contrarian's camp.
  • Be particularly careful with respect to the loudest views, the most widely held views, or the so-called "expert" views.
  • Double check the accuracy and the sources of your data. For many commentators, analysts, and reporters, their success is dependent on the excitement or controversy generated by their articles - not on the accuracy of their writing or of their predictions.
  • Lampert's prescription for investors: "Read broadly, and be appropriately skeptical of the so-called experts." Example: Most pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at JC Penney, missed the emergence of Google, and missed the resurrection of Kmart - until it was abundantly clear that those companies had succeeded.
  • Lampert's advice for managers: "Think about and understand one's business and its strategic and financial characteristics, make decisions based on that understanding, and have the confidence to stay with well-reasoned decisions even in the face of vocal doubters."

One-Foot Bar vs. Seven-Foot Bar

One interesting difference between Buffett and Lampert is perhaps the level of acrobatic difficulty of their respective shows on the stage. Warren Buffett, after reaching the ultimate master level at his game, currently follows the Chinese Taoist philosophy of minimal-effort-for-maximum-results by searching for one-foot bars and stepping over them. On the other hand, Eddie Lampert, while still in the midst of his rise to superstardom, is willing to jump over 7-foot bars.

Obviously, one-foot bars is hard to find in a nation of money mangers and financial analysts. That's perhaps why the younger Lampert started to build up his skills at jumping over the seven-foot bars and jumping into key board seats at sleepy corporation at old line businesses.

It is only natural for a young star to learn at the feet of the master, and then stand up to run on his own. Remember the young Warren? His mentor Graham told him to wait for a market correction. Young Warren did not. His mentor told him to buy below tangible book value. Young Warren bought into high-tech businesses of cables and broadcasting with huge intangibles. His master told him to focus on quantitative measures. Young Warren thrived on qualitative characteristics of people and business.

It will be interesting to see what other new things Eddie Lampert would come up with.

Warren Buffett: "Eddie Is A Very Smart Guy!"

In a recent talk to University of Kansas students, Warren Buffett made some interesting comments about Eddie Lampert. Buffett said that Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would be very difficult. Buffett challenged the students: "Can you think of an example of a retailer that was successfully turned around?"

The Oracle of Omaha further observed that broadcasting is easy; retailing is the other extreme. If you had a network television station 50 years ago, you didn't really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money. But in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day.

At 75, Buffett vividly recalls his experiences with retailing about 40 years ago just like they happened yesterday. Buffett said: "Retailing is like shooting at a moving target. In the past, people didn't like to drive around and go excessive distances to buy things. People would flock to those retailers that were near by. In 1969, we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn't going to be a long-term winner in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn't win. So we sold it around 1970. That store isn't there anymore. It isn't good enough that there were smart people running it."

Will Sears and Kmart Succeed?

Facing a hard ball question about Sears and Kmart from the students, Warren Buffett did a quick-and-dirty analysis of the Sears/Kmart situation:

  • Sears and Kmart have a lot of real estate.
  • They have let go of a bunch of Sears' management (about 500 people) and captured some savings already.
  • Maybe they can combine certain things and increase efficiencies.
  • But they won't be able to compete against Costco's margins. Costco is working on a 10-11% gross margin that is better than the Wal-Mart's and Sams'. In comparison, department stores have 35% gross margins. It's tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won't pick up new ones.
  • If Eddie sees it as impossible, he won't watch it evaporate. But it's a tough hand. How many retailers have really sunk, and then come back? Not many. I can't think of any. Don't bet against the best (Wal-mart and Cosco).
  • We [Berkshire Hathaway] would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn't make any money.

So will Sears/Kmart succeed? Here is the Oracle's answer: "Nobody knows."

Go, Eddie! Fly over that seven-foot bar!

_____________________________

Brian Zen, CFA, PhD, is the founder of Zenway.com Inc., an investment research and advisory firm that publishes Enlightened Investor Digest. Brian appreciates your feedback at: bzen@zenway.com

 


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