Eddie Lampert ... just like me?
I don't want to pile on the Sears Holdings boo-fest that's happening across all financial media this morning -- but I thought I'd share a few thoughts I had about Eddie Lampert and what I think are some mistakes he might have made ... mistakes that are certainly similar to the kinds of things individual investors, myself included, do to sabotage themselves every day.
What we have seen from Sears Holdings (SHLD), Eddie Lampert's primary holding and the stock that was supposed to be his investment vehicle as he built a Warren Buffett-like empire, has been nothing short of dismal. The shares are now about 50% below the high that they hit back in May, primarily because the actual Sears and Kmart stores are doing terribly -- weak sales, weak earnings, and, frankly, stores that no one could be excited about visiting.
But you've already heard that from pundits across the globe today already -- what I was thinking about was how Eddie Lampert's experience can illuminate some of the problems that individual investors often have, problems deeply rooted in our psychology.
There are two things that I think have been significant about the Sears Holdings story since Eddie Lampert got on board. Certainly, he almost immediately increased the value of the company dramatically by harvesting the value of the real estate below the Sears and Kmart stores, and no one can take that away from him.
But in terms of operating the company, beyond that first burst of value creation, there are two things that I think are significant.
The first, is that Eddie Lampert didn't just buy Sears because he thought it had undervalued real estate, harvest that value, and move on. He thought he could turn around the company itself.
That, to me, is a bit of a warning sign. It strikes me that this is the same kind of problem that individual investors often have, they assume that their skills and expertise in one area mean that they are naturally going to be skilled and expert investors.
What do I mean? Well, Eddie Lampert is, even given this current problem at Sears, clearly a brilliant value investor. He knows how to identify bargains, he knows how to use financial engineering of all sorts to harvest value, he knows how to get great returns on the public and private markets.
Does that mean he's a guy who can turn around a struggling retail giant? That's very much still an open question.
I've made similar kinds of mistakes more than once myself -- often times after I have an experience that I think validates my investing acumen, I have come across tiny stocks that seem brilliantly positioned, in areas where I have just enough knowledge to get myself in trouble, and I've invested in them. Often, it hasn't worked out, but I find myself buying those shares -- to psychoanalyze myself just a little -- because I get puffed up by a successful trade or investment and think, "I'm brilliant! If I like this new stock it must be great!"
I'm not saying that Eddie Lampert is nearly as swayed by emotion as the typical investor, or that he's as much of an idiot as I've proven to be at times ... but it continues to look to me like his belief that he could bring any kind of operating savvy to Sears, and manage the stores in a different way without worrying about standard metrics like same store sales growth, might have been a bit of hubris. He's a brilliant guy, by all accounts a strong-willed guy who has been able to bend many situations to his will -- he negotiated his own release from kidnappers, for crying out loud -- but that doesn't necessarily mean that his ideas for managing a retail dinosaur are going to work.
This psychological problem in individual investors has generally been described as "overconfidence" -- it's possible that other issues are coming into play for Eddie Lampert as well, like "cognitive dissonance," which as I think of it is the inability to process conflicting information -- in this case, his close relationship with Sears, his heavy investment in the company and it's future, and the confidence that he has the right plan makes him unable to see the skeletons of Montgomery Ward, Jamesway or Ames and realize how difficult (I'd say "doomed") his challenge is, especially with a weakening consumer market.
The other significant psychological barrier that Lampert seems to me to be running into, and again it's one that's quite common for me, is simple obstinacy. This is related a bit to cognitive dissonance, in that you want to stay on the same track with what you feel should be working, and you ignore warning signs that you're going the wrong way.
In my case, this would be akin doubling down on falling stocks because I still keep in my head the original conviction I had that they would be excellent investments -- one example of this is Chico's (CHS), I bought shares ages ago, at much higher prices, and averaged down a few times because I believed that the problems they were having were temporary. If so, they were "long term" temporary and they continue to worsen -- so in my case, I built an image of Chico's in my mind that said it was a strong grower for the long term ... and even though that growth case started breaking down, with plenty of evidence for that breakdown coming out every quarter, or sometimes every month, I kept putting more in. Ooops. Now I'm stuck with the evidence of my mistake in my portfolio every day.
When we talk about Sears and Eddie Lampert, I wonder whether something similar is coming into play, particularly with his aggressive share buybacks --all of which, in the past year, have clearly now been very badly timed. While Sears has been doing badly by all traditional metrics, it has been generating some very good cash flow ... and one of the things that Lampert was supposed to bring to the table was an ability to reinvest that cash flow into much better growth opportunities. That's what made his running Sears a great idea, his ability to allocate cash flow for better long term results.
And that's what made people say that he would be the "next Warren Buffett" or that Sears Holdings would be the "next Berkshire Hathaway." Looking back on his history, it's clear that Warren is an excellent allocator of capital and a great investor, but there isn't much evidence that he is great at running a textile mill (which is what Berkshire was when he bought it). His brilliance was not his ability to turn around a dinosaur in a dying industry, it was to (eventually) realize that the textile business was dying, harvest as much cash from it as he could, and move that money into something much more valuable -- in his case, insurance companies.
And this is where I really have a problem with Sears and the current Eddie Lampert plan, at least as I interpret it. While their recent offer to buy Restoration Hardware is intriguing, the fact remains that, so far, all of Sears' excess cash has been reinvested in Sears shares through very aggressive stock buybacks. And that investment by Lampert has been a massive money loser over the past year as Sears shares have crumbled.
So, does he really have a plan to really harvest the value of Sears, or is he continuing obstinately to believe that he can restore it to it's former glory as the leading retailer in the country? Or is it something in between? I'd be happy to hire him to chop up a dying firm and get the most money possible from it, but I'd be very reluctant to hire him to turn around a complex operating business -- even experts in the retail turnaround field, like Julian Day (who incidentally made his reputation at Kmart, now a part of Sears Holdings) don't necessarily find fast or certain success in doing this every time, and in Day's case the jury is still out on Radio Shack after about a year and a half of his turnaround leadership.
I find it refreshing that Eddie Lampert seems, at least on the surface, to face some of the same psychological barriers as I do in investing -- and I hope that I can think of the plight of Sears the next time I'm talking myself into doing something foolish in a situation that I don't fully understand.
Just to close this out on a friendlier note, it is very possible that the Eddie Lampert brilliance is poised inside the moldering shell of Sears, just waiting to pounce out. I don't know what their plans are, or how they will do in the future -- and I do understand that as a long term investor in a very short term world there are going to be times that Lampert looks foolish and takes unwarranted criticism, just as Warren Buffett has on many times when he's at least temporarily on the wrong side of a trend (as with his USG purchases most recently). I might be guilty of that here.
Value investors and contrarians are often portrayed as foolish by the investing punditocracy because of the short term movements of their portfolio as they try to envision a success that may be five or ten years away, so what look like mistakes might appear better in the future. For the sake of the investors who put their faith in Eddie Lampert to built the next great value investing empire, I certainly hope that's the case here.
full disclosure: I do own shares of CHS as of this writing (unfortunately), but not of any other stock mentioned.
What we have seen from Sears Holdings (SHLD), Eddie Lampert's primary holding and the stock that was supposed to be his investment vehicle as he built a Warren Buffett-like empire, has been nothing short of dismal. The shares are now about 50% below the high that they hit back in May, primarily because the actual Sears and Kmart stores are doing terribly -- weak sales, weak earnings, and, frankly, stores that no one could be excited about visiting.
But you've already heard that from pundits across the globe today already -- what I was thinking about was how Eddie Lampert's experience can illuminate some of the problems that individual investors often have, problems deeply rooted in our psychology.
There are two things that I think have been significant about the Sears Holdings story since Eddie Lampert got on board. Certainly, he almost immediately increased the value of the company dramatically by harvesting the value of the real estate below the Sears and Kmart stores, and no one can take that away from him.
But in terms of operating the company, beyond that first burst of value creation, there are two things that I think are significant.
The first, is that Eddie Lampert didn't just buy Sears because he thought it had undervalued real estate, harvest that value, and move on. He thought he could turn around the company itself.
That, to me, is a bit of a warning sign. It strikes me that this is the same kind of problem that individual investors often have, they assume that their skills and expertise in one area mean that they are naturally going to be skilled and expert investors.
What do I mean? Well, Eddie Lampert is, even given this current problem at Sears, clearly a brilliant value investor. He knows how to identify bargains, he knows how to use financial engineering of all sorts to harvest value, he knows how to get great returns on the public and private markets.
Does that mean he's a guy who can turn around a struggling retail giant? That's very much still an open question.
I've made similar kinds of mistakes more than once myself -- often times after I have an experience that I think validates my investing acumen, I have come across tiny stocks that seem brilliantly positioned, in areas where I have just enough knowledge to get myself in trouble, and I've invested in them. Often, it hasn't worked out, but I find myself buying those shares -- to psychoanalyze myself just a little -- because I get puffed up by a successful trade or investment and think, "I'm brilliant! If I like this new stock it must be great!"
I'm not saying that Eddie Lampert is nearly as swayed by emotion as the typical investor, or that he's as much of an idiot as I've proven to be at times ... but it continues to look to me like his belief that he could bring any kind of operating savvy to Sears, and manage the stores in a different way without worrying about standard metrics like same store sales growth, might have been a bit of hubris. He's a brilliant guy, by all accounts a strong-willed guy who has been able to bend many situations to his will -- he negotiated his own release from kidnappers, for crying out loud -- but that doesn't necessarily mean that his ideas for managing a retail dinosaur are going to work.
This psychological problem in individual investors has generally been described as "overconfidence" -- it's possible that other issues are coming into play for Eddie Lampert as well, like "cognitive dissonance," which as I think of it is the inability to process conflicting information -- in this case, his close relationship with Sears, his heavy investment in the company and it's future, and the confidence that he has the right plan makes him unable to see the skeletons of Montgomery Ward, Jamesway or Ames and realize how difficult (I'd say "doomed") his challenge is, especially with a weakening consumer market.
The other significant psychological barrier that Lampert seems to me to be running into, and again it's one that's quite common for me, is simple obstinacy. This is related a bit to cognitive dissonance, in that you want to stay on the same track with what you feel should be working, and you ignore warning signs that you're going the wrong way.
In my case, this would be akin doubling down on falling stocks because I still keep in my head the original conviction I had that they would be excellent investments -- one example of this is Chico's (CHS), I bought shares ages ago, at much higher prices, and averaged down a few times because I believed that the problems they were having were temporary. If so, they were "long term" temporary and they continue to worsen -- so in my case, I built an image of Chico's in my mind that said it was a strong grower for the long term ... and even though that growth case started breaking down, with plenty of evidence for that breakdown coming out every quarter, or sometimes every month, I kept putting more in. Ooops. Now I'm stuck with the evidence of my mistake in my portfolio every day.
When we talk about Sears and Eddie Lampert, I wonder whether something similar is coming into play, particularly with his aggressive share buybacks --all of which, in the past year, have clearly now been very badly timed. While Sears has been doing badly by all traditional metrics, it has been generating some very good cash flow ... and one of the things that Lampert was supposed to bring to the table was an ability to reinvest that cash flow into much better growth opportunities. That's what made his running Sears a great idea, his ability to allocate cash flow for better long term results.
And that's what made people say that he would be the "next Warren Buffett" or that Sears Holdings would be the "next Berkshire Hathaway." Looking back on his history, it's clear that Warren is an excellent allocator of capital and a great investor, but there isn't much evidence that he is great at running a textile mill (which is what Berkshire was when he bought it). His brilliance was not his ability to turn around a dinosaur in a dying industry, it was to (eventually) realize that the textile business was dying, harvest as much cash from it as he could, and move that money into something much more valuable -- in his case, insurance companies.
And this is where I really have a problem with Sears and the current Eddie Lampert plan, at least as I interpret it. While their recent offer to buy Restoration Hardware is intriguing, the fact remains that, so far, all of Sears' excess cash has been reinvested in Sears shares through very aggressive stock buybacks. And that investment by Lampert has been a massive money loser over the past year as Sears shares have crumbled.
So, does he really have a plan to really harvest the value of Sears, or is he continuing obstinately to believe that he can restore it to it's former glory as the leading retailer in the country? Or is it something in between? I'd be happy to hire him to chop up a dying firm and get the most money possible from it, but I'd be very reluctant to hire him to turn around a complex operating business -- even experts in the retail turnaround field, like Julian Day (who incidentally made his reputation at Kmart, now a part of Sears Holdings) don't necessarily find fast or certain success in doing this every time, and in Day's case the jury is still out on Radio Shack after about a year and a half of his turnaround leadership.
I find it refreshing that Eddie Lampert seems, at least on the surface, to face some of the same psychological barriers as I do in investing -- and I hope that I can think of the plight of Sears the next time I'm talking myself into doing something foolish in a situation that I don't fully understand.
Just to close this out on a friendlier note, it is very possible that the Eddie Lampert brilliance is poised inside the moldering shell of Sears, just waiting to pounce out. I don't know what their plans are, or how they will do in the future -- and I do understand that as a long term investor in a very short term world there are going to be times that Lampert looks foolish and takes unwarranted criticism, just as Warren Buffett has on many times when he's at least temporarily on the wrong side of a trend (as with his USG purchases most recently). I might be guilty of that here.
Value investors and contrarians are often portrayed as foolish by the investing punditocracy because of the short term movements of their portfolio as they try to envision a success that may be five or ten years away, so what look like mistakes might appear better in the future. For the sake of the investors who put their faith in Eddie Lampert to built the next great value investing empire, I certainly hope that's the case here.
full disclosure: I do own shares of CHS as of this writing (unfortunately), but not of any other stock mentioned.
Labels: SHLD
This article posted by One Guy @ 11/29/2007 09:55:00 AM 5 comments
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