Studying the Gurus:Eddie Lampert

Came across an old article about Eddie Lampert and his investment approach.It's a great article so do take the time to read through the entire article

Studying the Sage

If Lampert does turn Kmart into the next Berkshire Hathaway, he could simply follow Buffett's blueprint. Buffett started with an investment fund he founded at age 25, the same as Lampert when he started ESL. Then in 1962, Buffett started to buy shares of the textile company and by the late 1960s he was using the mill's excess cash to invest in other businesses -- first a Nebraska insurance company and then an Illinois bank. By 1970 he had dissolved the fund, selling off its investments and giving the partners a choice of cash or shares in Berkshire Hathaway. Many investors believe that Lampert is poised to do the same: using Kmart to make new investments while keeping ESL for his earlier investments, or alternatively dissolving it at some point by selling its assets.Lampert has carefully studied Buffett for years. He started reading and rereading Buffett's writings while working at Goldman after college. He would analyze Buffett's investments, he says, by "reverse engineering" deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO's annual reports in the couple of years preceding Buffett's initial investment in the 1970s. "Putting myself in his shoes at that time, could I understand why he made the investments?" says Lampert. "That was part of my learning process." In 1989 he flew out to Omaha and met Buffett for 90 minutes, peppering him with questions about his investing philosophy.Like the Sage of Omaha, Lampert targets mature and easily understandable businesses that have strong cash flows. Both focus on a company's ability to generate large amounts of cash over the long haul, so neither is particularly fazed by sharp ups and downs in profits and stock prices. In fact, says ESL President William C. Crowley, "Lampert would rather earn a bumpy 15% [return] than a flat 12%." And just as Buffett progressed from minority stakes, where his influence isn't guaranteed, to majority stakes, where he has control, Lampert is currently following the same path. Kmart marks his first majority play, and Lampert says it is the type of investment he plans for the future. "In a control position, our ability to create value goes up exponentially," he explains.

Link to the entire article

Eddie Lampert on Managing Risk

As investors, risk management is an essential tool.However, the problems of modern portfolio theory and the use of Beta to determine WACC, make us uncomfortable.Beta as a measure of a stock's past volatility does not equate to anything substantial and is a poor indicator of risk.So how does one manage risk? While rereading Lampert's shareholder letter 2006, i came across this interesting paragraph

"Indeed, business is about managing risk. When these risks come in other forms, they are not always accompanied by the same level of detailed disclosure in public filings. Doing business in California will always carry "earthquake risk" and doing apparel business in winter clothing will carry "weather risk." Investors and executives focus on some of these risks and tend to overlook others. If a company’s risk-management process is a robust one, the level of focus will be proportionate to the amount of risk and the probability of the risk occurring, as well as whether or not the risk can be effectively managed. At Sears Holdings, we try to manage risk in an effective way whether it is in our investment decisions, our real estate decisions, or our product line decisions and we are prepared to take risks where we believe the probability of success justifies the investment.We will not always be successful, but if we do a good job of evaluating opportunities and executing on them, we believe that our shareholders will be well rewarded"

Here, Lampert suggests that as investors ,we intend to overlook some risks while focusing on others.So for Lampert, risk management means being prepared for unexpected risks that may appear from nowhere.Another key point is the probability of success needs to be high enough to justify the investment.For Lampert who often buys larges stakes in companies and usually forces management to heavily buyback shares or allocate capital,this means one needs to be conservative with his capital and ensure the probability of success is very high.With the case of Autozone, he forced management to aggressively buy back stock .A share buyback would reward existing shareholders and be an excellent yet conservative way of allocating capital.After all,management is basically increasing the stake of its existing shareholders and not chasing risky acquisitions for growth.Once the stock rebounds, shareholders can then cash out and realise their returns ,provided they had bought it when it was relatively undervalued.What an excellent way to manage risk!

Regards,
Manpreet

Eddie Lampert looking for potential acquistions

In recent years, the takeover of the K-Mart by Eddie Lampert and its merging with Sears later has produced impressive for Lampert's ESL partnership.Now,after several years of laying low,Lampert has made it clear that Sears is looking for potential acquisitions in the coming months.It will interesting to see what lies ahead for this billionaire value investor in the coming months.Here is a short excerpt from the recent shareholder AGM(2007)

"Responding to a shareholder question about his plans for the company's more than $2 billion in cash, Lampert said there are "a variety of options to deploy that."

"What will shake out, especially this year, really is going to depend on what the opportunity set is," he said."

(Excerpted from Yahoo Finance)

Link to the entire article

http://biz.yahoo.com/ap/070504/sears_shareholders.html?.v=1