“The entrance strategy is actually more important than the exit strategy.” — Edward Lampert
Edward Lampert: Background & bio
Edward or Eddie Lampert is the chairman of Sears Holdings Corporation (SHLD) and also the founder and chairman of ESL Investments. After graduating from Yale University, Lambert joined Goldman Sachs as an intern and later joined the company’s Risk Arbitrage department. After working at the company for 3 years (1985-1988), Lampert quit the job to establish ESL Investments in Greenwich. The name of ESL is drawn from Lampert’s initials.
After turning his initial seed money of $28 million into a $ 9 billion hedge fund, Lampert stands out as a young and ambitious investor. His top clients are some of the major players in the business world, including the Dell inc. founder Michael S. Dell, the Tisch family of Loews Corp. (LTR) and the Ziff family.
His focus is so remarkable that he was back to work just within a couple of days after he was kidnapped in 2003. According to Thomas J. Tisch “Eddie is one of the most extraordinary investors of our age, if not the most extraordinary.”
Making a success story out of some of the least likely investments, Eddie Lampert has been able to turn failing and lousy companies into profitable giants.
In his interview with BusinessWeek, Eddie Lampert stated that he wanted to be a role model for the businessmen and show them how a business is run. Truly, Lampert has invested in businesses scarred with financial crisis, as well as management issues.
Edward Lampert: Kidnapping
On Friday, Jan. 10, at about 7:30 P.M., Lampert left his office to meet his wife and mother for dinner at a nearby restaurant. He was anticipating a weekend full of phone calls and meetings — the following Monday was a key deadline for Kmart’s refinancing — but as he walked to his car in the underground parking garage of ESL’s building, four masked men grabbed him.
They pulled a thick hood over his head, shoved him into an SUV, and sped off. An hour later Lampert was sitting on a toilet in a motel bathroom, blindfolded, his hands and feet bound by plastic handcuffs. His abductors told him that they had been hired to kill him. It made no sense, but he wasn’t about to argue. “One thing I was sure of was that I had to tell the truth because they knew everything about me,” Lampert recalls. “They knew where I lived, how much I had paid for my house, who worked at my office, how much I was worth. If I bullshitted them, they’d know it.”
He sat in that bathroom for 39 hours, awaiting who-knew-what. They gave him water and one meal (Popeye’s fried chicken).
When they removed his blindfold so that he could eat, he kept his eyes down, even though they had masks on. “I was respectful,” he says. They’d taken his wallet away but allowed him to hold a passport photo of his 5-month-old son that he’d wedged into his billfold.
Then they demanded that he record a message to his wife, he complied. “I was in God’s hands,” he says. It was later reported that Lampert talked his kidnappers into believing that he would deliver $5 million to them if they let him go.
But the real story is a little different. One of the kidnappers foolishly used Lampert’s credit card to order pizza delivered to a friend’s house. When Lampert heard them talking about it, he saw an opening. Didn’t they realize that the police were on to them now? Only if they released him would they have a chance to get away. Lampert, after all, had never seen them, so he couldn’t ID them. But if they got caught with him as a captive — or harmed him — they would be in terrible trouble. Lampert says he did discuss a payoff with his captors, but nothing was decided on. “Ultimately they realized that it was better to let me go than to kill me,” he says.
At 2 A.M. on Sunday the kidnappers dropped him at the off ramp of exit 3 on I-95. Even then he feared that they would shoot him, but they drove off. He walked a mile to the Greenwich police station. The cops apprehended the culprits within days. Ranging in ages from just 17 to 23, they had used the Internet to research Lampert and buy equipment for their caper. They later pleaded guilty. They are now in prison, and Lampert says he just wants to put the episode behind him.
Edward Lampert: Investment philosophy
Edward Lampert believes in the investment style of “concentrated value”, and this is often focused on the retail sector. His investment style is frequently compared with that of Warren Buffett’s. It is said that Lampert tries to follow Buffett’s footsteps by studying and analyzing his annual shareholder letters and matching them to Buffett’s investment philosophy. He is usually referred to as “the next Warren Buffett”.
Both, Eddie Lampert and Warren Buffett started off as hedge fund managers without the guidance of a senior person or a peer in their respective fields. Furthermore, both the investors found themselves in a position of writing annual shareholder letters, since they took over failing public companies.
However, there are some vast differences as well, particularly in their dealings with the shareholders. Writing about long-term investment plans, the two investors say:
“We will continue to make long-term investments in key areas that may adversely impact short-term results when we believe they will generate attractive long-term returns. In particular, we have significantly grown our Shop Your Way Rewards program, improved our online and mobile platforms, and re-examined our overall technology infrastructure. We believe these investments are an important part of transforming Sears Holdings into a truly integrated retail company, focusing on customers first.” – Edward Lampert
“By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well…. That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.”— Warren Buffett
There have been times when Sears has wavered under Lampert, but overall his record is commendable. In 2003, he rescued the bankrupt Kmart and merged it with Sears thus making Sears Holdings the country’s third largest retailer. However, despite the phenomenal growth in the retail sector, Sears has experienced declining revenue each year and the earnings have been reduced by 84%.
After the 1990s, Lampert became a more active investor and benefited immensely from his investments in AutoZone Inc. (AZO) and AutoNation Inc. (AN). When he purchased AutoZone in 1998, he owned about 30 million of the shares, which was 25% of the outstanding shares. From around $30 in 1998, the price has seen an appreciation of 1797% and the share is now priced at $324. Similarly, his efforts in reconstructing AutoNation added value to the company which has returned about 165%.
Lampert also invested in Wells Fargo and Co. (WFC), which is said to be one of Warren Buffett’s desired stocks.
And just like Buffett, Lampert takes special care with his money. He controls how every dollar in his fund is invested and makes sure all his investments bring the highest returns. Thus, often a time his company has bought back shares on cash rather than increasing capital spending.
His CEOs accept that most of their conversations with Lampert are based on how to best allocate capital for maximum returns.
“He will always want to work through, at a pretty high level of detail, what we are going to spend our money on and what the business benefits will be, Eddie doesn’t waste money — ever.”- Julian C. Day, former Kmart director.
Lampert keeps a firm control at ESL as well. Not even a single penny is invested without his endorsement. Lampert tends to go in intricate details regarding each project to ensure calculated and profitable decisions.
“When an art critic looks at a piece of art, he can talk to you not just about the color and technique but the history and where it fits into art in general,“ says Gavin Abraham, an analyst at ESL during the 1990s “Eddie talks about an investment the same way.”
Although often compared with Warren Buffett, Lampert tends to be more aggressive with his management style. He works his fund with the help of just 15 employees.
Friends attribute Lampert’s success and ambition to his father’s death. Lampert’s father passed away at when he was a mere teenager at 14 years of age. His father was 47 and succumbed to a heart attack as a result of which Edward had to assume the role of the man of the house.
“Eddie really assumed the responsibility, knowing that life had changed and we had to accomplish something by ourselves now,” says his mother, Dolores Lampert.
At all stages of his life, Lampert has tried to work with successful men to increase his knowledge base and learn something. On many occasions he has worked with the former head of Goldman Sachs and Co., Robert E. Rubin.
Furthermore, he has also been associated with the economics Nobel Prize winner James Tobin and the well-known investor Richard Rainwater. Rubin was highly impressed by Lampert’s will and independence to do something out of the box.
When Lampert, 25 at that time, shared his plans of starting his own hedge fund, Rubin argued that Lampert was taking a detrimental step for his career. Rubin recalls “He had a clear-eyed view of the risk he was taking and the likelihood he would succeed; I’d say it worked.”
Edward Lampert: ESL Investments
ESL Investments is a privately owned hedge fund that invests in American public equities. ESL is unique in the sense that it takes huge stakes in a small number of companies and holds them for many years. This is typical of passive investment funds who do not think that active trading can return a decent rate of profits.
According to Lampert, “If we put a product into Sears, we don’t want to have to pull it out in a year, or two years, or three years. We don’t want to do that only to have it yanked away.”
The main objective of ESL is to commit itself to large holdings in companies that have been studied thoroughly by its brokers, which allows it to leverage the full potential of its stock holdings. This of course increases its risk as well, considering that at any given time, the company is likely to hold anywhere between three to fifteen securities.
For any given company, ESL is likely to be holding more than 5% of issued shares. The main strategy of its hedge funds is Event Driven. In particular, ESL specializes in identifying distressed securities and intends to capitalize on them once circumstances around the company are reversed. Another obvious strategy is picking up of securities that are priced less than their intrinsic or fair value.
Since its inception, with $28 million seed money, ESL has witnessed an average return of 29% through to 2012. Because of ESL, Lampert was worth about $3.1 billion by 2012. However, over the past two years, ESL’s performance has deteriorated.
At the end of 2013, Clients of Goldman Sachs Group Inc. who invested about $3.5 billion, asked for their money back in advance of the expiration of the five-year lockup of the investors’ money. The demand for redemptions can be traced to the Sears holding. When Goldman’s clients started to invest, ESL’s largest holding was trading at $120 per share. The stock recently printed a low of $25 per share. Although he has traded in and out of a few dozen stocks since 2007, Mr. Lampert has held onto a handful of core holdings like Sears and the car retailer AutoNation.
Near its peak in 2006, Mr. Lampert’s hedge fund, ESL Investments, managed more than $15 billion. As recently as the end of 2011, it still managed more than $10 billion. But the disclosed total last year was less than $6 billion.
Merging Kmart and Sears
Another great achievement by Eddie Lampert was the merger of Kmart with Sears. While the company was facing bankruptcy in 2002, Lampert bought the controlling stake at $1 billion. He observed that the real estate blocks under the 1500 stores were very valuable. After stabilizing the company, he sold 68 of the company’s stores to Home Depot and Sears.
“Alan, Alwin and I believe these changes will achieve greater clarity in our operating management and align this corporate structure with our vision of Sears Holdings… Our goal is to build one company with multiple ways of connecting with our customers including our various store formats, online offerings, service relations and credit products.” – Edward Lampert
This transaction earned him $850 million, which was almost equal to the amount he paid for all the real estate blocks. Finally, he closed down 300 stores and laid off 34,000 workers for the purpose of cutting costs. Under Lampert’s control, the value of Kmart’s shares increased from $15 in March 2002 to $150 by the mid 2005, although over the past five years ESL’s Sears holding has only damaged the hedge fund’s reputation.
Edward Lampert: Recommended readings
In his letters from Feb. 26, 2009 and Feb 23, 2010, Lampert recommended a few books based on economics. They are as follows:
- The Fatal Conceit: The Errors of Socialism by Friedrich von Hayek
- Intellectuals and Society by Thomas Sowell
- The Essays of Warren Buffett: Lessons for Corporate America, Second Edition (Lampert tried to follow Warren Buffett’s investment philosophy even before he started a hedge fund. This book inspired him and helped him a lot.
- Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher (in an article published in BusinessWeek, Lampert referred to this as one of his favourite books.)
- The Aggressive Conservative Investor by Martin Shunk (At the third Avenue Management Investor Conference 2003, Lampert defined his hedge fund as an “Aggressive Conservative Investor”)
- Good to Great: Why Some Companies Make the Leap and Others Don’t by Jim Collins (in his letter to the shareholders in the year 2006, Lampert states the evolution of Sears into a company that is “Good to Great”.
- Winning by Jack Welch (in his 2006 shareholders’ letter, Lampert uses Jack Welch as an example of long-term excellence at GE.)
- Atlas Shrugged by Ayn Rand (It is said that Lampert handed out audio copies of this book to his investors during an ESL annual dinner)
- The Road to Serfdom: Text and Documents–The Definitive Edition by F.A Hayek (In his 2009 shareholders’ letter, Lampert recommended everyone to read this book and understand the effect of a socialist government on the business environment and economy)
- Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change by Louis V. Gerstner, Jr.
ESL’s top four holdings as of September 2014:
- Sears Holdings Corp (NASDAQ:SHLD)
- Autonation Inc Del AutoNation, Inc. (NYSE:AN)
- Lands End Inc New Lands’ End, Inc. (NASDAQ:LE)
- Sears Hometown And Outlet St (NASDAQ:SHOS)
The Sears and Autonation holdings account for 73% of ESL’s portfolio.
(Note form 13F-HR does not include cash balances.)
- Forbes Profile
- Can Sears be saved? CEO’s REIT plan faces complications
- Saving Sears: Eddie Lampert’s complicated dance
- Sears CEO Cries ‘Transformation’ While Sales Skid, Loss Steepens
- Sears Borrows $400 Million From Lampert’s ESL Investments
- Eddie Lampert’s Sears Strategy Disaster
- Paul Krugman On Eddie Lampert – Business Insider
- Investors In Eddie Lampert’s Hedge Fund Are Jumping Ship
- Crazy SEARS CEO Eddie Lampert Learns Even Cannibal Capitalists Can StarveEddie Lampert Still a Great Investor In Spite of Sears
- Investors, Dismayed by Losses at Sears, Pull Money From Hedge Fund
- Eddie Lampert: The best investor of his generation
- Buffet Vs. Lampert – A Tale of Two Letters
- The Next Warren Buffett?
- Sears Chairman Will Take a Step Back
- Lampert Tells Sears Investors to Remember Eli Manning
- Billionaire Lampert Takes Job at Sears
- Lampert says Sears in strong shape
- Picking likely Buffett successors – Pensions & Investments
- Hedge fund bosses raking in the cash
- Sears, Not Just a Retailer, Is Now Lampert Hedge Fund…
- Crazy Eddie – Forbes.com
- The Next Warren Buffett?
- Sears, Kmart Merge – 2004
- StreetInsider.com – Will Lampert Bail on AutoZone (AZO)?
- Sears, Where America Shops Less – Forbes.com
- Hedge Fund Billionaire Eddie Lampert Buys Netflix, Big Lots