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The Buffett Curse: Any comparisons to Warren Buffett will immediately result in disastrous investment performance. In this case, hedge fund manager Eddie Lampe

by dharmon 10y ago

The Buffett Curse: Any comparisons to Warren Buffett will immediately result in disastrous investment performance. In this case, hedge fund manager Eddie Lampert took control of Sears about 10 years ago, merged it with K-Mart, and 3 years ago installed himself as chairman and CEO. He's been selling off assets left and right to keep it afloat (real estate, Lands End, etc.) Prior to this he had been compared to and called "the new Buffett" due to similar investment styles (if you squint real hard). Since then Sears has lost over 90% of its market value. Yikes. For another example, see Bill Ackman, who has been absolutely slaughtered, and seems to be asking for more. It started almost immediately after Fortune put him on the cover with the slug line "Baby Buffett".

conistonwater 10y ago
Wasn't this also a case of pretty spectacular mismanagement on CEO's part? I remember reading stuff like this: https://www.bloomberg.com/news/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles https://www.bloomberg.com/news/articles/2013-07-11/at-sears-..., it was rather fascinating. It seems from that that it wasn't just a case of overly rosy expectations.
- dharmon 10y ago
  Yeah, definitely. Smart investors with no management or operations experience install capable people as CEO, as Buffett has done on several occasions. Arrogant investors seem to think, "running a business can't be that hard..."
  - huherto 10y ago
    > Arrogant investors seem to think, "running a business can't be that hard..." Running a country can't be that hard...oh my god.
- 2sk21 10y ago
  Indeed - Eddie Lampert seems to be very strongly driven by ideology instead of business.
johnwheeler 10y ago
> For another example, see Bill Ackman... Guy Spier also comes to mind. He won the charity auction to have lunch with Buffett and wrote "Education of a Value Investor." You don't hear as much of him or Mohnish Pabrai after the Horsehead Holdings bankruptcy. [1] http://www.valuewalk.com/2016/09/mohnish-pabrai-horsehead-holdings/ http://www.valuewalk.com/2016/09/mohnish-pabrai-horsehead-ho...
- dharmon 10y ago
  They are currently fighting it out in the courts to not get their equity wiped out by creditors. I actually really like Pabrai, and enjoyed his two books. But I cannot figure out what he was doing in Horsehead. Three strikes: high debt, highly cyclical, commodity product. Any one of those would be a tough sell, but all three? I thought after 2009 he learned his lesson with high debt companies, so I was really surprised to see him at it again. Not only to invest, but putting in such a high % of assets.
  - johnwheeler 10y ago
    I thought I read his thesis had to do with Zinc prices. I like Pabrai too, but I'm so in awe of Buffett, and I can't get over that he turned Pabrai and Spier down for employment then turned around and hired Ted and Todd on the spot at their respective luncheons. I wonder, what did Buffett see that he didn't like in the former? Probably just a stupid bias on my part, but it makes you wonder...
    - dharmon 10y ago
      I think it was similar to his shipping capacity play that made him a lot of money years before, where there was going to be a shortage of production once demand turned. The part I don't get is with the debt load he was essentially betting on timing of a commodity price, and if you are going to do that you might as well just play in futures where the upside on a correct call is higher. The same setup with a lower debt load might make more sense, since there is no timeframe on the cycle turn and you can quietly wait for it (like he did with the shipping company). I don't think Spier and Pabrai were trying to get jobs with him, although it could be they pretend now like they weren't, but they both were running their respective funds at the time. My "relationship" with Buffett is like the proverbial parent / child relationship: first you think they can do anything, then you think they don't know that much, then you realize how much they really knew all along. It doesn't hurt that I made good money following him into IBM early this year after I sat down and tried putting together the pieces for myself. The guy is packing some serious horsepower that I think is underestimated, even given that everyone knows he's super smart.
throwaway5752 10y ago
Timing aside, the namesake for Berkshire Hathaway is actually a pretty striking parallel to Sears Holding and Lampert: My first mistake, of course, was in buying control of Berkshire. Though I knew its business - textile manufacturing - to be unpromising, I was enticed to buy because the price looked cheap. Stock purchases of that kind had proved reasonably rewarding in my early years, though by the time Berkshire came along in 1965 I was becoming aware that the strategy was not ideal. If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit. Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original "bargain" price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre. You might think this principle is obvious, but I had to learn it the hard way - in fact, I had to learn it several times over. Shortly after purchasing Berkshire, I acquired a Baltimore department store, Hochschild Kohn, buying through a company called Diversified Retailing that later merged with Berkshire. I bought at a substantial discount from book value, the people were first-class, and the deal included some extras - unrecorded real estate values and a significant LIFO inventory cushion. How could I miss? So-o-o - three years later I was lucky to sell the business for about what I had paid. After ending our corporate marriage to Hochschild Kohn, I had memories like those of the husband in the country song, "My Wife Ran Away With My Best Friend and I Still Miss Him a Lot." http://www.berkshirehathaway.com/letters/1989.html http://www.berkshirehathaway.com/letters/1989.html
- dharmon 10y ago
  You are generally right, but there is one super key distinction: despite being a "bad" business, Berkshire was throwing of real hard cash, albeit in decreasing amounts. Buffett used that cash to invest in Washington Post and buy See's Candies, among other things. Buffett never let them do any serious reinvestment in the textile business. Sears, on the other hand, has been a cash consumer, not producer. Just look at the FCF numbers from the past 10 years: -2,175 -2,378 -1,657 -1,438 -681 -707 -311 1146 495 977 931 There was some money at the beginning, but not nearly enough to justify a $20B market cap. If you want to be like Buffett, buying a dying business is a terrible place to start. It'd be like someone idolizing Steve Jobs, so they go get a woman pregnant then abandon the offspring.

by dharmon 10y ago

conistonwater 10y ago

Wasn't this also a case of pretty spectacular mismanagement on CEO's part? I remember reading stuff like this: https://www.bloomberg.com/news/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles https://www.bloomberg.com/news/articles/2013-07-11/at-sears-..., it was rather fascinating. It seems from that that it wasn't just a case of overly rosy expectations.

dharmon 10y ago
Yeah, definitely. Smart investors with no management or operations experience install capable people as CEO, as Buffett has done on several occasions. Arrogant investors seem to think, "running a business can't be that hard..."
- huherto 10y ago
  > Arrogant investors seem to think, "running a business can't be that hard..." Running a country can't be that hard...oh my god.
2sk21 10y ago
Indeed - Eddie Lampert seems to be very strongly driven by ideology instead of business.

johnwheeler 10y ago

> For another example, see Bill Ackman... Guy Spier also comes to mind. He won the charity auction to have lunch with Buffett and wrote "Education of a Value Investor." You don't hear as much of him or Mohnish Pabrai after the Horsehead Holdings bankruptcy. [1] http://www.valuewalk.com/2016/09/mohnish-pabrai-horsehead-holdings/ http://www.valuewalk.com/2016/09/mohnish-pabrai-horsehead-ho...

dharmon 10y ago
They are currently fighting it out in the courts to not get their equity wiped out by creditors. I actually really like Pabrai, and enjoyed his two books. But I cannot figure out what he was doing in Horsehead. Three strikes: high debt, highly cyclical, commodity product. Any one of those would be a tough sell, but all three? I thought after 2009 he learned his lesson with high debt companies, so I was really surprised to see him at it again. Not only to invest, but putting in such a high % of assets.
- johnwheeler 10y ago
  I thought I read his thesis had to do with Zinc prices. I like Pabrai too, but I'm so in awe of Buffett, and I can't get over that he turned Pabrai and Spier down for employment then turned around and hired Ted and Todd on the spot at their respective luncheons. I wonder, what did Buffett see that he didn't like in the former? Probably just a stupid bias on my part, but it makes you wonder...
  - dharmon 10y ago
    I think it was similar to his shipping capacity play that made him a lot of money years before, where there was going to be a shortage of production once demand turned. The part I don't get is with the debt load he was essentially betting on timing of a commodity price, and if you are going to do that you might as well just play in futures where the upside on a correct call is higher. The same setup with a lower debt load might make more sense, since there is no timeframe on the cycle turn and you can quietly wait for it (like he did with the shipping company). I don't think Spier and Pabrai were trying to get jobs with him, although it could be they pretend now like they weren't, but they both were running their respective funds at the time. My "relationship" with Buffett is like the proverbial parent / child relationship: first you think they can do anything, then you think they don't know that much, then you realize how much they really knew all along. It doesn't hurt that I made good money following him into IBM early this year after I sat down and tried putting together the pieces for myself. The guy is packing some serious horsepower that I think is underestimated, even given that everyone knows he's super smart.

throwaway5752 10y ago

Timing aside, the namesake for Berkshire Hathaway is actually a pretty striking parallel to Sears Holding and Lampert: My first mistake, of course, was in buying control of Berkshire. Though I knew its business - textile manufacturing - to be unpromising, I was enticed to buy because the price looked cheap. Stock purchases of that kind had proved reasonably rewarding in my early years, though by the time Berkshire came along in 1965 I was becoming aware that the strategy was not ideal. If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit. Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original "bargain" price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre. You might think this principle is obvious, but I had to learn it the hard way - in fact, I had to learn it several times over. Shortly after purchasing Berkshire, I acquired a Baltimore department store, Hochschild Kohn, buying through a company called Diversified Retailing that later merged with Berkshire. I bought at a substantial discount from book value, the people were first-class, and the deal included some extras - unrecorded real estate values and a significant LIFO inventory cushion. How could I miss? So-o-o - three years later I was lucky to sell the business for about what I had paid. After ending our corporate marriage to Hochschild Kohn, I had memories like those of the husband in the country song, "My Wife Ran Away With My Best Friend and I Still Miss Him a Lot." http://www.berkshirehathaway.com/letters/1989.html http://www.berkshirehathaway.com/letters/1989.html

dharmon 10y ago
You are generally right, but there is one super key distinction: despite being a "bad" business, Berkshire was throwing of real hard cash, albeit in decreasing amounts. Buffett used that cash to invest in Washington Post and buy See's Candies, among other things. Buffett never let them do any serious reinvestment in the textile business. Sears, on the other hand, has been a cash consumer, not producer. Just look at the FCF numbers from the past 10 years: -2,175 -2,378 -1,657 -1,438 -681 -707 -311 1146 495 977 931 There was some money at the beginning, but not nearly enough to justify a $20B market cap. If you want to be like Buffett, buying a dying business is a terrible place to start. It'd be like someone idolizing Steve Jobs, so they go get a woman pregnant then abandon the offspring.