NY Times 2002 Piece on Lampert

This is interesting. Thanks to “Davidson” for emailing the article. Sorry but do not have original link to the article on Sears Holdings (SHLD) Chairman Eddie Lampert.

Personal Business; Big Returns, Minus the Pleasantries

By GERALDINE FABRIKANT

Published: February 17, 2002

HE is known as secretive, controlling and so impatient for success and obsessed with work that some who know him say he takes little note of people unless he needs them.

Warm and fuzzy Edward S. Lampert is not. But that has not seemed to matter. Mr. Lampert, a 39-year-old money manager, has scored an extraordinary 14-year record of value investing, with an average annual return of 24.5 percent. The 2001 performance of the ESL Partnerships, a group of hedge funds he controls, was particularly stunning: it soared 66 percent as the Standard & Poor’s 500-stock index sank 13 percent. Even after the typically high hedge fund fees, his investors had a 53 percent return.

He has attracted a host of superwealthy clients over the last decade, including David Geffen, the media mogul; Thomas J. Tisch, a son of Laurence Tisch, the co-chairman of the Loews Corporation; Michael S. Dell of Dell Computer; and Ziff Brothers Investments, the principals of which are the sons of the publisher William B. Ziff Jr.

”Eddie is probably the best single money manager of his generation, but he has never thought that a great bedside manner in investing was the No. 1 thing,” said Richard Rainwater, the Texas financier. In fact, Mr. Rainwater, one of his first big backers, had his own run-in with Mr. Lampert years ago.

Mr. Lampert is dismissive of the criticism. ”Our focus has been first and foremost on earning returns for our partners,” he said.

His dazzling returns have come from a high-wire act of intensely heavy concentration in a handful of companies and of betting for the longer term. Currently, 85 percent of the $5 billion that ESL invests is in just eight companies. He has avoided Internet stocks and other fads over the years and has instead sought holdings in more mundane companies like AutoZone, a car parts retailer, and the Deluxe Corporation, a check-printing and electronic payment services concern. During the 1990’s, his fund made killings in American Express and I.B.M.

Because of such heavy concentration, poor performance of a single stock can drag down total returns, and selling out of such illiquid positions can be tough. But, he said, ”If you have just 10 names and one blows up, you have less risk than if you are highly leveraged and you don’t really understand the other companies well.”

Clearly, he has made it work. Since he started his fund business in 1988, he has had returns there that are nearly double the 13 percent of the S.& P. 500, according to company documents obtained by The New York Times.

”There are very few investors who have done that over time,” said Jeffrey Tarrant, the founder and an advisory board member of Altvest, which tracks hedge funds.

Even last year, when short-selling funds did well in a falling market, his returns came from plain-vanilla, long-term investing, though his hedge fund can go short, or bet on market declines. In 2001, ESL trounced the CSFB Tremont hedge fund long/short equity index, which fell 3.65 percent.

IN the tightknit world of money managers to the superrich, Mr. Lampert is watched closely but is hard to follow. Until he has to file public documents after acquiring more than 5 percent of a company, he is reluctant to share information with even some of his highest-profile investors, like Mr. Tisch and Mr. Geffen.

That is noteworthy, given that both are longtime investors, that Mr. Tisch is a friend as well, and that Mr. Geffen’s $200 million investment in 1992 helped put Mr. Lampert on the money management map.

In an interview in his low-key suite of offices in Greenwich, Conn., where he works with a staff of 15, Mr. Lampert said: ”I tell people in advance what our practices are. If they don’t like those practices, they have a choice not to invest.” He is extremely proud of — some say arrogant about — his track record, which he likens to that of the basketball superstar Michael Jordan. ”People keep criticizing him,” Mr. Lampert said, ”but he keeps winning.”

For the privilege of riding along, ESL investors are asked to put up at least $10 million. They must pay a 1 percent management fee and 20 percent of profits — standard requirements for hedge funds, those investment vehicles for institutions and the superwealthy. They must also agree to lock up their money for at least five years — a highly unusual requirement. Most hedge funds allow annual withdrawals.

The lockup provision has discouraged several foundations from putting money into ESL, according to one hedge fund manager who serves on some foundation boards. But it has not deterred a host of sophisticated investors. ”You know your money is tucked in safe every night,” Mr. Tisch said. ”You know it isn’t chasing some silliness. He’s investing with solid, proven principles.”

The five-year lockup ”gives us time to build and to exit a position without having to worry about investors forcing liquidations,” Mr. Lampert said. ESL has kept its most profitable holdings an average of four years, qualifying them as long-term gains for tax purposes.

Mr. Lampert began requiring the lockup after his only down year: in 1990, investors lost 16 percent. Mr. Lampert had bought stock in the middle of the year, though by December the market had plunged. ”It was terrible,” he recalled. But for investors who stayed, the fund soared 56 percent in 1991. That underscored for him the value of having capital locked up through weak periods.

AutoZone was the big payoff last year. It also reflects another of his tactics — an increasingly active role in companies in which he invests. Attracted by AutoZone’s cash flows, brand name and low profile on Wall Street, he began acquiring shares in 1997. For two years, the stock barely budged, but Mr. Lampert kept buying. In mid-1999, James Hedges IV, a hedge fund consultant and a mutual friend of Mr. Lampert and AutoZone’s founder, Joseph Hyde III, arranged for them to meet.

Mr. Hyde recalls vividly the lunch at his 600-acre ranch, WildCat, in Aspen, Colo. ”He had visited our stores, talked to management up and down the line and knew everything — far more than most money managers,” Mr. Hyde recalled. ”Most investors talk to management and that’s it. But he had a fanatical awareness of the company.”

(The scrutiny continues: A report sent to shareholders in 2001 states that ESL employees had visited or spoken with people at 690 of the more than 3,000 AutoZone stores.)

In 1999, Mr. Lampert, who then owned about 15 percent of AutoZone stock, also gained a seat on the board. He believes that board membership allows him to participate in discussions of important decisions.

A year later, the board put in a poison-pill provision that would have been set off had he increased his stake. He fought it, and the board backed down. The poison pill was rescinded and the chief executive, John C. Adams, resigned. Mr. Lampert led the committee that in early 2001 brought in Steve Odland, an executive at Ahold USA, the subsidiary of the Dutch company. Under Mr. Odland, AutoZone increased its gross margins by two percentage points in the most recent quarter, ended Nov. 30.

For most of last year, ESL had 30 million shares of AutoZone, or 27.8 percent of the company. In that time, the stock more than doubled in value.

THERE have been disappointments, too. For example, Mr. Lampert holds 12 percent of Payless ShoeSource, the shoe retailer. Its stock fell from $70.75 a share at the end of 2000 to $56.15 at the end of 2001, dragging down Mr. Lampert’s investment by 20.6 percent, to $153 million. The shares closed at $56.94 on Friday.

A small investment in the ANC Rental Corporation, the parent of Alamo Rent-a-Car and National Car Rental, ended badly when the company filed for Chapter 11 bankruptcy protection in November.
The son of a lawyer and a homemaker, Mr. Lampert grew up in Roslyn, N.Y., on Long Island. The family lived in middle-class comfort until he was 14, when his father died of a heart attack. Mr. Lampert says the death put financial pressure on the family and is partly responsible for his relentless drive for financial security.

He became interested in investing during visits to his grandmother’s home in Miami, where they would study the stock market together. ”She owned a handful of stocks,” he recalled. ”I.B.M. and AT&T. She always wanted a good dividend. In her simplicity, she was profound.”

Mr. Lampert said his grandmother, who did not have much money, invested as a hobby. ”I thought she was good,” he said, ”but I never calculated her returns.”

At Yale, he majored in economics, and, contrary to his mother’s wishes, he decided to skip law school.

Early on, he showed great skill at cultivating powerful people who could help him move ahead in the elite world of finance. One story, in particular, has long made the rounds. While at Yale, he managed to snare a summer job at Goldman Sachs, and pursued an acquaintance with Robert E. Rubin, then head of risk arbitrage there. One day, Mr. Lampert offered to help carry his heavy briefcases to a rental car, gaining the ear of his quarry. He ultimately landed a job in the risk arbitrage department.

In a recent phone interview, Mr. Rubin, who later became Treasury secretary in the Clinton administration and is now chairman of the executive committee of Citigroup, said he did not remember the incident but did not dispute it. He said he did recall thinking: ”Eddie will go out on his own one day. He won’t stay at Goldman Sachs.”

Though some associates regarded such efforts by Mr. Lampert to parlay connections into cash as distasteful, Mr. Lampert counters: ”I want to be with people who can challenge me to be better.”

It was while he was at Goldman that Mr. Lampert met Mr. Rainwater, famous in the investment world for managing the Bass brothers’ fortune through the early 1980’s. He and Mr. Rainwater were introduced by mutual friends on Nantucket in 1987, and Mr. Lampert made sure to stay in touch.

In 1988, he left Goldman to work with Mr. Rainwater. His drive was evident. Over the summer, again on Nantucket, Mr. Lampert almost never left Mr. Rainwater’s house, Mr. Rainwater recalled. ”He slept in the room, ate in the room, never went to the beach, never saw the beach,” Mr. Rainwater said. ”I don’t think he ever went out to dinner with us.”

Mr. Rainwater backed his protégé by putting up the bulk of the $28 million in Mr. Lampert’s first fund, which the young investor ran from Mr. Rainwater’s Fort Worth office. Mr. Lampert was focusing on risk arbitrage and value investing. But after just a year, the strong-willed men clashed when Mr. Lampert wanted more control over what types of investments he could make. At the time, associates say, the parting was extremely acrimonious, and Mr. Rainwater withdrew his money.

In 1992, after a few more years of working in Texas, Mr. Lampert moved to Greenwich, at the urging of Mr. Geffen, whom he had met through Mr. Rainwater. ”David told me I needed to get a life,” he recalled.

But Mr. Lampert’s obsessions went with him. According to several people who have worked with him, he still works nonstop and makes all the decisions himself. One former employee said, ”Even if you presented a research report and he could not punch holes in it, he would not buy it.”

Mr. Lampert concedes the point. ”Most of the ideas come from me,” he said. ”I am the only person who has the ability to allocate capital.”

He also exercises very tight control over compensation, a former employee said. ”You were expected to work hard to make him rich,” he said. ”Bonuses were discretionary and Eddie was pretty moody, so you never knew how you would come out.”

Mr. Lampert seems to have come out fine. Though he declined to discuss his personal finances, several people who know him say he is worth $700 million or more. He has a home in Aspen and a sprawling estate in Greenwich, where he and his wife, Kinga Lampert, were married last summer.

Several hedge fund managers say the compensation arrangements for members of his staff are a bit controlling, but Mr. Lampert says they are more than fair. While employees are not pressured to invest in the fund, ”they were just prohibited from investing anywhere else,” he said. That, he said, could work to their interest.

Employees are not the only ones who can be put off by his style. One veteran money manager described a social lunch several years ago: ”He picked my brain on stocks, but offered nothing. The next time, I decided to talk about fishing until he offered something. So we never got past fishing.”

EVEN had Mr. Lampert been forthcoming, his investment strategy might have sounded deceptively simple: sticking to the basics. Because he tends to take large positions, each stock decision is crucial.

He studied the Internet but avoided the sector despite its wild run-up: ”Most businesses, as they grow, have a model where they make more money as they get more customers. Internet companies seemed to lose more money as that happened.”

He also does not like what he calls ”the vision thing.” ”Average investors like themes,” he said. ”A lot of times you pay a high price for the vision, and you can lose 80 percent of your money.”

Mr. Lampert also shies away from capital-intensive businesses. He says he believes that Intel, the computer chip maker, ”is a terrific business, but for it to exist, it has to keep feeding more and more money in, and it needs to be right when it does it.”

”If it is wrong,” he added, ”that will be a huge problem.”

He doesn’t like convoluted financial statements. Even when Enron was soaring, Mr. Lampert said, he was not interested. ”Complex financials don’t necessarily mean there is something wrong,” he said. ”But if you don’t have a clue, why invest?”

Grandma would have been proud.

Disclosure (“none” means no position):Long SHLD