Sears Holdings Corporation (SHLD), Big Lots, Inc. (BIG): How To Invest Like Eddie Lampert

Having a successful mentor is the fast track to your own success in the financial business. Following in the footsteps and learning from the mistakes of your mentor can shave years and countless dollars off your learning curve.

Fortunately, some successful investors have provided a clear and easy-to-follow outline on how they found success — and how you might follow along.

Many call Eddie Lampert the next Warren Buffett for his aggressive yet conservative approach toinvesting. Lampert has built a personal net worth of over $3 billion with an investment style known as concentrated value with a specialization in the retail sector. Lampert’s fund, ESL Investments, launched with $28 million of seed money in 1988, has returned an astounding average annual return of 29%.

Eddie Lampert’s Biography
Eddie Lampert’s drive toward greatness was triggered at age 14, when his father died of a heart attack. His father, a lawyer in New York, was a hands-on father who coached Little League baseball and taught Eddie and his sister the game of bridge. After his father’s death, Eddie’s mother worked as a clerk at Saks Fifth Avenue to help the family survive. This difficult situation made him keenly aware of the importance of finance in everyone’s life at an early age. Eddie also learned about the stock market from his grandmother who would watch Louis Rukeyser’s “Wall Street Week” with him and talk about her investments.
Lampert attended Yale University and majored ineconomics. He was Phi Betta Kappa, president of his class, and a member of the infamous Skull & Bones Society. He was also gifted and fortunate enough to work as a research assistant to Nobel Prize-winning economist James Tobin. His financial experiences while at Yale included being a member of the school’s student investment cluband summers at Goldman Sachs.

After Yale, Eddie took a job in Goldman Sachs’arbitrage department. In 1988, Lampert moved to Fort Worth, Texas, to work with Richard Rainwater, the money manager for the wealthyBass family and other members of the super-rich. Rainwater gave Eddie a large portion of the $28 million he used to start his fund, ESL Investments.

Eddie Lampert’s Investing Philosophy
Lampert is a big fan of Warren Buffett. While at Yale, Lampert studied and tried to reverse-engineer Buffett’s famed shareholder letters. He believes in forgoing short-term results in favor of long-term performance. Eddie’s concentrated value philosophy teaches to commit to a few large holdings rather than to diversify across multiple assets. In other words, invest in a few companies that you know inside and out, rather than spreading your capital into sectors in which you are not an expert.

Eddie’s concentrated value philosophy teaches to commit to a few large holdings rather than to diversify across multiple assets.

ESL Investments generally holds at least 5% of theissued shares of the companies it invests in. This going all-in on a few companies generally restricts ESL to holding between three and 15 securities at any given time. The fund’s stock-picking strategy is event-driven, meaning the fund looks for companies that are distressed and are trading for less than fair or intrinsic value.

Like many great investors, Eddie is a firm believer in Ayn Rand’s objectivist philosophy, which teaches thatcapitalism, self-interest and reason are the driving forces behind all upward movement of mankind. In addition, he cites “The Essays of Warren Buffett: Lessons for Corporate America” as an inspiration and guidebook.

Eddie may be best known for his aggressive purchase of the once-iconic American retail brand Kmart’sdebt while the company was in Chapter 11 bankruptcy proceedings. As the price of Kmart’s stock dropped, Lampert purchased more until he eventually gained control of the company. In 2003, he merged the bankrupt Kmart with Sears Holdings Corporation (NASDAQ:SHLD), creating America’s third-largest retail chain. Under Lampert’s management, Kmart’s shares exploded from $15 in March 2002 to $150 by the summer of 2005. Other Lampert success stories include Big Lots, Inc. (NYSE:BIG), which added 44% to its shares after he invested, and Seagate Technology PLC (NASDAQ:STX), which rose 35%.

Eddie Lampert’s Portfolio: What’s He Holding Now?
Lampert’s portfolio has recently experienced some strong winners and a nasty losing stock.

Lampert’s Top Holdings

His 8.4 million-share position in Genworth Financial Inc (NYSE:GNW) was up over 30% in this year’s first quarter. In addition, his Capital One Financial Corp. (NYSE:COF) holdings were up over 29% during the same time. However, his 1 million shares of Orchard Supply Hardware Stores Corp (NASDAQ:OSH) were slammed, losing nearly 90%. As you can see, ESL Investments has been lagging behind the S&P 500 index over the past three months.

Action to Take –> Eddie Lampert has made a fortune by emphasizing the importance of specialization and having a complete understanding of the sector that he wants to invest in. By following his example, you may be able to find stocks trading for less than their intrinsic value to add to your portfolio. Investors can also learn that losses come with the territory of the market. Even an investor as sophisticated as Eddie Lampert sustains losses from time to time.