Monday, June 25, 2007
Last Wednesday, I suggested that buying Sears Holdings (SHLD) was a better way to invest with stock-picking genius Eddie Lampert than his own hedge fund, ESL Investments.
It's a simple argument. To invest with ESL, you need a minimum investment of $20 million. SHLD, on the other hand, only requires $172 (the price of one share).
If you invest with ESL, you'll immediately hand over 2% of your assets in management fees. Investing in SHLD will only cost you commissions on the stock purchase.
On top of this, Lampert will charge you 20% of your profits for investing with ESL. According to SHLD's proxy statements, Lampert receives no compensation for chairing SHLD's board.
That's probably because his compensation comes from SHLD's share price…
Back in December 2005, Eddie Lampert owned 65.3 million shares (42%) of SHLD's stock. Between then and now, SHLD's share price has risen 49% from $115 to $172 per share. So Lampert has made more than $3.5 billion from his holdings in SHLD alone.
That's $3.5 billion in a little over two years.
It's also a massive indicator that Lampert's interests are aligned with SHLD's outside investors. Since most mutual fund and hedge fund managers are paid based on how much money they managed, they have little incentive for them to perform well.
On the other hand, Lamperts only makes money off of SHLD if SHLD's share price rises. Even Warren Buffett gets an annual salary for managing Berkshire Hathaway. (Well, it's a paltry $300,000 – he manages $166 billion – but it's still something.)
We mentioned earlier that David Geffen, Michael Dell, and the Tisch family have money with ESL. They're willing to pay the massive fees (2% of assets and 20% of profits) to have their money with Lampert.
So who owns SHLD?
Let's start with the insiders. Tom Tisch of the brilliant Tisch family owns 1.1 million shares of SHLD's stock, valued at $187 million. Tom also sits on SHLD's board. Aside from Tom, the Tisch family controls an additional 3.1 million shares of SHLD stock for combined holdings worth $722 million.
Hedge fund manager Richard Perry also sits on SHLD's board, and owns 1.8% of SHLD's shares outstanding, valued at $447 million.
Before we get to the outside investors, consider that altogether, SHLD insiders own 47% of the company. Typically you'll see insiders owning 5%-10% of a company's shares. A 47% stake is as close as you can get to a personal guarantee that management's interests are aligned with shareholders.
Bill Miller of Legg Mason owns 8.3% of SHLD's outstanding shares, valued at $2.1 billion. Miller's the only mutual fund manager to have beaten the S&P 500 14 years in a row.
Besides Miller, legendary trader Steven Cohen's hedge fund, SAC capital, owns 878,000 shares of SHLD's stock, valued at $151 million. From 1995 to 2005, Cohen averaged 40% a year after fees.
And then there's legendary value investor Marty Whitman, who owns 165,000 shares of SHLD's stock valued at $28 million. Since 1990, Whitman has shown investors average annual gains of 16%.
No upfront fees, no management fees, and an A-list of investing legends.
If you want your money with Lampert, you won't find a better deal anywhere else.
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