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Smart for a Day
ITA dozen years ago, Eddie Lampert, the chairman of Sears Holdings Corp., gave a luncheon talk in New York about how great it was to be as smart as Eddie Lampert. His opinion was elevated by his success in having leveraged the undervalued real estate of bankrupt Kmart into control of the venerable retail giant Sears. Lampert assured his audience at the Grant’s Interest Rate Observer conference that he was on top of every aspect of the business: store design, merchandise display, pricing. I don’t remember if he talked much about the financial side, but that was where his undisputable expertise lay, as the preceding several years had proved. BusinessWeek had already put him on the cover as “The Next Warren Buffett?”
Sears’s stock closed that week of November 1, 2005, at $83.33. About eighteen months later, it hit $141.29. Eddie Lampert earned his footprint on Wall Street’s Walk of Fame.
This past week, facing the likelihood of bankruptcy, Sears touched $1.07
From the week of his talk to the recent low was a drop of 98.8%. Lampert liked his management style so much he had the company buy in $5.9 billion of its common shares between 2005 and 2010. So the loss adds up to about $14 billion. Holders of a couple billion in debt presumably aren’t happy either, as the unsecureds trade at less than half-par.
In a dozen years, much has changed. Retail isn’t what it was, and neither is the real estate on which it sits. To have foreseen the extent of these changes would have taken someone even smarter than Eddie Lampert. And in truth, there probably aren’t a lot of people in the world who are smarter. So what went wrong?
The autopsies of Wall Street failure make entertaining reading for the resentful. When Genius Failed on the collapse of Nobel-driven Long-Term Capital Management, The Big Short on the mortgage bonds disaster, numerous exhumations of Lehman and Bear Stearns all feed on the not-quite-as-smart reader’s desire to see a comeuppance of the mighty. John Paulson made billions during the financial crisis shorting mortgage debt. Then he got his clock cleaned over the next decade. Bill Ackman was a celebrated short seller who bet against Herbalife. Add recent hedge fund casualties Paul Tudor Jones and David Einhorn. The moralist’s tale is that successful people succumb to hubris. But when things are working, who doesn't?
What even the best players can’t seem to get around is an impersonal problem: regression to the mean. This might imply that people are smart some days and stupid others, but it's also evidence that the world is so complicated and impossible to predict that the fellow who gets it right this year and a few others has probably been, in addition to very clever, also pretty lucky. It’s asking a lot to be not only smart every year but also lucky.
It’s easier to appear smart if you’re talking rather than doing. A stated opinion is much more nuanced than a buy or sell ticket. That helps explain why some investment advisors survive many decades longer than either their market-forecasting skill or chance would permit. That and the fact their followers can always blame themselves for failure. The late Joseph Granville had an illustrious career built on the fallacy that a close understanding of market history would provide insight into what lay ahead. In the 1970s, his pronouncements could move markets. A fellow who worked p.r. for Granville described a gathering at a resort, where Joe appeared in prophet’s robes, walked straight across a swimming pool on submerged boards that had been painted blue, spread his arms and announced, “Now you know.”
Two footnotes about impermanence. BusinessWeek, which was ad-fat well into this century, was sold to Bloomberg in 2009 for corporate pocket change. And as for those footprints on Wall Street’s Walk of Fame, they’re imaginary, but if they existed they would be etched in chalk. Being right, the only thing that counts in markets, is that fleeting.
August 28 2018
Sears’s stock closed that week of November 1, 2005, at $83.33. About eighteen months later, it hit $141.29. Eddie Lampert earned his footprint on Wall Street’s Walk of Fame.
This past week, facing the likelihood of bankruptcy, Sears touched $1.07
From the week of his talk to the recent low was a drop of 98.8%. Lampert liked his management style so much he had the company buy in $5.9 billion of its common shares between 2005 and 2010. So the loss adds up to about $14 billion. Holders of a couple billion in debt presumably aren’t happy either, as the unsecureds trade at less than half-par.
In a dozen years, much has changed. Retail isn’t what it was, and neither is the real estate on which it sits. To have foreseen the extent of these changes would have taken someone even smarter than Eddie Lampert. And in truth, there probably aren’t a lot of people in the world who are smarter. So what went wrong?
The autopsies of Wall Street failure make entertaining reading for the resentful. When Genius Failed on the collapse of Nobel-driven Long-Term Capital Management, The Big Short on the mortgage bonds disaster, numerous exhumations of Lehman and Bear Stearns all feed on the not-quite-as-smart reader’s desire to see a comeuppance of the mighty. John Paulson made billions during the financial crisis shorting mortgage debt. Then he got his clock cleaned over the next decade. Bill Ackman was a celebrated short seller who bet against Herbalife. Add recent hedge fund casualties Paul Tudor Jones and David Einhorn. The moralist’s tale is that successful people succumb to hubris. But when things are working, who doesn't?
What even the best players can’t seem to get around is an impersonal problem: regression to the mean. This might imply that people are smart some days and stupid others, but it's also evidence that the world is so complicated and impossible to predict that the fellow who gets it right this year and a few others has probably been, in addition to very clever, also pretty lucky. It’s asking a lot to be not only smart every year but also lucky.
It’s easier to appear smart if you’re talking rather than doing. A stated opinion is much more nuanced than a buy or sell ticket. That helps explain why some investment advisors survive many decades longer than either their market-forecasting skill or chance would permit. That and the fact their followers can always blame themselves for failure. The late Joseph Granville had an illustrious career built on the fallacy that a close understanding of market history would provide insight into what lay ahead. In the 1970s, his pronouncements could move markets. A fellow who worked p.r. for Granville described a gathering at a resort, where Joe appeared in prophet’s robes, walked straight across a swimming pool on submerged boards that had been painted blue, spread his arms and announced, “Now you know.”
Two footnotes about impermanence. BusinessWeek, which was ad-fat well into this century, was sold to Bloomberg in 2009 for corporate pocket change. And as for those footprints on Wall Street’s Walk of Fame, they’re imaginary, but if they existed they would be etched in chalk. Being right, the only thing that counts in markets, is that fleeting.
August 28 2018
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