Consider the following scenario: A great company faces a languishing stock price. A few quarters of managerial efforts fail to revive profits. The stock continues to decline. As a result, the CEO is ostracized for having lost his ability. Sound all too familiar?
During the Internet era, this exact scenario was being exacted on Warren Buffett. Buffett's company, Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) , was failing to outperform the darlings of the day like Cisco (Nasdaq: CSCO ) and Yahoo! (Nasdaq: YHOO ) , so Buffett was perceived as having lost his acumen. Individuals with no investing experience were earning returns better than Buffett, and it was puzzling that the "Oracle of Omaha" could not see the "value" in investing in the Internet. Apparently, while focusing on the short term, the media and analysts had forgotten that Buffett had increased Berkshire's book value by more than 20% annualized for decades. Instead they were advocating triple-digit P/Es and double-digit price to book ratios, respectively.
Those who forget history ...
We know how the story played out for Berkshire. Those who stuck alongside Buffett -- and there were many -- continue to be rewarded. Of course, Berkshire will probably never deliver the same returns as when it was much smaller, but Berkshire -- at the right price -- should continue to outperform the market.
Those who continue to kick themselves for abandoning Buffett may have a second chance, though. Eddie Lampert, hedge-fund-manager extraordinaire, is currently trying to right the ship at Sears Holdings (Nasdaq: SHLD ) . Shares in retailer Sears, of which Lampert is chairman, currently trade at 50% below their 52-week high. Factoring into this decline are economic concerns, which have taken their toll on all retailers. People are worried about the decline in housing prices, with folks becoming a little more attentive to the girth of their wallets. Even credit card companies have started to notice a slight uptick in late payments. So, in the near term, the company's outlook seems a bit murky.
... are often doomed to repeat it
But Lampert seems intent on trying to fix Sears, as he has recently announced his plans to divide the company into five divisions. But the retailing business is tough. You constantly have to adapt to consumer tastes and competition from all sides. Yet those who are looking at Sears from only the retail side might be missing the bigger picture.
Eddie Lampert is a brilliant capital allocator. It's been said that after he left Goldman Sachs (NYSE: GS ) to start his hedge fund, he spent hours upon hours reverse-engineering some of Buffett's earlier investments. Lampert clearly "gets it." He knows that in order to create value, you have to earn higher returns than your cost of capital. And given that he owns nearly 50% of Sears shares, and has been using the company's cash flows to continue to buy back shares as they decline, the odds for success go up tremendously. And for what it's worth, Lampert has had great success in long-term investing in retailers, most notably his investment in AutoZone (NYSE: AZO ) .
You're in good company
Some very shrewd investors are heavily invested in Sears because of their confidence in Lampert. Bill Ackman of Pershing Square and Bill Miller at Legg Mason have built up positions. Most recently, value investor Mohnish Pabrai reported a position in Sears. Pabrai's investment in Sears is notable, because he typically avoids investing in retail businesses. So I doubt very much that Pabrai sees Sears as merely a retailer.
Amid the weakness in its business operations, there are a lot of positive indicators suggesting Sears will create value over the long term. The big bet right now is on Lampert. His past endeavors suggest that it's not a wise bet to go against him. As always, do your own work on this one, but it certainly doesn't hurt that a lot of smart and savvy money would be invested alongside you, should you decide to buy.