Bruce Berkowitz, Sears, and the Perils of Concentrated Investing

During their recent episode, Taylor, Carlisle, and Tim Travis discussed Bruce Berkowitz, Sears, and the Perils of Concentrated Investing. Here’s an excerpt from the episode:

Tobias: I vastly prefer spreading the bets a little bit more, just because there’s so much idiosyncratic risk in every– I’ve worked in a public company. I was general counsel of a public company, and I used to talk to the analysts on the outside. I just thought it was crazy how much of a disconnect there was between what I saw was going on and what they thought was going on.

Getting some of that distance is probably a good thing sometimes, because maybe you can see things that people who are too close can’t see. So, it’s not just a one-way street. But I think that there are just a lot of ways to lose in this business. I think that if you have some edge, if you have some ability to find things that are undervalued, then the more you can let that edge express itself that’s not tied to one business, the better you’ll do over the long-term. But I can’t find fault with Charlie’s argument about, “Your fourth best idea.” I don’t really know what the answer that is other than diversification, variation is in and of itself a good thing.

Tim: I think Berkowitz learned that too, the hard way. Berkowitz was amazing. He is an amazing investor, and he had so many wins over his career and concentrated bets, really concentrated, gutsy picks. But so many people look at him and define him from Sears Holdings. That was just such a tough one. There was a lot of opportunity. There was a lot of logic in that thesis, but it seemed like Eddie Lampert got too attached to the retail business. It’s hard. It’s hard. You’re running a huge company, you don’t want to just lay off tens of thousands of employees. It’s a hard game when you get into the restructuring.

Tobias: So, when you said Berkowitz, I immediately thought of St. Joe’s. I thought St. Joe’s was his–

Tim: The monster. Yeah.

Tobias: But that’s right. I forgot he was very big in Sears as well.

Jake: And Fannie and Freddie too burned him.

Tobias: Yeah. Yeah, that’s a problem.

Tim: Those were logical bets too. Really logical bets. It’s hard sometimes. I think of a Puerto Rico assured guarantee– That’s a company I invested in for a long time. I know you invested in it a little bit, Toby. They reported earnings. They were really strong. But the situation in Puerto Rico was so bizarre, because you had this electric utility which is a monopoly. They really had liquidity issues and just huge corruption, huge fraud, where people are on the payrolls, but they’re not showing up to work. The most egregious stuff you could imagine.

Tobias: Like, a working [unintelligible [00:31:34]

Tim: It should have been a really easy restructuring. Like, “Okay, inject it with a little liquidity, put some capital in there, but put more efficiency controls,” that sort of thing. But it’s been going on for 10 years. They still haven’t restructured this one credit. It’s been 10 years since all the drama started. It’s like something that seems so easy, but it’s hard to tell political ramifications. That’s why I’m a little more sour on the banks than I used to. It’s just not a fun business to be in with all the regulatory risk that’s out there.

Tobias: [unintelligible [00:32:09] Yeah, it’s had a good run.

Tim: It’s had a great run. What’s crazy, is if you look at the book value per share growth of that company, it rivals just about any insurance company you’ll find. I was thinking about it with what you said, Toby is, there is danger being too close to a company, but it is nice when you know how a CEO will respond to adversity.

So, I remember during COVID and the lockdowns, that stock just plummeted, man. Like, a lot of them did. But I think one day, it went from $32 to $13, something like that. It was like, what was the news there? There really wasn’t any. There wasn’t any really news specific. The good thing about that CEO, Dominic Frederico is that he’s going to buy back his stock. Like, he’s going to take advantage of the massive discount. So, you’re going to see a huge growth in the per share metrics. That gives you a big degree of confidence. It’s amazing seeing it play out. He said longevity too. He’s been with that company since– They IPO-ed, I believe in 2003.

Tobias: It’s a good advertisement for smart buybacks, [unintelligible [00:33:26]

Tim: They are. Yeah. You don’t hear about them. Like, nobody really talks about them.

Tobias: If you look at it, then it just gets scarier. Like, the moment you start taking a look at it, it ensures unibonds and it’s– That always looks like a scare, anytime it pops up in the news, it’s because it’s associated with some bankruptcy somewhere. So, it’s never getting good news. It’s only ever the crises that attract attention.

Tim: It is. I saw today. So, their below investment grade exposure was at the lowest level it had ever been in. And then, today, they added, I believe it was $10 billion. I haven’t gone through everything yet. I believe they added almost $10 billion. It was these water companies in the UK. So, the Thames Water company, they’re having some liquidity issues. It’s a monopoly company in a good government. UK is generally pretty business friendly, or at least they were. So, it’ll probably work out fine. I don’t think they’re actually going to lose any money on it, especially when you factor in the premiums they’ve collected on it, but it’s like, “Okay, well now there’s such big numbers you’re throwing out there.” Like, “Oh, well, it’s a $5 billion exposure.”

So, exactly, it’s just always headline risk. So, we’re not as big there as we used to be. We just have a small position left, but I would definitely buy it if it went down. I was hoping it would go down actually.

Tobias: What’s the book value per share sitting at there?

Tim: Oh, man. The adjusted one is over 160 now. And then, the operating one is 111. So, just fantastic growth. Look, if you’re interested in stock buybacks done well, look at that company. Look what they’ve done. And look at how the returns on equity aren’t great or anything like that. It’s not a great business overall, but it’s been run well.

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