as I have seen in my career”
January 6, 2009
Rather than meeting with management, you scrutinize earnings call transcripts and texts of speeches to understand how management has behaved in the past. Since you have also said that some of your biggest mistakes have involved overestimating management, what clues or triggers do you look for when you do this analysis?
We meet with management, but we also rely on their paper trail. The key thing is to understand how management behaved under adversity. As Warren Buffet says, when the tide goes out, you get to see who is naked.
Today’s environment – right here and right now – lets us see how management will perform against significant headwinds. We are less concerned about how they performed with similar tailwinds.
As Buffet says, it pays to be greedy when others are fearful. There is a huge fear factor in the market right now. This is a necessary – but not sufficient – condition for great investing. Those that survive this environment will have many happy stories to tell.
In the past, you have said that your valuation of Sears Holdings is based, in part, on the value of their real estate. How exposed is your holding in Sears to the fragility of the commercial real estate market?
We are not looking at today’s values in the real estate market. We have come to the conclusion that we cannot snap our fingers and sell. If the value from Sears comes from its real estate holdings, then it may take a while to sell those properties.
The value in Sears is in four highly valuable brands, the largest appliance retailer and servicer, and a large automobile repair operation. I am not saying that Sears cannot continue in its current business model. We are coming through the Christmas season and inventory is down, so this may be a good time for them to buy back some shares. Sears has $11 billion in inventory with $4 billion in debt, so there are many ways we can capture the value in our investment.
You are heavily weighted toward defense and health care, based at least in part on projections of future government spending. Has your thinking changed at all as a result of the projected infrastructure stimulus package?
I am more optimistic. The decisions to invest in these sectors were made before the discussion of this stimulus package. The stimulus package is icing on the cake and it also makes me more comfortable in some of our rental businesses, which were originally aided by the Bush’s fiscal policies.
Now we are seeing the Mother of All Stimulus Packages. When we invested in our companies, we assumed nothing more than the value that was there at the time of our purchase. The government will be building roads, tunnels, and bridges. We are located in southern Florida, and there are man-made islands that were built during the Great Depression. Great things like these can happen as a result of adversity, although we may not know at the time. We have a way of forgetting what adverse conditions are like.
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