Air
date: November 19, 2004
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Serwer on Eddie Lampert
KAREN GIBBS: The business world is all atwitter over the impending marriage between two of America's most storied retailers - Kmart and Sears. But the real story may be the secretive billionaire playing matchmaker behind the scenes in this shotgun wedding. Eddie Lampert is the biggest Wall Street titan you've probably never heard of -- until now. Lampert's hedge fund is the largest shareholder in both companies, and last year he took the reins as Kmart's chairman. But that's just part of the story for this intriguing 42-year-old investor. FORTUNE editor Andy Serwer has been tracking the elusive Eddie Lampert, and he joins us now from New York.
So who is this Eddie Lampert?
ANDY SERWER: Well, Eddie Lampert is a Wall Street whiz. He runs a $9 billion hedge fund in suburban Connecticut that has produced unbelievable returns over the years, about a 29 percent annual return. He takes big stakes in companies that he perceives to be undervalued, and has done very, very well by this strategy, mostly retail type companies. And people are saying, you know, this guy really has the Midas touch.
GIBBS: Would we know any of those companies that he has touched?
SERWER: We would. Two that come to mind besides Sears and Kmart are AutoZone and AutoNation. AutoZone is an auto parts retailer which was down in the dumps, and he invested some money in and turned it around. AutoNation is a seller of cars, and he did the same thing there. Really a sterling track record, Karen.
GIBBS: Andy, what's the strategy behind this Sears-Kmart deal?
SERWER: Well, you know, that's the $64,000 question, or $11 billion question I guess I should say. To some it looks like combining two companies that frankly have been eclipsed by Wal-Mart and Target and putting them together to fight those two companies.
And I think that's partly true, but I think this is really less of a retailing story and more of a story about Eddie Lampert and about him trying to combine these companies to maximize their values for his hedge fund. And the way he really perceives to do this is mostly through real estate transactions. After all, that's what made Kmart such a successful investment over the past year and a half since it's emerged from bankruptcy is his ability to bring out the real estate values in this company. So it's really about Lampert and real estate rather than new retailing strategies by this new company I think.
GIBBS: Well, Andy, you know Wall Street really embraced this merger when it was announced. How much of that reaction was a vote of confidence in Lampert's management style? You know, Kmart stock is up 638 percent since he took the reins.
SERWER: Well, I think Wall Street's beginning to recognize or beginning to perceive that Lampert is someone that they should pay attention to, and there's becoming a Lampert effect. I mean let's face it, these stocks go up because Lampert is a golden boy and he creates value, and then they go up and people buy the stock and it goes up more.
Can you suggest, perhaps, that Kmart might be overvalued since it's gone from about $15 to over $100 in a year and a half? Some people are suggesting that. On the other hand, they were saying that when the stock was at $60 and $80, and so far they've been proven wrong. You know, when a person like this is perceived as successful, Wall Street often jumps on, and sometimes things get a little bit ahead of themselves, but right now, you know, Eddie Lampert has not struck out yet.
GIBBS: Lampert thwarted a kidnapping attempt, and he would really prefer to remain out of the spotlight. Doesn't this deal kind of undermine that low-profile attitude?
SERWER: He was always a private, very secretive even kind of guy, and this was just accentuated dramatically. In January of 2003, last year, four thugs kidnapped Lampert in his parking garage in that suburban Connecticut business park where he works. They gagged him, bound him up, threw him in the back of a Blazer, drove him up Route 95 in Connecticut up to New Haven, and they put him in a Days Inn, a cheap hotel outside of New Haven, put him in the bathtub and threatened to kill him if he didn't pay them ransom money. He was terrified. He thought he was going to die. And he somehow talked his way out, and they also then tracked the kidnappers, because the kidnappers used his cell phone, Lampert's cell phone and credit card to order a pizza. So there is a little bit of an element of preposterousness. But you know these guys, these kidnappers are very scary. They typed into Google, say, you know, richest person in Connecticut, and Eddie Lampert's name came up, and they tracked him down.
So no question and no wonder why Eddie Lampert is very private, but this is, as you suggest, Karen, going to put him much more in the public eye.
GIBBS: What can we expect next from Mr. Lampert?
SERWER: He's going to work very, very hard at combining these companies. I think the two names are supposed to remain intact for at least the time being, but I think it's very possible that ultimately the Kmart name will go away. Sears is a stronger name. Sears makes more money.
I think that he will continue to find ways to maximize value by looking to do real estate transactions. It will be interesting to see, Karen, how much of a retailing strategy he really embarks upon. Will he really try to spiff up the stores and get people to go in there? Or will he really just try to figure out a way to get a return for his investors in his hedge fund? You know ultimately those could be the same thing. He is in the public eye like he has never been before, and this is going to be the ultimate test for Eddie Lampert.
GIBBS: Andy Serwer, thanks for your insights.
SERWER: Thanks.
Ben Stein returns
KAREN GIBBS: Back when the baby boom generation was just getting started, there was a popular Guy Lombardo song that went… "It's later than you think." Well, it is later than you think, especially if you're talking about retirement. About 77 million baby boomers are racing toward retirement and are woefully ill-prepared to overcome the many financial challenges they will face. 90 percent of older Americans expect to rely on Social Security as their top source of retirement income, yet Social Security accounts for just 35 percent of retirement income. So how do we make up the shortfall? Ben Stein, former trial lawyer, economist and teacher, and a very funny actor who's also written seriously about the markets for years, has added a new job to his resume; he's become an outspoken advocate for helping people figure out how to make their money last as long as they will.
Ben, welcome.
BEN STEIN: Pleasure to be here.
GIBBS: Tell me, how important and how much of a crisis is this retirement situation?
STEIN: Well, we can look at it this way. There are about 77 million baby boomers, as you pointed out. About 40 percent of them have less than $50,000 in financial assets. Only something like 8 percent have more than $200,000 in financial assets. Only something like 20 percent, roughly, have more than $100,000 in financial assets. At current rates of interest, no matter what you're buying, that doesn't yield much money. The average Social Security benefit is something like $970 a month for the worker, something like $460 for the spouse. That doesn't add up to much money. Only about 20 percent of the workforce is covered by defined benefit plans that have any meaningful payments.
What are people going to do? The only way they can get through is by having more savings, and yet people are saving pitifully little. And unfortunately the personal savings rate is dropping rather than rising as the baby boom generation approaches retirement. So it's a tremendous crisis and is going to have to be made up for by disciplined effort on the part of the individual citizen.
GIBBS: It sounds like that disciplined effort is going to require a little bit of sacrifice, Ben.
STEIN: Oh, yes.
GIBBS: And you know we're the age of instant gratification.
STEIN: Yes, it's going to require serious sacrifice, a very serious sacrifice.
GIBBS: How do we convince people to start saving?
STEIN: Well, we have Ben Stein scare the hell out of them and tell them about what life is going to be like if they don't have enough money. They're not going to find themselves sleeping under a bridge. They're not going to find themselves sleeping in a doorway wrapped up in old newspapers. They're going to find themselves not being able to afford medical care, not being able to get their prescriptions filled, not being able to go on vacation, not being able to see their children and grandchildren, not being able to go to movies, wearing old clothes with holes in them.
They're going to find themselves steadily sinking into genuine poverty. I mean they will be in poverty. Years and years ago, my father, who was on this show, Herbert Stein, said poverty is a neighborhood you never want to get anywhere near if you can help it. And the time to make sure you don't get into that neighborhood is now by saving.
GIBBS: What do we do? How do we start it?
STEIN: Well, we start with a financial plan, and for that we need a financial advisor and we need a good, solid one. We don't need a crazy one that we meet on the Internet who promises to double our money in six months. We need a solid, sane financial guy or gal who has a plan for diversified savings, stocks, bonds, mutual funds, variable annuities, regular what you call fixed annuities, real estate, foreign stocks, foreign value, foreign emerging market, emerging market debt, leveraged real estate investment trusts, leveraged utility trusts, a lot of different stuff, all diversified, all adding to your income, building up to the point where you have -- now this is going to shock you -- 20 or more times your living expenses saved. So if you're living on $50,000 a year, you should have at least $1 million saved by the time you're in retirement, at least.
GIBBS: Conventional wisdom used to say that your age should reflect the percentage in your portfolio of bonds. So if you're 40 years old, 40 percent bonds, 60 percent stocks. What would a current, today Ben Stein portfolio look like?
STEIN: Well, it would vary. Ben Stein is going to be 60 on Thanksgiving Day.
GIBBS: Happy birthday.
STEIN: Thank you.
And so Ben Stein has a fair amount of his savings in fixed income, but I expect to be working until I am about 70 roughly, if I live that long. My father lived until 83 and was working the whole time.
I'd say that is approximately the right idea, but I would have, I would tell you something that is going to shock you. And I don't know if anyone's ever been on this show before saying this, but I'm going to tell you: Of all the growth in the income of stock portfolios, a very large percentage of it, something like 70 percent, comes from dividends. So if you're going to have stocks, I would have high dividend stocks. There is a good universe of stocks out there that pay excellent dividends. Financial companies, utility companies, real estate investment trusts, but also a number of industrial companies and also some pharmaceutical companies that have excellent dividends, and I would have a good chunk of them. I think the fact that they have dividends does not mean that the price of the stock won't also go up. And as the baby boomers scramble like mad lemmings for yield, they will bid up the prices of these high dividend stocks. And Mr. Bush has lowered the tax on dividends to such an astonishingly low level that it makes more sense than ever to own dividend-paying stocks.
GIBBS: Mr. Bush is also thinking about diverting some of the Social Security money to the stock market.
STEIN: Well, no, he's not going to divert it to the stock market. What he's going to do is say that you can take a certain small percentage of your Social Security payments and invest it yourselves. You don't have to put it in stocks. You can put it in bonds if you want, but you can put it in anything you want I think within certain limits. But it's going to be a small percentage, and you can figure out how little an amount this is this way. The average retiree, as you so kindly mentioned, gets something like 35 percent of his or her retirement income from Social Security. Mr. Bush is talking about taking roughly 10 percent -- roughly 10 percent -- of your Social Security and letting you invest it yourself. So that's 10 percent of 35 percent. That's 3.5 percent that's going to be diverted into the private sector. That's not going to make a huge different one way or the other, unless you get in on a fantastic growth stock, which you're not going to do. Don't count on doing that.
GIBBS: Well, if individuals are not saving a lot, the U.S. government's pretty much in a hole.
STEIN: The U.S. government is very much in a hole, but the U.S. government owns the printing press. The U.S. government has the power to tax. The U.S. government is not going to run out of money. You and I do not own the printing press. You and I do not own the Constitutional right to levy taxes. So we could run out of money. I mean we could literally run out of money. We probably won't, but we could see a drastic decline in our living standard. It means a whole new way of life for the baby boom generation, saving more, spending less.
GIBBS: Well, you pointed out the difference between us and the government is the government can print money, and the international community does seem to be a little concerned about our twin deficits, the budget deficit and the trade deficit.
STEIN: Well, they're very concerned.
GIBBS: And the dollar's falling, which is inflation.
STEIN: A dollar crisis is looming. I think we've already had a slow motion dollar crisis, and I think we're going to have a more rapid motion dollar crisis. There's a wonderful line in an F. Scott Fitzgerald's story, just a wonderful line, in which a man who used to be wealthy and who lost it all in the crash and the Depression is asked how he went broke. And he says, "Slowly at first, and then all at once." And I think that's sort of what's going to happen with the dollar. That's going to mean higher interest rates to defend the dollar and higher, considerably higher prices for imported goods, especially commodities.
We can make pretty much everything else we need in this country, but commodities we can't make. We can't make more oil in this country, and it's going to mean oil is going to become fantastically expensive, gasoline is going to be very expensive. What do we do about it? We buy foreign-denominated stock funds, emerging market funds, the EFA, the EEM -- there are many funds, I'm just mentioning a couple of them -- and there are many, many fine natural resources funds that will capitalize on increased prices in raw materials.
Goldman Sachs has an iShares index.
I would be diversifying out of the dollar. It's not unpatriotic. It's a perfectly legal, sensible, rational thing to do.
GIBBS: You said look at some of the foreign markets. How about the REITs?
STEIN: I love REITs.
GIBBS: Do you?
STEIN: I'm crazy about REITs. Well, I started getting into them in a big way a few years ago, and I've seen some very good appreciation in them.
At present they're a little pricey, but nothing else is yielding the dividends they're yielding. There are some leveraged real estate index funds -- they're not index exactly, but very wide, widely diversified portfolios -- that are paying 7.5 and 8 percent. That's a very good yield in today's world, and as, now if there's a big spike in interest rates, they will take a big drop. They took a huge drop last April, huge, but they came back very strong. And if there is a big inflationary spike, rents will rise and their payouts will rise. So you may have a, you may have a bumpy ride, but I think for the long run they're a very good investment.
GIBBS: Ben, what's the secret to dying rich?
STEIN: I haven't died yet.
GIBBS: I don't want you to die.
STEIN: I don't know. My father and mother died fairly well to do, and their secret was a simple one. They saved a lot and they lived very frugally. And of course the cruel other part of that secret was that the government took a huge chunk of that, a huge, huge chunk of it. But the secret is living within your means.
I don't know what your demographic of viewers might be, but I know that if you start young, it's a breeze. If you start when you're in your late 50s, it's pretty damn difficult. If you start when you're in your 30s or 40s, it can still be done fairly easily. But please start now and do the best you can. It's that simple. Start now and do the best you can.
GIBBS: Ben Stein, great advice. Thanks for joining us.
STEIN: Thank you so much. Thank you.
Perlman on investing mistakes
COLVIN: Failing to get real about retirement -- it's actually a perfect example of what may be the greatest mystery in all of investing, and it has nothing to do with P/E ratios or 52-week trend lines. It's just this: Why do we consistently make the same boneheaded mistakes? The rules of successful investing have been known for decades, yet the vast majority of investors unfailingly violate them, losing big money as a result. How come? Well, new research provides some answers -- which investing mistakes are most common, which ones you're most likely to make, and why avoiding them is so hard. Brian Perlman is with Greenwald Associates, which conducted this research for Merrill Lynch. He's also a chartered financial consultant and a psychologist, so just the right combination.
Now, Brian, your firm surveyed a lot of investors, found the top five investing mistakes, in order, are: 1) starting too late; 2) holding losers too long -- the losses become worse; 3) investing too little -- just not enough money; 4) holding winners too long -- so the gains disappear; and 5) over-committing to one investment -- just not diversifying enough. Now these can really add up. Money magazine recently reported that making two or three of these mistakes can cost the average investor maybe a quarter of a million dollars over a life time. But you found that some investors are more likely to make certain mistakes than others, yes?
PERLMAN: That's right. There are different types of groupings of investors, and those investors are more prone to make different mistakes. Now we actually did a statistical analysis and came up with four different groups.
COLVIN: By personality, or what?
PERLMAN: By personality and by their attitudes towards investing. We asked them a series of attitude statements as well as statements that describe their behaviors and then use those statements to sort them into four different groups.
COLVIN: So, what are the groups?
PERLMAN: Well, we have the unprepared investor.
COLVIN: And what characterizes them?
PERLMAN: The unprepared investors are people who never did fund their investments adequately to begin with, and as a result of that, they're well behind the curve. Now the second aspect of these unprepared investors are, besides being behind the curve, they try to catch up, and they try to catch up in foolish ways. And basically they make every mistake in the book. They chase losers, they hold on to winners too long, they try to go after the hot investment. And as a result, rather than catching up, they get themselves in even more trouble.
COLVIN: So these are people who just didn't want to think about it for a long time, and finally realized, perhaps in a panic…
PERLMAN: In a panic.
COLVIN: That they had to.
PERLMAN: That's right. In fact, these investors show higher levels of emotions. They're more anxious, they're more fearful, more concerned, and as a result, they're probably driven by this anxiety to do things they shouldn't do.
COLVIN: What's the second group?
PERLMAN: The second group is the reluctant investor. Now, the reluctant investor, similar to the unprepared, also didn't invest enough probably, but they aren't as anxious. They're more characterized by apathy. And so their biggest problems are mistakes of omission rather than mistakes of commission.
COLVIN: Meaning?
PERLMAN: In other words, they're not funding their investments well enough. However, because they're not getting that involved in the market, they're also not doing foolish things and losing money on purchasing stocks they shouldn't.
COLVIN: So at least they're not trading too much and doing all that kind of stuff.
PERLMAN: Right. And their biggest mistake is probably not shedding enough of their investments. Following the biggest mistake of not funding their investments well enough, the second biggest mistakes are not taking enough action to do something about it.
COLVIN: Third group.
PERLMAN: The third groups are the measured investors. Measured investors are people who are not that aggressive. They don't want to take too much risk, but they've been doing a good, solid job of putting money away, of putting the money into decent investments, and in doing a good job. They're confident that they're going to have a secure retirement. They're feeling okay about their financial situation, but they're not doing enough to actively manage their portfolio.
COLVIN: Well, I was going to say they sound like sort of ideal investors.
COLVIN: Measured investors in particular seem to be doing a lot of things right, but what are the mistakes they tend to make?
PERLMAN: Well, really there's only one mistake the measured investor makes, which is to hold on to investments for too long, and they do this despite the fact that they rebalance, which was kind of interesting in the research. They do every, within 18 months, do a reality check, but for some reason they don't seem to recognize that they're holding on to investments they shouldn't.
COLVIN: Is there any research or any insight into why we all tend to hold on to losers or at least are tempted to hold on to losers far too long?
PERLMAN: There is, and some of the behavioral economics look at some of this research. People like to buy winners. They don't like to admit fault. They don't like to turn mistakes on paper into real mistakes where you actually have lost the money, and so they hang on.
COLVIN: Hoping that it will come back.
PERLMAN: Hoping that it will come back and not willing to admit and face the mistake they made.
I also should say that when we talk about these segments, these are people in the survey who to begin with are making at least $75,000 a year and have $75,000 in assets.
COLVIN: Right. So this is not a survey of all average Americans. It's investors.
PERLMAN: It's investors. I think if we did all Americans, we'd probably find a lot more unprepared investors.
COLVIN: I'm sure you're right. Now, that's three. What's the fourth group?
PERLMAN: The fourth one is the competitive investor. Now the competitive investor's biggest distinguishing characteristic is that they like to chase hot stocks, and this could be good and this could be bad. They go after stocks. Sometimes they pick winners, sometimes they pick losers. But the biggest way to fix the mistakes that the competitive investor is making is to do a little more research into the stock, not just go after hot tips, but make sure that what you're going into is a sound investment and that it makes sense to do so.
PERLMAN: And I should say that there is some potential to work with these investors. I think over the last two or three years these investors know they've been burned. Probably four or five years ago they probably felt they were doing everything right.
COLVIN: Well, four or five years ago every strategy succeeded, and so...
PERLMAN: Right, except not investing.
COLVIN: Except not investing, but they would have thought they were geniuses.
PERLMAN: Right.
COLVIN: You know, a question that occurs to people all the time is why do so many people make these mistakes? Following the rules isn't that hard. Is it something that we are hardwired to do that prevents us from following these rules consistently on our own?
PERLMAN: It's emotions and it's behavioral tendencies. The emotions are, there's fear, anxiety, and on the other end there's greed and overconfidence. And when we looked at these segments, we saw some of these segments, like the competitive, were characterized by greed and overconfidence, whereas others like the unprepared were characterized by fear and anxiety.
COLVIN: I think everybody would like to know which of those four kinds of investors am I? How can they figure it out?
PERLMAN: Well, there's actually a test on the Merrill Lynch web site where you can answer a series of questions, and based on the same questions we used in the research, you can assign yourself to one of those investor categories, and then you can also read about the categories. So, for example, if you find out you fall into the unprepared category, you know that anxiety and fear are driving some of your mistakes and making you, and are causing you to do irrational things. Those are the things you need to work on to be a better investor.
COLVIN: Brian Perlman, thank you so much for your insights.
PERLMAN: It's my pleasure.
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