Brief thoughts on Sears (SHLD)

Is Sears a buy? The company is worth 1.34B. Berkowitz thinks it’s worth 18.8B. OK, so potentially at least 10x. Maybe 15x. Berkowitz’s analysis is here: http://www.fairholmefundsinc.com/Letters/FAIRX2015AnnualLetter.pdf

Berkowitz has a reputation as a brilliant investor. I’m not gonna argue against his NAV analysis. However, I’d like to point out the psychological aspects that I think are missing from the analysis.

If Sears shuttered and liquidated everything, I’d be a buyer. That’s a tremendous bargain. But it’s not closing down. Why? The big problem with Sears is Eddie Lampert. The problem is that Lampert is trying to be a retailer. Now if Lampert were trying to be an investor, like Buffett, and just liquidate everything, then Sears would be a brilliant move — Lampert’s average purchase price seems to be about 4B. So he’d make money.

But it seems clear that he’s trying to actually do retailing, given the “Shop Your Way” program and everything. Now that’s ridiculous. That’s just burning through a tremendous amount of cash. Nearly 1B each year. And why is he doing that? Look at the psychological aspects. Taking Charlie Munger’s psychological checklists for a look, we see many psychological misinfluences:

• Doubt Avoidance Tendency
• Pain Avoidance Tendency
• Excessive Self-regard Tendency
• Optimism Tendency
• Loss-Aversion Tendency
• Inconsistency Avoidance Tendency

The only counteracting agent might be “Social Misinfluence”, since everybody hates Sears. And none of these psychological misinfluences need commentary — it’s obvious enough on their own to see how they are found in the Sears situation.

So Eddie Lampert is trying to be a retailer. While Buffett and Munger have said that they’ve tried retailing long ago and failed miserably. Hm. Some lessons to be learned, I think.