Kraven

We sometimes use a neighborhood girl to babysit the kids. She is 13 and in middle school. The other day my wife and I were talking to her and somehow clothes came up. I took the opportunity to do a little market research. I asked her what stores her and her friends like the most. She quickly said Abercrombie and H&M are the favorites. I asked what she thinks of Aeropostal and she said "well, it used to be popular, but not so much anymore. Once in a while there's something there." What amused me is she said that her cousin in the Midwest still likes it and she thinks it's still popular there, although not around here (Northern Virginia) any more. I asked when it stopped being popular and she said maybe last year, which coincides very well with their performance. Finally, I asked her whether she would ever shop at Sears and JC Penney fully expecting her to either laugh or look puzzled. Surprisingly she said they shop at Sears a lot, although mostly for Lands End. I asked if Lands End is popular with her and her friends and she said, "yes, it's classic stuff". In terms of JC Penney she said not as much as Sears, but they do shop there. I asked what she thought of the updated stores and she said she hasn't been there in a while, it's all online. I asked if she has been to a Sears lately and she said yes, but it's mostly online for them too, both through Lands End and the Sears website itself. I asked if there is any stigma or anything about Sears and JCP and she looked confused. Said "no, they're fine. Not hip or anything, but good stuff." So there you have a sophisticated market research report. I found it interesting anyway.

This is a common sentiment, but one which really doesn't make sense to me. Lawyers are hired to do a job. The fees are not a mystery. Should the work be done for free? Really this is more a reflection of distaste for lawyers. I mean no one says "the only ones who get anything out of helping sick people are the doctors! They make all the money and all that happens is that sick people get better."

There is one in the 3rd edition but I am not sure its specifically what they used in house. Close enough I would think.

Goldman, Nike, Visa to join Dow; Alcoa, HP, BofA out http://finance.yahoo.com/news/goldman-nike-visa-join-dow-124902191.html

I like Berkowitz a lot as well and love his conviction on his ideas. That being said, he sometimes lets the story on things take over. One thing that caught my attention in terms of AIG is that when asked what he would do with it since it's about 50% of the fund, he replied that Graham had the same problem with GEICO and that since it was so undervalued he wouldn't sell it, but instead distributed it to his holders. It may have been true that he thought it was undervalued, but he distributed the shares because he had to as a result of securities regulatory issue related to fund ownership of insurance companies.

Exactly. Perhaps this whole debate is just semantics then, and ancillary products such as phones, gaming systems, tablets, online search and Skype are Ballmer's way of treating cash as if it were owned by the shareholder. First, I have no comment on the MSFT debate. I don't follow it and have no clue whether it's good or bad. In terms of whether this debate is just semantics, I don't think so. Remember that the value of the equity is at stake, so a shareholder has a vested interest in how the corporation acts and performs. At the end of the day though, reasonable minds can differ on how best to get the promised land. MSFT has a lot of cash. Many would argue that such cash should be returned directly to shareholders somehow whether via buyback or dividend, whichever makes the most sense. However, someone like a Ballmer might see that pile of cash and argue that if he returns a dollar, all anyone has is a dollar (in general terms), but if he invests it "wisely" that dollar can dance on the ceiling. Forget whether that's been true in the past, many successful business people look forward only and remain optimistic about their abilities. So long as they dotted the "I"s and cross the "t"s the only real recourse is to "fire" them. Just to be clear, I personally generally prefer said buybacks and dividends, as applicable, as I think most managers aren't that capable. I'm speaking strictly from the general standpoint of property ownership, etc that was the subject of this thread.

I know you're being sarcastic, but that's not accurate either. The question was who owns a corporation's assets. Technically it is the corporation. However, shareholders as owners of the corporation itself have their own bundle of property rights and expect that the value of the equity will be increased. They own a lot more than dividend payments and proceeds from a liquidation. Shareholders have collectively hired the officers and directors to run the company. They are required to do so using "reasonable" judgment (there are different standards depending on the situation). Obviously an argument can be made that in any kind of acquisition, etc it was the "best" use of capital. One may argue and disagree, but from a legal standpoint it is tough to say that they "destroyed" capital by doing something like this. In my view acting like an owner means treating "hiring" decisions with the utmost level of care since those are the people delegated to run "your" company. You may not have technical legal ownership to the underlying assets, but you have ownership in the equity of the "person" who does. Kraven your responses have been phenomenal, as usual especially with regard to legal issues. Let me ask you this - in one of his posts on the MSFT thread, Oddball stated that "a corporation cannot exist without shareholders" - intuitively this makes sense (as does believing a common stock holder is the "owner"), but based on the conclusion that a corporation is its own separate legal "person", a corporation must be able to exist as a stand-alone, shareholder-less entity, correct? Not being sarcastic here whatsoever - just trying to follow the legal logic. Ha ha, I try (sometimes). Oddball is correct. A corporation can't exist without at least one shareholder. Someone (whether a natural person or not) must own the corporation. Corporations survive indefinitely unless their organizational documents provide otherwise (rare these days). Ownership of the company can obviously transfer from one person to another, but it doesn't change the nature of that company. I want to try and clear up what is perhaps a confusing issue. Given that shareholders own the company that owns the assets, it is perfectly fine to think of the assets as one's own in the sense of considering how to maximize value of the equity. While it doesn't mean that if a company owns 100 bulldozers and you own 1% of the company that you can go in and drive "your" bulldozer away, it does mean that you have an interest in ensuring that those 100 bulldozers are maintained properly and their value utilized properly to the extent that it affects the value of your shares. What gets difficult and why there is so much debate about value maximization, is that there is no clearcut way to maximize value. If there is excess cash is it better to buyback stock, pay a dividend or make an acquisition? These things aren't always clear in real life and often are viewed through the lens of results, not process. But rational people may differ on what is best and that is why absent negligence or a failure to live up to the applicable standard of care, that management will do what it sees fit to do.

I know you're being sarcastic, but that's not accurate either. The question was who owns a corporation's assets. Technically it is the corporation. However, shareholders as owners of the corporation itself have their own bundle of property rights and expect that the value of the equity will be increased. They own a lot more than dividend payments and proceeds from a liquidation. Shareholders have collectively hired the officers and directors to run the company. They are required to do so using "reasonable" judgment (there are different standards depending on the situation). Obviously an argument can be made that in any kind of acquisition, etc it was the "best" use of capital. One may argue and disagree, but from a legal standpoint it is tough to say that they "destroyed" capital by doing something like this. In my view acting like an owner means treating "hiring" decisions with the utmost level of care since those are the people delegated to run "your" company. You may not have technical legal ownership to the underlying assets, but you have ownership in the equity of the "person" who does.

People are confusing the Graham/Buffett pronouncements to "act like an owner" as meaning that one is the owner. They are not technically or legally so. As to why this is "fair", one receives certain benefits from the corporate structure such as limited liability and so forth. In return one gives up certain rights with respect to the assets or property.

A corporation is an entity separate and distinct from its shareholders. Property owned by the corporation is NOT owned by the shareholders. A company is created by statute or in certain limited cases by common law (not usually in today's world). Once formed it is a "person" under the law. Person A forms a corporation and is the sole owner of equity. Person A causes the corporation to buy a building. Person A does not own the building, the corporation does. Subject to applicable law Person A may be able to unwind the company and distribute the assets to himself, but it is subject to any superseding interests which include anything from creditors, to government agencies, etc.

My recommendation is skip the presentations and just hang out in the lobby eating cookies, drinking coffee and pretending to be busy like everyone else. Skip the initial step of actually sitting down in the conference room and then 5 minutes in holding your blackberry or phone up and "angrily" shaking your head that someone has the audacity to require you speak right that second. But if you must sit first. Loudly whisper into the phone for added effect "What?! I'm in an important meeting! You have to talk now?! Ok. One second." Then rush out of the room and stand in a corner in the lobby facing the wall for a few min while pretending to have a call. Then when the crowd turns over and no one is paying attention to you sit in a chair with your cookies and coffee and spread a document out. Under it have the sports page. But if someone walks by be furiously writing notes in the margin.

What made you choose those 2 rather than some of the other beaten down stocks around that time? These were the two I felt I knew the best. There's a story, of course.....and it's etched in our family lore. Sunday March 8(?), 2009, the wife and I are at a car wash and I say, "look, I won't do this if you say no, but Wells Fargo and AXP are down to $10 and they are worth probably 3X that amount. The market thinks they are going under. I don't. I want to put 1/3 into each." She shocked me with an immediate "yes." So I was prepared to make the trade Monday morning....I didn't sleep well, and woke up at 3 AM. Absent-mindedly I turned on CNBC, and bam, there was Buffett. And he basically endorsed them both, you know, the way he tells you without actually saying 'buy the stock.' One thing he noted was their $40BB pre tax pre-provision income and how the company was selling for like 3 X that. Every once in a while we go back to that car wash and reminisce ;D P.S. Some one rudely pointed out later that if you just bought an index of small-cap stocks at that same time, you would have made even more. What would have happened, however if the market had really tanked in 09 and 10 as it did in the extension of the 1929 crash? I think it's very likely that the high quality stocks you bought would have been among the survivors, but many of the small caps, especially those with significant debt, would not. Your choice presented what Taleb calls convexity of outcomes, relatively good results under many prospective futures and resistance to failure in the worst circumstances. Congratulations on a fine risk adjusted decision that wasn't all that risky in even worse outcomes than what occurred. :) In my opinion there is a lot of hindsight bias involved in looking back at investments made in the post Lehman bankruptcy through March 2009 time period. At this point, almost 5 years later, it seems "obvious" that everything would be just fine. I like the reference to the convexity of outcomes. I think there was certainly a possibility that things didn't turn out ok and that everyone jumping into AXP, WFC, BAC, and many other financials and non-financials would have been burned. People forget that there was very real talk of nationalizing some of the banks. Would AXP and WFC just skated away if C and BAC, for example, were somehow nationalized? I don't know. It was a very scary time. The only thing that kept me sane about it was that while I didn't know what would happen or if it would all work out ok, I knew that the alternative was probably a change in life as we knew it. Maybe not guns, ammo and canned goods, but perhaps something closer to that. So either things got better or they didn't and if they didn't I wasn't sure that it would matter what your stock portfolio did. Good points. However, "if you don't know jewelry, know your jeweler" is apropos here. Everything Warren has bought repeatedly till it becomes a major position has that quality of convexity, although sometimes an entire industry like print media can be superseded by something new. With WFC, they would have been the last domino standing among the big banks, a likely survivor in anything other than a nationalization of the industry. AXP had relatively minor exposure to risky assets. The Taleb insight is key. We may not know as much about one of his holdings as Warren does or be able to predict the future, but knowing where convexity lies or betting on the jockey who rides the all weather horse when the course is a mud field is crucial. I can't disagree with anything you said. However, perhaps I suffer from lack of imagination, but I have a hard time seeing a world where things like BAC and C are nationalized and WFC and AXP just go on, business as usual. They might have been last man standing, but perhaps not by much. I just don't believe that BAC and C go under but people keep on taking out home loans from WFC and charging dinners at Lutece on their Amex card. But who knows, that was just my fear. I think we are all more interconnected than we believe. Look at the financial crisis. A crisis in real estate touched and has continued to touch every walk of life since.

What made you choose those 2 rather than some of the other beaten down stocks around that time? These were the two I felt I knew the best. There's a story, of course.....and it's etched in our family lore. Sunday March 8(?), 2009, the wife and I are at a car wash and I say, "look, I won't do this if you say no, but Wells Fargo and AXP are down to $10 and they are worth probably 3X that amount. The market thinks they are going under. I don't. I want to put 1/3 into each." She shocked me with an immediate "yes." So I was prepared to make the trade Monday morning....I didn't sleep well, and woke up at 3 AM. Absent-mindedly I turned on CNBC, and bam, there was Buffett. And he basically endorsed them both, you know, the way he tells you without actually saying 'buy the stock.' One thing he noted was their $40BB pre tax pre-provision income and how the company was selling for like 3 X that. Every once in a while we go back to that car wash and reminisce ;D P.S. Some one rudely pointed out later that if you just bought an index of small-cap stocks at that same time, you would have made even more. What would have happened, however if the market had really tanked in 09 and 10 as it did in the extension of the 1929 crash? I think it's very likely that the high quality stocks you bought would have been among the survivors, but many of the small caps, especially those with significant debt, would not. Your choice presented what Taleb calls convexity of outcomes, relatively good results under many prospective futures and resistance to failure in the worst circumstances. Congratulations on a fine risk adjusted decision that wasn't all that risky in even worse outcomes than what occurred. :) In my opinion there is a lot of hindsight bias involved in looking back at investments made in the post Lehman bankruptcy through March 2009 time period. At this point, almost 5 years later, it seems "obvious" that everything would be just fine. I like the reference to the convexity of outcomes. I think there was certainly a possibility that things didn't turn out ok and that everyone jumping into AXP, WFC, BAC, and many other financials and non-financials would have been burned. People forget that there was very real talk of nationalizing some of the banks. Would AXP and WFC just skated away if C and BAC, for example, were somehow nationalized? I don't know. It was a very scary time. The only thing that kept me sane about it was that while I didn't know what would happen or if it would all work out ok, I knew that the alternative was probably a change in life as we knew it. Maybe not guns, ammo and canned goods, but perhaps something closer to that. So either things got better or they didn't and if they didn't I wasn't sure that it would matter what your stock portfolio did.

You may want to also consider the Washington DC area. From a job standpoint for you and your wife, there is plenty of opportunity. Lots of hospitals and finance jobs. The DC area is one of those places where there are lots of people from various places. While it wouldn't be thought of as a small town, and it isn't, you will almost certainly be able to find groups of like minded people who also have transplanted to the area. It's not cheap, but then again if you don't have to live in the District there are plenty of outlying areas that are more reasonable. Traffic is terrible, but that goes with the big city aspect of it. And you get enough of (what I consider to be) that awful, humid southern weather to make it feel like home to you! Just something to add to the list.

Thanks Kraven. That was a good response. But I have a few questions on the above. Particularly on this: "There isn't a situation where just the guarantor entities go under....So if a leg got cut off, it's tough to see how Holdings doesn't default on its debt. " Maybe I am misunderstanding, but I thought that the guarantors could go under and this wouldn't cause a default on the parent. This seemed to be what Parsad's friend was discussing. Also, if we look at the CF statement, all the CFO is coming from the non-guarantees. So it does look like to me that ESL is setting a situation where he can selectively default if need be and leave the parent whole. These things get complicated and simplistic statements (from me) tend to oversimplify a complex matter. I personally believe that much has been attributed to the guarantor/non-guarantor issue then should be. Let me try to answer your question as best I can. Sears Holdings is the ultimate parent and the entity which shareholders hold an equity interest in. Holdings owns various subsidiaries, including the K-Mart Retail and Sears Retail entities. In turn, both of those subs own various subs and so on. Holdings is the issuer of this debt. Various subs are guarantors and various other subs are not guarantors. I am sure you know all of this, I'm just trying to set it out so that a discussion can occur using the same framework. Guarantees work in various ways, but essentially it means that if an obligor does not make good on an obligation the guarantor will be obligated to do so. As you know, a holding company generally only can get funds to pay its debts (and do whatever else it needs) in one of a few ways: (1) borrowing or equity issuance, (2) dividend or interest income from existing investments or (3) dividends from subsidiaries. Let's assume that Holdings needs money from its subs in order to pay current interest and ultimately pay off the principal. The credit agreement doesn't have that many covenants in terms of which subs needs to guarantors and which don't. I am sure this was heavily negotiated. There are 2 ultimate protections. One, it's a default if interest and principal isn't paid as required and two, there is a coverage test tied to the asset base (borrowing base which is essentially inventory and receivables, I believe). So now we have a framework. Forget about which entity is a guarantor for a second. It gets money from all its subs as they have it and are able to pay subject to their own obligations (remember that dividends can't be paid up until subs own obligations are paid, but that's neither here nor there). Let's assume that a guarantor sub goes under for whatever reason, it doesn't matter what. Let's assume this sub is not one of the "main" retail entities, but is just a random sub doing who knows what. So now it is unable to pay amounts to Sears or K-mart retail, as the case maybe, and that's that much less than those can pay to Holdings. Let's assume a non guarantor went under. Same thing! There's just that much less money to make it's way up the chain to Holdings. From the standpoint of a creditor it probably didn't really matter all that much who was a guarantor and who wasn't. They ultimately are backed by ALL of the cash coming in. It's not like non guarantors aren't still funneling money up to Holdings. At some point if enough guarantors OR non guarantors went under (including Sears and K-mart retail), it could cause Holdings to have insufficient funds to pay it's obligations and/or cause a coverage breach which required Holdings to buy back the debt in order to restore the appropriate coverage levels. However if subs are dropping like flies, how do they do that? So ultimately it would depend on which sub or subs went under. If it's a random one, not sure it matters. If it's Sears Retail or something then creditors would at some point likely be in a position to foreclose on the equity in the subs including the non guarantors. If it's Holdings that goes under, same thing. All the guarantor structure would mean is that non guarantors aren't obligated on the debt, but who cares? I am not even sure that the guarantor/non-guarantor structure even helps with the sale of entities. The structure was pretty flexible in terms of who is required to be a sub. It seemed to me pretty easy to sell one off or something so long as the coverage test is still met. I am just not seeing what the guarantor/non-guarantor structure really gets anyone. Would love someone that has a contrary view to speak up. I think it's nice to be able to see where value resides in the holding co structure, but don't think of it as ringfencing prime assets or anything so that they are outside the reach of anyone other than shareholders. That's not the case in any scenario. At the end of the day, if you believe in the value of the assets, it shouldn't ultimately matter what happens. Even if liquidated, value should be there. That is what I see. I don't give a crap about all the Shop Your Way or anything like that and all of the 10,000 posts a day. That's noise. Shop Your Way is useless. I would never use it in a million years. The beauty of being an asset based investor though is I don't care. In this case tear the structure down and divvy up the real estate and brands and tax assets. Sorry for the rambling post, hope it was helpful and coherent.

Just a quick response to try and help you move things along. 1. How do you figure out which subs are part of the Gaurantor and which are part of the non-gaurantor? Look at the Indenture and Security Agreement from the original debt issuance in 2008. It's the same documents. Just a point of clarification. There are subs that are guarantors and subs that are not guarantors, they are not "part of" the guarantor. That is, there are many guarantors and non guarantors. From memory, guarantors are all domestic subs that have substantial amounts of credit card receivables. It might have included certain levels of indebtedness as well, I don't recall. From my perspective, it was interesting to see Land's End included, but KCD and (certain) real estate excluded. 2. According to the bond prospects, it reads as if the only collateral they are able to call on are the inventories and receivables, not the real estate. Is that right, can a bond only have collateral from one part of a company and not the whole? Collateral can be whatever someone wants it to be with certain exceptions such as borrowing to carry stock. But in the case of "hard assets", sure, it could be this account and not that account, it could be these receivables and not those receivables. 3. When looking at the separate balance sheets offered in the recent 10Q, I am trying to figure out what the balance sheet would look like if the gaurantor subsidiaries went bankrupt and the shareholder was only left non-gaurantor and the parent. Do you only need to factor out the intercompany loans and inter company investments? I've tried to talk about these issues a couple of times, but other than one or 2 comments it's been ignored and the same questions and issues get raised repeatedly. Don't worry about figuring out what bankruptcy will do to the guarantor and non guarantor entities. It's a big waste of time in my opinion. People are confusing things here. It's not like the guarantors and non guarantors live in separate worlds. They are all related parties and have the same or related ownership. There isn't a situation where just the guarantor entities go under (it's also impossible for ALL of those to go under, there are dozens of entities). The more likely situation would be that either the K-Mart or Sears retail subs went under. That's the question. If they did then any creditors of those subs would be structurally subordinated to any creditors of their subs. But they would have a line on the equity therein. This then ultimately effects shareholders of Holdings. There is little to no value in Holdings itself, it's all in the various subs as far as I can tell. So if a leg got cut off, it's tough to see how Holdings doesn't default on its debt. However, at the end of the day, even in a liquidation there is almost certainly more than enough assets to protect against a permanent capital loss. 4. Looking at the intercompany investments, looks like the gaurantor made investments into the gaurantor, how is that so? See above. Guarantors and non guarantors have no special place in life other than their roles under the credit agreement. They are either on the hook for that debt or not. Other than that they are simply corporate entities. They can invest or not as their organizational and other constituent documents permit. 5. Why is there there 4.4B in PP&E in the gaurantor and only 1.6B in the non-gaurantor? Is all the good real estate in the non-gaurantor? If so, how can that happen. Can anyone explain this? See above. These are just corporate entities. They own what they own. Based on a 10-K or something there is no way to tell who owns what pieces of real estate. Hope this helps a little.

It's worth $199 and not a penny more. Oh well, I guess I won't be buying it then.

This is a great point, very true. Haven't people heard about those who surround themselves with people better and smarter than themselves? I too have had many experiences with people who are technically brilliant and perhaps geniuses, yet couldn't find their way to the restroom at work. As an example, anyone who has worked with an investment bank will know that many of the people on the desks are brilliant. If they weren't crunching numbers they'd be figuring out how to get to Mars and back before lunch. Yet . . . they can't function. They have no social skills. The people with business, the ones really bringing in millions and millions know how to get things done but couldn't tell you how to figure the minutia out to save their lives.

I loved Ender's Game. The movie is coming out and hopefully it will be good. At one point I tried to read some of the many sequels, but couldn't get into it. Check out Flood by Stephen Baxter and Dies the Fire by S.I. Stirling.

Thanks. Sounds like it's worth checking out.

Packer, how does it compare to the new Tilson book "The Art of Value Investing"? Is it similar? I've been reading the Tilson book and while it's good and there's some good quotes, very good in fact, I find it doesn't hold my interest. It's easy to read a page or 2 here and there, but not so easy to just sit down and keep reading quotes.

If there is a trustee, you could try to contact them. They won't tell you who owns it (if they even know), but might be willing to put you in touch with someone.

Oh! Foul company. An undeclared trace of milk in one of their bon bons. What a nanny state we have become. I'll give you a free pass on this as I normally respect your opinion. As a parent of a child with serious allergies, believe me, this is is serious stuff. Cheers nwoodman +1 We have to check labels carefully and if something wasn't there it could be a big issue.

I get the impression that you are confusing actual "cloning" with idea sourcing. That is, copying what someone else does vs using what others do as a source for potential ideas. Why in the world would anyone want to pay someone else to clone? Why not just go to the original? I can't speak for anyone else, but for those who have invested in SHLD it would NOT be cloning Berkowitz unless they bought just because he did. You're talking about investing in things because others have, but confirming the data. There is a big difference between doing that and simply saying here is a list of 50 ideas that have been obtained from various sources. You have backtracked a little bit on your level of confidence. That's fine. You are clearly young and confidence comes with experience. For your own sanity and preservation, I believe you should not invest anyone else's money until you truly feel confident that any investment you make is a good one and not just because Pabrai or Berkowitz has made it. If you have doubts, then it won't be a pleasant time for you. Managing money is stressful enough. Add in a lack of confidence and the stress could be unbearable.

A kindred spirit here. I always prefer to read on good, old fashioned paper if I can. We have a Kindle Fire and as you said while it's nice for reading, for annual reports and the like it doesn't work at all since the whole page doesn't show up. I don't know about the newer version. I got an Ipad and it works great for reading filings and anything else for that matter. It's pretty close to the size of a sheet of paper and everything fits on the screen nicely. It's a nice substitute for a hard copy, but everything being equal I still prefer regular paper if I have the option.