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So I have to do it again. I’m stealing an idea for a column from CNBC. The producer from the show On the Money wrote to me with his idea for a segment. As soon as I saw it, I could have cried. I wished I had written it first. It was the ever-important question: Warren Buffett or Eddie Lampert? Who is better? Which investor should you follow?

I had just written two articles on Mr Lampert, the super investor who runs ESL Investments, the hedge fund, has returned 29 per cent a year for his investors since he started, and also runs the retail group Sears Holdings. I also write regularly on Mr Buffett.

But I had not yet tackled the question of Buffett versus Lampert. Both are known as value investors, both have had similar returns in their respective hedge funds (Mr Buffett’s from 1957-69), and both had similar transitions into being an operator as well as an investor. But in many respects they are different.

First off, I would argue that Mr Lampert right now is like the Warren Buffett of 1968. Mr Buffett was finishing a nice run of success at his investment partnership. (This is normally referred to as a “hedge fund” but Mr Buffett never thought of it that way. Although he used arbitrage to generate his returns during this period, and in that sense can be considered “hedged”, he often took big long-only very focused bets that were far from hedged.) Mr Buffett was also making the transition from hedge fund manager to full-time operator of a business, the textiles company known as Berkshire Hathaway.

Furthermore, in 1967 and 1968, Mr Buffett was busy buying a string of ugly, distressed department store chains. Ultimately, Mr Buffett had two silos: stores and insurance/regional banks. He eventually settled on insurance by focusing on Berkshire Hathaway by the early 1970s. By then it was mostly an insurer.

And why insurance? Think of it this way: in a hedge fund, people give you their money and eventually they want not only their money back but they want 80 per cent of the profits you made for them. You get to keep 20 per cent. Thank you and good luck. Now let’s look at insurance: people give you their money, they never want it back and people get to keep 0 per cent of the profits you made for them. You keep 100 per cent. And what is wrong with the retail store business? Well, it is hard. And as Mr Buffett always states, even good management cannot save a bad business.

So I do not blame Mr Lampert for having difficulties with Sears. In his last quarterly report, announced on Thursday, retail store sales were down 4 per cent roughly for both the Kmart stores and the Sears stores. And other than a few weird things such as hurricane insurance settlements and various “swaps”, earnings were down year over year.

But forget that. I am more intrigued by the differences in their investment styles. Again, Mr Lampert is more like the Warren Buffett of the ’60s and early ’70s, when he was buying strong brand names that were temporarily distressed, such as American Express and the Washington Post. Mr Lampert’s recent purchases of Citigroup and Motorola intrigue me.

Let’s not forget that Mr Lampert, when he was a young pup, worked for Bob Rubin in Goldman’s arbitrage unit. Mr Rubin is now the man behind the scenes at Citigroup. And could it be that Mr Lampert followed another large Citigroup shareholder, Prince Al-Waleed, the “Warren Buffett of the Middle East”, into Motorola? Motorola had been one of the best brands in cellphones, until it failed to find a follow-up to the Razr. Carl Icahn is in a full-force attack here, and with Mr Lampert piling in things could get interesting.

Meanwhile, I view Mr Buffett now as more a demographic investor than a value investor. The railways have been cheap ever since they all went bankrupt in the “great railroad bubble of 1860-1890”, but now Mr Buffett sees growth. How come? Commodities get grown in the Midwest, get shipped to the west coast and then sent to the biggest demander, China. It is easier and cheaper to send via railways, and there is almost no capital expenditure involved (all the tracks are already there and there is zero competition). Mr Buffett has been loading up on rail companies such as Burlington National and Union Pacific.

Meanwhile, he’s also making a bet on ageing baby-boomers needing more medicine. You can’t go wrong with Johnson & Johnson if you view it as a long-term demographic bet, and Mr Buffett has been doubling down.

My prediction is that the next big investment move we see will come from Mr Lampert. He will end up doing what Mr Buffett did: getting into insurance. I would not be surprised to see him start his own insurance company or buy one of the more interesting players out there such as Endurance Specialty Insurance or Markel.

james@formulacapital.com

Copyright The Financial Times Limited 2017. All rights reserved.
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