Carl Icahn has been in the news a lot recently so much so that some are now wondering if the 77 year old investor is starting to overshadow history’s most successful investor, Warren Buffett.


Icahn has been so successful

In fact, Icahn has been so successful that his wealth has grown by 131% over the last 13 years, outperforming that of Warren Buffett, whose wealth only grew by 26% over the same period.

But is it time for Buffett to give up his crown as the world’s greatest investor? The numbers don’t lie and Icahn certainly appears to have achieved the best returns over the past decade but there are several key factors that should be take into account before jumping to this conclusion.

Perhaps the key factor here is risk. Taking more risk usually leads to greater returns but it can also result in greater losses. Buffett’s first rule of investing is ‘don’t lose money’ and this shows through in all of his investments. In particular, Buffett’s largest investments are in the world’s largest companies, which come with a huge moat, no competitors and a strong financial position.

Icahn’s key holdings

Buffett’s investments are designed to grow wealth over the long term, at a steady rate and with very little risk. In comparison, Icahn’s key holdings come with much more risk.  Dell Inc. (NASDAQ:DELL) for example, is grappling with falling PC’s sales and the only real share price catalyst over the past year has been Icahn’s attempted take-over. Herbalife Ltd. (NYSE:HLF) and Netflix, Inc. (NASDAQ:NFLX) also constitute a large portion of Icahn’s portfolio—two investments that come with a lot of risk and which Buffett would never touch.

The second factor to consider is size, with a net worth of $53 billion compared to Icahn’s $20 billion it is a lot harder for Buffett to make money. A 10% increase in net worth for Icahn is only $2 billion, a large sum but still manageable on Wall Street. A 10%, or $5.3 billion increase in net worth for Buffett would be considerably harder to achieve, there are very few ways that this kind of profit could be made.

Indeed, Buffett has commented on this himself, stating in a letter to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)  shareholders back in 1999, that he would like to have less money to invest. Why?  Well because the best returns are to be had in the small cap section of the market and with Berkshire’s size it is just not possible to 1) make decent returns and 2) not influence the market.

Consider this: Buffett and Icahn each take a 10% stake in a $1 billion small cap company. When the rest of the market finds out, the company’s stock price subsequently doubles. Both investors make a 100% return. This is a 0.5% overall gain on Icahn’s overall portfolio, but Buffett only makes a tiny 0.18% gain—hardly worth the effort.

My third and final point is activism. Icahn has made a name for himself turning companies around using the activist approach, demanding change to boost company performance, the stock price and consequently his wealth. Buffett on the other hand does not demand change, he sits and waits, only buying into companies that can run themselves, removing the need for any input from himself or any other investors.

Buffett can still make good returns on investment

So, overall the Icahn approach may have rewarded New York’s third richest man over the past decade or so, but the Buffett approach is much more sustainable. Buffett is somewhat a victim of his own success and can no longer achieve the returns he once could as the huge size of his transactions would influence the market and distort prices.

It is not a question of whether or not Buffett can still make good returns on investment, it is a question of finding big enough investments for him to make, and which also align with his strict criteria. As of yet, this is not a problem that Icahn has.