Throughout this ten-part series, I’m looking at the life and times of Carl Icahn, how he started on Wall Street, his most famous and infamous trades, his transition from stockbroker to corporate raider to activist investor and his activities today.
Of all the world’s great investors, Carl Icahn is perhaps the most feared and respected at the same time. Icahn started his life on Wall Street as a stockbroker and worked his is way up to become the Street’s most respected activist investor and most feared corporate raider.
From 1968 through 2011, Icahn compounded the initial $100,000 he invested in his Wall Street firm at a 31% annual rate. Over the same period, the book value of Warren Buffett’s Berkshire Hathaway grew at only 20% annualized.
According to Bloomberg, Icahn is currently the world’s 33rd richest person with a fortune of $20 billion (at time of writing).
- Carl Icahn Part One: The Beginning
- Carl IcahnEarly Years: Working Through The Ranks
- Carl Icahn Parts Three And Four: The First Battle
- Carl Icahn Part Five: Trans World Airlines
- Carl Icahn Part Six: Texaco & Nabisco Group
Carl Icahn Part Seven: Better Than Buffett?
In the introduction to this series, I mention that Carl Icahn’s returns have been better than those of Warren Buffett over the period 1968 to 2011. To many readers, this may come as a surprise. Warren Buffett is considered to be the world’s greatest investor and his position as the world’s second-richest man is a testament to this.
However, comparing Icahn and Buffett on returns alone without further explanation does not give the whole picture. For the most part, Icahn made the majority of his money as a corporate raider in the 70s, 80s and to a lesser extent in the 90s. Rather than reinvesting his returns in a publicly traded investment vehicle, Icahn has kept the profits for himself. Icahn Enterprises was launched in 1987 as American Real Estate Partners giving Buffett a 22-year head start.
It's all in the reputation
Not only has Berkshire had a longer time to compound, but Buffett has a better reputation as a business owner, which has improved his ability to buy good businesses at attractive prices and has increased the likelihood that the managers of these firms will work with Buffett and Berkshire to achieve the best results.
Icahn would be more respected if he had never gone into the "greenmail" game. After making a fortune in options and arbitrage (the practice of taking advantage of price discrepancies in different markets), Icahn became one of the nation's preeminent practitioners of greenmail and corporate raiding. As profiled in earlier parts of this series, these battles often concluded with the “greenmailer” profiting at the expense of the shareholders of the targeted company.
Still, Icahn gave up “greenmailing” years ago and has tried to improve his image in recent years. Today, he is considered somewhat of a solid corporate citizen, looking to achieve the best results for all stakeholders involved. And since he adopted this strategy, Icahn Enterprises’ returns have accelerated.
One thing to consider here is the fact that Icahn, who owns more than 90% of IEP, structured the business as a partnership, so rather than keeping cash in the business to reinvest, IEP returns huge amounts of cash to investors via distributions. The units currently support a yield of 10.5%. When including these distributions, IEP has produced a total return of 15.9% for investors per annum during the past 15 years. Over the same period, Berkshire Hathaway has only returned 8.5%. IEP’s returns are even more impressive when you consider the fact that the units lost 50% of their value in 2015, and 70% of their value during 2008.
Icahn Enterprises vs. Berkshire
IEP is different to Berkshire in many ways. Looking at the mix of businesses both conglomerates own, Berkshire’s subsidiaries are predominately insurance focused, and Buffett has successfully deployed the float from these insurance businesses into acquisitions to boost the overall growth.
IEP’s business mix, on the other hand, is predominantly industrial and manufacturing, sectors where cash flow tends to be lumpy and returns on capital are lower due to the upfront investment and CapEx required. This business mix has surely held back IEP’s growth over the years, but Icahn's returns have still exceeded those of Berkshire.
All in all, comparing Icahn and Buffett isn’t as easy as it first appears. Both investors have different backgrounds and ways of doing business. Nonetheless, looking at the returns of an investment in IEP and Berkshire alone over the past 15 years and between the period 1968 to 2011, it’s clear which investor has produced the best returns.