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Carl Icahn Has Outperformed Buffett Over the Past 20 Years

·4 min read
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At first glance, the investment styles of billionaire gurus Warren Buffett (Trades, Portfolio) and Carl Icahn (Trades, Portfolio) could not be more different.

Buffett prefers a slow and steady, value-orientated investment approach, while Icahn is an aggressive activist investor who will initiate a few significant positions and then drive for change at the companies he owns.

That being said, you can make a strong argument that both investors do follow a similar investment style because they both buy what they perceive to be undervalued businesses.

The difference is, Buffett rarely gets involved in unlocking value. Icahn, meanwhile, is not afraid to get his hands dirty.

"Control" positions

Buffett used a similar approach to Icahn in the 1960s.

Back when he was managing his investment partnerships, the young investor would often initiate large "control" positions in companies, and then strive for change. Examples include Sanborn Map, Dempster Mill and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).

The Oracle of Omaha's tactics were never as aggressive as those of Icahn, but they didn't need to be. Wall Street was a very different place in the 1960s. When Icahn's career took off in the 1980s, Buffett was already an established investor with billions of dollars in capital at his disposal. You can argue that Icahn needed to be aggressive at the time to stand out in a crowded environment.

Icahn overtakes Buffett

For many decades, Buffett's investment style seemed to be the right one as Berkshire Hathaway far outperformed Icahn's investment vehicle, Icahn Enterprises (NASDAQ:IEP). However, over the last couple decades, this trend has reversed.

Indeed, over the past 20 years, an investment in the latter vehicle has produced a total return of 1,980% compared to 545% for Berkshire Hathaway.

Over the past decade, Icahn Enterprises has outperformed Berkshire by 17% on a total return basis, though it has still underperformed the S&P 500 by around 68%.

Investment style

It would appear that Icahn's active investment style is the primary reason why he has been able to outperform the Oracle of Omaha over the past couple decades.

As well as his stock portfolio, where he employs his activist tactics, Icahn's investment vehicle also owns a portfolio of private businesses. The company is an active buyer and seller of these companies, unlike Berkshire.

For example, at the end of last August, Icahn Enterprises announced it had completed the previously announced sale of Ferrous Resources Ltd. to Vale S.A. (NYSE:VALE) for a total consideration of approximately $550 million. It recognized a book gain of approximately $264 million on the sale.

Roughly a year earlier, Icahn also sealed a deal to sell American Railcar Industries for $1.8 billion, booking a $757 million profit or 500% return on investment.

These value-creating events have helped support the partnership's share price.

With the exception of the recent divestment of its newspaper portfolio to Lee Enterprises Inc. (NYSE:LEE), Buffett rarely sells any of Berkshire's businesses. So while it is highly likely that he could get many multiples of a company's book value in a sale of one of the conglomerate's businesses and crystallize this value on the balance sheet, it is not likely to happen.

Chose your investment

What does this mean for investors? It isn't very easy to tell.

Icahn Enterprises has always returned a large amount of capital to investors. In the past, its dividend yield has been as high as 10%.

This signifies a very different approach to Buffett. Icahn is trying to unlock value and return the cash to himself and other investors to invest as they wish. Buffett, on the other hand, wants to keep the money in Berkshire.

That's fine if you're happy to let Buffett continue managing your money as a shareholder. I'm sure he will continue to produce attractive returns for many years to come. But if you'd like to invest alongside a more flexible manager, Icahn might be a better choice.

Disclosure: The author owns shares of Berkshire Hathaway.

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