Icahn Versus Buffett: Does the Man Matter More Than the Business?
Here’s a frivolous but entertaining thought exercise: Would you rather own a stake in Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRKA)(NYSE:BRKB) or Carl Icahn’s Icahn Enterprises L.P. (NASDAQ:IEP)?
For many market watchers, the answer is simply a matter of preference — a question of which person they would rather stand behind rather than which company they would actually like to own a share of. Both of the businesses, two of the most successful conglomerates on the face of the planet, owe much of their success to the luck and savvy of their principals. Each a self-made billionaire in their own right, Buffett and Icahn are too well known and too successful to disassociate their personal reputations from the businesses they lead.
Although they both generally prescribe to a philosophy of value investing, there are some pretty fundamental differences in the way each investor approaches his work. For example, Icahn is a notorious contrarian and activist investor. He is an outspoken critic of anybody he thinks is running a company poorly and is not afraid to use his ownership stake in a business to shake people out of board positions. Icahn has a penchant for finding fixer-uppers and helping fix them.
Buffett, on the other hand, likes to invest in companies that are structurally sound and already have good management. Buffett’s annual letters to shareholders are usually dense with praise for the executives that run the myriad businesses owned by Berkshire. Where Icahn is known to enter a position in a company with the aim to do something with it, Buffett generally invests with the simple aim of holding on to the stock for the long term.
If Berkshire and Icahn Enterprises are reflections of their leaders, then it’s worth looking at their track records. Each is storied in its own way. A study released in November by the National Bureau of Economic Research argues that Buffett is one of the greatest investors of all time given his relatively enormous Sharpe ratio.
The Sharpe ratio measures the risk-adjusted performance of an investment and can be used as a way to gain insight into where the returns are coming from in a portfolio. Two portfolios with with the same returns could have very different Sharpe ratios if one made risky bets and got lucky, and the other made safe bets that produced superior returns. A high Sharpe ratio is arguably the Holy Grail of investing: low risk, high reward.
According to the NBER study, the average Sharpe ratio for all mutual funds that have been in existence for 30 or more years is 0.37. The Sharpe ratio for the S&P 500 is 0.39, meaning that your typical mutual fund’s risk-adjusted returns are a little below the index at large. Berkshire logs a Sharpe ratio of 0.76, more than double the median score for the long-term mutual funds included in the study.
Buffett’s performance as a money manager can also be measured by simple returns. According to his 2013 letter to shareholders, Berkshire stock has logged a compounded annual gain in book-value per share of 19.7 percent since 1965. This compares against a compounded annual growth rate of 9.8 percent for the S&P 500 including dividends.
Icahn’s track record isn’t too shabby itself. According to data compiled by Kiplinger, Icahn’s $100,000 initial investment in his own firm compounded at an annual rate of 31 percent between 1968 and 2011. This compares against a 20 percent annualized rate for Berkshire over the same period. Icahn Enterprises, which was founded in 1987 under the name American Real Estate Partners, has returned an annualized 18.4 percent over the past 10-year period.
That said, the earnings power of each company is very different. In 2013, Icahn Enterprises reported just over $1 billion in profit. This seems like a large sum of money until it is compared to the $19.5 billion in net income reported by Berkshire Hathaway that year. From this perspective, Buffett has built an empire where Icahn has built a kingdom.
The opportunity to own a stake of either conglomerate is available for approximately $120 — on March 10, shares of Icahn Enterprises opened for trading at $118 even, and Berkshire Class B stock opened at $121.84 (at $183,772 apiece, Class A stock remains outside the grasp of most mere mortals). Financial and operational performance aside, a choice between the two companies is as much a choice between their management as anything else.