Carl Icahn (Trades, Portfolio) is a polarizing Wall Street figure. The billionaire activist investor has made a tremendous fortune over the past few decades by shaking up struggling companies.
He made the most of the easy-money environment in the 70s and 80s to borrow vast amounts of money to finance his takeover deals. Some of these deals proved disastrous for all stakeholders apart from Icahn himself.
These actions have earned him a somewhat notorious reputation in the business community and on Wall Street. Some media outlets put forward the idea that he would rather break up a company and profit than try and produce a positive outcome for stakeholders.
But whatever you think about the investor, we can learn quite a bit from his approach to the stock market and running businesses in general.
Lessons from Icahn's career
Throughout his career, Icahn has never been afraid to act on an opportunity when he sees it. During the first few decades of his rise, he would often target just one company at a time and extract as much money as he could before moving on.
This might appear to be a high-risk approach, but it's actually fairly common. Most of the successful investors and business magnates of the past few decades have made the bulk of their money from just one company or investment. They have been able to take these overweight positions because they really believe in the company and opportunity or know it inside out. This gives them a competitive advantage over the rest of the market.
Icahn was no different. If he liked a company, he acted quickly and with conviction to take advantage. This approach helped him to compound his capital at an outstanding rate.
Another approach the investor used was to target what he believed to be undervalued businesses. On the surface, this approach seems relatively similar to the one Warren Buffett (Trades, Portfolio) employed in his early partnership days. Buffett would find a stock that looked deeply undervalued and push the management to instigate changes to unlock value for shareholders. Icahn pursued a similar if more aggressive approach. The big difference between these two investors was that with Buffett, it was usually all shareholders that benefited. With Icahn, he was usually the biggest beneficiary. Nevertheless, we shouldn't overlook these common traits between the two investors.
Another investment lesson we can learn from Icahn is the fact that he never bought into a company he did not understand. He only ever invested in businesses where he thought he could make a change. He didn't waste time and effort chasing other opportunities that might not have yielded a positive result just for the sake of diversification. Once again, this is very similar to Buffett's circle of competence principal. He does not like to invest in businesses he does not understand.
All of the above shows there are some valuable lessons we can learn from the life and career of activist investor Icahn. In some respects, the investment strategy he employed throughout his career was very similar to that of Buffett. Both of these billionaires only targeted companies they understood and waited for the perfect opportunity before acting with conviction when the opportunity emerged.
That being said, there were some critical differences between the two as well. Buffett has always been more concerned about his reputation and stopped taking so much of an activist approach after he shut down his partnerships.
Judged on wealth alone, Buffett has achieved a more successful career. But that does not mean we should ignore Icahn's successes. Comparing the investment careers of these two billionaires shows the common ground, and that's what we should be looking to replicate as investors ourselves.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Some Thoughts on Why Warren Buffett Missed the Market Crash
- Berkshire Hathaway: How Much Is the Company Really Worth?
- Some Thoughts on the Daily Journal's Current Valuation
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