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The stage was set in parts I and II (here and here). Now, time to answer the question: Warren Buffett or Carl Icahn, to which investor should we hitch a wagon?
First, we have to know what we’re hitching our wagon to.
With Buffett, we hitch our wagon to Berkshire Hathaway (NYSE: BRK.a). Buffett is chairman, CEO, and 30% owner of Berkshire. The majority – 99% – of Buffett’s net worth is engulfed by the company he built.
Icahn’s net worth is also concentrated. Icahn owns 91% of the outstanding units in Icahn Enterprises LP (NYSE: IEP), the publicly traded partnership he found in 1987. Icahn is Icahn Enterprises’ chairman. The partnership accounts for 36% of Icahn’s net worth.
Buffett and Icahn are majority owners and control their respective investment vehicles. Both have considerable skin in the game. Both also employ lieutenants to assist in allocating capital.
We have two notable differences, though: Berkshire Hathaway is organized as a C-corporation. It pays income taxes at the corporate level. Icahn Enterprises is organized as a partnership that pays no federal income taxes. Berkshire pays no dividend. Icahn Enterprises pays a distribution.
We have differences, but we have enough similarities. We have enough similarities to use both vehicles as proxies for Buffett’s and Icahn’s respective investing strategies: Berkshire is the large-cap-growth vehicle. Icahn Enterprises is the value-contrarian vehicle.
If we measure to the beginning of Icahn Enterprises in 1987, we find that investors who had hitched their wagon to Berkshire Hathaway are ahead by a country mile. Berkshire shares have appreciated 23,000% over the past 31 years. Icahn Enterprise units have appreciated 713%.
That said, it’s misleading to extend so far into the past. The representative investing strategies we see today didn’t solidify until the turn of the century.
If we examine performance from 2000-on, a different picture emerges. We find the tables turned.
Berkshire Hathaway shares have appreciated 400% since we entered the new millennium. Icahn Enterprises units have appreciated 600%. Icahn’s value strategy has trumped Buffett’s large-cap-growth strategy.
But time is a moving thing. Investors come and go over time.
Investors who established positions at the beginning of the current bull market would have fared better hitching their wagons to Berkshire Hathaway. Since the start of the bull market, which commenced in March 2009, Berkshire shares have appreciated 250%. Icahn Enterprise units have appreciated 170%.
As we move deeper into the bull market, we find large-cap growth expanding its dominance. Large-cap growth has powered the bull market for the past five years. Berkshire Hathaway shares are up 88% in the past five years.
The gains garnered by large-cap growth have come at value’s expense. Icahn Enterprise units have been dead money for the past five years.
But no investing strategy leads in perpetuity. Strategies cycle up and down. Value is showing signs of finally cycling up. Icahn Enterprise units are up 6% year to date. Berkshire shares are flat.
With all that said, to whom should investors hitch a wagon?
If we measure an investing career in total, the answer is obvious. It’s Warren Buffett. If we measure in discrete periods, the answer becomes obfuscated.
If we take the long view, Icahn Enterprises has outperformed Berkshire Hathaway since 2000. Granted, the ride been marked by fits of exaggerated volatility. Icahn Enterprises’ concentrated value approach leads to volatile price swings compared to Berkshire’s sedate large-cap-growth approach.
If we take the short view, Berkshire has led the way. Berkshire has outperformed Icahn Enterprises over the past 10 years. What’s more, it has outperformed over many discrete increments within those 10 year.
But investing is a future-centric endeavor. Given that investment strategies cycle in and out of favor, the out of favor value strategy will return. The longer the current strategy has dominated, the more likely the disfavored strategy will gain favor.
The recent past has favored Berkshire Hathaway. I expect the future – more near than far – to favor Icahn Enterprises. The time is at hand for value to dominate.
This is particularly good news for income investors. They have a greater opportunity to outperform the market with an Icahn Enterprises investment. They also have the opportunity to outperform while collecting a distribution – recently raised – that offers a 12% yield.
Buffett might be the greatest investor of all time, but that doesn’t mean he’s the greatest investor for the current time. I favor Icahn’s value approach to investing for the current time.
Good Fortunes,
Stephen Mauzy
Downingtown, Penn.