Legends of Investing: Carl Icahn

July 12, 2019
Read time:
11 minutes

Carl Icahn is one of the most recognisable and successful investors in the world, having far outperformed the market on an annualised basis since 1968; at a rate which, by some measures, has him ahead of Warren Buffett.

Though his corporate raider or activist approach to investing has proven to be controversial at times, his involvement in companies has still resulted in a boost for shareholders more often than not. Leading to the so-called ‘Icahn effect’ in stock prices when he announces a position.

Whether you love him or hate him, the man Time magazine called the “Master of the Universe” and “the most important investor in America” is definitely someone to be respected and studied.

This is his story…

Early Years

Carl Icahn was born on the 16th February 1936 in Queens, New York. It was a beach neighbourhood and a poor area. His mother was a pianist, but dropped her dreams of pursuing it as a career and instead chose a more stable job as a school teacher. His father also became a substitute teacher.

As you may expect with both parents involved in education, Carl was extremely studious. At high school, he didn’t involve himself in many activities such as sports and clubs, instead he had set himself the big goal of making it to an Ivy League university; something most people in his area had no chance of doing. His teacher didn’t even think it was worth him applying, but this made him even more determined to be different. He had a mind-set that he wanted to be the best at everything.

Icahn’s parents said they would only pay for university if he got into one of the top Ivy League universities. Although no one thought he stood a chance, he managed to enrol at Princeton University and studied philosophy as his major.

His parents fulfilled their promise and paid for his Princeton fees but couldn’t stretch to anything else such as his accommodation or food. Instead, Carl got himself a summer job at a Cabana club in his neighbourhood to fund his living costs.

It was at the Cabana club that he learnt how to play poker and joined in the games regularly. He says at the start he didn’t know how to play, but then he read 3 poker books in 2 weeks and became the best player there, taking home huge winning each summer. He says:

“To me, it was a big game, big stakes. Every summer I won about $2,000, which was like $50,000 back in the ‘50s”

Just like in high school, at Princeton Icahn wasn’t interested in any extra-curricular activities or socialising. Instead, he’d spend the majority of his time in his room or at the library reading books and studying philosophy, only occasionally getting involved in games of chess or a bit of volleyball. He was basically described as a ‘nerd’ and didn’t want to participate in much, he just wanted to spend more time broadening his mind and taking his thoughts to another level.

At university he won an award for his thesis “An Explication of the Empiricist Criterion of Meaning,” and has always said his study of philosophy had a massive effect on him and the way he built his way up to be where he is today.

“Empiricism says knowledge is based on observation and experience, not feelings. In a funny way, studying twentieth-century philosophy trains your mind for takeovers. . . There’s a strategy behind everything. Everything fits. Thinking this way taught me to compete in many things, not only takeovers but chess and arbitrage.”

He graduated from Princeton in 1957 earning himself a degree in Philosophy and then moved on to medical school at the New York University School of Medicine. He attended here because it was what his mum wanted him to do, but after two years he decided to leave as he just wasn’t interested in it. He said to CNN in an interview

“One of the greatest things I did for the human race was not to become a doctor.”

Ironically, a medical school was named after him in 2012.

Early Trading Career

After dropping out of medical school, Icahn still had no idea what he wanted to do with his life. He went to the army for a little while and then decided to get in touch with his uncle who worked on Wall Street.

He managed to secure a job as a stockbroker for Dreyfus & Co in 1961. At this time the markets were in a strong bull market, but were soon to experience a crash. It was at this point that Icahn realised the best choice for him would be to focus on the options market.

He began working for Tessell, Patrick & Co in 1963 as an options manager and then went on to Gruntal & Co the following year, where he took over the options department.

A few years later in 1968, Icahn decided it was time to start up on his own and approached his uncle again for support. His uncle lent him the money to buy a seat on the New York Stock Exchange for $400,000 and that year he formed Icahn & Co.

The company mainly specialised in options trading, as well as risk arbitrage. Icahn & Co did very well and Icahn claims they started making “$1.5 million to $2 million per year”. Although there are no public records to state how much they earned, it is thought they were worth over $100 million by the 1980’s.

Corporate Raider

Although Icahn made significant returns in options trading and risk arbitrage, it was his role as a ‘corporate raider’ or ‘activist investor’ that really earned him his reputation and extreme levels of wealth. This began in 1978, when Carl Icahn started to take large positions in single companies to have more control.

A corporate raid is when a trader buys a large amount of shares, therefore gaining more rights within that company, including voting rights. This enables them to push specific changes, which could then increase the share prices. They may also push to change the board of directors or management, leading to them having more influence over major changes such as corporate takeovers or stock sales.

The first company he did this with was Tappan & Co. Icahn bought a huge number of shares in the company, so large that the company owner Dick Tappan called him personally. However, Icahn was demanding a seat on the board and was persistent in this request. Eventually, out of fear that Icahn would take over the company and sell parts off, the owner of Tappan & Co found another buyer. This was not an absolute defeat for Icahn, since his original investment made around $2.7 million.

Icahn gained a reputation as a Corporate Raider and for his hostile takeovers. People would criticise his approach of ‘bullying’ his way to company takeovers. Many city executives came to dislike him, with one M&A chief saying:

“Carl’s dream in life is to have the only fire truck in town. Then when your house is in flames, he can hold you up for every penny you have.”

He continued to take over more companies in the late 1970’s and early 1980’s. In 1985 he attempted to takeover Phillips Petroleum, however the board used a ‘poison pill’ to stop the takeover.

A ‘poison pill’ is a tactic used by companies to prevent a hostile takeover from taking place. These are usually provisions the board agrees which makes the acquisition of shares less desirable. In this case Icahn sold his shares back to the company, earning $50 million in the process.

One of the biggest and most public takeovers was of Trans World Airlines (TWA) later that same year. Icahn bought a large stake in the company, he knew they were not doing well so could get them for cheaper as the company was in debt of $1 billion. TWA tried everything they could to stop him from buying more shares and taking over the company, even searching for another airline to acquire them. However, Icahn succeeded and took over the company for $800 million and made himself CEO in the process.

As expected, this move wasn’t just plain sailing, as the company wasn’t doing well. Icahn had already sold off assets to pay back the money he borrowed to buy into the company and in 1988 he took the airline private. The company declared bankruptcy in 1991 after selling half of its London routes to another airline. Icahn resigned as chairman.

Icahn continued to buy large amounts of shares in companies in an attempt to takeover the company. Some takeovers proved unsuccessful, such as his attempt on U.S Steel and Texaco. He didn’t manage to takeover either of those companies, but he still made huge profits through the process.

Activist Investor

His approach to investing is to always look for companies that are trading below their value and invest in them. In many cases, there will be some changes that need to be made to ensure their future success.

This is where Icahn has earned his title as an activist investor. An activist investor uses their stake in a company to apply pressure to management to enact changes. In many cases, this will involve a change in the top management. Icahn has been very vocal in complaining about the state of management around the world today and believes changes in management can often be the key to success.

Although this activist approach is not achievable for many smaller or private investors, there are still some key lessons for all investors, in order to emulate Icahn’s approach to a certain extent.

Lessons for Investors

This falls into two very key criteria:

  • You should look for companies that are potential ‘value’ plays. In other words, they are not trading at the current or potential value.
  • The company must have good management that is working on behalf of shareholders.

These factors are not so straight forward to achieve, but certain companies will come along that stand out above all others, particularly due to their management.

Icahn typically goes long in equities and The Motley Fool found that his typical holding period is no more than 18 months. Therefore making him more of a short term investor or trader, rather than a long-term holder.

He also likes to be very focused on his big opportunities, with more than 50% of his portfolio comprising of just three stocks at certain points in time.

Although this does make him very exposed to the stock market, he does also claim to be hedged when there are times of uncertainty.

He has announced in interviews in recent years that he was heavily hedged in his portfolio against a downturn, with the use of derivatives at times. He claims he finds it difficult to hedge against certain stocks such as Apple, but will assume those sort of companies will weather the storm, therefore making the lower price a buying opportunity.

It’s clear from interviews that although Icahn is focused on individual companies, he does keep a close view on the macro environment and key significant variables from other asset classes.

Icahn Partners

In 2004 Icahn started a new firm called Icahn Partners. He did this through investors and managed to raise $3 billion. By 2007 the fund was worth $5 billion.

He bought a large amount of shares in big companies like Blockbuster Video and also threatened proxy fights with companies, in order to get what he wanted.

One example of this was when Mylan Laboratories was in the process of acquiring King Pharmaceuticals, Icahn bought a large amount of shares and threatened a proxy fight until Mylan Laboratories backed down.

Recent Years

The 2008 financial crisis meant that Icahn had to sell of a lot of his shares, including those of Blockbuster Video at a huge loss of $180 million. He went on to return money to investors in 2011. In recent years Icahn has made the headlines in a few different cases.

In 2012 he attempted to acquire a large stake in Netflix, which deterred him through the use of a poison pill, although he still made $1.9 billion on his holding.

He had a holding in Apple which eventually reached nearly $5 billion, which he sold in 2016.

A notable rivalry with another activist investor Bill Ackman, led to Icahn taking a large stake in Herbalife to oppose Ackman’s famous short sale. This led to an on-going feud that made the financial headlines for a number of years, although the two have supposedly called a truce.

More recently, Icahn was hired and subsequently stepped down as a Special Advisor to President Trump on Regulatory Reform.

At the time of releasing this article, Icahn has a net worth of nearly $17 billion. Although he claims to not have the time to spend it, he has been involved in many charitable initiatives.

It’s clear that very few investors have or ever will reach the level of success that Carl Icahn has achieved with his unique and intense approach to investing.

Although most people can’t take his blueprint for success and apply it directly, due to capital restrictions, it’s still possible to take the key points from his investment philosophy, as outlined in this article and use it to enhance the way you assess investments.


Our latest articles

Trading Development
Most traders take the easy route with their trading development, but there are severe costs in not giving it your 100% effort
Trading Development
Successful traders can make trading look easy and effortless, but that simplicity hides a complexity that it's important you develop first.
Trading Development
Being a full-time trader has its own unique challenges. Here are the three biggest things you should NEVER do.