I have only encountered Carl Icahn once in a business environment and even then it was indirectly. I have never met him. The indirect interaction took place in the aftermath of the crash of the Internet Bubble and control the company XO Communications was up for grabs (if you had cash, which was relatively rare at the time, you could try to gain control of companies in Chapter 11). The private equity firm in which I was a partner had to decide whether to try to gain control of XO or double down on Nextel. We chose Nextel and as a result avoided a battle with Icahn. We were glad not to cross swords with him, but the choice was based on Nextel being the better opportunity for us. Icahn is a very smart investor and has deep pockets.
Icahn is also a controversial public figure so this post on Icahn is an opportunity for me to comment on the nature of these blog posts. This blog series is about “what I’ve learned.” The stated intent is to stay mostly positive. I believe you can learn something from almost anyone. That’s why I have done posts on people like Groucho Marx, Rza and Bill Murray. I could probably even do a post on what to learn from Bernard Madoff as an anti-role model.
If you don’t like positive blog posts, don’t read this blog series. The price to read this blog is zero and there are no refunds. If you want hear some snark from me, then try following me on Twitter, where you will find plenty.
Now for the dozen quotes as usual, in this case from Carl Icahn:
1. “Some people get rich studying artificial intelligence. Me, I make my money studying natural stupidity. I sit on a lot of boards…I don’t have to watch Saturday Night Live anymore, I just sit at the board meetings.” The idea that people are not perfectly informed rational agents is obvious even to a very young child. The only people who do not understand this reality are a few economists above a certain age. As Richard Thaler points out: “Behavioral economics is really no longer controversial for economists under 40.” Stocks composed of perfectly informed rational agents don’t drop as much in a single day as LinkedIn or Tableau this week. Anyone who has worked at a real company knows that it is not composed of perfectly information rational managers. And yet somehow Murray Gell-Mann amnesia kicks in and people think other companies are perfectly rational.
2. “If the system wasn’t so messed up, guys like me wouldn’t make this kind of money.” As Howard Marks likes to say, investing is the search for the mistakes of other people that may create a mispriced asset. In other words, one person’s mistake about the value of an asset is what can create an opportunity for another investor to outperform the market. You must be contrarian about some bets and be right about some of those bets to outperform a market average (keeping in mind that it is magnitude and not frequency of success that matters).
3. “I look at companies as businesses, while Wall Street analysts look for quarterly earnings performance.” This is very much a Ben Graham value investing approach. A share of stock is an actual proportional share of a real business and not just a piece of paper. If you think about the value of the business and not about the psychology of people who may want to buy that piece of paper, you are an investor rather than a speculator. To understand the stock you must understand the business. Understanding a business takes time and requires real work.
4. “I buy assets and potential productivity.” Understanding how the pricing power of a business will change over time is critical to successful investing. If you do not understand moats and wholesale transfer pricing power, you do not understand pricing power. Finding a business in which you can invest which has untapped pricing power is a wonderful thing.
5. “In life and business, there are two cardinal sins, the first is to act precipitously without thought, and the second is to not act at all.” This quotation is straight up consistent with the approach of Charlie Munger. It may seem odd, but the ideal posture to have in life is to be patient and yet aggressive when the time is right. Opportunity doe snot come to people who always sit on their hands. Failure often comes to people who think their is a prize for hyperactivity.
6. “The cardinal rule is to have enough capital at the end of the day.” “In takeovers, the metaphor is war. The secret is reserves. You must have reserves stretched way out ahead. You have to know that you could buy the company and not be stretched.” As Harold Geneen said once: “The only unforgivable sin in business is to run out of cash.” In the first Godfather movie the character Sonny at one point says: “Hey, listen, I want somebody good – and I mean very good – to plant that gun. I don’t want my brother coming out of that toilet with just his [ **** ] in his hands, alright? Clemenza: The gun will be there.” The same principle from that scene applies to cash, including in a takeover fight over assets. Cash is always king, but periodically people tend to forget that fact. Cash is about to become more king than it has been.
7. “I made an awful lot of money not having plans. Ask a running back ‘what was your plan when you saw three guys coming at you?’ He doesn’t say, ‘well Jesus I had a plan.’ These things have a life of their own.” Icahn is talking about optionality. In a previous post on Sheryl Sandberg I wrote: “Positive optionality is very valuable. If you are not open to opportunity as it arises, you can’t harvest optionality. My friend Craig McCaw likes to say ‘flexibility is heaven.’ If he can delay a decision somehow, he will do it because he knows a better option might arise in the meantime. Sheryl Sandberg is a protégé of Larry Summers who is close to Robert Rubin. So to understand Sheryl it is useful to understand Rubin. In a New York Times article Summers describes Rubin’s approach: ‘Rubin ends half the meetings with – ‘So we don’t have to make a decision on this today, do we?’ Summers says. New information will evolve.'”
8. “The consensus thinking is generally wrong. If you go with a trend, the momentum always falls apart on you. So I buy companies that are not glamorous and usually out of favor. It is even better if the whole industry is out of favor.” This quotation again reflects a Ben Graham approach. Be greedy when others are fearful and fearful when others are greedy. Contrarian investing can be a very profitable way to act. Of course, you must still be right when contrarian or otherwise. Being contrarian and wrong is unhelpful.
9. “I will tell you, at the risk of being immodest, that we have one of the best records around over the last decade, over the last year. I will tell you this: I’ve learned one thing: Don’t micromanage. Don’t go in and tell somebody else how to run their business. I look at it from the big picture: We go into companies and we tell them how to run their finances, we tell them how to buy pencils instead of buying from their cousin Vinnie, for example. But we don’t tell them what to do in this situation.” The situation Icahn was talking about in this quote was his stake in Apple. Telling executives at Apple how to run their business is dumb. As I stated above, this blog series is intentionally positive. If you disagree with what Icahn said above or believe he is not walking the talk, take it up with him, not me.
10. “Ideas comes to you… not necessarily working and sitting at a desk.” The best ideas come from other people since the smartest people do not always work for you or with you. In addition, creativity needs the sparks you get from everyday life to find their way to your consciousness. Being away from your desk gives you optionality. As Nassim Taleb likes to say: “Living in a city, going to parties, taking classes, acquiring entrepreneurial skills, having cash in your bank account, avoiding debt are all examples of activities which increase optionality.”
11. “I enjoy the hunt much more than the ‘good life’ after the victory.” Business is the greatest game of all. Icahn enjoys that game a lot. As Charlie Munger has said: “There’s nothing as insignificant as an extra $2 billion to an old man.” For someone in Icahn’s shoes, its not about the money.
12. “In the takeover business, if you want a friend, you buy a dog.”