When you hear of Carl Icahn, what do you think? I think billionaire activist investor who fights for minority shareholders, shakes up inefficient management, and finds a way to unlock value through obvious company changes. Carl’s push to spinoff Paypal from eBay is one such example.
Yet despite all the well-known investments Carl has made (e.g. Netflix, Apple, etc), Carl’s fund has actually performed horrendously over the past two years. If you aren’t an investment enthusiast who’s created his own active investment portfolio, you’d probably never know. Take a look at Icahn Enterprises, IEP in the chart below. Over the past two years, his company is down about 60%, while the S&P 500 is flat.
So why is IEP down so much? Because Carl made poorly timed investments in energy stocks, which have not only eroded IEP’s net asset value (NAV or Book Value), but also decreased the premium IEP trades above book value (from 2.5X book to 1.3X book). In other words, investors no longer believe Carl has the magic touch. So why should they pay as high a premium for IEP?
PERCEPTION IS REALITY
When it comes to Carl Icahn, probably 90%+ of us have portfolios that have outperformed Carl’s portfolio over the past two years. I know I certainly have after being up 1.7% for 2015. But despite our massive outperformance, Carl is the one who is a billionaire, not us!
When it comes to investing, you can have a series of good years where you outperform the market. But unless you are Warren Buffet (who also had a bad 2015 down 12% due to large holdings in IBM, Amex, and Walmart), the chances are high that you will then revert to several years where you underperform the market and end up wasting your time! In other words, passive index investing is the way to go for most of us, and most of our investable assets.
Carl’s ability to still trade at a 30% premium to book (the value of his actual holdings) is what we need to focus our learning on.
Imagine if you had a $1 million net worth, but someone was willing to given you $2.5 million in exchange for all your assets? You’d take that in a heart beat! That’s what Carl’s market perception was able to achieve. Nowadays, Carl can only command $1.3 million for every $1 million in assets, but that’s still a premium. No wonder why Carl believes so much in activism vs. being a passive shareholder.
The reality is that anybody who underperforms the S&P 500 by 50% should trade at a DISCOUNT, let alone a 50% premium. This is the power of perception.
As the portfolio manager of your own net worth, you should be like Carl and take an active approach to managing your money by understanding, analyzing, and allocating. You can decide to invest everything you have in a passive portfolio, but at least you took action to understand why.
HOW TO DEVELOP BETTER PERCEPTION
We’re all constantly looking to improve ourselves in some way. It’s just important not to be delusional with the way other people see you and how you see yourself. Once you’ve understood the importance of congruency, you’ll be able to greatly improve your perception with the following steps.
1) Look and speak as if you belong. Our minds are filled with images of what we think successful people should look like. Your goal is to simultaneously understand their biases, blend in with your clothing, and stand out with your speech and mannerisms.
2) Act in a consistent manner. Those who are consistent, gain credibility. Even if you are not the most skilled producer, if people know that you are reliable, they will naturally trust you more. When people trust you more, you will get more opportunity.
3) Never lie or try to mask the truth. Everybody messes up at some point in their lives. Instead of trying to mask failure, hang a lantern on it. Not only will you feel better about admitting mistakes, you’ll also become more relatable to the millions of other people who’ve also done wrong.
4) Do what you say you will do. Perhaps more than anything, the world likes to see people do what they say they will do. Saying “no new taxes” during a campaign and subsequently raising taxes once in office ensures no second term. But if you can consistently act with integrity, then people will love you.
5) Develop a giving mentality. Bill Gates used to be the most reviled business man on the planet. Now he is one of the most loved due to his resolve to give back. Nobody remembers the time Bill was so ruthless. We can all give back to others in our own little ways. Find the time, and your character will shine.
Follow these five tips and you’ll not improve your book value, you’ll also improve your premium to book value. The more you are worth, the more people will respect you, pay you, promote you, and follow you.
BUILD YOUR CHARACTER
It’s easy to be brash and cocky when we are young. We think we know it all, yet we look back years later and wonder what the hell were we thinking. I’ve had many a moment where all I wanted to do was confront my <25 year old self and knock him upside the head for being an idiot.
They say a reputation takes a lifetime to build and seconds to destroy. Hopefully none of us will ever be gutted. But if we are, then we best admit our faults while maximizing our value beyond book value while we still have the chance.
Improve yourself OR improve other people’s perception of you = GOOD. Improve yourself AND improve other people’s perception of you = GREAT!
Finally, the best way to take matters into your own hands is to start a business if you believe in your abilities. There’s nothing better than being your own boss and seeing maximum correlation with effort and reward. Not a day goes by where I don’t give thanks for starting Financial Samurai in 2009. Start something special on the side while you have a job, and work on it until it gains traction. You might surprise yourself!
Updated for 2017 and beyond.
I agree, credibility and consistent good character are key. I’m lucky enough to work for a small law firm where we take those values very seriously, and it pays off in more ways than you can imagine. Not only do we have good and loyal (current) clients who trust us based on our prior conduct, but all of the client referrals we get tend to be good people, too. It’s a self-reinforcing positive spiral.
In trials and arbitration, and even in settlement conferences and dealings with opposing counsel, our honesty and integrity make a huge difference. If you have credibility, everything coming out of your mouth is treated as gospel. If you don’t have credibility, you lose all of the weight of your words.
Does it make sense to pull funds out of my business where I can generate 15-20% and invest into the stock market?
Cheers
Scott
It does not. I think we’d be lucky to get a 5% return in 2016 in the S&P 500 (I predict down for the year). Hence, if you can make 15%-20% in your business, and your business isn’t at risk of being seized or shut down, then you should focus your time and efforts there.
As a business owner myself, my business is exactly what I’m focusing on in 2016 as well. Don’t expect the stock market to do much to your net worth. But also be careful of tying everything up in your business too.
Read:
Recommended Net Worth Allocation By Age
Accumulate More Wealth With an Investing Game Plan
Sam makes some points here, but I would say it more plainly: it does not make sense in terms of maximizing your return, but it does make sense to diversify your wealth.
In fact, this is a risk for many people, on a smaller scale. There are many horror stories of people who had their 401(k) invested 100% in their company’s stock. Then, when their company failed, they not only lost their jobs, but also their investments.
As a business owner, you have more influence on the success of your business, and better information about its condition. But, you are also likely more emotionally tied to it, which can distort your perception of its condition. You can ask yourself how risky your business is, but in abstract that is tough to get a realistic answer to. (just like asking an investor how much risk they can tolerate) If your business is old enough, think back to 2008 / 2009: were you concerned you might go out of business? Or, if it is not that old, how did your industry fare?
If your answer is something less than confident, something that makes you uncomfortable, then your goal should be to have at least enough invested outside your business to provide you with basic security: a liquid rainy day fund and retirement investments that would cover your mandatory spending.
In Sam’s own case, he is very open about his diversification, as described in the links he provided, as well as elsewhere with the regular updates he provides.
So, fake it til you make it :) That often works but the biggest caveat is that your money runs out before you get to the ‘make it’ part!
I too made the unfortunate plunge into commodities in recent years thinking there is no way the downtrend could continue. I keep holding on hoping that we will see a return one of these days. Very disconcerting to be well-diversified but watch a portion of the portfolio get completely hammered year after year. Here’s to hanging a lamp on my failures! Enjoyed the post. Thanks Sam.
It’s so true that everyone should take an active interest in their investments. This is how we learn what we did right, what we did wrong, and how we can make adjustments.
I agree that there are a lot of people with questionable performance, who are getting air time. A lot include short sellers and perma-bears.
It would be very nice to have transparency and see exactly how someone’s personal portfolio has done ( especially if that someone is getting air time, or claiming to be a successful investor who somehow managed to time buys and sells perfectly in hindsight). I also agree with you that 80% of savers out there are better off owning their home, having an adequate emergency fund and then investing the proceeds in a 401K/IRA in index funds.
In the case of Carl Icahn, he has done much better than the market in the past 15 years ( as judging by IEP). So perhaps we need to give him a little more time, and not be too hung up on short-term performance.
(remember when everyone was talking how Buffett was out of touch with reality in 1998 – 2000)
In active investing, it’s all about “what have you done for me lately.” Two years is an eternity in this respect, given people pay much higher fees for active management or premiums to book, as is the case with IEP (1.5X), and Berkshire (1.3X).
But absolutely, over a 10-15 year period, Carl Icahn is the billionaire winner! I just think there is very insightful lessons we can learn through Carl’s example at this current moment. Improve yourself or improve your perception = good. Improve yourself AND your perception = Great.
It’s just important not to be delusional with the way other people see you and how you see yourself.
Anybody who has been to a concert in the past 20 years and seen some middle-aged muffin-top wearing a half-shirt with a belly-ring understands this. There is a fine line between ‘confidence’ and ‘delusion’.
Those five criteria are all sensible and worthy. The frustrating part is watching so many around us, especially in public life, bypass 1) conforming; 2) consistency; 3) truth; 4) reliability; and 5) giving, and yet still thriving. I don’t have an answer to this cultural deterioration, and all I can do is be true to myself and others.
Amen JayCeezy… look no farther than our possibly future president (cringe), the Donald. He violates every rule and always has in my opinion. Has it hurt him?… clearly not in the pocket book. Cultural deterioration incarnate.
Nah. Get real. Hillary lying on Benghazi, on her e-mails, on her “being fired upon in Bosnia”, on her “always being a Cubs fan”, on her “immigrant grandparents”, on being named after Sir Edmund Hilary who wasn’t famous until six years after she was born, on her knowledge of Bill’s cuckholding her and chumping her out, etc.
Trump’s ex’s support him in his run for President. Do you really think Bill supports Hillary? Really?:-) What, EXACTLY, do you see Trump violating rules? Nah, me neither. But Hillary? Can you see it? And be real? Yeah. It is disappointing.
That, and Charlie Sheen being the face of heterosexual AIDS, Dennis Hastert being the face of the moral right-Republicans, John Edwards being the face of moral left-Democrats, David Petraeus being the face of protecting American Top Secret intelligence as CIA Director, James Clapper lying to the Senate Intelligence Committee and being the face of the NSA, Lois Lerner representing the IRS and taking the Fifth Amendment, etc. etc. etc.
So….naaah. Trump isn’t even close to it. Look around.
All good points. Personally, I try to follow the 4 agreements:
– Be Impeccable with your Word
– Don’t Take Anything Personally
– Don’t Make Assumptions
– Always Do Your Best
Hi Sam, I read you speak Chinese. I’m moving to Taiwan this year to learn the language and will be teaching English to support myself. Do you have any suggestions on jobs/ companies I can apply to instead of teaching? Thanks for the blog, Josh
Im guessing Icahn though energy was going to rally. Imagine if he was right, he would look like a genius and would’ve crushed everyone else the past few years.
Im only recently getting into wall street and paying close attention to how it works and its mind boggling.
Icahn has a solid reputation and if he ever gave me advice I would cherish it.
MMM does a great job in creating the perception that he lives on less than $30,000 a year while making hundreds of thousands a year from his site and spending much more than he reveals for years.
Ramit was able to make millions from selling a book, I Will Teach You To Be Rich, while not being rich as a <25 college graduate, and selling courses on making money online and getting a raise at work even though he's never worked.
Convincing lower income and vulnerable people is the way to wealth. It always will be.
Your comment is spot on. You can also add Dave Ramsey to that list. And many more like them. People with an above average interest in finance/financial independence hopefully see right through that, but sadly lower class people will always be a target. Of course people are free to offer any kind of service, it is always up to the buyer. But telling people with 10’s or even 100’s thousands of dollars in debt to buy this magical $100 book and all your problems will be gone seems wrong to me.
Perception is an interesting thing. I think I have an ok idea of how others perceive me. I do try to be receptive to constructive criticism when I get feedback. I do think there are always ways to improve.