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 2019 and beyond.