Should You Invest With Carl Icahn? Chesapeake Energy Corporation (CHK), Netflix, Inc. (NFLX)

Carl Icahn may not be as famous as Warren Buffett, but he is one of the best value investors in the world. He has an outstanding long term track record in the markets, built through years of contrarian investing and shareholder activism, a ruthless corporate raider who is not afraid to go against management when trying to unlock value and extract benefits from his positions.

Investing with Icahn is not easy, and certainly not for the faint of heart, but it does offer the potential to achieve market beating returns in the long term.

A Tough Guy

Viewers enjoyed one of the most interesting moments in the history of financial TV last week, when Icahn called CNBC’s Fast Money Halftime Report to get into a fierce 30 minute discussion with hedge fund manager Bill Ackman regarding shares of Herbalife Ltd. (NYSE:HLF). Actually, the argument was about much more than that; the two billionaires have a long-standing dispute regarding a legal battle from years ago, and Icahn left subtleties aside during the discussion.

Icahn described Ackman as “a crybaby in the schoolyard” and “a major loser,” saying about his abilities as an investor, or lack of thereof: “I wouldn’t invest with you if you were the last man on Earth.” This may not be good business etiquette, and probably not fair to Ackman either, but it shows Icahn as he is: frontal and decided in his opinions and actions.

Icahn has made a fortune for himself and his investors by making big bets in undervalued securities. He is also a coldblooded activist when it comes to pushing for strategic restructurings or management changes if he believes that´s the way to go. Icahn may not be a kind guy, but he is certainly a successful investor.

According to Kiplinger, Icahn has even done better that Warren Buffett himself over the last years:

Icahn, 76, is arguably one of the great value investors of all time, and by one key measure may be an even better investor than Buffett. From 1968 through 2011, Icahn compounded the initial $100,000 he invested in his Wall Street firm at a 31% annual rate. Over the same period, the book value of Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) grew 20% annualized.

Icahn Enterprises, L.P. (NASDAQ:IEP)

Icahn Enterprises is a holding company which has operations in investment, automotive, gaming, railcar, food packaging, metals, real estate and home fashion. The most prolific and interesting segment of the company is investment management, which has been responsible for the biggest share of the firm´s profits over the last years.

There are many similarities between Icahn Enterprises and Buffett´s Berkshire Hathaway Inc. (NYSE:BRK.A). Both companies include operating subsidiaries and an investment management business, and they are also very unique in the sense that they are managed by investing luminaries.

Being smaller and more aggressive, Icahn Enterprises has outperformed Berkshire in terms of book value per share over the last years, and they are both trading at similar valuations in the area of a price to book value ratio near 1.3.

Investors need to consider, however, that Berkshire is much safer since it benefits from the stability and recurrent profits provided by its insurance and utilities operations, among other operating segments. Buffett leverages the cheap financing produced by the insurance business to invest in low risk, high quality, companies. He has built in Berkshire a rock solid fortress that can withstand any kind of economic hurdles.

Icahn Enterprises is much more exposed to the results from the investment management business, and in that sense it can be much more volatile. The upside to this bigger volatility is superior return potential.