Buffett Vs. Icahn

| About: Berkshire Hathaway (BRK.B)

Two proven investors with legendary track records offer vehicles for the investing public to join in their success. Individual investors can invest in Warren Buffett's Berkshire Hathaway through either the (NYSE:BRK.A) or (NYSE:BRK.B) shares, and individual investors can invest in Carl Icahn's Icahn Enterprises through (NYSE:IEP).

The BigRiverReport.com portfolio is presently considering both securities for potential investment. Berkshire Hathaway essentially uses insurance premiums generated from it's ownership interests in insurance companies to fund purchases in a diversified mix of private businesses and public companies. So long as there is adequate cash available to meet regulatory requirements for funding expected insurance losses, insurance companies are permitted to invest the excess premiums. The excess premium available for investment is known as the "float".

Warren Buffett measures the performance of Berkshire Hathaway through the annual increase or decrease in Berkshire Hathaway's book value. The process of investing insurance premium "float" creates significant leverage as the gains or losses on the investments made with the insurance "float" add to or detract from the insurance company's book value which ultimately accrue to the owners of Berkshire Hathaway.

Mr. Buffett has been very successful at making investments with the "float" from Berkshire Hathaway's insurance holdings, and he has also done an excellent job at keeping down the losses and costs at Berkshire Hathaway's insurance companies.

Berkshire Hathaway is comprised of a well diversified group of businesses. Mr. Buffett utilizes a philosophy of hiring good people and letting them do there job. He also believes in investing in businesses which he expects will stand the test of time and holding the businesses indefinitely into the future. We've seen through Mr. Buffett's accomplishments that so long as the insurance companies are profitable, i.e. no major catastrophe nor underwriting losses, because of the leverage created from the "float", the underlying investments made by Berkshire Hathaway do not have to be homeruns, just run profits, and Berkshire Hathaway's book value can continue to increase over time.

It would be interesting to strip out Mr. Buffett's investment portfolio of public companies as well as all of the investments in private companies that he has made on behalf of Berkshire Hathaway. Then we could look at the returns on his public investments and his private investments independently versus the returns from the increase in Berkshire Hathaway's book value. This would give us a much better picture of Mr. Buffett's stock picking prowess, Mr. Buffett's achievements in private equity and the exercise would provide insight into the value added by leveraging the insurance "float".

Leveraging insurance "float" was an incredible idea, successfully executed by Mr. Buffett and at one time it made him the richest man in the world.

In contrast, Icahn Enterprises owns a more concentrated group of core holdings where Mr. Icahn takes an active interest in managing the business and will usually sell the business after his improvements have lead to a realized investment gain. In addition to the core businesses, IEP has real-estate holdings and manages an internal hedge fund.

The hedge fund is where Mr. Icahn usually makes shorter term investments in public companies and advocates change at the companies in order to increase the value of the stock of the target company.

Mr. Icahn also employs significant leverage in achieving his returns, mostly in the form of debt.

Both companies have been tremendous winners. For comparison, we will look at BRK.B versus IEP. BRK.B does not pay a dividend and IEP pays out roughly 6% to investors. For the period January 1, 2000 through March 31, 2013 IEP returned approximately 725% to investors while BRK.B returned approximately 185%. To give you an idea of the market's performance, an investment in the SPY (an ETF designed to mimic the S&P 500) during the same time period returned approximately 36%. BRK.B outperformed the SPY 5:1 and IEP outperformed SPY nearly 22:1.

BRK.A was up 178% during the period 1/1/2000 - 3/31/13. BRK.A trades at approximately $160,000.00 per share.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IEP, BRK.B over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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