There are a few stocks out there that buck the normal trends with what might seem like eclectic, if not random, portfolios across a wide array of businesses. But that can make sense if the person running the show is a famous investor like Warren Buffett or Carl Icahn. But be careful when you look at Buffett's Berkshire Hathaway (BRK.A +0.16%)(BRK.B +0.14%) or Icahn's Icahn Enterprises (IEP +0.50%) because you really need to understand what you're buying.
Not your typical investments
Generally, when you buy a stock, you're buying a company with a fairly specific business approach, like building cars or producing food. Sure, there are some conglomerates that bring together more disparate businesses, but even then, there's usually some glue that holds the logic together.
When it comes to Berkshire Hathaway and Icahn Enterprises, however, that glue is not really about the businesses involved. It's all about the personalities.
Image source: Motley Fool.
These two companies are probably better viewed as mutual funds because the investment decisions are made by Buffett and Icahn. It's their respective approaches that matter more than anything else.
You could even argue that there's no good or bad time to buy Berkshire Hathaway or Icahn Enterprises because you're really buying the investment approach. After all, the businesses within the two companies can change as holdings get bought and sold over time.
Right now, Berkshire Hathaway's portfolio includes businesses that range from insurance to utilities to trains, and a whole lot in between. It's a very hard company to track if you try to drill down to the fine details of each business line it operates.
Icahn Enterprises isn't nearly as large as Berkshire Hathaway, but its collection of businesses is just as diverse, spanning from the pharmaceutical sector to the energy sector to the auto sector. On top of the owned investments, each of these companies also owns a portfolio of stocks, just to add in some extra complication.
What should you be focused on?
Since trying to track Berkshire Hathaway and Icahn Enterprises is, at best, difficult, a better way to go about investing in either of them is to focus on how Buffett and Icahn invest. There are some pretty stark differences.
NYSE: BRK.A
Key Data Points
For example, Warren Buffett likes to buy good companies at reasonable prices. He then takes a hands-off approach, letting the management teams he has put in place do their jobs. The ultimate goal is to collect reliable cash flow from operating businesses that can be used to buy even more businesses.
Given the success of Berkshire Hathaway over time, Buffett has earned the nickname the Oracle of Omaha. The key is that he's willing to wait for good opportunities to buy, even if it means sitting on cash for a long period of time. But when he finds something he thinks has value, he'll make his move, and those moves are often very big.
Carl Icahn's approach is very different. He's what's known as an activist investor, basically looking for companies that are struggling for some reason. He then steps in, buying stock or the entire company, and attempts to unlock value by implementing changes.
Often that will mean getting rid of the management team, with Icahn putting his own people in place so he can control the show. When Icahn feels like he's done his job, he'll sell and move on to a new target, hopefully inking substantial profits.
NASDAQ: IEP
Key Data Points
But the big story is that Icahn doesn't take a hands-off approach in any way shape or form. He gets in there and rolls up his sleeves, which is dramatically different from what Buffett tries to do. That's what investors need to understand if they are looking at these two stocks.
Who should buy these stocks?
Berkshire Hathaway will probably be the better option for conservative investors who focus on diversification and high-quality businesses. Carl Icahn will probably be an interesting choice for more aggressive types who like to take a contrarian stance.
However, you really have to go in knowing what you are buying or you could end up with an investment that doesn't make sense for you. Sure, Icahn and Buffett are both famous Wall Street giants, but that doesn't mean what they do is going to be a good fit for your portfolio.
