Carl Icahn on a Junk Bond Bubble, Opportunities in Oil and Why Shareholder Democracy is a Myth

Carl Icahn on a Junk Bond Bubble, Opportunities in Oil and Why Shareholder Democracy is a Myth

By Ben Steverman Dec 15, 2014 3:03 AM PT

Being stubborn turned Carl Icahn into a man worth $23 billion.

First, he finds something he’s certain of. Right now, he says that’s the near-doubling of Apple Inc.’s (AAPL) stock price.

Then, he waits. And waits. When a stock eventually rises, a currency drops, or a company fires its CEO and is acquired, Icahn’s empire gets a little bigger. As chairman of Icahn Enterprises LP (IEP), the 78-year-old activist investor has stakes in casinos, an auto parts maker, a meat casings company, a home-fashions business and enough railroad cars to stretch from Ohio to Manhattan.

Icahn spoke with Bloomberg.com about the looming risks in junk bonds, the opportunities in falling oil prices and why it’s a particularly dangerous time to be an investor.

Is there a mistake a lot of investors make?

Yeah, they invest.

I’m being facetious, but not completely. Investing can be very dangerous and that especially holds true when the market has increased for a number of years, as is the case today.

What’s the biggest source of risk for investors now?

There’s still risk in the financial markets, even though the economy looks pretty good. The one area I think is getting to be a bubble is the high-yield market. These bonds are still at way too low an interest rate. In other words, you can borrow money too cheaply if you’re a risky company.

There are arguments that there’s a lot of cash flow to cover the interest payments on the bonds. But some of that cash flow is ephemeral -- it’s not likely to last. It’s a bubble that’s going to burst in the next couple of years.

With the price of oil falling, people have been raising concerns about the high-yield bonds of energy companies.

That might be construed as proof of what I’m saying. Six months ago, you would have said those are fine. Now there are a lot of questions about them.

Oil will be a great opportunity, but not now. The energy sector is probably in for more problems. Oil prices will probably go down more, and these energy companies, especially oil service companies, are going to be hurt. But then I think there will be a tremendous opportunity.

Oil prices will eventually recover, because worldwide demand will continue to grow and supply will diminish, due to depletion. Additionally, the cost of finding oil is growing. We are not coming up with enough alternative energy that quickly.

But these things -- the opportunity in oil and the bursting of a high-yield bubble -- don’t always happen that quickly. Hell, I’ve been short the Eurobond now for three years. I suffered through the upside on it. I shorted [Eurobonds], and then gritted my teeth and just waited. And now I’m making a good deal of profit.

Patience is one of the most important attributes of a successful investor. There is no one who is able to tell you “I know what is going to happen” -- next week, next month and even maybe next year. There are too many variables. Sometimes you get very lucky, and sometimes there are a lot of bumps in the road.

One criticism of shareholder activism is that it might encourage more short-term thinking by CEOs or investors.

Some activists look for immediate gratification. That is a problem. But I can speak for myself, and we’ve kept stocks an average of 8, 10 years.

With true [shareholder] activism, like in all investing, you have to have patience. On Forest Laboratories, I waited three years. [In July, Actavis Plc acquired Forest Laboratories Inc. in a $25 billion deal, less than a year after Icahn successfully pushed Forest’s board to replace its CEO of 36 years.]

If you bought IEP [Icahn Enterprises] in 2000, your annualized return would be over 20 percent. But there are years when you lose money, because you have to wait. That’s what activism’s about. In the long run it’s a good model.

You’ve said that “many companies in America are terribly run” and that this “leads to many of the financial woes we face today.”

That’s out of context. There are companies where the CEOs aren’t the right guys to run the companies. And those companies suffer from the fact there’s no accountability, which means boards often wait too long to act.

In August, you said income inequality was one of the financial woes connected to a lack of shareholder democracy.

The CEO is undoubtedly the most important person in a company. But it’s absurd to pay the CEO a thousand times more than the worker, especially when the company is doing poorly and the shareholders are losing.

So a lot of these CEOs are not only ineffective but are paid too much?

There are very good CEOs and very good boards, but the system itself is dysfunctional. It’s all camouflaged today because the economy’s good, interest rates are low and the market is high. So shareholders aren’t really upset by it.

It’s called a democracy, but it’s a misnomer. It’s more of a totalitarian state, a dictatorship or at the very least a monarchy. That’s what you really have.