Value Investing

Icahn Lost It All In One Day During The Crash Of 1962 – This Is What He Learned From It

‘The crash came in 1962. I was wiped out in one day; I didn’t even have the poker winnings left. I tell you, I can’t recall if the car left first or the girl left first, but it was pretty close–maybe the same day actually.”

– Carl Icahn

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I love reading biographies of famous investors, especially reading about their first experiences working in an investment firm, when they experienced an unexpected market crash or other significant near career-ending event, because it is during this “baptism of fire” that the investor learns crucial investment lessons that end up shaping their investment philosophies.

One such investor was Carl Icahn. In his first market crash, he lost all his investment gains from the past two years.

All this is detailed in the book “King Icahn: The Biography of a Renegade Capitalist,” by Mark Stevens.

Enjoy the except below:

First Wall Street Job

Icahn’s first contact with Wall Street was arranged by Uncle Elliot, who called a friend, then a partner at Dreyfus & Co., and set up Carl’s first interview on the Street. This turned promptly into a job as a $100-a week broker trainee. Icahn reported to Dreyfus in 1961, just as the Street was in the midst of a roaring bull market that saw the Dow soar nearly 200 points to 730. It was the kind of “another-day-another-record high-close” upswing in the cycle that created euphoria in the houses of Merrill and Hutton and Dean Witter, and that made every broker believe he was a genius on the verge of a windfall that would set him up for life. Twenty-four-year-old Carl Icahn was no exception. “I was a good salesman and so I had the ability to get clients to buy on my recommendations,” Icahn recalled. “And I was moving fast, telling customers to buy this and buy that and sell the other. Because everything was going up at the time, I felt like a seer and I started to look like one.”

The silver lining from losing it all

In 1962, the market crashed from a high of 730 to a low of 535.

“When the market went into its nosedive, I lost all that I had made, about $50,000 to $100,000. Things got so bad that I had to sell my white convertible Ford Galaxie for $2,500 so that I could have enough money to eat.”

Icahn’s first experience with a Wall Street boom-to-bust cycle was certainly a disappointment, but it also taught him two lessons he never forgot.

First, no one makes money playing the market. A small investor dabbling in stocks is always vulnerable to bigger, more powerful forces that time after time will wipe him out.

Second, if he was going to emerge as a dominant force, he needed more than a broker’s training. He had to gain expertise in a market niche overlooked by the hordes of brokers content to sit by the phone and take orders. His study of empiricism had taught him that “there is a strategy behind everything,” and now he had to determine what that strategy was. Unlike his peers, who viewed the peaks and valleys of the stock market as an inevitable part of the business, Icahn the empiricist, Icahn the chess player, was determined to outsmart the system or at least to find a void he could exploit.

That the stock market had bested him would prove for Icahn to be a blessing in disguise. The swiftness of his gains and losses made him realize that this was a business of enormous complexity and equally enormous rewards for those who could decipher the codes.

To succeed required patience, intelligence, determination, and the ability to concoct shrewd strategies involving intricate and interrelated moves—precisely the kind of process that had always appealed to Carl Icahn.

Options trading

Icahn learned that finding and dominating a niche was where he was going to make big money.

With these lessons in mind, he recognized that the options business—not the traditional brokering of stock and bonds—was the ideal place to launch his career. Two critical factors figured into his thinking. Options trading occupied a niche market, it was free of the pervasive competition in traditional brokerage. What’s more, as complex instruments, options allowed for a wide range of creative techniques and strategies. Rather than simply picking stocks, Icahn, the options specialist, could delve deeper into the intricacies of the market.

When Carl established his options business, he joined a select group. To me, that showed where Carl’s head was at from the beginning. He had finely tuned antennae for finding where the money was and partaking of it.

Think about it: By going into the options business, Carl was injecting himself in what amounted to an oligopoly.

To distinguish himself from the competition, and to build a national following based on price appeal, Icahn published a newsletter, the “Midweek Option Report,” which served as a rudimentary over-the-counter market for options. Reflecting on those early years, Icahn remembered: “When I went into the options business, it was tightly controlled by a small group of men. They did nothing criminal but they charged huge markups for buying and selling options. . .

“I felt there was a need for something whereby option investors across the county would know what prices they should be getting for their options. In other words, a guy would sell an IBM option or he would sell a call in those days, and perhaps one of these put-and-call dealers would call a broker, who really didn’t know very much, and say, ‘Look, try to get me these calls.’ And he’d pay him $400 and the call really should be worth $550 or something.

“So my idea was to come up with the ‘Midweek Option Report’ and in that scrupulously tell people what these things were trading for and what they should be getting, and I built a good business . . . .

“What I would do is—there was a guy in Kansas, for instance, and he told me he wanted to sell calls on Ford Motor . . . So I would get a bid from a put-and-call dealer for $400. And very often the guy in Kansas would say, ‘Well, go ahead and do them. That’s pretty good.’

“I would go back to the dealer and would fight with the dealer to get $500, because I knew it should be $500. Even though I could have done them for $400, and the dealer would be a little beholden to me, I would wait and hold out for two or three hours, sometimes lose the trade, but I would go back to the guy and say, ‘Look, instead of $400, I got you $500.’ Well, obviously, the guy loved me. Here’s a guy in New York he didn’t even know I was getting him another thousand dollars.”

By focusing on niche markets, Icahn parlayed his success in options and arbitrage into an income exceeding $350,000 in the late 1960s. Reflecting his new prosperity, Icahn moved from his tiny flat to an uptown apartment at Third Avenue and 63rd Street and then to the more affluent environs of Sutton Place, where he took a two-bedroom apartment at the foot of the East River. [The End]

Icahn would eventually move on to purchasing undervalued companies and involving himself in the operations, resulting in him earning the title of corporate raider during the late 1970s and 1980s.