Losing It All Pt. 1

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I’ve noticed something interesting covering famous investors over the years. A large number of investors, who’ve then gone on to make enormous sums have, at some point in their careers, lost it all.

It is often said that in investing, you learn more from a bad investment than you do a good one, and while it may be painful at the time, taking a substantial loss gives you a tremendous opportunity to learn — if you’re open to learning from your mistakes.

With this in mind, I thought I’d do a mini-series on the losses of some of the world’s greatest investors with the goal of trying to learn from other peoples’ mistakes.

The first candidate for this series is Carl Icahn. Here’s him describing his first roller coaster ride with Wall Street in an interview with¬†Professor Robert Shiller. If you’re interested in reading the rest of the interview, you can find it here.

“I went down to Wall Street back in–way back in the ’60s and I thought I was really–I had gone to Princeton, a really good school. I had gotten in there from a tough high school; I was the first to go from my high school. Nobody believed I could do it–they never took an Ivy League–the Ivy League never took anybody from this school I went to. But anyway, I went; got in and left there and I thought I was a real smart guy. Cut it short–went down to Wall Street and worked with Jack Dreyfus and then I was playing the market in 1961. That shows how old I am. And in a bull market you make a great deal of money by doing leverage. It’s a little bit like today with all the leverage that we had and now might be coming to fruition.

I was borrowing money and bought all these convertibles and I thought I was a genius and Jack Dreyfus said, you’re going to lose all your money. I had made a few bucks playing poker and that’s how I started with about eight, ten thousand dollars and I made all this money by borrowing at 90%. I would go out and I was making a lot more in two weeks than my father made in two years. My father said, well you know, put the money away. I said, no Dad, I’m really going to make a fortune here. So, I went out–I remember once–and bought a Galaxy convertible. It was a beautiful car. I had a beautiful girlfriend; she was a model–it was just pretty nice.

“What happened? 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.”

So, what did Icahn learn from this experience?

“After that, I learned you have to learn something and I became an expert in options. After that, I built a following and built a big following and a big commission base by just learning one area very well. Probably, I knew that area better than almost anyone on Wall Street. Not to sound too presumptuous, but very few people knew it, so it doesn’t mean very much. But in any event, I built up a big following and in 1968 bought a seat on the stock exchange with the help of a one of my uncles. By that time, I had saved a pretty big amount of money for those days.

Then, I got into arbitrage–but not merger, bona fide. That’s something else you could–you can still do it today, but it’s much tougher with all these computers. So, I don’t do it because I don’t understand the computers; they’re beyond me, so I don’t work with them too well. I’m being a little facetious, but not too facetious. You could buy different convertible bonds and short the stocks against them. You had no risk, but you could make a lot of money and eventually we did real well with that.”

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