The Financial Times had a story this week about Carl Icahn’s bets against the stock market that went awry.
Since 2017, Icahn has been positioning part of his portfolio for a huge crash. It cost him nearly $9 billion over the past 6 years.
Sounds like a lot.
Here’s what he told the Times:
“I’ve always told people there is nobody who can really pick the market on a short-term or an intermediate-term basis,” Icahn told the FT in an interview to discuss the analysis. “Maybe I made the mistake of not adhering to my own advice in recent years.”
At times, Icahn’s notional exposure, the underlying value of the securities he was betting against, exceeded $15bn, regulatory filings show. “You never get the perfect hedge, but if I kept the parameters I always believed in . . . I would have been fine,” he said. “But I didn’t.”
Good on him for admitting his mistake.
Although, he did follow the tried and true portfolio manager excuse that when all else fails blame the Fed:
“I obviously believed the market was in for great trouble,” Icahn said. “[But] the Fed injected trillions of dollars into the market to fight Covid and the old saying is true: ‘don’t fight the Fed’.”
And I would have gotten away with it too, if it weren’t for you meddling kids!
I’m not trying to dunk on Icahn. He’s a billionaire many times over. He’ll be fine. You can’t win ’em all, especially when trying to time the market.1
But there are some good investing lessons in all of this.
Sure, the stock market does crash from time to time but most of the time it goes up.
By my count, there have been just 13 bear markets since World War II (including the current iteration).
That’s one out of every 6 years or so, on average.
During that same time frame, the stock market has fallen by 30% or worse 4 times.
That’s one out of every 13 years or so, on average.
A crash of 50% or worse has occurred just 3 times.
That’s one out of every 26 years or so, on average.
Stock market returns are anything but average but it’s true that calamities in the stock market are rarer than you think.
The crash scenario is always going to sound more appealing narrative-wise but the upside vastly outweighs the downside in the stock market.
Having a negative bias against the market year after year after year is a low-probability bet.
I’ve shown the data many times in the past about the historical track record of gains vs. losses over various time frames but it bears repeating.
Since 1926, the U.S. stock market has experienced positive returns:
- 56% of the time on a daily basis
- 63% of the time on a monthly basis
- 75% of the time on a yearly basis
- 88% of the time on a 5 year basis
- 95% of the time on a 10 year basis
- 100% of the time on a 20 year basis
Can I guarantee these win rates in the future? Of course not! There are no guarantees when it comes to the stock market.
But betting on a crash sounds intelligent until you realize (a) how difficult it is to predict the timing of a bear market and (b) how often the stock market typically goes up over time.
The stock market has crashed in the past and it will crash in the future.
It’s just that no one, no matter how rich they are, can predict when it will happen.
It makes sense to prepare for downside risk in the stock market but it’s impossible to predict it ahead of time.
And it’s also important to prepare for upside in the stock market because most of the time it goes up.
Further Reading:
Why Does the Stock Market Go Up Over the Long-Term?
1I also find it interesting how many legendary gray-haired investors turn into perma-bears later in life. Buffett is basically the only older investor who is still optimistic about the future.
