Carl Icahn is considered by many a great investor.  He likely considers himself an activist investor.  The truth is he’s someone who takes control positions in corporations and uses them as leverage to agitate for activity that unlocks short-term shareholder value.

Since we never want to let facts get in the way of a good story we have anointed Mr. Icahn an investing deity much as we labeled clairvoyant Meredith Whitney and Elaine Garzarelli for their respective “calls” on Citi’s 2007 dividend cut and the 1987 stock market “crash.”  (For convenience sake we’ll ignore their many utterly wrong predictions.)

What pray tell did Mr. Icahn say on CNBC in September 2015?

I think the public is walking into a trap again as they did in ’07 and what I’ve said is…as I get older I think it’s almost the duty of well-respected investors like myself…to warn people – to tell people that you really are making errors.

Unfortunately for the “well-respected investor” Mr. Icahn the S&P 500 as of 1/30/20 was up nearly 90% since his dire warning.  A selloff of nearly 47% would be needed just for the S&P 500 to revert to its level at the time of Mr. Icahn’s “clairvoyance.”

Taking a shot at Carl Icahn is not the goal.  Our aim is to use his example to put some numerical context around fears of a selloff.

Investors often look at return needed after a selloff to break even.

  • a loss of 10% requires a gain of 11.1%
  • a loss of 20% requires a gain of 25.0%
  • a loss of 30% requires a gain of 42.9%
  • a loss of 40% requires a gain of 66.7%
  • a loss of 50% requires a gain of 100.0%

Scary numbers to be sure.

What about the other side of the coin?  What if investors expected a selloff, liquidated positions and held cash?  What’s the opportunity cost of sitting on the sidelines?  How much of a loss is needed after a gain just to break even?

  • a gain of 50% requires a loss of 33.3%
  • a gain of 100% requires a loss of 50.0%
  • a gain of 150% requires a loss of 60.0%
  • a gain of 200% requires a loss of 66.7%

Using the above as a guide if an investor expected a selloff 150% ago (i.e. 2014) s/he would need to lose 60% from current levels just to be indifferent.  SIXTY PERCENT!

2014?  C’mon.  That was so yesterday.  Well, OK, many yesterdays.  If we’re being honest, however, we must admit that we and/or many within our circle of friends, relatives, co-workers, neighbors and assorted other acquaintances were saying things like, “The market’s gone straight up since 2009.  It can’t continue.”  And yet it did.

Some other interesting stats using 1/30/20 as a reference point:

  • a 10% selloff would take the stock market back to October 2019 levels
  • a 20% selloff would take the stock market back to January 2019 levels
  • a 30% selloff would take the stock market back to late spring / early summer 2017 levels

10%?  20%?  30%?  Sounds awful…and yet most of us were feeling pretty good about ourselves given the almost 500% increase in the S&P 500 since the March 2009 lows.  Must we really be so upset if we give back 10% and find ourselves in the positions we were in October 2019?  Were our financial lives so dire a few months ago?

Long-term investment strategies (a redundancy b/c if you’re thinking short-term you’re a speculator) require accepting both gains and losses.  It means riding out painful selloffs as the price of participating in euphoric rallies.

On the other hand if speculation is your game go right ahead and call for selloffs.  Liquidate positions, sit in cash and incur opportunity cost.  Hey, if you’re right you can stick out your chest although, frankly, 50/50 seems like awful odds on which to bet.