Carl Icahn's $40 Billion Missed Opportunity

The billionaire investor sold Apple too early

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Jan 05, 2022
Summary
  • Icahn sold Apple too early
  • There is a lot we can learn from this error
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I like to study other investors' mistakes as part of my investing process. I believe this is one of the best ways to learn and develop as an investor, and it is a lot less painful than making the mistakes myself.

I am not only searching for errors that resulted in a loss. I think there is a lot to learn from mistakes such as opportunity cost, where an investor skipped over an opportunity in favor of something else, only for the missed opportunity to go on and outperform. These errors are usually harder to find, but they can be just as informative.

One example of this is the fact that multiple successful hedge fund managers sold shares of Apple Inc. (

AAPL, Financial) too early. Warren Buffett (Trades, Portfolio)'s decision to sell off some of his position in Apple last year was only a modest reduction, but it has cost Berkshire Hathaway's investors billions in missed profits. An even bigger loss came on the part of activist investor Carl Icahn (Trades, Portfolio), an earlier investor who sold out of the stock entirely in the first quarter of 2016.

Selling too early

Icahn was one of the first high-profile billionaire investors to have a sizable position in the tech company and believe in it when the rest of the market was looking the other way.

Icahn Capital Management first reported a position in Apple back in the third quarter of 2013. According to its 13F, the fund bought around 110 million shares in the quarter. The fund manager continued to increase his holding over the next few quarters. By the first quarter of 2015, it made up 21% of the fund's $32 billion portfolio, the second-largest holding after core position Icahn Enterprises (

IEP, Financial).

In the third quarter of 2013, the stock had fallen to around $17 per share after peaking at around $25 towards the end of 2012 (all figures are split-adjusted). The activist investor tried to push the company to increase its capital returns to investors. He complained that the corporation was criminally undervalued, and it should not have been holding so much cash on its balance sheet when it could have been returning the money to investors. He proposed a $150 billion buyback.

Ultimately, the company gave in to his demands. It spent $120 billion buying back shares through the end of 2016, when Icahn had completely sold out of the position.

The hedge fund manager sold the entire position in the first quarter of 2016. The stock was changing hands for a split-adjusted $30 per share at the time of the sale, a significant 100% return from a blue-chip stock in a period of just over two years.

Icahn made the classic mistake of selling a winning stock too early. He thought he could time the market, and the company was becoming fully valued. However, it seems as if he discounted the overall brand power of Apple and the power of the subscription services the company sells to its consumers.

It is unlikely that any investor or analyst would have predicted that Apple could eventually become a $3 trillion company back in 2013, but that is just the way the world works sometimes. It is also a valuable lesson of why selling a top-performing holding with a substantial competitive advantage is usually a bad idea. A company that can earn high capital returns and compound those returns year after year is worth holding onto forever (at least, as long as it maintains its advantages).

It is difficult to calculate exactly how much money Icahn left on the table with this trade, as I do not have the exact figures. Still, according to my estimations, if the investor had held on and not sold a single share between 2013 and today, his holding would be worth somewhere in the region of $40 billion. Icahn Enterprise's market capitalization is just $14.5 billion at the time of writing. This trade could be flagged up as one of the biggest missed opportunities of all time.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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