Jim Chanos on Short-Selling

This lengthy Jim Chanos interview, hosted by Barry Ritholtz, is well worth listening to. Here are a few of the best Chanos quotes I pulled out of it (there’s no transcript, so I’m paraphrasing):

On his Baldwin Insurance short…

“I said to sell this thing short at $25. It went briefly to $20 before going straight to $55. It was a good initiation into fundamental short-selling.”
“The interesting thing about that story was … a lot of the radioactive aspects of Baldwin were hiding in plain sight. You could see it if you looked at the publicly-available documents…”
“It wasn’t in a lot of peoples’ interests to spot it. The analysts who were covering the Company most closely and had buy ratings on it were also working for the firms that sold the annuities. It was a good introduction to the whole concept of conflicts of interests.”
“In many ways, not being an insurance analyst – just being a young analyst who was learning about insurance – I just simply kept asking questions about things that didn’t make sense to me. Most of the answers were logical, but every once in a while, they would come back with something that was simply nonsensical.”

On his Enron short…

“…the facts of Enron were also hiding in plain sight.”
“The other interesting similarity [between Baldwin and Enron] was that they both had very charismatic leaders who were very bright.”

On being in the minority…

“If you are a short-seller or if you’re negative on a situation, you’re being told constantly that you’re wrong … Not everyone has the ability to drown that out and say, “Okay, well that’s all well and good but that’s in the price of the stock and we know that. And the facts that I have are very important and the market doesn’t really know or appreciate how important they are.”
“In a fundamental short position, not only are you analyzing the company or whatever it is that you’re analyzing, but in many cases you have a management team interposed that’s actively working to prove you wrong through activities that are not necessarily kosher … And so there is an added layer here of three-dimensional chess when you’re on the short side … The market won’t necessarily see what you see, and, in fact, often doesn’t, which is why most fundamental short-sellers will tell you that they’re most often early.”

Miscellaneous…

“The whole idea of fundamental short-selling is to select a portfolio of stocks that are fundamentally overvalued, no matter what the market does.”
“I’ve seen more stocks go to zero than infinity.”
“One of the good asymmetries on the short side is that it’s easy to find out what the bull case is.”
“Every CEO always thinks that their stock is undervalued – we know that.”
“Acquisitions are replacing corporate capital sending or R&D. So companies are buying their R&D or capital, and that should probably be deducted from free cash flow, because in aggregate, corporate America is not growing.”
“Often I tell people that the time to risks … is when you’re younger and you’re given an opportunity.”

-Kaiser

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