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James Chanos Discusses Investment-Driven Models · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg
0:06
Speaker 1: Radio this week on the podcast What Can I Say?
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Speaker 1: Jim Chanos is a legend in the world of shorting
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Speaker 1: and hedge funds, UH and institutional investing. And this is
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Speaker 1: just a tour to force if if you are at
0:23
Speaker 1: all interested in running a two sided book as opposed
0:27
Speaker 1: to a long only book, If you want to know
0:30
Speaker 1: what it's like to be a short seller, how to
0:33
Speaker 1: uncover financial fraud, what it was like to uncover some
0:38
Speaker 1: of the biggest frauds of the past fifty years, whether
0:41
Speaker 1: it was Enron or Tycho or just go down the list. Uh,
0:46
Speaker 1: then you're gonna love this conversation. And rather than have
0:49
Speaker 1: me babel incessantly about how much fun it was, I'm
0:53
Speaker 1: just gonna say, with no further ado, my conversation with
0:57
Speaker 1: Jim Chanos. I'm Barry Ritults. You're listening to Masters in
1:05
Speaker 1: Business on Bloomberg Radio. My extra special guest today is
1:09
Speaker 1: Jim Chanos. He is the founder and managing partner of
1:12
Speaker 1: Kinakos Associates, the largest exclusive short selling investment firm in
1:18
Speaker 1: the United States. It was launched in n He is
1:23
Speaker 1: a celebrated short seller, who was known perhaps best for
1:27
Speaker 1: his short sale on Enron about a year before the
1:32
Speaker 1: company collapsed to zero. He is a lecturer at and
1:36
Speaker 1: a Beckton Fellow at the Yale School of Management, where
1:40
Speaker 1: he teaches graduate students about financial fraud. Jim Chanos, Welcome
1:45
Speaker 1: to Bloomberg. It is I've been looking forward to this
1:48
Speaker 1: a while, and I have to begin by pointing out
1:51
Speaker 1: that I don't know if this is true. You have
1:53
Speaker 1: to confirm this. Kinakos is Greek for sync Is this right? Yeah,
1:58
Speaker 1: it means literally dog like. But the the Kinkasts were
2:03
Speaker 1: a group of philosophers who lived outside of Athens in
2:05
Speaker 1: the Golden Age um and they basically, uh were searching
2:11
Speaker 1: for the ultimate truth. They believed in an independence of
2:16
Speaker 1: thought and self discipline, and Diogenes was their philosophical leader.
2:20
Speaker 1: But it's the root of the word cynic in English,
2:23
Speaker 1: and and you're obviously referring to the Golden Age of philosophy.
2:27
Speaker 1: So let's talk about the philosophy that led to both
2:31
Speaker 1: cynicism and short selling. You began your career as a
2:34
Speaker 1: financial analyst at Pain Webber and then Guilford Securities and
2:38
Speaker 1: Deutsche Bank. These tend to be long only firms or
2:43
Speaker 1: their clients are long only. What what was it like
2:47
Speaker 1: then when there was a heretic in their midst? Well,
2:50
Speaker 1: when I got onto Wall Street, the first gentleman hired
2:54
Speaker 1: me um in night was completely puzzled as to why
2:58
Speaker 1: anyone would want to work on Street because in it
3:03
Speaker 1: was not a lucrative field. It was we were at
3:07
Speaker 1: the tail end. We didn't know it of a sixteen
3:09
Speaker 1: year bear market and so uh and in fact, from
3:12
Speaker 1: nineteen sixty six eighty two in real terms, that Dow
3:15
Speaker 1: dropped as much as it did in in two, so
3:19
Speaker 1: flat in nominal terms. But it was Yeah, it was
3:23
Speaker 1: basically peaked at a thousand in nineteen sixty six and
3:26
Speaker 1: bottomed out of seven seven hundred something in in eighty two.
3:30
Speaker 1: But as you say, in real terms, it was a
3:32
Speaker 1: disaster and so um so I got a job as
3:35
Speaker 1: a as a as an analyst doing deal books. Um
3:39
Speaker 1: but I was fascinated with the market and uh and
3:42
Speaker 1: always had had invested whatever speremoney I had in the
3:46
Speaker 1: market in college my dad had pushed me to sort
3:49
Speaker 1: of learn about it, and the head of the head
3:52
Speaker 1: of retail sales was down the hall, so I used
3:55
Speaker 1: to spend my lunch hours and after work talking to him,
3:58
Speaker 1: and ultimately he hired me in nine needy two UH
4:01
Speaker 1: to come work at a small firm that he was forming,
4:05
Speaker 1: UM leaving Blithe Eastman, Pain Webber and and forming Guilford Security.
4:09
Speaker 1: So I went there as a securities analyst and that
4:11
Speaker 1: was fantastic. UM. He gave me latitude to do whatever
4:15
Speaker 1: I wanted to short. My first recommendation was a short sailor,
4:20
Speaker 1: Baldwin United. So so let's we'll talk a little more
4:23
Speaker 1: about bold when United um in in a few minutes.
4:27
Speaker 1: What was the reaction in the community, be it analyst
4:30
Speaker 1: community or or typically mostly long only investment community that
4:36
Speaker 1: here's this young whipper snapper and their first report is
4:40
Speaker 1: not just hold or neutral or sell, but sell short. Yeah.
4:44
Speaker 1: It wasn't received very well as you can imagine, uh,
4:48
Speaker 1: particularly since the big brokerage firms who were recommending stock
4:51
Speaker 1: were also making a fortune selling their annuities, and so
4:55
Speaker 1: it was it was a double payer. So not only
4:59
Speaker 1: were they placing the stock, they were also placing they
5:01
Speaker 1: were Baldwin was an insurance company. They're selling annuities single
5:04
Speaker 1: premium deferred and neuis. They were all Baldwin Piano by
5:07
Speaker 1: the right, which then more that's sort of like iced
5:10
Speaker 1: tea companies morphing into blockchain company. Well, their CEO was
5:14
Speaker 1: a charismatic guy, and he made his market the company
5:18
Speaker 1: selling pianos door to door. And I've always said, if
5:20
Speaker 1: you can sell pianos door to door, you're a pretty
5:22
Speaker 1: good salesman. Yeah. So and uh and Baldwin was was
5:27
Speaker 1: the the fastest growing financial services company in the United
5:31
Speaker 1: States in UM and it was you know, for fortunes,
5:35
Speaker 1: most admired, blah blah blah blah blah. A lot of
5:37
Speaker 1: things that we would see later twenty years later in
5:40
Speaker 1: the end run story were uh, we're basically uh indicative
5:45
Speaker 1: of Baldwin back. So, so what alerted you that not
5:47
Speaker 1: things were not all kosher at Baldwin Piano slash Insurance?
5:51
Speaker 1: As if that alone wasn't enough. So I was. I
5:54
Speaker 1: was as a young analyst. I had no insurance analytical experience,
5:58
Speaker 1: so I had to sort of start it at ground zero,
6:00
Speaker 1: which I think at the end of the day was
6:02
Speaker 1: was helpful for me because I had to learn basically,
6:06
Speaker 1: um it was from scratch, and it was while I was.
6:09
Speaker 1: I was making phone calls and trying to understand how
6:12
Speaker 1: it was that Baldwin could use insurance company money to
6:15
Speaker 1: do acquisitions. That was sort of the game that they
6:18
Speaker 1: were playing. I got a phone call um one night,
6:22
Speaker 1: I was working late at the office, and it was
6:24
Speaker 1: it was someone who wouldn't give me their name and said,
6:26
Speaker 1: I understand you're you're asking questions about Baldwin United and uh.
6:30
Speaker 1: I said, yeah, who's this? And he said, it's not
6:33
Speaker 1: important who this is, but you should be aware that
6:36
Speaker 1: there are insurance files at the State of Arkansas insurance
6:39
Speaker 1: Department that are public that you should get and you know,
6:43
Speaker 1: click and uh and so in Arkansas. And so the
6:48
Speaker 1: next morning I told my boss that and he of
6:50
Speaker 1: course asked if I had been drinking and said, I said,
6:53
Speaker 1: you know, no, I got an anonymous call and we
6:55
Speaker 1: should check it out. We hired a local law firm
6:58
Speaker 1: and it was a treasure trove. It was letters going
7:02
Speaker 1: back and forth in the state regulators to Baldwin basically
7:05
Speaker 1: saying they were insolvent and that they needed to raise
7:08
Speaker 1: capital immediately and that they would no longer be allowed
7:11
Speaker 1: to use insurance company money to make acquisitions. And blah
7:14
Speaker 1: blah blah blah. It was the whole story laid out
7:16
Speaker 1: in public documents and and so Yeah. Then years later
7:19
Speaker 1: I was at an insurance conference and I heard the
7:21
Speaker 1: same voice from behind me, and uh it was It
7:25
Speaker 1: was a well known insurance analyst who at the time
7:27
Speaker 1: was in Chicago, and um, he could not cover Baldwin.
7:31
Speaker 1: His firm would not let him because he looked at
7:33
Speaker 1: it and saw it was a house of cards and
7:35
Speaker 1: the firm had sold annuities, so they told him to
7:37
Speaker 1: shut up. And uh, I've always kept him anonymous ever since.
7:41
Speaker 1: But it was that that tip that helped that that
7:44
Speaker 1: set you off. Let's talk a little bit about some
7:47
Speaker 1: of the fascinating fang stocks Facebook, Amazon, Netflix, Apple, Google. Uh.
7:56
Speaker 1: What doesn't get mentioned in that list is Tesla. And
8:01
Speaker 1: some people have said Tesla may not be worth as
8:03
Speaker 1: much as its current market cap. You have a slightly
8:07
Speaker 1: different view. What's your perspective on Tesla? Well, I think
8:11
Speaker 1: the stock might not be worth anything, um on a
8:14
Speaker 1: pure financial analysis basis. It is to us, it's one
8:18
Speaker 1: of the bellweathers of this market. It is it is
8:22
Speaker 1: a hopes and dream stock that investors have pinned. You know, really,
8:27
Speaker 1: whatever their expectations are on a future, a green future globally,
8:31
Speaker 1: they have they have put it on this stock and
8:33
Speaker 1: on this CEO, who has done a really good job
8:36
Speaker 1: in promoting that very vision. The problem, of course, is
8:40
Speaker 1: is that it's an automobile company, and it's it's increasingly
8:44
Speaker 1: having problems making automobiles, and soon it's going to be
8:48
Speaker 1: facing much more competition from people who do know how
8:51
Speaker 1: to make automobiles. In fact, every major automobile manufacturer around
8:56
Speaker 1: the world, Europe, Japan, the United States has come out
8:59
Speaker 1: and said we will have some form of an electric
9:02
Speaker 1: or hybrid vehicle either throughout our line or that's what
9:07
Speaker 1: our entire line will consist of. So the question is
9:11
Speaker 1: Tesla an actual paradigm shift, or they a game changer
9:15
Speaker 1: in the world of automotives, or are they a stock
9:19
Speaker 1: that simply, you know, came up with an idea that
9:22
Speaker 1: everybody else has adopted, but there's nothing unique to the
9:25
Speaker 1: company other than a very charismatic leader. I think it's
9:29
Speaker 1: a great question. Berry. I think they were a paradigm
9:32
Speaker 1: shift six or seven years ago when they introduced the Models,
9:35
Speaker 1: and I have always said the Models was an important
9:38
Speaker 1: car because Musk made E vs electric vehicle sexy. Right
9:43
Speaker 1: Prior to that, any type of green vehicle was a
9:46
Speaker 1: compromise the Nile exactly. And I know you're a car guy,
9:51
Speaker 1: Berry and and so you know that. And and suddenly
9:53
Speaker 1: you had this Models which was a car that was
9:56
Speaker 1: aspirational car you wanted to drive up to the country
9:58
Speaker 1: club or two, you know, the restaurant valet, and and
10:02
Speaker 1: everybody wanted one. And the problem is, of course, the
10:05
Speaker 1: model Lesque now is seven years old. And finally, finally
10:10
Speaker 1: the Europeans and and Detroit and ultimately Japan are coming
10:15
Speaker 1: with their vehicles. We have Audi and Jaguar coming this
10:18
Speaker 1: year with very good looking sexy crossover cars. And then
10:22
Speaker 1: um near and dear to your heart, we have Porsche
10:24
Speaker 1: coming out next year. Miche a handsome car which is
10:28
Speaker 1: a gorgeous car and it's coming out next year and
10:31
Speaker 1: and is a sports car designed from the bottom up
10:34
Speaker 1: from I believe their Lamon's team, and uh, you know.
10:37
Speaker 1: And so now Tesla is in is in a scrum.
10:42
Speaker 1: They're going to be competing with well financed operations with
10:46
Speaker 1: good R and D whose technology is is probably well
10:49
Speaker 1: ahead of theirs at this point. They can't fund themselves
10:51
Speaker 1: by selling flamethrowers every couple of months. Flamethrowers and hats. Um, yeah,
10:57
Speaker 1: I mean and and and but we're laughing. But that's
10:59
Speaker 1: kind of problem them, right, because you have a CEO
11:01
Speaker 1: is kind of all over the place. Um. We believe
11:04
Speaker 1: actually his passion is space X. So I think he's
11:07
Speaker 1: going to actually hand over the reins as CEO at
11:10
Speaker 1: some point in the next few years. Um, and and
11:13
Speaker 1: and move full time over to to space X. Plus
11:16
Speaker 1: the hyper loop and the boring. Oh yeah, they forgot
11:19
Speaker 1: about the hyper loop. Yeah, that's enough. And supposedly they're
11:21
Speaker 1: really exploring doing something with that boring company is testing
11:26
Speaker 1: boring equipment and and so there's a lot going on there.
11:30
Speaker 1: And and that's part of I think that's part of
11:32
Speaker 1: the allure of the of the company. It's valuation is
11:36
Speaker 1: the CEO. The problem again is that he's he's up
11:40
Speaker 1: against serious competitors in his core business. And and then
11:44
Speaker 1: finally on that we track executive departures. We have this
11:48
Speaker 1: list we put out and it is stunning as to
11:53
Speaker 1: how many senior executives have left this company in the
11:55
Speaker 1: last two years. The only two companies that we've seen
11:58
Speaker 1: in our history with a similar executive departure pattern, where
12:02
Speaker 1: Valiant Pharmaceuticals a couple of years ago and a little
12:05
Speaker 1: company in Houston call En Round. And it is never
12:09
Speaker 1: a good sign when almost all your senior executives are
12:12
Speaker 1: leading at the stock price at at a high. That's
12:15
Speaker 1: telling you there's something wrong. And I and I don't
12:18
Speaker 1: know what it is. But but almost all the senior
12:21
Speaker 1: executives at Test, let's see something and are leaving stock
12:24
Speaker 1: option packages on the table. What about the idea that
12:29
Speaker 1: some big company, maybe it's a GM, comes along and
12:33
Speaker 1: buys them as a rescue package and jump starts their
12:37
Speaker 1: own um e V program. Well, the problem with that
12:42
Speaker 1: is is the GM, for example, the reason you would
12:45
Speaker 1: buy Test ostensibly is because of technology, not because of
12:48
Speaker 1: manufacturing process. Right. Their manufacturing process is actually pretty poor.
12:53
Speaker 1: It's the model three is their new car appears to
12:56
Speaker 1: have lots of issues upon production, so you would be
13:00
Speaker 1: buying them for for Elon's vision or their technology. Little
13:05
Speaker 1: brand Halo also a little make your little hipper than
13:07
Speaker 1: you General Motors might be just using them as an example.
13:11
Speaker 1: It might be, but the problem is, of course that
13:13
Speaker 1: that GM's cruise software is now better than Tesla's autopilot,
13:17
Speaker 1: and their product is out and their manufacturing exactly and
13:21
Speaker 1: and so um, and you have to be careful because
13:24
Speaker 1: again most of this mystique of Tesla is based on
13:27
Speaker 1: one car, the models right, which is still a beautiful
13:30
Speaker 1: car seven years old, but it's Yeah, but the Model
13:34
Speaker 1: X was was was just was lukewarm. It was too
13:37
Speaker 1: expensive for what essentially is a mid size van. And
13:41
Speaker 1: and and now the Model three is is maybe problematic
13:45
Speaker 1: and and so you've got to got an issue here
13:47
Speaker 1: where you've got basically a fifty billion dollar market gap,
13:51
Speaker 1: which by the way, is almost the same as GMS,
13:53
Speaker 1: and it's and it exceeds forwards. Uh, you'd be buying
13:58
Speaker 1: a company just as big as yourself off to basically
14:01
Speaker 1: lose money and and have a little cache. I don't
14:04
Speaker 1: see it makes perfect sense. Um. So the other side
14:10
Speaker 1: of them, let me push back a little bit on Tesla.
14:13
Speaker 1: They've completely changed the game. They've forced everybody else in
14:18
Speaker 1: that somebody, maybe Toyota does a joint venture with them,
14:23
Speaker 1: maybe some other Chinese or Korean manufacturer comes along and says,
14:27
Speaker 1: we want a toe hold in the US and elsewhere.
14:31
Speaker 1: What what is the company worth in a takeover or
14:34
Speaker 1: do you end up in a take under situation? Well,
14:37
Speaker 1: you're you're a little late, because Toad and Diameler did
14:39
Speaker 1: do joint ventures with Tesla ten years ago and sold
14:42
Speaker 1: all their stock. They did, yes, and they did in
14:45
Speaker 1: fact both Interestingly, both of those both those companies sent
14:49
Speaker 1: teams of engineers to help Ellen get the models out.
14:53
Speaker 1: And so I think that that we've already seen this,
14:57
Speaker 1: and and the problem is is we we just discussed,
15:01
Speaker 1: is that the valuation of the company, which is a
15:04
Speaker 1: fifty billion, fifty billion dollars in equity cap and then
15:08
Speaker 1: by the time West plus debt, you're talking about a
15:12
Speaker 1: sixty plus billion dollar total enterprise value. This would sink
15:16
Speaker 1: almost anybody but the very largest companies who would have
15:20
Speaker 1: to finance not only the sixty billion costs but the
15:23
Speaker 1: operating losses. So you you would destroy the earnings of
15:27
Speaker 1: almost any auto O E M by buying Tesla. Fascinating.
15:30
Speaker 1: Let's talk a little bit about hedge funds and how
15:33
Speaker 1: they've changed over the years. The last time you and
15:38
Speaker 1: I sat down for a conversation was about three years ago,
15:42
Speaker 1: or a recorded conversation. I should say you mentioned that
15:45
Speaker 1: back in the day, uh, there were a few hundred
15:49
Speaker 1: hedge funds and and out of those, twenty or thirty
15:52
Speaker 1: were reliable alpha generators. Today there's eleven thousand or so
15:58
Speaker 1: hedge funds. How many? And probably is it that? Is
16:03
Speaker 1: it still that smaller percentage of regular You know, it's
16:09
Speaker 1: I have a little bit of advantage UM advantage point
16:14
Speaker 1: because not only am I a manager, but I also
16:16
Speaker 1: sit on some investment committees, so reasonably large investment committees.
16:20
Speaker 1: So I get to see the pitches. I get to
16:22
Speaker 1: see the pitches, and I get to see the results
16:24
Speaker 1: from a lot of people in the industry as as
16:26
Speaker 1: as someone who allocates capital. And I have to tell you,
16:30
Speaker 1: I mean, the industry is wanting UM, and it's wanting
16:35
Speaker 1: across the board, and alpha's have dropped, including our own
16:40
Speaker 1: UM over time UM, whether they've been competed away UM. Now,
16:45
Speaker 1: another theory I have, of course, being on the short side,
16:48
Speaker 1: is that lower interest rates, particularly for short sellers, have
16:51
Speaker 1: reduced rebate income. And so when I started, UM, if
16:57
Speaker 1: we saw the stock short before anything happened, we are
17:00
Speaker 1: in six or seven percent annually on the cash proceeds
17:04
Speaker 1: and we split that with the prime broker, and now
17:07
Speaker 1: that number more recently was zero, and that's that was
17:10
Speaker 1: a significant source of returns. UM. So I think that
17:16
Speaker 1: that um that's one aspect, particularly for fundamental short sellers.
17:21
Speaker 1: But look, I mean, markets have gotten more and more efficient.
17:24
Speaker 1: The more you have smart people pursuing something, the tougher
17:27
Speaker 1: it's going to be to beat the market. That's just
17:29
Speaker 1: a given. I think paradox of skill is what And
17:32
Speaker 1: then and of course the size, right, I mean, you know,
17:35
Speaker 1: it's a lot easier to to beat the market if
17:38
Speaker 1: you're running fifteen million than than a few billion, even
17:42
Speaker 1: a few hundred million, there's still some some opportunity. But
17:46
Speaker 1: some of these funds are five and ten and twenty
17:48
Speaker 1: billion dollars. That's tough to move. Swing that around. Well.
17:51
Speaker 1: The other thing is that, of course, you stop managing
17:54
Speaker 1: a portfolio and you start managing a business as well.
17:56
Speaker 1: And I'm always mystified by my peers who who been
18:00
Speaker 1: very successful and they're now running you know, as you say,
18:03
Speaker 1: ten or twenty billion dollars but have two hundred three
18:05
Speaker 1: hundred employees, and I just I mean, that just blows
18:09
Speaker 1: my mind. That's reasonably large business. How big is can
18:12
Speaker 1: a coast these days? We're probably we're the same as
18:15
Speaker 1: we've been for years and years and years basically about
18:17
Speaker 1: thirty people, um, which is still work to manage. But
18:20
Speaker 1: it's not a full time just not it's not it's
18:24
Speaker 1: it's that's it's a it's a magnitude of difference. So,
18:27
Speaker 1: given your perspective as both a fund manager and an
18:31
Speaker 1: asset allocator, when you're reviewing a hedge fund and deciding
18:35
Speaker 1: whether or not you're gonna give them capital, what are
18:39
Speaker 1: you actually looking for? What? What would make you say
18:43
Speaker 1: this is a place I could park some money. So
18:45
Speaker 1: some you know, Julian Robertson said it best, Um, and
18:49
Speaker 1: I think to some extents why the Tiger cubs have
18:51
Speaker 1: been so successful is what is your edge? And he always,
18:55
Speaker 1: he always, when when having a bear and a bull
18:59
Speaker 1: discuss debate a stock at his shop, Um, we ran
19:02
Speaker 1: money for him, and he would have us come in
19:04
Speaker 1: and talk about one of his shorts are shorts because
19:07
Speaker 1: someone in the shop may have liked it on alongside,
19:10
Speaker 1: and he would constantly say, what is your edge? What
19:12
Speaker 1: do you know that the market doesn't and and and
19:14
Speaker 1: that applies I think the fund managers generally, what is
19:17
Speaker 1: in your process that gives you an edge, whether it's
19:21
Speaker 1: trading wise, whether it's research wise, that that basically sets
19:25
Speaker 1: you aside, that that you see things differently, and you
19:28
Speaker 1: see you see the reality versus the perception of reality.
19:32
Speaker 1: And and so what I found is that numbers can
19:36
Speaker 1: be very misleading because um, very smart people can struggle, um,
19:41
Speaker 1: and very very uh uh mediocre people can excel for
19:45
Speaker 1: periods of time. Um. It's just not where you want
19:48
Speaker 1: to place your bets. And so if if as an allocator,
19:52
Speaker 1: if we see someone who we think is not only
19:55
Speaker 1: smart and hard working, but has a define herble and
19:58
Speaker 1: sustainable edge, um, that's someone that you might want to consider,
20:02
Speaker 1: particularly if they're struggling, um to be allocating capital. Because
20:06
Speaker 1: reversion to the mean is also a pretty powerful process.
20:09
Speaker 1: So when you say struggling, you mean struggling running the fund,
20:13
Speaker 1: or struggling in terms of their performance. You know, maybe
20:16
Speaker 1: they're not generating the alpha they're they're they're matching the
20:18
Speaker 1: market and or slightly behind the market. But but yet
20:22
Speaker 1: you know, have a have a pretty superior long term
20:24
Speaker 1: track record. Same people doing it, same process, um and
20:29
Speaker 1: and so sometimes you see sometimes you see an opportunity
20:33
Speaker 1: to do that. What most people do, of course, is
20:35
Speaker 1: they just simply look at performance and and it's it's
20:39
Speaker 1: that alone will not do it for you, because you're
20:42
Speaker 1: always going to chase that which has been hot. And
20:45
Speaker 1: it's so hard to to say, well, this guy is
20:48
Speaker 1: not doing well, we should be allocating some capital because
20:51
Speaker 1: they're gonna come back into favor and and by the way,
20:54
Speaker 1: they're still doing what they've always done well. Um, very
20:57
Speaker 1: very tough. And then of course you have to you
20:59
Speaker 1: have to disaggregate the beta from managers, and that's that's essential. Um.
21:05
Speaker 1: You have to take out the market because we can
21:07
Speaker 1: buy the market for ten basis points, right, So paying
21:11
Speaker 1: big fees to people who are who are either matching
21:14
Speaker 1: the market with no no edge or or leveraging the
21:19
Speaker 1: market to get out performance is the fools earned. You know.
21:22
Speaker 1: I read somewhere that past performance is no guarantee of
21:27
Speaker 1: future returns. I think I saw that on some documents somewhere.
21:32
Speaker 1: Let's talk about some of those Conseco, Tycho, Commodore, coll
21:37
Speaker 1: Eco Integrated. I think I don't think your listeners were
21:40
Speaker 1: alive when most of those who were done there were
21:42
Speaker 1: more recent more recent there were more recent ones. So
21:46
Speaker 1: so so let me ask a different question. Then, tell
21:50
Speaker 1: us about something that in hindsight you looked at and said,
21:53
Speaker 1: why don't we short that? That's right in our strike zone?
21:57
Speaker 1: Any anything that you looked at and didn't I think
22:00
Speaker 1: the biggest, the biggest, the biggest whiff uh that that
22:05
Speaker 1: we had done work on and took a pass on
22:09
Speaker 1: was Japan in the late eighties. No, I was sure
22:12
Speaker 1: a lot of commercial real estate stocks in the US
22:14
Speaker 1: in the late eighties, the tax law had changed. Everyone
22:17
Speaker 1: had levered up in the commercial real estate to sell
22:19
Speaker 1: it to the Japanese um. The tax shelter business was
22:22
Speaker 1: was kneecapped by the tough by the a Tax Act
22:25
Speaker 1: of eight six And when we looked at what the
22:29
Speaker 1: Japanese were doing, we saw them doing all kinds of
22:31
Speaker 1: dumb things. And I began looking at the Japanese banks,
22:34
Speaker 1: which at the time were the largest in the world,
22:36
Speaker 1: and some of the Japanese conglomerates which were the largest
22:40
Speaker 1: in the world, and the numbers didn't make any sense.
22:43
Speaker 1: But I felt that I had my hands full in
22:44
Speaker 1: the US, and what I really missed was a twenty
22:47
Speaker 1: year bear market in in these heavily leveraged Japanese companies,
22:51
Speaker 1: and compared to even the dot com NASDAC, the Japanese
22:55
Speaker 1: market was far more expensive, far more overstretched. And then
23:00
Speaker 1: NASDAK even got at the peak and two things right,
23:03
Speaker 1: it was and and and of course it got to
23:06
Speaker 1: it got to just insane heights that it's still not
23:09
Speaker 1: scaled um. And and so I think that that that was,
23:13
Speaker 1: you know, one of our greatest our greatest missus um
23:16
Speaker 1: fundamentally so from Japan. Let's just hop across the China
23:20
Speaker 1: Sea and talk about China. You were very negative on
23:24
Speaker 1: China for a long time before they had a little
23:27
Speaker 1: bit of a hiccup. Tell us about the China trade
23:30
Speaker 1: and what do you think of the Chinese economy here
23:34
Speaker 1: and that region as a area to invest in. Well,
23:37
Speaker 1: it's funny that we talked about Japan, because the analog
23:40
Speaker 1: that China eight years ago, when we started talking about it,
23:44
Speaker 1: most most resembled was actually actually Japan of the late eighties.
23:48
Speaker 1: If you think about it, it was a state driven
23:51
Speaker 1: capitalist model that was a better model, some thought than
23:55
Speaker 1: the US of the Western model. It was heavily relied
23:58
Speaker 1: on debt, it was heavily relied on a domestic real
24:01
Speaker 1: estate bubble. It was very trade oriented, export oriented. Um.
24:07
Speaker 1: It had a protected currency, it had its own culture.
24:10
Speaker 1: I mean, the similarities between Japan in in oh nine
24:14
Speaker 1: two tho ten and China and nine two thousand ten
24:18
Speaker 1: in Japan were actually somewhat significant that, of course everything
24:25
Speaker 1: is different and and um. But when we started looking
24:29
Speaker 1: at China, the f x I, which is the eighth
24:32
Speaker 1: share you know, et F was trading around forty one dollars.
24:36
Speaker 1: It's just forty six now, so it's up about it's
24:40
Speaker 1: up a little bit more than ten percent in eight years.
24:43
Speaker 1: The rest of the markets that we were looking at,
24:46
Speaker 1: you know, have doubled and tripled um. So China has
24:50
Speaker 1: been one of the better places to be short for
24:52
Speaker 1: the past eight years if you're a short seller. I
24:56
Speaker 1: think that what's really interesting about China is how little
24:59
Speaker 1: has changed in the eight years. Shishingping is basically now
25:03
Speaker 1: the emperor, but the whole concept of all the stuff
25:07
Speaker 1: you've heard in the last eight years, Oh, they're going
25:10
Speaker 1: to become a consumer driven economy that hasn't happened. They're
25:13
Speaker 1: going to reduce investment as a percent of GDP. That
25:16
Speaker 1: hasn't happened. Uh, you know, the currency is going to
25:19
Speaker 1: either go up a lot or down a lot. That
25:21
Speaker 1: hasn't happened. Um. What's really interesting about China is that
25:25
Speaker 1: it's pretty much status quo and the model, the the
25:29
Speaker 1: economic model that is China is still the same. It
25:32
Speaker 1: relies heavily on debt, and so debt is still growing. Uh,
25:36
Speaker 1: it's not growing as fast as it was eight years ago,
25:39
Speaker 1: when it was growing twenty percent a year. It's now
25:42
Speaker 1: growing ten to fifteen percent a year. But it's still
25:44
Speaker 1: growing at twice GDP growth. And they can't get off
25:49
Speaker 1: the the stimulus or the steroids, if you will, of
25:53
Speaker 1: just constant debt injections to build new airports, roads, high rises.
25:59
Speaker 1: It's still what's driving the economy. So what's the end
26:01
Speaker 1: game for China? I wish I knew. Um, it's it's
26:05
Speaker 1: it's fascinating to watch because everybody sees it now. When
26:09
Speaker 1: we started talking about eight years ago, it's a controversial viewpoint.
26:12
Speaker 1: You know now now it's not right. It's hard to
26:15
Speaker 1: the debt levels have doubled and tripled since then. That's
26:17
Speaker 1: sixty minutes um segment on the ghost Cities of China.
26:22
Speaker 1: I as I was watching that, I'm thinking Jim Chanos
26:25
Speaker 1: has to be turning cart wheels over this. What's fascinating
26:28
Speaker 1: about that, of course, is is that the cities that
26:30
Speaker 1: they showed have, as the bulls have said, mostly filled up.
26:34
Speaker 1: The problem, of course is is there's new empty cities.
26:38
Speaker 1: And then this is the inherent problem, right and so
26:41
Speaker 1: I think that that that any any time you've got
26:45
Speaker 1: a model that's credit driven based on a property bubble
26:50
Speaker 1: and and and investment, now that that is not needed.
26:53
Speaker 1: I always joked that Hainan, the island of Hainan, their
26:56
Speaker 1: tropical island in the South China Sea, when when we
26:59
Speaker 1: started looking at China, it had one international airport. Um
27:03
Speaker 1: about three or four years later they completed the second
27:06
Speaker 1: international airport, which is not fully utilized today. And now
27:10
Speaker 1: they've begun work on a third international airport which is
27:14
Speaker 1: just folly on that little island in the little island.
27:17
Speaker 1: So so this is the problem with an investment driven model.
27:20
Speaker 1: All three of those have contributed to GDP construction. You know,
27:25
Speaker 1: dollars go right into GDP. But of course the economic
27:29
Speaker 1: returns and each one will have dropped. I'm going to
27:32
Speaker 1: mangle this data point. I believe it was you who
27:35
Speaker 1: had either said or written China over the past three
27:39
Speaker 1: years used as much cement as United States used in
27:42
Speaker 1: the entire twentieth century. I think it was. It was
27:45
Speaker 1: not us, it was it was somebody else at Bill Gates,
27:47
Speaker 1: I know, pointed out I don't know who the originator
27:49
Speaker 1: of the data point was, but I think it was.
27:51
Speaker 1: China in the last ten years has has used uh
27:54
Speaker 1: as much concrete as the US did in the last
27:57
Speaker 1: hundred plus UM. And they is true. Um, it's remarkable
28:02
Speaker 1: to look at what China since it entered the w
28:05
Speaker 1: t O in two thousand one has done. UM. And
28:08
Speaker 1: it is done so. It has done so, and it
28:11
Speaker 1: is and it is literally transformed a country in less
28:13
Speaker 1: than twenty years. The problem again, of course, that that
28:17
Speaker 1: the bears will keep pointing to, is you've pulled a
28:20
Speaker 1: lot of it forward. Anytime you use debt to fuel
28:23
Speaker 1: to fuel your growth, you're basically pulling forward consumption and
28:27
Speaker 1: and that's just in the economic identity, and so there
28:31
Speaker 1: will be a reckoning at some point. The deaths do
28:34
Speaker 1: have to be serviced or inflated away and and one
28:37
Speaker 1: of the two will happen. So let's let's talk about
28:40
Speaker 1: a few other UM topics that I really enjoy your
28:43
Speaker 1: perspective on. We talked about hedge funds earlier. I've been
28:48
Speaker 1: reading a decent amount about private equity, and they're being
28:53
Speaker 1: challenged in terms of are they really generating the sort
28:56
Speaker 1: of above market returns they claim they're They're doing a
29:00
Speaker 1: little bit of um, let's just call it creativity. So
29:04
Speaker 1: when you for those who are unfamiliar, when you make
29:06
Speaker 1: an investment in private equity, you're committing capital, but you're
29:10
Speaker 1: not actually giving them capital, so you have more or
29:12
Speaker 1: less after sequester that they calculate their performance based on
29:18
Speaker 1: literally when the money hits, which could be two, three
29:21
Speaker 1: or four years later. That you're sitting with capital tied
29:24
Speaker 1: up that's not yet working theoretically, it's in a short
29:28
Speaker 1: term fixed income fund. What what's your perspective on what's
29:31
Speaker 1: going on with private equity. I assume you allocate on
29:34
Speaker 1: some of the boards you sit UM money instil We do,
29:37
Speaker 1: and some of my best friends and clients are in
29:39
Speaker 1: private equity. So you know, look, I I always tell
29:43
Speaker 1: them I'm jealous of them. You know, they have a
29:46
Speaker 1: great business model, um and and and they're one of
29:50
Speaker 1: the two areas in in investment management where nobody's questioning
29:55
Speaker 1: fees and or returns or venture capital and private equity.
29:58
Speaker 1: And remember bain Ca Capital and Mitt Romney. There was
30:01
Speaker 1: a lot of reports about have did Bayne exaggerate its returns?
30:06
Speaker 1: And that's sort of what started this whole cascade over
30:09
Speaker 1: the PAIL. I think that the issue is a broader one,
30:12
Speaker 1: which is if you're investing in venture capital in private equity,
30:16
Speaker 1: I would just tell investors understand that in the case
30:20
Speaker 1: of venture capital, you are investing in high beta, high beta,
30:25
Speaker 1: high risk, high return situations. So a venture capital fund
30:29
Speaker 1: should be measured not against the SMP but against some
30:33
Speaker 1: some high beta you know whatever. Yeah, and a small cap,
30:39
Speaker 1: high high beta fund. Private equity is a little bit different, right,
30:42
Speaker 1: because all the private equity funds are are different, but
30:46
Speaker 1: they do lever, and so at the end of the day,
30:50
Speaker 1: a private equity fund should have multiples of return of
30:53
Speaker 1: the SMP if you're using leverage. UM, I believe they don't.
30:58
Speaker 1: And and so that's that examination and hedge funds began
31:03
Speaker 1: this You and I both know, people began kind of
31:07
Speaker 1: wondering about hedge funds after oh eight. The golden age
31:10
Speaker 1: of hedge funds was two thousand to O two. That's
31:13
Speaker 1: when the markets went down. And let's let's not forget
31:17
Speaker 1: the two thousand oh two was worse than oh eight
31:20
Speaker 1: for the stock market. The SMP went down, the NASTAC
31:24
Speaker 1: went down where forty it was basically forty for everything,
31:29
Speaker 1: and peaked to trot. The SMP was down about fifty seven.
31:33
Speaker 1: But NASTAC didn't get nearly as she lacked in O
31:35
Speaker 1: eight as it did. Yeah, that was a concentrated and
31:41
Speaker 1: like collapse. Yeah, I was. And that's where retail investors were.
31:43
Speaker 1: And and hedge funds missed that, right. They in fact,
31:47
Speaker 1: some a lot of them made money in that period.
31:49
Speaker 1: They were short the garbage and long value and value
31:52
Speaker 1: actually and and and that that performance ushered in the
31:58
Speaker 1: golden era of lows from oh three to oh eight.
32:02
Speaker 1: And and then hedge funds didn't. They didn't basically hedge
32:07
Speaker 1: they didn't protect you in oh seven oh eight, And
32:10
Speaker 1: from there on end people began to look at them
32:12
Speaker 1: differently and scrutinize them and look at the alpha's and
32:15
Speaker 1: kind of disaggregate the results. And and you know, hedge
32:19
Speaker 1: funds have had a basically rough goal of it ever
32:21
Speaker 1: since of justifying their existence. Private equity has not had that. So,
32:26
Speaker 1: to be fair to hedge funds, I think the pizza
32:29
Speaker 1: troth returns according to some of some of the pizza
32:33
Speaker 1: troth returns for some of the UM indices or something
32:37
Speaker 1: like down twenty in a year when the markets were
32:41
Speaker 1: down thirty, which is good on a relative basis, but
32:45
Speaker 1: sure as hell is an absolute retire well, and then
32:47
Speaker 1: they underperformed on their way back up. That's the problem.
32:49
Speaker 1: That was the giant up six percent and when the
32:51
Speaker 1: markets and so you know, stay for the you know,
32:55
Speaker 1: you know, come for the come for the ips and losses,
32:57
Speaker 1: and then stay for the under performance on the snappack.
33:01
Speaker 1: You know, I get a nickel every time somebody says that,
33:03
Speaker 1: which is fascinating. But but but you get my point.
33:06
Speaker 1: And I think private equity, which has seen these short,
33:10
Speaker 1: sharp recessions, you know, and and and then and easing
33:14
Speaker 1: by the way of monetary policy over their life, private
33:17
Speaker 1: equity really see nothing but lower rates over over its
33:20
Speaker 1: golden era. Here, Um, what happens if if asset prices
33:24
Speaker 1: don't go anywhere and rates go higher for the next generation.
33:27
Speaker 1: I'm going to guess they're in trouble. I would guess that, well,
33:29
Speaker 1: I guess that they may not be in trouble. Will
33:32
Speaker 1: be the hope for returns that the pension funds and
33:35
Speaker 1: endowments and sovereign wealth funds who just constantly just assume
33:39
Speaker 1: private equity is going to earn them ten to twelve
33:41
Speaker 1: percent um somewhat uncorrelated sort of boggles my mind. It's
33:46
Speaker 1: the ultimate correlated asset theoretically. Can you stick around a
33:50
Speaker 1: little bit, I have a bunch more questions for you.
33:51
Speaker 1: I can stick around as long as you'd like. We
33:54
Speaker 1: have been speaking to kinda Coast associates Jim Chainos. If
33:58
Speaker 1: you enjoy this conversation, sure and check out our podcast
34:01
Speaker 1: Extra is where we keep the tape rolling and continued
34:04
Speaker 1: to discuss all things short selling. We love your comments,
34:08
Speaker 1: feedback and suggestions right to us at m IB podcast
34:13
Speaker 1: at Bloomberg dot net. You can check out my daily
34:16
Speaker 1: column on Bloomberg View dot com. Follow me on Twitter
34:19
Speaker 1: at rid Holts. I'm Barry Riholts. You're listening to my
34:22
Speaker 1: master's in Business on Bloomberg Radio. Welcome to the podcast, Jim,
34:40
Speaker 1: Thank you so much for doing this. I've been looking
34:41
Speaker 1: forward to this for a while. I have so many
34:45
Speaker 1: questions we didn't get to, and I have only a
34:49
Speaker 1: finite amount of time, and I want to get to
34:51
Speaker 1: my favorite questions. I asked all of my guests. UM,
34:55
Speaker 1: but let me just go through one or two questions
34:57
Speaker 1: that I have to ask. So you're a fundamental guy.
35:01
Speaker 1: You you do not engage in technical shorting. You're not
35:05
Speaker 1: looking at trend breaks or support failures or any of
35:09
Speaker 1: that sort of chart chart reading. I've never been able
35:12
Speaker 1: to to to make any money by looking at charts,
35:15
Speaker 1: and so I don't think it's I don't think it's
35:18
Speaker 1: a strength. I don't think I have any edge. No
35:20
Speaker 1: edge it comes back, so I I you know, and
35:22
Speaker 1: what about the quantitative side? Um. I know you've talked
35:26
Speaker 1: about a lot of data, but do you guys use
35:28
Speaker 1: data At Can of Coast, we we let everybody you
35:31
Speaker 1: know are looking at factor based uh investing and what
35:36
Speaker 1: factors are driving our stocks when we or another UM.
35:39
Speaker 1: The problem of course with with using using factor based
35:44
Speaker 1: data on price performance and not on research. We'll get
35:47
Speaker 1: to that in a second is that, of course, by
35:51
Speaker 1: the time you analyze the factors, they become self defeating.
35:54
Speaker 1: And we had a quantitative um hedged version of our
35:57
Speaker 1: short fund back in the mid nineties, and we really
36:00
Speaker 1: license even back then that all the factors we were
36:03
Speaker 1: extracting from the portfolio, they didn't last that long. And
36:06
Speaker 1: I bet you now, I don't know for a fact,
36:09
Speaker 1: but I think that that these factor based observations canceled
36:14
Speaker 1: canceled themselves out even faster. And if we look at
36:18
Speaker 1: the returns for some of the algorithmic funds in the
36:21
Speaker 1: last few years, I think that bears it out. So
36:24
Speaker 1: we mentioned earlier and ron Um you have had a
36:28
Speaker 1: very good relationship with reporters and media. Have to mention
36:33
Speaker 1: Bethany McClain, who whose work I've always loved and who
36:36
Speaker 1: was right there in the middle of enron How has
36:40
Speaker 1: the media worked with you over the years. How have
36:42
Speaker 1: have people reached out to you, whether it's an analyst
36:46
Speaker 1: um sort of calling late at night. What is your
36:50
Speaker 1: relationship with the press? Well, I mean I think that
36:52
Speaker 1: that reporters generally like talking to short sellers because they're
36:56
Speaker 1: going to get they're going to get the opposing point
36:59
Speaker 1: of view, typic be on a situation. Um, well, look,
37:03
Speaker 1: there's there's thousands of people gainfully employed, making a lot
37:06
Speaker 1: of money who are there to promote promote stories, right,
37:10
Speaker 1: whether whether it's pr firms, whether it's analysts, whether it's
37:13
Speaker 1: bankers who are always going to tell you why why
37:16
Speaker 1: something is fantastic. Um, there's only a handful of people
37:20
Speaker 1: who are economically motivated to say, you know, wait a minute, hey,
37:25
Speaker 1: but um, you know this class might be half empty,
37:28
Speaker 1: not half full. And so you know, most journalists I
37:32
Speaker 1: know that, um that we talked to, have been talking
37:34
Speaker 1: to short sellers for years and and just understand they're
37:37
Speaker 1: going to get the other side of the story. It
37:39
Speaker 1: might not be right, by the way, but at least
37:42
Speaker 1: they will hear a reasoned opinion as to why maybe
37:45
Speaker 1: the stock is overpriced not underpriced. And and a couple
37:49
Speaker 1: of quotes of yours. I would be remiss if I
37:51
Speaker 1: did not mention quote in investing, you can be really
37:55
Speaker 1: right or and but temporarily quite wrong. What does that
37:59
Speaker 1: experience can't be fun? It's it's it's not only not fun,
38:05
Speaker 1: it's constant. I mean, we'll keep in mind, I mean
38:08
Speaker 1: We started our fund when the DOT was are original
38:12
Speaker 1: short only fund. So um this has been basically thirty
38:17
Speaker 1: years of not only up equity markets, but lower interest rates.
38:21
Speaker 1: And I don't think people kind of appreciate just what
38:24
Speaker 1: an amazing tailwind most investors have had for the past
38:29
Speaker 1: thirty or forty years. It is. It is unlike almost
38:32
Speaker 1: anything we've seen in American financial history. And so this
38:36
Speaker 1: is people have gotten very very used to this. If
38:38
Speaker 1: you're a short seller, you've gotten very very used to
38:41
Speaker 1: basically coming in every day and struggling. I mean just
38:45
Speaker 1: that that that before anything happens, more likely than not
38:49
Speaker 1: the stocks you're short are going to be up, and
38:51
Speaker 1: so you had better be right. You had better be
38:53
Speaker 1: right in your fundamentals, and you can often be early.
38:57
Speaker 1: And often the things that the short sellers see that
39:00
Speaker 1: that become really important nobody cares about until the company
39:04
Speaker 1: acknowledges itself that it's a problem. So take a look
39:07
Speaker 1: at Valley and Pharmaceuticals, one of our celebrated shorts from
39:10
Speaker 1: a few years ago. We started shorting that at a
39:13
Speaker 1: hundred and thirty dollars before it doubled to two sixty,
39:18
Speaker 1: and then it went down a lot, and it went
39:20
Speaker 1: down fast. But but the things we saw back in
39:27
Speaker 1: didn't come to the fort and and and late and
39:32
Speaker 1: uh and then the company finally had to realize admit
39:35
Speaker 1: that it had had some real issues. Um, that's that
39:40
Speaker 1: could be pretty maddening and painful. I remember the Enron peaking.
39:45
Speaker 1: I'm doing this from memory, so six or somewhere in
39:47
Speaker 1: that range on it might have been the Bethanie McClain article.
39:52
Speaker 1: It took a year for the stock to collapse. It
39:56
Speaker 1: it fell so slowly. It's it looks like a binary outcome. Hey,
40:01
Speaker 1: either this company is a fraud or it's not. That
40:04
Speaker 1: doesn't mean it goes from eighty six to seventy five
40:06
Speaker 1: to sixty. It should be zero or eighty six, not
40:10
Speaker 1: anything in between. It was a full year to collapse.
40:14
Speaker 1: I hate to burst your bulpa. Barry and Round was
40:16
Speaker 1: one of the easiest shorts we ever had. Really, Yeah,
40:18
Speaker 1: we started shorting it in in the sixties. It did run
40:21
Speaker 1: to eighty in January of oh one, on the Blockbuster
40:24
Speaker 1: announcement that that the Blockbuster they were getting into business
40:28
Speaker 1: with Blockbuster video to stream video. No, it was a
40:31
Speaker 1: wonderful announcement. The problem was they booked profits instantly on
40:35
Speaker 1: the announcement. I mean they kind of got the technology right.
40:38
Speaker 1: It's now of course Netflix, but well there, but there
40:41
Speaker 1: wasn't streaming Netflix for another dozen years, so it looked
40:44
Speaker 1: a little bit like a like a fun announcement. Um
40:48
Speaker 1: there was no real technology that it didn't exist yet,
40:50
Speaker 1: and and so it was still on the drawing boards,
40:53
Speaker 1: and and and then Bethany's story came out in February
40:57
Speaker 1: about one um at the stock basedly kind of went
41:00
Speaker 1: eighty to zero in the next nine months. But but
41:05
Speaker 1: it but it there were some of course, gut wrenching
41:07
Speaker 1: rallies along the way. Along the way. Alright, so let's
41:09
Speaker 1: jump into some of our favorite questions that we ask
41:13
Speaker 1: all of our guests. Tell us the most important thing
41:16
Speaker 1: people don't know about your background? Um, well I was.
41:22
Speaker 1: I was pre med in college for about three days. Um,
41:27
Speaker 1: and so that got me, got me moving towards the
41:31
Speaker 1: world of finance. Who were some of your early mentors?
41:34
Speaker 1: So I was lucky when I when I when I
41:37
Speaker 1: got into the business. The fellow that that hired me
41:40
Speaker 1: away from Blathe Eastman pain Weber, guy named Bob Holmes,
41:43
Speaker 1: was was not only a mentor, but he stood behind me.
41:47
Speaker 1: It kind of the darkest days of bald when the
41:49
Speaker 1: stock had doubled, the New York partner was it was
41:52
Speaker 1: was screaming from my head on a plate. I was
41:56
Speaker 1: all of h I was all of twenty five years old,
41:59
Speaker 1: and um, and he stood behind me. Had seen the work,
42:02
Speaker 1: he'd seen the documents. Um, he said, you know, kid,
42:06
Speaker 1: you're right, You're right, go ahead and publish again. We
42:08
Speaker 1: put a second report out after after it doubled, and
42:12
Speaker 1: and just reaffirming everything we had, laying out all the
42:16
Speaker 1: documents we had, all the case we had, and and
42:18
Speaker 1: he was a guy who kind of taught me about
42:20
Speaker 1: courage and and you know, courage your convictions. But he
42:24
Speaker 1: was my boss as well, So it was an important
42:26
Speaker 1: kind of lesson. When I moved to New York in
42:29
Speaker 1: three I had I had a number of wonderful, wonderful
42:33
Speaker 1: mentors who sort of introduced this Midwestern kid to New
42:37
Speaker 1: York City and Low Street itself. You know, people like
42:41
Speaker 1: like Stephen Peck um Wiss Peck and Career who was
42:44
Speaker 1: passed on a few years ago, and and just kind
42:48
Speaker 1: of took me under his wing, and you know, a
42:49
Speaker 1: right kid, were going to Rio's on Tuesday night and
42:52
Speaker 1: I'm going to do set to everybody in town. And
42:55
Speaker 1: and um, he was. He was tremendously tremendously important man
43:00
Speaker 1: in in my growth on Wall Street, you know. And
43:03
Speaker 1: then they were sort of my contemporaries. An old friend, uh,
43:08
Speaker 1: Jim Grant who was on the journalistic side, who who
43:12
Speaker 1: of course his ancient. He's much much older than I am,
43:15
Speaker 1: like thirty or forty year or something like that. Right,
43:17
Speaker 1: he's gonna he's gonna kill me. He's about he's about
43:20
Speaker 1: he's about ten years older than uh. But but he
43:23
Speaker 1: started his his his firm in eighty four. I started
43:27
Speaker 1: mining eighty five. So we both were kind of struggling,
43:30
Speaker 1: you know, entrepreneurs trying to get our businesses off the
43:33
Speaker 1: ground in the mid eighties. Both of us as sort
43:35
Speaker 1: of skeptics. You know. He had a pen in his
43:38
Speaker 1: hand and I had had clients money. And um, I
43:41
Speaker 1: think we commiserated a lot and learned a lot from
43:43
Speaker 1: each other way back way back then. So I think
43:45
Speaker 1: bow ties age people. Um, a lot of folks don't know.
43:48
Speaker 1: Tom Keene is twenty nine. That's uh, that's what a
43:51
Speaker 1: bow tie will do to you, UM, tell us about
43:54
Speaker 1: the investors who influenced your approach to investing too short. Yeah,
43:59
Speaker 1: so probably the the investors to stand out. Again, both
44:05
Speaker 1: both people I met early in my career. UM one
44:08
Speaker 1: of course was the legendary Julian Robertson Who's Who's Who's
44:12
Speaker 1: of course still around, still investing, and his approach was
44:17
Speaker 1: something that sort of really galvanized me. You know when
44:19
Speaker 1: I when I ran money for him and and he
44:22
Speaker 1: called me up and he say, Jim, see we're short
44:26
Speaker 1: x y Z corps. You know some guys in my
44:28
Speaker 1: shop like that. Why don't you come over for lunch
44:30
Speaker 1: we'll talk about it. And so it was always like
44:33
Speaker 1: going into the lions Den, right, because that Julian would
44:37
Speaker 1: be a one end of the table, and and there'd
44:40
Speaker 1: be a bunch of of his investors, his his analysts,
44:43
Speaker 1: many of whom are now legendary investors in their own right,
44:45
Speaker 1: sitting around the table, and we'd argue back and forth
44:48
Speaker 1: over whatever whatever stock it was, and and you know,
44:52
Speaker 1: what about this? What about this? And you had better
44:54
Speaker 1: know your story because they they they knew their story.
44:59
Speaker 1: Often they agreed with me, by the way, but sometimes
45:01
Speaker 1: they didn't. But but you had to hone your craft
45:04
Speaker 1: pretty well to understand again, what is your edge? What
45:07
Speaker 1: didn't investors know? And then another one who is no
45:10
Speaker 1: longer with us, who was also a bit of a
45:12
Speaker 1: mentor about New York as well, was was the legendary
45:15
Speaker 1: short seller Bob Wilson. Bob and I would have lunch
45:18
Speaker 1: from time to time every few months, and then he
45:21
Speaker 1: had these wonderful dinners with Dick gilder Um, you know,
45:24
Speaker 1: sort of every few months as well, and I was
45:26
Speaker 1: privileged to attend those. But Bob, Bob also had one
45:30
Speaker 1: of the greatest quotes of all time that I never
45:32
Speaker 1: forget um about about investing. And I was grumbling about
45:37
Speaker 1: someone who I worked with at Deutsche Bank at the time,
45:40
Speaker 1: and this guy was one of the world's worst investors.
45:44
Speaker 1: Everything he touched went down, and he was a long investor.
45:49
Speaker 1: And I was always grumbling because the guy was always
45:51
Speaker 1: just making a complete fool of himself at research meetings
45:54
Speaker 1: and internal meetings. And Bob looked up at me over
45:57
Speaker 1: over his his cup of coffee or tea and just smiled.
46:01
Speaker 1: He has great, little sort of devilish smile, he said.
46:04
Speaker 1: Jim just Remember, someone who is always wrong is just
46:08
Speaker 1: as valuable as someone who's always right. Just take the
46:11
Speaker 1: other side of the trade. That's fantastic. Let's talk. Let's
46:15
Speaker 1: talk a little about books. This is everybody's favorite question.
46:18
Speaker 1: Tell us about some of your favorite books. What fiction, nonfiction?
46:21
Speaker 1: Market related not so, I read a lot. I read
46:24
Speaker 1: a lot of history. Um. It's it's my thing. Um,
46:29
Speaker 1: not just financial history, but but broad history. So there's
46:32
Speaker 1: always there's a handful of books. UM. I always recommend
46:35
Speaker 1: to people if they haven't read them. Um. One of
46:37
Speaker 1: my favorites, and one of my favorite historians is William Manchester.
46:42
Speaker 1: And everybody remembers his his MacArthur biography and his his Churchill,
46:47
Speaker 1: his unfinished Churchill uh trilogy. I think his daughter may
46:51
Speaker 1: have finished it for him. But the book that that
46:54
Speaker 1: is utterly one of those game changer books. If you
46:57
Speaker 1: read history is a world lit only by five here,
47:00
Speaker 1: which is the story of the late Late Middle Ages
47:03
Speaker 1: and the early Renaissance and Reformation, um, and written through
47:07
Speaker 1: this prism of great people like Magellan and Martin Luther
47:12
Speaker 1: and the Borgia popes and and and Guttenberg and and
47:16
Speaker 1: basically it just sort of sets the stage for modernity
47:20
Speaker 1: and and he and he tells the tale in a
47:22
Speaker 1: way as only he can. And it's just wonderful history.
47:24
Speaker 1: But I recommended highly up to the world only by
47:27
Speaker 1: fire right. And then in business books, Um, I've always
47:31
Speaker 1: been in my class, always loves um my fraud history
47:35
Speaker 1: of fraud class. We love The Match King by Frank Partner,
47:39
Speaker 1: which was the voted best business book I think in
47:42
Speaker 1: oh nine. Um. And it's just the wonderful story of
47:46
Speaker 1: the greatest fraud stir of the nineteen twenties, Ivar Krueger
47:50
Speaker 1: Um who built this enormous empire on the back of
47:54
Speaker 1: raising money for European countries on the back of a
47:57
Speaker 1: match monopoly, and and how he became greater than JP
48:01
Speaker 1: Morgan by and basically dragged down most of the European
48:05
Speaker 1: banking system with his collapse in two Huh, that's fascinating.
48:10
Speaker 1: I love partners work he did. Uh, infectious screens he did.
48:14
Speaker 1: And then he did wait, which is a fascinating psychological study. Uh.
48:19
Speaker 1: Tell us about a time you failed and what you
48:21
Speaker 1: learned from the experience. Well, I mean we we we've
48:25
Speaker 1: failed in all kinds of things. Um. And and whether
48:29
Speaker 1: it's whether it's single stock ideas. I mean, like anybody else,
48:33
Speaker 1: we're wrong. We're wrong a lot of times in the
48:35
Speaker 1: short side. You have to be, of course mindful of this.
48:39
Speaker 1: So whether it's Valiant doubling on you or or America
48:42
Speaker 1: Online which which went up eight fold on us from
48:45
Speaker 1: ten to eighty. And then of course we got out
48:48
Speaker 1: and uh and then Time Warner bought them, and uh
48:51
Speaker 1: we never got back in UM, which was a really
48:54
Speaker 1: good lesson because it was lesson not only in humility
48:57
Speaker 1: and timing, but it was a lesson on risk. Man
49:00
Speaker 1: In that case, it didn't carry us out because we
49:03
Speaker 1: kept the position very very small over the course of
49:06
Speaker 1: to three years. UM. So you know, I learned a lot. Uh,
49:10
Speaker 1: I learned a lot, a lot of painful lessons in
49:13
Speaker 1: the nineties as uh as as the fantastic years we
49:18
Speaker 1: had in our first five six years, as as hedgehope
49:20
Speaker 1: managers became a struggle and it just the early nineties
49:25
Speaker 1: to mid nineties were just a terrible time on the
49:27
Speaker 1: short side, and and and just you know, whether it
49:30
Speaker 1: was paying people out of my own pocket or or
49:33
Speaker 1: or having to know to really go and search hard
49:36
Speaker 1: for investors you know, it was it was. It was
49:38
Speaker 1: a time. Uh. We got through it, and I got
49:41
Speaker 1: through it with great partners and great employees. But you know,
49:45
Speaker 1: a little adversity sometimes is a good life lesson. That's
49:48
Speaker 1: how you hard and steal. UM tell us what you
49:51
Speaker 1: do for fun? What do you do to relax when
49:53
Speaker 1: you're out of the office. So I travel a fair amount. UM.
49:57
Speaker 1: I enjoy that. UM, I read fair amount. And I
50:00
Speaker 1: do teach. I mean the teaching has been over the
50:03
Speaker 1: last eight years. I teach up at Yale at s O.
50:07
Speaker 1: M and also every other year at the University Wisconsin,
50:10
Speaker 1: which is my family alma mater on Wisconsin. And UH
50:14
Speaker 1: and UH it's been a lot of fun. It's been enjoyable.
50:18
Speaker 1: I enjoy interacting with the students. UM. It's a fun course.
50:22
Speaker 1: We teach starting in the sixteen nineties all the way
50:26
Speaker 1: up to today. UM. And we teach teach about some
50:31
Speaker 1: of the great episodes of of financial market fraud, from
50:33
Speaker 1: the Mississippi Scheme and South Sea Bubble all the way
50:37
Speaker 1: to UH to Donald Trump's hotel and resorts and uh
50:42
Speaker 1: and some of the more recent things. UM and and
50:44
Speaker 1: and and do so in a thematic and systematic way. So,
50:49
Speaker 1: speaking of of students in in college, a grad student,
50:52
Speaker 1: if one of them, or a millennial came up to
50:54
Speaker 1: you and said, I'm looking um for some career guards
50:58
Speaker 1: and I'm considering a job and finance, what what sort
51:02
Speaker 1: of advice would you give them. One of the things
51:04
Speaker 1: I tell my students and and and young people who
51:08
Speaker 1: come up to me to ask for that kind of
51:09
Speaker 1: advice is I sort of asked them, you know, are
51:13
Speaker 1: you this is something you you feel you want to
51:16
Speaker 1: do as a career in a big institution, do you
51:18
Speaker 1: want to do you feel you want to go out
51:20
Speaker 1: and do something on your own? Entrepreneurial and if it's
51:23
Speaker 1: the latter, I try to impress upon them that, unlike
51:28
Speaker 1: what they might consider conventional wisdom, I tell them that
51:32
Speaker 1: the time to take risks is when their youngest. Yes,
51:36
Speaker 1: you need certain skills, of course, but it's very very
51:39
Speaker 1: hard once you're in your forties and fifties and you've
51:42
Speaker 1: got the obligations of life, financial, family, you know, education,
51:47
Speaker 1: call it too then up and say I'm gonna go
51:50
Speaker 1: do this on my own and and and by the way,
51:53
Speaker 1: if you do and it doesn't work out, you've kind
51:56
Speaker 1: of that's it, right And and and on the other hand,
52:00
Speaker 1: if you're twenty five, twenty six and you have a
52:03
Speaker 1: great idea and you have a backer, go for it.
52:07
Speaker 1: If you fail, nobody's going to hold it against you.
52:10
Speaker 1: You you know you you you you were. In fact,
52:12
Speaker 1: they might even admire you for it. And and so
52:16
Speaker 1: I always tell people if they're going to go do
52:18
Speaker 1: something with with with a small group of people, or
52:21
Speaker 1: do it when you're youngest, not when you're not when
52:23
Speaker 1: you're twenty years or thirty years into it, because you're
52:26
Speaker 1: not going to be able to do it as easily then.
52:29
Speaker 1: And if if it fails, and by the way most
52:32
Speaker 1: things do, um, you just dust yourself off and pick
52:36
Speaker 1: yourself help and dust yourself off, and you know, go
52:38
Speaker 1: do something else. It's not the end of the world
52:41
Speaker 1: for you. Very interesting, very interesting advice. Our final question,
52:46
Speaker 1: what is it that you know about short selling today
52:49
Speaker 1: that you wish you knew thirty years ago when you
52:51
Speaker 1: first launched Kinnicus not to do it? Is that true? No?
52:57
Speaker 1: But I say again, my sense of timing isn't exactly fantastic, right. Um,
53:02
Speaker 1: So you launched the launched a short fund just as
53:06
Speaker 1: a thirty year bullmarket was Yeah, pretty much exactly. So again,
53:09
Speaker 1: timing is not there for a day. Uh. Look, it's
53:13
Speaker 1: lots of lessons I've learned along the way, UM on
53:16
Speaker 1: managing risk both in a portfolio career um and and
53:22
Speaker 1: uh sadly, however, in our business you sort of have
53:24
Speaker 1: to learn them yourselves. It's it's hard to impart them.
53:26
Speaker 1: You can, you can speak all you want, but the
53:29
Speaker 1: market is is is a cruel mistress, and uh, she
53:33
Speaker 1: tends to uh, she tends to impart her lessons on
53:36
Speaker 1: everyone singularly and individually. We have been speaking with Cana
53:41
Speaker 1: Coast Associates Jim Chainos. If you enjoy this conversation, be
53:45
Speaker 1: sure and look up an inch or down an inch.
53:47
Speaker 1: You can see any of our other two hundred or
53:50
Speaker 1: so conversations on Apple iTunes, Bloomberg Overcast, wherever your final
53:55
Speaker 1: podcasts are sold. Check out my daily column on Bloomberg
53:58
Speaker 1: View dot com. You can follow me on Twitter at Ridholts.
54:02
Speaker 1: I would be remiss if I did not thank our
54:05
Speaker 1: crack staff who helps put together, uh these conversations. Medina
54:10
Speaker 1: Parwana is our producer slash audio engineer. Taylor Riggs is
54:14
Speaker 1: our booker. Mike bat Nick is our head of research.
54:18
Speaker 1: I'm Barry Risholts. You've been listening to Masters in Business
54:21
Speaker 1: on Bloomberg Radio.