James Chanos Discusses Investment-Driven Models

and hedge funds, UH and institutional investing. And this is just a tour to force if if you are at all interested in running a two sided book as opposed to a long only book, If you want to know what it's like to be a short seller, how to uncover financial fraud, what it was like to uncover some of the biggest frauds of the past fifty years, whether it was Enron or Tycho or just go down the list. Uh,

then you're gonna love this conversation. And rather than have me babel incessantly about how much fun it was, I'm just gonna say, with no further ado, my conversation with Jim Chanos. I'm Barry Ritults. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Jim Chanos. He is the founder and managing partner of Kinakos Associates, the largest exclusive short selling investment firm in

the United States. It was launched in n He is a celebrated short seller, who was known perhaps best for his short sale on Enron about a year before the company collapsed to zero. He is a lecturer at and a Beckton Fellow at the Yale School of Management, where he teaches graduate students about financial fraud. Jim Chanos, Welcome to Bloomberg. It is I've been looking forward to this a while, and I have to begin by pointing out that I don't know if this is true. You have

to confirm this. Kinakos is Greek for sync Is this right? Yeah, it means literally dog like. But the the Kinkasts were a group of philosophers who lived outside of Athens in the Golden Age um and they basically, uh were searching for the ultimate truth. They believed in an independence of thought and self discipline, and Diogenes was their philosophical leader. But it's the root of the word cynic in English, and and you're obviously referring to the Golden Age of philosophy.

So let's talk about the philosophy that led to both cynicism and short selling. You began your career as a financial analyst at Pain Webber and then Guilford Securities and Deutsche Bank. These tend to be long only firms or their clients are long only. What what was it like then when there was a heretic in their midst? Well, when I got onto Wall Street, the first gentleman hired me um in night was completely puzzled as to why anyone would want to work on Street because in it

was not a lucrative field. It was we were at the tail end. We didn't know it of a sixteen year bear market and so uh and in fact, from nineteen sixty six eighty two in real terms, that Dow dropped as much as it did in in two, so flat in nominal terms. But it was Yeah, it was basically peaked at a thousand in nineteen sixty six and bottomed out of seven seven hundred something in in eighty two. But as you say, in real terms, it was a disaster and so um so I got a job as

a as a as an analyst doing deal books. Um but I was fascinated with the market and uh and always had had invested whatever speremoney I had in the market in college my dad had pushed me to sort of learn about it, and the head of the head of retail sales was down the hall, so I used to spend my lunch hours and after work talking to him, and ultimately he hired me in nine needy two UH to come work at a small firm that he was forming,

UM leaving Blithe Eastman, Pain Webber and and forming Guilford Security. So I went there as a securities analyst and that was fantastic. UM. He gave me latitude to do whatever I wanted to short. My first recommendation was a short sailor, Baldwin United. So so let's we'll talk a little more about bold when United um in in a few minutes.

What was the reaction in the community, be it analyst community or or typically mostly long only investment community that here's this young whipper snapper and their first report is not just hold or neutral or sell, but sell short. Yeah. It wasn't received very well as you can imagine, uh, particularly since the big brokerage firms who were recommending stock were also making a fortune selling their annuities, and so

it was it was a double payer. So not only were they placing the stock, they were also placing they were Baldwin was an insurance company. They're selling annuities single premium deferred and neuis. They were all Baldwin Piano by the right, which then more that's sort of like iced tea companies morphing into blockchain company. Well, their CEO was a charismatic guy, and he made his market the company

selling pianos door to door. And I've always said, if you can sell pianos door to door, you're a pretty good salesman. Yeah. So and uh and Baldwin was was the the fastest growing financial services company in the United States in UM and it was you know, for fortunes, most admired, blah blah blah blah blah. A lot of things that we would see later twenty years later in the end run story were uh, we're basically uh indicative

of Baldwin back. So, so what alerted you that not things were not all kosher at Baldwin Piano slash Insurance? As if that alone wasn't enough. So I was. I was as a young analyst. I had no insurance analytical experience, so I had to sort of start it at ground zero, which I think at the end of the day was was helpful for me because I had to learn basically, um it was from scratch, and it was while I was.

I was making phone calls and trying to understand how it was that Baldwin could use insurance company money to do acquisitions. That was sort of the game that they were playing. I got a phone call um one night, I was working late at the office, and it was it was someone who wouldn't give me their name and said, I understand you're you're asking questions about Baldwin United and uh.

I said, yeah, who's this? And he said, it's not important who this is, but you should be aware that there are insurance files at the State of Arkansas insurance Department that are public that you should get and you know, click and uh and so in Arkansas. And so the next morning I told my boss that and he of course asked if I had been drinking and said, I said, you know, no, I got an anonymous call and we should check it out. We hired a local law firm

and it was a treasure trove. It was letters going back and forth in the state regulators to Baldwin basically saying they were insolvent and that they needed to raise capital immediately and that they would no longer be allowed to use insurance company money to make acquisitions. And blah blah blah blah. It was the whole story laid out

in public documents and and so Yeah. Then years later I was at an insurance conference and I heard the same voice from behind me, and uh it was It was a well known insurance analyst who at the time was in Chicago, and um, he could not cover Baldwin. His firm would not let him because he looked at it and saw it was a house of cards and the firm had sold annuities, so they told him to shut up. And uh, I've always kept him anonymous ever since. But it was that that tip that helped that that

set you off. Let's talk a little bit about some of the fascinating fang stocks Facebook, Amazon, Netflix, Apple, Google. Uh. What doesn't get mentioned in that list is Tesla. And some people have said Tesla may not be worth as much as its current market cap. You have a slightly different view. What's your perspective on Tesla? Well, I think the stock might not be worth anything, um on a pure financial analysis basis. It is to us, it's one of the bellweathers of this market. It is it is

a hopes and dream stock that investors have pinned. You know, really, whatever their expectations are on a future, a green future globally, they have they have put it on this stock and on this CEO, who has done a really good job in promoting that very vision. The problem, of course, is is that it's an automobile company, and it's it's increasingly having problems making automobiles, and soon it's going to be facing much more competition from people who do know how

to make automobiles. In fact, every major automobile manufacturer around the world, Europe, Japan, the United States has come out and said we will have some form of an electric or hybrid vehicle either throughout our line or that's what

our entire line will consist of. So the question is Tesla an actual paradigm shift, or they a game changer in the world of automotives, or are they a stock that simply, you know, came up with an idea that everybody else has adopted, but there's nothing unique to the company other than a very charismatic leader. I think it's a great question. Berry. I think they were a paradigm shift six or seven years ago when they introduced the Models, and I have always said the Models was an important

car because Musk made E vs electric vehicle sexy. Right Prior to that, any type of green vehicle was a compromise the Nile exactly. And I know you're a car guy, Berry and and so you know that. And and suddenly you had this Models which was a car that was aspirational car you wanted to drive up to the country club or two, you know, the restaurant valet, and and everybody wanted one. And the problem is, of course, the

model Lesque now is seven years old. And finally, finally the Europeans and and Detroit and ultimately Japan are coming with their vehicles. We have Audi and Jaguar coming this year with very good looking sexy crossover cars. And then um near and dear to your heart, we have Porsche coming out next year. Miche a handsome car which is a gorgeous car and it's coming out next year and and is a sports car designed from the bottom up from I believe their Lamon's team, and uh, you know.

And so now Tesla is in is in a scrum. They're going to be competing with well financed operations with good R and D whose technology is is probably well ahead of theirs at this point. They can't fund themselves by selling flamethrowers every couple of months. Flamethrowers and hats. Um, yeah, I mean and and and but we're laughing. But that's kind of problem them, right, because you have a CEO

is kind of all over the place. Um. We believe actually his passion is space X. So I think he's going to actually hand over the reins as CEO at some point in the next few years. Um, and and and move full time over to to space X. Plus the hyper loop and the boring. Oh yeah, they forgot about the hyper loop. Yeah, that's enough. And supposedly they're really exploring doing something with that boring company is testing boring equipment and and so there's a lot going on there.

And and that's part of I think that's part of the allure of the of the company. It's valuation is the CEO. The problem again is that he's he's up against serious competitors in his core business. And and then finally on that we track executive departures. We have this list we put out and it is stunning as to how many senior executives have left this company in the

last two years. The only two companies that we've seen in our history with a similar executive departure pattern, where Valiant Pharmaceuticals a couple of years ago and a little company in Houston call En Round. And it is never a good sign when almost all your senior executives are leading at the stock price at at a high. That's telling you there's something wrong. And I and I don't know what it is. But but almost all the senior executives at Test, let's see something and are leaving stock

option packages on the table. What about the idea that some big company, maybe it's a GM, comes along and buys them as a rescue package and jump starts their own um e V program. Well, the problem with that is is the GM, for example, the reason you would buy Test ostensibly is because of technology, not because of manufacturing process. Right. Their manufacturing process is actually pretty poor. It's the model three is their new car appears to have lots of issues upon production, so you would be

buying them for for Elon's vision or their technology. Little brand Halo also a little make your little hipper than you General Motors might be just using them as an example.

It might be, but the problem is, of course that that GM's cruise software is now better than Tesla's autopilot, and their product is out and their manufacturing exactly and and so um, and you have to be careful because again most of this mystique of Tesla is based on one car, the models right, which is still a beautiful car seven years old, but it's Yeah, but the Model X was was was just was lukewarm. It was too

expensive for what essentially is a mid size van. And and and now the Model three is is maybe problematic and and so you've got to got an issue here where you've got basically a fifty billion dollar market gap, which by the way, is almost the same as GMS, and it's and it exceeds forwards. Uh, you'd be buying a company just as big as yourself off to basically lose money and and have a little cache. I don't

see it makes perfect sense. Um. So the other side of them, let me push back a little bit on Tesla. They've completely changed the game. They've forced everybody else in that somebody, maybe Toyota does a joint venture with them, maybe some other Chinese or Korean manufacturer comes along and says, we want a toe hold in the US and elsewhere. What what is the company worth in a takeover or

do you end up in a take under situation? Well, you're you're a little late, because Toad and Diameler did do joint ventures with Tesla ten years ago and sold all their stock. They did, yes, and they did in fact both Interestingly, both of those both those companies sent teams of engineers to help Ellen get the models out.

And so I think that that we've already seen this, and and the problem is is we we just discussed, is that the valuation of the company, which is a fifty billion, fifty billion dollars in equity cap and then by the time West plus debt, you're talking about a sixty plus billion dollar total enterprise value. This would sink almost anybody but the very largest companies who would have to finance not only the sixty billion costs but the operating losses. So you you would destroy the earnings of

almost any auto O E M by buying Tesla. Fascinating. Let's talk a little bit about hedge funds and how they've changed over the years. The last time you and I sat down for a conversation was about three years ago, or a recorded conversation. I should say you mentioned that back in the day, uh, there were a few hundred hedge funds and and out of those, twenty or thirty were reliable alpha generators. Today there's eleven thousand or so

hedge funds. How many? And probably is it that? Is it still that smaller percentage of regular You know, it's I have a little bit of advantage UM advantage point because not only am I a manager, but I also sit on some investment committees, so reasonably large investment committees. So I get to see the pitches. I get to see the pitches, and I get to see the results from a lot of people in the industry as as

as someone who allocates capital. And I have to tell you, I mean, the industry is wanting UM, and it's wanting across the board, and alpha's have dropped, including our own UM over time UM, whether they've been competed away UM. Now, another theory I have, of course, being on the short side, is that lower interest rates, particularly for short sellers, have

reduced rebate income. And so when I started, UM, if we saw the stock short before anything happened, we are in six or seven percent annually on the cash proceeds and we split that with the prime broker, and now that number more recently was zero, and that's that was a significant source of returns. UM. So I think that that um that's one aspect, particularly for fundamental short sellers. But look, I mean, markets have gotten more and more efficient.

The more you have smart people pursuing something, the tougher it's going to be to beat the market. That's just a given. I think paradox of skill is what And then and of course the size, right, I mean, you know, it's a lot easier to to beat the market if you're running fifteen million than than a few billion, even a few hundred million, there's still some some opportunity. But some of these funds are five and ten and twenty billion dollars. That's tough to move. Swing that around. Well.

The other thing is that, of course, you stop managing a portfolio and you start managing a business as well. And I'm always mystified by my peers who who been very successful and they're now running you know, as you say, ten or twenty billion dollars but have two hundred three hundred employees, and I just I mean, that just blows my mind. That's reasonably large business. How big is can a coast these days? We're probably we're the same as we've been for years and years and years basically about

thirty people, um, which is still work to manage. But it's not a full time just not it's not it's it's that's it's a it's a magnitude of difference. So, given your perspective as both a fund manager and an asset allocator, when you're reviewing a hedge fund and deciding whether or not you're gonna give them capital, what are you actually looking for? What? What would make you say

this is a place I could park some money. So some you know, Julian Robertson said it best, Um, and I think to some extents why the Tiger cubs have been so successful is what is your edge? And he always, he always, when when having a bear and a bull discuss debate a stock at his shop, Um, we ran money for him, and he would have us come in and talk about one of his shorts are shorts because someone in the shop may have liked it on alongside,

and he would constantly say, what is your edge? What do you know that the market doesn't and and and that applies I think the fund managers generally, what is in your process that gives you an edge, whether it's trading wise, whether it's research wise, that that basically sets you aside, that that you see things differently, and you see you see the reality versus the perception of reality.

And and so what I found is that numbers can be very misleading because um, very smart people can struggle, um, and very very uh uh mediocre people can excel for periods of time. Um. It's just not where you want to place your bets. And so if if as an allocator, if we see someone who we think is not only smart and hard working, but has a define herble and sustainable edge, um, that's someone that you might want to consider,

particularly if they're struggling, um to be allocating capital. Because reversion to the mean is also a pretty powerful process. So when you say struggling, you mean struggling running the fund, or struggling in terms of their performance. You know, maybe they're not generating the alpha they're they're they're matching the market and or slightly behind the market. But but yet you know, have a have a pretty superior long term

track record. Same people doing it, same process, um and and so sometimes you see sometimes you see an opportunity to do that. What most people do, of course, is they just simply look at performance and and it's it's that alone will not do it for you, because you're always going to chase that which has been hot. And it's so hard to to say, well, this guy is not doing well, we should be allocating some capital because they're gonna come back into favor and and by the way,

they're still doing what they've always done well. Um, very very tough. And then of course you have to you have to disaggregate the beta from managers, and that's that's essential. Um. You have to take out the market because we can buy the market for ten basis points, right, So paying big fees to people who are who are either matching the market with no no edge or or leveraging the market to get out performance is the fools earned. You know.

I read somewhere that past performance is no guarantee of future returns. I think I saw that on some documents somewhere. Let's talk about some of those Conseco, Tycho, Commodore, coll Eco Integrated. I think I don't think your listeners were alive when most of those who were done there were more recent more recent there were more recent ones. So so so let me ask a different question. Then, tell us about something that in hindsight you looked at and said,

why don't we short that? That's right in our strike zone? Any anything that you looked at and didn't I think the biggest, the biggest, the biggest whiff uh that that we had done work on and took a pass on was Japan in the late eighties. No, I was sure a lot of commercial real estate stocks in the US in the late eighties, the tax law had changed. Everyone had levered up in the commercial real estate to sell

it to the Japanese um. The tax shelter business was was kneecapped by the tough by the a Tax Act of eight six And when we looked at what the Japanese were doing, we saw them doing all kinds of dumb things. And I began looking at the Japanese banks, which at the time were the largest in the world, and some of the Japanese conglomerates which were the largest in the world, and the numbers didn't make any sense.

But I felt that I had my hands full in the US, and what I really missed was a twenty year bear market in in these heavily leveraged Japanese companies, and compared to even the dot com NASDAC, the Japanese market was far more expensive, far more overstretched. And then NASDAK even got at the peak and two things right, it was and and and of course it got to it got to just insane heights that it's still not

scaled um. And and so I think that that that was, you know, one of our greatest our greatest missus um fundamentally so from Japan. Let's just hop across the China Sea and talk about China. You were very negative on China for a long time before they had a little bit of a hiccup. Tell us about the China trade and what do you think of the Chinese economy here

and that region as a area to invest in. Well, it's funny that we talked about Japan, because the analog that China eight years ago, when we started talking about it, most most resembled was actually actually Japan of the late eighties. If you think about it, it was a state driven capitalist model that was a better model, some thought than the US of the Western model. It was heavily relied on debt, it was heavily relied on a domestic real

estate bubble. It was very trade oriented, export oriented. Um. It had a protected currency, it had its own culture. I mean, the similarities between Japan in in oh nine two tho ten and China and nine two thousand ten in Japan were actually somewhat significant that, of course everything is different and and um. But when we started looking at China, the f x I, which is the eighth share you know, et F was trading around forty one dollars.

It's just forty six now, so it's up about it's up a little bit more than ten percent in eight years. The rest of the markets that we were looking at, you know, have doubled and tripled um. So China has been one of the better places to be short for the past eight years if you're a short seller. I think that what's really interesting about China is how little

has changed in the eight years. Shishingping is basically now the emperor, but the whole concept of all the stuff you've heard in the last eight years, Oh, they're going to become a consumer driven economy that hasn't happened. They're going to reduce investment as a percent of GDP. That hasn't happened. Uh, you know, the currency is going to either go up a lot or down a lot. That

hasn't happened. Um. What's really interesting about China is that it's pretty much status quo and the model, the the economic model that is China is still the same. It relies heavily on debt, and so debt is still growing. Uh, it's not growing as fast as it was eight years ago, when it was growing twenty percent a year. It's now growing ten to fifteen percent a year. But it's still

growing at twice GDP growth. And they can't get off the the stimulus or the steroids, if you will, of just constant debt injections to build new airports, roads, high rises. It's still what's driving the economy. So what's the end game for China? I wish I knew. Um, it's it's it's fascinating to watch because everybody sees it now. When we started talking about eight years ago, it's a controversial viewpoint. You know now now it's not right. It's hard to

the debt levels have doubled and tripled since then. That's sixty minutes um segment on the ghost Cities of China. I as I was watching that, I'm thinking Jim Chanos has to be turning cart wheels over this. What's fascinating about that, of course, is is that the cities that they showed have, as the bulls have said, mostly filled up. The problem, of course is is there's new empty cities.

And then this is the inherent problem, right and so I think that that that any any time you've got a model that's credit driven based on a property bubble and and and investment, now that that is not needed. I always joked that Hainan, the island of Hainan, their tropical island in the South China Sea, when when we started looking at China, it had one international airport. Um about three or four years later they completed the second

international airport, which is not fully utilized today. And now they've begun work on a third international airport which is just folly on that little island in the little island. So so this is the problem with an investment driven model. All three of those have contributed to GDP construction. You know, dollars go right into GDP. But of course the economic returns and each one will have dropped. I'm going to

mangle this data point. I believe it was you who had either said or written China over the past three years used as much cement as United States used in the entire twentieth century. I think it was. It was not us, it was it was somebody else at Bill Gates, I know, pointed out I don't know who the originator of the data point was, but I think it was. China in the last ten years has has used uh as much concrete as the US did in the last

hundred plus UM. And they is true. Um, it's remarkable to look at what China since it entered the w t O in two thousand one has done. UM. And it is done so. It has done so, and it is and it is literally transformed a country in less than twenty years. The problem again, of course, that that the bears will keep pointing to, is you've pulled a

lot of it forward. Anytime you use debt to fuel to fuel your growth, you're basically pulling forward consumption and and that's just in the economic identity, and so there will be a reckoning at some point. The deaths do have to be serviced or inflated away and and one of the two will happen. So let's let's talk about a few other UM topics that I really enjoy your

perspective on. We talked about hedge funds earlier. I've been reading a decent amount about private equity, and they're being challenged in terms of are they really generating the sort of above market returns they claim they're They're doing a

little bit of um, let's just call it creativity. So when you for those who are unfamiliar, when you make an investment in private equity, you're committing capital, but you're not actually giving them capital, so you have more or less after sequester that they calculate their performance based on literally when the money hits, which could be two, three or four years later. That you're sitting with capital tied up that's not yet working theoretically, it's in a short

term fixed income fund. What what's your perspective on what's going on with private equity. I assume you allocate on some of the boards you sit UM money instil We do, and some of my best friends and clients are in private equity. So you know, look, I I always tell them I'm jealous of them. You know, they have a great business model, um and and and they're one of the two areas in in investment management where nobody's questioning fees and or returns or venture capital and private equity.

And remember bain Ca Capital and Mitt Romney. There was a lot of reports about have did Bayne exaggerate its returns? And that's sort of what started this whole cascade over the PAIL. I think that the issue is a broader one, which is if you're investing in venture capital in private equity, I would just tell investors understand that in the case of venture capital, you are investing in high beta, high beta,

high risk, high return situations. So a venture capital fund should be measured not against the SMP but against some some high beta you know whatever. Yeah, and a small cap, high high beta fund. Private equity is a little bit different, right, because all the private equity funds are are different, but they do lever, and so at the end of the day, a private equity fund should have multiples of return of the SMP if you're using leverage. UM, I believe they don't.

And and so that's that examination and hedge funds began this You and I both know, people began kind of wondering about hedge funds after oh eight. The golden age of hedge funds was two thousand to O two. That's when the markets went down. And let's let's not forget the two thousand oh two was worse than oh eight for the stock market. The SMP went down, the NASTAC went down where forty it was basically forty for everything, and peaked to trot. The SMP was down about fifty seven.

But NASTAC didn't get nearly as she lacked in O eight as it did. Yeah, that was a concentrated and like collapse. Yeah, I was. And that's where retail investors were. And and hedge funds missed that, right. They in fact, some a lot of them made money in that period. They were short the garbage and long value and value actually and and and that that performance ushered in the golden era of lows from oh three to oh eight.

And and then hedge funds didn't. They didn't basically hedge they didn't protect you in oh seven oh eight, And from there on end people began to look at them differently and scrutinize them and look at the alpha's and kind of disaggregate the results. And and you know, hedge funds have had a basically rough goal of it ever

since of justifying their existence. Private equity has not had that. So, to be fair to hedge funds, I think the pizza troth returns according to some of some of the pizza troth returns for some of the UM indices or something like down twenty in a year when the markets were down thirty, which is good on a relative basis, but sure as hell is an absolute retire well, and then they underperformed on their way back up. That's the problem.

That was the giant up six percent and when the markets and so you know, stay for the you know, you know, come for the come for the ips and losses, and then stay for the under performance on the snappack. You know, I get a nickel every time somebody says that, which is fascinating. But but but you get my point.

And I think private equity, which has seen these short, sharp recessions, you know, and and and then and easing by the way of monetary policy over their life, private equity really see nothing but lower rates over over its golden era. Here, Um, what happens if if asset prices don't go anywhere and rates go higher for the next generation. I'm going to guess they're in trouble. I would guess that, well,

I guess that they may not be in trouble. Will be the hope for returns that the pension funds and endowments and sovereign wealth funds who just constantly just assume private equity is going to earn them ten to twelve percent um somewhat uncorrelated sort of boggles my mind. It's the ultimate correlated asset theoretically. Can you stick around a little bit, I have a bunch more questions for you. I can stick around as long as you'd like. We

have been speaking to kinda Coast associates Jim Chainos. If you enjoy this conversation, sure and check out our podcast Extra is where we keep the tape rolling and continued to discuss all things short selling. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my daily column on Bloomberg View dot com. Follow me on Twitter at rid Holts. I'm Barry Riholts. You're listening to my

master's in Business on Bloomberg Radio. Welcome to the podcast, Jim, Thank you so much for doing this. I've been looking forward to this for a while. I have so many questions we didn't get to, and I have only a finite amount of time, and I want to get to my favorite questions. I asked all of my guests. UM, but let me just go through one or two questions that I have to ask. So you're a fundamental guy.

You you do not engage in technical shorting. You're not looking at trend breaks or support failures or any of that sort of chart chart reading. I've never been able to to to make any money by looking at charts, and so I don't think it's I don't think it's a strength. I don't think I have any edge. No edge it comes back, so I I you know, and

what about the quantitative side? Um. I know you've talked about a lot of data, but do you guys use data At Can of Coast, we we let everybody you know are looking at factor based uh investing and what factors are driving our stocks when we or another UM. The problem of course with with using using factor based data on price performance and not on research. We'll get to that in a second is that, of course, by the time you analyze the factors, they become self defeating.

And we had a quantitative um hedged version of our short fund back in the mid nineties, and we really license even back then that all the factors we were extracting from the portfolio, they didn't last that long. And I bet you now, I don't know for a fact, but I think that that these factor based observations canceled canceled themselves out even faster. And if we look at the returns for some of the algorithmic funds in the

last few years, I think that bears it out. So we mentioned earlier and ron Um you have had a very good relationship with reporters and media. Have to mention Bethany McClain, who whose work I've always loved and who was right there in the middle of enron How has the media worked with you over the years. How have have people reached out to you, whether it's an analyst um sort of calling late at night. What is your

relationship with the press? Well, I mean I think that that reporters generally like talking to short sellers because they're going to get they're going to get the opposing point of view, typic be on a situation. Um, well, look, there's there's thousands of people gainfully employed, making a lot of money who are there to promote promote stories, right, whether whether it's pr firms, whether it's analysts, whether it's bankers who are always going to tell you why why

something is fantastic. Um, there's only a handful of people who are economically motivated to say, you know, wait a minute, hey, but um, you know this class might be half empty, not half full. And so you know, most journalists I know that, um that we talked to, have been talking to short sellers for years and and just understand they're going to get the other side of the story. It might not be right, by the way, but at least they will hear a reasoned opinion as to why maybe

the stock is overpriced not underpriced. And and a couple of quotes of yours. I would be remiss if I did not mention quote in investing, you can be really right or and but temporarily quite wrong. What does that experience can't be fun? It's it's it's not only not fun, it's constant. I mean, we'll keep in mind, I mean We started our fund when the DOT was are original short only fund. So um this has been basically thirty years of not only up equity markets, but lower interest rates.

And I don't think people kind of appreciate just what an amazing tailwind most investors have had for the past thirty or forty years. It is. It is unlike almost anything we've seen in American financial history. And so this is people have gotten very very used to this. If you're a short seller, you've gotten very very used to basically coming in every day and struggling. I mean just that that that before anything happens, more likely than not the stocks you're short are going to be up, and

so you had better be right. You had better be right in your fundamentals, and you can often be early. And often the things that the short sellers see that that become really important nobody cares about until the company acknowledges itself that it's a problem. So take a look at Valley and Pharmaceuticals, one of our celebrated shorts from a few years ago. We started shorting that at a hundred and thirty dollars before it doubled to two sixty, and then it went down a lot, and it went

down fast. But but the things we saw back in didn't come to the fort and and and late and uh and then the company finally had to realize admit that it had had some real issues. Um, that's that could be pretty maddening and painful. I remember the Enron peaking. I'm doing this from memory, so six or somewhere in that range on it might have been the Bethanie McClain article. It took a year for the stock to collapse. It it fell so slowly. It's it looks like a binary outcome. Hey,

either this company is a fraud or it's not. That doesn't mean it goes from eighty six to seventy five to sixty. It should be zero or eighty six, not anything in between. It was a full year to collapse. I hate to burst your bulpa. Barry and Round was one of the easiest shorts we ever had. Really, Yeah, we started shorting it in in the sixties. It did run to eighty in January of oh one, on the Blockbuster announcement that that the Blockbuster they were getting into business

with Blockbuster video to stream video. No, it was a wonderful announcement. The problem was they booked profits instantly on the announcement. I mean they kind of got the technology right. It's now of course Netflix, but well there, but there wasn't streaming Netflix for another dozen years, so it looked

a little bit like a like a fun announcement. Um there was no real technology that it didn't exist yet, and and so it was still on the drawing boards, and and and then Bethany's story came out in February about one um at the stock basedly kind of went eighty to zero in the next nine months. But but it but it there were some of course, gut wrenching rallies along the way. Along the way. Alright, so let's jump into some of our favorite questions that we ask

all of our guests. Tell us the most important thing people don't know about your background? Um, well I was. I was pre med in college for about three days. Um, and so that got me, got me moving towards the world of finance. Who were some of your early mentors? So I was lucky when I when I when I got into the business. The fellow that that hired me away from Blathe Eastman pain Weber, guy named Bob Holmes, was was not only a mentor, but he stood behind me.

It kind of the darkest days of bald when the stock had doubled, the New York partner was it was was screaming from my head on a plate. I was all of h I was all of twenty five years old, and um, and he stood behind me. Had seen the work, he'd seen the documents. Um, he said, you know, kid,

you're right, You're right, go ahead and publish again. We put a second report out after after it doubled, and and just reaffirming everything we had, laying out all the documents we had, all the case we had, and and he was a guy who kind of taught me about courage and and you know, courage your convictions. But he was my boss as well, So it was an important

kind of lesson. When I moved to New York in three I had I had a number of wonderful, wonderful mentors who sort of introduced this Midwestern kid to New York City and Low Street itself. You know, people like like Stephen Peck um Wiss Peck and Career who was passed on a few years ago, and and just kind of took me under his wing, and you know, a right kid, were going to Rio's on Tuesday night and I'm going to do set to everybody in town. And

and um, he was. He was tremendously tremendously important man in in my growth on Wall Street, you know. And then they were sort of my contemporaries. An old friend, uh, Jim Grant who was on the journalistic side, who who of course his ancient. He's much much older than I am, like thirty or forty year or something like that. Right, he's gonna he's gonna kill me. He's about he's about he's about ten years older than uh. But but he started his his his firm in eighty four. I started

mining eighty five. So we both were kind of struggling, you know, entrepreneurs trying to get our businesses off the ground in the mid eighties. Both of us as sort of skeptics. You know. He had a pen in his hand and I had had clients money. And um, I think we commiserated a lot and learned a lot from each other way back way back then. So I think bow ties age people. Um, a lot of folks don't know. Tom Keene is twenty nine. That's uh, that's what a bow tie will do to you, UM, tell us about

the investors who influenced your approach to investing too short. Yeah, so probably the the investors to stand out. Again, both both people I met early in my career. UM one of course was the legendary Julian Robertson Who's Who's Who's of course still around, still investing, and his approach was something that sort of really galvanized me. You know when I when I ran money for him and and he called me up and he say, Jim, see we're short x y Z corps. You know some guys in my

shop like that. Why don't you come over for lunch we'll talk about it. And so it was always like going into the lions Den, right, because that Julian would be a one end of the table, and and there'd be a bunch of of his investors, his his analysts, many of whom are now legendary investors in their own right, sitting around the table, and we'd argue back and forth over whatever whatever stock it was, and and you know,

what about this? What about this? And you had better know your story because they they they knew their story. Often they agreed with me, by the way, but sometimes they didn't. But but you had to hone your craft pretty well to understand again, what is your edge? What didn't investors know? And then another one who is no longer with us, who was also a bit of a mentor about New York as well, was was the legendary

short seller Bob Wilson. Bob and I would have lunch from time to time every few months, and then he had these wonderful dinners with Dick gilder Um, you know, sort of every few months as well, and I was privileged to attend those. But Bob, Bob also had one of the greatest quotes of all time that I never forget um about about investing. And I was grumbling about someone who I worked with at Deutsche Bank at the time, and this guy was one of the world's worst investors.

Everything he touched went down, and he was a long investor. And I was always grumbling because the guy was always just making a complete fool of himself at research meetings and internal meetings. And Bob looked up at me over over his his cup of coffee or tea and just smiled. He has great, little sort of devilish smile, he said. Jim just Remember, someone who is always wrong is just as valuable as someone who's always right. Just take the

other side of the trade. That's fantastic. Let's talk. Let's talk a little about books. This is everybody's favorite question. Tell us about some of your favorite books. What fiction, nonfiction? Market related not so, I read a lot. I read a lot of history. Um. It's it's my thing. Um, not just financial history, but but broad history. So there's always there's a handful of books. UM. I always recommend

to people if they haven't read them. Um. One of my favorites, and one of my favorite historians is William Manchester. And everybody remembers his his MacArthur biography and his his Churchill, his unfinished Churchill uh trilogy. I think his daughter may have finished it for him. But the book that that

is utterly one of those game changer books. If you read history is a world lit only by five here, which is the story of the late Late Middle Ages and the early Renaissance and Reformation, um, and written through this prism of great people like Magellan and Martin Luther and the Borgia popes and and and Guttenberg and and basically it just sort of sets the stage for modernity and and he and he tells the tale in a way as only he can. And it's just wonderful history.

But I recommended highly up to the world only by fire right. And then in business books, Um, I've always been in my class, always loves um my fraud history of fraud class. We love The Match King by Frank Partner, which was the voted best business book I think in

oh nine. Um. And it's just the wonderful story of the greatest fraud stir of the nineteen twenties, Ivar Krueger Um who built this enormous empire on the back of raising money for European countries on the back of a match monopoly, and and how he became greater than JP Morgan by and basically dragged down most of the European banking system with his collapse in two Huh, that's fascinating. I love partners work he did. Uh, infectious screens he did.

And then he did wait, which is a fascinating psychological study. Uh. Tell us about a time you failed and what you learned from the experience. Well, I mean we we we've failed in all kinds of things. Um. And and whether it's whether it's single stock ideas. I mean, like anybody else, we're wrong. We're wrong a lot of times in the short side. You have to be, of course mindful of this. So whether it's Valiant doubling on you or or America Online which which went up eight fold on us from

ten to eighty. And then of course we got out and uh and then Time Warner bought them, and uh we never got back in UM, which was a really good lesson because it was lesson not only in humility and timing, but it was a lesson on risk. Man In that case, it didn't carry us out because we kept the position very very small over the course of

to three years. UM. So you know, I learned a lot. Uh, I learned a lot, a lot of painful lessons in the nineties as uh as as the fantastic years we had in our first five six years, as as hedgehope managers became a struggle and it just the early nineties to mid nineties were just a terrible time on the short side, and and and just you know, whether it was paying people out of my own pocket or or or having to know to really go and search hard for investors you know, it was it was. It was

a time. Uh. We got through it, and I got through it with great partners and great employees. But you know, a little adversity sometimes is a good life lesson. That's how you hard and steal. UM tell us what you do for fun? What do you do to relax when you're out of the office. So I travel a fair amount. UM. I enjoy that. UM, I read fair amount. And I do teach. I mean the teaching has been over the

last eight years. I teach up at Yale at s O. M and also every other year at the University Wisconsin, which is my family alma mater on Wisconsin. And UH and UH it's been a lot of fun. It's been enjoyable. I enjoy interacting with the students. UM. It's a fun course. We teach starting in the sixteen nineties all the way

up to today. UM. And we teach teach about some of the great episodes of of financial market fraud, from the Mississippi Scheme and South Sea Bubble all the way to UH to Donald Trump's hotel and resorts and uh and some of the more recent things. UM and and

and and do so in a thematic and systematic way. So, speaking of of students in in college, a grad student, if one of them, or a millennial came up to you and said, I'm looking um for some career guards and I'm considering a job and finance, what what sort

of advice would you give them. One of the things I tell my students and and and young people who come up to me to ask for that kind of advice is I sort of asked them, you know, are you this is something you you feel you want to do as a career in a big institution, do you want to do you feel you want to go out and do something on your own? Entrepreneurial and if it's the latter, I try to impress upon them that, unlike what they might consider conventional wisdom, I tell them that

the time to take risks is when their youngest. Yes, you need certain skills, of course, but it's very very hard once you're in your forties and fifties and you've got the obligations of life, financial, family, you know, education, call it too then up and say I'm gonna go do this on my own and and and by the way, if you do and it doesn't work out, you've kind of that's it, right And and and on the other hand, if you're twenty five, twenty six and you have a

great idea and you have a backer, go for it. If you fail, nobody's going to hold it against you. You you know you you you you were. In fact, they might even admire you for it. And and so I always tell people if they're going to go do something with with with a small group of people, or do it when you're youngest, not when you're not when you're twenty years or thirty years into it, because you're not going to be able to do it as easily then.

And if if it fails, and by the way most things do, um, you just dust yourself off and pick yourself help and dust yourself off, and you know, go do something else. It's not the end of the world for you. Very interesting, very interesting advice. Our final question, what is it that you know about short selling today that you wish you knew thirty years ago when you first launched Kinnicus not to do it? Is that true? No?

But I say again, my sense of timing isn't exactly fantastic, right. Um, So you launched the launched a short fund just as a thirty year bullmarket was Yeah, pretty much exactly. So again, timing is not there for a day. Uh. Look, it's lots of lessons I've learned along the way, UM on managing risk both in a portfolio career um and and uh sadly, however, in our business you sort of have to learn them yourselves. It's it's hard to impart them.

You can, you can speak all you want, but the market is is is a cruel mistress, and uh, she tends to uh, she tends to impart her lessons on everyone singularly and individually. We have been speaking with Cana Coast Associates Jim Chainos. If you enjoy this conversation, be sure and look up an inch or down an inch. You can see any of our other two hundred or so conversations on Apple iTunes, Bloomberg Overcast, wherever your final podcasts are sold. Check out my daily column on Bloomberg

View dot com. You can follow me on Twitter at Ridholts. I would be remiss if I did not thank our crack staff who helps put together, uh these conversations. Medina Parwana is our producer slash audio engineer. Taylor Riggs is our booker. Mike bat Nick is our head of research. I'm Barry Risholts. You've been listening to Masters in Business on Bloomberg Radio.