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