WEBVTT - James Chanos Discusses Investment-Driven Models 0:00:02.240 --> 0:00:06.439 This is Masters in Business with Barry Ridholts on Bloomberg 0:00:06.519 --> 0:00:12.640 Radio this week on the podcast What Can I Say? 0:00:12.800 --> 0:00:15.760 Jim Chanos is a legend in the world of shorting 0:00:16.000 --> 0:00:21.400 and hedge funds, UH and institutional investing. And this is 0:00:21.440 --> 0:00:23.560 just a tour to force if if you are at 0:00:23.600 --> 0:00:27.400 all interested in running a two sided book as opposed 0:00:27.440 --> 0:00:30.000 to a long only book, If you want to know 0:00:30.200 --> 0:00:33.040 what it's like to be a short seller, how to 0:00:33.159 --> 0:00:38.320 uncover financial fraud, what it was like to uncover some 0:00:38.440 --> 0:00:41.720 of the biggest frauds of the past fifty years, whether 0:00:41.720 --> 0:00:46.080 it was Enron or Tycho or just go down the list. Uh, 0:00:46.120 --> 0:00:49.640 then you're gonna love this conversation. And rather than have 0:00:49.720 --> 0:00:53.800 me babel incessantly about how much fun it was, I'm 0:00:53.840 --> 0:00:57.480 just gonna say, with no further ado, my conversation with 0:00:57.600 --> 0:01:05.039 Jim Chanos. I'm Barry Ritults. You're listening to Masters in 0:01:05.080 --> 0:01:08.960 Business on Bloomberg Radio. My extra special guest today is 0:01:09.040 --> 0:01:12.440 Jim Chanos. He is the founder and managing partner of 0:01:12.520 --> 0:01:18.720 Kinakos Associates, the largest exclusive short selling investment firm in 0:01:18.760 --> 0:01:23.280 the United States. It was launched in n He is 0:01:23.360 --> 0:01:27.440 a celebrated short seller, who was known perhaps best for 0:01:27.560 --> 0:01:32.119 his short sale on Enron about a year before the 0:01:32.120 --> 0:01:36.480 company collapsed to zero. He is a lecturer at and 0:01:36.680 --> 0:01:40.440 a Beckton Fellow at the Yale School of Management, where 0:01:40.480 --> 0:01:45.120 he teaches graduate students about financial fraud. Jim Chanos, Welcome 0:01:45.120 --> 0:01:48.600 to Bloomberg. It is I've been looking forward to this 0:01:48.640 --> 0:01:51.760 a while, and I have to begin by pointing out 0:01:51.880 --> 0:01:53.840 that I don't know if this is true. You have 0:01:53.880 --> 0:01:58.400 to confirm this. Kinakos is Greek for sync Is this right? Yeah, 0:01:58.440 --> 0:02:03.120 it means literally dog like. But the the Kinkasts were 0:02:03.120 --> 0:02:05.520 a group of philosophers who lived outside of Athens in 0:02:05.560 --> 0:02:11.119 the Golden Age um and they basically, uh were searching 0:02:11.760 --> 0:02:16.320 for the ultimate truth. They believed in an independence of 0:02:16.360 --> 0:02:20.480 thought and self discipline, and Diogenes was their philosophical leader. 0:02:20.720 --> 0:02:22.919 But it's the root of the word cynic in English, 0:02:23.200 --> 0:02:27.000 and and you're obviously referring to the Golden Age of philosophy. 0:02:27.120 --> 0:02:31.160 So let's talk about the philosophy that led to both 0:02:31.200 --> 0:02:34.480 cynicism and short selling. You began your career as a 0:02:34.520 --> 0:02:38.280 financial analyst at Pain Webber and then Guilford Securities and 0:02:38.480 --> 0:02:43.360 Deutsche Bank. These tend to be long only firms or 0:02:43.400 --> 0:02:46.880 their clients are long only. What what was it like 0:02:47.120 --> 0:02:50.920 then when there was a heretic in their midst? Well, 0:02:50.960 --> 0:02:54.600 when I got onto Wall Street, the first gentleman hired 0:02:54.600 --> 0:02:58.839 me um in night was completely puzzled as to why 0:02:58.840 --> 0:03:02.959 anyone would want to work on Street because in it 0:03:03.000 --> 0:03:07.440 was not a lucrative field. It was we were at 0:03:07.440 --> 0:03:09.560 the tail end. We didn't know it of a sixteen 0:03:09.600 --> 0:03:12.680 year bear market and so uh and in fact, from 0:03:12.800 --> 0:03:15.680 nineteen sixty six eighty two in real terms, that Dow 0:03:15.800 --> 0:03:19.080 dropped as much as it did in in two, so 0:03:19.240 --> 0:03:23.240 flat in nominal terms. But it was Yeah, it was 0:03:23.280 --> 0:03:26.640 basically peaked at a thousand in nineteen sixty six and 0:03:26.960 --> 0:03:30.280 bottomed out of seven seven hundred something in in eighty two. 0:03:30.320 --> 0:03:32.200 But as you say, in real terms, it was a 0:03:32.240 --> 0:03:35.640 disaster and so um so I got a job as 0:03:35.640 --> 0:03:39.600 a as a as an analyst doing deal books. Um 0:03:39.640 --> 0:03:42.640 but I was fascinated with the market and uh and 0:03:42.800 --> 0:03:46.640 always had had invested whatever speremoney I had in the 0:03:46.680 --> 0:03:49.160 market in college my dad had pushed me to sort 0:03:49.160 --> 0:03:52.760 of learn about it, and the head of the head 0:03:52.760 --> 0:03:55.440 of retail sales was down the hall, so I used 0:03:55.440 --> 0:03:58.120 to spend my lunch hours and after work talking to him, 0:03:58.200 --> 0:04:01.480 and ultimately he hired me in nine needy two UH 0:04:01.600 --> 0:04:04.800 to come work at a small firm that he was forming, 0:04:05.080 --> 0:04:09.120 UM leaving Blithe Eastman, Pain Webber and and forming Guilford Security. 0:04:09.200 --> 0:04:11.520 So I went there as a securities analyst and that 0:04:11.600 --> 0:04:15.600 was fantastic. UM. He gave me latitude to do whatever 0:04:15.680 --> 0:04:20.240 I wanted to short. My first recommendation was a short sailor, 0:04:20.240 --> 0:04:23.120 Baldwin United. So so let's we'll talk a little more 0:04:23.120 --> 0:04:27.080 about bold when United um in in a few minutes. 0:04:27.839 --> 0:04:30.840 What was the reaction in the community, be it analyst 0:04:30.839 --> 0:04:36.839 community or or typically mostly long only investment community that 0:04:36.960 --> 0:04:39.560 here's this young whipper snapper and their first report is 0:04:40.080 --> 0:04:44.839 not just hold or neutral or sell, but sell short. Yeah. 0:04:44.880 --> 0:04:47.760 It wasn't received very well as you can imagine, uh, 0:04:48.000 --> 0:04:51.560 particularly since the big brokerage firms who were recommending stock 0:04:51.640 --> 0:04:55.280 were also making a fortune selling their annuities, and so 0:04:55.600 --> 0:04:59.160 it was it was a double payer. So not only 0:04:59.160 --> 0:05:01.920 were they placing the stock, they were also placing they 0:05:01.920 --> 0:05:04.920 were Baldwin was an insurance company. They're selling annuities single 0:05:04.920 --> 0:05:07.240 premium deferred and neuis. They were all Baldwin Piano by 0:05:07.279 --> 0:05:10.120 the right, which then more that's sort of like iced 0:05:10.120 --> 0:05:14.560 tea companies morphing into blockchain company. Well, their CEO was 0:05:14.920 --> 0:05:18.040 a charismatic guy, and he made his market the company 0:05:18.120 --> 0:05:20.480 selling pianos door to door. And I've always said, if 0:05:20.480 --> 0:05:22.800 you can sell pianos door to door, you're a pretty 0:05:22.839 --> 0:05:26.760 good salesman. Yeah. So and uh and Baldwin was was 0:05:27.600 --> 0:05:31.320 the the fastest growing financial services company in the United 0:05:31.360 --> 0:05:35.080 States in UM and it was you know, for fortunes, 0:05:35.120 --> 0:05:37.839 most admired, blah blah blah blah blah. A lot of 0:05:37.839 --> 0:05:40.280 things that we would see later twenty years later in 0:05:40.320 --> 0:05:45.039 the end run story were uh, we're basically uh indicative 0:05:45.080 --> 0:05:47.680 of Baldwin back. So, so what alerted you that not 0:05:47.880 --> 0:05:51.520 things were not all kosher at Baldwin Piano slash Insurance? 0:05:51.560 --> 0:05:54.920 As if that alone wasn't enough. So I was. I 0:05:54.960 --> 0:05:58.479 was as a young analyst. I had no insurance analytical experience, 0:05:58.480 --> 0:06:00.640 so I had to sort of start it at ground zero, 0:06:00.680 --> 0:06:02.839 which I think at the end of the day was 0:06:02.839 --> 0:06:05.280 was helpful for me because I had to learn basically, 0:06:06.040 --> 0:06:09.400 um it was from scratch, and it was while I was. 0:06:09.520 --> 0:06:12.240 I was making phone calls and trying to understand how 0:06:12.240 --> 0:06:14.960 it was that Baldwin could use insurance company money to 0:06:15.040 --> 0:06:18.640 do acquisitions. That was sort of the game that they 0:06:18.680 --> 0:06:22.080 were playing. I got a phone call um one night, 0:06:22.240 --> 0:06:23.919 I was working late at the office, and it was 0:06:24.440 --> 0:06:26.360 it was someone who wouldn't give me their name and said, 0:06:26.400 --> 0:06:30.560 I understand you're you're asking questions about Baldwin United and uh. 0:06:30.960 --> 0:06:33.640 I said, yeah, who's this? And he said, it's not 0:06:33.680 --> 0:06:36.279 important who this is, but you should be aware that 0:06:36.320 --> 0:06:39.600 there are insurance files at the State of Arkansas insurance 0:06:39.640 --> 0:06:43.520 Department that are public that you should get and you know, 0:06:43.680 --> 0:06:48.200 click and uh and so in Arkansas. And so the 0:06:48.480 --> 0:06:50.800 next morning I told my boss that and he of 0:06:50.839 --> 0:06:53.880 course asked if I had been drinking and said, I said, 0:06:53.920 --> 0:06:55.920 you know, no, I got an anonymous call and we 0:06:55.960 --> 0:06:58.880 should check it out. We hired a local law firm 0:06:58.960 --> 0:07:02.520 and it was a treasure trove. It was letters going 0:07:02.520 --> 0:07:05.320 back and forth in the state regulators to Baldwin basically 0:07:05.320 --> 0:07:08.120 saying they were insolvent and that they needed to raise 0:07:08.200 --> 0:07:11.000 capital immediately and that they would no longer be allowed 0:07:11.000 --> 0:07:14.160 to use insurance company money to make acquisitions. And blah 0:07:14.240 --> 0:07:16.120 blah blah blah. It was the whole story laid out 0:07:16.160 --> 0:07:19.720 in public documents and and so Yeah. Then years later 0:07:19.760 --> 0:07:21.440 I was at an insurance conference and I heard the 0:07:21.480 --> 0:07:25.000 same voice from behind me, and uh it was It 0:07:25.040 --> 0:07:27.000 was a well known insurance analyst who at the time 0:07:27.080 --> 0:07:31.360 was in Chicago, and um, he could not cover Baldwin. 0:07:31.440 --> 0:07:33.520 His firm would not let him because he looked at 0:07:33.560 --> 0:07:35.680 it and saw it was a house of cards and 0:07:35.720 --> 0:07:37.640 the firm had sold annuities, so they told him to 0:07:37.680 --> 0:07:41.800 shut up. And uh, I've always kept him anonymous ever since. 0:07:41.840 --> 0:07:44.440 But it was that that tip that helped that that 0:07:44.520 --> 0:07:47.440 set you off. Let's talk a little bit about some 0:07:47.520 --> 0:07:56.480 of the fascinating fang stocks Facebook, Amazon, Netflix, Apple, Google. Uh. 0:07:56.480 --> 0:08:01.000 What doesn't get mentioned in that list is Tesla. And 0:08:01.080 --> 0:08:03.840 some people have said Tesla may not be worth as 0:08:03.920 --> 0:08:07.520 much as its current market cap. You have a slightly 0:08:07.600 --> 0:08:10.960 different view. What's your perspective on Tesla? Well, I think 0:08:11.000 --> 0:08:14.280 the stock might not be worth anything, um on a 0:08:14.320 --> 0:08:18.720 pure financial analysis basis. It is to us, it's one 0:08:18.800 --> 0:08:21.480 of the bellweathers of this market. It is it is 0:08:22.000 --> 0:08:27.239 a hopes and dream stock that investors have pinned. You know, really, 0:08:27.280 --> 0:08:31.440 whatever their expectations are on a future, a green future globally, 0:08:31.600 --> 0:08:33.840 they have they have put it on this stock and 0:08:33.880 --> 0:08:36.920 on this CEO, who has done a really good job 0:08:36.960 --> 0:08:40.480 in promoting that very vision. The problem, of course, is 0:08:40.480 --> 0:08:44.319 is that it's an automobile company, and it's it's increasingly 0:08:44.679 --> 0:08:48.160 having problems making automobiles, and soon it's going to be 0:08:48.240 --> 0:08:51.520 facing much more competition from people who do know how 0:08:51.600 --> 0:08:56.240 to make automobiles. In fact, every major automobile manufacturer around 0:08:56.240 --> 0:08:59.240 the world, Europe, Japan, the United States has come out 0:08:59.280 --> 0:09:02.600 and said we will have some form of an electric 0:09:02.760 --> 0:09:07.240 or hybrid vehicle either throughout our line or that's what 0:09:07.320 --> 0:09:11.000 our entire line will consist of. So the question is 0:09:11.120 --> 0:09:15.439 Tesla an actual paradigm shift, or they a game changer 0:09:15.480 --> 0:09:19.200 in the world of automotives, or are they a stock 0:09:19.320 --> 0:09:22.600 that simply, you know, came up with an idea that 0:09:22.640 --> 0:09:25.720 everybody else has adopted, but there's nothing unique to the 0:09:25.760 --> 0:09:29.319 company other than a very charismatic leader. I think it's 0:09:29.320 --> 0:09:32.360 a great question. Berry. I think they were a paradigm 0:09:32.360 --> 0:09:34.920 shift six or seven years ago when they introduced the Models, 0:09:35.360 --> 0:09:38.240 and I have always said the Models was an important 0:09:38.280 --> 0:09:43.719 car because Musk made E vs electric vehicle sexy. Right 0:09:43.800 --> 0:09:46.800 Prior to that, any type of green vehicle was a 0:09:46.800 --> 0:09:51.040 compromise the Nile exactly. And I know you're a car guy, 0:09:51.080 --> 0:09:53.880 Berry and and so you know that. And and suddenly 0:09:53.920 --> 0:09:56.000 you had this Models which was a car that was 0:09:56.040 --> 0:09:58.800 aspirational car you wanted to drive up to the country 0:09:58.840 --> 0:10:02.760 club or two, you know, the restaurant valet, and and 0:10:02.920 --> 0:10:05.720 everybody wanted one. And the problem is, of course, the 0:10:05.760 --> 0:10:10.320 model Lesque now is seven years old. And finally, finally 0:10:10.920 --> 0:10:15.439 the Europeans and and Detroit and ultimately Japan are coming 0:10:15.440 --> 0:10:18.320 with their vehicles. We have Audi and Jaguar coming this 0:10:18.400 --> 0:10:22.320 year with very good looking sexy crossover cars. And then 0:10:22.520 --> 0:10:24.679 um near and dear to your heart, we have Porsche 0:10:24.720 --> 0:10:28.720 coming out next year. Miche a handsome car which is 0:10:28.880 --> 0:10:31.400 a gorgeous car and it's coming out next year and 0:10:31.400 --> 0:10:33.959 and is a sports car designed from the bottom up 0:10:34.000 --> 0:10:37.000 from I believe their Lamon's team, and uh, you know. 0:10:37.080 --> 0:10:42.199 And so now Tesla is in is in a scrum. 0:10:42.320 --> 0:10:46.160 They're going to be competing with well financed operations with 0:10:46.240 --> 0:10:49.559 good R and D whose technology is is probably well 0:10:49.600 --> 0:10:51.680 ahead of theirs at this point. They can't fund themselves 0:10:51.679 --> 0:10:57.040 by selling flamethrowers every couple of months. Flamethrowers and hats. Um, yeah, 0:10:57.040 --> 0:10:59.360 I mean and and and but we're laughing. But that's 0:10:59.440 --> 0:11:01.360 kind of problem them, right, because you have a CEO 0:11:01.600 --> 0:11:04.000 is kind of all over the place. Um. We believe 0:11:04.040 --> 0:11:07.360 actually his passion is space X. So I think he's 0:11:07.360 --> 0:11:10.600 going to actually hand over the reins as CEO at 0:11:10.640 --> 0:11:13.200 some point in the next few years. Um, and and 0:11:13.200 --> 0:11:16.040 and move full time over to to space X. Plus 0:11:16.080 --> 0:11:19.280 the hyper loop and the boring. Oh yeah, they forgot 0:11:19.280 --> 0:11:21.880 about the hyper loop. Yeah, that's enough. And supposedly they're 0:11:21.960 --> 0:11:26.600 really exploring doing something with that boring company is testing 0:11:26.880 --> 0:11:30.600 boring equipment and and so there's a lot going on there. 0:11:30.640 --> 0:11:32.480 And and that's part of I think that's part of 0:11:32.480 --> 0:11:35.839 the allure of the of the company. It's valuation is 0:11:36.240 --> 0:11:40.760 the CEO. The problem again is that he's he's up 0:11:40.760 --> 0:11:44.640 against serious competitors in his core business. And and then 0:11:44.800 --> 0:11:48.839 finally on that we track executive departures. We have this 0:11:48.880 --> 0:11:53.320 list we put out and it is stunning as to 0:11:53.400 --> 0:11:55.520 how many senior executives have left this company in the 0:11:55.600 --> 0:11:58.720 last two years. The only two companies that we've seen 0:11:58.760 --> 0:12:02.520 in our history with a similar executive departure pattern, where 0:12:02.600 --> 0:12:05.520 Valiant Pharmaceuticals a couple of years ago and a little 0:12:05.520 --> 0:12:09.280 company in Houston call En Round. And it is never 0:12:09.440 --> 0:12:12.679 a good sign when almost all your senior executives are 0:12:12.720 --> 0:12:15.880 leading at the stock price at at a high. That's 0:12:15.920 --> 0:12:18.160 telling you there's something wrong. And I and I don't 0:12:18.160 --> 0:12:21.240 know what it is. But but almost all the senior 0:12:21.240 --> 0:12:23.959 executives at Test, let's see something and are leaving stock 0:12:24.000 --> 0:12:29.040 option packages on the table. What about the idea that 0:12:29.400 --> 0:12:33.040 some big company, maybe it's a GM, comes along and 0:12:33.160 --> 0:12:37.040 buys them as a rescue package and jump starts their 0:12:37.080 --> 0:12:42.760 own um e V program. Well, the problem with that 0:12:42.920 --> 0:12:45.400 is is the GM, for example, the reason you would 0:12:45.400 --> 0:12:48.640 buy Test ostensibly is because of technology, not because of 0:12:48.720 --> 0:12:53.400 manufacturing process. Right. Their manufacturing process is actually pretty poor. 0:12:53.600 --> 0:12:56.560 It's the model three is their new car appears to 0:12:56.600 --> 0:13:00.840 have lots of issues upon production, so you would be 0:13:00.880 --> 0:13:05.360 buying them for for Elon's vision or their technology. Little 0:13:05.360 --> 0:13:07.840 brand Halo also a little make your little hipper than 0:13:07.880 --> 0:13:11.120 you General Motors might be just using them as an example. 0:13:11.280 --> 0:13:13.400 It might be, but the problem is, of course that 0:13:13.520 --> 0:13:17.439 that GM's cruise software is now better than Tesla's autopilot, 0:13:17.559 --> 0:13:21.040 and their product is out and their manufacturing exactly and 0:13:21.040 --> 0:13:24.000 and so um, and you have to be careful because 0:13:24.080 --> 0:13:27.439 again most of this mystique of Tesla is based on 0:13:27.440 --> 0:13:30.439 one car, the models right, which is still a beautiful 0:13:30.720 --> 0:13:34.160 car seven years old, but it's Yeah, but the Model 0:13:34.360 --> 0:13:37.600 X was was was just was lukewarm. It was too 0:13:37.640 --> 0:13:41.680 expensive for what essentially is a mid size van. And 0:13:41.679 --> 0:13:44.840 and and now the Model three is is maybe problematic 0:13:45.040 --> 0:13:47.400 and and so you've got to got an issue here 0:13:47.440 --> 0:13:51.000 where you've got basically a fifty billion dollar market gap, 0:13:51.040 --> 0:13:53.840 which by the way, is almost the same as GMS, 0:13:53.880 --> 0:13:58.200 and it's and it exceeds forwards. Uh, you'd be buying 0:13:58.200 --> 0:14:01.760 a company just as big as yourself off to basically 0:14:01.800 --> 0:14:04.800 lose money and and have a little cache. I don't 0:14:04.800 --> 0:14:10.200 see it makes perfect sense. Um. So the other side 0:14:10.240 --> 0:14:12.439 of them, let me push back a little bit on Tesla. 0:14:13.000 --> 0:14:18.000 They've completely changed the game. They've forced everybody else in 0:14:18.760 --> 0:14:23.360 that somebody, maybe Toyota does a joint venture with them, 0:14:23.360 --> 0:14:27.400 maybe some other Chinese or Korean manufacturer comes along and says, 0:14:27.800 --> 0:14:30.200 we want a toe hold in the US and elsewhere. 0:14:31.720 --> 0:14:34.160 What what is the company worth in a takeover or 0:14:34.200 --> 0:14:37.040 do you end up in a take under situation? Well, 0:14:37.120 --> 0:14:39.440 you're you're a little late, because Toad and Diameler did 0:14:39.440 --> 0:14:42.360 do joint ventures with Tesla ten years ago and sold 0:14:42.400 --> 0:14:45.800 all their stock. They did, yes, and they did in 0:14:45.840 --> 0:14:49.880 fact both Interestingly, both of those both those companies sent 0:14:49.960 --> 0:14:53.400 teams of engineers to help Ellen get the models out. 0:14:53.960 --> 0:14:56.720 And so I think that that we've already seen this, 0:14:57.160 --> 0:15:01.720 and and the problem is is we we just discussed, 0:15:01.840 --> 0:15:04.440 is that the valuation of the company, which is a 0:15:04.880 --> 0:15:08.440 fifty billion, fifty billion dollars in equity cap and then 0:15:08.560 --> 0:15:11.960 by the time West plus debt, you're talking about a 0:15:12.000 --> 0:15:16.000 sixty plus billion dollar total enterprise value. This would sink 0:15:16.720 --> 0:15:20.400 almost anybody but the very largest companies who would have 0:15:20.440 --> 0:15:23.160 to finance not only the sixty billion costs but the 0:15:23.200 --> 0:15:26.960 operating losses. So you you would destroy the earnings of 0:15:27.000 --> 0:15:30.560 almost any auto O E M by buying Tesla. Fascinating. 0:15:30.960 --> 0:15:33.440 Let's talk a little bit about hedge funds and how 0:15:33.440 --> 0:15:38.000 they've changed over the years. The last time you and 0:15:38.040 --> 0:15:42.040 I sat down for a conversation was about three years ago, 0:15:42.400 --> 0:15:45.880 or a recorded conversation. I should say you mentioned that 0:15:45.920 --> 0:15:49.160 back in the day, uh, there were a few hundred 0:15:49.160 --> 0:15:52.360 hedge funds and and out of those, twenty or thirty 0:15:52.400 --> 0:15:58.360 were reliable alpha generators. Today there's eleven thousand or so 0:15:58.560 --> 0:16:03.760 hedge funds. How many? And probably is it that? Is 0:16:03.800 --> 0:16:08.920 it still that smaller percentage of regular You know, it's 0:16:09.720 --> 0:16:13.280 I have a little bit of advantage UM advantage point 0:16:14.160 --> 0:16:16.440 because not only am I a manager, but I also 0:16:16.520 --> 0:16:19.800 sit on some investment committees, so reasonably large investment committees. 0:16:20.160 --> 0:16:22.680 So I get to see the pitches. I get to 0:16:22.720 --> 0:16:24.440 see the pitches, and I get to see the results 0:16:24.800 --> 0:16:26.760 from a lot of people in the industry as as 0:16:26.880 --> 0:16:30.560 as someone who allocates capital. And I have to tell you, 0:16:30.600 --> 0:16:35.600 I mean, the industry is wanting UM, and it's wanting 0:16:35.720 --> 0:16:39.320 across the board, and alpha's have dropped, including our own 0:16:40.040 --> 0:16:45.240 UM over time UM, whether they've been competed away UM. Now, 0:16:45.360 --> 0:16:47.840 another theory I have, of course, being on the short side, 0:16:48.280 --> 0:16:51.600 is that lower interest rates, particularly for short sellers, have 0:16:51.760 --> 0:16:57.280 reduced rebate income. And so when I started, UM, if 0:16:57.320 --> 0:17:00.720 we saw the stock short before anything happened, we are 0:17:00.720 --> 0:17:03.960 in six or seven percent annually on the cash proceeds 0:17:04.680 --> 0:17:07.360 and we split that with the prime broker, and now 0:17:07.400 --> 0:17:10.800 that number more recently was zero, and that's that was 0:17:10.840 --> 0:17:16.800 a significant source of returns. UM. So I think that 0:17:16.800 --> 0:17:21.360 that um that's one aspect, particularly for fundamental short sellers. 0:17:21.400 --> 0:17:24.360 But look, I mean, markets have gotten more and more efficient. 0:17:24.440 --> 0:17:27.720 The more you have smart people pursuing something, the tougher 0:17:27.800 --> 0:17:29.560 it's going to be to beat the market. That's just 0:17:29.640 --> 0:17:32.879 a given. I think paradox of skill is what And 0:17:32.920 --> 0:17:35.800 then and of course the size, right, I mean, you know, 0:17:35.840 --> 0:17:38.080 it's a lot easier to to beat the market if 0:17:38.080 --> 0:17:42.440 you're running fifteen million than than a few billion, even 0:17:42.440 --> 0:17:46.040 a few hundred million, there's still some some opportunity. But 0:17:46.160 --> 0:17:48.280 some of these funds are five and ten and twenty 0:17:48.280 --> 0:17:51.199 billion dollars. That's tough to move. Swing that around. Well. 0:17:51.240 --> 0:17:54.240 The other thing is that, of course, you stop managing 0:17:54.280 --> 0:17:56.680 a portfolio and you start managing a business as well. 0:17:56.720 --> 0:18:00.199 And I'm always mystified by my peers who who been 0:18:00.280 --> 0:18:03.000 very successful and they're now running you know, as you say, 0:18:03.000 --> 0:18:05.239 ten or twenty billion dollars but have two hundred three 0:18:05.320 --> 0:18:09.680 hundred employees, and I just I mean, that just blows 0:18:09.720 --> 0:18:12.880 my mind. That's reasonably large business. How big is can 0:18:12.880 --> 0:18:15.119 a coast these days? We're probably we're the same as 0:18:15.160 --> 0:18:17.120 we've been for years and years and years basically about 0:18:17.119 --> 0:18:20.280 thirty people, um, which is still work to manage. But 0:18:20.359 --> 0:18:24.000 it's not a full time just not it's not it's 0:18:24.040 --> 0:18:26.600 it's that's it's a it's a magnitude of difference. So, 0:18:27.320 --> 0:18:31.040 given your perspective as both a fund manager and an 0:18:31.080 --> 0:18:35.840 asset allocator, when you're reviewing a hedge fund and deciding 0:18:35.840 --> 0:18:39.199 whether or not you're gonna give them capital, what are 0:18:39.200 --> 0:18:42.639 you actually looking for? What? What would make you say 0:18:43.119 --> 0:18:45.160 this is a place I could park some money. So 0:18:45.600 --> 0:18:49.240 some you know, Julian Robertson said it best, Um, and 0:18:49.600 --> 0:18:51.760 I think to some extents why the Tiger cubs have 0:18:51.840 --> 0:18:55.440 been so successful is what is your edge? And he always, 0:18:55.520 --> 0:18:59.320 he always, when when having a bear and a bull 0:18:59.359 --> 0:19:02.879 discuss debate a stock at his shop, Um, we ran 0:19:02.960 --> 0:19:04.479 money for him, and he would have us come in 0:19:04.520 --> 0:19:07.399 and talk about one of his shorts are shorts because 0:19:07.400 --> 0:19:09.480 someone in the shop may have liked it on alongside, 0:19:10.160 --> 0:19:12.600 and he would constantly say, what is your edge? What 0:19:12.640 --> 0:19:14.959 do you know that the market doesn't and and and 0:19:14.960 --> 0:19:17.800 that applies I think the fund managers generally, what is 0:19:17.840 --> 0:19:21.040 in your process that gives you an edge, whether it's 0:19:21.280 --> 0:19:25.760 trading wise, whether it's research wise, that that basically sets 0:19:25.760 --> 0:19:28.680 you aside, that that you see things differently, and you 0:19:28.720 --> 0:19:32.360 see you see the reality versus the perception of reality. 0:19:32.520 --> 0:19:36.480 And and so what I found is that numbers can 0:19:36.520 --> 0:19:41.200 be very misleading because um, very smart people can struggle, um, 0:19:41.280 --> 0:19:45.080 and very very uh uh mediocre people can excel for 0:19:45.160 --> 0:19:48.400 periods of time. Um. It's just not where you want 0:19:48.400 --> 0:19:52.160 to place your bets. And so if if as an allocator, 0:19:52.200 --> 0:19:55.000 if we see someone who we think is not only 0:19:55.000 --> 0:19:58.240 smart and hard working, but has a define herble and 0:19:58.359 --> 0:20:02.840 sustainable edge, um, that's someone that you might want to consider, 0:20:02.880 --> 0:20:06.240 particularly if they're struggling, um to be allocating capital. Because 0:20:06.280 --> 0:20:08.960 reversion to the mean is also a pretty powerful process. 0:20:09.119 --> 0:20:12.960 So when you say struggling, you mean struggling running the fund, 0:20:13.160 --> 0:20:16.040 or struggling in terms of their performance. You know, maybe 0:20:16.040 --> 0:20:18.679 they're not generating the alpha they're they're they're matching the 0:20:18.760 --> 0:20:22.160 market and or slightly behind the market. But but yet 0:20:22.440 --> 0:20:24.520 you know, have a have a pretty superior long term 0:20:24.560 --> 0:20:29.320 track record. Same people doing it, same process, um and 0:20:29.320 --> 0:20:33.200 and so sometimes you see sometimes you see an opportunity 0:20:33.240 --> 0:20:35.520 to do that. What most people do, of course, is 0:20:35.560 --> 0:20:39.120 they just simply look at performance and and it's it's 0:20:39.800 --> 0:20:42.640 that alone will not do it for you, because you're 0:20:42.640 --> 0:20:45.119 always going to chase that which has been hot. And 0:20:45.840 --> 0:20:48.080 it's so hard to to say, well, this guy is 0:20:48.080 --> 0:20:51.119 not doing well, we should be allocating some capital because 0:20:51.160 --> 0:20:54.240 they're gonna come back into favor and and by the way, 0:20:54.240 --> 0:20:57.880 they're still doing what they've always done well. Um, very 0:20:57.960 --> 0:20:59.720 very tough. And then of course you have to you 0:20:59.760 --> 0:21:05.080 have to disaggregate the beta from managers, and that's that's essential. Um. 0:21:05.320 --> 0:21:07.439 You have to take out the market because we can 0:21:07.480 --> 0:21:10.800 buy the market for ten basis points, right, So paying 0:21:11.080 --> 0:21:14.600 big fees to people who are who are either matching 0:21:14.600 --> 0:21:19.199 the market with no no edge or or leveraging the 0:21:19.280 --> 0:21:22.560 market to get out performance is the fools earned. You know. 0:21:22.640 --> 0:21:27.080 I read somewhere that past performance is no guarantee of 0:21:27.160 --> 0:21:30.760 future returns. I think I saw that on some documents somewhere. 0:21:32.000 --> 0:21:37.840 Let's talk about some of those Conseco, Tycho, Commodore, coll 0:21:37.920 --> 0:21:40.399 Eco Integrated. I think I don't think your listeners were 0:21:40.400 --> 0:21:42.800 alive when most of those who were done there were 0:21:42.800 --> 0:21:46.280 more recent more recent there were more recent ones. So 0:21:46.280 --> 0:21:50.000 so so let me ask a different question. Then, tell 0:21:50.080 --> 0:21:53.480 us about something that in hindsight you looked at and said, 0:21:53.880 --> 0:21:57.240 why don't we short that? That's right in our strike zone? 0:21:57.320 --> 0:22:00.680 Any anything that you looked at and didn't I think 0:22:00.680 --> 0:22:05.600 the biggest, the biggest, the biggest whiff uh that that 0:22:05.840 --> 0:22:08.200 we had done work on and took a pass on 0:22:09.000 --> 0:22:12.040 was Japan in the late eighties. No, I was sure 0:22:12.119 --> 0:22:14.200 a lot of commercial real estate stocks in the US 0:22:14.280 --> 0:22:17.359 in the late eighties, the tax law had changed. Everyone 0:22:17.400 --> 0:22:19.280 had levered up in the commercial real estate to sell 0:22:19.320 --> 0:22:22.720 it to the Japanese um. The tax shelter business was 0:22:22.720 --> 0:22:25.280 was kneecapped by the tough by the a Tax Act 0:22:25.320 --> 0:22:28.960 of eight six And when we looked at what the 0:22:29.040 --> 0:22:31.080 Japanese were doing, we saw them doing all kinds of 0:22:31.160 --> 0:22:34.720 dumb things. And I began looking at the Japanese banks, 0:22:34.720 --> 0:22:36.600 which at the time were the largest in the world, 0:22:36.960 --> 0:22:40.200 and some of the Japanese conglomerates which were the largest 0:22:40.240 --> 0:22:42.520 in the world, and the numbers didn't make any sense. 0:22:43.040 --> 0:22:44.480 But I felt that I had my hands full in 0:22:44.520 --> 0:22:47.240 the US, and what I really missed was a twenty 0:22:47.320 --> 0:22:50.960 year bear market in in these heavily leveraged Japanese companies, 0:22:51.000 --> 0:22:55.639 and compared to even the dot com NASDAC, the Japanese 0:22:55.680 --> 0:23:00.520 market was far more expensive, far more overstretched. And then 0:23:00.640 --> 0:23:03.399 NASDAK even got at the peak and two things right, 0:23:03.480 --> 0:23:05.879 it was and and and of course it got to 0:23:06.400 --> 0:23:08.919 it got to just insane heights that it's still not 0:23:09.080 --> 0:23:13.080 scaled um. And and so I think that that that was, 0:23:13.359 --> 0:23:16.360 you know, one of our greatest our greatest missus um 0:23:16.440 --> 0:23:20.800 fundamentally so from Japan. Let's just hop across the China 0:23:20.840 --> 0:23:24.040 Sea and talk about China. You were very negative on 0:23:24.200 --> 0:23:27.440 China for a long time before they had a little 0:23:27.480 --> 0:23:30.840