- Chanos does not use options, which are used to either manage risk or gain leverage; Chanos believes he can do either more effectively and cheaply outside the options market. Never uses CDS because of counterparty risk, which requires two correct decisions.
- Good short sellers are born, not trained
- Sources of ideas
- Experience
- Third-party accounting research
- Screens
- Other managers
- Partners/investors in the fund
“What we define as a bubble is any kind of debt fueled asset inflation, where the cash flow generation from the asst itself a rental property apartment building does not cover the debt service and the debt incurred to buy the asset. So you depend on the greater fool. Minsky called it Ponzi finance, meaning you need the greater fool to come in and buy it at a higher price because as an income producing property it’s not going to do it. And that’s certainly the case inChinaright now.” — Jim Chanos, 4-12-10
“Bubbles are best identified by credit excesses, not valuation excesses.” – Jim Chanos
Regarding the notion that since security prices are bounded by zero and infinity, it is always more common to get zero than infinity
Joel Greenblatt
“There’s a clarity that comes with great ideas: You can [easily and simply] explain why something’s a great business, how and why it’s cheap, why it’s cheap for temporary reasons and how, on a normal basis, it should be trading at a much higher level. You’re never sitting there on the 40th page of your spreadsheet, as Buffett would say, agonizing over whether you should buy or not.” – Joel Greenblatt
“Value investing strategies have worked for years and everyone’s known about them. They continue to work because it’s hard for people to do, for two main reasons. First, the companies that show up on the screens can be scary and not doing so well, so people find them difficult to buy. Second, there can be one-, two- or three-year periods when a strategy like this doesn’t work. Most people aren’t capable of sticking it out through that.” – Joel Greenblatt
“I wait until an investment idea is so good, it hits me over the head like an anvil.” – Joel Greenblatt
Joel Greenblatt (unknown source):
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can’t be a good value investor without being an independent thinker – you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do. The back and forth that goes on in the investment process helps you get at that.”
“I still believe that for good business analysts a concentrated portfolio is a good strategy combined with a long term horizon. Once again, the secret to success in following the formula strategy is patience, a quality in short supply for both professionals and individual investors alike. I think investors should have a large portion of their assets in equities over time.”
“I don’t know too many people that are good at timing the market relative to macro-economic events.”
“The way we make money as a group is that we don’t pay a lot for anything, and most of the stocks we buy have low expectations.”
“Figure out what something is worth and pay a lot less.”
“If I plug my estimates into the Magic Formula, and it comes out cheap, that’s good.”
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can’t be a good value investor without being an independent thinker – you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do. The back and forth that goes on in the investment process helps you get at that.”
“Buying a share of a good business is better than buying a share of a bad business. One way to do this is to purchase a business that can invest its own money at high rates of return rather than purchasing a business that can only invest at lower ones. In other words, businesses that earn a high return on capital are better than businesses that earn a low return on capital.”
“I think the exercise of trying to figure out how to simplify concepts has been incredibly helpful to me over the last 13 years of teaching and I hope my students have benefited from it.”
“The Magic Formula works on average. It can either be used as a screening device to find companies to do more work on to determine whether earnings are sustainable and predictable or as a way to accumulate a basket of20 or 30companies that on average are cheap and good. If you don’t plan on doing additional research, buying individual companies without further research would obviously be imprudent.”
“The big picture is: the main thing you should be concerned about in the future are incremental returns on capital going forward. As it turns out, past history of a good return on capital is a good proxy for this but obviously not foolproof. I think this is an area where thoughtful analysis can add value to any simple ranking/screening strategy such as the magic formula. When doing in depth analysis of companies, I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of “normal” earnings power over time.”
“My goal is to buy a company at a low multiple to normal earnings power several years out and that the company earns good returns on capital at that level of normal earnings. A holding period of more than one year also works quite well as the factors are persistent in years 2 and 3.”
Howard Marks
“…in the economic/investment world, what matters most in the short run isn’t necessarily what’s true but, rather, what’s on people’s minds.” -Howard Marks
“There are a few things I dismiss and a few I believe in thoroughly. The former include economic forecasts, which I think don’t add value, and the list of the latter starts with cycles and the need to prepare for them. ‘Hey,’ you might say, ‘that’s contradictory. The best way to prepare for cycles is to predict them, and you just said it can’t be done.’ That’s absolutely true, but in my opinion by no means debilitating. All of investing consists of dealing with the future…and the future is something we can’t know much about. But the limits on our foreknowledge needn’t doom us to failure as long as we acknowledge them and act accordingly. In my opinion, the key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you’re going. Knowing where you are in a cycle and what that implies for the future is different from predicting the timing, extent and shape of the cyclical move.” – Howard Marks
“There’s simply no magic in investing.” – Howard Marks[136]
“Second-level thinking is deep, complex and convoluted. The second-level thinker takes a great many things into account:
- What is the range of likely future outcomes?
- Which outcome do I think will occur?
- What’s the probability I’m right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future, and with mine?
- Is the consensus psychology that’s incorporated in the price too bullish or bearish?
- What will happen to the asset’s price if the consensus turns out to be right, and what if I’m wrong?”
-Howard Marks[137]
Conventional Behavior Unconventional Behavior
Favorable Outcomes Average good results Above-average results
Unfavorable Outcomes Average bad results Below-average results
“Respect for efficiency says that before we embark on a course of action, we should ask some questions: have mistakes and mispricings been driven out through investors’ concerted efforts, or do they still exist, and why? Think of it this way:
- Why should a bargain exist despite the presence of thousands of investors who stand ready and willing to bid up the price of anything that’s too cheap?
- If the return appears so generous in proportion to the risk, might
