NEW – An Interview With Jim Chanos: The Biggest Short via Steven Drobny‘, author of Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets
Also see the first interview –Kyle Bass On Potential War Between Japan And China
I met Jim Chanos thanks to The New House of Money. He downloaded the first serialized chapter, an interview with Kyle Bass, on the day it was released. From there, I invited him to speak at one of my events, which he accepted. And he was brilliant. It is rare to find a manager who can blend a solid macro framework with granular expressions in individual names, long or short. Chanos has done it far more consistently on the short side than the long – which is even rarer.
He then invited me to attend his Bears in Hibernation event which is a sort of annual “Short Sellers’ Ball” during the winter in Miami. It was there that I saw him in his natural habitat, with other short-sellers talking about stocks that have flawed business models, are overvalued, or are outright frauds. And it was there that I realized in a world of eclectic short-sellers, Chanos is quite simply King of the Shorts, a position he has held since the early 1980s. And now, after a roaring bull market from 2009 to 2014, fueled by quantitative easing and other unorthodox central bank policies, bears in general, and dedicated short sellers in particular, are becoming an endangered species. Yet Chanos has persevered.
As Jim Chanos himself likes to say, short sellers are often classified as guys in dark hats coming to rain on everyone else’s parade. But short sellers play an integral role in the efficient functioning of markets because they assist the price discovery process. This is especially so in the era of QE. Despite the tabloid image, Chanos is a gentleman and a scholar. He is the real deal; an investor who’s seen it all before and who knows a lot about a lot of things.
This is the definitive Jim Chanos interview, and it reads like a walk through the history of financial market blow-ups and frauds. I certainly learned a lot during this conversation, and hope that you will as well. And the timing couldn’t be better as volatility is injected back into markets. Now just might be time for bears and short sellers to shine once again.
How did you become a short seller?
Jim Chanos: I must have been dropped on my head at birth! Actually, I was fascinated with the stock market from the time I was a kid. My dad piqued my interest in it. During college at Yale University, I dabbled in the options market and stock market. Then I started out in investment banking in Chicago in 1980.
How did you get to Chicago from Yale?
Jim Chanos: After graduation, I took a job at Blyth, Eastman Dillon & Co., which was converting to Blyth Eastman, Paine Webber. Within a year-and-a-half, I knew I did not want to be in investment banking. I was fascinated by it but could not stand doing deal books and sitting in on presentations, advising McDonald’s whether to issue debt at 14 percent or 12.75 percent.
The equity market was what interested me. The next year, I was offered a job as a generalist securities analyst at Gilford Securities, a Blyth spin-off founded by three of its partners. I jumped at the chance. The first stock I was asked to look at was a fast-growing company called Baldwin-United Corporation, formerly Baldwin Piano Company. It had morphed into financial services in the early 1980s and became quite the stock market darling. In fact, in 1982 it was Merrill Lynch’s favorite stock.
Merrill’s number one favorite stock?
Jim Chanos: Yes. It had a charismatic CEO who had sold pianos door-to-door. If you can sell pianos door-to-door, you can probably sell anything. At the time, they were buying a company our clients had positions in, called Mortgage Guaranty Insurance Company, or MGIC, based in Milwaukee. It was the original mortgage insurance company, run by a guy named Max H. Karl. It was clear to me and to the risk arbitrage community that Baldwin was using insurance company proceeds to fund acquisitions. That was unheard of then and, for the most part, still is today.