Business

Jim Chanos: The Psychology Of Short Selling

An interview with famed short seller and founder of Kynikos Associates, Jim Chanos. In this interview, Jim discusses the psychology needed to be a short seller and traits of a successful short seller. Jim also talks about China and his prediction it is heading for a crash.

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Jim Chanos

Video Segments:

0:00 Introduction

0:18 Your background?

1:47 Psychology and skill sets of short selling?

6:16 China is heading for a crash?

10:53 Risk in short selling?

13:05 What do institutional investors look for?

Transcript

Welcome to West TV. Today we have Jim Chanos founder of Kynikos Associates and legendary short seller. Jim thanks for joining us today. My pleasure. Thanks for having me. Can you give us an introduction to your background and to your firm. I got onto Wall Street in 1980 to graduating from college. I first joined the investment bank that no longer exists in Chicago blithesome spent a little over a year doing investment banking deals and being the junior analyst on the team. In 1982 I left to join a small retail brokerage firm which had been founded by Blasius been partners called Gilford Securities and it was there that I sort of stumbled on my first short idea which was Baldwin United and Valde united. Shortly after we got involved filed for bankruptcy and was the largest financial bankruptcy in the US. Up until that time and that got me thinking about the whole idea of whether or not there was a business to be made in fundamentally analyzing short ideas. I formed Kinko's associates in 1985 as a hedge fund management company to manage

short only partnership. It subsequently has diversified a bit and grown quite a bit since then but we run about 6 billion dollars. Five and a half billion of that short only both global and U.S. and about half a billion in long short fund called the Opportunity Fund which we've been running for nine years. Jim are there different psychological profiles and possibly different skill sets behind typical long only investors and successful short sellers. When we talk about the skill set and the psychological profile of short selling.

I used to think they were the same when I first started. And I no longer think that what I've said about this is that while the actual skill set for looking at companies should be exactly the same whether you had something you know long or short you should be analyzing the same type of ratios making the same kinds of phone calls. I think the psychological behavioral part of the equation is completely different. We like to point out is that almost everybody that will view this video for example is the beneficiary of a positive reinforcement cycle in their life that is they were told to study hard by their parents go to good schools get good grades go to better schools get a good job work hard you know get promoted be paid well sold and so forth. The so-called virtuous cycle but studies have also shown that most rational people including people who fit that profile their decision making breaks down in an environment of negative reinforcement.

The ultimate example of which would be an interrogation where your ability to withhold information rationally is broken down by by physically or mentally by by very different techniques. If you think of Wall Street it's a giant positive reinforcement machine. Basically I mean every morning on my Blackberry or check Bloomberg at 5:00 in the morning and of the hundred short ideas that we have in our Global Fund I can pretty much confidently predict that there's going to be about 20 to 25 percent. Every day was going to be some sort of commentary Research Report analyst by recommendation reaffirmed estimates raised CEO is on Bloomberg or CNBC.

And generally its noise generally there's not much informational content in that but it's positive noise. It's why you should be investing in Company ABC or why it's a takeover target or why they have new products. And most people don't even sort of notice that because they're in the business of going long securities. And I like to say it's the music that plays in the background of the investment world. But if you're short seller that's negative reinforcement you're being told one quarter of your portfolio every morning that you're wrong stocks can go up a lot for these reasons and for those reasons. And for this rumor and for most people that becomes a difficult environment in which continue to think clearly about their investments because there's a constant drumbeat of just negative reinforcement that you're in correct or incorrect and an awful lot of people are in this sort of life's too short camp.

I just don't need this. And it's why an awful lot of very good investors by the way are not really good short sellers. We point this out to a lot of hedge fund investors that in fact you know people who do the long shot long sight and short sighted equally well are very very rare. So it's one of the reasons I think what we have. Business number one but number two I think it's an interesting insight into some of the asymmetries of the long side and the short side. And there's an awful lot of them on the short side that don't exist in regular investing a lot of people don't think through. This is clearly one of them.

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