At this week’s invite-only value investing conference hosted by by Vitaliy Katsenelson, the Vail, Colo. locale’s conversation focused on many great ideas. Morningstar’s footnoted blog author Michelle Leder was an attendee and found a talk by hedge fund manager Jimmy Chanos particularly interesting.
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
He is the managing partner and founder of Kynikos Associates LP; it is the largest investment firm devoted solely to short selling.
Jim Chanos discussed classic value investing traps and Leder offered the following highlights. She begins with these five common value traps per Chanos:
• Cyclical and/or overly dependent on one product
• Hindsight drives expectations
• Marquis management and/or famous investors
• Appears cheap using management’s metric
• Accounting issues
Jim Chanos also mentioned one of these ideas at the Value Investing Congress. Chanos states that just because another great investor owns a stock, does not make it a buy or cheap. We have seen many examples with some great investors buying Best Buy, RIM, CHK and many other companies.
So what does all this mean? According to Leder, the thought of a unique metric applying to just one company is fascinating as analysts go for it all the time. Chanos said at the conference, “Management sets up their own metrics and they become well-accepted.”
This isn’t a sign of fraud but an investor should ask questions, not just take management’s word.
Another rule noted by Chanos is to remember financial statements are prepared by a company, not independent auditors; in the end, they’re just the ones who sign off on it. They may not know what information is missing.
In the spirit of the conference’s theme–value traps–Chanos listed the following stocks as examples: CONSOL Energy Inc. (NYSE:CNX), Petroleo Brasileiro SA (NYSE:PBR), Hewlett-Packard Company (NYSE:HPQ), Coinstar, Inc. (NASDAQ:CSTR), Banco Santander, S.A. (NYSE:SAN), and the Australian-based Fortescue Metals Group Limited (ASX:FMG).
He also shared that some of his short ideas come from assets that become liabilities. One example is Best Buy Co., Inc. (NYSE:BBY); it is “increasingly becoming the showroom for Amazon.com, Inc. (AMZN).”
This isn’t the first time that we’ve highlighted value investing traps by Chanos. Back in October, we devoted a post to him called, “Jim Chanos: Beware The Global Value-Trap!,” which highlighted some of his infamous trades and comments.