Friday, May 11, 2012

Jim Chanos on Shortselling

This is from a Jim Chanos interview in the Graham & Doddsville Newsletter:

If you’re a short seller, that’s a cacophony of negative reinforcement. You’re basically told that you’re wrong in every way imaginable every day. It takes a certain type of individual to drown that noise and negative reinforcement out and to remind oneself that their work is accurate and what they’re hearing is not. Most people are in the “life’s too short to put up with this stuff” camp.

The other problem is that there’s an asymmetry on the return patterns of short ideas. Because markets tend to go up over time and you need discrete news to affect a short idea, you tend to have weeks and months and even years when you’re not making money in your ideas. Then when you do make money with a short idea, it happens all at once.Here once again, most people are just not hard wired to find that asymmetry comfortable but good short sellers are.
I'm always fascinated that most investors prefer being long equities (and also short volatility), and are very uncomfortable with shortselling.

That is also why I think it is funny that people are short CHK. Companies that are distressed or failing will enter a death spiral where they are able to obtain financing on less and less favorable terms. For example they will need to offer monthly amortization of a convertible loan, plus warrants, to get anyone to lend.

What we just saw CHK do is borrow unsecured to pay back a bank loan. That is actually moving in a favorable direction along the financing spectrum. As you would expect from a company with lots of valuable assets.


Mark said...

What is the EV you come up with for CHK? i.e. what are the off balance sheet figures? (I've just been watching from afar so I'm not close to it).

CP said...

That is all nonsense. What we are seeing is a bunch of journalism majors liveblogging their first time ever reading an oil company financial statement.