James Chanos: A Short Seller with Record Success

LEARN FROM THE GENERALS OF THE MARKETS - PART 56

"The most important function that fundamental short sellers bring to the market is that they are real time financial detectives."

Born in 1975, James Chanos is an American professional speculator and funds manager who’s a great bear in the market. He was born in a Greek family, and he attended Yale.  He worked as an analyst at Blyth Eastman Webber, Gilford Securities, and later, Deutsche Bank Capital Corp (where he was also vice president).

In 1985, James founded Kynikos Associates (registered in New York), which focuses on short selling. Since then he’s amassed great wealth by making popular short trades.  This is the mirror of what the Oracle/Sage/Wizard of Omaha does, which is based on fundamentals and long-term bullish outlook. James Chanos uses fundamentals and long-term bearish outlook. He’s successfully shorted some popular stocks like Baldwin-United and Enron Corporation, which have made him famous. He doesn’t just sell short, he sometimes blows whistle on some companies whose stocks, based on his analyses, would soon assume long-term southward journeys. He blew another whistle on China in 2010, that the country should be shorted. He’s plausible reasons for saying this, but time would tell how true the forecast is.

How rich is James? A recent report reveals that he’s worth about $1.5 billion. His net worth testifies to the validity of his forecasts and trading strategies.

Lessons:

These are some of what can be learned from James:

1. There are many profitable short sellers like James Chanos and Tim Knight. These are astute speculators who take advantage of bear markets while some buy-and-hold investors suffer. When a trading instrument moves south, that signifies that the bears are still willing to continue selling the seemingly undervalued market. Some of the profitable sell trades are also taken from bear markets that are already established; from the markets some people think are too cheap. Permabulls invariably suffer in weak markets – a stupid experience in such markets. In these weak markets, the permabulls pay dearly for prices that drop like stones. Why must you suffer in a bear market? You mustn’t suffer at all when you have strategies that work in bull and bear markets. Of course, James also buys some stocks. He’s sometimes bullish on stocks, with commendable success. 

2. Like James, you’ll do yourself a favor as you make intensive research into stocks you’re interested in. By doing this, you’ll get an insight into to the probable reality that may affect your predetermined direction. Once your positions are open, you may want to hold them for as long as the markets are in your favor. James holds his positions for the long term also. The big profits are to be made in the long-term.

3. Sometimes, you may be correct in the long-term, but incorrect in the short-term. As a position trader or an investor, there are trade management techniques that can save you from being stopped out abruptly.

4. According to James, you need to be able to weather being told you’re wrong all the time. Critics may be jeering at you when your forecasts go wrong, but never mind. As long as your method has positive expectancy and you make more gains than you lose, you’ll be fine.

5. Don’t be carried away by the noise the media make. When I was still a rookie, I checked several websites for technical and fundamental analyses on the instrument I wanted to trade. In most cases, I got lost among conflicting opinions. Even, when I seemed to conclude that most analysts were saying the same thing, I still lost on the trade I made based on it. Don’t worry about the noise in the market, even if you listen to it.

6. It’s better to start trading when one is a young man or woman. It was a regret that I started trading in my early 30’s, not in my early or late 20’s. In my article titled “Teach Your Teens the Art of Trading,” I mentioned some of the benefits of learning trading early in life. This is why some traders like Joe Ross, Anton Kreil, Peter Soodt, Kenneth Fisher, etc. became financially free early. Elderly people can also learn trading and attain success in the market, but it’s far better to do so when one is still young. This is what James says further concerning this fact:  "Life intrudes -- as when you get older you end up with more responsibilities and your ability to take risk diminishes.  If you are 25 and have a great idea and you fail, no one is going to hold it against you, and future employers and investors might actually look favorably upon it. So if you really want to pursue something, do it while you're young — you'll have more energy and you'll be able to take more financial and career risk. If it doesn't work, you still have your whole life ahead of you."  Chanos thinks that if you have to take risk, take it early in life. Nevertheless, it’s never too late for me; it’s never too late for you.

Conclusion: The bulls and the bears make the market what it is. Hence, the bulls and the bears are watching one another with suspicion and each group is ready to take advantage of the other group’s stupidity.  When the market experiences a roll-down, its existence may be transient, but the intensity may be great enough to make the bears wealthy.

This article is ended by a quote from James. The quote above is also from him:

"There’s a big difference between a long-focused value investor and a good short-seller."

Source: www.tallinex.com

Learn from the Generals of the Markets: Market Generals