Sunday, November 15, 2009

Jim Chanos: The Man Going Against Stocks

Jim Chanos opened his own firm in 1985 to bet against stocks. Micheal Steinhardt & George Soros were among those who sought his opinion. Today he manages the world’s largest hedge fund (around $4 billion) that bet against stocks. It does not matter whether the market was bullish.

Jim Chanos would seek out the companies which he thought would fold. He made a presentation (does his homework) about two companies, Enron & Williams Communications which he thought would be on its way down the next year. Enron did fall & so did Williams Communications at 99.9% & 96% respectively.

How does Jim Chanos do it? How does he manage to do what he does best, going against stocks? Well, the first thing he does is what all traders should practice which is limiting his risk. The second thing is that he does his homework, lots of it & makes good trades. The first thing is easier than the second which not many people do let alone know how to do, I mean how do you know a company is going to fold? Jim Chanos has his methods.

What are Jim Chanos’s methods in making a successful business by going against stocks? He looks at certain elements that influence the success of business. The first element is Consumer Fads. Jim Chanos has made money going against companies associated with Martha Stewart, Cabbage Patch Dolls, George Foreman Grills, & etc. What do all the examples have in common? They are all out of trend where the purchasing appeal is virtually non existent. Well, at least it is my opinion. More research has to be done into it. UUgggh! Homework. :(

Other elements of a company that Jim Chanos looks at & does his homework upon are Accounting irregularities, Booms that go bust, & Technology obsolescence. Accounting irregularities are like Enron & cases. Booms that go bust are like the dot-com bubble in the 1990s & real estate bubble in the late 1980s. Technology obsolescence is business concepts that are outdated for example Netflix. Netflix’s business concept is likened to having little old ladies in warehouses stuffing envelopes with DVDs. Jim Chanos does not see Netflix lasting more than a few years.

Jim Chanos tells about the demise of cable television companies & the rise of internet television companies. He likened Cable companies buying each other as shuffling deck chairs on the Titanic. From my understanding it means that regardless of whatever is happening with the cable television companies, their ship is going to sink. Well, Jim Chanos has given us the tips & it is up to us to do our homework for some smart investing.


Financial Times interview with Jim Chanos.

1 comment:

Shaun of the Dead(beats) said...

Wow, what a business model! Even in the best of times, there are terrible stocks to short. :)

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