“If you are willing to trim on the way up, you have to be willing to add when it is working.”  World-renowned short seller Jim Chanos, president and founder of Kynikos Associates, joined Mike Green, of Logica Capital Advisors, for the latest edition of Mike Green in Conversation.  Short selling is one of the more difficult skill sets in market speculation, and many smart minds have been rekt – even with the best info and setups. 

Chanos outlines how he approaches a short entry on a company, his stop loss process and why you must adjust your positioning. As a rule, he and his team never allocate more than 5% to a position. Even then 3-4% is still a large position for them. What he and his team have found, is that even with all of the available information at their fingertips, a stock can still go up despite mounting evidence that price should go down. 

Shorting the Fraud – “Until you are actually confronted with the crime being admitted by the criminal, it is business as usual in Wall Street,” Chanos explained.

In an era of passive investing, ETF’s & large institutional investors, it is easy for stocks to get caught up in a wave of bullishness. Chanos details a story about a company named Wirecard.  In spite of overwhelming evidence that they were making up their numbers, the stock continued to hold firm. 

“The company was not what it appeared to be, and yet, the stock seesawed from basically 80 to 120 euros from the fall into June, when the company finally had to admit itself that it was making up the numbers and there was a couple billion euros missing from the company accounts,” Chanos stated. “Then the stock went from 100 to basically, three in a handful of days.”

The Long Short – Commercial real estate companies and IBM are two deep dives that Chanos and Green cover.  These will require patience and playing the long game. 

Commercial real estate was already flashing warning signs before the COVID-19 pandemic.  “Office vacancy rates were already at levels that we have seen at previous cycle bottoms, they were mid-teens in many markets,” Chanos said. “This is going to be a slow-motion train wreck.”

What is propping up commercial real estate? The contracts. Many of the corporate office deals are multi-year leases. If you are looking to short commercial real estate, you will need to do your homework to find the makeup of some companies. Which one is Chanos short right now? One that has nearly half of their tenants in the movie theater industry. 

Another option is IBM.  The tech giant appears to be more name than numbers in Chanos’ eyes. “The cloud is killing them,” he stated. “You have to ask, is this company even really all that profitable?” There is nothing worse than a tech company with shrinking revenues. This one isn’t rocket science.