[From The Archives] Jim Chanos: Smarter Than The Average BearVW Staff
Jim Chanos: Smarter Than The Average Bear from VII 2005 interview
The press calls are few and far between these days for Jim Chanos, managing partner of Kynikos Associates and easily the most-heralded short seller of the past 20 years. “No one calls when the market’s going up, “ he jokes. Which is exactly why we wanted to speak with Jim Chanos now. Famous for his early bearish calls on such legendary busts as Baldwin-United, Integrated Resources, Sunbeam, Conseco and Enron, Jim Chanos excels in identifying company-specific ticking time bombs as well as big-picture trends that will roil companies and industries.
Now with more than $2 billion in assets under management, Chanos is as aggressive as ever in rooting out potential losers – and is finding no dearth of attractive short opportunities in today’s market.
Jim Chanos: Smarter Than The Average Bear
Jim Chanos of New York’s Kynikos Associates describes where he’s most likely to find short opportunities, why he’s negative on the cable- and satellite-TV industries and why he thinks Fairfax Financial, Eastman Kodak and Martha Stewart Living are significantly overpriced. You’ve chosen an investment specialty that few pursue, let alone do for 20 years. Tell us how that came about.
Jim Chanos: I went to college with the idea that I was interested in medicine. I joke now about looking up at what they call “Science Hill” at Yale – this half-mile hill you climb, usually in rain or sleet or snow, to get to classes – and saying, “You know what, it’s a liberal arts college, I can always take science my junior and senior year.” So I was derisively named “Doc” by my Yale roommates for my pre-med ambitions that lasted three days.
Back then – I graduated in 1980 – business was pretty much a four-letter word at Yale. I took whatever they had in terms of practical business classes, which was basically two accounting courses. I did read two books then that had a real impact on me: John Train’s The Money Masters, and David Dreman’s Contrarian Investment Strategy. In The Money Masters I found I kept coming back to the chapter on Robert Wilson, the legendary short seller in the 1970s. I guess that was an omen, though only in retrospect.
After my short stint in big-company investment banking (see box, this page), I took a job in Chicago with Gilford Securities, a small boutique firm. My job description was just about anything, but was focused mostly on research.
One of the first stocks I was asked to look at was MGIC Investment Corp. (NYSE:MTG), a mortgage insurer in Milwaukee. They’d gotten an unsolicited bid from a rapidly-growing company in Cincinnati called Baldwin-United, which had transformed itself from selling pianos to one of the fastest-growing financial-services companies in America by gobbling up insurance companies and selling single-premium deferred annuities through Wall Street brokers, primarily Merrill Lynch.
Baldwin’s CEO, Morley Thompson, was this charismatic, almost evangelical sales person – I’d put him two steps ahead of Mr. Haney from Green Acres – who was considered a genius.
There was a large spread between Baldwin’s offer for MGIC and where the stock was trading, so I was asked to look at it from an arb perspective, to see if we could earn an extra 25% annualized by betting on the deal closing. I read an article in Financial World that for the first time sort of questioned Baldwin-United, and though it raised more questions than it answered, it got me to look more closely into it.
I started reading their financial statements and I couldn’t understand how they made their money. They were issuing annuities at 12-14%, and I couldn’t figure out what they were investing in that was possibly earning that. Other than all their acquisitions, their portfolios were mostly bonds bought years before that were basically underwater.
I recommended that we tell our clients holding MGIC to sell right away in the market, because I didn’t think Baldwin was necessarily for real and that there was real risk the deal wouldn’t go through. The deal did end up closing, so we left a lot of money on the table – the first of many times I looked like an idiot.
I got a call one day soon after that from an analyst saying that I should get my hands on the insurance files from the state of Arkansas on Baldwin-United. [The Arkansas insurance commissioner had to approve Baldwin’s purchase of MGIC because an insurance subsidiary of Baldwin’s involved in the deal was based in Arkansas.] He didn’t say why, just that I should look through them. Sure enough, the state of Arkansas had realized they had been had and hired a consultant to look into Baldwin-United in more depth. They found that Baldwin had been double-pledging assets with this massive paper shuffle between their subsidiaries.