We’re in “the golden age of fraud” says short-selling legend Jim Chanos. He also says he’s preparing for what he believes will be “one of the great short opportunities of all time.”
Chanos, the founder of the hedge fund Kynikos Associates and often considered one of the greatest short-sellers of all-time. He says he’s a “real-time financial detective who is incentivised to root out fraud” and a “forensic financial statement junkie.”
His Kynikos Capital Partners fund, which goes both long and short individual stocks, has returned an average of 22% a year over the past 35 years, doubling the returns of the S&P 500.
He predicted Enron would collapse due to what he believed was “aggressive accounting” where the energy company would front-load profits and shift debt over to its subsidiaries. Chanos made a fortune when the company eventually went belly-up.
Most recently, his hedge fund made nearly $100 million when German payment processor Wirecard collapsed. After years of allegations and questions, the company admitted that $2 billion of cash on its balance sheet simply didn’t exist.
Looking for Fraud
This dogged ability to find fraud is because Chanos approaches each company by first looking at its business model. Then, he sees if its financial statements match the business. He says there are consistent themes with companies that make good short positions. These include technological obsolescence, come-and-go consumer fads, single-product companies, growth via acquisitions and accounting games. Chanos says he doesn’t look for out-and-out frauds. Instead, he looks for “legal fraud” — where he says companies adhere to the accounting rules and regulations but with an “intent to deceive”.
Chanos believes today’s markets, with low interest rates, a “fear of missing out” by retail investors and a “fake it until you make it” culture in Silicon Valley, is “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”.
He says the lack of oversight is fueling the market growth, as there’s essentially no deterrent for bad behavior. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was.”
He calls it “a heady witch’s brew for trouble.”
Chanos has a particular interest in Tesla, having been short the company for quite some time. When asked about Tesla and its CEO, Chanos says the mercurial Musk is the poster child for the current bubble.
“I think Elon Musk has personified the hopes and dreams of this bull market,” Chanos says. He believes Tesla will ultimately fail, saying it’s an unprofitable, highly leveraged and facing increasing competition.
Chanos believes the company “burnishes its results through aggressive accounting,” stopping short of calling Tesla a fraud. He also says it has “a culture of deception” because it is selling self-driving to consumers. He claims that, as yet, this “doesn’t exist.”
If you have the stomach for short-selling, Chanos believes “this market is setting up to be one of the great short opportunities of all time.”