the Darth Vader of Wall Street

the Darth Vader of Wall Street

“good short-sellers have something in their DNA. or maybe we were dropped on our heads as babies,” says Jim Chanos. but is that all there is to be a good short-seller? the man is definitely selling himself and his ilk short.

Chanos is the founder and managing partner of Kynikos Associates, which is the world’s largest exclusive short selling investment firm.

dubbed as the ‘Darth Vader of Wall Street’, Chanos is probably one of the most celebrated short-sellers.

he grew up in a Milwaukee suburb. in 1985, he started Kynikos. and since then, he has been credited for unearthing and spotting many businesses which had serious corporate governance issues or were due to go through a tough time, hence making them good bets to short.

Here is a good explainer we did on short selling.

over his career, Chanos has identified and shorted shares of many well-known corporations which include the likes of Baldwin-United, Commodore International, Tyco International, etc. he is remembered for his bet against Enron. he had detected many red flags with the firm and eventually, a massive fraud was uncovered.

the bet against Enron made a $500 million profit for Chanos.  

shorting involves borrowing shares, selling them in the market, and then buying them back in the future, hoping that it’ll be available at a lower price. this means steeper the price, larger will the profit.

how did he do it?

Chanos took the road less travelled and in a space where everyone wants to generate wealth by picking undervalued stocks with immense growth potential, Chanos looks out for businesses which are overvalued or about to go through a tough time and hence are bound for a price correction. no wonder many call him the ‘mirror image’ of Warren Buffett as the same amount of due diligence goes into picking stocks which can be called future failures.

“short sellers are the professional skeptics who look past the hype to gauge the true value of a stock,” Chanos once said.

Chanos says that they don’t short a stock just on the back of inflated valuations but like to focus on businesses where something is going wrong. “we look for companies that are trying — often legally but aggressively — to hide the fact that things are going wrong through their accounting, acquisition policy or other means. those are our bread-and-butter ideas,” he says.

but the art of picking losers is more arduous than picking winners in the stock market. at times, it can be more punishing than rewarding. Chanos has experienced this aspect of short selling as well.

in case your short bet goes wrong and the share price continues to rise, one could theoretically incur an infinite loss on their position as well.

what now?

the start of the bull-run post the 2008 financial crisis has made it tough for short-sellers to make money. snd the rally since last year along with the rise of subreddits has made matters even worse for the industry. 

Chanos has been notably short on Elon Musk’s Tesla, which has rallied by many folds in the last one year but his bet against German Fintech firm Wirecard did play out last year.

see, it is difficult being a bear in a perennial bull market.