THE POWER OF NEGATIVE THINKING: 4 SHORT SELLING THEMES
28 June 2010 by Cullen Roche
3 Comments
Jim Chanos recently gave an interesting interview on the power of negative thinking and the benefits of short selling. Most interesting were the 4 major themes Chanos looks for in his short positions. Much like a long only macro thinker Chanos develops his specific short positions from much larger macro themes. In the article he detailed the 4 themes he looks for:
Some recurring themes in shorting selling:
- Booms that go bust – define boom as anything that is fueled by debt in which the cash flows produced by the asset do not cover the cost of the debt. The internet is not a boom since they didn’t have debt. The telecom bubble that went along with it was.
- Consumer fads – Investors like to extrapolate strong growth well further into the future than they should. It’s also a great source of decoration for your office, he’s got a Cabbage Patch Kid next to a George Forman Grill next to a Nordic Trak.
- Technological Obsolescence – Everyone thinks the old product will last longer than it actually does. Examples were Wang Word Processors (replaced by PCs), Record Stores (replaced by digital downloads). He says the internet is the cheapest way to distribute anything. However, people are still renting DVDs by mail, which surprises him (hint: likely short Netflix!). These businesses always look cheap but the cash flow goes down just as fast as the share price (think Kodak film).
- Structurally flawed accounting – Beware serial acquirers, they often write down the assets of the acquired firm in the stub period that no one sees. Ask management what the nets assets of the firm were on their latest end of quarter and what they were when they were acquired. Most management won’t tell you this, some will, however. But by writing down inventory and A/R they can “spring load” results once the company is acquired. They’re supposed to adjust the purchase price, but more don’t.
Source: Market Folly
Isn’t netflix on the front line of delivering content via the web?
Thanks for this. I would be grateful if you could begin a series of posts related to shorting the market and other such strategies.
As you have written the politics of the times have increased the odds of another recession as well as the possibly one or more systemic economic breakdowns (in the euro, etc). However, while I have bought in to the fact we are in a secular bear market I do not believe I know how to think and act like a bear, other than to sell my positions and sit on cash.
I’ve been reluctant to short because of the risks inherent in it. I think this, in part, stems from the fact of having grown up in the last secular bull market I am subconsciously conditioned to think and act like stocks will eventually go up again. I’d like some help transforming my mind to this different reality. I know bears are wired entirely different from bulls. That, for example, it requires far more than understanding the differences between the risks of being long vs. short. I imagine it requires looking at the world and the world of investments in an entirely different way.
Again, any help with this would be appreciated. Thanks for your work on this site.
Don’t short netflix, they provide a lot of tv shows and movies on the web.