Sunday, April 29, 2018

Jim Chanos on primary research and peeling the onion...

The below excerpt is from a chat earlier this year between Jim Grant and Jim Chanos that was taped for Real Vision Television. Real Vision has just dropped its price from $597 a year to $180, and is also offering a 14-day free trial. I signed up for the free trial and have so far watched some great interviews with John Hempton, Marc Cohodes, and Kyle Bass, as well as some videos on the auto finance industry. At the new price point, I will probably be keeping my subscription. I get no commission of any sort from them, so my recommending one sign up for the free trial is all because I think there is valuable content on their platform. The Real Vision team was also kind enough to give me permission to post this excerpt, which I thought would be especially of interest to readers of this blog:
Jim Grant: Well, this has been pretty terrific. I think I ought to not wind this up before asking you about dear alma mater and about your not so secret other life as a professor. You teach a course both at Yale and at the University of Wisconsin, kind of a sentimental alma mater. And I'm going to ask you one thing about that. What is the single most important thing that you teach your students?   
Jim Chanos: So the single most important thing I teach my students is primary research. And although it's nominally a history course, it's a course on the history of financial market fraud, we overlay some systematic models on a historical narrative. What I stress to my students and my analysts is the importance of working the opposite way of most investors. And whether it's examining something historically or something currently, the parallels hold.  
So what I try to teach and really, really reinforce to the students is that it's shocking what you can find out when you do primary research. Because most investors, if you think of investing in an idea as sort of an onion, that whereby the kernel of the onion is primary source documents. The second layer is sort of company press releases. The third layer would be conference calls where management expounds on their business. The fourth layer would be sort of Wall Street research reports. And then the fifth layer would be stories, rumors--   
Jim Grant: The good stuff.   
Jim Chanos: --tips, the good stuff. Virtually all investors work from the outside of the onion in. They hear a story, they might read some research, they might listen to a conference call. I tell my students, start with the documents. Start with what the companies have to tell you or are mandated to disclose and work your way out.   
Often the same situation looks radically different when you start that way as opposed to when you start with the chorus and their interpretation of that kernel of truth. And it has put my analysts, I think the firm in good stead in doing that kind of research, whether it's historical or current, and its kind of amazing what you find when you read the Enron 10-K and read the footnotes as opposed to listening to what the sell side was saying. Or you see what Mike Pearson at Valeant was doing with his acquisition accounting, despite what Wall Street was saying. And that's something that we sort of reinforce with historical examples. And I hope that my students, [if they] take anything away from the class, it's that.