Short Seller's Checklist

Jim Chanos uses this 7-point checklist for companies he's going to short

Julia La Roche

Reporter

Yahoo Finance October 19, 2016

Prominent short-seller Jim Chanos, the founder of Kynikos Associates, says there are seven things he looks at when making a short bet.

His checklist comes from a book called “The Seven Signs of Ethical Collapse” by Marianne Jennings.

He uses this book for a course he teaches at Yale entitled A History of Financial Market Fraud: A Forensic Approach.

The seven signs include: “pressure to maintain those numbers”; “fear and silence”; “young’uns and bigger-than-life CEO”; “weak board”; “conflicts”; “innovation like no other”; and “goodness in some areas atones for evil in others.”

Chanos achieved legendary status for his bet against Enron as it was later revealed to be a fraud. More recently, he has targeted Canadian pharmaceutical company Valeant (VRX) and Elon Musk’s Telsa (TSLA) and Solar City (SCTY).

“At Valeant and Enron, the CEOs in the situation fit six or seven — innovation like no other, larger-than-life CEO, and complaint board… We keep an eye on these kinds of things,” Chanos said at the Vanity Fair New Establishment Summit in San Francisco on Wednesday.

Later in the panel, moderator Bethany McLean asked Chanos about Musk, who has found fame and fortune in the products he has introduced.

Later in the panel, moderator Bethany McLean asked Chanos about Musk, who has found fame and fortune in the products he has introduced.

“Yeah I remember a company you and I had something to do with,” he said, referring to McLean’s book that chronicled the collapse of Enron. “Jeff Skilling was called the ‘smartest guy in the room’ as I recall.”

“There’s a difference between being smart and being clever.”

—
Julia La Roche is a finance reporter at Yahoo Finance.

Source: https://finance.yahoo.com/news/jim-chanos-7-point-checklist-for-companies-hes-short-195853257.html

David F. Swensen: The Money Management Gospel of Yale's Endowment Guru

•  Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can’t make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? 
  There’s also more fees on top of existing fees. And the best managers don’t want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed.  
  In a fund of funds, you will likely be excluded from the best managers. 
  [Mr.] Madoff also relied enormously on these intermediaries. He wouldn’t have had nearly as much resources were it not for fund of funds.
  
  

  David Swensen revises asset allocation for individual investors

  Posted by: The Investment Scientist on: March 25, 2009
  • In: asset allocation
  • 
    
   
  In his book Unconventional Success: A Fundamental Approach to Personal Investment, Swensen recommends the following allocations, for individual investors who want a “well-diversified, equity-oriented portfolio”:
  30% Domestic stock funds
  20% Real estate investment trusts
  15% U.S. Treasury bonds
  15% U.S. Treasury inflation-protected securities
  15% Foreign developed-market stock funds
  5% Emerging-market stock funds
  In an interview with Yale magazine, Swensen said, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.
  Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
  The following illustrates an implementation of the Swensen allocation with a strong small and value tilt. Despite having only 70% in equity, it has outperformed the benchmark S&P 500.
  
  
  Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
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David F. Swensen - Wikipedia

https://en.wikipedia.org/wiki/David_F._Swensen

David F. Swensen (born 1954) is an American investor, endowment fund manager, and philanthropist. He has been the chief investment officer at Yale University since 1985. Swensen is responsible for managing and investing Yale's endowment ... Yale's preferences in a letter to the endowment's money managers.

Thesis‎: ‎A Model for the Valuation of Corporate ...

Residence‎: ‎New Haven, Connecticut‎, U.S

Known for‎: ‎The Yale Model‎; Swensen approach; ...

The Money Management Gospel of Yale's Endowment Guru - The ...

https://www.nytimes.com/.../the-money-management-gospel-of-yales-endowment-guru....

Nov 5, 2016 - The mammoth Yale endowment fund run by David Swensen has been a training ground for investment managers, its alumni now scattered ...

Yale Investments Office

investments.yale.edu/

During the decade ending June 30, 2016, Yale's investment program added .... per annum of outperformance and Yale's superior manager selection contributed ...

Investment Managers — Yale Investments Office

investments.yale.edu/investment-managers/

Start-up managers play a central role in the Endowment's portfolio. Yale readily partners with early-stage managers without formal track records or a substantial ...

Yale's Money Guru Shares Wisdom with Masses : NPR

https://www.npr.org/templates/story/story.php?storyId=6203264

Oct 5, 2006 - Yale Money Whiz Shares Tips on Growing a Nest Egg April 3, 2008 ... portfolio likely to give you good returns while still managing risk:.

How to invest like ... Yale University's £20bn fund - The Telegraph

www.telegraph.co.uk/investing/funds/invest-like-yale-universitys-20bn-fund/

Apr 7, 2017 - Like the retired investor, Yale University relies on its fund to provide ... This typically involves lending money to the managers of a business in ...

Yale U's Unconventional - Lazy Portfolios - MarketWatch.com

https://www.marketwatch.com/lazyportfolio/portfolio/yale-u-portfolio

David Swensen manager of Yale University's endowment fund generated returns in the range of 16% annually the past couple decades portfolio for retail.

Do Harvard, Yale Overpay Their Money Managers? - Bloomberg

https://www.bloomberg.com/.../are-harvard-and-yale-overpaying-their-money-manag...

Jan 30, 2014 - Money managers who handle university endowments tend to be the highest-paid employees on campus. (Executives at Harvard Management ...

Harvard's New Fund Manager, Copying Yale, Will Farm Out Money ...

https://www.bloomberg.com/.../harvard-says-endowment-will-outsource-most-manag...

Jan 25, 2017 - The new head of Harvard University's endowment moved quickly to

The Yale Model, sometimes known as the Endowment Model, was developed by David Swensen and Dean Takahashi and is described in Swensen's book Pioneering Portfolio Management. It consists broadly of dividing a portfolio into five or six roughly equal parts and investing each in a different asset class.

David F. Swensen - Wikipedia

https://en.wikipedia.org/wiki/David_F._Swensen

The Curse of the Yale Model - Forbes

https://www.forbes.com/sites/rickferri/2012/04/16/the-curse-of-the-yale-model/

Apr 16, 2012 - The Yale Model is an investment strategy named after the university endowment that popularized the concept. The strategy produced superior returns over the past 15 years and made the Yale endowment the envy of all institutional investors. ... Alternative investments dominate the portfolios.

David F. Swensen - Wikipedia

https://en.wikipedia.org/wiki/David_F._Swensen

The Yale Model, sometimes known as the Endowment Model, was developed by David Swensen and Dean Takahashi and is described in Swensen's book Pioneering Portfolio Management.  

It consists broadly of dividing a portfolio into five or six roughly equal parts and investing each in a different asset class.

Thesis‎: ‎A Model for the Valuation of Corporate ...

Residence‎: ‎New Haven, Connecticut‎, U.S

Known for‎: ‎The Yale Model‎; Swensen approach; ...

How Do The Rich Invest? A Look Inside Yale Endowment's Asset ...

https://www.financialsamurai.com/a-look-inside-investment-asset-allocation-of-massiv...

In 1987 Steyer approached David Swensen, Yale's CIO, to manage a portion of ... investments for us for much lower fees than traditional money managers. In the ...

In 1987 Steyer approached David Swensen, Yale’s CIO, to manage a portion of Yale’s endowment for no fee to prove himself. After Farallon’s initial success, other college endowments followed Yale’s example. By then, hedge funds were now charging 2% of assets under management and 20% of the profits.

Tom Steyer backs $10 million campaign to impeach Trump - CNNPolitics

www.cnn.com/2017/10/20/politics/tom-steyer-ad-impeach-trump/index.html

Oct 22, 2017 - Billionaire Tom Steyer is spending what an aide says is "well over $10 ... TV ad campaign Friday calling for President Trump's impeachment. ... These actions represent systemic attacks on our nation's future," Steyer writes.

Quotes From Charlie Munger

Quotes From Charlie Munger, Warren Buffett's Right-Hand Man

Don't drift into self-pity because it doesn't solve any problems.

Flickr/Night of the Proms Deutschland 

"Generally speaking, envy, resentment, revenge and self-pity are disastrous modes of thoughts. Self-pity gets fairly close to paranoia, and paranoia is one of the very hardest things to reverse. You do not want to drift into self-pity. ... Self-pity will not improve the situation."
Source: Charlie Munger USC Law Commencement Speech, May 2007

Those who keep learning, will keep rising in life.

Stringer / Getty Images

 

"I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you."
Source: Charlie Munger USC Law Commencement Speech, May 2007

At a certain point, you have to suck it up and cope.

MGM/ IMDB 

“There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be. At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”

Source: University of Michigan discussion 

Life has terrible and unfair blows. Utilize them in a constructive fashion.

Wikimedia Commons

 

"Another thing, of course, is that life will have terrible blows in it, horrible blows, unfair blows. It doesn't matter. And some people recover and others don’t. And there I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well, every missed chance in life was an opportunity to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea."
Source: Charlie Munger USC Law Commencement Speech, May 2007

Real knowledge is knowing that you don't know anything.

Flickr/Jack Beijing

 

"Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing. Is it a skill that can be taught or learned? It probably can, if you have enough of a stake riding on the outcome. Some people are extraordinarily good at knowing the limits of their knowledge, because they have to be. Think of somebody who’s been a professional tightrope walker for 20 years – and has survived. He couldn’t survive as a tightrope walker for 20 years unless he knows exactly what he knows and what he doesn’t know.  He’s worked so hard at it, because he knows if he gets it wrong he won’t survive. The survivors know. ... Knowing what you don’t know is more useful than being brilliant."
Source: The Wall Street Journal

If you're lazy and unreliable, it doesn't matter what you're good at.

Flickr/Graeme Churchard

 

"What do you want to avoid? Such an easy answer: sloth and unreliability. If you’re unreliable it doesn’t matter what your virtues are. You're going to crater immediately. Doing what you have faithfully engaged to do should be an automatic part of your conduct. You want to avoid sloth and unreliability."

Source: Charlie Munger USC Law Commencement Speech, May 2007

There's a lot of stupidity on the part of major philanthropic groups.

"I’ve seen so much folly and stupidity on the part of our major philanthropic groups, including the World Bank. I really have more confidence in building up the more capitalistic ventures like Costco."

Source: University of Michigan discussion

Don't overspend. Even Mozart couldn't get away with doing that.

Wikipedia Commons

 

"Another thing that does one in, of course, is the self-serving bias to which we’re all subject. You think the 'True Little Me' is entitled to do what it wants to do. And, for instance, why shouldn’t the True Little Me overspend my income. There once was a man who became the most famous composer in the world but was utterly miserable most of the time, and one of the reasons was because he always overspent his income. That was Mozart. If Mozart can’t get by with this kind of asinine conduct, I don’t think you should try."
Source: Charlie Munger USC Law Commencement Speech, May 2007

Avoid extremely intense ideology because it ruins your mind.

Wikimedia

 

"Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind. ... When you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out, what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind."
Source: Charlie Munger USC Law Commencement Speech, May 2007

Keep it simple.

Chaos.en.wikipedia.org\

 

"One of the greatest ways to avoid trouble is to keep it simple. When you make it vastly complicated—and only a few high priests in each department can pretend to understand it—what you’re going to find all too often is that those high priests don’t really understand it at all…. The system often goes out of control."
Source: Wesco Financial annual meeting, 2008 (quoted in Stanford Business School paper)

Optimistic accounting leads to 99% of problems.

Wikimedia Commons

"Ninety-nice percent of the troubles that threaten our civilization come from too optimistic accounting. And yet these damn accountants with their desire for mathematical purity want to devote exactly as much attention to accounting that is too pessimistic as they do to accounting that is too optimistic — which is crazy. Ninety-nie percent of the problems come from being too optimistic. Therefore, we should have a system where the accounting is way more conservative."

Source: University of Michigan discussion

Assets require more scrutiny than the liabilities.

Flickr

 

"The liabilities are always 100 percent good. It’s the assets you have to worry about."
Source: Wesco Financial annual meeting, 2008 (quoted in Stanford Business School paper)

People who rise high enough in business have a moral duty to be underpaid.

Justin Sullivan/Getty Images\

 

"People should take way less than they're worth when they are favored by life... I would argue that when you rise high enough in American business, you’ve got a moral duty to be underpaid— not to get all that you can, but to actually be underpaid."
Source: Wesco Financial annual meeting, 2008 (quoted in Stanford Business School paper)

Only those who are willing to leave at any point should hold high level corporate jobs.

Wikimedia Commons

 

"'No man is fit to hold office who isn't perfectly willing to leave it at any time,'... I think that ought to be more the test in corporate directorships. Is a man really fit to make tough calls who isn't willing to leave the office at any time? My answer is no."
Source: Berkshire Hathaway 1995 Annual Meeting (quoted in Stanford Business School paper)

"One solution fits all" doesn't work.

Courtesy of TripAdvisor

 

"'One solution fits all' is not the way to go. All these cultures are different. The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can't run all these places with a cookie-cutter solution."
Source: Stanford University Director's College, June 26, 2006. (quoted in Stanford Business School paper)

Many successful organizations have fewer (rather than more) controls.

AP Images

 

"A lot of people think if you just had more process and more compliance — checks and double checks and so forth — you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust."
Source: Wesco Financial annual meeting, 2007 (quoted in Stanford Business School paper)

Deserved trust is the most important thing.

Eric Francis/Getty Images

 

"The highest form that civilization can reach is a seamless web of deserved trust — not much procedure, just totally reliable people correctly trusting one another. ... In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has forty-seven pages, I suggest you not enter."
Source: Wesco Financial annual meeting, 2008 (quoted in Stanford Business School paper)

Great investing requires a lot of delayed gratification.

REUTERS/Dominick Reuter

 

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that.”

Source: The Wall Street Journal

He wanted to be rich in order to be independent.

Emanuel Leutze

 

"Like Warren, I had a considerable passion to get rich, not because I wanted Ferrari's – I wanted the independence. I desperately wanted it."
Source: Buffett: The Making of an American Capitalist

Wisdom acquisition is a moral duty.

Flickr

 

"Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. Wisdom acquisition is a moral duty. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here."
Source: Charlie Munger USC Law Commencement Speech, May 2007

School is not a prerequisite.

Wikimedia Commons/HBS1908

 

“To this day, I have never taken a course anywhere, in chemistry, economics, psychology, or business.”

Source: Forbes

He learned by reading, not schooling.

Wikipedia

 

"I met the towering intellectuals in books, not in the classroom, which is natural. I can't remember when I first read Ben Franklin. I had Thomas Jefferson over my bed at seven or eight. My family was into all that stuff, getting ahead through discipline, knowledge, and self-control."
Source: Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger

CEOs should be "empowered" to make decisions without extensive review by the board of directors.

Paul Morigi / Stringer / Getty Images

 

"When you have a really complicated place and a good CEO, you want him to have power to speak for the place in dealing with outsiders.... Berkshire Hathaway of course is raised that way. Can you imagine Warren Buffett saying to somebody, 'Well I'm sorry I have to go back and check with my directors?' I mean, of course he has to go back to check with his directors, but he knows what they're going to say, and everybody knows that what he says is going to govern."
Source: Stanford University Director's College. (quoted in Stanford Business School paper) 

Even Ben Graham had a lot to learn as an investor.

Benjamin GrahamAP

 

"I don’t love Ben Graham and his ideas the way Warren does. You have to understand, to Warren — who discovered him at such a young age and then went to work for him — Ben Graham’s insights changed his whole life, and he spent much of his early years worshiping the master at close range. But I have to say, Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay."

Source: The Wall Street Journal

The bailouts should've been ever bigger.

Ben BernankeChip Somodevilla / Getty Images

 

"Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens. So I think when you have troubles like that you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”

Source: University of Michigan discussion

The fortunate should give back.

Mario Tama/Getty Images

 

"Those of us who have been very fortunate have a duty to give back. Whether one gives a lot as one goes along as I do, or a little and then a lot (when one dies) as Warren does, is a matter of personal preference."
Source: Poor Charlie's Almanack: The Wit and Wisdom of Charlie T. Munger

Regarding quick trading of derivatives and stocks.

REUTERS/ Brendan McDermid

 

It’s like the slaughter of the innocents. It makes the people who run Las Vegas seem like good people.
Source: The Wall Street Journal

On Wall Street.

The Wolf of Wall Street/Paramount Pictures

 

"Wall Street has too much wealth and political power."
Source: Forbes

And his closing advice is...

Amazon

 

"In the end I’m like an Old Valiant for Truth in The Pilgrim’s Progress: 'My sword I leave to him who can wear it.'"

Source: Charlie Munger USC Law Commencement Speech, May 2007

 

BONUS: Some additional Munger zingers.

Lane Hickenbottom/Reuters

 

On global warming: "So what we are really talking about with global warming is dislocation. Dislocations could cause agony though. The sea level rising would be resolved with enough time and enough capital. I don't think it's an utter calamity for mankind though. You'd have to be a pot-smoking journalism to think that."

Regarding Buffett's cancer diagnosis: "I regarded it as a total non-event. I would bet a lot of money that I have more than he does, I don't event allow them to check for it. … So when my doctor puts down PSA test I just cross it out.”

On Donald Trump (according to Andrew Ross Sorkin): "Obviously I think he's a jerk."

On buying gold: "I think gold is a great thing to sew in to your garments if you're a Jewish family in Vienna in 1939 but I think civilized people don't buy gold."

On Bitcoin: "I think it's rat poison."

On bankers: "I do not think you can trust bankers to control themselves. They are like heroin addicts."

And on investment banking in general: "There's more honor in investment management than in investment banking."

And how he will be remembered: I may be remembered as a wise ass.

 

BONUS: Warren Buffett wants to be remembered as a teacher, not a businessman.

Grant Halverson/Getty Images

 

"And I like to ask Warren what he wants to be remembered as, and he says a teacher. Who else in America who is a CEO says he wants to be remembered as a teacher? I like it."
Source: CNBC interview

 

More: Charlie Munger Warren Buffett Features Money Game Features

Source: Charlie Munger USC Law Commencement Speech, May 2007

 

Source: http://www.businessinsider.com/charlie-mungers-best-quotes-2014-9?op=1/#nt-drift-into-self-pity-because-it-doesnt-solve-any-problems-1

Charlie Munger's Wisdom

The Thinking of Charlie Munger: Speeches, Quotes, Videos, Transcripts, and Book Recommendations

“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.” — Charlie Munger

***

Charlie Munger is one of the great minds of the 20th century. Below is an attempt to capture that wisdom in one shareable place. 

Speeches

• A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
• Turning $2 Million Into $2 Trillion
• Academic Economics — Strengths and Weaknesses, after Considering Interdisciplinary Needs
• Charlie Munger: The Psychology of Human Misjudgment

Wisdom

• The Munger Operating System: How to Life a Life that Really Works
• The Tension Created by Stretch Goals
• Adding Mental Models to Your Mind’s Toolbox
• Charlie Munger on the Value of Thinking Backward and Forward
• Three Underrated Reasons for Berkshire Hathaway’s Enormous Success
• Working Together: Why Great Partnerships Succeed
• Circle of Competence
• Temperament is more important than IQ
• Inversion and The Power of Avoiding Stupidity
• Charlie Munger on why Energy Independence is a Terribly Stupid Idea
• The Work Required To Have An Opinion
• A Two-step Process for Making Effective Decisions
• Worldly-Wisdom from Charlie Munger
• How Good Gamblers Think
• Charlie Munger on Mental Models
• Charlie Munger: “If I were teaching business school …”
• Bad Morals Drive Out the Good
• The Human Mind has a Shut-Off Device
• Getting The Best Odds
• Become a Learning Machine
• How Raising Prices Can Increase Sales
• Charlie Munger: Why Bureaucracy is not Shareholder Friendly
• The Present Mess

Videos

• A Conversation with Charlie Munger DuBridge Distinguished Visitor Lecture 2008

Articles

• Basically, It’s Over: A Parable About How One Nation Came To Financial Ruin

Books

• Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition
• Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger

Book Recommendations

• 20 Book Recommendations from Billionaire Charlie Munger That will Make you Smarter
• 19 More Book Recommendations from Billionaire Charlie Munger

The wit and wisdom of Charlie Munger:

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

“Just because you like it does not mean that the world will necessarily give it to you.”

“I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.”

Link: https://www.farnamstreetblog.com/charlie-munger/

The Hollow Men: What the end of the world looks like...

What the end of the world looks like...

The Hollow Men

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper. 

by T. S. Eliot Written 1925



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