Too much to listen and too little time...
My rating: ★★★★☆ (4/5)
- 3:39 – How did you get into the business?
- 7:22 – The good short seller who is producing nominally minor positive returns in a bull market enables you to be more long.
- 8:26 – “We really won’t accept and don’t want to accept any money we know is consciously coming to us because they think the market is going down. You can get that protection elsewhere.” If they invest with us (Kynikos) is because we are enabling to hedge out their excess long exposure or let them be long more.
- 10:21 – How do a short seller think about risk management? “I’ve seen far more stocks go to zero than infinity.”
- 12:59 – How do you think about situations where you are conceptually correct but just early? There are two reasons for being early in the short-side: 1) a lot of the things we look for tend to show well before the earnings report. 2) We have to borrow the shares at a good price (rebate structure) and/or before the fall.
- 15:03 – How do you know when is time either to declare victory or to get out of the stock?
- 19:34 – How do you come up with ideas?
- 22:33 – Walk us through how the China short came to be.
- 31:09 – How does the process of going long work for a short seller? First we construct the short portfolio and then we try to hedge it with long passive instruments.
- 32:30 – What kind of patterns do you look for that set the alarm bells? Debt, Technological Obsolescence, Consumer Fads (extrapolating out single-product-companies with hockey sticks growth), Growth by Acquisition, Companies playing accounting games.
- 39:02 – “I’m always wary of accountants who become CEOs too. That’s always a bad sign for me.”
- 39:10 – About Valeant (VRX).
- 43:03 – “[VRX] It went up a 100% on us… We started in the low 100s and our first blended set of average prices was somewhere around 130. So, yes, it got our attention. It doubled first.”
- 43:25 – Is the growing gap between GAAP and pro forma accounting something that we should be aware of in general?
- 47:00 – “My friend Bethany McLean has a term which I’ve actually turned into one of the models of my fraud class, and she calls it legal fraud, and I think it’s as good a definition as any. And she basically points out that companies can actually completely comply with all the rules and regulations to accounting and corporate governance and what have you, and yet still there’s an intent to deceive.”
- 47:50 – “When you have the rules-based system almost by definition you’re going to do deals to comply with the rules, but that doesn’t mean that the rules reflect the economics of the transactions accurately.”
- 52:46 – “people do distrust the markets and do distrust free market capitalism when you just let people run roughshod over the rules and enrich themselves at everybody else’s expense.”
- 55:39 -- You identified the excesses in the housing market in 2005 and 2006. Did you ever thought about shorting it or engage in CDS trades? “We thought about it. And my fear was: I was worried that we wouldn’t get paid, and that really was what kept us in the listed stocks and we did just fine there… I was short AIG, and covered way too early, but I saw what their role was in this and I think if the federal government had not stepped in to make sure AIG could cover its obligations, the system probably would have imploded. And that was the bet everybody was making, because if AIG couldn’t meet those margin calls or whatever, an awful lot of people that were right about the mortgage market would have not gotten paid. That’s with hindsight of course.”
- 58:02 – How do you deal with risk management if your counterpart won’t make good on their promise?
- 1:00:08 – Leverage and Rehypothecation of collateral. “This is a simplified manner. There are bells and whistles. But for the purposes of your listeners, say I have one share of IBM, and if I just own the one share of IBM and don’t borrow against it, that one share of IBM stays in my account. If I have a margin account, and I buy one share of IBM and then I use that to borrow another $100 on my IBM, Bear Sterns can take that one share of IBM that’s in my account and borrow against it for their own purposes. Pledge it as collateral to another bank and give me a $100 Bear Sterns IOU in my account. Now, I’ll still… My equity will go up and down based on the price of IBM, but I won’t have a share in there. I’ll actually have a Bear Sterns IOU. So if the music stops and Bear Sterns files bankruptcy, suddenly as opposed to my share of IBM in my account, I’m an unsecured creditor of Bear Sterns.” Hedge Funds and people who didn’t experience Drexel in 1990 or LTCM in 98 realized this belatedly.
- 1:06:11 – people always say: “Well, short-selling’s expensive.” And I point out, actually, in a reasonably higher rate environment, short selling throws off tons of cash, because you’re earning interest on your T-bill and then typically you split the interest 80/20 with the prime broker on the segregated sale proceeds. So when interest rates were 6%, my portfolio was earning about ten or 11 on the asset side, minus any dividends I owed on the short. So short selling threw out an awful lot of cash when rates go up. Short sellers are the biggest proponents of higher interest rates on the street. So that’s the thing. But people have a hard time understanding that for a short position, your liability goes up and down every night, not your asset.
- 1:08:02 – Why freezing short sales is a mistake?
- 1:12:45 – What made you decide to go into teaching on the side?
- 1:15:50 – “the fraud cycle tends to follow the financial cycle, typically with a lag.”
- 1:19:20 – What is the biggest mistake you’ve made in your career?