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Jim Chanos On Short Selling: The Power of Negative Thinking

Short selling and Jim Chanos go hand in hand. Whenever you see his name, you instantly think of Enron and how he unveiled the fraud there. The Kynikos Associates hedge fund manager is worth following due to his success but maybe more-so for the fact that he makes so many public appearances. If hedge funds operate behind a shroud of secrecy, then short sellers typically operate behind a shroud ten times as secret. Yet Chanos deviates from the norm and can often be found on television, doing interviews, and sharing his ideas. While talking his book might help some of his positions, it also means he’s more often than not cast as a villain. Chanos argues that good short sellers are born, not trained. Many would take issue with that statement as numerous hedge funds recommend their analysts read Kathryn Staley’s book, The Art of Short Selling

to really gain an edge.

In late May, Chanos delivered a presentation at the CFA Institute’s annual conference. You’ll remember that Baupost Group’s Seth Klarman also spoke at this event and we previously covered his thoughts on the markets

as well. This time around we present you Chanos’ speech entitled, “The Power of Negative Thinking” which focused on his bread and butter: short selling. (more…)

Symptoms of fear- For Traders

  • Jumping into unplanned trades because you fear being left out 
  • Hesitate in pulling the trigger because you fear the prospects of a loss 
  • Cut winners short in fear of giving prof its back, affected by noise 
  • Hang on to losing trades because you fear taking the real loss 
  • Feeling helpless about trading results 
  • Fear of missing out on trade 
  • Afraid to pull the trigger on a trade

     

    Feeling paralyzed once in a trade 
  • Living in denial about results 
  • Rationalizing poor results 
  • Chasing big moves only to find you bought top and sold low 
  • Not taking stops 
  • Take small gains to “catch up”, market leaves you behind
  • Winners turn to losers and then you get out 
  • Wanting to get back at market 
  • Experiencing large mood swings; big highs, deep lows, anger and /or depression

Difference between trading and gambling?

Gambling is, usually, an event with:

  • Limited duration
  • Finite upside
  • Finite downside
  • Binary outcome

When you gamble you either win or lose. That event usually takes only a small amount of time.

For example, you can bet on a horserace 10 minutes before it starts and 5 minutes later you have a result. For anyone who plays poker, you know it may take a little bit more time as the stakes are raised. So poker is a little bit closer to trading.

In gambling your risk on any event is usually what you outlay. And your potential return is what the house is offering at the time you agree to the bet.

I love to play blackjack (and for some reason, while I don’t play often, I have been profitable almost every time I’ve played in the last 3 years) like one of my trading mentors who was an original Turtle Trader.

A bet on a Blackjack table can take a minute or two until it’s over. Whereas in trading, a trade has the following characteristics: (more…)