Legendary Short Seller: Fraud Is Hiding Behind Record Highs

the fraud cycle follows the financial cycle with a lag and the longer the financial cycle goes on uh the more amount of fraud is ultimately uncovered on the down cycle. So I've already dubbed this the golden age of fraud and I suspect that when we're on the down part of this cycle um the bodies will float to the surface as they always do. But remember the correlary to that is the harshest prosecutor and the staunchest defense attorney of a company is its stock price. Nobody goes after frauds at all-time highs. Today's number 25. That was the percentage decrease in Canadian travel to the US in 2025. Ed, what did the beaver say to the maple tree? >> What's up? >> It's been nice knowing you. How are you, Ed? >> I'm doing very well. >> Yeah. Say more. >> The weather's nice. I've been going out to Long Island, getting tan. Had a wedding this weekend, which was nice. >> Oh, you're at that age. >> Yeah, the weddings they're they're happening. They're coming. Every other weekend it feels like At first it's fun and then it gets a little that you're like, "Wow, it's a lot of uh a lot of trekking out." But we It was a beautiful wedding and a really good time. So, you know, I'm very very happy for my friends. >> In 2 or 3 years, you'll experience the doovers where people realize like we only got married cuz we were 27 and it didn't work. So, there'll be a few of those. In 10 years, that's when the really ugly divorces set in cuz they have kids. >> Okay. >> Then in about 20 years, you'll go to the second weddings when you decide to tie the knot. I just can't wait. I wish I would be a fly on the wall when you have a very rational conversation around you suggesting that you take the money for the wedding for a down payment for a house. You're the kind of guy that would suggest that and I just wish I could see >> actually I think it's the opposite with this. I think I want the the awesome wedding and to splurge on the on the on the party and I think I don't think she cares that much about it. But I think I think having a sick wedding is I think you got to have a sick wedding. I'm a little I'm a little probably probably don't have my head screwed on quite straight on that one. What I would suggest is just throw a huge party and don't tell anyone it's a wedding because when people hear the term wedding, they mark everything out by 50%. >> That's a really interesting point. Yeah. Maybe just don't get the wedding planner, get an events planner, pretend that you're sort of celebrating your birthday and then you kind of Trojan horse a wedding. It's an interesting interesting strategy. >> Or if you do what I did, just go down to city hall with a woman who looks like she's about to start dilating and get married in front of a judge. That was the ro that was the romance I brought and we had to call four different people to get a witness that morning. Um that's how I expressed my love and my undying commitment. >> I love it. I love it. So you not a fan. Are you not a fan of a big wedding or where do you stand on the issue? >> So first off, what you have to acknowledge is in all of these decisions, you're an influencer, not a decision maker. And that is I'm I'm a big believer in dividing and conquering in a partnership. And in my partnership, I'm in charge of money and movies and everything else. She decides because she has much better instincts and judgment than I do across everything. So she pretends to listen to me and she nods right? >> You know, I say, "Well, you know, we should stick in the US for high school." Kids like, "Oh, no. We're moving to Europe." I'm like, "Okay, just tell me where to be when. just tell me where to be when. Send me the address. Um, so, but yeah, get used to that. Decide, pick one or two things you're really good at and just acknowledge every other decision is going to be made by your partner. >> Okay. Money and movies is a good that's a good combo. That's a that's fun to be in charge of those two things. >> And you're good at both of those. >> I'm outstanding at at both of those things. Yeah, that's that's my value ad. Speaking of money, let's get to our guest. Let's do it. Our guest today is one of the most famous short sellers on Wall Street. Over the years, he's been given nicknames such as the Darth Vader of Wall Street and also the LeBron James of shortselling. He first made a name for himself in 1982 when as a junior analyst, he urged clients to bet against a piano manufacturer that had expanded into insurance. Just months later, the company filed for bankruptcy. But he is perhaps best known for calling the collapse of Enron before it imploded. That bet cemented his reputation as one of Wall Street's most respected skeptics. Now he is sounding the alarm once again, this time about AI. He has argued that today's AI boom may be an even bigger bubble than the dot era. So, we wanted to understand why one of Wall Street's most successful contrarian investors thinks the market has become so euphoric and what he believes investors are missing. Here is our conversation with the legendary Schwarzeller Jim Chenos. Jim, great to have you on the show. Thank you for joining us. I'm going to start with a simple two-part question for you. Is this market in a bubble? And if so, is it going to pop? The market is very very expensive. I learned a long long time ago about 40 years ago when I started my firm that the market was inherently predictable but that there were companies and sectors within the market that are often much more predictable and and so I don't know if the market broadly speaking is in a bubble. It's certainly quite expensive as expensive as pretty much it's ever been. uh right up there with the with 1999 2000 the.com bubble you rep uh reference um but look I mean it's been expensive for a number of years um however what we are seeing right now is an unprecedented capex boom and and capex booms tend to end badly. They tend to leave behind very productive assets as they did during the dotcom and telecom buildout or going back further the railroad buildout of the 19th century. But investors often get burned along the way in financing that buildout and that's my concern right now particularly as it relates to physical assets related to AI. What are some of the biggest concerns that you're seeing in the market as it relates to AI? There are several things going on. There's the circular financing. There's the explosion in AI debt. There's the fact that the debt appears to be increasingly going off of the balance sheets of the hyperscalers and stuffed into these SPVS. I mean, there's a lot going on to be sort of skeptical of. Which things do you see uh as the largest concerns in AI right now? Well, if we go back to the the dot analog, most of the spending that was done uh and Scott knows this back in the late 90s was by enterprise and and by relatively profitable telecom companies. The the spending by the dotcoms and the selexs and the fiber guys was relatively small amount of the total capital spending. the the the companies that had in effect unprofitable business models that remained unprofitable and basically a lot of them went bankrupt. Most of the spending was done by AT&T, by by Bank America, by Coca-Cola who were networking their systems together uh to take advantage of the internet. Um, and then on top of that, you remember we had the Y2K and I remember my firm, we replaced all our PCs in 1999. So, a lot of the capital spending, budgeting and spending was by fairly profitable companies. What happened in the dotcom era was that they just got too optimistic in terms of how much they needed and order books collapsed beginning in late 2000 into into 2001 and so S&P earnings collapsed 40%. Um from the middle of 2000 to the middle of 2001 they dropped as much as they did during the global financial crisis um which a lot of people find hard to believe. And so nowadays we are seeing much much more concentrated capital spending in the form of uh buildouts by the hyperscalers by the the so-called neoclouds and by uh the AI companies themselves. So we're seeing um a lot more risk in a lot smaller subset of the market. The broader question of course is is will there be a return on this investment and I think that that question is is remains to be seen. Um I I pointed out to people interestingly um the uh US GDP growth uh in the 10 years prior to Netscape um was exactly the same as it was in the 10 years postnetscape from basically 1996 to 2007. And S&P profits which have a long-term sort of trend growth rate of about 6% a year. S&P profits grew 6% in the decade before Netscape uh 6% peranom and they grew 6% peranom in the decade after Netscape. So for all of the wondermen of the internet and it certainly changed their lives and it brought forth all kinds of new businesses and killed a lot of old businesses um you wouldn't have really kind of noticed it in the aggregate economic or even arguably financial statistics and so the question will be what will AI bring in the form of productivity what will it bring in the way of enhanced profitability and and how much of that is being frontloaded today. And that's a big question because like the dot boom, we have an accounting identity problem that that follows these capex booms. Namely, that the companies that are spending the money um do not expense immediately most of that money that's being spent. It's capitalized and depreciated over 5 to 10 years. um the companies receiving a lot of that money, the Nvidias of the world, the Caterpillar tractors of the world, the utilities, they're receiving it in terms of revenues and profits immediately. So the same dollar is basically contributing to profits in a far greater extent than it does in a more normalized economy um where it would be recognized as revenue by one company and expense by another. And that's what we're seeing and that's why S&P profits have taken off in the last two years. It's because of this mismatch. >> Could you describe more or speak more to this this expensing problem because I think a lot of the argument as to why we shouldn't be worried about any of this is one GDP growth is growing as a result of AI. Uh two uh S&P earnings are also growing because of AI and significantly. And then three, a lot of the financing, a lot of the debt that that was kind of the the the undoing in previous cycles, I mean, it's coming from companies that actually do have significant profits, that actually do have significant cash flows, and that you could make the argument that actually they have uh the money and the credit to build the amount of data centers that they are building. So what would be your response to people who make that argument and how does that relate to these expensing problems and perhaps these accounting problems that you bring up? >> Well, all three of those were present in 1999 and 2000. As I said, the companies that were taking on the most debt and obligations to build out their networks were by and large the the largest most creditworthy companies in the United States. Um and so so that that happened then. Um and and and it's really an important point to make. However, there was also a mismatch. S&P earnings grew 30% from mid98 to mid 2000. So they're growing even faster today. But then, as I said, there was a collapse. The we had a mild corporate recession. I think GDP dropped 1% and corporate profits dropped 40%. And they dropped because order books collapsed. people realized they didn't need 10,000 routers, they needed 2,000. So, they cancelled their order books. But the guys who were building the routers, you know, had had expense levels that were predicated on on the boom lasting longer and growing further than it actually did. So, this mismatch in earnings is is substantial right now. It's in the hundreds of billions of dollars a year and is is the real reason that corporate profits are growing way above trend. I mean, I think the economy, we agree, is doing fine. Um, which means corporate profits maybe should be growing eight or nine, but they're growing somewhere like 28 or 29. Um so you get an idea of really just how much of the profitability is going to the chip companies and to the infrastructure companies um for this buildout. So then the question becomes and and Scott's a better judge of this I think than I am is what is the ultimate ROI on all this spend? Um, and and can can we take the tokenized economy and turn it into real productivity gains for Bank America and Coca-Cola and 3M and and my company and and and Riverside and what have you. And and that I think is a little bit more nebulous right now um in terms of what uh what companies are seeing and and relative to their spend. >> Jim, it's it's nice to finally meet you. I've been following your work for what feels like three decades. And and yes, I do remember the dotcom era, still nursing those wounds. The the economists perfectly called the dot bomb implosion. They said it would go from B to C, then to B to B, then the infrastructure guys would be hit. They just laid it out, the implosion perfectly. They laid it out though in 1997, and from that point, the NASDAQ tripled. And the question I would have for you is, do you think we're in 97 or 99? And I think you're going to say we're in 99, but how do you discern the difference between something that's overvalued and things are about to go insane versus we're we're in, you know, we're in the beginning of the end, if you will. Is there a way to tell if we're a 97 or 99? >> Well, first of all, I would argue, Scott, that that tell me anything in the corporate world or the technology world that hasn't gotten faster since 1997. >> Yeah. So in terms of the ability of investors to sort of react to things um in my experience has been uh time compressed dramatically uh in in uh in the last 30 years. So um these things get get sort of figured out much quicker than they did back when I was shorting I Omega and scouring the Yahoo message boards um you know to to to figure out whether it was overvalued or not. So not that's number one. Number two, we're not so close to to the ignition point as we think. I mean, uh, chat GPT was fall of 2022. So, we're now entering the fifth year of this. Um, it's not it's not the Netscape moment of 1996, I don't believe. Um and and then think of all the VC infrastructure that and and other sort of ecosystem around technology that exists today to take advantage of these fabulous investment opportunities that really you know didn't exist as much in 1996 or 1997. So, I would say that that there's one other indicator, however, that I think has been foolproof in trying to figure out whether you're closer to a beginning or an end. And that is equity issuance. And equity issuance really didn't start picking up until, you know, late 989 in the dotcom boom and then crescendoed in in the first quarter of 2000. Um we haven't had a lot of equity issuance. Um we had a we had a blip in 2021 at one point uh post GameStop. Um spaxs were raising about 2 and a half to three billion a night which at the time was equivalent to the US savings rate. Um and and of course we know how that ended. It didn't last long. Um and and uh gave retail investors some indigestion in late 21 and 22. Um 2026 is an entirely different animal as SpaceX would indicate. Um we are now seeing massive equity issuance and we're going to probably, you know, unless things really cool off a lot faster here, we're going to see probably record amounts of equity issuance um in 2026. And so I've always joked that Wall Street has a printing press as well as the Fed. it just takes a while to get it going and um Wall Street's printing press is now now going full boore um in uh in this year. So I think that there's a fair amount of indicators that telling us we're closer to a 99 type moment than a 97 m. But who knows? And by the way, so I do my investment conference every year. We used to have it in Miami in February. And in February 2000, um we uh we met and we were about 10 days away from the peak. We didn't know it, but uh one fellow gave a short and pointed out that it had doubled in 1999. It had doubled in January of 2000. it had doubled again in the first two weeks of February 2000 and did a final double the week of our conference which was the third week of February. Um so to your to one of your points I mean when you're in a parabola you know you have price risk if not time risk and uh as a short seller I'm well aware of that. So the market being at near historic highs in terms of valuation rational argument AI being the epicenter for driving that what feels like irrational valuations also very rational when you look at within within the AI ecosystem assuming that's sort of ground zero for leverage upon leverage or the tail of the whip of overvaluations and presenting opportunities for for a short seller such as yourself or someone who shorts the market. Are you do you find the ripest targets to be the hyperscalers, the Nvidas, the SpaceX's or do you find that it's the adjacent and maybe are less don't have the same cash flows, the same brand equity like what is the white meat or the white meat or the soft tissue of the soft tissue where you think these things are are really have the potential to go down, you know, 90 plus% if you will. Since 1996, we we run our portfolio or advise our clients to be hedged, right? So, we're long we're long the market and short a portfolio of 40 what we think are structurally overvalued situations. And in the AI space, um we focused really over the course of most of this year in the adjacent companies. So, we're we're we're in effect long the hyperscalers. We're in effect long Nvidia since we own them through the indices. Um but where we've been been short are the Bitcoin miners who have suddenly become data center companies. The so-called Neoclouds that um are not are not estimated to make money until 2030 or beyond um despite a booming market for what they do. um and and and those types of narratives that have sprung up and companies that have sprung up to take advantage of investor capital. Um where you can't really make the business model work. Um it's and it's it's getting tougher enough for the hyperscalers. We could talk about that in a few minutes. Um they are seeing increasing um increasingly lower returns on their invested capital. But there's businesses out there that are doing deals for sort of low singledigit mid singledigit pre-tax returns on capital who have weighted average cost of capital of 12 15%. And and they're doing it because it's growth. They can announce deals. And similar to the dot era, um those kinds of companies usually are the ones that end up in the most trouble because they're capital intensive. they're low return and when when sentiment changes and the capital markets tighten up they can't access capital anymore and they collapse and and so there's just a lot of those out there but I want to add just one other interesting observation about this and as much as the AI and the leverage and some of the accounting and corporate structures um are questionable uh in this boom Um the overall stock market itself is a lot more expensive than it was in 1999. And by that I mean in in 1999 it was the so-called TMT section that you remember technology, media, telecom that just had stratospheric, you know, valuations and then there were just lots and lots and lots of companies that traded at 10 and 11 and 12 times earnings. Um, and in fact, value guys did pretty well coming out of the dot boom as those stocks were bit up as everything else collapsed. Now, we're seeing all kinds of sort of what I would call, you know, relatively senior companies or or mature companies trading at 40 and 50 times earnings. Um, take a look at Walmart, take a look at Caterpillar, take a look at, you know, a lot of companies that um are not square in the AI um height that are trading at extremely extremely high valuations. One of our favorites, just as an as an example, is WD40. WD40 has grown its revenues and earnings I think something at about a 3% pace over the past couple of decades um right in line with GDP and uh it trades at 40 times earnings and and so I mean it I mean there's just lots of those kinds of companies that because of the the the trend of passive index investing and the fact that retail and households have the largest share ever of their assets in stocks means that that the broad market is is relatively expensive relative to just technology. We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts. Support for the show comes from BCX, the public ticker for private tech. For generations, American companies have moved the world forward through their ingenuity and determination. And for generations, everyday Americans can be a part of that journey through perhaps the greatest innovation of all, the US stock market. 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You mentioned some of those kind of funky new names that are data centers, neoclouds like Coreweave and NBS and all of these other names. And then there's of course some of the newer memory names like SanDisk, SKH Highix. I mean a lot of these companies that suddenly just have exploded and I think a lot of people would agree that there's probably a lot of speculation going on in there and therefore a lot of risk. Is it your view though that big tech, Google, Microsoft, Amazon, Meta that they are relatively safe and protected right now? Or are they just as at risk as anyone else? >> I don't know that they're as at risk given their balance sheets. We know Google just went into negative free cash flow in this last quarter. um the these companies are still funding most of their build um from internally generated cash. So in that respect um they're they're in much better shape than some of the other companies. Um but again that didn't you know that didn't prevent General Electric from going down you know 40% in 2001 2002. Um and and increasingly the returns on that investment that they are increasingly making are dropping. They're still robust, but they're not what they were. And um in fact, you know, we track that pretty closely. And uh most of the return on incremental invested capital that that is how much operating additional operating profit are you getting from an additional amount of investment um has been pretty much cut in half for the hyperscalers over the past year and a half. And um that's that's a lot. And companies that were earning 100% um incrementally on their capital are now earning 25%. Um and and and couple of the companies are are now earning in the teens on their incremental investment. And if that continues to deteriorate over the next 12 to 18 months, I think the sea suite in Silicon Valley for some of the giants are going to be having some interesting conversations about their continued spend. Um, I know that they feel that they can't quote unquote lose the race, but there could come a point, you know, 18 months from now where they're all losing the race. Um and and that gets back to our original question which is unanswerable which is what is the ultimate ROI on all this spend. not not not for Nvidia or or OpenAI or Anthropic, but for you and for me and for you know the plumber down the street and corporate and corporate America and and what what advantages and and what increases to productivity and profitability will that bring and that that I think is still the the the 64 you know trillion dollar question before the market. Um because we haven't seen a lot of that yet. Um we might and hopefully we will but that that will remain to be seen. >> It seems that the breaking point that you outline in your scenario of what could happen over the next 12 to 18 months. The turning point is when the people in the seauite at big tech have that conversation and say we're not sure that this actually makes sense. Are you surprised that that hasn't happened yet given the fact that we haven't really seen the ROI yet in AI that we haven't seen it uh at the consumer level at least? You know, you point out the the return on incremental invested capital, which as you correctly point out is declining for big tech. I mean, why hasn't that conversation happened yet? And do you think that it will happen soon? human nature is still human nature and this is the shiny new object and people are still enamored with it and the boards of directors haven't yet started to ask difficult questions um because companies are still making their earnings estimates um and and generally being rewarded or not completely trashed for it um but as I say if the trends continue that we clearly see over the past two years um it's going to be hard um to keep justifying growing your capital spending um you know 40 50% a year if your operating income is only growing 10% a year that will get noticed and it will get noticed by the market and it might be already noticed by the market the hyperscalers are underperforming um you know the the the big buyers of compute have un underperformed in the past sort of three four months So, um, who knows? We'll have to see. >> That has been a fascinating question to me is to what extent are the points that you're making already priced in. And in a lot of ways, it seems that there are certain corners of the market where it is priced in, certain corners of the market where it isn't doesn't exist whatsoever. Um, and I can't quite understand what to make of that and more importantly, what to do about that from an investing perspective. Um what what is your view on that? >> Yeah, I mean I I would agree with you. Um you know there there's there's still these buckets of speculative capital that keep slloshing around to keep looking for the hot new area. So if we we give up on hyperscalers, we buy neoclouds. And if we give up on neoclouds, we buy chip companies and memory companies. And and if you know, we tire of those, we buy something, we buy Apple, which is hitting a new high, who's not spending any money. Um so it's it's it's as old as stock markets, right? I mean, people just keep looking for the the hottest area. Um but I would think that if overall um the AI spend begins to to get pulled back because of lower returns, I think the whole ecosystem, much like the whole ecosystem really prospered in 2024 and 2025, everything went up. Um, now we're starting to see some discernment and um and I think that'll that'll continue if the if the ROIC's continue to drop. >> That discernment is are you seeing that based on what we're seeing in the bond markets where these CDS prices are exploding or perhaps even interest in the in the stock markets. I mean the NASDAQ is in correction territory. >> We're seeing in the stock market there's a lot of there's a lot of bifurcation going on. I mean, we're having a very good year on the short side, and I think the S&P is within a stones throw of uh of of its all-time high, and the equal weighted S&P is at all-time highs, and yet under the surface, there are a lot of stocks that are down 20, 30, 40%. Um, so so it it has started already. Um, it and by the way, just to go back to the peril, that started in late 99. Um I would point out that for every stock that kept going doubling as I indicated u my friend stock did you know at the end of the parabola there were stocks that were starting to break down um starting in mid99 and uh and not following generally uh the u I think Amazon peaked in in the fall of 99 or summer of 99. Um so this has happened before. Um and and yet you know you can still see indices and and certain sectors continue to race to uh to all-time highs. But but as I indicated, you know, before the broader problem is is that the rest of the market ain't so cheap. So um slloshing around uh is is is moving, you know, companies around. I I I haven't looked at Apple recently, you know, Scott, maybe Scott knows. Is Apple back at 40 times earnings, 50 time I mean something something like that non-rowing earnings. I think >> it defines what you said. It's a it's a mature company being priced as a growth company. the you said something that fascinated me that when I think about looking for shorting opportunities, you you naturally go to the stuff that's most appears to be most irrationally priced, but I find there's there's up there's risk to the upside that these irrationally priced pro uh stocks you could wake up and they can double. And whereas you you mentioned something fascinating that I hadn't thought about and that is a company like WD40. I don't I think the risk that you wake up and it's doubled is much lower than we wake up and find out that as irrational as it is that SpaceX has doubled. Do you find that in terms of your your own risk calculation that the the lesser risk to the upside of some of these stocks that these mundane stocks that have risen with all with the tide? Do you find that those in fact create in your view better shorting opportunities than some of the names we talk about? >> To tell you how bifurcated I am, I have both in the portfolio. How's that? So, >> right. Right. I have some some companies that just are are just simply overpriced by any kind of traditional corporate finance metric by by 100%. And generally those stocks, you know, have they're not going to double on you overnight. And generally they've been what what we call pretty good alpha shorts, right? They've been flat for years as the market has gone up. Um then you have the hopes and dreams stocks, right? and and and for the hopes and dream stocks, you need the market to help you out, right? You need the stock market to go down and retail investors to actually lose money. And that's when the hopes and dream stocks go down 90%. Um, you know, WD40 is not going down 90%. Um uh but but but the hopes and dream stocks really are are are the ones that that you know have the most risk and should therefore be sized accordingly in your portfolio at smaller positions or via puts or you know variety different ways you can express your view um without taking um inherently unlimited risk uh that you have on on a on a classic short position. So there's there's there's a few ways we figured out how to do that after 40 years. But um but look, you can't you can't avoid it. And those types of names are the ones that excite retail people. I would take you back just a few years when we were short similar kinds of things. um like Pelaton and Beyond Meat and uh it wasn't so long ago that those stocks were up 10x before they dropped 90 95x. So it's a it's an exciting game and and and mad. >> So I I want to double click on the idea of the mechanics. So SpaceX comes out at 80 times revenues, it goes to 120 times revenues. and call me a boomer. I just I just can't I can't wrap my head around that. And so I think, okay, this is an opportunity to short it. And I think, well, I know what I'll do. I'm I'm not a sophisticated investor around shorting. I'm going to go buy puts. And what I find out is that puts are really expensive. That word is out that this might be overvalued. And then I think, well, okay, I'm going to sell calls. That creates its that has its own inherent risk, right? What you guys look at every which way but loose to express a viewpoint in the most advantageous way in terms of risk-to-reward recognizing the market's pretty good at calibrating stuff. But what mechanics around expressing a viewpoint around a stock being overvalued is in your view your optimal means of expressing that viewpoint. How do you go and you how does Jim Chenos go short in what you think is the most thoughtful risk adjusted uh way? >> Well, again, we we beta adjust our portfolio number one. So, so really highly volatile situations like a SpaceX or whatever will be very small positions relative to to a a core position that that might be much greater. That's number one. and and a portfolio of 40 names goes a long way of diversifying you particularly if you're in things like WD40 or whatever. Um you you you diversify away a lot of that idiosyncratic you know uh short side risk on the upside kind of you give away uh the potential reward as well. So, it's it's an alpha game on the short side. And the idea is you find enough enough really bad business models that uh that that the one or two that are going to just be devil you like Tesla did for us in 2019 and 2020. Uh and by the way, Tesla Tesla was a two to 3% position during that period for us. And you know, and we just had to keep cutting it back because it just kept going up and up and up and up. and to keep it at two or three percent. So you have to you have to do use dynamic risk mitigation as well. If something's going against you on the short side, you can't just let it run. You have to trim it to keep it within your risk parameters. And and the same thing on the downside, you have to add to it. So there's a lot of paradoxes in the short side, and that's that's the biggest one. um things that go against you become bigger and things that go your way become smaller. It works u uh against you in an individual way. However, in a portfolio of 40 names, you know, you're always going to have, you know, names that are working, names that aren't working, and most of them just mcking about. So, it's a matter matter of structuring the right portfolio, not being too concentrated in one area like AI. Um, you know, we have a number of AI shorts. It is not an AI short fund. Um, you know, it's we're in all kinds of diverse consumer industries, financials, all kinds of things. So again, trying to for our clients just build a portfolio that makes the most sense for business models that just inherently are unprofitable or will never be profitable or about to be unprofitable and and then combine it with the right passive indices on the other side. Um so a SpaceX the hedge against the SpaceX is different as versus the hedge against the WD40. So it works on the asset side of the balance sheet too. The tone I'm getting from you that's surprising to me is I always think of Jim Chainos as like a maverick cowboy like taking extraordinary risks sort of the the Bill Aman con you know you're concentrated if you have conviction and if you're not you don't have conviction and what I hear from you is something we talk about a lot and that is no one individual is bigger than the market and the key is diversification and you sound quite frankly just like a very thoughtful I don't want to say conservative ative but tempered, you know, hedge fund manager. Have you always been like that or as you as you've gotten older and have registered, you know, idiosyncrasies of the market, you've become a little bit more measured and recognize that, okay, let's have 40, not not not four. Have you changed over time or is the perception of you being a maverick a little bit outdated? >> We were cowboys from 1985 to 1995. We ran much more concentrated, ran ran on margin and made a fortune from 85 to 90 1990 91 and then gave a lot of it back from 91 to 95. And um we had a client who was a fantastic client of ours for 20 years. They came to us and said, "Well, why don't you just run this hedged for us and uh and don't use don't use margin and and be less than 100% invested and we'll we'll take the the long side of the portfolio and we'll judge you accordingly, i.e. on an alpha basis." And that changed our business model overnight. And so really for the last 30 years um we have been running portfolios that are much less concentrated than people think. I know if you go on to Twitter people would think that I'm only short Tesla and like three other stocks. And uh of course I just I like to to write about Tesla and three other stocks, but we are short 40 names um and in various levels uh well below 100% invested and hedged. So we're we're much more conventional in that respect than I think people think and and you thought. >> I think our listeners are probably interested in knowing what some of those names are. Before I move on, could you share some of those names that you're short on? >> Well, I again, we we we've written about a number of them on public and public forums on on some of them that I just find highly questionable like like the Neoclouds um and Mr. Musk's two companies. >> Both Tesla and SpaceX are in that. >> Tesla and SpaceX. Yes. Yes. I prefer my CEOs to have a a a more a more shall we say strengthened relationship with the truth. Um um we and then for years and years we were short we were short a significant amount of the portfolio in China um which we aren't anymore. Um, and that that kept us in pretty goodstead from 2010 to 2020. Um, because of just how crazy that market is and how crazy that economy was um, based on real estate and um, and uh, that's now completely reversed and that trade has moved on. Um, but it's uh it it's it's important to remember this doesn't always just happen here. We'll be right back. And for even more markets content, sign up for our newsletter at profgarkets.com. We're back with Profy Markets. One of the the my favorite addages in shortselling, which I feel like just sums it all up, is that the market can stay irrational longer than you can stay solvent. And I find that to be an important point. And my takeaway is that the name of the game of shortselling isn't actually to be correct. It is to know when the market will agree with you that you are correct. And to me, those are two very, very different games. And I feel as if it's sort of under discussed when it comes to short selling. I feel this personally because a lot of the content that we talk about on this show is look at all of these bubbleicious trends that we're seeing in the market and then everyone says yeah but the market's going up. So I guess how do you think about that problem and how do you do you agree with my takeaway uh that it's actually about timing >> after 40 years. I will make one observation about that statement and and that is I tend to hear it right before the bulls are the ones that become insolvent. Um, so it's uh you have to be a little bit careful when people say, "Well, yeah, of course I I you know, prices are crazy, but so what? They can get crazier." And and and at that at that point, the bears have already taken their pain and they've left the field or reduce their risk or whatever. And it's usually the the unsophisticated investor who's on margin who's about to get killed. But setting that aside, it gets back to the point of portfolio construction and diversification and and there's just lots of businesses you can analyze. Um, and Scott knows this better than than than me or you and that that just make no sense, right? where the just the returns aren't there, the returns will never be there, a dream is being sold or the returns are below the cost of capital and they're using debt to to to finance it or what have you. And the failure rate in business is quite high. I mean, most companies fail. Um, you just have to avoid the ones the the 2% that you know not only prosper but but go on for 50 and 60 and 70 years because that's where people make most of their money on the long side via indices. It's the successes and and most companies fail. So again, if you watch your risks and mitigate your risks and avoid the uh the 100x's, um generally you can do pretty well on a diversified hedged short portfolio. for a listener who's hearing this and is in total agreement with you on the risks in AI, some of the problems and some of those names that have just gotten flatout overvalued over their skis. What should they actually do in their investment portfolio? Like is this the moment where you I mean do you do you sell anything? Do you go short anything? What would be your advice? One thing I would just tell investors is if you have a portfolio full of companies that are based that that aren't going to be profitable for five years, you know, you might want to start trimming those, right? If if because predicting the future, I found over 40 years is really really hard. And and the further out you go in predicting the future, the harder it gets. Um and and so if if you know your favorite sellside analyst is telling you, well the stock is cheap at only 40 times 2035 EBIT DA, you know, maybe step aside because it it really is that's where the that's where the blowup risk in your portfolio resides. um in terms of and there's lots of those companies right now where because of AI whatever they're being built literally as castles in the sky based on 2030 or 2035 you know hopes of profitability and they're not cheap on those metrics. So, I think if if you can find companies that are doing well now, are making profits now, will probably make more profits if the boom continues, you'll generally be in goodstead than buying, you know, a Bitcoin miner that's losing hundreds of millions of dollars, but is telling you they're going to make a dollar a share in 2030 and the stocks at 60. That's one practical thing I can tell investors. at this point in the cycle, you should be sort of pruning your portfolio of those stories. >> What about investing in index funds at this point? Because I think that's sort of the classic safe move when it comes to equity investing. But to your point, a lot of the names in the S&P are overvalued. There has also been this massive influx of passive investing which arguably might be propping up a lot of these names and it's generally expensive. I mean, is investing in the S&P either the equal weight or regular S&P, does that hold more risk at this point than it did before? >> I own it. So, >> I'm not the one to ask because I've got I've got these 40 radioactive companies against it, right? So I'm probably not the right person to say even though I think it is expensive, you know, I own the indices, >> which is one of the dilemmas for for basically everyone. I mean, you'd be hardressed to find any investor who isn't doesn't have significant exposure to the S&P. But then perhaps many of us are also agree as you do it looks looks pretty expensive, which puts us in a tough spot. But again, it's hard to time the market and and most investors, you know, should have beta in their portfolio. Most investors should be exposed to the stock market. It's just a matter of how much and where and what your risk to tolerance is. But I would never tell anybody, you know, a young investor or a mid a midlife investor, you know, get out of the stock market because it's expensive. I I have no idea. It might get more expensive as we discussed. you discover something, you think, "Okay, there's just way more risk to the downside than risk to the upside. We've discovered something." You that's half, it strikes me that's kind of half the battle because then what you want is to ensure that other people discover what you've already found. And you have been very adept at you make these, you do research, you go on media. Talk a little bit about how structured or planned. Do you have a system for helping? You're arguably the most famous short seller in the world. So, you clearly have an ability. >> Scott, that's a very low bar. As an old partner of mine, you say that's like being called the toughest guy in France. >> I'll come back to that because what I will say is I think a lot of that is fear of shame. And that is I put out a post I think five or six years ago where I said OYO and Snap and Weiwork were just dramatically overvalued. And I have never seen that kind of push back, anger, character assassination, saying I'm an evil person as I registered from the the valley who had all, you know, marked their portfolios. I I just couldn't get over it. It's as if I said that their parents were war criminals or something. I've never So, I think a lot of a lot of what you endure, quite frankly, is you have to have thick skin because you can you can lose a ton of other people's money promoting a stock, but God help you if you start posting a stock. You know, everybody, it feels like what I've I can't believe the hate you get and when anyone questions a stock, it's like it's almost like it's countercultural. You're not you're being non-patriotic. But Jim, where I was headed with this before I started feeling sorry for myself was was what did does your firm have a a structured approach in investment capital in terms of your own time and money around getting the word out? What is your media strategy around your favorite shorts? >> There is no media strategy other than doing occasional podcasts and and and my social media account on X. Um and and and again, we try to just point out things that are public. Um and and our opinions on things that are public. That's what makes prices, right? People's people's opinions about facts. But you're right, there's an asymmetry there that is that is completely hard to ignore. Um that that that if you impugn a company that people own, they take it quite personally. Uh I I went through that and and you you did it in Weiwork, which I to this day I still can't believe still came public, but uh because we we got shorted on the IPO, but in the uh the the post GameStop era, you know, we were we were pretty publicly short AMC and uh and and you know, the the AMC apes um were were quite the uh quite the group. And one of my rules is if any stock has a community, it it automatically it merits a look on the short side, you know. Um but but but but we went through it all again last year in in what was maybe the greatest classic arbitrage trade I've ever seen in my life, which was of course um being long Bitcoin and being short Micro Strategy. At its peak, there was an $80 billion difference in the value of Micro Strategy versus the value of its Bitcoin holdings, which you could easily hedge and you could easily short the Micro Strategy component of it and earn a full short rebate. And I I've never seen I mean I remember the threecom palm spin out back in 2000 and a variety of other sort of classic arbitrageages that were interesting and maybe were a couple billion dollars of that were hard to implement by putting on the short leg whatever. But this was $80 billion in December of 2024 and you could do it literally as much as you wanted. And the unbelievably the company helped you out by selling a billion or two billion of common equity every week to to do to close the spread. and and the vitrial we got online for for challenging the genius of Micro Strategy and and creating this Bitcoin treasury company that was a perpetual motion flywheel was just I think one for the efficient market hypothesis academics to study for um for a while because it should never have existed. So you you shorted Enron in 2000 before it went bankrupt and it seems that I mean there are there are companies where their multiples have gotten too high there's too much speculation too much euphoria and those multiples must come down and then there are companies which are either fraudulent or their businesses don't work or they are at risk of bankruptcy. Uh, Enron was one of those companies and you were right about it before anyone else. I guess the question becomes, you know, yes, you might see a few companies that are doing something shady or their business models don't work, but the logic question is, is that indicative of a larger problem um that could bring the markets down? It's one of the themes of the course on the history of financial market fraud I teach um and that the fraud cycle follows the financial cycle with a lag and the longer the financial cycle goes on uh the more amount of fraud is ultimately uncovered on the down cycle. So I've already dubbed this the golden age of fraud. Uh, and I suspect that when we're on the down part of this cycle, um, the bodies will float to the surface as they always do. But remember, the other the the correlary to that is is is the harshest prosecutor and the staunchest defense attorney of a company is its stock price. Nobody nobody goes after frauds at all-time highs. um they only go after them uh after investors have lost money because these kinds of things are political and and and the resources to prosecute corporate fraud are political. Um, and it wasn't until Enron and Worldcom and Tao and others had collapsed in O2 that the public, you know, demanded scalps because it wasn't the fact that they overpaid for lots of companies and lost money in the stock market. It's because these were corporate crooks. And I think we will see the same uh same thing happen uh in this cycle except with with the possible uh exception of the fact that a lot of these guys might get pardoned first. >> Can do a whole other podcast on that. Um I'll I'll start to wrap us up. Would you do you have any advice for young investors? Um, I mean, you seem to be very good at spotting BS in general. How do you do that? And what advice would you give to young people who are looking to build out their portfolios? >> Well, I mean, again, I I think we've already talked about some of it. I keep keep it passive. Um, it it it's it's tough to get into the weeds with the professionals. It's hard enough to make money really digging into these companies and trying to figure out what they're worth. Um, and and most professionals don't add value doing that. So, as an amateur doing it, you're still probably better off keeping your cost down and saving as much as you can and just putting it in the market at a young age. That's the that's the simple and it may sound trit, but it's the right advice. Um, and and if you want to play around with some of your capital as a young investor and and and you know, chase a hot story or or or put money on on something that you think is uh, you know, is is the next Nvidia, you know, go to it. You can take the risk, but don't do it with all your capital. And that's what I find most young investors right now are way too concentrated. they own one or two or three stocks and and and are betting everything on them and when things go wrong it's hard to recover from that. Uh so just take a small part of your portfolio and and go chase SpaceX or whatever you know whatever you think might be you know mining asteroids 10 10 years from now but with the bulk of your capital you know put it put it in index funds and uh and just let it grow. Jim Chenos is the founder and managing partner of Chainos and company formerly known as Kinos Associates, the world's oldest exclusive shortselling investment firm. Jim launched the company in 1985 to implement investment strategies he uncovered while beginning his Wall Street career as a financial analyst with Payne Weber, Guilford Securities, and Deutsche Bank throughout his investment career. Jim has identified and sold short the shares of numerous well-known corporate financial disasters. Jim has testified before Congress and provided comments to regulations proposed by the US Securities and Exchange Commission and the Financial Services Authority in the UK. He is currently a lecturer in finance at both the Yale School of Management and the University of Wisconsin School of Business where he teaches a popular class on the history of financial fraud. Jim, we really appreciate your time. Thank you. >> My pleasure, guys. Thank you. Scott, what did you think? >> Well, he's definitely a a legend. When they talk about when they talk about finance and investing in this era, I I think no book would be complete without talking about Jim Jim Chanos. What struck me was quite frankly, he's just more reasoned and and measured. And I mean it sounds like he's running a hedge fund that is what really well diversified, big on the long side with perhaps more thoughtful or robust hedging as opposed I'm not sure describing him as a short seller is an accurate description at this point. Uh because he acknowledges that the markets go up and you want to be in the market. But a lot of the advice he gives to young people, quite frankly, it's the exact same advice we give. Be diversified, be in the market, low cost, don't go too big on any one thing. don't be too concentrated. But I was struck at how I would have thought he was a little bit more quite frankly cavalier um and pounding the table on how insane some of this stuff is. He just struck me as very measured and for lack of a better term very adult. >> Yeah, I think that's exactly right. I mean I I want to invest in his fund. >> Yeah, it sounds like a good fund, right? >> I mean there's not one thing that came out of his mouth that I don't agree with. Um, literally every everything he said I from from what he's short on to what he's long on to the fact that we you don't have much of a choice than to invest in the S&P and the fact that he recognizes like yeah technically I'm I'm long that it can be it can be expensive but that doesn't mean you go out and sell your sell your S&P. I mean, you you you take the draw down, but then you recognize that over the long term, it's going to go up and to the right. And then you also recognize that there are some bags of as well out there in the market. And those are the companies that you can go short on. And I agree with all of his picks. I mean, the Neoclouds and Core Weave, Nebius, like I I I'm I'm just I I want to invest. Yeah. the the the piece of data that buttress what we're talking about is that if you believe social media, you'd think that he mortgaged his house and and levered up, you know, 3 to one to just go short Tesla. And what he said that I thought was illuminating was Tesla's never been more than 2 or 3% of his portfolio, the short on the short side. >> And he had to trim it down as it kept on rising. And yeah, by the way, Tesla is getting crushed. And and something I pointed out on social media, if you invested in Tesla in November of 2021, you would be down at this point around 20%. So having there's a little caveat there, which is it was it's been extremely volatile throughout it. But what I'm a little bit sick of hearing is this idea that Tesla has been this roaring stock that has just crushed over the past 5 years. Actually, it hasn't. it has been extremely volatile and depending on when you invested, you might be significantly down on that position over a long period of time. Just want to put that out there because I know that you've been short. >> Well, you know, I never like to say anything negative about Elon Musk, so I'm just going to keep quiet. >> Fair enough. 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