Lessons in Short Selling: Why Jim Chanos Targeted Enron

I saw this testimony, delivered to Congress February 6, 2002, by Jim Chanos on his decision to short Enron before it collapsed, posted over at John Chew’s Case Study Investing. I enjoyed reading it and thought it was worth commenting on as a kind of basic guide to short-selling– why and how. This testimony is a Warren Buffett-style (and quality) lesson on short-selling fundamentals.

How To Identify A Short-Sell Opportunity

Kynikos Associates selects portfolio securities by conducting a rigorous financial analysis and focusing on securities issued by companies that appear to have (1) materially overstated earnings (Enron), (2) been victims of a flawed business plan (most internet companies), or (3) been engaged in outright fraud.

Three key factors to look for in a short-sell:

  1. Overstated earnings
  2. Flawed business model (uneconomic activity)
  3. Fraud

As with the Enron fiasco, Chanos first became interested when he read a WSJ article that discussed Enron’s aggressive accounting practices. Aggressive, confusing, archaic or overly technical accounting practices are often a potential red-flag that could identify a company which is not actually as profitable as it appears to be to other market participants. When this profitability if revealed to be illusory later on, a catalyst is in place to galvanize investors into mass selling.

Another factor which can create an opportunity for a short is when the company has a flawed business model which essentially means the company is engaged in uneconomic activity. Short of government subsidies and other protective regulations, the market place tends to punish uneconomic (wasteful, that is, unproductive) activity with the tool of repeated and mounting economic losses until the offending individual or firm’s resources are exhausted and they must declare bankruptcy and liquidate their assets into the hands of more able owners. Chanos gives the example of tech bubble companies which never managed to achieve operating profitability– their business models were nothing more than exciting ideas, unable to overcome the reality check of achieving business profit.

The last type of short Chanos describes is general fraud– a company claims to own assets it does not own, or it is subject to liabilities and debts it has not disclosed, or there is an act of corruption or embezzlement amongst employees or managers of the business. Recent examples could be found in the growing “China short” sub-culture of financial research and hedge fund activity, such as the Sino Forest company which did not have thousands of acres of productive timberland it claimed to own.

The Enron “Case Study”

Returning to the Enron example, Chanos discloses three suspicious facts he and his firm uncovered through perusal of public financial disclosures that got them thinking about shorting Enron:

The first Enron document my firm analyzed was its 1999 Form 10-K filing, which it had filed with the U.S. Securities and Exchange Commission. What immediately struck us was that despite using the “gain-on-sale” model, Enron’s return on capital, a widely used measure of profitability, was a paltry 7% before taxes. That is, for every dollar in outside capital that Enron employed, it earned about seven cents. This is important for two reasons; first, we viewed Enron as a trading company that was akin to an “energy hedge fund.” For this type of firm a 7% return on capital seemed abysmally low, particularly given its market dominance and accounting methods. Second, it was our view that Enron’s cost of capital was likely in excess of 7% and probably closer to 9%, which meant, from an economic cost point-of-view, that Enron wasn’t really earning any money at all, despite reporting “profits” to its shareholders. This mismatch of Enron’s cost of capital and its return on investment became the cornerstone for our bearish view on Enron and we began shorting Enron common stock in November of 2000.

Chanos essentially did a competitive analysis on Enron and concluded that Enron was underperforming its competitors in the energy trading arena, despite large size and market dominance. He also concluded that its returns appeared uneconomic because they did not cover costs (capital), implying the company was  consuming capital rather than generating it.

We were also troubled by Enron’s cryptic disclosure regarding various “related party transactions” described in its 1999 Form 10-K as well as the quarterly Form 10-Qs it filed with the SEC in 2000 for its March, June and September quarters. We read the footnotes in Enron’s financial statements about these transactions over and over again but could not decipher what impact they had on Enron’s overall financial condition. It did seem strange to us, however, that Enron had organized these entities for the apparent purpose of trading with their parent company, and that they were run by an Enron executive. Another disturbing factor in our review of Enron’s situation was what we perceived to be the large amount of insider selling of Enron stock by Enron’s senior executives. While not damning by itself, such selling in conjunction with our other financial concerns added to our conviction.

Importantly, Chanos notes that it was not the insider selling alone, but within the context of other suspicious activity, that concerned him. Often executives and insiders sell for personal liquidity reasons (buying a new home, sending kids to college, buying a boat, etc.) and some observers necessarily conclude this means foul play or that the insider knows the Titanic is about to hit an iceberg.

More common with smaller companies where management and ownership are often synonymous, related-party dealings are always something to be skeptical about and almost never are harmless in the context of multi-billion dollar public corporations.

Finally, we were puzzled by Enron’s and its supporters boasts in late 2000 regarding the company’s initiatives in the telecommunications field, particularly in the trading of broadband capacity. Enron waxed eloquent about a huge, untapped market in such capacity and told analysts that the present value of Enron’s opportunity in that market could be $20 to $30 per share of Enron stock. These statements were troubling to us because our portfolio already contained a number of short ideas in the telecommunications and broadband area based on the snowballing glut of capacity that was developing in that industry. By late 2000, the stocks of companies in this industry had fallen precipitously, yet Enron and its executives seemed oblivious to this! Despite the obvious bear market in telecommunications capacity, Enron still saw a bull market in terms of its own valuation of the same business — an ominous portent.

Again, Chanos and his firm were able to see the Enron picture more clearly by comparing it to the competitive landscape as a whole. How much validity does a firm’s claims possess when looked at in the context of the wider industry (or economy), rather than just its own dreams and/or delusions?

Throughout the rest of the testimony, we learn a few other interesting details about the development of his short thesis concerning Enron: the use of Wall Street analysts for sentiment feedback, the analysis of additional qualitative data for confirming target company statements and the use of conferences and investor communications networks to spread an idea and generate critical investor momentum.

Chanos also shares this helpful Wall Street axiom:

It is an axiom in securities trading that, no matter how well “hedged” a firm claims to be, trading operations always seem to do better in bull markets and to struggle in bear markets.

An important reminder for considering all business strategies which require positive momentum (ie, Ponzi schemes) to work.

More telling than insider selling, in Chanos’ mind, is management departures, change ups and board reshufflings:

In our experience, there is no louder alarm bell in a controversial company than the unexplained, sudden departure of a chief executive officer no matter what “official” reason is given.

In the case of Enron, the executive to depart was Enron CEO Jeff Skilling who was considered to be the “chief architect” of the company’s controversial trading program. His absence meant not only that Enron was potentially a ship without a rudder, but that the captain had found a leak and was jumping overboard with the rats before everyone else figured it out.

In Summary

To summarize the lessons of the Enron case, good shorts usually involve at least one or more of the following: questionable earnings, uneconomic business models and/or fraud.

Accomplished short-sellers look for clues suggesting the presence of the above factors by reading between the lines in public financial disclosures and major news stories. They use social signaling clues like surveying Wall Street analysts and other market participants to gauge sentiment, which is a contrarian tool for discovering whether controversial information they are aware of is likely priced into the market or not. They engage in competitive analysis to judge whether the target firm’s claims are credible and reasonable. They watch the activity of insiders, specifically unanticipated departures of key staff, for confirmation of their thesis. They anticipate stressors to a firm’s business model which might serve as catalysts for revealing the precarious state of a firm’s business to other market participants.

Finally, and perhaps most importantly, they never take the price of the shorted security going against them as evidence that they are wrong and they add to their position as their conviction rises with new evidence of weakness or trouble for the target firm.

As Ben Graham would observe, in the short term the market is a voting machine and it’s common for those who are responsible for a fraud or dying business to cheerlead the market out of desperation. And as Chanos himself observed,

While short sellers probably will never be popular on Wall Street, they often are the ones wearing the white hats when it comes to looking for and identifying the bad guys!

Geoff Gannon As Kierkegaard: Leap Of Faith Net-Net Investing

Net-Net guru Geoff Gannon breaks down the secret ingredient to successful Net-Net investing using the example of one of his recent Japanese Net-Nets which received a buyout offer:

What special skills did earning this 130% return require? You didn’t need smarts. The key information – the cash and securities per share – was publicly available. Anyone could find it on the Internet. And the gap was egregious. If you looked at hundreds or even thousands of stocks – in Japan and around the world – Sanjo would’ve popped as a Ben Graham bargain.

No. You didn’t need smarts. You didn’t need any real insight or appetite for risk or anything like that. You just needed to embrace uncertainty.

Sanjo was certainly worth more than 200 yen a share. A lot more. No reasonable person would deny this. But most reasonable investors probably wouldn’t buy the stock. Why? There was no catalyst. No reason for the stock price to rise. Sanjo is a Japanese company. It’s a micro cap. Stocks like that don’t get bought out.

As it turns out, Sanjo’s largest shareholder had been in “intensive discussions and price negotiations with management over the last year.” So there was a catalyst. It’s just that nobody – except the company’s biggest shareholder and its president – knew about it.

That’s the uncertainty in net-nets. Most of the best net-nets have this certain/uncertain duality. It is certain the stock is selling for less than it’s worth. It is uncertain how the stock will ever sell for what it’s worth.

Net-nets are half about knowing and half about believing. They are part knowledge and part faith. If you can’t accept both of those ideas at once – you’ll never be a good net-net investor.

You can only know the stock is selling for less than it’s worth. You simply have to believe the stock will someday sell for what it’s worth.

This is probably also why Net-Nets are best bought in baskets and groups. You usually don’t have enough of a clue of what the catalyst will be to concentrate your holdings into just one company.

So it isn’t necessary to be super smart in your analysis as long as you are super smart in your actions. The big problem for a lot of would-be net-net investors is not bad analysis. It is bridging the gap between analysis and action.

And this is the key point to make about net-nets that earn low returns on equity. You don’t have to see how mean reversion will occur for it to occur.

The future does not care if you can envisage it ahead of time. It comes whether you see it or not. The good news: You can bet on things you can’t imagine.

Close your eyes and jump!

Thorsten Polleit: Deflation Will Not Be Tolerated

Over at the Mises Blog, Frankfurt-based business professor Thorsten Polleit explains the deflationary forces active in the banking system following the 2008 crisis:

In “fighting” the credit crisis, the US Federal Reserve increased US banks’ (excess) reserves drastically as from late summer 2008. As banks did not use these funds (in full) to produce additional credit and fiat-money balances, however, the credit and money multipliers really collapsed.

The collapse of the multipliers conveys an important message: commercial banks are no longer willing or in a position to produce additional credit and fiat money in a way they did in the precrisis period.

This finding can be explained by three factors. First, banks’ equity capital has become scarce due to losses (such as, for instance, write-offs and creditor defaults) incurred in the crisis.

Second, banks are no longer willing to keep high credit risks on their balance sheets. And third, banks’ stock valuations have become fairly depressed, making raising additional equity a costly undertaking for the owners of the banks (in terms of the dilution effect).

The bold part in effect represents Mike Shedlock’s argument for why we will see sustained deflation due to economic forces. He insists that the only way mass inflation or hyperinflation could occur is if the political forces in society decide to create it.

Interestingly, Polleit agrees:

The political incentive structure, combined with the antideflation economic mindset, really pave the way for implementing a policy of counteracting any shrinking of the fiat-money supply with all instruments available.

And the shrinking of the fiat-money supply can be prevented, by all means. For in a fiat-money regime the central bank can increase the money supply at any one time in any amount deemed politically desirable.

Even in the case in which the commercial banking sector keeps refraining from lending to the private sector and government, the central bank can increase the money supply through various measures.

Polleit says mass inflation can be produced by a central bank policy of quantitative easing (direct monetization of existing and newly issued government debt) and that in fact this is the policy choice already being observed with regards to the actions of the Federal Reserve and European Central Bank.

Deflation will be incredibly painful for the political and financial classes. But mass inflation is not necessarily a policy that will delight them either. On each side lies disaster and it’s hard to make the case that any particular disaster is more preferential than the other from the perspective of the political and financial interests. And surely, the absolute size of the problem and the precariousness of the perch currently enjoyed seems to dictate that an attempt at finding an “easy middle” ground will fail this time around.

John Chew of “csinvesting” Responds

John Chew, publisher of “csinvesting“, which it only took me about two weeks to realize stood for “Case Study Investing”, was kind enough to respond to a personal e-mail I sent him by publishing his reply on his blog.

The post itself is a great reference, like everything on John’s blog, and I wanted to link to it here to make sure I always can find the link again for future review. A few of my favorite sentiments are below:

You never “master” investing which is why the journey is fascinating.

Rational humility, the moment you think you know it all, you learn about a shortcoming you never knew you had.

Investing really is constant applied learning which is cumulative.

“Compounding” returns to one’s investment of time and energy in learning the trade!

Foxes are eclectic, viewing the world through a variety of perspectives, with no allegiance to any single approach.

Don’t box yourself in with silly mandates or addiction/devotion to one strategy or style. Markets are dynamic and the best strategy is not the same at all times and in all places. The natural laws of reality dictate that basic truths and financial mechanics will always be active and provide general boundaries within which a rational, conservative investor must operate (such as margin of safety and the principle of buying value at a discount), but even Ben Graham in The Intelligent Investor clearly demonstrated that different markets provide different opportunities: sometimes it is the opportunity to buy outstanding businesses at a discount, sometimes it is the opportunity to buy certain businesses for less than their liquidation values, sometimes it is the opportunity to take advantage of special situation arbitrage, etc.

Few great investors are overnight successes. Many have to overcome failure.

It’s unreasonable to expect perfection because we are not omniscient. We will misstep and occasionally even fall. The art is in finding ways to take tumbles that do not break your leg, back or skull, and learning to pick yourself up again.

Money is about freedom, not consumption.

Money is the ultimate form of potential opportunity. It helps us with, “What can I do?” and not, “How much can I have?” Life is dynamic and it is lived best through abundant action, not abundant accumulation (static).

[Great investors] enjoy the process, not the proceeds.

We have a relative great deal of control over the process we employ, but relatively less control over the proceeds that result from that process. We are not omnipotent– life is volatile. There will be disappointments. Self-esteem and self-satisfaction are built on acting the best way we know how, not achieving the best we know of at any given moment. In life, a journey is guaranteed, a destination is not. Best to learn to savor the ride as it’s all you’ve ever got until it’s over.

Ever wonder why a steel company fluctuates more in earnings and price than a beverage company? The distance from the consumers in terms of time and production structure. Look at your watch. How long did it take to make? Two hours? Well, who mined the sand to make the glass? Who mined the metal to make the case? Who killed the cow to make the leather wrist-band? And who planned all the production? Perhaps your watch took two years from the moment of assembly to the first production of the materials.

A great application of Austrian economics to investment analysis!

Good reminders, all.

A Future Full of Urban Gulches

Zach Caceres over at Let A Thousand Nations Bloom has penned a rebuttal to a critic, called “In Defense of Urban Life“:

Urban life brings people together for mutual aid, and it opens wealth-generating possibilities for specialization and trade. It can integrate otherwise contentious groups, and it melds culture together to bring about beautiful new hybrids of music and art. We shouldn’t write off cities because of a romanticized ideal of the pastoral.

Indeed. There’s more and it’s a good, brief apologia for the urban environment versus the un-urban (suburbia, rural, pastoral, wilderness) in terms of satisfying human needs and lifestyle preferences. He touched on it briefly but I believe it bears further emphasizing, much of the problems his critic and those like him cite about urban environments are caused by central planning and non-market regulation.

Pollution, economic exploitation, environmental degradation and destruction (a poorly defined term for an ill-premised concept, but even accepted at its face in this situation it makes some sense), resource “overuse”, all of these problems are caused by undefined or poorly defined property rights and arbitrary interference and dictates from governments and other political, non-market institutions.

The solution to society’s economic ills are free markets. And the solution to society’s habitat ills are free cities. More of the current paradigm of Ponzi city construction based upon uneconomic, unproductive government infrastructure, city service and land-use planning will surely doom us all. But free cities, organized voluntarily by the participants and outcomes of local and international free markets, are just as surely the salvation, offering nearly limitless density, technological innovation, economic opportunity and variety in lifestyle.

Imagine the high rise urban wonderland of New York City meeting the honesty, productivity and heroic excellence of Galt’s Gulch.

That’s the way forward.

Aswath Damodaran: What Is Private Equity All About? (#investing, #PrivateEquity)

NYU Stern corporate finance professor Aswath Damodaran has a good summary of the types of private equity investors that exist in the financial markets, how they add value through their corporate activism and what motivates them on his blog in “Private Equity: Hero or Villain?“:

Here is an indisputable fact. If you are a stockholder in a publicly traded company, the entry of a private equity investor into your stockholder ranks is good news, since stock prices go up substantially.

Overall, a useful post for anyone looking to understand the basics of private equity, just don’t pay too much attention to his naive suggestion that the political problem facing this country is potentially just “mismanaged” government.

What’s The Yield On Saudi Prince Alwaleed’s “Strategic” Twitter Investment?

Saudi Prince Alwaleed bin Talal has made a $300M “strategic” investment in Twitter, according to Bloomberg.com:

Alwaleed, who leads the 2011 Arab Rich List, and his investment company agreed to buy a “strategic stake” in Twitter, Kingdom Holding said today. A strategic holding means more than 3 percent, Ahmed Halawani, a Kingdom Holding director, said in an interview. That would give the San Francisco-based company a valuation exceeding $10 billion.

Alwaleed is described by Bloomberg as a businessman and an investor. But Alwaleed is a politician, not a businessman– he is a member of the Saudi royal family, and his capital and wealth are continually generated by the Saudi royal family’s political control over Saudi oil fields. Similarly, Alwaleed is an “investor” in businesses like Citi and Twitter in the same sense that the CIA “invested” in Google and Facebook– for information and for control, not for economic or financial profit.

If this is a challenging view to accept, let’s consider just this recent purchase of his Twitter stake from insiders. According to the article, an industry research group recently cut their forecast for Twitter’s 2011 ad revenue from $150M to $139.5M. What kind of value multiplier did Alwaleed “invest” in if he paid $300M for more than 3% of the company which is now valued at over $10B?

Let’s give Alwaleed the benefit of the doubt and say that Twitter’s 2011 ad revenue comes in at $150M. Let’s further assume that Twitter is a highly profitable company and 30% of their revenues drop down to the bottom line and become net profit. That’s $45M of net profit in 2011.

At a $10B market cap, Alwaleed’s investment was made at 66.6x Price-to-Revenues and 222.2x Price-to-Earnings. I should hope I don’t need to do the math for you to show what kind of growth expectations you have to factor into those ratios for them to make sense.

Now, ask yourself, have you ever heard of the “Best Investor In the Universe”, Warren Buffett, investing in companies at these kinds of multiples? Ask yourself, what kind of margin of safety does Alwaleed have here when paying so much for so little. Ask yourself, is it a credible idea that Alwaleed is truly a successful businessman and investor who has managed to grow his personal fortune to $19.6B (according to Wikipedia) since 1979 by investing at such high multiples?

Alwaleed “is a savvy investor and the hot thing in the IT world is social networking,” said Nabil Farhat, a partner at Abu Dhabi-based Al Fajer Securities.

Historically, how do even “savvy investors” fare investing in the latest “hot thing”?

As hinted at earlier, there is a more reasonable explanation for why Alwaleed invested in Twitter, why he has invested in Citi and News Corp., and why he invests in almost anything– Alwaleed is part of a political front and he makes investments as part of a political agenda. Politics is not an economically efficient system, it cares not for scarcity and cost in the economic sense of productive effort and opportunity cost. Political systems get their revenues from coercion, and they use economic resources as but another means to their arbitrary political ends.

Why did Alwaleed invest in Twitter? Because Twitter played an embarrassing role in the recent “Arab Spring” of revolutionary fervor across the Middle East this year and Alwaleed and his sponsors want to be in a position which allows them the knowledge and influence of the insider, of control. This is what is meant by the savvy Mr. Alwaleed’s “strategic” investment in a not-so-profitable social media favorite.

Why did Alwaleed invest in Citi? Because Citi is a centerpiece to the financial chicanery involving the global drug trade controlled by the CIA, the power-politics of world political intrigue and espionage and the dangerous, corrupt game of arms dealing and the financing of imperial military adventurism.

Why did Alwaleed invest in News Corp.? To control the news!

Let us not confuse legitimate businessmen and investors with political operatives and speculators any longer!

Flight Of The Permabulls?

Legg Mason’s Bill Miller, famous for being permabullish during the entirety of the world’s largest bubble of all time (essentially his whole career, when he kept catching his one card straight draw on the river with bailout after Fed-engineered bailout over and over again), is finally calling it quits (Bloomberg):

Bill Miller, the Legg Mason Inc. (LM) manager famous for beating the Standard & Poor’s 500 Index for a record 15 years through 2005, will step down from his main fund after trailing the index for four of the past five years.

Miller, 61, will be succeeded by Sam Peters as manager of Legg Mason Capital Management Value Trust (LMVTX) on April 30, which is the 30-year anniversary of the fund, the Baltimore-based firm said today in an e-mailed statement. Miller will remain chairman of the Legg Mason Capital Management unit while Peters will be chief investment officer.

Miller, a value investor known for his bullish views of the economy and stock markets, became mired in the worst slump of his career as he wagered heavily on financial stocks during the 2008 credit crisis. Value Trust lost 55 percent that year as the S&P 500 dropped 37 percent, including dividends, prompting a wave of withdrawals. The fund’s assets have plunged from a peak of $21 billion in 2007 to $2.8 billion.

Bill Miller is a living example of selection bias at work. Notice what happens when his coin-flipping strategy of “heads” stops working.

We’ll likely see more announcements like this from other “top stock pickers” of the past few decades in the coming months and years. Good riddance!

Whitney Tilson’s Terrible, Horrible, No Good, Very Bad Investment ($NFLX)

Whitney Tilson, famed value investor and manager of T2 Partners, has had a tumultuous and sordid affair with NFLX, a company he first failed to romance as a spectacular ever-rising short and which he now may very well fail to romance as a spectacular ever-cheapening long (Bloomberg):

Tilson had bet against Netflix from at least December, when he first wrote about shorting the stock, until February, when he disclosed to investors in a letter that he covered the short and was no longer confident that his investment thesis was correct. Tilson said he decided to buy shares today because he deemed them “cheap.”

“It’s been frustrating to see our original investment thesis validated, yet not profit from it,” Tilson, 44, said in a statement e-mailed from his New York hedge fund. “The core of our short thesis was always Netflix’s high valuation. In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it.”

Netflix plunged 35 percent to close at $77.37 in New York trading, its biggest drop since Oct. 15, 2004. The shares have declined 56 percent this year.

This is every investor’s worst nightmare and I am not calling attention to this to slander or heap ridicule on Tilson. Far from it– I don’t know if I’d have the cajones to go long a stock (at nearly 18x earnings) that I was previously trying earnestly to short.

That being said, let’s review this performance. If he started shorting in December he probably did it around $165-170/share. If he covered in February it was probably anywhere from $205-220/share. Let’s say $165/share short and $210/share cover. That’s a 27% loss.

The good news is the stock went as high as approximately $298/share, so he dodged that bullet. But then it plunged dramatically since then and is now trading at about $77/share. Assuming Tilson had just held his short (and kept making margins calls, or better yet, kept adding to it), he would’ve ultimately made a 53% gain!

What’s interesting about this? One, it would’ve taken Tilson nearly a year to be vindicated in his thesis. Value investors typically think of themselves as “long-haul” capital allocators. But in the world of shorting, time scales are compressed and a period like a year is more like a decade. A lot more seems to change. The moral of the story, perhaps, is to focus on shorts where you have identified an immediate, short-term catalyst that will cause the market to abandon its effort to push the stock higher. Simply recognizing a stock is overvalued doesn’t appear to be robust enough.

Two, investor psychology appears to be completely different between shorts and longs and with good reason. With a long, many value investors (like Tilson) invite the position to go against them, at least temporarily, rationalizing that this just makes it cheaper and easier for them to make money when their investment plays out. But with a short, where your potential loss is infinite, no investor ever has nor I assume ever will invite the position to go against them. Nobody ever says, “I hope the stock rises substantially from here because it just means another opportunity to short it more and make more money when it finally crashes.” Instead, many end up throwing in the towel, often at the worst possible moment.

Three, this episode demonstrates the need for humility. It’s possible Tilson will eventually make a good bet with his decision to go long NFLX. But if he doesn’t, he’s going to look doubly foolish, rather than singly. And, because he’s had a poor experience with this company once before, he risks making rash, emotional decisions about it in the future out of a subconscious effort to conquer his fear or slay the wild beast that marred him in battle once before.

If I was a big T2 investor, I’d be wanting to know what kind of safeguards Tilson and his team have put into place to prevent emotional bias from getting in the way of their analysis of NFLX going forward. And frankly, I’d have a hard time fighting my urge to tell Tilson to just leave the damn thing alone and reminding myself that I invest with him because I trust his judgment and if I were the expert I wouldn’t be paying him to manage part of my wealth.

The good news is Tilson is an experienced, grizzled value investor with an outstanding track record so even if he ends up totally boffing this one again it’ll likely be far from his undoing. For every potentially poor decision like this Tilson has demonstrated he can make many more superior ones and he doesn’t make the kind of levered, concentrated bets that could lead to a one-position wipeout that some of the less savvy figures like John Paulson have suffered in recent months.

Say what you will about value investors but one thing is for sure, they’re generally more prudent than the average bear, and I mean that metaphorically, not descriptively. Then again, this whole episode makes me wonder how Tilson defined his risk, then and now.