Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[Fact Checking]

I'd like to make a post about the kind of short Chanos is. I see him mentioned at lot here, and often in a very negative way, so I'd like to share my perspective as someone who likes the kind of investing he does.

If anyone has access to an hedge fund database and could provide actual perfomance numbers for his three funds - short only, long short, 190/90 - that'd make things more clear/interesting. Unfortunately I don't have that kind of access.

I realize this post is kind of misorganized; sorry. But I think it's helpful to understand what actually happens at a fund like his. I think this is the reason it's unlikely there's any sort of short conspiracy to make the stock go down. Very few people are as concentrated as someone like Spiegel, which manages a very very small fund.

Many already know what Chanos' business model is, but some don't - not the least because promoting your hedge fund to the general public is actually illegal.

Kynikos main product is a short only fund, that typically doesn't really make any money. Making money is not actually the purpose of this fund. The purpose of this fund is to not make money while being short. This short only fund typically has a max position of 2-3% per stock. What this means is that tesla going up or down by even 30% like it has recently occurred is not actually a big deal for a fund like this. That's less than 1% up or down for the whole short portfolio.

Making no money being short only is actually a lofty goal when you consider that picking 20 stocks by throwing darts at a list and equal weighting them, you will probably do about as well as the benchmark. If you were to do that as a short seller, you'd have made -20% in 2017, -12% in 2016, -23% 2019 YTD... the list goes on.

The product that is actually designed to make money is, like many other hedge funds, a 190/90 long/short fund. That means, roughly, that if you give chanos $1M, he will short $900K worth of stuff, and go long $1.9M worth of stuff. This product is actually 100% net long, like a typical mutual fund might be - but it has 280% gross leverage. The $1.9M worth of long stuff is usually just the US market; something like just buying $1.9M worth of SPY. The short book is the aforementioned short only fund.

You can't just go long the market with a 2x leverage, because events like the great financial crisis or the dotcom bubble are going to potentially wipe your fund completely. It doesn't matter how well you do in the rest of your investing career if you have a -90% year.

But if you have a short book, what happens with events like the great financial crisis? Well, you lose a ton of money on your http://nymag.com/nymag/features/52754/index.htmllong side, but you also make a ton of money on your short side. You might actually have your short book perform better than just shorting the market during these periods - after all, if your short book is about breakeven when everything else goes up, when everything else goes down your short book is probably going to perform very, very well. While you're exposed about 2x to the general trend of equities going up, you're still losing around the same amount of money (or less) during these events where equities go sharply down.

Finally, what would happen if 100% of Chanos' short book was Tesla (remember, Tesla is actually a small portion of that portfolio), and as we said he was 1.9x long SPY?

View attachment 474848

He'd still be doing just slightly less well than holding the market. (For what is worth, the same backtest started from 2016 has him about breakeven, but again it's not representative of his actual short book).

I hope this kind of post is OK and cleared up some confusion.

While what you outlined is true: Chanos makes money by being 190% long, 90% short, and thus he is able to capture 100% of long returns AND twice the volatility of the S&P - which makes it a valuable money making fund over many decades of fluctuations of the business cycle.

But the other important part you left out that Chanos & associates use passive long term investments and put almost all their intellectual effort into making the short book break-even (which is all they need).

Note the rumors and allegations of Chanos actively putting his hand on the scale and influencing public opinion against his "targets", like the infamous Fairfax incident, and his unethical relationship with Bethany McLean, Linette Lopez and who knows how many other financial journalists - which makes him a net negative force in society.

See these very incriminating messages from Bethany McLean that turned up in a lawsuit:

Tesla, TSLA & the Investment World: the 2019 Investors' Roundtable

Also see:

Jim Chanos: The Catastrophe Capitalist

"But the suit paints a different picture of Chanos’s trading tactics. Throughout the summer of 2006, Roddy Boyd, then a New York Post business reporter, published a series of critical pieces about Fairfax that alleged Enron-like dealings by V. Prem Watsa, the company’s CEO. The suit claims Chanos and Loeb told Boyd, who, like McLean, is a former financial analyst, that Fairfax was “the next Enron,” and that Chanos was a background source for his reporting. Both Boyd and Chanos deny the allegations."
​

All alleged indicators are that Jim Chanos is a dangerous parasite, who tries to actively make shorted companies fail, via carefully orchestrated disinformation and smear campaigns. For every Chanos lucky find of an Enron there's probably 5 other Fairfax Financial and Tesla targets that are innocent.

While there are honest shorts, please don't normalize what Chanos is doing ("short and distort") - he's not just a random bystander who is good at picking shorting targets - he is an active participant.

Also, if what Chanos allegedly does is even just remotely true, it's all illegal AF and he belongs in federal prison with dozens of counts of RICO Act violations, securities fraud and extortion - and once the feds are done with him, civil lawsuit damages would be awarded to his victims, totaling one or two orders of magnitude larger than his net worth.

 

[JRP3]

I just mean going short as an hedge and long with more leverage. I'm not a Chanos fan - I just know more or less how his fund works based on bits and pieces I've read. I don't know the history of what he actually shorted (apart from the fact that he's pretty vocally short Tesla, obviously).

You might be interested in this Elon Musk vs. Short sellers

 

[S3XY]

I'm afraid you are going to be disappointed. Expect a bog standard Cybertruck straight out of 2030. Standard features - bullet proof, amphibious with occasional flying capability.

I just watched Bladerunner (which takes place in November 2019) for the first time and there were many flying cars in it. Soooo, maaaybeeee?

 

[Fact Checking]

I just watched Bladerunner (which takes place in November 2019) for the first time and there were many flying cars in it. Soooo, maaaybeeee?

Yeah, I too think that the Pickup Truck might demo the "SpaceX Options Package" for the first time, with a couple of seconds of hovering capability. Not exactly a practical flying car, but impressive as hell.

 

[ReflexFunds]

I'd like to make a post about the kind of short Chanos is. I see him mentioned at lot here, and often in a very negative way, so I'd like to share my perspective as someone who likes the kind of investing he does.

If anyone has access to an hedge fund database and could provide actual perfomance numbers for his three funds - short only, long short, 190/90 - that'd make things more clear/interesting. Unfortunately I don't have that kind of access.

I realize this post is kind of misorganized; sorry. But I think it's helpful to understand what actually happens at a fund like his. I think this is the reason it's unlikely there's any sort of short conspiracy to make the stock go down. Very few people are as concentrated as someone like Spiegel, which manages a very very small fund.

Many already know what Chanos' business model is, but some don't - not the least because promoting your hedge fund to the general public is actually illegal.

Kynikos main product is a short only fund, that typically doesn't really make any money. Making money is not actually the purpose of this fund. The purpose of this fund is to not make money while being short. This short only fund typically has a max position of 2-3% per stock. What this means is that tesla going up or down by even 30% like it has recently occurred is not actually a big deal for a fund like this. That's less than 1% up or down for the whole short portfolio.

Making no money being short only is actually a lofty goal when you consider that picking 20 stocks by throwing darts at a list and equal weighting them, you will probably do about as well as the benchmark. If you were to do that as a short seller, you'd have made -20% in 2017, -12% in 2016, -23% 2019 YTD... the list goes on.

The product that is actually designed to make money is, like many other hedge funds, a 190/90 long/short fund. That means, roughly, that if you give chanos $1M, he will short $900K worth of stuff, and go long $1.9M worth of stuff. This product is actually 100% net long, like a typical mutual fund might be - but it has 280% gross leverage. The $1.9M worth of long stuff is usually just the US market; something like just buying $1.9M worth of SPY. The short book is the aforementioned short only fund.

You can't just go long the market with a 2x leverage, because events like the great financial crisis or the dotcom bubble are going to potentially wipe your fund completely. It doesn't matter how well you do in the rest of your investing career if you have a -90% year.

But if you have a short book, what happens with events like the great financial crisis? Well, you lose a ton of money on your long side, but you also make a ton of money on your short side. You might actually have your short book perform better than just shorting the market during these periods - after all, if your short book is about breakeven when everything else goes up, when everything else goes down your short book is probably going to perform very, very well. While you're exposed about 2x to the general trend of equities going up, you're still losing around the same amount of money (or less) during these events where equities go sharply down.

Finally, what would happen if 100% of Chanos' short book was Tesla (remember, Tesla is actually a small portion of that portfolio), and as we said he was 1.9x long SPY?

View attachment 474848

He'd still be doing just slightly less well than holding the market. (For what is worth, the same backtest started from 2016 has him about breakeven, but again it's not representative of his actual short book).

I hope this kind of post is OK and cleared up some confusion.

Long short makes sense as a de-risked investment strategy. Shorting stocks isn't inherently bad, however in practice it has become largely damaging to the global economy and short investors now often employ immoral or outright illegal methods. I know because I have met short hedge funds PMs who have actively bankrupted many companies using these methods.

In theory short investors should focus on shorting overvalued companies or fraudulent companies and this shorting will act towards correcting the valuation and/or raising awareness of the fraud.
However in practice many shorts have discovered it is easiest to make money by trying to actively bankrupt companies rather than just taking a view on valuation or independent facts. This is completely unrelated to their view of the company's true valuation and whether or not it is overvalued.
Liquidity crisis and bankruptcy is very often self fulfilling. People get worried that a company might go bankrupt so suppliers accelerate payment terms, customers fear to buy the products, banks stop rolling financing etc. This can make any company go bankrupt even if the only thing which makes them bankrupt is the fear of bankruptcy itself. There are very few companies in the world which couldn't go bankrupt within 6 months if many people started fearing it was possible.

Hence, the easiest way for short investors to make money is to create fear about a potential bankruptcy and hence cause a real bankruptcy. In terms of the supply demand balance of a traded stock, the act of shorting is equivalent to a capital raise which does not give a company any capital - this virtual share dilution (with virtual shares created as some shares are now owned by two people) acts to crash the stock price. This can cause a panic and the lower stock price can also make it more and more difficult to raise new capital. Shorts also often have close relationships with financial journalists who they use to spread fear and misinformation. They often combine this with unfounded accusations of fraud and use regulatory contacts (or pressure in the media) to encourage preliminary investigations to add legitimacy to these accusations.

The capital markets were invented to provide capital to companies who have potential to make positive long term cash flow (and hence have a positive valuation) but need more short term cash. This is where capital markets can add most value to the global economy. It can enable companies with opportunity for growth with a good return on investment to grow faster than they otherwise could do. This leads to increased job creation in the economy and reallocation of capital to companies that can spend it most efficiently. This access to capital can also allow stable or declining companies who still have long term value potential to bridge short term liquidity issues and hence prevent unnecessary bankruptcy and destruction of value and jobs.

Unfortunately it is these companies that can make the most use out of the capital markets that are the best targets for Shorts who are employing the confidence crisis strategy. Hence this massively disincentivises using capital markets where they are most useful. Cue the growth of private equity rather than public capital raises to turnaround companies in temporary difficultly plus venture capital rather than public markets funding companies that have growth opportunities beyond their cash flow.

In this interview Jim Cramer describes some of the short and distort methods he used to use:

 

[StealthP3D]

If Einhorn was smart ...

If pigs could fly ... then we could have a tasty alternative to chicken wings!

Sometimes the most audacious things turn out to be true. Sadly, neither of these things is true.

 

[Unpilot]

I just watched Bladerunner (which takes place in November 2019) for the first time and there were many flying cars in it. Soooo, maaaybeeee?

I was promised flying cars when I was young....I WANT MY FLYING CAR!!!!

 

[scaesare]

You guys talking about engine displacement reminded me of an old rule of thumb that was etched in stone:

There's no replacement for displacement.

So, what's the displacement of a P100D?

Rather than cubic inches, the unit of measurement for P100D displacement is space-time.

 

[EVNow]

Honestly, don't all long time TSLA bulls/supporters 'deserve' a private factory tour from EM more than Einhorn?

Musk apparently thinks long time TSLA bulls/supporters 'deserve' a private factory tour for Einhorn from EM.

If you think shorts like Einhorn are holding the SP back, it makes some sense.

But I'm not sure Einhorn is flappable. He seems to think there is some accounting fraud happening at Tesla (as an accountant that's all he can think of) - and unless internal accounting details are shows, he won't be satisfied.

One possibility is for Zach to ask Einhorn to submit questions which Tesla answers publicly. But, if Zach answers 10 questions, he may come back with 100 more.

 

[jbcarioca]

Note that short sellers do not exist in a vacuum - there's at least one former associate of Einhorn that our own @jbcarioca convinced to (apparently) go long TSLA:



...
(And I hope it wasn't Adam Capital, the big Brazilian hedge fund that went short TSLA... )

...
"Turning" David Einhorn would be a major coup and would have ripple effects - more so than turning Jim Chanos (who is a genuine douche).

True, that some short sellers have studied their targets well and do not employ nefarious means, a la, Chanos and Trump, even though both of them lost more than they made on manipulation and Trump mostly tried to copy Soros, another who actually reasoned his decisions. Even Chanos was thoughtful at the beginning before he discovered that manipulation was more profitable than legitimacy. Sadly in politics these tactics often have no consequences.

It wasn't Adam. My friend. married to a relative of mine, is exceedingly thoughtful. Back in the day, his fatehr made money with Einhorn but got out before stupidity set in.

We are prone to dismiss all negative narratives as FUD, but some of them actually are serious. Those people would benefit from education. It's barely possible that Einhorn might listen now. It hurt him when multiple investors extracted >$Billion positions. He's certainly trying to brazen it out. That is NOT expressing optimism, but acknowledging the possibility. Elon can be very convincing, can he not?

 

[StealthP3D]

I'd like to make a post about the kind of short Chanos is. I see him mentioned at lot here, and often in a very negative way, so I'd like to share my perspective as someone who likes the kind of investing he does.

Really? You like the kind of investing practiced by Jim Chanos?

He is well-known for taking large short positions in companies that would be harmed by a lack of confidence in the capital markets and then going on TV and the print media with false and exaggerated reports to create a crisis in confidence in an attempt to cause those companies to fail so he can cash in.

What kind of cretin "likes" this kind of investing? It matters not one iota if the short position is a hedge or not, the fact is, the short position only exists to increase leverage and profit when it declines. If it shoots to the sky, you lose. While there is nothing inherently wrong with that in and of itself, it becomes reprehensible when you actively try to cause your targets to go bankrupt by misleading people as to the true nature of their business and finances. And that is exactly what he has done with Tesla.

Do you think we're stupid?

 

[kbM3]

In case Elon is reading this, please tell Einhorn that shareholders appose the idea to give a short special treatment. Real investors should have priority to meet with Elon and tour the factories. After all investors had their turns, than shorts can have a chance (maybe in 2045). Einhorn doesn't deserve it.

Especially a short that has attacked to an unhealthy level. Why in the world should Elon “reward” this kind of behavior? It only encourages the next crazy person to say even more outlandish things in order to get noticed. STOP giving these people the spotlight.

Maybe but imagine the scenario where Einhorn was to go to Tesla, see the progress, chat in-depth with Elon and Zachary, and come away understanding his short position was only going to get worse and cover.

How would you think the market would react to that? I think it might be rather positive.

Of course he's probably too stubborn and entrenched in his beliefs to do that even when handed all the facts, but would be a very interesting development.

Here’s my idea. Elon should ask Einhorn if he’d be okay with a video of the tour. I am relatively sure that he would agree, since he’s probably convinced that he will catch Elon in a fraud. Then Elon should surprise him with some massive positive market moving news during the tour, so the expression on his face can be caught live

 

[kbM3]

I was responding to a troll on Electrek and thought my comment may have some vale to newer readers of this thread. Of course it is all old hat for the old-timers.


Elon’s brilliant approach is to gradually advance drivers assist to reach FSD. That has the following advantages:

1) Tesla books revenues and profits for very desirable features. Each FSD package sold generates 7k pure gross profit and the included AP functionality increases demand for all Teslas as most other vehicles don’t include it standard.

2) It provides a shadow mode so Tesla’s AI can learn from human driving.

3) Because the customers gain value, they are more than willing to use the functionality and thus function as free volunteer test drivers and help train the neural net when they disengage. Contrast this to Waymo who has to pay safety drivers a salary in order to gain real world data. Tesla is able to gather 100X more miles (and growing) of real world data than Waymo. If you know ANYTHING about neural net development, large data sets are one of the absolute most critical aspects.

4) Whereas Waymo waits until they hit a very high safety level before they deploy, Tesla has been reducing accidents for years. I.e. even if the system is less safe than Waymo overall, because it is still safer than human alone and it is used for far more miles, it ends up preventing more accidents.

 

[EinSV]

Here’s my idea. Elon should ask Einhorn if he’d be okay with a video of the tour. I am relatively sure that he would agree, since he’s probably convinced that he will catch Elon in a fraud. Then Elon should surprise him with some massive positive market moving news during the tour, so the expression on his face can be caught live

If they're going to go through with this, bringing Einhorn to Buffalo when they're making ~1000 solar roofs per week and videotaping it (so all investors are on an equal playing field), could be fun.

 

[MFranc123]

What kind of cretin "likes" this kind of investing?

Do you think we're stupid?

I don't think I'm being disrespectful, but If I am, please let me know.

It matters not one iota if the short position is a hedge or not, the fact is, the short position only exists to increase leverage and profit when it declines.

This is incorrect. The position makes money as long as the position loses less than the market goes up.

Also please keep in mind that I explained the structure of Chanos' fund and its mechanics; that's what I like, not chanos as an individual (I have no opinion about him in particular).

 

[sparcs]

I also would not give einhorn any tour or extra information.

i agree. He's just going to find something new to whine about Tesla. Someone like that isn't going to change until they lose substantial amounts of money.

 

[StealthP3D]

I don't think I'm being disrespectful, but If I am, please let me know.

By telling us you like his style of investing, you are either unaware of the way he actively participates in trying to bring companies he has shorted down or that you think we are stupid. Because I don't know anyone who thinks it's ok to spread misinformation in an attempt to harm companies and people.

This is incorrect. The position makes money as long as the position loses less than the market goes up.

That's a twisted way to look at it. The position itself either loses money or makes money. The more it makes, or the less it loses, the better it is for the fund. The fact that it exists in the first place in order to increase leverage makes no difference to this fact. A fund manager wants all the positions in the fund to make as much as possible (or lose as little as possible). Misleading and deceiving others in the name of that goal is *NOT* ok. It's not even legal.

Also please keep in mind that I explained the structure of Chanos' fund and its mechanics; that's what I like, not chanos as an individual (I have no opinion about him in particular).

But nobody has complained about "the structure of Chanos fund and it's mechanics". We dislike the person and his selfish, reprehensible actions. The structure of his fund has nothing to do with it beyond that (and his greed and level of arrogance) is why he does these reprehensible things. Why would you defend something (the structure and mechanics of his fund) that no one has spoken out against?

 

[AudubonB]

While you are right for most shorts, I do think what Elon is attempting here might work out to the advantage of Tesla investors:

• David Einhorn isn't just any short, he is perhaps the biggest, most well known Tesla short. Taking out an enemy general - via arms, money or persuasion - and weakening his army is well accepted military tactics.
• There's reliable reports that Einhorn isn't an anti-social douchebag - instead he somehow got sucked into the TSLAQ cult and is still short Tesla more due to stubbornness than conviction. I.e. Einhorn might be a "weak short", a weak link, and if Elon manages to turn or pacify Einhorn, it would be a major coup with far reaching consequences. Note how Elon didn't attempt any communications with Jim Chanos, who is a lying scumbag who knows exactly what he is doing.
• Highly visible acts of de-escalation would also weaken the "Tesla is targeting shorts unfairly" media narrative.
  
• I also suspect Elon is intellectually curious about the arguments of one of the "leaders" of the shorts who seems to be genuinely convinced that Tesla should be shorted.
• Technically if Einhorn lost 1 billion dollars shorting Tesla, then he transferred those funds to Tesla investors - and didn't get any shares in return. I.e. big shorts deep in the red can be considered involuntary Tesla investors, who, despite their best efforts to harm Tesla, actually ended up transferring money to Tesla investors.

I.e. I think the risks of this stunt going bad seem fairly low at the moment, and the potential upsides are significant.

I do agree that Elon shouldn't make a habit out of this - shorting Tesla shouldn't be rewarded. Or at minimum there should be a clearly formulated policy:

"If you are a Tesla short you are only eligible for a Fremont factory tour if you have a proven track record of losing at least 1 billion dollars. If your losses are higher than 2 billion dollars then Elon might accompany you. Beyond losses of 5 billion dollars you are eligible for the gold plated "Biggest Loser TMC award", funded by TMC members."​

Thank you for having written my post for me....err...you wrote a nice prècis of my opinion of the events as they presently stand. There is one salient point I take issue with, however - and it stands in my sig-line with every post I make. Even when deep in the red, it is inappropriate for a short (whether big or minuscule) to be garnished with the term investor, involuntary or not. I know what you mean, but to me you are making an incorrect parallel to those in a poker game - all of whom correctly are called gamblers - and that chump who keeps pouring money in a futile effort to back his losing hand does indeed eventually enrich his opponent(s) - because although Mr Chump is a gambler, the short-seller is not an investor. That "note to SEC" I have is not present for kicks and giggles; rather, it is there solely for kicks, even if no one from the SEC ever does take notice.

 

[EVNow]

Many already know what Chanos' business model is, but some don't - not the least because promoting your hedge fund to the general public is actually illegal.

Chanos business model is to cash in on the Enron success to bring down companies he doesn't like and make money.

He is the worst kind of human - actively trying to put hundreds of thousands of people out of jobs through FUD.

The entire shorting thing should be banned. Shorts are no better than monkeys at picking fraud.

 

[EVNow]

My guess: that new section might be for Semi production. (!)

Didn't Musk say in ER new building will come up for Y ?