In the world of investment, I am skeptical soul; I am always skeptical about what I read and heard. When someone is building the biggest, the highest, or the longest, I tend to first look at the matter as a contrarian [1]. I don't believe or buy into hype. When people are trying to tell me how much money and easy money they have made from the property market in China, I see worries -- I see herds who are doing the same sort of things as it happens over and over again in human history. When the Indian Central Bank was buying Gold, I prefer to ask myself if it meant we were at a seasonal peak. When Warren Buffett was buying into Burlington Northern Santa Fe and called it his "all-in wager" on the economic future of the U.S. [2], I felt a sense of shiver down the back of my spine -- what if the world's most celebrated investor of all time was wrong?
I prefer to look for an investment thesis and investment ideas that can stand the test of time, steer myself away from confirmation bias, and think, analyse, and research in a framework with integrity. If I called something a bubble, and I said it had popped, I will not expect it to recover anytime soon and making a new high. If it does, it will invalidate my believe that it had popped or my believe that it was indeed a bubble. Integrity. Our thinking must be robust and exhibit its integrity over time.
Proving something right doesn't really make it right. Proving something wrong is much more significant. I often tell people of this: we human first thought the world was flat, later round, then oval, now it's none of these. Each time we prove our previous believe wrong we get closer to the truth, not necessary the real truth, but it is speticism and the disproving of something that enable us to acquire new knowledge.
... similarly, the speculator George Soros, when making a financial bet, keeps looking for instances that would prove his initial theory wrong. This, perhaps, is true self-confidence: the ability to look at the world without the need to find signs that stroke one's ego.
Nassim Nicholas Taleb, The Black Swan
China is heading for a big crash
James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.
Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
Born in 1958, of Greek origins, he was schooled at Wylie E. Groves High School and Yale, where he graduated in 1980. In business, he developed an investment strategy based on intensive research into stocks (as long as months), searching for fundamental and large market failures in valuation: typically under-estimated or previously un-reported failings in the business or market of a stock followed by committing to a (usually large) short-position which he is willing to hold for long period of time - almost the mirror image of Warren Buffet's reputed "fundamentals+long stay" investment strategy. Because of this model, his investments function more like those of a whistle-blower than most typical investments. Examples of this include short-selling companies such as Baldwin-United, Drexel Burnham, and more recently, the notorious Enron Corporation.
He rose to fame in the 1980s as a "short" - a short seller who had a knack of spotting stocks that he thought to be overvalued. After working as an analyst in several firms, he founded Kynikos (Greek for "cynic") in 1985 as a firm specializing in short selling. A critical position taken at Kynikos was his shorting of Enron.
In October 2000, Chanos started research into the valuation of Enron Corporation. He examined their use of mark to model (cousin to mark-to-market) accounting, which, in Chanos' experience, results in management overstating earnings, as well as what appeared to be a worryingly low (6-7%) return on capital investment. Enron stock declined from $90 in August 2000 to a low of $1 in January 2001. Over this period, Chanos was a short seller of Enron during 2001, increasing his short position as more information surfaced. Kynikos profited greatly and Chanos himself became somewhat of a celebrity as a consequence of his early awareness of Enron's problems.
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China is, afterall, an export economy. It should have and could have developed a domestic consumption economy during the boom time, but it didn't. Recent rally in the S&P as well as Shanghai, in my view, is nothing more than some sort of LIQUIDITY DRIVEN STUPIDITY... Therefore, I am going against the consensus here: S&P 500 will fall, so is China. Enough said.
-- bhc investment, 7 August 2009
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