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Taming the Beast: Wall Street's Imperfect Answers to Making Money by Larry Light

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Chapter 10

Looking for the Bad: Short Selling

His face gaunt and mournful, James Chanos is not an upbeat guy. He certainly is not a popular man in Corporate America. If Chanos is poking around a stock, it usually indicates he sees something wrong. And that means he might well short the shares, a bet they will decline in value.

While shorting is a very risky proposition, investors often have made out well siding with Chanos and other short sellers with good track records. Once obscure figures, shorts now are prominently part of the financial landscape, and their views are well displayed in the media and on the Web. They have become a real force.

Chanos is the person who exposed the accounting shenanigans at Enron, once a sterling company, universally admired on Wall Street for its dynamic growth and innovative spirit. After Chanos unmasked the firm, it tumbled into bankruptcy and some of its executives went to prison. He burrows deep into the books of a company like Enron and, if the accounting is suspect, he shorts the stock, expecting that the weaknesses he found will eventually lead other investors to sell it and thus lower the price. Chanos is of Grecian descent and the investment outfit that he heads is called Kynikos Associates, which in Greek means “cynic.”

In the 1990s, Enron was so revered that it regularly made magazines’ lists of best corporations. In an interview with Barron’s, Chanos said he initially thought Enron stock was “viable,” but simply overpriced. Changing ...

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