A Third Grade Logic Test Failure

May 4, 2016
The Market Ticker: Chanos, Valeant, and Math

I just saw an utterly amusing "interview" on CNBS with Jim Chanos in which he defended continuing to be short Valeant.

The problem is that his argument doesn't pass the third grade arithmetic test.

And why is that?

You can have all the conviction you want but the fact of the matter is that whenever you have managed to get 82% of the maximum return possible out of a trade you are a damned idiot if you don't take the money.

Logic dictates that if Chanos is a damned idiot to continue to sell the stock, then I am a damned idiot not to buy that stock. I did not buy that stock when given the chance. Therefore, I must be a damned idiot. That's what logic says.

Further, third grade logic suggests that we have just found a sure thing in a market with no sure things. We simply buy any stock that is 82% off of its highs. We'd be damned idiots not to do so.

Valeant trades at $28 and change as I type this, down from $34 and change last week. So what went wrong with the third grade math test? The stock market doesn't care where we've been. It only cares where we're going. Perhaps Chanos is not an arrogant damned idiot after all. As Warren Buffett once said, if past history was all there was to the game, the richest people would be librarians.

In my opinion, Karl Denninger's argument didn't and doesn't pass the third grade logic test. There are no sure things in the stock market. Saying that you'd be a damned idiot to sell a stock is no different than saying you'd be a damned idiot not to buy. It's just two sides of the same coin.

When it comes to the stock market, there are no sure things. If you ever think you've found a table pounding screaming bargain, for example, then be very careful. You may shortly become a damned idiot.

Where will Valeant go from here?

To paraphrase a favorite quote, better to remain silent and be thought a damned idiot than to speak out and remove all doubt. ;)