Legendary short-seller Jim Chanos thinks a good short portfolio enables investors to do one counterintuitive thing: be more long.

At the Vanity Fair New Establishment Summit in San Francisco on Wednesday, Chanos said that as a short-seller, he is effectively offering investors insurance. And when he’s right, this insurance even pays out a premium.

“A good short portfolio allows you to be more long,” Chanos said. “And that’s the crux of what we do. It enables our investors — and ourselves — to be more long, whether it’s passive investments or stocks we select.”

Chanos, who runs Kynikos Associates, added that a successful short portfolio — that is, a basket of stocks one bets will go down in price — can finance an investor’s long bets, or investments they think will go up in price. In other words, profits from the decline in the value of some companies allow you to add to bets on improved prospects for others. (A common formulation is known as the “130-30” strategy, in which your portfolio is 30% short and 130% long.)

Like many short-sellers, though, Chanos perhaps has garnered a reputation as a curmudgeon who believes the world is falling apart merely because he is primarily known for betting against the prospects of companies rather than on continued improvement.

Quotes like Warren Buffett’s formulation from a recent investor letter that, “For 240 years, it’s been a terrible mistake to bet against America, and now is no time to start,” might, to some, seem like a rebuke of Chanos’ investment approach. But Chanos’ quote makes clear that he also agrees with this sentiment.

Over time, things will get better. And stocks, of course, usually go up in price. But inside any market there will always lie companies that are deeply flawed, if not outright fraudulent.

And it is these weaker hands that are harder to sniff out. Chanos said that Wall Street, with its combination of positive earnings announcements, mergers, and upbeat analyst commentary, is one giant positive reinforcement machine. Being a short-seller requires you to work against this, time and time and time again.

“Come in and be short a diversified portfolio of crummy companies in a bull market and then I’ll let you know whether you’re a contrarian or not,” Chanos said.

“Because until you get paid it can drive you crazy, so you have to have the courage of your convictions, you have to do the work, and you need to stay with it. And that’s really, really hard to do on Wall Street.”

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Myles Udland is a writer at Yahoo Finance.

Read more from the Vanity Fair New Establishment Summit here:

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