(MONEY Magazine) – Most of us invest with the idea of our stock picks going up, not down. Not short-sellers. They are the Cassandras of the stock market, spotting problems on the horizon and waiting for them to unfold. (A short-seller borrows shares and then sells them, hoping to make a profit by buying them back at a lower price and pocketing the difference.) While most of us don't have the stomach for short-selling, we can learn plenty from these folks about evaluating a stock's prospects.

Gobs of hedge funds try to make money betting against stocks, but James Chanos of Kynikos Associates (the firm's name is based on the Greek root of the word cynic) has been more successful than most. He was one of the first to spot problems at Enron and Tyco, well before the stocks of those companies plummeted. "I don't advocate short-selling for individuals, but learning what the bears look for will make people better investors," says Chanos. "To be better long-term investors, people should take the time to evaluate the bear case."

Here are a few situations where Chanos typically spots discrepancies between what the companies are reporting--and the companies' economic reality.

FADING FADS Chanos says investors often fail to recognize that consumer fads inevitably fade: "Wall Street loves a growth story and will take an unsustainable growth record and assume that it will always continue." Diet plans are a classic case. Take Weight Watchers, he says. The meeting-driven weight-loss company had a resurgence two years ago, but sales growth is slowing due to the rising popularity of the Atkins diet and other low-carbohydrate regimens. Asks Chanos: "Does anyone remember Jenny Craig or NutriSystems?"

DISRUPTIVE TECHNOLOGIES Chanos, who developed a following as an analyst for his negative reports, also looks for situations where companies are falling victim to technological change. He says that's the case for video-rental chains Blockbuster and Hollywood Entertainment. Chanos expects sales at those retailers to shrink as more people order movies over cable systems rather than going to the store. "Movie studios are going to be forced to realize that the traditional video-rental companies are doomed," he says. "They are going to shorten their release time between when the movie comes out and when it's available to cable and satellite subscribers." Blockbuster lives off that window of time, he adds. Also, Internet piracy is depressing video sales.

Another company Chanos is sour on is film giant Eastman Kodak, which he says has been "slow to embrace the disruptive technology of digital photography." Of course, some investors say that Kodak is cheap--including Legg Mason's Bill Miller. Chanos' response to that argument: "Looking at the valuation of a shrinking company and calling it a bargain is like driving a car and only looking out the rearview mirror. You need to look out the windshield or you may drive off a cliff."

SERIAL ACQUIRERS Chanos is wary of companies that pursue growth by acquisition because of the many tricks companies can employ to overstate the benefits of doing an acquisition. Examples of big red flags: companies that dramatically write down the assets of an acquisition or that engage in what Chanos calls "springboarding"--having the acquired company stop selling before the acquisition only to have sales explode after the company is acquired. Serial acquirers he is keeping a close eye on include Danaher and L-3 Communications. "Who knows if anything wrong is going on there, but the serial acquisitions raise flags for us," he says. --S.G.