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Feshbach Partners: Bears in a Bull Market

October 1, 1989 GMT

PALO ALTO, Calif. (AP) _ The stock market just closed for the day, up again, and the Golden Bear of finance is slumped in his chair - eyes red and squinty, shirt wrinkled, voice strained.

It’s tough for a bear to make a buck in a bull market, and this bear has more than $400 million on the line, betting stocks will drop. It’s known in trading parlance as shorting, or selling borrowed stock with the intention of repurchasing it after prices fall.

Joe Feshbach and his brothers, working out of an office strewn with symbolic teddy bears, aren’t gambling the whole market will collapse, just companies they’ve identified as overhyped and overvalued.

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Or better yet, companies in trouble.

The Feshbachs, for example, say their clients earned several million dollars two years ago by shorting ZZZZ Best Inc., the Los Angeles carpet- cleanin g company whose founder, Barry Minkow, was convicted of fraud in 1988.

The Feshbachs have bet against about 500 companies since 1982, probing the seamy side of American business. Officers of at least 10 companies they’ve shorted have been indicted or imprisoned.

″I think ethics is a very big thing and it’s in short supply in the business world,″ Feshbach says. ″We get a certain amount of satisfaction exposing a company that turns out to be a fraud. It’s kind of fun if you find the right target and nail it.″

Many large investors, pension funds and mutual funds, use short selling as a hedge against stock purchases. The Feshbachs - Joe, Matt and Kurt, plus partner Tom Barton - claim to be the biggest pure short sellers in the country.

Despite a bull market through most of the 1980s, the Feshbachs’ limited partnership, Southgate Partners, is up 290 percent from its 1985 inception through this past June, vs. a 60 percent rise for the Standard & Poors 500 index during the same time.

In 1987, the year of the October crash, when the S&P 500 finished up just 2 percent, Southgate rose 59 percent. In 1988, when the S&P rebounded 12.4 percent, Southgate rose 21.8 percent.

The Feshbachs beat the odds in other ways. Joe, 36, is a college dropout. Kurt, 37, didn’t graduate high school, and Matt, 36, barely finished high school.

They attribute much of their success to skepticism inherited from their father, Bernard, a stockbroker, and the principles of Dianetics, a self-help book by the late writer L. Ron Hubbard.

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The Feshbachs say they go to work every day at 6 a.m. figuring the market’s going up, because two out of three times it does.

″We had no idea the crash was coming in 1987, and when the next crash comes we’ll be the last guys to predict it,″ says Joe Feshbach. ″We just try to short stocks we think are good shorts whether the market goes up or down.

″Now if you ask me whether I sometimes hope the market will go down, I’d say, yeah, all the time.″

They look for companies headed for bankruptcy, or at least a 50 percent drop in their share price. It’s a risky business, though, borrowing stock from brokers on the hunch prices will fall. If prices rise, losses are limitless.

The Feshbachs, like gamblers betting against the house, aren’t popular in the investment business. When they win, investors in the companies they’re shorting lose.

″They are the preeminent short sellers in the country, but that might be like calling them the best ax murderers,″ says New York broker Robert Gordon of Twenty-First Securities Corp.

The Feshbachs usually limit each position to $5 million. They’ll hold a stock they believe will fall eventually, even if it takes a few years. They shorted Cannon Group at about $17, held while it went to $42, and made a bundle when it dropped to $3.

Cannon Group, a Los Angeles-based movie company that recently changed its name to Pathe Communications, was reporting high earning and raising large amounts of capital to produce films when the Feshbachs began looking into it in 1985.

″We looked at the way they were amortizing the company and we began seeing their numbers weren’t adding up,″ Feshbach said.

When the market was rising last January, there were rumors the Feshbachs were going out of business. They lost money, but weren’t even close to collapsing. Southgate dropped 7.9 percent in the first quarter and gained 10.1 percent in the second quarter.

Perrin Long, a Wall Street analyst with Lipper Analytical Securities Corp., says traders like to find out what stocks the Feshbachs are shorting.

″They have a good track record, and if people know which stocks they’re short in, they might sell those stocks,″ Long says.

The Feshbachs claim they’re right eight or nine times out of 10. They investigate companies with help from 10 full-time analysts and a total staff of 45.

They talk to clients, suppliers and competitors of the companies, anyone who might help uncover bad news.

Sometimes the Feshbachs are wrong. Two of their biggest blunders were skyrocketing L.A. Gear and Reebok International Ltd., which cost them a total of about $15 million.

″We obviously do not know how to sell a shoe stock short for love or money,″ says Feshbach. ″My kids were telling me I was stupid for shorting L.A. Gear.″

With Reebok, the Feshbachs thought the company’s expensive sneakers were a passing fad. With L.A. Gear, they didn’t think the company could fulfill predictions of rapid growth.

″Good sales and earnings are absolutely the best way to annihilate a short seller because stocks go up on those,″ Feshbach says. ″If you have good sales and earnings, with clean accounting, you’re going to take any short seller and ruin his afternoon.″

That’s exactly what Reebok and L.A. Gear did to the Feshbachs. Elliot Horowitz, executive vice president and chief financial officer of L.A. Gear, didn’t criticize the Feshbachs by name but said short sellers can seriously damage an innocent company’s reputation.

″The biggest problem is when rumors are being spread,″ Horowitz said. ″When they tell half-truths, it can really hurt the whole operation of a company, not only in the investment community, but in its own industry.″

Feshbach responds that ″as we’re fond of saying, the louder they scream, the better the short.″

Dianetics, which they began studying more than 15 years ago, helps the brothers cope with the pressures of swimming against the market’s tide.

″It doesn’t help us read minds, it isn’t a mumbo-jumbo thing,″ Feshbach says. ″But what it does do is help us understand how the mind works and predict what other people will do a little better.

″Secondly, and this is really the key, it helps us to remain analytical when other people panic.″