Investor Profile: Fleckenstein bets against tech
By Deepa Babington
NEW YORK, Aug 20 (Reuters) - A printout on the wall of Bill Fleckenstein's small office shows soaring stock quotes from the time that Nasdaq reached a seemingly unstoppable 5000 points on March 7, 2000.
It serves as a reminder of the terrible days when the veteran short seller's gamble against technology companies coincided with the dot-com mania that sent tech stocks on a wild ride.
The long-haired contrarian's fortunes have since turned the corner. He is still shorting tech stocks like Intel Corp. (NasdaqNM:INTC - News) and Micron (NYSE:MU - News), but now, his $85 million short-only fund is posting handsome returns in the current bear market.
Fleckenstein is not apologetic about the days he lost money betting against popular wisdom.
"The best lessons all come from when you lose money," he said in a recent interview. "The whole trick in making money is to keep your errors to a minimum. I made every kind of error there is. Nobody goes out and bats 1000."
Fleckenstein, 49, is one of many short sellers who benefitted from the burst of the Internet bubble and more recently, Wall Street's doldrums after a spate of accounting scandals.
Short sellers, who bet that a company's share price will fall, borrow a firm's shares and sell it immediately, in the hopes of buying it back at a lower price and pocket the difference as profit.
It's a risky world. While those who buy stocks stand to lose only as much as they've invested in a worst case scenario, there's no limit to the losses short sellers can incur because shares can keep rising.
The money manager remains tightlipped about the exact performance of Fleckenstein Capital, the hedge fund he manages, saying only that it has posted gains of well over 20 percent this year. Among the hedge funds tracked by the service MAR, short sellers were the best performers this year, with a median return of more than 11 percent through the end of May, said Michael Ocrant, editor at MAR.
SCOURING TECH TARGETS
Arriving in his Seattle office by 6 o'clock every morning, Fleckenstein scours the technology world for targets to short.
"When most people look at the tech world, they see glamor, fizz and fast growth. When I look at technology, all I see is a lousy business," he said. "Because as sexy as all these products are in technology, there's really no barrier to entry -- other companies can copy the design and be in the same business."
While many short sellers scrutinize balance sheets for accounting irregularities, Fleckenstein chooses his targets by keeping his ear to the ground for any hint of bad news from tech companies' customers.
"They have public customers and suppliers so you can triangulate in on the timing of when things might go wrong," he said. "And for the last few years, it's very important to get timing right because in the meantime you can get your lungs ripped out being short something waiting for it happen."
Once he is interested in shorting a company, Fleckenstein zeroes in on its customers. He then gets on their conference calls and listens to what their executives have to say for clues on the problems the company may be facing, he said.
The companies that top his short list are well known in the technology world. On a recent Wednesday morning, Fleckenstein rattled off names such as Intel, Micron, Applied Materials Inc. (NasdaqNM:AMAT - News), Dell (NasdaqNM:DELL - News), and CDW Computer (NasdaqNM:CDWC - News) as his top short picks.
The strategy cost him during the tech boom, but paid off dividends when the bubble burst two years ago. He says he started shorting Gateway Inc (NYSE:GTW - News), for example, after becoming curious about the company's claims that it was growing because of its retail outlets. He says he sold Gateway shares at $58 and bought it back when it tumbled down to $5.
BULLISH TO BIG BEAR
A math major in college, Fleckenstein first became fascinated with the stock market during the late 1970s when inflation was raging and interest rates were high.
In 1979, when he was still in his 20s, Fleckenstein stepped into the investment world as a stockbroker after a stint dabbling in the computer business. He recalls that one of the first stocks he bought was the aerospace company Boeing Co. (NYSE:BA - News) It was also one of his first lessons in losing money.
Three years later, eager to manage money, he started his own firm, Fleckstein Capital. At that time, the bear says, he was "wildly bullish."
In fact, Fleckenstein, married with two teen-aged daughters, didn't short stocks until several years later, and didn't become a full-time bear until more than a decade after that.
"I left the long side of investment in late 1995 because I thought what was happening would end badly," he said.
At first it was smooth sailing. But the pendulum began to swing against him towards the end of 1998, as the markets' fascination for Internet and hi-technology stocks started moving into high gear.
With his news terminal flickering with stock quotes that were racking up astounding gains, Fleckenstein's losses mounted. His heart in his mouth, he one day watched shares of Micron -- in which he had a large short position -- shoot up 20 percent. He even considered quitting.
"I've enjoyed plenty of pain," he said. "There was an 18-month period where getting burned would be putting it mildly."
But by early 2000, when tech stocks lay in tatters, Fleckenstein was beginning to look like one of the smart guys.
His long-time friend James Grant, the editor of Grant's Interest Rate Observer and another well-known bear, calls Fleckenstein among the most "tenacious people on Wall Street" for sticking to his guns and crying foul on technology stocks when everyone else was profiting wildly.
"I've observed him over the years, not giving an inch to the mania," Grant said. "Others have made peace with it in some way -- over the years they developed hedge strategies. But he never gave in. He remained defiant."
Others consider short sellers -- among the most despised groups on Wall Street because they are viewed as playing on the fears of investors -- as simply those who come into the limelight each time the markets swoon.
"This is their time; they are the oracles now," said Robert Willens, an accounting analyst at Lehman Brothers, who has little respect for short sellers. "They go through their phases and then their time will end, as it always does."
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