(FORTUNE Magazine) – YOU MIGHT THINK that the great American bull market of the past five years must have been tough on shortsellers. A shortseller, after all, makes money on a stock only when it goes down -- and stocks have gone up by 230% on the Dow since the bull market began on August 13, 1982. But in fact, the professionals whose principal business is selling short have done quite well. Interviews with shortsellers, their brokers, and knowing observers indicate that the pros as a group have performed better than the Dow -- which means much better than the average stock mutual fund. Some shortsellers have achieved annual returns on capital higher than 100%. How have they done it? In shorting a stock, you want to do much the same thing as a long investor -- buy low, sell high. But in shortselling you sell the stock before you buy it. You do that by borrowing shares from a broker whose customers own them in margin accounts. Eventually, you will have to cover, meaning purchase the same number of shares and thereby close out the transaction. You make a profit if you buy the securities for less than you earlier sold them for. When an amateur ventures to short a stock, he usually expects to cover within a few weeks, or a few months at most. Success or failure depends on timing. If the timing proves unfortunate and the stock price rises instead of falling, the amateur is likely to lose his nerve and cover at a loss. The pros don't operate that way. They sometimes have to cover at a loss, of course, but they minimize the risks of timing by basing short-sale decisions on painstaking analysis of value -- or lack of value. When they take a short position, they do so with enough confidence to hang on if the price goes up. Sooner or later, their analysis has told them, it will come down. Professional shortsellers, or shorts as they're often called, speak of the importance of doing homework, and they do a lot of it. Says Mike Murphy, publisher of The Overpriced Stock Service, required reading for shortsellers: ''We look for overvalued companies to short, which you can only do if you have a firm grounding in classic security analysis.'' From San Francisco, Murphy sends his newsletter, a tip sheet of short-sale prospects, to over 1,000 subscribers at $495 a year. As evidence that most shorts are value players, Murphy points out that many hold positions a year, two years, and even three while waiting for the market to recognize the overvaluation. Shorts dig like badgers in looking for dirt on companies. Some spend months doing research on a target company before deciding whether to take a position. If they need industry experts or private detectives to help, the shorts get them. They do whatever it takes ''within the letter of the law,'' as one of them puts it. Consequently, their analysis is often superior to buy-side research done by investment firms. A broker who counts some of the top West Coast shorts among his clients attests to the quality of the shortsellers' studies. He set up a phone conversation between his firm's medical technology analyst -- ''who is no dummy'' -- and a shortseller. The purpose was to discuss a particular company. Says the broker: ''She explained the bull story for about 15 minutes, and then he began asking questions. By the end of their conversation, she was asking him questions. He was well beyond her understanding of how vulnerable this business was and how tricky the accounting was.'' The number of professional shortsellers in the U.S. is quite small -- there may be fewer than 50. They tend to share certain characteristics, notably tough-mindedness. They need it to discern corporate weaknesses that other investors do not see and that managers are trying to conceal. They also need it to hold on when the price of a shorted stock keeps going up. And they need it to delay covering when the price goes down, to wait until the stock hits bottom. Their minds seem exceptionally sharp, as if the work keeps them well honed. MOST OF THEM guard their anonymity. Some who were interviewed for this story agreed to talk only on condition that their names would not be mentioned. Low visibility is a help in gathering intelligence. As one short puts it: ''Some companies won't return a phone call or send quarterly reports if they know you are short their stock. It's as if you were calling up the CEO to ask if someone in his family has AIDS.'' With certain exceptions, the pros can be divided into two categories: those who short large-capitalization companies and those who go after smaller companies. One of the best-known shortsellers in the large-company group is James Chanos, 29, who won renown for predicting the collapse of Baldwin- United, the financial services company that went bankrupt in September 1983, with Chanos holding a large short position in the stock. He now does business as a one-principal firm, Kynikos (''cynic'' in Greek) Associates Ltd. He has two unlisted phones, at home and at his office. Chanos was born and raised in Milwaukee, and though he graduated from Yale and now lives in New York, he thinks of himself as a Midwesterner. Every working day at lunchtime he takes the subway to Brooklyn to play basketball with employees of Brooklyn Union Gas Co. He feels that his Midwestern upbringing gave him a certain common sense that helps him spot overvalued stocks. He leans to companies that are carrying a lot of debt, and he quotes with approval a friend's dictum: ''Asset values are contingent, but debt is forever.'' Baldwin-United, he says, exemplifies the kind of company he looks for -- ''stupendously leveraged, no operating earnings, and a stock price dependent on asset values that were not sustainable.''

He likes to short companies that are followed by few analysts because he thinks they are probably not well understood. ''As a rough-and-ready guide to the quality of coverage,'' he says, ''I look at total capitalization, including debt, and then divide by the number of analysts who cover the company.'' Southland Financial, a Texas real estate development outfit, was an example of a hot-stock company covered by few analysts. Because management advertised that the company was for sale and because then-renowned Ivan Boesky owned 10%, the stock spiked to $28.50 a share. The market capitalization -- number of + shares times price per share -- ballooned to $478 million despite Southland's 1986 loss of $41.9 million on revenues of $58.8 million. ''It had all the things I like,'' says Chanos. The stock tanked to $5.75 a share when investors discovered that no one wanted to buy Southland at anywhere near its inflated valuation. Chanos, like most shorts, prefers not to say whether he has covered his entire position. Chanos loses some, of course. The first quarter of 1987 was bad for him, and only a solid second quarter let him break even for the first half of the year. ''I've been short the cable TV stocks, and that has been a fiasco,'' he says. ''They've all doubled on me. People trade the cable systems at ever higher asset values per subscriber.'' Another shortseller who prefers to short sizable companies is Jim Rogers, 44. Rogers, originally from Alabama, has made many millions selling short. He lives in a sumptuous townhouse overlooking the Hudson River on Manhattan's Upper West Side. Partly retired from Wall Street, he teaches security analysis at Columbia University's business school. While Rogers and Chanos do not work in concert, they meet once or twice a year for lunch to discuss investing ideas. Their first meeting, in 1983, came about because Rogers -- who also went to Yale -- was interested in hearing the younger man's short-sale ideas. It is a rite of passage for rookie short- sellers to meet stars and try to impress them with the quality of their stock analysis. Rogers still sells short, and these days his main targets are big financial companies. ''I'm short a raft of financial services companies because that is where I see excesses in the economy.'' Morgan Stanley is a favorite of his. ''It's nothing personal, truly,'' he says. ''Morgan Stanley is a great investment bank. Just overvalued in my opinion.'' If Drexel Burnham Lambert were publicly traded, Rogers adds, he would cover Morgan Stanley and all his other financial services short sales and go short on Drexel. He thinks that firm's heavy involvement in junk bonds will make it vulnerable in an economic downturn. In contrast to Rogers and Chanos, some shortsellers concentrate on small, seamy companies where hype, fraud, or dubious accounting is often found. Connoisseurs of sleazy stocks are the three Feshbach brothers -- fraternal twins Joe and Matt, 34, and their older brother, Kurt, 35. The Feshbachs go for what Joe calls ''terminal'' stocks that will drop even if the Dow goes to 3000. ''We want to be sure we short lousy ones,'' he says. ''Frauds and bankruptcy candidates and accounting fiascos.'' The brothers work from messy offices in Menlo Park and Palo Alto, California. Since they began shorting in June 1982, when the Dow sat on its tuffet around 800, the Feshbachs have yet to endure a down year. Their fund was up 248% in 1984. In the worst year so far, 1985, it rose 44%. They made 62% last year, but the fund is up only 13% for the first half of 1987 because the brothers made a mistake and shorted a large block of Reebok International shares. After watching the price rise, they covered at a loss. Reinvested profits and money from outside investors have pushed the total under Feshbach management to over $100 million. The fund is not open to new money just now. When it does reopen, the minimum investment in the partnership will be $2 million. The Feshbachs must be the only big-time shortsellers who are also converts to Scientology, founded by science fiction writer L. Ron Hubbard. They keep copies of Hubbard's book Dianetics: The Modern Science of Mental Health at the office. Matt recently opened a second office in Florida to be closer to a teacher of Scientology, which purports to free people of psychological problems. What role Scientology plays in the brothers' investing is unclear. Perhaps it strengthens their confidence and discipline to short as aggressively as they do. One of the Feshbachs' most profitable short sales in the past year was ZZZZ Best, a carpet-cleaning company that went bankrupt in July. They investigated the company after the chief financial officer was accused by customers of having stolen over $92,000 from them by charging flowers to their credit cards at a florist business he owned. To the Feshbachs' surprise, ZZZZ Best's 21- year-old president did not fire the executive. Their suspicion grew when they saw ZZZZ Best's claim to have a $7-million contract to restore damaged carpets in Sacramento, California. A young analyst with the Feshbachs quickly discovered by talking to reputable carpet cleaners that no contract that size had ever been won anywhere in the U.S., let alone in Sacramento. ''So we started to short the stock at $6,'' says Joe. ''It ran all the way to $10 and we kept shorting.'' ZZZZ Best currently trades at 25 cents a share. OTHER SHORTSELLERS admire the Feshbachs for their work on the Cannon Group, maker of such schlock films as The Last American Virgin and Death Wish II. * Kurt heard about Cannon from a broker when he was living in Los Angeles in 1984. Wall Street was in love with the stock. The company was reporting impressive earnings. Says Kurt: ''They claimed in their reports to shareholders that by preselling movies for cable and videocassettes and foreign rights they had already covered production costs.'' But since Cannon was making ever more expensive films and almost none were box-office hits, the Feshbachs could not figure out how the company was paying its overhead, interest, and other expenses. Talking with former employees and the people who booked Cannon's films, Kurt discovered that management was understating costs, which dramatically boosted reported earnings. Rumors that the SEC was investigating Cannon's books began to surface in June 1986, and the stock peaked at $45.50 a share. It bombed to $2.63 and is now at $4.

Though professional shortsellers make good livings and some get rich, money is not their only motivation. They could also make money on the long side of the market, where their combination of diligent research, analysis, and fortitude would serve them well. Says a Texas shortseller: ''My wife teases me, 'Why don't you just be happy and buy stocks?' '' One reason is that shorts find winning on the short side more pleasurable than winning on the long side. James Grant, publisher of Grant's Interest Rate Observer, offers an explanation: ''It might have been sweet owning Cannon Group when it went from $10 to $40, but it must have been triply sweet being short on the way to $3 a share because you saw the optimists in disarray when the company's preposterous claims and cockeyed accounting exploded in their faces.'' New York psychiatrist Wilbert Sykes thinks he knows why shortsellers get such kicks from shorting. He suggests that they see themselves as outsiders and enjoy undermining the investing game. ''Shortsellers,'' he says, ''like an atmosphere that justifies their picked-on feeling. When the hostility and envy and jealousy cascade upon them, they see it as proof that they are getting the kind of attention they deserve.'' According to Sykes, shorts may actually enjoy the snide remarks, hate mail, and lawsuits heaped on them by corporate executives, shareholders, and investment bankers. A shortseller demurs: ''I don't want to be thought of as a destructive person. But not everybody understands what we do and likes us.'' Some shortsellers admit to getting satisfaction from shorting companies they despise. Says a New Yorker: ''Most of these really good shorts are run by charlatans, thieves, and dogs.'' Having shorted a tobacco company, he worries that his investment may stem more from hatred than from coldblooded desire to earn a profit. ''Those people are selling chewing tobacco to kids, telling them it's macho. I would be delighted to see those guys go under. I would cheer.'' Another facet of shortseller psychology can be glimpsed in the following true story. On a grim down day on Wall Street, two veteran shorts were gleefully chatting on the telephone about what a wonderful day it had been. One said, ''Bill, I don't understand it, but when a short goes my way it is really fabulous.'' The other replied, ''Jonathan, don't you realize? It is fabulous. It's sexual. You're screwing somebody.'' A sense that somebody gets ''screwed'' may help account for the negative attitude many people have toward shortselling. They feel there is something disreputable about it. Quite a few Americans would agree with Robert Price, president of Price Communications Corp., a New York radio and television company. ''I find no redeeming feature in shortselling, nor is it necessary or proper in a free-enterprise society,'' Price says. ''It is just not sympathetic to the American philosophy, which is positive. Shortsellers are not a positive force. I wouldn't want my daughter to marry one.'' Price is no impartial observer, though: There is a big short interest in the stock of his company, and he does not like it. Two Texas companies targeted by shortsellers have formed a posse to get them. Commonwealth Financial Group, a troubled Houston savings and loan, teamed up with Carrington Laboratories of Dallas, which claims to have an AIDS treatment using aloe vera, to attract attention to alleged illegal shortselling of their stocks. They say that shortsellers spread false and misleading information about companies to knock their stocks down. Commonwealth is using its public relations firm, Hill & Knowlton, to help put the message across. THE TWO COMPANIES also complain that shortsellers use the press to get publicity for negative stories on stocks they have a position in. Shortsellers retort that the press hears a lot more from companies and long investors than from shorts. Says Jim Rogers: ''Go to Harry's Bar and see the gigantic amount of pumping that goes on for stocks people own. Lies being told. Exaggeration and hyperbole.'' So far, SEC officials do not think much of the attacking companies' allegations. Says Richard Wessel, associate director for market regulation: ''One company has come to us in person -- officials and lawyers from Commonwealth, who claim they and other companies are being injured. I personally was not overwhelmed with their arguments. I have not yet been presented with proof that it really is a problem.'' Wessel's peer on the enforcement side of the SEC, associate director William McLucas, says he cannot remember an instance in which he took action against a shortseller for manipulation. In defending themselves against target-company complaints, shorts can point to a 1986 study of shortselling by Irving Pollack, a former SEC commissioner. Pollack examined 11 cases and found no basis for company allegations that shortsellers misused the press. Encountering hostility during a bull market, shorts sometimes wonder what a bear market will bring. Financially, they should do fine: The overvalued stocks they had sold short would top out sooner and fall faster. But some shortsellers, Jim Rogers among them, fear that negative feelings about shorting could turn venomous in a bad bear market, as battered investors see their assets and hopes shrivel. Jim Grant thinks the stage is being set for a congressional inquisition, like the hearings on shortselling after the market drop in 1937. He says that if the 1930s were repeated, ''shorts would be literally or figuratively hanged.'' Shortsellers may find some consolation in the thought that if these dire forebodings come true and they are hauled up before Congress, they will have made enough money on the short side to afford expensive lawyers.