Pegasus soars over bear market

Published 11:00 am Friday, March 14, 2003

For most investors, Monday was another stock-market slaughter – Dow down 172, Nasdaq off 27, Standard & Poor’s 500 index down 21.5.

But for Pegasus Investment Partners, Monday was somewhere between a wash and a slight gain. The difference – the disciplined, cautious approach of managing partner Doug Saksa.

“There is no free lunch in the investment market,” he said. “Our first rule is, don’t lose money. The second rule is, don’t forget the first rule. And the third rule is, make some money when you can.”

While that may seem self-evident, Saksa said individual investors frequently behave in opposite fashion, ignoring their losses in the hopes that things will improve, and selling their winners too quickly out of fear that today’s small gain may turn into tomorrow’s loss.

“If you can manage your losses, you’ll be in pretty good shape,” he said. “You can’t really get into much trouble when you have gains.”

Saksa’s $20 million fund differs from the typical mutual fund in a number of respects, principally by making extensive use of “short-selling,” in which the investor sells a stock he borrows but doesn’t own at market value, then buys the stock later on.

If prices drop between the sale and subsequent purchase, the investor makes a profit.

The last three years have been great times for short-sellers, Saksa said, particularly those who shorted small technology stocks.

“Microsoft and IBM may drop, but some of those smaller companies went from $50 or so all the way to zero,” he said.

Saksa calls Pegasus a hedge fund, and as the name implies, he hedges his bets, buying some stocks to resell later in hopes that the price goes up – being “long,” in market parlance – and shorting others.

“We were a little more short than long today,” Saksa said on Monday, which is why Pegasus eked out a small profit on a dismal day.

It sounds simple enough in theory – be “long” in stocks that will do better than the overall market, and “short” in stocks that will do less well. But there’s nothing easy about picking them for Saksa, who manages the portfolio, or for partner Peter Bortel, who analyzes the stocks.

The secret, Saksa said, is to do your homework, but admit that you don’t know everything.

“We look at how a stock does relative to the market. If the market is going up, and other stocks in the industry are going up, and ours is going down, we suspect somebody knows something we don’t. That’s where we get very cautious.”

The results: 13 percent annual growth for the past 20 years. And although Pegasus got clobbered when the bull market turned bearish, it has gone up 31 percent in the last five years while the S&P 500 has gone down 9 percent.

A Shoreline native and UW graduate, Saksa got his MBA from Columbia University, then spent 10 years on Wall Street before starting Pegasus. He moved to Bainbridge in 1989, and operates the fund from his Seabold home.

As well as being the manager, Saksa is the fund’s largest investor, and he manages it so that he can sleep well at night.

“We’re not always right,” he said, “but our goal is not to be very wrong for very long.”