Stock picker.

David Ryan, who first made a name for himself at the age of 26 by winning an investment contest, recently set out on his own as a hedge fund manager

David Ryan first made headlines as a stock-picking wunderkind in 1985, when he was only 26 years old. That year he won first prize in an investment championship sponsored by a former Stanford professor. Ryan won by demonstrating that he had increased the value of-his personal stock holdings by 161 percent in the previous year.

At the time, he was studying for his MBA at Loyola Marymount University, and working for William O'Neil, founder of Investor's Business Daily. Ryan staved with O'Neil for 16 years, first as a filing clerk, then as a leader of investment workshops, and later running O'Neil's mutual fund, the New USA Growth Fund.

The fund was designed to use O'Neil's investment strategy, which involves looking for strong earnings and consistent five-year growth. It favors small and mid-sized companies that offer a new product, fill a new niche, or belong to a new industry. The fund was created in 1992 and was sold in 1997 to Boston-based Massachusetts Financial Services.

In June of this year, Ryan left O'Neil to start his own hedge fund, Ryan Capital Management LLC. The two-man company is based in a Wilshire Boulevard skyscraper that overlooks Santa Monica Bar. Ryan works with Thomas Schroeder, a friend from Paul Revere Junior High School and former O'Neil employee. Ryan grew up in Pacific Palisades and now lives in Santa Monica Canyon, within bicycling distance from work.

Question: How did you become interested in stocks?

Answer: When I was about 13, my dad brought home the Wall Street Journal, as he did every night, and I was flipping through it and I found a stock trading at $1. I went to my dad and said, "I have a dollar in my drawer. Can I take it out and can we buy this $1 stock?"

He said no, it doesn't work that way, you've got to do some research and find a company that you think has a good future. A few nights later we saw an article on a company that was supposedly turning itself around, called Ward Foods, which makes Bit-O-Honey and Chunky candy bars. So we ended up buying 10 shares at $10.50. It went to about $4, and took about two more years to come all the way back. What fascinated me was, why did my stock drop so much? While others held very well, or even, some stocks made some good moves in a tough market.

Q: What does your father do?

A: He develops shopping centers and individual properties in California. His company is Ryan/Kalof Commercial Real Estate. There's a Trader Joe's on Third and La Brea, they own the property. He did a number of shopping centers with Ernie Hahn.

Q: How did you come by the money that you had invested in 1985, the year you won the investment championship?

A: It was money my dad had invested for me over the years. It was probably $40.000 or so at the time.

Q: What is your new fund's strategy?

A: It's very similar to O'Neil's, with additional nuances. The stocks we like best are medium- and small-cap stocks that aren't followed as much on Wall Street. They should be the strongest stocks in strong industry groups that have been going well for a while. All the stocks we buy have some institutional sponsorship because mutual funds have such buying power that when they really like a company, they keep on buying it, and it keeps on going. We will still buy large-cap stocks if they meet all the characteristics. We will also sell short, which is something that O'Neil doesn't really endorse much.

Q: How have you handled your new fund during this volatile period?

A: My company was founded July 1, when the market was doing well. We got fully invested in the first two weeks, and then all of a sudden the market turned. Within a few days I realized this correction was different from the ones we've had in the past. So I went straight back to cash, and missed all the damage that occurred from the middle of July until now. We were up for July, and in August we are about even. A lot of the growth funds were down 12.5 to 15 percent in a month's period of time.

It's such an advantage being small, especially in this type of market, because we can move quickly. If the market is really going to come off, we can get out of the way and preserve our clients' assets. Cutting losses is a part of my philosophy. I just can't stand the pain. If I buy a stock and it starts going down, I move on to the next stock or hold cash and wait for another alternative.

Q: What does your portfolio look like now?

A: Now we've got some long positions, we've got some short positions. It looks like the market is going to rally for a couple of weeks. We're playing it very sensibly because a lot of damage was done. and there are still a lot of questions, like, where is our economy going, and where are the economies of the world going? I'd say we're 80 percent cash. Of course we're so small, you could call me three days from now and it could be 20 percent cash. With a couple of days of buying we're fully invested again.

Q: What do you like, given the market?

A: The ones we like are the ones with the most consistent growth and consistent earnings. Stocks like Lexmark, a company that makes printers and competes with Hewlett-Packard. Another one that's really very diversified is Tyco. Those are the ones the mutual funds will come back to very quickly if we have a rally. Some of the retailers are also doing well, the Home Depots and Abercrombie & Fitches. Home Depot has tremendous expansion plans.

Q: When do you start buying?

A: When a stock starts turning up. You can see when a stock is rallying by looking at the volume. Say a stock is dropping day after day, and averaging 300,000 shares a day. Then all of a sudden there's a huge volume, it trades 800,000, and is up a point. That's when you know it has probably hit bottom and it's going to turn. That's when a lot of big buyers come in and say, hey this is a great value here. They start buying and running it back up. So I look for volume to come in, to turn a stock higher. Underlying all that are good fundamentals, good earnings growth. In the end, that's why people buy companies, because of their earnings power.

Q: When there is market volatility, do you sleep at night?

A: I'm fairly good at staying on the correct side of the market, so most nights I sleep pretty well. And 1 have four kids that put it all in perspective. They have a hard time understanding what it is I do. My wife was saying, "Your dad had a tough day today, he lost some money." They were like, "Oh, well, can we go look for it? Can we help him out? Where'd he lose it?" Also I've been going to Calvary Church in Pacific Palisades for 15 years now. That gives me a great perspective on what I'm doing.

Q: How often do you go to church?

A: Every week. I also teach Sunday school for the 4 and 5 year olds. My wife says when it comes to kids, I have the mind of a 5 year old, so I relate perfectly. One thing I do once a year, is I get a box of cooking chocolate, and cut it into pieces. Then I say, 'You guys are so special, I want to give you guys this chocolate.' Then they all start fighting over it. 'I want the biggest piece, no, I want the biggest piece.' When they start eating it, it's kind of bitter, so they start spitting it out in the garbage can. That's how I demonstrate to them that a sin can look so good, but after you taste it, you realize it can have the worst consequences.

Q: Are there any stocks you avoid for ethical reasons?

A: It doesn't happen that much, but there are a few companies out there that have material that doesn't promote good Christian values. I'm not going to be buying a Playboy, and I try to avoid the Time Warners, just because I don't like the material. I think they do more harm than good for this country. But there aren't many companies you really have to avoid.

Q: You were a history major at UCLA. Why not economics or finance?

A: I actually did do econ, but halfway through, I started realizing how many economists make predictions that are so wrong. I wondered, how can they be so wrong and teach us to do the same thing? So I switched majors. I was much more interested in history.

David Ryan

Title: Portfolio Manager, Ryan Capital Management LLC

Born: Long Island, N.Y., 1959

Education: B.A., UCLA: MBA. Loyola Marymount University

Most Admired Person: Charles Colson, special counsel to Richard Nixon. "After Watergate, he gave his life to Christ, and established a prison fellowship that administers to prisoners."

Career Turning Point: "In 1984, when I sat down and analyzed why I had lost so much money in 1983. I started using a set of rules and being very disciplined."

Hobbies: Tennis, family, body surfing

Personal: Married, four children