Ryan Jacob, whose Jacob Internet Fund is the top performer among similar funds during the past three years, is selling money-losing stocks faster than ever and focusing on shares that are inexpensive relative to earnings.
"Cutting your losses makes a lot of sense," said Jacob, 35, in an interview from his office at Jacob Asset Management in New York. "It really helps you manage risk a lot better."
Jacob, along with co-manager Frank Alexander and research director Darren Chervitz, said he learned the importance of shedding losers after 2000, when the fund plunged 79 percent. The fund is investing more assets in companies such as IAC/InterActiveCorp that are cheaper relative to earnings and other financial yardsticks than most Internet stocks.
The $65 million Jacob Internet Fund rose at an annual average rate of almost 28 percent in the past three years, ranking first of 25 Internet and telecommunications funds tracked by Bloomberg. The gains were helped by investments in Ask Jeeves Inc. and Sina Corp., developers of Internet search engines, and Plumtree Software Inc., a maker of business software.
Investors who have owned shares in Jacob's fund since it opened in December 1999 are stuck with losses because of declines in 2000 and 2001. An investment of $10,000 when the fund first opened is worth $1,882 today.
"Twenty years from now, this fund may make it all back and make people rich," said Dan Culloton, an analyst at research firm Morningstar Inc. in Chicago. "The question you have to ask is: How much risk are you willing to endure along the way?"
Jacob's fund rose 6.3 percent in the past 12 months, placing 10th among 25 competing funds. The competing ProFunds Mobile Telecommunications UltraSector Fund is up 25.5 percent.
Jacob has experienced the peaks and troughs of the stock market firsthand. The graduate of Drexel University in Philadelphia almost tripled investors' money in 1998 and then endured what he calls "the rough years" from 2000 to 2002.
The Jacob Internet Fund reached a peak on March 10, 2000, when the Nasdaq composite index closed at an all-time high. The nadir was Oct. 9, 2002, when the index fell to its lowest level in more than six years. During that period, the fund lost 97 percent of its value.
Jacob said the bear market has made him a more active trader. The fund now sells winning stocks before they peak and gets rid of declining shares before they plunge, he said.