The First Rule of Investment Clubs
by Douglas Gerlach
Too often, I hear new investment club members complaining that their fellow club members don't want to spend time on education -- developing a common approach to the stock market that all club members agree upon and will follow. Those who balk at investing the time in learning about investing -- who would rather buy stocks based on tips from brokers or from TV pundits -- are not only shortchanging the rest of the club members, they are dooming the club to failure. Successful, established invesment clubs are often profiled in the press, and they are invariably asked about the key to their success. But do they ever say, "Well, we just buy stocks based on hunches?"

No! Successful clubs are always the ones that share two factors:

  1. They have a common methodology, and
  2. They use it consistently.

Most often, successful investment clubs faithfully use the Stock Selection Guide and follow NAIC's approach to investing. This strategy, buying growth stocks with a long-term horizon, has been honed by NAIC for nearly 50 years, and is well-suited for clubs because:

That't not saying that other methodologies wouldn't be practical or effective in a club -- but some investing strategies seem especially inappropriate. For instance, a momentum investing approach, attempting to ride a stock to the top and dumping it at a high, might be difficult to implement in a club that meets once a month.  Any kind of commodities or options investing, where a member might be liable for losses that are greater than their invested capital, seems way too aggressive to implement in a club setting. Technical analysis, which requires constant watching of the markets and a lot of training and study to understand, also seems out of place in a monthly meeting.

These strategies aren't "bad" for individual investors, but many clubs will find them difficult to use in their operations.

Undoubtedly, the most important rule of investing for anyone -- club member or not -- is to Know Your Approach, and Stick To It. Mark Hulbert, of the Hulbert Digest, tracks the performance of investing newsletters. He's often asked which methodology works best. His answer? The top-performing newsletters come from many different strategic viewpoints: technical, fundamental, momentum, contrarian, value, etc. The only common characteristic of all these approaches is that their publishers stick to their ideologies consistently.

It scares me when I hear of investors and clubs whose only strategy is to "buy stocks they think will go up." Unless a club has a solid approach to the stock market, an approach that all its members agree upon, then that club would, in all likelihood, be one of the large number of clubs that fail within a year or so of forming.