Chapter 1

Getting Acquainted with Investment Clubs

In This Chapter



It’s hard to read about any kind of financial topic these days without stumbling across references to investment clubs. Pick up your favorite personal finance magazine, and you’ll probably see a story about a traveling troupe of trapeze artists who spend their time on the ground debating methods of stock selection in their family investment club. Or a class of precocious third-graders whose teacher helped them form a club that regularly outperforms the best Wall Street analysts. Or even the retired firefighters in their 90s who meet in their nursing home’s recreation room to douse a small hot spot in their portfolio before it rages out of control.

What’s so special about investment clubs? Why do you want to be part of one? Thanks for asking. Luckily for you, we have some answers, even if you’re not a circus performer and you graduated from elementary school long ago. All that you need to be an investment club member is some enthusiasm and a deep desire to find out more than you ever imagined about investing while having much more fun than you expected. Do you fit the bill? Great. Pull up a chair and we’ll fill you in on everything you need to know to get started in an investment club of your own (fire hose not required).

Defining Investment Club

Simply stated (which we assume you prefer), an investment club is a group of people whose membership regularly meets, either in person or online, to study and then purchase individual stocks using a pool of money to which each member has contributed. Put another way, you and a bunch of your friends get together once a month to help each other learn about investing in stocks, and you collectively invest in those stocks that you decide have the best potential for future growth. Boiled down to its mathematical formula (always appropriate when discussing finances), that would be:

Study + Stocks + Socializing = Investment Club.

Don’t try reproducing that on your financial calculator.

Investment clubs can take many different forms. Some are clubs made up of co-workers, family members, or high school students. People interested in starting a club may recruit people from their social clubs, their place of worship, or even complete strangers they meet at an investing event or by placing an ad in the local newspaper. Some clubs meet for an hour or two once a month. Some meet less frequently but then spend a weekend together. Other clubs never meet face-to-face at all.

Yes, being in an investment club and never meeting your fellow members is possible, even if you’re all active club participants. Online clubs take advantage of the miracle of the Internet, and conduct all their club activities using e-mail, Web sites, and real-time chat to communicate. Completely online clubs are growing in popularity, as more investors become dependent on the Web for financial information gathering.

Online clubs also are perfect for students or others who move frequently and therefore can’t commit to a traditional club because they know they’ll soon be living in a different county or state. Many extended families use online investment clubs as a way of keeping family members connected even though they may live far apart. Holidays and family reunions provide the perfect time for semiregular club meetings, while monthly business is conducted by e-mail or on a Web site. We explain more about online clubs and ways to incorporate some of the better online tools into your traditional club in Chapter 5.

Roots in Motor City

Investment clubs have been around in one form or another for the last century or so. The modern investment club movement traces its roots back to World War II. A group of young men near Detroit began a club to invest in stocks; something that would’ve been prohibitively expensive if they’d tried to do it on their own. The club continued through the war years, as members in the service stationed overseas sent their contributions to the club members still at home, who’d research and then purchase stocks for the entire club. When the war was over, the club returned to normal operating procedures.

This club, one of the longest-lasting clubs in investing history, is the Mutual Investment Club of Detroit. Founded in 1941, it’s still active today and its portfolio is worth millions of dollars. This club and many others that have lasted for decades are tangible proof that a group of novice investors can band together to educate themselves about investing. Using this education, they select and invest in quality stocks with excellent growth potential. By doing so regularly, year after year, they take advantage of compounded growth and watch their portfolio grow over the long-term. With a little discipline and determination, you and your fellow club members can do the same thing.

Measuring the Payback from Joining a Club

The most important reason for choosing to be a part of an investment club is that you’re committed to discovering more about investing in the stock market and you’d prefer having a few other people join you on your journey. There’s safety in numbers, of course. If you know you’re not the only club member who’s clueless about price-earnings ratios or estimating future growth rates, you probably won’t be as self-conscious about asking questions and struggling to understand new investing concepts. Investment clubs offer you a number of specific benefits:

Perspectives

By their nature, investment clubs often inadvertently pull together people with diverse opinions of the world. That means a wide variety of perspectives adding to the mix when discussing the pros and cons of your monthly stock study, which benefits your club. When you listen to your fellow club members share their thoughts about a stock, regardless whether you agree with them, you’re gaining knowledge about how other people make judgments that you’d never get reading a book at home alone.

Safeguards

Sometimes, making decisions in a group keeps you from making mistakes when you’re buying and selling stocks. Convincing yourself that you’ve found the absolute best, most perfect, guaranteed-to-rise-in-price stock that’s come along in the history of the stock market is all too easy. In a club setting, however, your believing the stock will be a winner isn’t enough -- your fellow club members must also be convinced. Frequently, someone else in the club finds a reason (or two or three) why the stock may not be such a terrific buy after all. The club’s collective brain often is smarter than the brain of an individual member.

Performance

The club approach seems to work well when it comes to investing in the market. According to annual surveys conducted by BetterInvesting's NAIC (formerly the National Association of Investors Corporation) of the stocks most widely held by investment clubs, club holdings outperform the overall market. For instance, for the five years ending February 28, 2001, the annualized total return on NAIC clubs’ Top 100 holdings has been 19.1 percent versus 15.9 percent for the S&P 500.

Affordability

Another great benefit of investment clubs is that your minimum monthly membership contribution usually is relatively small. So, even if you’re living on a shoestring salary and can’t put away much money toward retirement, for example, you can probably afford $20 to $40 a month for club dues. You’re immediately putting that money to work for you, and someday when you have even more money to invest, you’ll be able to use the investing skills you develop with your club to build up your own personal portfolio.

Purchasing power

By participating in an investment club, you’re pooling your small investment with those of many other people, enabling all to make investments you probably couldn’t make on your own, and keeping your commission costs much lower than if you’d been investing all by yourself. The higher the percentage your commissions are of the total amount invested, the less money you’re actually able to invest. If you don't have thousands of dollars to start investing on your own, you usually can buy stock much more inexpensively on a percentage basis through an investment club than you can by yourself.

Deciding Whether an Investment Club is Right for You

Those are just a few of the many reasons hundreds of thousands of people choose to belong to investment clubs. We’ve probably convinced you that it’s time to take the plunge and join a club, right? Wrong, we hope. We know you’ll have a hard time believing that we’re actually saying this, but not everyone is cut out for investment club membership. Clubs can be time-consuming and involve a great deal of study time outside of the regular meetings. Your investments may not always grow in value, leaving you discouraged about the wisdom of investing in stocks at all. Of course, you can’t rely on any guarantees that your personal portfolio will perform well, either.

Save yourself the heartache of devoting hours of your life to starting or joining a club only to later doubt your commitment and have to decide whether to quit. Even one unmotivated member can be incredibly destructive to the morale of an otherwise healthy investment club. You don’t want to have to hide your face as you walk around town to avoid being pointed out as “the one who destroyed Grandma’s investment club,” do you?

Measuring the fit between you and a club

If you’re questioning whether you’d benefit from an investment club experience, we’ve commissioned a highly scientific diagnostic test to determine your investment club membership potential. Grab a Number-2 pencil and proceed. Your time begins . . . now!

Okay, you caught us. Just because this really is only a simple true and false quiz doesn’t mean that it can’t help you decide whether you’re cut out for investment club nirvana. The more questions you answer true, the more likely you’ll enjoy participating in a club with other enthusiastic investors.

Are you ready for club membership?

So how did you score? We’re hoping that taking this quiz opened your eyes at least a little to what you can expect as a member of an investment club. If you were hesitant about answering true to any of the questions, spend some time thinking hard about what it is you’re looking for from a club before you join or start one of your own. Successful clubs only get that way through the hard work of a club full of dedicated members.

When you become a club member, you’re entering into a legal arrangement with your fellow club members. Filling out all the paperwork and spending time getting acclimated to life as an active club member isn’t necessary, if you know deep down that you’re not in it for the long haul. Figure out what it is about the club environment that you can’t fully embrace. If you still find that you want to be a club member at some point in the future, continue your financial education on your own while you work on whatever you need to do to accept the realities of club membership.

Networking Nationally through NAIC

If you’re still reading, we assume that you’ve passed the self-test and you’re committed to pursuing membership in an investment club, whether it’s one that you join or start yourself. We give you all the information that you need to do both in Chapter 3 and Part II. Right now, however, we want to introduce you to a not-for-profit organization that can greatly increase your chances for investment survival if you choose to take advantage of all that it has to offer.

The single most useful resource any investment club can turn to (not counting the book you’re currently holding, of course) is the National Association of Investors Corporation (NAIC). NAIC was founded in 1951 by members of four investment clubs in Michigan, including the Mutual Investment Club of Detroit. One of those club members, Tom O’Hara, still serves as NAIC Chairman. O’Hara is a lifelong advocate of investment club membership. Because of his leadership and the talents of thousands of NAIC volunteers nationwide, more than 34,700 NAIC-affiliated investment clubs operating in the United States now sport an estimated 545,000 members.

Who are NAIC’s members? They’re people just like you: 54 percent are female, 46 percent are male. 73 percent hold college or advanced graduate degrees, and the median age of NAIC members is 54 (although members are as young as 5 and as old as 95).

The average investment club is 4 years old with a portfolio of $106,000. Among all clubs, 54 percent are all female, 8 percent are all male, and the remaining 38 percent enroll men and women. (One interesting note: NAIC has found that all-women clubs tend to perform better than the all-men and mixed clubs.)

If the size of the average club portfolio seems daunting to you at first glance, don’t fret. Remember that every investor started out with an empty portfolio and a few dollars. The average investment club has 11 members who each invest just $84 a month and, overall, commit an average of $927 to purchase stocks each month.

These investments, however, begin to add up, considering that the estimated total value of the portfolios of all NAIC clubs and their members is an astonishing $197 billion. Each month, NAIC clubs invest $247 million into the market.

Full disclosure by the authors

You may have noticed in the Introduction or author biographies that we're both affiliated with NAIC in various capacities. Among other roles, Doug is member of NAIC's Computer Group Advisory Board, the creator and consulting editor of NAIC's official Web site, occasionally contributor to NAIC publications and frequent guest speaker at NAIC events nationwide. He is also the Investment Club Therapist at ICLUB.com, official provider of NAIC's club accounting software and online service. Angele writes a monthly column and occasionally other articles for Better Investing, NAIC's monthly member magazine. She is also one of the original organizers of NAIC's Online Investor's School, which offers free online investment classes through NAIC's Web site. We are both frequent contributors to some of NAIC's many e-mail lists, such as the I-Club-List, as well.

If you're concerned that by writing this book we're hoping to give NAIC some free publicity, well, in a way you're right. NAIC is the only organization of its kind offering high-quality investment information at a low cost for both investment clubs and individual investors. Not only that, it's a non-profit organization run mainly by hundreds of dedicated volunteers throughout the country, volunteers who so strongly believe in the value of what NAIC teaches that they're willing to spend countless hours helping their fellow investors learn to invest their money more profitably.

We know this because we live it. Beyond any compensation either of us receives for articles we may write, we are strictly NAIC volunteers like all the other volunteers. Doug receives no speaking fees for his many educational presentations, just as a small example. We've both dedicated countless hours of our own over the years in the desire to give back just a little of what NAIC has taught each of us.

So if we introduce a few more people to a fantastic resource by mentioning NAIC frequently throughout this book, it's not because we'll somehow later profit from our relationship with NAIC. Our motive is simply to expose you, the reader, to the one organization that provides the most services and the most valuable information to anyone interested in being an investment club member. We don't hesitate to mention other quality organizations or investment club resources throughout the book. It just happens that NAIC offers more of what investment clubs need than anyone else out there. We hope that as you refer to this book, you'll be as impressed with NAIC as we still are, many years after our first encounters.

Although it now also welcomes individual investors as members, NAIC began as an organization geared toward serving investment clubs. As the number of investment clubs steadily rises each year, NAIC continually provides a support system for new and established clubs. Membership in NAIC is an important investment that your new club can make. Annual dues are around $40 per club, plus $15 or so per member. Some clubs decide to skip NAIC membership because they don’t want to pay the annual dues, but we consider that a shortsighted mistake. NAIC’s dues are a nominal cost for the benefits you can receive, so be sure to take advantage of NAIC membership for your club.

NAIC offers support for investment clubs new and old and can provide a sample partnership agreement, brochures and manuals about starting and operating a club, and other materials designed with the unique needs of investment clubs in mind. Here are a few of the major benefits of NAIC membership:

You can discover more about NAIC programs and materials that can help you and your club, including a youth investing program, instructional videotapes, an investor advisory service, and a club study program by calling its toll-free number (877-275-6242) or visiting its Web site at www.better-investing.org or service@better-investing.org. The NAIC mailing address is: National Association of Investors Corp., PO Box 220, Royal Oak, MI 48068.

It’s Not a Perfect World: The Trouble with Investment Clubs

As wonderful as learning to invest with a great big bunch of friends or family can be (and it is a pretty wonderful thing), problems definitely arise from time to time. As we caution you in Chapter 2, almost all these problems can be avoided if your club is deliberate during initial planning and carefully creates and follows, a partnership agreement, organizational by-laws, and an investment philosophy. We detail exactly how to prepare these important documents in Chapter 6, and you’ll find samples from real-life clubs throughout the book.

Other common sources of club problems are control issues and personality conflicts. You may have every intention of being a perfect club member, but that doesn’t mean your fellow participants are always going to be on their best behavior. Investment clubs by definition mean decision by consensus, or at least majority vote. Some people can’t let go of their opinions enough to abide by the group’s decision, and their disapproval can lead to discord and dissatisfaction. You also may have some club members with strong personalities who dominate every discussion and intimidate others who may choose to vote differently.

Dealing with overbearing members

If your club dynamic starts to suffer from the consequences of having overly dominant members, don’t sit around waiting for the situation to resolve itself. Things aren’t going to get better all on their own. Your club president may need to tell the offending member to tone it down (if your club president is the dominant one, you’ll need the vice president to step in). If members don’t feel comfortable about voting because of confrontations with opposing members, you may try a secret ballot rather than an open show of hands for a while. We offer more problem-solving strategies in Chapter 12, but the underlying message is that investment clubs are real-life. Sometimes you need to deal with difficult people or situations, but you can’t allow your club experience to be ruined by them. Be proactive and persistent in shutting down annoyances as soon as they spring up.

Another problem with investment clubs is that they demand the participation of their members. Many club members lose interest after a year or two. If disinterest invades your entire club, and no one wants to do any work, then your club is doomed to fail. By the same token, because you’re in a club, you can spread the work around so that no one is overburdened with responsibilities. Clubs are only as strong as their collective members.

Revisiting the Beardstown Ladies

You may have heard about the controversy surrounding the Beardstown Business and Professional Women's Club, authors of the 1994 bestseller The Beardstown Ladies’ Common-Sense Investment Guide. Two years after the book was published, an investigative reporter discovered that the rate of return trumpeted on the book’s cover, 23.4 percent a year, would have been impossible for the Ladies to achieve.

Eventually, the truth was revealed. After computerizing their club’s records, switching from manual bookkeeping to NAIC’s accounting software, the club’s treasurer misinterpreted the rate of return calculated by the program. The 23.4 percent investment return wasn’t for the life of their club; it was only for the prior two years. In truth, the club’s performance was closer to 9.1 percent a year, hardly the handiwork of “investment geniuses” (as their publicists proclaimed), and much lower than the S&P 500’s record of 14.9 percent for the same period.

Nevertheless, the resulting media hoopla all but ignored the fact that it was an honest mistake, that the ladies never had knowingly tried to deceive anyone, and their many books did far more good than harm.

The number of new investors the Beardstown Ladies turned on to the joys of stock study, investment clubs, and NAIC is hard to calculate, but we’ve talked to many people who’ve said that their first exposure to investing came courtesy of the ladies’ homespun wisdom. And no amount of media backlash, deserved or not, can erase the sense of joy the ladies seem to derive from their club and each other’s company.

Dismissing their books and philosophy as naďve or unsophisticated is easy, but we prefer to focus on the simple, rational stock selection criteria that they’ve championed from their beginnings along with their encouraging words aimed at inexperienced investors. Any club would do well to emulate the ladies’ emphasis on the creation of community and generosity of spirit over a solitary focus on monetary gains. Some things you just shouldn’t attempt to measure solely by annual return.

Oh, and perhaps the better of the lessons to be learned from the Beardstown Ladies? Read the manual. Whether you’re using new software, learning to invest, or starting a club, it pays to read the instructions before you begin.