Investment clubs earn while learning
THREE years ago, Bonnie Hand got a call from ``a lady up the road wantin' to form a club to indulge in investin' in stocks.'' That call spawned the all-female Piedmont Investment Club. And, starting from scratch, several teachers, homemakers, a nurse, receptionist, and bookkeeper have put together a remarkable performance record.
Their $23,000 portfolio of 11 stocks has produced a 32.7 percent annual return (vs. 24.3 percent for Standard & Poor's 500 index) over the life of the club (as last April 30).
The Piedmont Investment Club has also won a spot in the 1986 All-Star team, a recognition awarded by the National Association of Investment Clubs (NAIC). Not surprisingly, there's a waiting list of women in Anderson, S.C., ``wantin''' to join the club and ``indulge in investin'.''
But success did not come immediately. The club got off to a rocky start when the original president quit and several members withdrew before Ms. Hand took over.
``The first year and a half were the worst,'' Hand says. ``We've had so many women that came in for social reasons or to get rich quick. Nothing is get rich quick. You have to learn to be very patient.''
Typically, 50 percent of all investment clubs fold after the first 18 months, according to Thomas E. O'Hara, chairman of the NAIC, a nonprofit organization.
``The biggest reason is a difference in investment philosophy. When you get short-term and long-term investors in the same club, it just doesn't work,'' he says.
Nonetheless, there are more than 6,500 NAIC groups in the United States now, almost double the number in 1981. Membership tends to ebb and flow with the stock market. In 1970, at the tail end of the go-go era, association membership peaked at 14,000 clubs.
Robert L. Baird agrees that to counter such cyclicality and head off problems, careful selection of members is crucial to long-term success. After four years, Mr. Baird's first investment club broke up over communication problems. His second, a 1986 NAIC All-Star, has thrived for 11 years and has amassed a $111,000 portfolio.
Baird also mentions patience: ``It takes five years to see the fruits of your labors.'' His Seventy-Five Club of Ann Arbor, Mich., has set a goal of 15 percent annual return. In January, the club's portfolio rose 21 percent, while the S&P 500 was up 13 percent. ``If you do 15 percent, you'll double your money every five years.''
The Seventy-Five Club (members include accountants, a librarian, and an auto mechanics teacher) has done slightly better than 15 percent annually. Baird has chipped in $13,000 over the years ($25 a month is the club minimum), and his stake in the portfolio is now worth $34,000.
``My 25-year goal is $270,000, and by that time I'll be ready to retire. At 15 percent, I'll have put in only $30,000 of my own money,'' he says cheerfully.
In addition to building a retirement fund, investment clubs offer an inexpensive ``hands on'' class for the stock market neophyte. Most clubs require only a $20 to $25 minimum monthly deposit (although some start out with larger sums to build up the pool of money quickly to make some purchases early on).
Typically, the clubs meet once a month and each member keeps track of one stock in the portfolio (reading quarterly reports, following the stock's price, and watching for news events).
New ideas often come from local companies, news events, members' brokers, and the NAIC. The Seventy-Five Club requires two members to make a company presentation, with a recommendation, at each meeting. The club has also set up 16 financial ratios to serve as guideposts in selecting stocks.
Buy-and-sell decisions are made by majority votes. But admittance of new members may require a unanimous vote.
And the club meetings generate ideas for members' own portfolios. ``I knew very little about the process of investing,'' says Hand. But her club membership gave her the confidence and understanding to pull her individual retirement account money out of a bank certificate of deposit and open a self-directed IRA at a brokerage.
There's no limit on what a club can do - except, of course, how much time members are willing to devote to the effort. For instance, the Ann Arbor Seventy-Five Club gets the competitive juices flowing by running an annual stock selection contest.
Each December, each member picks 10 stocks for a theoretical portfolio. The club follows the stocks' prices, dividends, and splits. The winner keeps, for a year, the ``Robert Visel Memorial Trophy,'' a Tiffany lamp made by one of the members' wives.
To those thinking of starting a club, Baird counsels: ``Run the club as a business, set up a good partnership business.'' Indeed, that's the best way to avoid corporate taxes. Both Baird and Hand recommend setting up procedures for members who must withdraw (or are asked to leave), taking their money with them.
For instance, to avoid disrupting the portfolio excessively, the Piedmont Club returns funds to withdrawing members over a three-month period (except in hardship cases). And it charges a 4 percent penalty to cover brokers' fees if they have to sell stock to cover the withdrawal.
Despite the caveats, Baird remains a gung-ho investment-clubber. ``I live and breathe it. I have fun doing it.'' And he's quick to add, ``It's been a good investment.''