Ways to make your investment club prosper.

Belonging to an investment club can be a sociable and educational experience. But it takes commitment to make it a money-making venture.

IT'S ALWAYS EASIEST AT THE BEGINNING. WHENEVER your investment clubs meets, everyone is bustling with enthusiasm. There's never a problem getting members to research stocks. There's a feeling, a spirit that anything is possible.

Two years later, though, it's a different story. The excitement has started to fade and club members start to slack off. They stop coming to the meetings. They do less and less work researching companies and recommending stock picks. Their idea of belonging to an investment club has narrowed to sending in a check for their dues each month.

It takes more than a monthly contribution to achieve wealth, though. BLACK ENTERPRISE decided to talk to clubs that have gotten over the two-year hump on the road to long-term success. We looked for their advice on how to keep that initial momentum going strong. Here are their tips on how to help your club survive the down cycles, of group investing. After all, you need members who are willing to do the research and devote their time to club activities. You need the group to pull together. And, if your club hangs in there long enough, everyone will reap financial rewards.

1. Keep interest high. Perhaps the greatest challenge clubs face is keeping members active. "What happens is that a handful of club members end up doing 80% of the work, which eventually leads to resentment and fleeting club members," says Walter L. Clark, vice president of investments with Gruntal & Co. L.L.C. in Baltimore, and financial advisor to several investment clubs.

It doesn't help that member participation tends to drag in a declining market. Then again, doubt sets in with club members who thought they would make money quickly, and then jump ship soon after the club's formation, adds Clark. "The first two years are really the building blocks. The club can't afford to have such setbacks because people become complacent and impatient."

Thomas O'Hara, chair of the National Association of Investors Corp. (NAIC) in Royal Oak, Michigan, agrees that it is crucial that clubs stay together for a significant period of time; otherwise, their potential to achieve long-term gains will vanish. "If club members can be persuaded to continue even during long down periods, you are virtually certain to purchase stocks at bargain prices and profit handsomely when prices move upward."

A buddy system can be one way to keep members active and interested. Your club can form teams of two or three members who meet outside of the monthly meetings to do the research together, and then present their findings to the group.

The Black Women Investment Corp. in Raleigh, North Carolina, used another strategy to keep members motivated: training programs. Every partner is required to complete a short session each month and attend an annual program that could last one day or six weeks. The sessions cover a wide range of issues, such as using library resources to investigate companies, finding information on-line and using NAIC tools to analyze and select stocks. "Last year, we had six three-hour sessions because we had new people who wanted to join the club," says Saundra Wall Williams, past president of the investment club and an NAIC council president for the eastern North Carolina region. "Before a new partner can join, we require her to take the training. This way, she is clear about what she is getting into. We started out with nine women who wanted to join the group, but after the sessions, only six decided to sign on," adds Williams.

Launched in 1988, the Black Women Investment Corp. is made up of 15 women who represent various professions from educators to engineers and range in age from 25 to 55. According to the club's bylaws, members must attend 75% of the meetings throughout the year, although there are no penalties or punishments inflicted on no-shows. "I know of some clubs that charge their members fines if they don't come to a meeting or if they are late," says Williams, co-editor of the Wall Streetwise newsletter. "One club charges late members a dollar a minute. So, if you show up 10 minutes after the scheduled time, then that's $ 10 out of your pocket--even thought it goes into the portfolio. Another club stipulates that if a member misses three meetings out of the year, [he or she] is put out of club. Or if you don't present a stock at least one time a year, you are out of the club."

Williams and other NAIC council directors point out, however, that such measures are somewhat harsh. The idea is to bring together--from the start--people who are willing to work together and are committed to the club's success. That's why it is also important to make sure the club's partnership agreement clearly states members must attend a set number of meetings and must recommend a stock a certain number of times a year.

2. Provide ongoing education.

Initially, each member brings a different understanding or level of knowledge about the stock market to the group. And, logically enough, the most knowledgeable members tend to be the most committed to the club. With that in mind, it's in your club's best interest to continuously increase members' knowledge about investing.

"It's important for clubs to join NAIC, participate in their stock-study programs and attend the regional council meetings," says Baunita Greer, president of Cromwell, Miller and Greer, a New York-based brokerage firm. "Encourage members to attend classes sponsored by regional NAIC councils. Many council presidents will actually go out and tutor a new investment club," adds Greer, an active participant of New York NAIC council.

The NAIC, which has a board of directors and 93 regional councils, is the national clearinghouse for investment club information. Williams, of the Black Women Investment Corp., is also one of the 20 members of the NAIC national board of directors, the governing body responsible for making the rules for member councils. Additionally, her home state, North Carolina, has four regional councils.

"Right now, we have 13 different club representatives who are part of the regional council; that's less than 1% when you are talking about 13 clubs out of 280," adds Williams. "As president, that' something I intend to change over the next two years."

Council directors also serve as a sounding board for local clubs, many of which sponsor open forums where club members get to ask questions and address their needs. Just about all host an annual Investors Fair, where four to five companies of different sizes make presentations. Of course, each region's event may vary slightly.

Club members must be willing to learn the rigors of evaluating a company stock the NAIC way, says Greer, who belongs to the CMG Investment Club in New York, a group consisting of five professionals, mostly Wall Street types, and is a spinoff of the brokerage firm. "Every member should know how to use NAIC's stock selection guide," Greer adds. Another key step in boning up on the market is reading NAIC's Better Investing magazine, which is chock-full of great advice and pointers. Furthermore, members should also routinely read at least one business or investment publication.

"My belief is to make mistakes while the club is still young," adds Williams. "If you are going to lose money, let it be in the early stages while you are still learning as opposed to waiting until you have a lot of money to lose. We watch a stock for three months before we decide if we want to buy it."

To date, the Black Women Investment's portfolio is valued at over $55,000, with an average return of 28%. It holds shares in 15 companies, including Nike, Home Depot, BET, Microsoft, PepsiCo and Cisco Systems. A company has to have at least a five-year history before the club will even consider it.

Clark says there should be a stipulation that partners continuously develop their skills when it comes to picking stocks. "They need to understand what fundamental statistics to consider: sales, prices, earnings, betas, dividends and trends. But they also need to know how to interpret the information, so they understand when to buy, hold and sell a stock."

3. Keep the team spirit alive.

A club's success depends on its members being in sync. A major cause of clubs breaking up is that members don't share the same investment philosophy.

What tends to happen is that clubs split up, with members cashing out and depleting reserves. Oftentimes, members set on growth stocks go one way and start their own. One club fell apart because several members wanted to invest in initial public offerings (IPOs). "Some individuals might have the mindset that they want to constantly trade stocks to garner higher returns quickly. But trading stocks is a highly developed skill," cautions Clark. "Some clubs get caught up in the buy/sell frenzy of Wall Street. Short-term trading doesn't work with the long-term growth objective of investment clubs."

Whenever your club buys or sells a stock, it has to take into account how that decision will impact the club's overall portfolio, advises Clark. "Be wary of people who overreact to the news," adds Clark. "For instance, if they find out that a company is being sued, then they know it s bad news that could drive the price of the company's stock down. So, they decide [that would be] the time to buy. As soon as the stock starts to go up, they are ready to sell it to make a quick profit."

NAIC recommends that clubs buy and hold stocks with an investment objective of doubling their money every five years. This means a club's investment portfolio should achieve an average 14.9% compounded annual rate of return. Before a club even gets started, it should take into account potential members' risk-tolerance level, which may be conservative, moderate or aggressive.

Gail Perry-Mason, vice president of investments at First of Michigan in Detroit, works with 15 local investment clubs. The first thing she does is to give members a risk profile personality test. "This way, they know up front where everyone stands--whether an individual likes to take a lot of risks," says Perry-Mason. "This also helps them come together as a group and decide how they really want to invest their money and manage the club's portfolio."

The Future-Vest Investment Club started around the time of the 1987 crash. The New York-based club purchased five stocks and a couple of mutual funds using Citibank's brokerage services. "When we first started, we said we didn't want to get involved with very large companies, because we didn't have a lot of money," says Monica Noel, the club's president and an NAIC council director. "We set a limit that the companies had to trade at $25 a share or less. We didn't specify industry, although some people said they didn't want to invest in tobacco or South African stocks."

Today, the club's portfolio is heavily weighted in blue chip companies. NAIC suggests a portfolio diversification of 25% in small enterprises, 25% in large firms and 50% in mid-size companies.

Future-Vest now holds shares in 22 companies, including Motorola, American Express, Advanced Micro Devices, Intel, Abbott Labs, Carnival Corp., Hasbro, PepsiCo and American Software. To date, the club's portfolio is valued at $240,000, with an average rate of return of about 16%. Future-Vest has some 25 active members who come from all walks of life, ranging in age from 25 to 75. "A lot of the members are older and want to stay with blue chip companies," says Noel, a former Citibank vice president and currently a financial planner. "The club's younger members are interested in many of the tech stocks, which tend to be more volatile." Still, these younger members, who are in their 20s, view the club as a long-term venture by which to increase their wealth, she adds.

4. Handling departing and joining members. Not enough clubs address what to do when a member leaves and when someone joins the group in their bylaws. In fact, many clubs don't follow their bylaws as closely as they should. Or they neglect to update their operating procedures and bylaws to deal with issues as they arise.

"What happens when someone moves away or experiences financial hardship?" asks Perry-Mason. "Do you pay the person in cash or securities? If someone wants his share of the money out right away, he has to liquidate that part of the portfolio." Clubs can opt to transfer a number of shares in stock to a departing member. If the member wants cash, then the club has to sell shares unless it has enough in its cash reserve to cover the loss.

"We allow members to take out their money in one of two ways: a partial or full withdrawal," notes Williams. "A partial withdrawal means you can take out a part of your money--the minimum amount is $500 but you have to have been in the club for at least two years. Full withdrawal means you totally divest your capital from the club."

It takes 60 days for the club to get the withdrawing member her money since it will have to sell some of the portfolio if cash is not available. The member has to pay the fees associated with selling the securities. The club reduces the member's personal holdings by the amount that is withdrawn. However, members can put that portion of their money back into the club at any time.

5. Promote, outside, social activities. You can rekindle members' spirits by hosting outside activities, such as a trip or party. Most clubs sponsor one IN or two social events during the year, usually a Christmas party or summer picnic, in which spouses, children and other family members are invited. Some clubs hold a three-day weekend annual retreat at a resort or elegant hotel. Your club could also give a party with one or more clubs in your region.

Another idea is to invite guest speakers to attend meetings to discuss trends and investment opportunities. You could ask a stockbroker or financial planner to talk to your club. You could also reach out to your regional NAIC council president or a local club that has been together longer than yours. A local economist, banker or college professor makes a great guest to invite to club meetings and can lead engaging discussions on the regional, national or even international economic outlook.

The NAIC's O'Hara suggests arranging a club visit to a company in which your club owns shares so that members can see and possibly meet the people who supply the company's products or services. It's also wise to have a member attend a company's annual shareholder's meeting and report back on the management's message, business discussed and voted on, problems that were brought up and reported on, and any questions raised by other stockholders.

"Your outside activities don't have to be related to investing," adds O'Hara, "although a field trip to a financial institution, such as a stock exchange, could also be very interesting. Take advantage of the visitor's gallery to learn firsthand how the market works."

You might also consider publishing a quarterly newsletter that discusses the club's portfolio performance, gives investment tips for members with personal portfolios or announces special events in members' lives.

Just keep in mind that the social aspect of the club is secondary. Treat your club as a business because that's what it is. As long as your club continues to obtain superior investment results, everyone's attention will remain focused.

"What makes our club successful is that we are consistent," says Williams. "We have always invested regardless of what was going on in the market or around us. When you invest that way, you see your club getting a constant return and you see your portion of the portfolio continue to grow. That's an incentive for partners to stay in the club, to keep learning and to continue investing."

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Here are some guidelines set forth by NAIC to help you develop a successful club

* Follow a structured yet flexible agenda.

* Set goals, both short- and long-term, and track the club's performance toward achieving them.

* Required involvement of all club members.

* Reward member participation.

* Support the continuing education of all members.

* Maintain a disciplined approach to studying and selecting stocks as well as portfolio management procedures.

* Think creatively: "How can we continue to meet the needs of our club?"

* Encourage member involvement in NAIC council activities and national NAIC congresses.

* Promote the spirit of enthusiasm, excitement and enjoyment.