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Investment clubs outperform the experts.

Federick C. Russell gave birth to the modern investment club movement in Detroit in 1940. Unable to find a job and desiring to buy a small business, the recent college graduate formed the Mutual Investment Club as the vehicle for accumlating capital. The club had three objectives" invest every month, reinvest all dividends and buy growth companies.

More than fifty years later, the Mutual Investment Club is still active. Membership has grwon from six people to 22 (although only 15 continue to invest regularly). The group has invested a total of $220,000, from monthly contributions of $20 to $25 during the lifetime of the club. The value of the club's portfolio is worth more than $2.2 million. Not bad considering members, at one time or another, have withdrawn $1.4 million.

The Mutual Investment Club is not alone. There are a number of groups that have been around for decades, even though the average club is about 8 years old. What's exceptional about investment clubs is that their portfolios have compounded annual earnings at an average rate of 14.96%. If those same members had invested in Standard & Poor's 500 Index (of stocks), their money would have earned (12.25%, according to the National Association of Investors Corp. (NAIC) in Royal Oak, Mich., a governing body representing 7,600 investment clubs with a total of 140,000 members.

How are investment clubs able to consistently outperform the S&P 500? One reason: "Investment clubs tend to leave their portfolios fully invested [in select stocks, bonds or funds] at all times instead of trying to guess what the market is doing," says Thomas O'Hara, NAIC chairma of the board of trustees. Another reason clubs do well, says O'Hara, is because they are in it for the long haul. This explains why members stay together for years.

Outside of superb performance, an investment club provides a simple and generally cheap way to get into the financial markets. Vernon Brown, a financial planner with Bilal, Brown & Williams a financial planning firm in Tarrytown, New York, says investment clubs are ideal because, on a basic level, they operate in accordance with the first rule of thumb in any investment strategy--diversification.

"An individual with a small sum of dollars rarely can diversify the way he would like, so he usually ends up getting into a mutual fund that is a one-stop shop for diversification (since a given mutual fund may invest in many different companies), Brown says.

For some people, however, a mutual fund has not been an attractive investment, in that they have no control over which securities the fund holds. n addition, there are numerous fees and administrative charges.

Yet, many individual investors do not pick stocks on their own, or they may not have enough money to buy enough shares. One solution is joining an investment club. This way memmbers can select the securities they are going to buy and sell within their portfolio.

Of course, mutual funds are still the most popular form of pooled capital investment for securities in spite of the growing popularity of investments clubs. The total assets of mutual funds reached a record $1.3 trillion by the end of 1991, according to the Investments Company Institute. In comparison, the investments of NAIC member clubs have a total value of less than $450 million. Albeit a professional money manager brings experience and knowledge about the market to his stock picks, investment decisions are made by members, many of whom took a crash course in the world of securities when they joined the club.

It's inconceivable that the performance of stocks chosen by investment clubs would stack up to those chosen by mutal fund managers. But in fact, the stocks that professional money managers picked haven't performed as well. At least according to a survey by NAIC that shows over a nine-year period, almost 62% of NAIC accounts eqauled or exceeded the earnings rate of the S&P 500. But only 19% of professional money managers equaled or exceeded the S&P 500 during the same period, says NAIC's O'Hara.

Who's Who Among Investment Clubs

The typical investment club is a group of people, often family members, friends and/or associates, who meet reguarly and pool their money to purchase securities. Much like the oldest known club, which began operating in Texas in 1898, today's investment clubs are built around a combination of social interests and a desire to take a risk in the financial market.

Most investment clubs are small, usually anywhere from 10 to 20 people. Although a few are incorporated, most clubs are partnerships.

But there is no one type of investment club or one type of club member. People from all walks of life, from all job descriptions belong to investment clubs. Yet, a number fo clubs are organized along an ethnic or gender base. While NAIC doesn't have any concrete figures on the number of black investment clubs, there has been a signficant increase in the presence of blacks at NAIC annual meetings in the last couple of years, says Thomas O'Hara.

A recent NAIC survey does reveal, however, that women's groups represent nearly 42% of all NAIC investment club members. What's even more surprising is that women investment clubs outperform male investment clubs. Women's groups have a higher annual lifetime return, averaging 15.2%, compared to men's groups, which average 14.5% and mixed groups, 15.1%. The reason: Men are more prone to invest based on tips and many seek short-term profits, whereas women tend to do more research and look for long-term investments, O'Hara says.

The Washington Women's Investment Club (WWIC) is a group of 21 black women that was formed in 1987 in D.C. "WWIC started as a mechanism for making group investments as opposed to individual investments, says Sherri Blount, one of the club's founders (the others are Denise Gibson-Bailey and Irene Duke).

"At first," Blount recalls, "I thought that people wouldn't welcome the idea and would be reluctant to put up the initial investment we were asking for to join." Initially members invested $500 a piece to start the club and paid monthly dues of $50 (current members pay $60 a month). But a pleasant surprise, according to Blount, was that "everyone we invited to the first meeting not only showed up, but they joined." At that time, there were 18 women in the group. The careers represented in the group run the spectrum from an elementary school teacher to a CEO of a Fortune 500 company subsidiary, says Blount, who is associate general counsel for Public Broadcasting Service (PBS). The average age of WWIC members is 38. Some of the women are married, others are married with children, and some are single.

"What's different about our club from other clubs," says Blount "is that they striclty invest in securities (stocks and bonds), whereas we have a more active club." The group operates via a three-tier committee structure: the investment committee, real estate committee and entrepreneurial ventures committee. Each group is made up of roughly five members.

WWIC has devoted a lot of attention to entrepreneurial ventures. While the group has sold memorabilia at conventions before, a more ambitious project is the art show the group has sponsored in the past three years. WWIC, acting almost like an agent or broker, gets a small commission on any piece sold. WWIC showcases the work of well-known national and local artists. The artwork ranges in price from as little as $200 to $5,000 for original paintings, sculptures, serigraphs and lithographs by famed artis Jacob Lawrence. The entrepreneurial committee is currently pursuing some type of joint venture to do at the 1996 Olympics in Atlanta.

Of course, the most active group is the investment committee, which handles all bond, stock and mutual fund investments. Although individual members often make recommendations on investments that they favor and have researched, the investment committee has the authority to purchase any investment on behalf of the group. Those members are responsible for doing most of the legwork and dealing with brokers. In almost five years, the group has made some impressive gains. The value of the club's portfolio is a little over $100,000. "In spite of the volatility of the market, the stocks and mutual funds in our portfolio have averaged about 20% a year," says WWIC President Loretta Polk, assistant general counsel for The National Cable Television Association. Company shares included in WWIC's portfolio are The Boeing Co., American Express Co., Reebok International Ltd., Toys 'R' Us Inc. and BET Holdings Inc. (BET). The group also has invested in Calvert-Ariel Growth Fund.

While the individual goals of the women vary, the group envisions being together for at least another 20 years, Polk says. "What keeps us together is that we can take risks and make investments we wouldn't have done alone or couldn't have afforded to do alone."

Investing For profit, Education and Fun

Not every investment club starts out as adventurous as WWIC. "Most of the clubs that I'm familiar with, started out as a fun thing for people to do," says Vernon Brown. "These people sat on the sidelines, listened to the news every night about the Dow Jones and always wanted to be involved in the stock market, yet they never wanted to get their feet wet." Investment clubs offer novices with limited resources the chance to work with securities in a way that would be educational, comfortable and profitable.

It's not unusual to see one person joining two or three groups. Some people believe they can earn three times the amount of money they would make in just one club by belonging to say three clubs. "People start out saying let's see what happens. It will be fun and maybe I'll learn something," Brown says. "After a while club members tend to be a lot more knowledgeable about investments, research a lot more and become very aggressive about the investment club itself, and how it should make money."

Visionary Investment Managers, an investment club formed about three years ago in Buffalo, N.Y., came about when Roger Strother got a group of friends from a church interested in stocks. "I got up at this church group and said, 'if there is anybody in this organization that is interested in understanding how to buy and invest in stocks see me after the meeting,'" Strother says.

Ten people got involved in forming the club. But they didn't buy stocks right away. "I wanted to set up something where we would learn about stocks and then invest on our own. That didn't work out, so we eventually talked about forming a club," Strother recalls.

Visionary Investment Managers is organized a bit differently from most NAIC-associated clubs in that only one person has the major responsibility to research and select stocks. In many NAIC clubs, the responsibility of research goes from one member to the next so at every meeting a different person might introduce a stock.

Strother says he had the most experience with stocks out of everyone in the group. So, for the most part, he picks the companies. However, he still wants to involve all the members in the process as much as possible. But so far, Strother's stocking-picking instincts are paying off. Members invested $7,000, at a minimum $20 monthly dues, the value of the portfolio has now reached $9,000. That's about a 28% return on the investment. Which stocks does Strother like? Mark IV Industries, PepsiCo, Excel Industries and Altera.

Ivesting: The Low-Cost Way

A common thread amon investment clubs is the focus on growth and regular investing. By building long-term value, investment club members are achieving their dreams by saving for retirement, funding a college education or financing a business.

In January, 109 new clubs joined and stayed with the NAIC. This followed a record 35,000 people who wrote to the organization asking for information. In 1991, the NAIC added 35 at 40 clubs a month.

For those clubs affiliated with NAIC, the toal amount invested per month is $3.4 million with the average value of an investment club portfolio at slightly more than $57,000. Investment dollars add up quickly even though clubs generally require monthly dues of only $20 or $25 (the amount invested by each member).

This March, Philadelphia-based Visions Investment Club turned 2 years old. There are 207 members, who range in age from 22 to 72. Dues are a minimum of $20 per month, but many of the members contribute as much as $100 per month. Members have invested $8,372, and the value of the portfolio was $10,189, which means the club was up about 22% during its first two years.

Paul Watkins, president of Visions Investment Club, says the club has been careful about the stocks it selects. Indeed, it only invests in eight different companies: American Family Corp., Bob Evans Farms Inc, Colgate-Palmolive Co., Central Maien Power Co., The Dow Chemical Co., McDonald's Corp., RPM Inc. and US West Inc. Over the last 23 months, only US West has slipped in price. All the companies in Visions Investment Club were bought through NAIC's Low Cost Investment Plan. The plan allows members to invest in the dividend reinvestment programs of a number of corporations for as little as $5.

Most stockbrokers won't handle transactions smaller than 100 shares of stock. When they do, the commissions can amount to more than the sum the club has to invest. But with the NAIC's low cost plan, a club can start a portfolio with just one share. Clubs purchase the first share from NAIC without having to go through a broker, thereafter, the clubs must deal directly with corporation.

According to O'Hara, 60% to 70% of NAIC's clubs use a full-service brokerage firm. Others use a discount broker. And most newer clubs use the dividend reinvestment plans of corporations to avoid paying hefty commissions. There are more than 90 corporations in NAIC's Low Cost Plan, including Mobil Corp., Quaker Oats, Walt Disney, Kellogg Co. and Wendy's International.

Visions Investment Club members do their own research on stocks. In fact, it's in the bylaws of the club. Before the club makes a purchase, a member must do a presentation that involves a 10-year history of the company and a five-year projection of performance.

This is not as intimidating as it seems. As with other clubs, many of the members had never invested in stocks before and had no knowledge of the stock market. But thanks to the assistance of the NAIC, member clubs can utilize forms and guidelines for conducting research. The NAIC method is well planned out, says Watkins, who is a retired automotive maintenance supervisor for the City of Philadelphia.

Taking advantage of his professional experience and NAIC materials, Chris Wilson helped to spearhead The New Freedom Investment Club. Wilson, a systems analyst at Glaxo Holdings, started the club when he moved to the Research Triangle Park area of North Carolina in 1990. New Freedom boasts 18 members, all of whom live in the area. Wilson had been in an investment club before. It was such a good experience that he thought he would try it again. "The first club I was in did pretty good, but we're [New Freedom] doing much better."

So far the club has invested $8,500. Its portfolio is currently valued at $14,000--up 65%. There are only 12 stocks in the portfolio, some of which are part of the NAIC Low Cost Investment Plan. New Freedom share include Microsoft Corp., Apple Computer Inc., Omnicare Inc., Office Depot Inc., Food Lion Inc. and Glaxo Holdings, which, of course, was one of the group's first investments.

New Freedom is extremely egalitarian. As Wilson notes, "everybody has a responsibility for the management of the portfolio. Everybody has an equal vote and everybody participates in management." Each month, at least two people will present a stock for the club to choose. The club does appoint one agent who deals with a stock-broker.

An incentive to get members to research and present stocks is the club's investor-of-the-year award. This cash prize is given to the member who presents a growth stock that increases the most in value, even if the club decides not to buy it.

When it comes to picking the companies, the club uses the software version of NAIC's guidelines for evaluating stocks. But New Freedom has taken this process one step further and has formed HW Research, a computerized service that provides investment data to other investment clubs.

A growing number of club reports are even being done on computers. Most of New Freedom's members, whose average age is 30, are engineers or work in information systems at Glaxo or IBM. Wilson says the club's stock selection has been quite successful, because New Freedom's members only invest in industries they are comfortable and familiar with.

While financial wizards on Wall Street dream of making a killing in the stock market, investment clubs continue to challenge and beath the pros at their own game.
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
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Author:Bergsman, Steve
Publication:Black Enterprise
Date:Jun 1, 1992
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