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Seven keys to a profitable investment club.

These three clubs show high returns can be had by following the right path to investing

IT WAS A BLACK ENTERPRISE STORY ABOUT AN African American family who gained substantial wealth through an investment club that gave birth to Investors 2000 in 1993. Today, the Richmond, Virginia, group of men and women is making its own headlines. Investors 2000 won a $1,000 cash prize and was deemed the 1998 Investment Club of the Year by the Coalition of Black Investors (COBI) in Winston-Salem, North Carolina.

In addition to a combined compound annual return of 70% for 1996 and 1997, the group's youth and community advocacy was a factor in COBI's selection of Investors 2000. The 15-member club's Second Generation Program encourages members to bring children to their monthly meetings.

Today's most prosperous investment clubs--those with assets of several thousand to more than a million dollars --started out years ago with only a few dollars and little or no prior experience, yet they've achieved results that would make many professional money managers green with envy.

Your club can apply the same tested and proven standards that have made these clubs profitable. Like the tortoise in Aesop's fable, all you need is to be patient--slow and steady wins the race--and to avoid a few hare traps. Rabbit-like investors end up with sleepy portfolios when they develop a basic plan but fail to stick with it through thick and thin.

BE talked to the presidents of Investors 2000 and two COBI finalists: Washington Metropolitan Club and Minority Investment for Tomorrow. The following seven keys are fundamental principles these and other winning clubs practice.

key #1 Practice Dollar-Cost Averaging

It doesn't matter whether the market is in a boom or bust, club members commit to investing a set amount of money in the market each month--a practice known as dollar-cost averaging. This way they buy more shares when prices drop and fewer shares when prices go up. Market tides may cause speculators or inexperienced investors to bail out, but astute club members welcome dips as buying opportunities.

The Washington Metropolitan Investment Club used dollar-cost averaging to make the most of a turbulent market. The club's portfolio, valued at $130,277 (as of November 19, 1998), dropped 28% in 1998. "We aren't bothered by market fluctuations," says Gerald Coles, the dub's president. "Because we dollar-cost average, we were able to use the same monthly contributions to purchase more shares in our current holdings when prices dropped last fall."

In fact, Washington Metro doubled the number of shares owned in several companies, including Colgate-Palmolive (NYSE: CL), Lucent Technologies (NYSE: LU), Waste Management (NYSE: WMI) and Golden Triangle (NYSE: GTII).

"With this approach [dollar-cost averaging], you're virtually certain to purchase stocks at a bargain and profit handsomely when prices move upward," says Thomas O'Hara, chair of the National Association of Investors Corp., the Madison Heights, Michigan-based trade group.

Washington Metro is proof of this strategy and has stuck with dollar-cost averaging since 1992. After just four years in existence the club was top gun among all clubs in its home state of Virginia in 1996, and an elite member of the top 30 clubs overall in the United States as ranked by NAIC and Value Line Investors. The club's portfolio soared in 1995 and 1996, posting an average annual rate of return of 32.2% and 52.7%, respectively.

key #2 Buy/Growth Stocks

It was regular social get-togethers--food, fun and family games--that spawned Minority Investment for Tomorrow in 1992. "We decided to bring something to the table that was long-lasting and prosperous," says Dr. Reginald L. Parker, vice president of the Columbia, South Carolina, group, which has 14 members ranging in age from 21 to 53.

The club's investment philosophy involves growth and value investing, as well as long-term investing. "We like stocks that are growing at a rate of at least 15%," he says, "but we want to get them at relatively low price-to-earnings [P/Es]."

Investment clubs can almost assure solid returns by buying shares in companies whose sales and earnings are increasing at a rate faster than their industries in general. When it comes to growth, Minority Investment reviews each stock to see if it has the potential of doubling in value over a five-year period. Growth in a business comes in many ways. A company may be in a new industry or fill a need in a new market. Some new products or services spur growth. The most reliable and long-lasting growth is driven by management.

"We keep our eyes attuned to what is happening around us," explains Parker. "Recent statistics have shown that two-thirds of the gross domestic product is primarily in consumer spending. And we as consumers like stores that have a lot of products at a good price. That's how we ended up with Wal-Mart (NYSE: WMT) as one of our holdings."

Another club favorite is Cisco Systems (NYSE: CSCO). "It's a growing technology company and is a major leader like Intel. We believe there's going to be a higher demand for the type of product Cisco offers [networking hardware]."

Minority Investment's portfolio, valued at $13,222 (as of November 26, 1998), posted an average return of 43% in 1997 and was up 57.2% as of November 1998.

key #3. Diversify Investments

By diversifying its portfolio, a club minimizes risks and maximizes returns. It may elect to invest in stocks, bonds, mutual funds and/or real estate investment trusts (REITS). More important, the club should invest in different size companies in different industries. "Aim for holdings in eight core industries: consumer staples, technology, consumer cyclical, capital goods, communications, healthcare, financial services and energy," says Simone A. Thompson, investment representative with Brooklyn, New York-based Edward Jones. You can check size by the market capitalization or the number of shares outstanding times the stock price.

NAIC suggests a balanced portfolio where 50% of the club's holdings are in medium-size companies, 25% in large companies with $2 billion or more in sales and the remaining 25% in small companies with sales under $400 million and rapid growth rates. This ratio may differ depending on a given club's risk-tolerance level.

Washington Metro's portfolio has 19 holdings that expand across different industries from consumer household goods to pharmaceuticals to telecommunications to waste management. Coles says the club tries to get a "sort of bell curve" by investing half of its money in small and mid-size companies and the other half in large firms.

"We know that with the blue chips they may not make as much money in returns, but we know those companies have been out there for awhile and they are the ones we can count on," says Coles. "With the smaller stocks, we know we can make more money with them but we might also lose money on them because they are a high risk."

key #4 Create Study Teams; Invest in What You Know

"Each one teach one" best describes Investors 2000. Members range in age between 30 and 50, with diverse backgrounds from nursing to banking. Some members have worked in the industry, including the club's president, Carolyn Williams-Robinson. "We taught what we knew to the other members and we developed stock study groups," she says. As with most clubs, the members of Investors 2000 attended NAIC's stock study program, a series of twelve lessons on selecting and evaluating stocks.

The group set a oneyear timetable before buying its first stock, America s Utility Fund (offered by their local utility company). "We noticed in our bills it was offering customers a plan to buy into this mutual fund." A team of members researched the fund and presented their findings. The group voted in favor of investing.

Teams of two or more members research stocks together, prepare reports and present their findings to the group, says Baunita Greer, an active participant in NAIC's regional council and COBI, and president of Cromwell, Miller & Greer, a New York-based brokerage firm. "It's important that the group solicits ideas from every member about companies to look into as possible purchases," she adds.

Instead of chasing hot tips, Investors 2000's members check out companies whose products or services fill their homes. Says Williams: "The question on everyone's mind when we started out was `How do you know when and what to buy?' I told people to research something that they have an interest in or a product that they use."

Key #5 Reinvest All Egrnings, Dividends and Capital Gains

A club's money grows faster when earnings are reinvested. The club maximizes its profits through compounding. Moreover, those clubs that flourish do so because they tend to stay fully invested at all times. They rarely turn over their portfolios, instead reinvesting all returns, including dividends and interest. Investors 2000, Washington Metro and Minority Investment all use dividend reinvestment plans (DRIPs), accounts you open directly with a company that allow you to buy shares from headquarters. This lets members avoid paying broker commissions and dividends are automatically reinvested into the account.

"The majority of the stocks we own have DRIPs, including McDonald's (NYSE: MCD), Pepsico (NYSE: PEP), Quaker Oats (NYSE: OAT) and Waste Management," says Washington Metro's Coles. "We normally set aside [out of our total monthly contributions] $100 each to buy shares in these companies. We tripled that amount recently to $300 to take advantage of falling prices."

The clubs we spoke with concentrate on increasing their ownership of the best performers, substituting the better stocks for the laggards. When a club sells a stock it's generally because the company no longer has a high growth potential. Professional money managers may sell and buy their holdings once or even three times a year in hope of garnering higher profits. But a short-term trader mentality doesn't quite mesh with the long-term growth objective of dubs.

Since its start-up six years ago, Investors 2000 has sold only two stocks, Novell (Nasdaq: NOVL) and Heilig Meyers (NYSE: HMY, which failed to live up to expectations. Says Williams, "Those stocks had really lagged behind their peers for an extended period of time. When we crunched the numbers, we didn't see anything that would change that."

Minority Investment has 12 holdings and has sold three stocks since inception, Diebold (NYSE: DBD), Andrea Electronics (NYSE: AND) and Applied Materials (Nasdaq: AMAT), because of trailing earnings. And Washington Metro has stayed fully invested. The club did sell its shares in Upjohn (NYSE: PNU), opting to buy Pfizer (NYSE: PFE). "These are two companies in the same sector, but we felt Pfizer had a better growth and earnings projection."

key #6 Set Goals and Evaluate the Club's Portfolio and Capital Gains

At every meeting, most groups evaluate the club's portfolio to determine if it wants to buy, hold or sell its shares. The club minimizes risks and maximizes gains when it purchases shares it intends to hold onto as long as the business operates successfully.

According to the NAIC, a club's goals ought to be to attain average growth in prices and dividend income of 14.9%, compounded annually. At this rate, the club will double the value of its holdings every five years. Equally, the club should realize a 4%-6% percent yield over time on an investment from dividend income.

Each month, Minority Investment evaluates its holdings using fundamental and technical research. "We do a graph that plots sales, earnings and price fluctuations, so that we can get a visual analysis to determine if a company is meeting our projected growth rate of 15% or above," explains Parker. "In our fundamental analysis, we look at the company's P/E ratio and where it stands in its respective industry."

key #7 Invest for the Long-Term

It's crucial for clubs to stay together for a significant period of time; otherwise, their ability to achieve long-term gains will vanish. Members should plan to maintain their member status until their retirement years.

"We have a minimum 20-year projected goal for the club to stay together," says Washington Metro's Coles. The 29-member club's broad group of investors range in age from people in their mid-30s to retirees. And it represents several different sectors of the population, including corporate professionals, government workers, senior officers in the U.S. military and small business owners. Adds Coles, "We formed this dub to do smart investing so that we could build a nest egg for ourselves, our children and our families."

According to the NAIC, dub members who begin their program in their 20s and maintain it until their departure from the labor force 40 years later could amass $1.9 million at a rate of return of 10%. Some dubs have been around for as long as 50 years, but achieving such longevity requires keeping club members in sync and maintaining their activity level.

In all, the idea is to buy and hold a portfolio of well-researched stocks. As members become more knowledgeable and the amount of money under management grows, gains often begin to increase exponentially. Adhere to the seven principles set forth and you may be able to accumulate enough wealth to avoid any money blues during your golden years.

resource guide for investment clubs

Organizations: Coalition of Black Investors (COBI) P.O. Box 30553 Winston-Salem, NC 27130-0553 888-411-COBI

For a $10 fee for investment clubs plus $5 per member, you'll receive lists of African American brokers and brokerage firms, a free subscription to Better Investing magazine and other educational materials.

National Association of Investors Corp. (NAIC) P.O. Box 220 Madison Heights, MI 48068 248-583-6242

This organization represents more than 37,000 clubs and is the leading authority on running a profitable and fun investment club. The membership fee is $39 for individuals and $35 per club plus $14 per member.

Books/Magazines/Newsletters: Starting And Running A Profitable Investment Club by Thomas E. O'Hara and Kenneth S. Janke Sr., (Time Books, $15). The official book of the NAIC.

Better Investing 248-583-6242

The NAIC monthly magazine covers online investing, stock analysis and investment club profiles. The annual subscription price is $24 for nonmembers.

Wall Streetwise 800-419-1318

This quarterly online newsletter, founded by the New Freedom Investment Club, offers stock recommendations and advice on various investment styles.

Web Sites:

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COPYRIGHT 1999 Earl G. Graves Publishing Co., Inc.
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Author:Brown, Carolyn M.
Publication:Black Enterprise
Date:Feb 1, 1999
Previous Article:Honey, I Shrunk the Mortgage.

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