Friends Pool Funds for Fun, Profit
In 1986, Art Johnson and nine of his old high school buddies began meeting once a month for breakfast at a coffee shop. Fresh out of college, they each put $20 in the kitty and started an investment club.
Things have progressed for the group of friends since then. Most are married, and some have babies. And, though their group has dwindled to seven faithful members and they’ve withdrawn money for various purposes, they’ve accumulated an investment pool of more than $18,000. Through investments that in recent years have been heavy in foreign stock and bonds, they have achieved an average annual return of 14.7%.
There are at least 15 known investment clubs in North County: The Trader Belles convene in Rancho Bernardo, the Dow-Jones in Fairbanks Ranch; others meet in Oceanside, Valley Center, Poway and elsewhere.
Though each is different in the makeup of members, their views of the equities markets and the way they operate, Jackie Mirazzi, president of the San Diego Council of the National Assn. of Investors Corp., said most are flourishing.
“We all make money,” Mirazzi said, referring to those clubs who are members of NAIC and are tracked by the nationwide organization. “The question is how successful we are.”
Mirazzi’s Palomar Investment club is strict in following the philosophy of NAIC and has an average annual return of 20%. Most clubs, she said, average 10% to 12% a year in earnings. In fact, several years ago the Palomar club, which meets at the Lake San Marcos Community Room, was judged to have the best portfolio of any NAIC club in the United States.
That was achieved, Mirazzi said, by carefully studying and buying stocks, on being fully invested most of the time and by reinvesting all dividends. Despite its exceptional record, Mirazzi says the purpose of the club is not solely to make money for its members.
“I’ve been in the club for six years,” explained Mirazzi, an accountant practicing in Escondido. “I’ve stayed with it because it is a great group. But it’s also educational.”
Laura M. Benedickt, vice president at the Rancho Bernardo discount brokerage office of Spear Reeds & Co., handles accounts for 10 investment clubs. The primary value of an investment club, she believes, is the training it offers individual investors.
“It’s a great way if you’ve never invested before,” Benedickt said. “You need to protect yourself, so to speak. If you belong to a club, you can then become savvy, learn about good deals, bad deals.”
Nancy Johnston, treasurer for the Rancho Bernardo Trader Belles, agrees with Benedickt that learning about stocks is the most important function of the club. Members are asked to study then report on attractive stocks, and members then decide whether it is something they should buy. Buying, as most experienced investors know, is the easier part. Selling is tougher.
“At first we had trouble selling,” Nancy Johnston recalled. “When someone had suggested a stock, they thought we were selling their baby. Now we’re more inclined to sell.”
Though the Trader Belles follow the precepts and use work sheets and other tools offered by NAIC, they’ve never let strict rules get in the way of their reasoning and intuition. Years ago, the club owned shares of Oak Industries, an electronics firm in Rancho Bernardo that produced equipment for the cable television industry.
“Then we went on a tour of their headquarters,” Johnston said. Oak was acclaimed for its spacious, stunningly decorated corporate offices. “We had a meeting in the parking lot and decided to sell our shares. We thought they were putting too much money into the headquarters. It was obvious where the money was coming from.”
As it turned out, Oak’s stock did take a dive. With great angst and turmoil, the company was reorganized and finally moved its headquarters out of town.
The Trader Belles, a women’s club, has existed for more than 10 years. The club meets in homes during the day, and for that reason is made up mostly of retired women. Johnston is a homemaker, but members include former teachers and even a stockbroker.
They car-pool to corporate annual meetings that are held nearby, an activity they’ve often found exciting. At one meeting, the company chairman passed out in the middle of rancorous proceedings.
“What we have in common is that we like investing,” Johnston said. “We’re all close friends and it’s important that we are congenial. We have a rule that a new person has to come to at least two meetings. Then we decide if we all like each other.”
Like many clubs, Trader Belles has gone through several transitions over the years. It evolved from a study group of the American Assn. of University Women and originally had 17 members. “When someone goes out of the club you pay them off,” Nancy Johnston explained. “We lost seven in one year. That hurt the club; we lost value.” Now, she says, they are comfortably settled in at about eight members and have a portfolio of seven stocks with a value of about $22,000.
Russ Novak, who helps launch new clubs in the county for NAIC, indicated that the Trader Belle’s experience is not uncommon. Some clubs don’t survive transitional times. “We start an average of six to 10 clubs a year. We usually lose about four. We don’t always know why they become dysfunctional. We’ve had four or five military clubs, but they’re mostly gone because people get transferred.”
The oldest known club in the county, Novak says, has been meeting since 1965. That group assembles each month for a nice dinner. They each put $50 in the kitty, and whatever is left after dinner is paid for is invested. Although the approach isn’t the one recommended by purists, it apparently makes the members happy.
Under NAIC guidelines a club can have as many as 30 members but ideally should have around 15. Some organizations, like Art Johnson’s, are all male. Others, like Trader Belles, are entirely female. Many are made up of married couples.
Novak says that women-only clubs seem to have better performing portfolios than men-only clubs. He supposes the women work harder at it. However, Novak said he suspects that people learn more in clubs with both men and women among their members, and he encourages that type of group.
Regardless of the size of circle, paperwork can become a problem unless tasks are shared among the members. Most NAIC clubs are organized as partnerships, and the parent organization gives guidelines on how to handle the somewhat complex tax requirements.
Art Johnson and his group are not associated with NAIC, and have kept their club under 10 members so that they would not have to file with the Internal Revenue Service as a limited partnership. The paperwork for that, Johnson said, is a hair-puller. However, if each member of the group has an equal amount invested and the club submits a year-end statement for each member to report on his individual tax reforms, independent clubs are in compliance with the law.
Johnson’s club has worked out its own way to delegate authority over the years. Now that careers and family activities are in high gear, it is difficult to meet monthly. The members talk on the telephone and communicate by newsletter. Because he is a professional investment manager with a Del Mar firm, Johnson handles most of the investments. Another member is treasurer. These two do the same jobs year after year, which the group feels has led to stability and consistency. Johnson says his group is less focused on the education process than it is in building wealth for its members.
“The critical thing is 100% participation,” agreed Laura Benedickt. “If two or four of the more aggressive people lead the pack, you lose the whole purpose.”
