Tea and S&P--The; Club Approach to Buying Stocks

At a time when the professionals who manage mutual funds are grabbing headlines--not to mention billions of newly invested dollars--there is a rapidly growing cadre of individuals who shun professional management.

Either alone or with groups of friends, they manage their own money and do their own research. And by and large, they do it with success--often beating the pros.

“An individual has some advantages over professionals when buying stocks,” says Ken Janke, president of the National Assn. of Investors Corp., a Madison Heights, Mich., group that aids individual investors. “When you are operating a Magellan fund, you can’t buy certain stocks. You’re too big and too closely watched. But when you’re an individual buying 100 or 200 shares, the world is your oyster. You ought to be better than the institutions.”

Although it’s impossible to track the performance--or even the precise number--of individual investors who truly work alone, the NAIC keeps statistics on the burgeoning ranks of individuals who belong to investment clubs.


Over the last year, the number of investment clubs has grown by a staggering 45%, and since 1980, it has increased more than tenfold. Still, with just 23,273 clubs and 446,000 individual members, the clubs don’t exactly pose a threat to the $3-trillion mutual fund industry, which boasts 40 million investors.

Nevertheless, club performance has been noteworthy.

About half the individual investors tracked by the NAIC are able to meet or exceed the performance of the Standard & Poor’s 500 market index, says Janke. Although more than half of professional money managers have beaten the index in short periods, in the long run only about a third do, according to Lipper Analytical Services.

Overall, the typical club earns 12% annually in good years, Janke says--but admittedly, no one audits reported returns from investment clubs.

That performance is particularly remarkable when you realize that a good number of the individuals who form investment clubs have absolutely no experience with investing.

“For some of these people, looking a stock up in the newspaper was a new experience,” says Edwin Williams, a full-time investor, a member of two investment clubs and the president of the NAIC’s Los Angeles-area council.

Consider Pramila Shah of Burbank. When her husband suggested she join an investment club with him, she told him she wasn’t interested. Not even a little.

“The first couple of meetings, I was dragging myself,” Shah says. “Now I am in the club for three years.”


Shah’s 16-member club, called EPS (for “earnings per share”), has posted an average annual return of 28.4% for the last two years.

“It’s better than keeping money in a bank account,” Shah deadpans. “It is the best way for me to save my money.”

Joan Selwyn, a Beverly Hills-based artist and graphic designer, was also a novice when she and a handful of friends formed an investment club two years ago. The six-member group convinced a Smith Barney broker to spend a year teaching them the basics--such as how to read a financial statement and what to make of apparently complicated terms such as “price-earnings ratio.”

“This group is all thoughtful, intelligent women who came together to learn,” says Selwyn. “We all acknowledged the fact that we knew less about economic issues than we should. There was no pretense--although there were those few moments that we all hesitated to ask a question that we felt we should have asked 10 or 20 years ago.”


If an average annual return is a sign of investment savvy, it’s safe to say they’ve learned their lessons well. Since the group formed, its average return has topped 30% annually. It earned 37% last year.

By and large, investment clubs are formed as partnerships. Each member of the club gets a number of “partnership units” that correspond to the amount he or she has invested in the club.

Some clubs require all members to invest the same amount; others don’t. Some require members to add to the pot monthly, while others--particularly the smaller clubs--are less formal about investment requirements, preferring to add money only when they’re presented with more viable investments than they have funds in the kitty.

Some clubs invest small amounts--a few thousand dollars total. Others literally manage millions.


Janke, for example, is in a Michigan-based club that boasts $3.3 million in assets. But he says accumulating money per se is not the idea. “It is the education that you receive from investing yourself.”

How do clubs choose their investments? Each member is given an assignment, which usually boils down to researching companies in a particular industry. After reading up on the industry, the member will recommend specific stocks that he or she believes the group ought to consider.

At regular meetings, usually held once a month, the ideas are discussed. Then members vote on the securities they want to buy, sell and hold.

Decisions are usually made based on a simple majority vote. However, some groups give more votes to those who have invested the largest amounts--voting based on partnership units rather than partners.


The success of their homespun methods are testament to the fact that investing well isn’t exactly rocket science, says Janke.

The NAIC tells its members to concentrate on just three things: fundamental value, dividend reinvestment and regular, long-term investing.

That means that individual investors who follow the NAIC formula--and many do--pore over corporate balance sheets to ferret out growth prospects, debt, management and strategy. They invest regularly. And when they decide on a stock, they stick with it for long periods, reinvesting the dividends to get the full benefit from compounded investment returns.

Most don’t try to time the markets. They don’t invest on “tips.” They don’t expect their stocks to appreciate vast amounts in a short time. In fact, most will tell you that their main goal isn’t to strike it rich.


“It’s hard to get rich investing $30 a month, no matter how well you do,” says Williams. “The idea is the education. It’s to understand the markets, so that you can get better at investing your own portfolio.”

In fact, that’s precisely why many current members say they join.

When you don’t quite understand the financial markets, confusion and fear can cause you to sit on your hands, says Sherri Porter, a 26-year-old graduate student from Los Angeles.

“Since the 1980s, I’ve been looking for a way to get into investing, but I was afraid of losing money,” she says.


When an acquaintance introduced her to their investment club, Porter was enthusiastic. “I wanted a situation where I could get as much information as possible. The club was the best alternative because I don’t have time to investigate everything,” she says. “At the beginning of the year, we decide on a set number of topics that we want to focus on and we research them.”

Over time, new investors like Porter become seasoned, savvy and far more active in the financial markets, experts note. Indeed, after a few years, most begin investing on their own.

Social contact is a major factor for many clubs. “We have an annual Christmas party, we take turns bringing refreshments to meetings,” says George Matsuyama, president of the North Orange County Investment Club.

And clubs are created out of all kinds of circumstances. Pat Chick recruited a group of Girl Scouts’ mothers at a camp-out to form Women’s Investment Network in Orange County. “We didn’t know how to read a stock table, we didn’t know how to choose an investment,” she says. “We were truly neophytes.”


The women, ages 35 to 60, use the club as a tool to learn about the stock market. “We’ve done decently, but the wealth we gained in knowledge has way outdone the monetary growth,” member Mary Crowley says.

“We purposely didn’t include men,” Chick says. “They would have dominated the club because they knew more than we did.”

Of course, many men are in the dark about many kinds of investments.

Dixon Johnson, director of the international services office at USC, had never ventured into the stock market before he joined an investment club made up of USC faculty and staff six years ago. Now, in addition to investing small amounts through the club--their per-member investment requirement is just $300 annually--he buys individual stocks through discount brokers.


“I learned how to read market reports and how to evaluate individual stocks,” he says. “I also have a better understanding of the risks involved.”

Although he also holds some mutual funds in his pension portfolio, Johnson, like many individuals, prefers to manage his money on his own.

“Why do I invest on my own rather than through a mutual fund? I don’t know. I suppose it’s why some people buy sports cars instead of family sedans,” he says. “The sedan is good and stable and dependable, but the sports car is just a lot more fun.”

“Fun” is also a word used by Marilyn Morrison, who founded the Oxnard-based Pacific Mermaid Syndicate. Outside her club, Morrison says, she manages a personal portfolio for herself and her husband, which she said is necessary to provide them with retirement income. But she finds the club “a fun thing to play with.”


“I have CNBC on the TV before I get out of bed in the morning,” says the former executive secretary.