A Matter of Mix and Timing

Five years ago, soon after she joined the University Park Investment Group, Cathy Van Orman asked her broker for a tip she could share with club members.

“I said that I had just joined an investment club, and wanted to go in really small, so give me a stock you think is going to do well--for around $5 a share,” said Van Orman.

Her Smith Barney broker suggested Benton Oil & Gas, a small oil explorer based in Carpinteria, Calif.

So after doing some homework--including attending Benton’s annual meeting--Van Orman recommended the stock to the club, composed mainly of faculty members, graduate students and other staff members at USC. The group invested $317 of their pooled funds in Benton stock.

It was a great move--for a while. From the group’s initial purchase price of $5.88 a share in March 1994, Benton gushed to $28.50 by Nov. 11, 1996. Elated, the club plowed an additional $1,165 into the shares in 1995.

But then the stock fell into a near-three-year slide that turned the club’s black gold into sludge.

Benton--saddled with debt--now sells for $2.56 a share. Early this month, the company’s chief executive quit.

How does a 385% gain turn into a 73% loss?

“Something always kept us hanging on,” said Leonard Wines, 72, a founding member of the club and former associate vice president at USC for university affairs.

For the members of UPIG, as the club likes to refer to itself, a willingness to hold on has mostly served the group very well. Indeed, Benton has been one of the few major disasters in a buy-and-hold portfolio that has sparkled in recent years, and now is worth $67,100.

But the 13-year-old club has been focusing lately on some of the issues that nag many clubs and many individual investors:

* Should the club be more forceful--and faster--in dealing with losing bets?

* Is its stock-selection process, which ignores most fundamental stock valuation factors, too haphazard?

* Is the portfolio adequately diversified--and should the club continue to try to pepper its mostly blue-chip holdings with smaller, more speculative stocks such as Benton?

The Club and Its Strategy

The Club: University Park Investment Group. The club, whose 22 members range in age from 27 to 72, has been meeting about once a month since 1986.

The Dues: $25 a month.

The Goal: To have fun, to make some money “and to learn,” said Donna Simmons, 55, a neuroscience researcher in USC’s biological sciences department.

Portfolio Performance: Club members say they don’t compare their portfolio’s overall performance to any benchmark, such as the Standard & Poor’s 500 blue-chip stock index.

Nine of the 17 stocks now in UPIG’s portfolio are up from their average purchase prices, some considerably. Three others, more recent purchases, are down only modestly.

The big winners includes Netherlands-based Ahold, which runs more than 3,600 supermarkets and specialty stores in Europe, Asia and South America; Oracle, the database software giant; Carnival Corp., the world’s leading cruise operator; McDonald’s; and Freddie Mac, the mortgage finance company.

These blue-chip names have racked up gains of between 70% and 400% in the last two to six years.

But UPIG has struggled with its attempts to pick smaller stocks, such as Benton. For example, the club held comic-book firm Marvel Entertainment Group all the way to worthlessness.

So far, UPIG also has lost about 13% of its investment in Mercury Air Group, an aviation industry services firm. And despite a fat 7.9% dividend yield on shares of Arden Realty, the club’s total return (yield plus or minus capital appreciation) on the real estate investment trust now is negative.

The Stock-Picking Process: “It’s eclectic,” said Simmons. There are no set formulas or “screens” the group uses to find promising stocks. Club members don’t rely much on standard valuation measures, such as earnings growth or price-to-earnings ratios.

Nor do members rely on stock-selecting tools provided by the National Assn. of Investors Corp., an umbrella organization for investment clubs. Simmons said the NAIC’s generic blue-chip recommendations are “boring.”

In fact, the portfolio includes only one of the 10 stocks NAIC says are most popular with clubs nationwide (Cisco Systems).

What UPIG members seem to like best is a good “hook.”

For instance, when Jason Dietz, 27, a recent USC law school grad and now a corporate tax consultant, suggested buying shares of Walt Disney Co., his reasoning was partly based on a classic investing strategy, and partly on a “story.”

“I think I bought into the ‘Dogs of the Dow’ theory,” said Dietz, referring to the time-honored strategy that recommends buying the most beaten-down stocks in the Dow Jones industrial average, anticipating a rebound.

“It’s a big-name company, a member of the Dow, falling on tough times,” he said of Disney.

But, he adds, “it’s also getting involved in the Internet”--the “story” angle. Since UPIG bought Disney in June at $30.33 a share, the value of the Magic Kingdom has slumped an additional 7%. But members figure it’s still early.

Two years ago, the club bought into another entertainment company, Marvel, also based on a seemingly good story. “The feeling was, the company had ownership of certain cartoon character that could be hot,” noted Wines, adding: “We all like Spider-Man.”

What’s more, “it was so cheap,” said Michael Khandelwal, 29, a graduate student in USC’s professional writing program.

So in May 1997, as Marvel was still in bankruptcy reorganization, UPIG picked up 500 shares for about $2.25 a pop.

But as often happens with cheap stocks, they got a lot cheaper. Marvel’s reorganization left its shares worthless. The club never tried to sell.

The Sell Discipline: UPIG doesn’t have a formal one--a big reason Benton and Marvel were allowed to waste away.

Much of the bad news that drove Marvel shares into oblivion came out rather fast--or at least too fast for the club, which meets once a month, to digest. “We had no reaction time,” said Khandelwal. “We were kind of stuck.”

The club has experimented with formal sell policies in the past. “We’ve been through every iteration you can think of,” said Simmons, including establishing automatic “stop-loss” orders, wherein a stock was dumped if it fell 10% from its highs.

Unfortunately, Wines noted, under that strategy, “we sold a lot of stocks that really appreciated a lot [after the club sold], and we [left] a lot of money” on the table.

In fact, about five years ago, the club sold many of its holdings as their declines triggered the stop-loss orders. Among the stocks the club parted with were Intel, Motorola and Amgen--all names they now wish they’d never let go. Hence, the formal sell policy was abandoned, and the club has continued to let many of its long-term winners ride.

The Issues: Timing, Diversification

In reviewing UPIG’s portfolio and strategies, Times financial editors and writers found a lot to praise.

For starters, the club’s portfolio was well diversified among different industries. Noted Times Senior Markets Editor Tom Petruno: “With a lot of clubs, you see the same basic list of NAIC growth stocks. It looks like you’ve digressed from that. You’ve got a good mix of growth and value stocks, industrials, technology and consumer stocks, and some large stocks and small.”

Petruno noted that the club made a smart move into the blue-chip energy sector this year with its purchase of 50 shares of oil-services firm Halliburton.

And although the group pays little attention to formal valuation issues, worrying too much about valuation has been more hindrance than help to investors since the mid-1990s, Petruno conceded. Many good “stories” have continued to be good stocks.

But the panel did identify key issues the club needs to address:

* Whether to invest in smaller stocks at all. Liz Pulliam, Times personal finance columnist, noted that low-priced stocks such as Benton and Marvel, though nominally cheap, “‘are often very risky and volatile”--perhaps too volatile for a club format, if bad news strikes and members can’t meet fast enough to decide what to do.

Though the club hasn’t specifically addressed whether to avoid smaller stocks, members already had decided that other types of stocks were too volatile for their portfolio. For instance, “nobody’s dared suggest Internet stocks yet,” noted Simmons.

Club member Phil Linsley, a tax attorney, suggested that if UPIG continues to invest in small stocks, it will “have to monitor the heck out of them.”

Yet this could be hard to do, conceded Dietz. “If disaster strikes, since we meet only once a month, it might be hard to react.”

Times financial writer Paul Lim offered a suggestion: In addition to assigning a monitor for each stock, assign a second member to monitor each small stock. This person’s sole mission should be to watch for signs of trouble and alert the group immediately.

Lim also suggested establishing mechanisms to speed buy and sell decisions for small stocks, if the club continues to invest in that market sector.

The club already has instituted an e-mail chain, through which members can quickly vote whether to sell a stock in between meetings. Lim also suggested coming up with a wish list of small stocks to buy, because “the window for selling and buying these volatile stocks is that much narrower.”

One reason club members gave for hanging on to both Benton Oil and Marvel as they collapsed was that the dollars involved were relatively modest.

But Petruno said that’s a dangerous mind-set to have. The $1,158 lost on Marvel, he said, isn’t chicken feed. Too many such losses could demoralize the club.

* Whether to introduce some type of “sell” review. Instead of a hard-and-fast rule that says sell a stock when it falls by a particular percentage, Times stock market writer Walter Hamilton offered a couple of suggestions.

“What you want to do is pay attention to what the stock is doing, not just what the company is saying, or what analysts are saying,” he said.

Keep an eye on the “relative strength” of a stock versus its peers, Hamilton said. “How is that stock doing against others in its industry group and against the market as whole?”

Petruno noted that had the club spied that Benton wasn’t participating as other oil stocks have rallied in recent months, it might have realized the company’s problems were mounting.

* How large to allow the Ahold position to grow. The stock, UPIG’s biggest position, now represents nearly 20% of the club’s portfolio.

Petruno cautioned against letting it get much bigger. Some club members agreed, and suggested it should be a candidate for trimming, using the proceeds for new ideas.

*

This special investment club make-over column was compiled by Paul J. Lim and other Times staff writers. Lim can be reached at paul.lim@latimes.com.

If your club would like to be considered for review, send club name, number of members, phone contact and holdings to Investment Club Make-Over, Business Editorial, Times Mirror Square, Los Angeles, CA 90053; fax to (213) 237-7837; or e-mail the information to money@latimes.com.

To be considered for an individual or family Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over at the above mail addresses. You can also print or download the regular make-over questionnaire at https://www.latimes.com/HOME/BUSINESS/FINPLAN/make-over.htm.

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Club at a Glance

The Club: University Park Investment Group

History: Founded in 1986

Portfolio value: $67,100 in 17 stocks

Situation: Generally happy with many of its holdings, the group has stumbled with smaller stocks and struggle with timing decisions. Members also wonder how large they should permit their biggest holding to get.

UPIG’s Portfolio

The University Park Investment Group currently owns 17 stocks. The oldest holding, McDonald’s, has been in the portfolio since 1993. The most recent purchases were Walt Disney and Halliburton, in June. How the club’s stocks have fared:

*--*

Date Avg. Avg. of first per-share Current gain Stock (symbol) purchase price* price or loss McDonald’s (MCD) 10/7/93 $13.19 $44.38 +237% Royal Ahold (AHO) 2/9/94 8.36 35.50 +325 Benton Oil (BNO) 3/10/94 9.42 2.56 -73 Boeing (BA) 12/9/94 24.23 44.81 +85 Oracle (ORCL) 4/20/95 8.92 45.75 +413 Abbott Labs (ABT) 10/30/95 19.63 45.19 +130 Carnival (CCL) 10/29/96 15.31 40.88 +167 Freddie Mac (FRE) 2/27/97 31.25 53.69 +72 Waste Mgt. (WMI) 2/27/97 38.25 20.69 -46 Marvel Ent. Group** 5/29/97 2.25 0.00 -100 Arden Realty (ARI) 12/9/97 30.25 22.56 -25 Mercury Air (MAX) 3/31/98 8.50 7.38 -13 Cisco Sys. (CSCO) 1/28/99 51.47 70.69 +37 FDX Corp. (FDX) 1/28/99 46.64 45.56 -2 State Street (STT) 1/28/99 74.37 59.75 -20 Disney (DIS) 6/9/99 30.33 28.06 -7 Halliburton (HAL) 6/9/99 42.00 50.31 +20

*--*

* Weighted in cases where the stock was purchased on more than one date

** No longer traded

Source: University Park Investment Group