Investment Club: Now, Don’t Get Greedy
They may not have realized it at the time, but the Sand Dollar Investment Club got off to an impressive start at its first meeting in January 1997.
The group of 17 South Bay women opted to make Microsoft Corp. their first stock holding. Their $8,000 investment has ballooned more than 220% in 3 1/2 years--which says something about both their stock-picking ability and their willingness to hang on to their winners.
Not every selection since then has done as well as Microsoft, but the club has hooked several other big gainers, including Cisco Systems and Home Depot.
More impressive, the club bought two technology stocks in early March of this year, just before the sector as a whole peaked. Although many technology issues have crashed since then, the club’s picks--telecom equipment maker ADC Telecom, and electronic components maker Vishay Intertechnology--both have appreciated sharply.
The club’s successes have helped boost the total portfolio to a value of nearly $90,000.
But success also has caused a philosophical problem for some members: Once content to find steady performers the group could hold for three to five years minimum, some members admit they’re looking for highfliers--what Wall Street would call “momentum” stocks.
“We like very dynamic stocks and back away from ho-hum choices,” said Linnea Snyder of Manhattan Beach when the club met last week with a group of Times writers and editors to discuss their portfolio and strategy.
“Unless we can see high returns during the next three to five years, we’re not interested,” she said.
But Snyder admits that she and other members can get impatient about a stock’s performance, or lack thereof, well before the three-year minimum threshold.
The three- to five-year horizon was one of the criteria the group established when 20 members contributed $1,000 each to start the club in January 1997.
Many of the original members belonged to a South Bay service club known as the Sandpipers that awards scholarships and assists nonprofit agencies.
In addition to the initial investment, each participant pledged to contribute $50 monthly to the investment pool.
The club has 17 members after three people left the group for various reasons.
Education in Ways of Market
To make educated stock choices, the Sand Dollar club, like many clubs, has members take turns analyzing stocks. At first they worked in teams to help members unfamiliar with stock picking become better versed in the language of equities.
Later, as their comfort level grew, members performed the research individually or in pairs.
The club relies heavily on the Value Line Investment Survey, which provides detailed historical and forward-looking information on 1,700 stocks. Members of the group also clip articles from a variety of publications and pass them around at meetings.
“We look at this as a business,” said Joanne Hunter of Manhattan Beach. “It’s not a social club, although we have had one party that was a lot of fun.”
Like all clubs, the group has had its share of losers. In 1998, the club purchased PeopleSoft at $46 a share in the hope that it would benefit from fears related to the Y2K computer bug.
“We thought it would be the perfect Y2K play,” said Laurie Byren of Hermosa Beach.
When the stock plunged to $30, the group held on. In fact, they bought more. But the stock slid even further in 1999, prompting the group to finally hoist the white flag and sell when PeopleSoft dipped to $18. The misadventure cost $2,000 in capital.
More recently, the group bought 50 shares of AT&T; at $55 each about a year ago. They liked the company’s management and figured the combination of cable TV and wireless communications added up to big gains.
Instead, AT&T; has fallen to $34 currently. The club has held on.
“I was the one who suggested AT&T; because of [CEO] Michael Armstrong and because it looked like it was positioned well for the future,” Byren said.
There is little immediate consensus among club members on what to do with AT&T.; Indecision about selling losers is a problem faced by many clubs.
“We don’t have a firm plan about how to make decisions about selling stocks,” Hunter said. “It’s just something we discuss when we meet.”
The group is sometimes so torn about whether to sell a stock that members unable to attend meetings are contacted by telephone to break voting ties.
Yet with hotel company Marriott International, the club bailed out relatively quickly by following a time-honored rule: If the company is no longer following the business model on which the buy decision was based, it’s often a good time to sell.
The club bought Marriott last October, expecting the company to become aggressive in the retirement housing industry. When it became clear that wouldn’t happen, the group dumped the stock this year at a small loss.
“It was gone immediately,” Snyder said. “It was a change in the direction we had once expected so we sold it.”
At the meeting with Times editors and reporters, Times Senior Markets Editor Tom Petruno said the Sand Dollar club has made some great stock choices so far.
But the gains in the market overall, and technology stocks in particular, between 1997 and this last March may be tough to repeat over the next two years, he warned.
The club, he said, may face a new problem: Rather than sell losers, it may have to decide how much profit it wants to retain on its big winners, if they head south, or fail to move much in the next year or more.
Volatile Stocks Raise Questions
The tech-stock dive early this year, and declines in club winners such as Cisco Systems and Microsoft from their peaks, raise the question of how far the group would be willing to ride those stocks down.
“Is there a limit to how much you’re willing to give back” on paper? Petruno asked.
Club members agreed that was a point they would have to focus on.
As for new purchases, Times markets writer Walter Hamilton noted that many investors set “stop loss” orders on stocks after they buy them. That means the stock is sold if it falls a certain percentage--perhaps 10% or 15%, or less--from the purchase price.
That would prevent the club from taking a PeopleSoft-style drubbing on any single stock.
Once sold at a modest loss, if the stock eventually showed signs of recovery, the group could always buy it back, Hamilton noted.
“The idea is to hold your winners and dump your losers,” he said. “It’s better to cut your losses than not cut a loss. If you do let a loser ride, it can take two or three winners to make it back.”
For clubs, however, setting automatic sell orders can be tough, given that many clubs meet just once a month. An automatic order would mean a stock could be sold without any discussion among members.
In addition to devising some sales strategies, the club wanted advice on diversification. Almost 30% of the group’s portfolio is in a single stock--Microsoft. And almost two-thirds of its holdings are technology-related. “We are not diversified,” Snyder conceded.
Yet some club members cringe at the possibility of selling even a portion of its first holding. “I still love Microsoft and I want to keep it,” said Caramia Justian of Manhattan Beach.
Their success with tech stocks so far has kept the club searching in other tech fields. Currently, HomeGrocer.com, an Internet grocery company, is on the club’s radar screen as a possible buy.
Although the stock has lost about two-thirds of its value since it went public earlier this year, some club members have used the service and came away impressed.
“I use it and so do about 90% of my friends,” said Lynn Range of Manhattan Beach.
Great Chicken, Lousy Investment
Picking companies that investors use and understand can be good advice but it’s not a guaranteed way to select winning stocks, Hamilton cautioned.
Koo Koo Roo, for example, knew how to cook great chicken but burned many investors who purchased the company’s stock after tasting the food, Hamilton noted.
In any case, it might be time for the club to broaden its search beyond technology, Petruno suggested.
“There is fantastic growth in technology, but there might be opportunities to pick up cheap stocks in other sectors,” he said.
He mentioned health care, with a particular emphasis on pharmaceutical companies, and energy, which has enjoyed rapid recent growth.
Perhaps most important, Petruno said, is that the club reaffirm its original game plan, which called for having a long-term time horizon.
He encouraged them to trust their instincts about which stocks have a solid future, rather than trying to guess which stock will make a massive run in the next month or two.
“Like most people, you like the excitement when a stock is going up,” he said. But with many stocks already highly valued, many could produce little in the way of gains for a couple of years--then soar again, he said.
“The hardest thing to do is to think about what the economy will look like in five years.
“You’ve got to ask yourself if you’re really willing to give some stocks three to five years,” Petruno said.
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The Club: Sand Dollar Investment Club of South Bay
History: Founded in January 1997
Number of members: 18
Number of stocks owned: 12
Stocks’ value: $86,262
Situation: Club has achieved very high returns on some stocks but worries portfolio may be too heavily weighted toward technology. Some members also are struggling with balancing long-term investing philosophy with impatience over stocks that don’t perform immediately.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Sand Dollar’s Portfolio
The Sand Dollar Investment Club of South Bay, formed in January 1997, holds 12 stocks worth a total of $86,840. The club has bought and sold a number of other shares along the way. Stocks are listed in order of purchase.
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Ticker Purchase No. of Purchase Monday Pctg. Company symbol date shares price price change Microsoft MSFT 1/9/97 400 $20.70 $66.88 223% Home Depot HD 7/10/97 300 14.79 46.00 211 Schering-Plough SGP 10/1/97 50 26.16 43.75 67 Cisco Systems CSCO 11/5/98 200 16.48 62.13 277 General Electric GE 11/5/98 120 29.44 49.88 69 Pfizer PFE 2/4/99 75 44.04 44.38 1 America Online AOL 4/8/99 60 77.91 52.63 --32 AT&T; T 6/3/99 50 55.00 34.13 --38 America Online AOL 9/2/99 40 45.06 52.63 17 Clorox CLX 9/2/99 50 45.31 40.50 --11 Charles Schwab SCH 10/8/99 60 22.00 28.88 31 ADC Telecom ADCT 3/2/00 60 45.19 74.00 64 Vishay Intertech. VSH 3/2/00 90 32.33 45.38 40 Cisco Systems CSCO 5/10/00 50 60.00 62.13 4 Total portfolio
Stock Company value Microsoft $26,752 Home Depot 13,800 Schering-Plough 2,188 Cisco Systems 12,426 General Electric 5,986 Pfizer 3,329 America Online 3,158 AT&T; 1,707 America Online 2,105 Clorox 2,025 Charles Schwab 1,733 ADC Telecom 4,440 Vishay Intertech. 4,084 Cisco Systems 3,107 Total portfolio $86,840
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Percentage gains or losses on stocks don’t include dividend income, which for most of the stocks listed is minimal or nonexistent. Figures are adjusted for any stock splits.
Source: Sand Dollar Investment Club
