Club Sticks Together Through Thick, Thin
Like a lot of investors, the Women Taking Stock investment club got to the Great Bull Market of the 1990s just as the party was coming to an end.
Dazzled by watching others reap double-digit returns in the stock market year after year, the group of Westside friends decided to form an investment club and get in on the fun.
It hasn’t exactly been a joy ride.
A victim of bad timing, the club made its first purchase in late 1998 and continued building its portfolio over the next three years as the market peaked and then plunged--taking many of the club’s holdings with it.
Five of the club’s selections have lost more than half their purchase price, and some of the worst performers have shed two-thirds of their value. With their portfolio awash in red ink, club members have been paralyzed into inaction.
“We are not comfortable selling anything,” said Gail Berlant, a founder of the 15-member group. “And we are hesitant to buy, although we think it might be a good time.”
What makes the downdraft more difficult to stomach is that the club thought it was employing a safe strategy. It chose mostly well-known companies it expected to be steady performers, avoiding riskier choices. And unlike many investment clubs, Women Taking Stock diversified its holdings and resisted the temptation to buy Internet stocks, a once-hot sector that burned many investors when it crashed.
The group’s portfolio includes several well-known names in pharmaceuticals, entertainment, energy and financial services. Although their few technology choices, including Cisco Systems and Applied Materials, have contributed to their fall, they’ve also lost big on non-tech stocks such as retailer Gap.
Despite the declines, the club members are determined not to give up. They intend to stick together--defying the trend among many investment clubs to disband in the face of the grinding bear market. And although they are still solidly on the losing side of the ledger, there are some factors that bode well for the group’s future.
For one thing, the stakes are relatively modest: Members contribute $125 to join and chip in $50 a month. No one is counting on the club to pay for a child’s college costs or to fund a retirement. The club’s entire portfolio is currently worth less than $25,000.
In addition, members see the group as a way to learn about investing, not as a road to instant riches. “We look at this as a learning process,” Berlant said.
Perhaps most important, club members learn from their mistakes. For instance, they realize that their stock selection has lacked focus, particularly in the early days.
“Each meeting, people would present stocks they had read about in newspapers and in Better Investing,” a publication of the National Assn. of Investors Corp., an umbrella group for clubs, said Sandy Roberts, the club’s president.
Using that approach, many of the club’s early investments were in companies that members were familiar with, high-profile names such as Disney, Coca-Cola and Gap. “We thought Gap’s TV commercials were fantastic,” member Susan Osti said.
The results were disappointing, even given the stock market’s overall decline. Gap, for example, has lost 61% since the club bought it. The Standard & Poor’s index of retail stocks is down about 3% during that same period.
After several of their other early choices tanked--the club’s WorldCom shares, purchased in October 1999, are down 80%--the club members decided to adopt a more systematic approach to stock-picking.
“A year ago, a stock broker friend of ours told us that we should focus on certain industries and assign people to research stocks within those industries,” member Penny Berro said. “So we divided up some industries [among the members] and started by looking at pharmaceuticals and energy.”
In the pharmaceutical field, the group settled on Pfizer, which has risen 15% since the club purchased it in March, and Johnson & Johnson, which also sells consumer products and is up 32% since March.
In energy, the club narrowed its choice to Enron and Dynegy. At the time, Enron was getting bad publicity for its role in California’s electricity woes, leaving the women feeling uncomfortable with buying stock in the Houston-based company.
“There were no red flags with Dynegy,” Vicki Whitney said. “It was diversified and seemed like it could withstand problems better than Enron.”
The choice has proved to a wise one, relatively speaking. Enron, enmeshed in an accounting scandal, is down 91% since July. Dynegy has been hurt by a sharp downturn in energy stocks that accompanied the recent fall in oil prices, but is down a comparatively mild 19% since the club bought it. Ironically, part of Dynegy’s current slide is due to its proposed acquisition of Enron.
Club members asked Times Business editors to review their portfolio. In a recent meeting with the group, Senior Markets Editor Tom Petruno encouraged club members not to be too hard on themselves, noting that they avoided the mistake made by many investment clubs: concentrating too much--or all--of their money in volatile tech stocks.
“You have some failures, but you’ve also done some things right,” Petruno said. “You arrived late in the market, but you’ve got good asset allocation.”
But he warned that selecting stocks such as Gap and Disney merely because they are large or well-known is not necessarily a sound strategy. “It used to be that you couldn’t go wrong with Gap,” Petruno said. “Now you can go very wrong. Just because a company is big and has a huge brand name doesn’t guarantee anything.”
He suggested that the members stick to their commitment to dig into a company’s financial condition and competitive position before investing.
“Read annual reports and quarterly reports and really look at a company’s fundamentals,” Petruno said. “Ask yourself what’s going on with the company. Are you comfortable with management? What’s the company’s focus? If it’s having problems, how does it plan to get back on track?”
Club members should be wary of companies with a lot of debt on their books, he said, particularly if club members expect the current economic downturn to be prolonged. “What’s reasonable debt in a good economy may not be reasonable in a bad economy,” he said. “Creditors tend to get nervous in a bad economy. Debt can sink a company.”
The club should compare debt-to-equity ratios for companies in the same industry to determine if a company’s debt load is unusually heavy, Petruno said.
Martin Zimmerman, Times assistant business editor for markets, also warned the club to resist buying stocks that appear to be cheap just because they’ve fallen a long way from their highs. “Even if you find a viable company that may be priced at $20 [a share] after once being priced at $150, that doesn’t make it a bargain,” he said. “It may only ever be worth $25, or worse, it may only be worth $10.”
The club deserves credit for going against conventional wisdom by buying stocks in industries that may be momentarily out of favor, Petruno said.
Referring to the club’s decision in August to buy more shares of Cisco Systems, Petruno said: “I’m glad you’re not succumbing to the temptation not to look at anything in tech. A lot of people who lost money in that area won’t go near it. But there will be survivors. And fortunes can be made by picking stocks when no one else likes them.”
Refining its buying discipline is only one of the club’s challenges. Investors also need to know when to sell. Women Taking Stock has sold only one stock in its history, and it sold that one, Compaq Computer, only after the company’s shares lost a third of their value and a friend in the securities industry urged them to unload the stock.
Meanwhile, stocks that have shed more than half their value, such as Gap, WorldCom and Applied Materials, remain in their portfolio.
“Our goal was to buy stocks that would double in five years,” Berlant said. “That’s why we haven’t sold anything.”
One way to take make the decision easier is for club members to set a limit on how much they’re willing to lose on a stock, Petruno suggested. If a stock drops 25%, for example, the club could unload it or at least agree to take a critical look to determine whether it’s worth sticking with.
“It’s easy to say that a stock is going to come back, but they don’t always come back,” he said. “Many times, a 25% loss can turn into a 40% or 50% loss. You need a point where you will take a hard look and decide whether you need to cut your losses.”
One thing club members agree on: Although their initiation into investing has come during the worst bear market in three decades, they’re determined to stay the course.
“We realize that we got into the market late,” Roberts said. “But we’ve learned a lot and we’re not discouraged. We’re definitely going to hang in there.”
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Hanging in There: The Club’s Portfolio
The members of Women Taking Stock, a Westside investment club, have seen their portfolio take some big hits over the last three years. But some of their most recent picks have fared better.
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Ticker Date No. of Purchase Mon.Pctg. Company symbol purchased shares price price change Walt Disney DIS 9/21/98 50 $25.29 $21.39 -15.4% Wells Fargo WFC 1/26/99 50 35.91 43.37 +20.8 Coca-Cola KO 3/17/99 25 68.94 48.31 -30.0 Computer Motion RBOT 8/17/99 100 10.02 4.03 -59.8 Coca-Cola KO 9/22/99 25 52.63 48.31 -8.2 WorldCom WCOM 10/19/99 50 74.25 14.47 -80.5 Gap GPS 11/16/99 50 38.25 14.95 -60.9 Amgen AMGN 1/11/00 40 71.92 67.39 -6.3 Applied Materials AMAT 3/21/00 20 96.58 40.06 -58.5 CVS CVS 3/21/00 20 37.63 26.90 -28.5 Cisco Systems CSCO 6/20/00 25 68.99 19.93 -71.1 Consolidated Water CWCO 6/20/00 75 7.43 10.51 +41.5 General Electric GE 8/22/00 25 56.63 41.32 -27.0 Johnson & Johnson JNJ 3/20/01 50 45.82 60.50 +32.0 Pfizer PFE 3/20/01 25 38.15 43.90 +15.1 S&P; 500 Trust SPY 3/20/01 20 118.21 115.93 -1.9 Dynegy DYN 7/17/01 50 48.54 39.25 -19.1 General Electric GE 8/21/01 20 41.52 41.32 -0.5 Cisco Systems CSCO 8/21/01 25 16.93 19.93 +17.7
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Note: Johnson & Johnson purchase price is adjusted for a stock split.
Sources: Women Taking Stock investment club, Times research
