The Investment Club Book

INVESTING THE INVESTMENT CLUB WAY

By joining or forming investment clubs, anyone from any background can become a shrewd stock market investor. From picking the right companies to managing your trading costs, this book gives you all the information — including a complete glossary and resource list — you need to start investing.

LEARN

•   Why more than 60 percent of investment clubs regularly beat the performance of the Standard & Poor's 500 index
•   How your club should choose a broker and get your money's worth from commissions
•   How clubs are organized and run for maximum return on the dollar
•   How clubs decide to buy stocks — and when to sell them
•   How to analyze companies to see the growth and profit potential — no matter what the stock market is doing
•   How to diversify your club's portfolio and reinvest dividends
•   The Five Habits of Highly Effective Investment Clubs — for long-term stability and success.

"A useful guide for taking charge of your financial life. John Wasik has written a book full of practical information for anyone interested in starting or joining an investment club."

—Joseph Anthony, financial writer, author of
Working for Yourself: Full Time, Part Time, Anytime

An Alternate Selection of The Literary Guild® and a Featured Alternate Selection of Doubleday Book Club®

"What a great book! It is time that the individual be shown how to truly safeguard their future and invest with intelligence. This book does exactly that. If you want to secure your retirement, read this book."

—Suze Orman, CFP, author of
You've Earned It, Don't Lose It!

"If you invest on a shoestring, then this is the book for you. No more feeling left behind by all those wealthy Wall Street aristocrats. John Wasik uncovers some of the hottest secrets to investing and teaches you how to become your own tycoon."

—Christy Heady, syndicated and financial journalist,
author of The Complete Guide to
Making Money on Wall Street

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Copyright

Copyright 1995 by John F. Wasik

All rights reserved.

Warner Books, Inc.

Hachette Book Group

237 Park Avenue

New York, NY 10017

Visit our website at www.HachetteBookGroup.com

First eBook Edition: September 2009

ISBN: 978-0-446-56504-2

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TO KATHLEEN,

WHOSE PATIENCE AND LOVE

COMPOUND OVER TIME.

Thanks to all of the wonderful people of the NAIC, especially Tom O'Hara, Ken Janke, Martha Moore, and Ralph Seger. And, of course, to investment clubbers everywhere.

All materials obtained from the National Association of Investors Corporation are used with permission.

Charts used with permission from Ibbotson Associates, Chicago, from Stocks, Bonds, Bills and Inflation 1994 Yearbook (annual updates by Roger Ibbotson and Rex A. Sinquefield). All rights reserved.

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the publisher nor the author is engaged in rendering legal, investment, or other professional services. If legal or investment advice (or other expert assistance) is required, the services of a competent professional should be sought.

Figures used throughout the book, in various charts and throughout the text, are for illustrative purposes only. Readers should consult with appropriate sources for precise figures when computing analyses.

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FOREWORD

In the thirty-five years that I have been involved in investing, perhaps a thousand books on the subject have found their way to my desk, ranging from cattle futures to the potential downfall of the American economy. Most have centered on how to invest in myriad financial instruments with chapter headings that can almost be predicted without going beyond the cover. They have contained all kinds of different theories and formulas to make the investor more successful. What I have discovered, however, is that successful investing comes from common sense. Investing is not mysterious. John Wasik has been able to capture that common sense from people who invest, using time-tested principles that may appear simple on the surface but when followed produce superior results. Instead of only a "how to" book, he offers a "how they did it" book, where the reader has an opportunity to learn firsthand how different people made their investment decisions. He has added the human factor.

It has long been my contention that an individual can take every investment course that is offered through adult education and various brokerage firms and still not know how to invest. That experience comes only when the individual puts money at risk, whether it's a large sum or $30 each month. In surveys taken by NAIC over the years, we have consistently found that in a newly formed investment club of fifteen members, only one or two have ever invested before the club was organized. After five years, the figures are completely reversed. All of the members, except for one or two, are not only continuing in their club, but are investing on their own, building individual portfolios and investing three times as much as in their club. Investment clubs serve as an introduction to the stock market. By investing on their own, they are able to build sizable nest eggs for retirement or other needs. But the investment club account itself can turn into a bonanza if it's a lifetime project.

In the Mutual Investment Club of Detroit, which was founded in 1940, one of the original members began by investing $10 each month and then increased that amount to $20. Upon retirement, he withdrew $70,000 to pay off his mortgage and become debt free. Even though he is retired, he continues to invest and participate in the club activities. Through the years his out-of-pocket investment has been less than $10,000, yet his total worth in the investment club is now $570,000. His experience has served as an example for the younger members who have joined the investment club in recent years.

At times the professional investment community, with some notable exceptions, has passed off investment club members as amateurs who get lucky now and then. Yet those professionals have been unable to argue with the clubs' success. On these pages you will be able to meet real people who make real decisions. That's important, because there's more to investing than simply trying to use some formula.

John has visited with clubs, attending their meetings as well as the investor fairs and other seminars that are held for the benefit of club members and individual investors. He has invested himself and is even part of a family investment club. The result is that John has been able to impart real-life investing experiences in this book. From all of this, he has learned why some are successful while others fail, and that information is passed along to the reader in a manner that makes it not only interesting, but informative. If you belong to an investment club, you will easily be able to relate to various incidents. If you don't belong, it probably won't be very long before you organize one of your own. I hope so. It's a wonderful experience.

— Kenneth S. Janke
President and CEO
NAIC (National Association of Investors Corporation)

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PREFACE

This book is about hundreds of thousands of people who weren't born with money, didn't invent anything, didn't build a successful business, didn't win the lottery. They started out with as little as $10 a month and built it into sizable sums using some simple yet elegant rules. Profitable stock investing as perfected by thousands of investment clubs throughout the world is hardly a fluke. This "movement" has created at least one hundred millionaires and countless thousands who are able to retire in comfort, buy second homes, and send their children to college. I've talked to clubs from coast to coast, attended investment fairs and seminars, and visited the headquarters of organized investment clubs in an effort to distill some of their methods. There is no one secret to winning big, but a handful of strategies is enough to guide you along the path to a kind of successful investing rarely seen on Wall Street.

The only sure thing about the knowledge in this book is that if you don't apply the basic tools of investing, make some mistakes, learn from them, and consistently monitor what you're doing over decades, you'll get frustrated and go back to buying lottery tickets every week. If you do follow a pattern of quality, long-term investing, you'll be well on your way to a financially secure future. Yet when it comes to one of the most durable ways of making money over the long term, most people ignore this tantalizing investment strategy.

If you're expecting these strategies to work overnight, this book is not for you. You may wait years for this kind of investing to pay off. But it's worth the wait.

I first became interested in investment clubs because some interesting material crossed my desk at Consumers Digest some three years ago. It had to do with how groups of ordinary people were picking their own stocks, investing small sums of money — and profiting consistently over the years. Many were outperforming the top investors on Wall Street. To a seasoned financial journalist, this seemed an absurd idea at first. How could people outside the investment community make money by picking common stocks? I thought. Wouldn't they be too impatient to stick by their choices through thick and thin? Worse yet, wouldn't they get toasted because they weren't trading on Wall Street with their ears to the track?

So I did a short piece on investing alternatives for Consumers Digest. I interviewed Tom O'Hara, the genial chairman of the National Association of Investors Corporation (NAIC), and gave a short mention of the group in the piece. Although I'm fairly diligent about including addresses and phone numbers when I mention a resource, I neglected to do so in this article. After the piece ran, I found out firsthand about the appeal of investment clubs. My phone rang off the hook for three weeks. Everybody wanted to know where they could find this group. I must have logged several hundred responses. In eighteen years as a journalist, it was the greatest response I'd ever received to anything I wrote — or, rather, didn't write. That episode convinced me that there was something more to these investment clubs. So what did I do? First I pitched a story on clubs to my editors, with no success. Then I joined the NAIC as an individual member. I learned a lot and lost a lot, but, following investment club principles, I was able to profit from my knowledge (for my results, see the epilogue). I also impressed my wife, Kathleen, who started a club for us and our immediate family.

About one year after doing the magazine piece, inspired by the high success rate of clubs, I began writing this book. Along the way, I discovered much of what makes conscientious amateur investors the sharpest in the world. They do their homework. They're not afraid to take a risk as long as it's measured over time. And they are supporting the very structure of capitalism in the process. By taking risks, they're helping to preserve and create jobs. If they stay the course, they are rewarded immensely for their small portfolios. Except for an occasional amen to Peter Lynch, there's no religion involved in the process. They just want what everyone who wasn't born with money wants: security and a comfortable life.

This book is for investors at any level who feel they can learn and earn in a club setting—or by themselves. Whether you plan to start or join a club, or you are already in one, you can benefit from this volume.

Use the index and table of contents to spot areas of interest. Since this book wasn't meant to be read exclusively from beginning to end (unless you're a total novice), feel free to browse.

If you feel that your biggest problem is getting off the ground, start with the epilogue, where you'll find lots of basic savings tips. Then begin at the beginning and work your way through. If you feel you're an intermediate to advanced investor, try the chapters on stock picking, cycles, and brokers. You'll find some useful information there. Most of all, enjoy. And profit from the experience.

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PART I

The Power of
Investment Clubs

 

It doesn't take an investment genius to beat professional investors and mutual fund managers. Two-thirds of them don't beat the average market performance anyway. The secret to long-term profits is that there is no one secret. Success comes with diligence.

Nearly half of all investment clubs regularly outperform professionals and beat the average return for the stock market. And you can do the same. Others have from all walks of life. And they've done it consistently and safely, using conservative strategies. For example, the Beardstown Ladies' Club has attained such fame for its streak of winning investment club contests that it's been on national television, produced a video, and written a book. This small group of middle-aged and older women, based near Peoria, Illinois, has had extraordinary success over more than ten years of investing. Their average annual return has been 23.4 percent. Their prime secret: "We do our homework."

Ironically, club members have been a victim of the Beards-town Ladies' success. The NAIC has suspended its annual performance contest because too many clubs got frustrated over their inability to match the Ladies' results.

Fortunately, those with the least amount of knowledge—and the greatest desire to learn—do the best in investment clubs. No one race, gender, profession, or creed has a lock on what it takes to make money through stock investing. In fact, investors who are not located near major financial centers seem to do the best. Why is club investing a good idea? There seems to be strength in numbers.

All told, there are more than 14,000 clubs in the United States that are affiliated with the NAIC, plus uncounted thousands that operate independently. And some fifty-one million individual investors work outside of U.S. clubs.

Even more remarkable is the fact that often more than half of the investment clubs surveyed beat the stock market (as measured by the Standard & Poor's 500 index). The majority of them started out with very small investments of as little as ten dollars a month per person.

In clubs and by themselves, individual investors are flaunting the conventional wisdom that most people lose money in the stock market. Simply put, they are "cookie jar" investors. They invest small amounts relatively conservatively, but they research their investments carefully. Over time, they are rewarded by the superior returns from stocks. They are able to retire comfortably and finance college educations or dream vacation homes.

You don't even need to have a group of people to benefit from the investment clubs. In fact, you can do it yourself or with your spouse or significant other. All it requires is a commitment to save on a regular basis and to learn the successful techniques.

Although there are investment clubs in every state and across the world, some 20 percent of U.S.-based clubs are located in the "heartland" states of Michigan, Ohio, Indiana, and Illinois. All kinds of people are active members, from teachers to retired grandmothers, engineers to janitors: these organizations don't require business school resumes, special handshakes, secret oaths, or funny hats. The one thing their members have in common is a simple devotion to learning about investing.

Unlike the profiles of most stock investors, the profiles of investment clubs are as diverse as the world itself. Clubs include janitors, engineers, truck drivers, housewives, musicians, beauticians, professors, and maintenance workers. There's scarcely an ethnic, professional, religious, or socioeconomic group that's not represented. In speaking to more than twenty investment fairs throughout the country every year, Ken Janke has come across clubs that comprise priests, members of Lawrence Welk's band (the "Champagne Investors"), infield maintenance workers for the Philadelphia Phillies, and public school custodians. "Success in a club is not related to their background," Janke notes.

The investment club concept has universal appeal. Despite the fact that the NAIC doesn't advertise, they receive some 76,000 inquiries a year. Some 4,000 people a month join up for their low-cost stock purchase program alone.

There are other personal investment organizations in the United States. The Chicago-based American Association of Individual Investors (see the resources section at back of book), for example, provides a fine program of educational materials and seminars. They too have more than 150,000 members.

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CHAPTER 1

Investing for Peace of Mind

Larry Carlson is just one example of what club investing can accomplish. He long believed that his best chance for a comfortable retirement involved investing in the stock market. Since 1970 the former Vermont paper industry engineer has been following the National Association of Investors Corporation (NAIC) investing format as an individual member. Picking good stocks at an early age helped him achieve an annual average return of 18 percent. He's confident that he's beaten most professionals at their own game. He did this through discipline and starting out small—$100 every three months, starting in 1966. Having amassed a seven-figure portfolio, he retired early.

Saving from 5 percent to 20 percent of his pay, he started his investment plan in his twenties, picking stocks with ample growth potential and reinvesting the dividends. Although some of his picks soared due to pure luck, the rest grew prodigiously simply because they were good companies—and he never sold them.

One of his hottest stocks—U.S. Tobacco—is what he terms a "ten bagger." It's appreciated some twelve times beyond what he originally invested in it. Another pick (made by his wife) was a company called Daxor, which specialized in frozen blood supplies. Fueled by the AIDS (tainted) blood scare, the stock zoomed 700 percent within two weeks of purchase.

Although he's held some dogs (A. H. Robins and Bolar, to name two), he's built his portfolio through long holding periods and refusing to get spooked when the market turned south. He says he's held his best stocks—like Pepsico, Abbott, Kellogg, Johnson & Johnson, and Quaker Oats—some fifteen to twenty years. As he puts it: "As long as they're meeting my objectives and making progress, I hold 'em."

For more than eleven years he's enhanced his stock-picking skills by using a computer. The computer helps him screen out good picks from the more than 7,600 stocks in a database provided by the American Association of Individual Investors (AAII), which provides research and educational materials to amateur investors (see resources section in back of book). He also uses the group's materials to find small-company stocks, which constitute 20 percent of his portfolio and tend to lower overall risk.

"I've found peace of mind [through stock investing]," Carlson says. "I'm not counting on Social Security as we know it. I stressed my own investing even more. I wanted to retire before I was fifty."

His straightforward Yankee advice is typical of that offered by both the NAIC and the American Association of Individual Investors. Although Wall Street no doubt cringes at the mention of it, hundreds of thousands of individual investors are beating the market—and doing it consistently by picking their own stocks. The following strategies have proven profitable for Carlson and for thousands of diligent investors across the country:

 

•   Invest in companies you know rather than highfliers. Stay away from penny stocks and brokers' picks (see page 49).
•   Even if you buy one share of a company, reinvest the dividends; they just keep building up in dividend reinvestment plans (see page 163).
•   Initially find a stock that'll grow for five to ten years.
•   Don't follow business cycles (when buying). Dollar-cost average and keep investing on a regular basis in the bad part of business cycles (see page 185).
•   Go with companies that have good earnings in both up and down years.

DON'T LET THE STOCK MARKET SCARE YOU

Even with odds of more than ten million to one, millions of sure losers line up every week for lottery tickets. But when you mention the stock market, most people turn up their noses and tell you it's too risky. Even if they're not thinking of winning the jackpot, they'd rather bet on a sure thing: federally insured savings accounts. Again, they're betting on sure losers, since these accounts rarely beat inflation, meaning they consistently lose money over time when you subtract taxes and inflation.

But consider this: If you were to invest in common stocks for just five years, you stand an 89 percent chance of making money, according to Ibbotson Associates. Over twenty years your chances grow to 100 percent. That's a sure thing (based on historical data). And that's just with a breadbasket of five hundred stocks bought and not touched. Imagine if you carefully picked a portfolio and a handful of your stocks did really well. It just takes time and patience.

By investing on a regular basis over decades, you can ride through the downturns and buy stocks at lower prices when others are selling. It's that simple.

Earnings Rates ^* on Various
Types of Investments
For Sixty Years, Per Ibbotson Study

Copyright 1994, Ibbotson Associates, used with permission

INVESTMENT CLUBS ARE A LEARNING EXPERIENCE

John Paterson is another example of investment club success. Although he is eighty-one years old and one of the leading investment clubbers in the Seattle area today, he can remember a time when he bought AT&T because it was the only stock he knew and it paid a 9 percent dividend. The psychology of money is a peculiar one that invokes the most intense love-hate relation-ships. Investing is an activity that most of us fear for all the right reasons. We look for the safest, surest vehicle there is, believing the sales pitches and ignoring the real returns. But John somehow overcame the conventional wisdom.

"I didn't even know why, I just went down to the bank and bought it [AT&T]. I didn't even follow up."

But when Tom O'Hara, one of the founding NAIC members, came through town in 1961, Paterson saw stock investing in a different light. So he started the "Blue Chip" club, adhering religiously to NAIC techniques. The former navy engineer was working at a Seattle shipyard at the time and contacted men he knew from the Boy Scouts. His club of thirteen families has not only padded several nest eggs—including his own—it prospered with "local" stocks such as Microsoft (now the club's largest holding). His son, Tim, also a member, was one of the original authors of Microsoft's breakthrough MS-DOS program.

Before almost anyone knew what a personal computer was, John had already begun developing investment software, including an accounting and stock selection package in 1978. When his investment club was organized, he invited only friends and people he knew from work. All fourteen original members were men.