Amateurs Beat the Profs

How Amateurs Beat the Profs

You and Your Friend Have a Good Chance of Beating the Market

You are afraid to deep into the stock market alone? You can try an investment club, a group of like-minded people who pool their time, skills and money to research and invest in stocks. There are nearly 15,000 investment clubs in the United States, with more than 300,000 members holding an estimated $70 billion of stocks. The average club has a portfolio of $95,000, although the average member`s portfolio is $200,000.

Small wonder. Today, 50% of investment clubs perform as well as or better than the Standard & Poor’s 500 stock index, according to the National Association of Investors Corp., the parent organisation of Investment Clubs of America. Fewer than 25 percent of Wall Street heaviest hitters beat the S&P during any given period.

The stock-picking credo of NAIC group is simple. First, look for companies with five-year growth rates in earnings and revenues of about 15 percent a year or more. Try to buy stocks when the price earnings ratio (share price divided by the company’s earnings per share), is at or below their average price/earnings ratio over the past five years.

Once you’ve picked a stock, stick with it. Reinvest dividends and earnings and don’t sell unless the company really sours. One or two down quarters isn’t enough to trigger a sell. So long as the company’s underlying financials are still healthy, it may be a good time to buy. Finally, diversify your portfolio to spread the risk.

Manhattan Island. Photo by Elena

How to Start an Investment Club

Want to launch your own Investment Club? Here are some tips of how to get it off the ground:

• Invite interested family, co-workers or friends to a meeting. Ask each of them to bring someone else but limit the total number to fewer than 30. Your goal is to have 10 to 15 members of varied interests and ages. Be sure all prospective members know they are expected to investigate and analyze securities and make periodic reports. Screen out those who are joining as a way to get rich quick. NAIC officials have found that 40 percent of clubs break up within two years.
• At the first meeting discuss how much money each member will invest. Most groups set a monthly figure of $20 to $200 per person, although many allow members to occasionally invest larger sums.
• Choose an investment strategy. Will the club buy stock for long-term gain or current income?
• Pick a broker or a discount brokerage. In many cases you can buy stock directly from companies through dividend reinvestment plans, sidestepping commissions and management fees.
• Join the National Association of Investors which provides a wealth of educational materials, including step-by-step guidelines and a sample partnership agreement. An investor’s manual helps you get your club together, tells you how to conduct meetings, find and pick stocks, maintain tax records, and other basics. Consult annual membership costs for the club and for each member.
• If you’d rather join an existing investment club, you’ll have to do some digging to locate one in your area. Most investment clubs are also social groups, and members save opening for other friends. The NAIC doesn’t release names and addresses of clubs in your area, but some sites and magazines carry lists of regional contacts who may be able to steer you. Once you have found a club in your area, try to attend at least one meeting as an observer. See if the personalities and investment goals fit your own before you sign on.

Ladies’ Clubs

Curiously enough, women who make up their Ladies exclusive investment clubs enjoy an impressive percent average return of portfolios fewer than 20 stocks. In the old bestseller The Beardstown Ladies Common Sense Investment Guide (Hyperion, 1994), a group of the Beardstown Ladies Investment Club of Illinois revealed their top ten reasons for choosing a stock, as adapted below:

• The company is ranked in the top of its industry by Value Line.
• The Value Line timeliness rating (how fast it will grow relative to other stocks) is one (highest) or two (above average).
• The Value Line safety rating is one (highest) or two (above average).
• Its total debt is no more than a third of total assets.
• Its beta falls between 0.90 and 1.10 (Beta compares the volatility of a stock’s price relative to the total market).
• The company has had five years of growth in sales and earnings, and is projected to grow 12 to 15 percent in the next several years.
• Its price per share is $25 or less.
• The price-earnings ratio is below the company’s average p/e ratio for the last five years.
• Its upside-down ratio is at least 3 to 1. (The upside-down ratio evaluates the relative odds of potential gain versus the risk of loss for a given price per share).
• The company has competent and experienced management.