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Tea and S&P--The Club Approach to Buying Stocks

June 30, 1996|KATHY M. KRISTOF

At a time when the professionals who manage mutual funds are grabbing headlines--not to mention billions of newly invested dollars--there is a rapidly growing cadre of individuals who shun professional management.

Either alone or with groups of friends, they manage their own money and do their own research. And by and large, they do it with success--often beating the pros.

"An individual has some advantages over professionals when buying stocks," says Ken Janke, president of the National Assn. of Investors Corp., a Madison Heights, Mich., group that aids individual investors. "When you are operating a Magellan fund, you can't buy certain stocks. You're too big and too closely watched. But when you're an individual buying 100 or 200 shares, the world is your oyster. You ought to be better than the institutions."

Although it's impossible to track the performance--or even the precise number--of individual investors who truly work alone, the NAIC keeps statistics on the burgeoning ranks of individuals who belong to investment clubs.

Over the last year, the number of investment clubs has grown by a staggering 45%, and since 1980, it has increased more than tenfold. Still, with just 23,273 clubs and 446,000 individual members, the clubs don't exactly pose a threat to the $3-trillion mutual fund industry, which boasts 40 million investors.

Nevertheless, club performance has been noteworthy.

About half the individual investors tracked by the NAIC are able to meet or exceed the performance of the Standard & Poor's 500 market index, says Janke. Although more than half of professional money managers have beaten the index in short periods, in the long run only about a third do, according to Lipper Analytical Services.

Overall, the typical club earns 12% annually in good years, Janke says--but admittedly, no one audits reported returns from investment clubs.

That performance is particularly remarkable when you realize that a good number of the individuals who form investment clubs have absolutely no experience with investing.

"For some of these people, looking a stock up in the newspaper was a new experience," says Edwin Williams, a full-time investor, a member of two investment clubs and the president of the NAIC's Los Angeles-area council.

Consider Pramila Shah of Burbank. When her husband suggested she join an investment club with him, she told him she wasn't interested. Not even a little.

"The first couple of meetings, I was dragging myself," Shah says. "Now I am in the club for three years."

Shah's 16-member club, called EPS (for "earnings per share"), has posted an average annual return of 28.4% for the last two years.

"It's better than keeping money in a bank account," Shah deadpans. "It is the best way for me to save my money."

Joan Selwyn, a Beverly Hills-based artist and graphic designer, was also a novice when she and a handful of friends formed an investment club two years ago. The six-member group convinced a Smith Barney broker to spend a year teaching them the basics--such as how to read a financial statement and what to make of apparently complicated terms such as "price-earnings ratio."

"This group is all thoughtful, intelligent women who came together to learn," says Selwyn. "We all acknowledged the fact that we knew less about economic issues than we should. There was no pretense--although there were those few moments that we all hesitated to ask a question that we felt we should have asked 10 or 20 years ago."

If an average annual return is a sign of investment savvy, it's safe to say they've learned their lessons well. Since the group formed, its average return has topped 30% annually. It earned 37% last year.

By and large, investment clubs are formed as partnerships. Each member of the club gets a number of "partnership units" that correspond to the amount he or she has invested in the club.

Some clubs require all members to invest the same amount; others don't. Some require members to add to the pot monthly, while others--particularly the smaller clubs--are less formal about investment requirements, preferring to add money only when they're presented with more viable investments than they have funds in the kitty.

Some clubs invest small amounts--a few thousand dollars total. Others literally manage millions.

Janke, for example, is in a Michigan-based club that boasts $3.3 million in assets. But he says accumulating money per se is not the idea. "It is the education that you receive from investing yourself."

How do clubs choose their investments? Each member is given an assignment, which usually boils down to researching companies in a particular industry. After reading up on the industry, the member will recommend specific stocks that he or she believes the group ought to consider.

At regular meetings, usually held once a month, the ideas are discussed. Then members vote on the securities they want to buy, sell and hold.

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