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(Investment
Clubs Can Be an) Easy
Way Into the Market
By Jodye Deal
Article published in The Network Journal
magazine
 You don’t need to
be a financial tycoon in order to make money in the stock market. In fact, thousands of average Americans regularly
beat market indices. Who are these people? How can they succeed when so many others fail? These folks belong to investment clubs. They succeed by taking a very straightforward
approach to investing in the stock market.
An investment club is a group of partners who pool their ideas
and money to invest together. As a group,
they agree to a basic investing philosophy and each take part in researching investments. The strength of an investment club is a
combination of capital, research and philosophy, which together can outperform the most
intelligent of financial analysts.
Consider
starting or joining an investment club if:
You’re
new to investing and are looking for a good way to get your feet wet.
You’d
feel more comfortable learning about investing with others on your own.
You
have roughly $20 to $50 that you can invest through the club each month.
You’ve
been putting off learning about investing and sense that having a responsibility to the
group would provide some much-needed discipline.
Some of the benefits of joining an investment club:
It
is a low-cost way to get into the stock market.
Many
people are reluctant to start their own portfolio because they are not sure how to
proceed. Joining an investment club gives
them the experience and the confidence they need to invest successfully on their own.
Individuals
can learn how to invest in the stock market in a non-threatening atmosphere.
Individuals
invest with a diverse array of opinions and investment experience. The more diverse your club, the better the
probability of successful investing.
Your
portfolio will appreciate into a handsome retirement fund with the combination of time and
investing on a regular basis.
Investment clubs serve as a terrific way for those new to
investing to learn more about it in a friendly group setting. Many people are
hesitant about taking their first investing steps and clubs make this relatively painless,
as members cough up modest sums and invest carefully together after deliberating over the
pros and cons of any action.
 Many members eventually find
that the clubs guide their own personal investing. After
a while, their equity in the pooled club account may be relatively small compared with
their separate personal accounts. Club
meetings will offer many good ideas of attractive stocks in which to invest; and while the
club may buy a few shares, members often go home and buy more shares for their own
accounts. You may not have the time to
research several stocks each month on your own, but participating in a club, you’ll
share in the research of others and have the extra bonus of a group setting in which to
discuss investing ideas and issues.
How do
investment clubs work?
Successful clubs follow a long-term investment strategy. Most clubs require members to contribute a small
amount each month. In addition, each club
member has a specific role or responsibility. For
example, some members research certain industries, such as technology or retailers. Other members keep meeting minutes. Still others are responsible for securing a
location for the meeting. In many cases, the
duties rotate so that each club member does a fair share of work.
 Together, the group evaluates
various stocks. General, clubs focus on the
fundamentals. First, club members evaluate an
industry’s overall economic outlook. Then,
they compare a particular company with its competitors.
When everyone works together, investment clubs can provide a valuable opportunity
to learn about the world of finance and meet investment goals.
Starting a club or joining
an existing club
The main difference between starting a club and joining a club
is control. If you start a club, you can
decide which people you want in the club; how to form the club; when to hold meetings;
whether to have an in-person club or online club; whether to be a value club or aggressive
club; and how many members to have in the club.
Finding an existing club is always an option. The first problem is actually finding a club,
which can be difficult if you currently don’t know of any. Legally, investment clubs cannot promote to find
membership since it is against Security Exchange Commission (SEC) regulations.
When you find a club, and get voted in (just because you find
a club doesn’t mean they will automatically accept you), you will be buying into
experience. Depending upon how long the club
has been around, you may be jumping right into a wonderful portfolio with a large market
value. This can be good and bad. Good in the fact that you will have more investing
options with an experienced club. Bad that
you have to accept the decisions the club has made before you became a member. You may not like their portfolio, but if you join,
it will be all yours.
With starting a club, you are starting with nothing. That is the biggest detriment. Someone has to do the work to get everything
together legally. Someone has to find enough
members to start the club. This is no easy
task. The biggest advantage to all this is
that you and your initial members can mold the club into whatever you ant. Starting an investment club may be the biggest
adventure of your life.
Setting up a club
Most investment clubs start out with friends, family members,
coworkers or neighbors getting together to explore the art of investing. But before you start an investment club, consider
what skills are needed to make your club a success.
 What type of person can become a valuable club
member? First, you should consider anyone
with a financial background. An MBA is ideal,
but not necessary. Instead, you may
want to include anyone who is an experienced investor.
Also, look out for certain professions, such as accounting, law, and banking, among
others. The idea is to find people who are
comfortable working with numbers.
Next, consider people who have research experience. Club members should know their way around a
reference library or feel comfortable with the Internet.
Remember that research is vital to the success of any investment club.
Finally, consider individuals who have a genuine interest in
making the investment club a success. Each
club member must have discipline, drive, and the desire to learn about investing.
While experienced investors form many clubs, inexperienced
individuals can also make excellent club members. No
amount of investing know-how can replace true dedication and willingness to learn about
investing, economic trends and corporate finance.
Getting started
 Make the first meeting informal. Invite your prospective club members to a casual
setting. You’ll need to discuss the
goals of the group and the anticipated workload. Then,
arrange a follow-up meeting to discuss some of the ground rules, as well as some
administrative matters. These include the
club’s organization, operations, investment philosophy, and the roles and
responsibilities of its members.
Organization. Most clubs form a partnership before they begin investing. Be sure that everyone reviews and understands the
partnership agreement before you proceed. You
should then establish a hierarchy of club officers. If
you plan to operate a partnership, you’ll need a tax partner who arranges to file the
club’s tax return.
Operations. Be sure to discuss how you plan to conduct meetings. You should also develop a meeting schedule,
determine the amount of your monthly investment, and choose a name for the club.
Investment philosophy. Prior to the meeting, you should research other investment clubs and try to
pinpoint their strategy for success. The vast majority of successful clubs invest for the
long-term. That means the clubs buy and hold
their investments for many years.
Roles and responsibilities.
Each club member must commit to educating him or herself about the stock market. Some members may need to take courses on
investing before they can fully contribute to the group.
The National Association of Investors Corporation (NAIC) offers many courses, books
and other resources to assist investment club members.
Guiding principles for
investing success
Pool assets. By pooling assets, including money, knowledge and resources, club members can
maximize investing dollars and benefit from the insights of the group. Membership also provides an open forum for
discussions about making money. Once an
uncomfortable topic for many individuals, club members share investing ideas openly. These open discussions often lead to a
comprehensive review of stocks and can ultimately add to the club’s bottom line.
Research thoroughly.
Club members should take their research very seriously. Oftentimes, individual club members research a
particular stock and report back to the group. With
a limited amount of money for stock purchases, every investment decision is important. Therefore, club members should analyze the
company’s management, its stock price, long-term price chart, dividends, key ratios,
growth potential and other factors. When
selecting a stock, be sure to refer to the company’s annual report.
Invest with a long-term
perspective. Successful clubs know that it’s wise to buy
and hold for the long haul, usually at least five years.
As a result, many clubs find that they don’t sell stock very often (thus
postponing income taxes on gains) and is another reason why research is so vital.
Reinvest dividends. Many clubs use Dividend Reinvestment Plans (DRIPs), as a sure fire way to buy
more shares automatically and avoid additional brokerage fees.
Be patient. The stock market fluctuates. Club
members must ride out the peaks and valleys in order to achieve their investment goals. Most clubs rely on the principle of
dollar-cost-averaging.
Annual
Reports
 When it comes to investing, everyone wants to
pick a winner. But it is often difficult to
sift through financial rhetoric to find valuable information about a company. That’s why it is so important that investment
club members know how to read an annual report.
Annual reports contain a lot of specific financial information
about a company, including its balance sheet, income statement, statement of cash flows
and an independent auditor’s report. Annual
reports are free. Just contact the
company’s investor relations department for a copy.
When you receive it, keep in mind that most annual reports are loaded with
corporate-speak intended to make it look great to outsiders like you. You need to read between the lines. Start by flipping straight to the back of the
report where the financials are listed. Here
is a brief overview of what to consider when evaluating a company’s annual
report.
Financial highlights. Be sure to look for an increase in sales and earnings per share (EPS). Pay close attention to net sales (revenues minus
expenses) and net EPS. Earnings growth should
be between 15 and 20 percent. Also look for
the return on average invested capital. This
figure illustrates the company’s performance relative to the amount of money invested
in it. A double-digit figure is excellent.
Results of operations,
Liquidity of capital resources. Focus on profits, sales, and net margin on sales. All three should show an increase each year. Also consider the stockholder’s equity, which
depicts the value of shares and dividends paid.
Financial statements. Financial statements include the company’s balance sheet, income statement
and statement of cash flows. The balance
sheet is a snapshot of the company’s financial condition. It represents assets and liabilities. Look for year-to-year increases in accounts
receivable, assets and inventories. Also look
for companies with relatively low debt, preferably less than 33 percent of capital. The income statement reveals the company’s
earnings growth, revenue growth, and the number of common shares outstanding. It also shows whether the company has a stable or
increasing margin. The company’s cash
flow statement should reflect a positive and increasing cash flow.
Notes to financial
statements. Pay close attention to contingent liabilities,
which could mean pending lawsuits. Other
interesting tidbits may include executive compensation and environmental liabilities, or
areas of operations that are of concern to the company’s management and its auditors.
Please keep in mind that there is a lot of information
included in a company’s annual report. This
brief overview is meant only as an introduction to annual reports.
Being a member of an investment club is a great way to get
into the stock market. Be sure to utilize
the expertise of your investment professional to help guide you toward your wealth
potential.
This article was published in The Network Journal. Jodye Deal,
contributed this article for the New York-based magazine. If you have
questions on investing, please send them to Investing@GazelleAssociates.com.
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