Need a stock tip? Join the club

Vermont Business Magazine, Mar 01, 1997 by Barna, Ed

Like other areas of the country, Vermont is seeing strong growth in investment clubs, whose members pool their research and money for the purpose of steady financial growth and enjoy social activities as a side benefit.

Usually they seek assistance from the National Association of Investors Corporation, formed in 1951 by financial analyst George A Nicholson, and which now has 79 regional councils guiding more than 30,000 clubs and 500,000 members. A year ago, there were only about 10,000 clubs, according to the NAIC central office.

The national organization provides educational materials, software to help keep track of pooled investments, and a structured way to invest at lower cost than with brokerage fees, while the regional and local groups sponsor a variety of meetings on a volunteer basis. Behind it all is a philosophy that is just the opposite of playing the market as if it were a horse race: Invest regularly after careful research, and "dollar cost averaging" will never fail to lower the average cost of investing and in a down market will position an investor for the next great advance.

The continuing rise of stock market indices in the current phenomenal bull market has made many heed advice like the words in an editorial statement in the February 1997 issue of NAIC's magazine Better Investing: "History shows quite consistently that it is more dangerous to be out of the market than in it."

NAIC has been able to interest many people in investing who had previously been deterred by memories of older relatives losing everything in the stock market crash that began in 1929. Their approach emphasizes a thorough grounding in the fundamentals of investing, careful research into possible stock picks, and the expectation of holding those stocks until they manifest the potential scouted out in their assets, patents, market shares, employee strengths, executive abilities and so on.

Headlines about record highs on Wall Street, expert confidence in continued growth without major inflation, Social Security's woes and single-digit bank and Treasury interest rates attendant on low inflation have all boosted club participation, as might have been expected.

But unexpected publicity for NAIC has come from books about the success of the Beardstown Business and Professional Women's Investment Club, formed in November of 1983 in an Illinois agricultural town of about 6,000.

The Beardstown Ladies, as they have come to be known, set a goal of a 14.7 return per year, which would have meant doubling their investment in five years (following the so-called "rule of 72," which says to divide the rate of return into 72 to see how many years it will take for an investment's principal to double). Instead, at a time when the Dow-Jones Industrial Average was seeing growth of about 10 percent a year, their annual return over a 10-year period was 23.4 percent--better than for most fund managers and financial analysts.

The real prototype was the Mutual Investment Club of Detroit, founded in 1941, which by 1992 had turned $291,045 into holdings worth $2,109,917--after withdrawing $1.310.411. That club also set the typical pattern of pooling money to invest every month in diversified growth companies, while re-investing the dividends. The February issue of Better Investing reported that in the club that NAIC started with in 1951, "several of those people have become millionaires."

Not all clubs have succeeded. The NAIC has seen about 40 percent fall apart within two years, and few clubs have done as well as the Beardstown Ladies. Still, the landmark study of investment returns, the 1926-1995 figures compiled by Robert G Ibbotson, has given what is now the conventional wisdom: inflation 3.1 percent, Treasury bills 3.7 percent, government and corporate bonds a bit over 5 percent, stocks up an annual average of 10.5 percent.

The club model has proven to have a special appeal to women, for whom taking control of personal finances in the wake of a divorce or a spouse's death is often a challenge. The Beardstown Ladies' second book, their Common Sense Investment Guide, recounts how one founding member struggled in the mid-197Os to find a stockbroker willing to take her on as a client. About 20 years later, the NAIC tracked the performance of all-female versus all-male clubs, and found that the lifetime earning rate for women's groups was significantly better (10.5 percent versus 9.7 percent).

For all accounts, NAIC statistics show the percentage of accounts equalling or exceeding the S&P 500 has fluctuated from 22.2 percent in 1987 (15.37 versus 19.79): to 69.4 percent in 1992 (13.87 versus S&P 10.75); to 42.9 percent in 1996 (though the average NAIC earnings rate of 19.06 was better than the S&P 15.30). The average compound annual lifetime earnings rate for accounts in clubs 205 months old or more was 11.87 percent as of 1996.

At a time when the US savings rate has been unfavorably compared with the average credit card debt load, the economy's emphasis on retail-driven prosperity and soaring bankruptcy rates, the clubs emphasize what yesteryear called the nest egg or the money for a rainy day though not the approach of putting it in a piggy bank or under the mattress. The NAIC is now looking to bring its contemporary version of being in good standing to elementary schools and then high schools.