Investment Clubs Outperform the Experts

By Bergsman, Steve | Black Enterprise, June 1992 | Go to article overview

Investment Clubs Outperform the Experts


Bergsman, Steve, Black Enterprise


Federick C. Russell gave birth to the modern investment club movement in Detroit in 1940. Unable to find a job and desiring to buy a small business, the recent college graduate formed the Mutual Investment Club as the vehicle for accumlating capital. The club had three objectives" invest every month, reinvest all dividends and buy growth companies.

More than fifty years later, the Mutual Investment Club is still active. Membership has grwon from six people to 22 (although only 15 continue to invest regularly). The group has invested a total of $220,000, from monthly contributions of $20 to $25 during the lifetime of the club. The value of the club's portfolio is worth more than $2.2 million. Not bad considering members, at one time or another, have withdrawn $1.4 million.

The Mutual Investment Club is not alone. There are a number of groups that have been around for decades, even though the average club is about 8 years old. What's exceptional about investment clubs is that their portfolios have compounded annual earnings at an average rate of 14.96%. If those same members had invested in Standard & Poor's 500 Index (of stocks), their money would have earned (12.25%, according to the National Association of Investors Corp. (NAIC) in Royal Oak, Mich., a governing body representing 7,600 investment clubs with a total of 140,000 members.

How are investment clubs able to consistently outperform the S&P 500? One reason: "Investment clubs tend to leave their portfolios fully invested [in select stocks, bonds or funds] at all times instead of trying to guess what the market is doing," says Thomas O'Hara, NAIC chairma of the board of trustees. Another reason clubs do well, says O'Hara, is because they are in it for the long haul. This explains why members stay together for years.

Outside of superb performance, an investment club provides a simple and generally cheap way to get into the financial markets. Vernon Brown, a financial planner with Bilal, Brown & Williams a financial planning firm in Tarrytown, New York, says investment clubs are ideal because, on a basic level, they operate in accordance with the first rule of thumb in any investment strategy--diversification.

"An individual with a small sum of dollars rarely can diversify the way he would like, so he usually ends up getting into a mutual fund that is a one-stop shop for diversification (since a given mutual fund may invest in many different companies), Brown says.

For some people, however, a mutual fund has not been an attractive investment, in that they have no control over which securities the fund holds. n addition, there are numerous fees and administrative charges.

Yet, many individual investors do not pick stocks on their own, or they may not have enough money to buy enough shares. One solution is joining an investment club. This way memmbers can select the securities they are going to buy and sell within their portfolio.

Of course, mutual funds are still the most popular form of pooled capital investment for securities in spite of the growing popularity of investments clubs. The total assets of mutual funds reached a record $1.3 trillion by the end of 1991, according to the Investments Company Institute. In comparison, the investments of NAIC member clubs have a total value of less than $450 million. Albeit a professional money manager brings experience and knowledge about the market to his stock picks, investment decisions are made by members, many of whom took a crash course in the world of securities when they joined the club.

It's inconceivable that the performance of stocks chosen by investment clubs would stack up to those chosen by mutal fund managers. But in fact, the stocks that professional money managers picked haven't performed as well. At least according to a survey by NAIC that shows over a nine-year period, almost 62% of NAIC accounts eqauled or exceeded the earnings rate of the S&P 500. …

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