The stock market. What could be more confusing? Those crazy fluctuations, those dizzying tables in the Business section, those bewildering words. Could someone please explain what a price-to-earnings ratio is? In English?
And yet somehow, everybody seems to be making money in the stock market. Everybody, that is, except you. Your money is parked safely in the bank–the modern equivalent of keeping it under your mattress. It may only be earning 3 percent interest, but, heck, at least it’s not going to disappear the next time Alan Greenspan sneezes.
True, the stock market can be a scary scene for beginners. The good news is that you don’t have conquer it alone. You can do what hundreds of thousands of others are doing: Band together and create an investment club. An investment club is, simply, a bunch of people who pool a little money and decide together what stocks to buy. Hopefully, along the way, they earn a little and they learn a lot.
Like the Raging Bulls. Sean Essex and his wife, Kim, joined forces with about a dozen colleagues and friends to create the Raging Bulls Investment Club in 1995. Its members each put $100 a month into the pot. At monthly meetings, they study companies and decide which ones to buy into.
An investment club is a low-risk way for people to learn about investing. “Together you have money to invest that, as an individual, you wouldn’t have,” says Essex. That means it’s easier to diversify their stock portfolio; the money’s spread around in different stocks instead of being locked up in just one. It also means that a smaller percentage of each person’s money is wasted on paying commissions for stock transactions. And because club members have to agree on every decision, there’s less chance of making a risky or dumb choice, and less chance of buying or selling in a panic.
Learning is the key word here. “In an investment club you learn by doing, as opposed to learning by reading, or not learning at all,” says Essex, 31, a vice president at Ogilvy Public Relations.
Members typically spend two hours a month at meetings and two hours a month doing outside research to prepare for meetings. Everybody in the group is equally responsible for researching potential buys and tracking stocks that the club owns. Everybody learns how to read the stock tables. And yes, everybody learns, among other things, what a price-to-earnings ratio is.
The National Association of Investors Corp. (NAIC), a non-profit group that has helped establish more than 30,000 investment clubs nationwide, suggests these guidelines for running an investment club:
– Invest regular sums of money every month.
– All earnings, dividends and capital gains should be reinvested in stocks, not pocketed.
– Buy growth stocks. The NAIC has stock selection guidelines for your club to follow, to help you select and evaluate stocks.
– Diversify investments.
It can take a few months to get a club up and running. And you get better at choosing stocks as time goes by. But don’t expect to score big right away. The NAIC says a reasonable goal for a 15-member club is $20,000 after 20 years of each member putting in $20 to $25 a month. You should aim to double your money every five years. But it’s not uncommon to lose money in the first year as you’re gathering experience.
View your investment club as a business. Like all businesses, it will have expenses. You’ll pay commissions every time you buy or sell a stock. You’ll have to file taxes. If no one in your club knows anything about taxes or bookkeeping, you may have to hire someone to help.
Here’s some advice from the NAIC and current members on how to start a successful investment club:
– Sit in on a few meetings of an existing club in the area. When you’re ready to start your own, ask an experienced clubber to sit in on your first meeting or two.
– Pick your members carefully. Choose people who are willing to share in the work. And make sure that members share the same investment philosophy.
– Consider joining the NAIC. They can assist in establishing bylaws for the group, setting up a bank account, finding a broker to handle your trades, registering with the IRS, registering your club as a partnership with the state or the county, and teaching you how to handle bookkeeping.
NAIC membership is $35 for the club, plus $14 per member per year. You can call 248-583-6242, or write to: 711 W. 13 Mile Rd., Madison Heights, Mich. 48071. Also, check out its Web site at www.better-investing.org/
– Whether you join the NAIC or not, you may want to establish your club as a legal and taxable entity and to limit your liability by registering your club as a general partnership (in which everybody has equal roles and responsibilities). Contact your county’s Assumed Business Names Division. In Cook County, that’s 312-443-5652. The cost is $5. The second part of the process is running three legal notices in a local newspaper announcing the creation of your club.
– Learn more about investment clubs by attending the monthly NAIC Coffee Club Express Speaker Series. The breakfast speakers series is held at the Diplomat Ballroom, at North Avenue and Highway 83 in Elmhurst. Tickets are $15 for NAIC members; $25 for non-members. Call 773-736-4444.
GETTING HELP GETTING STARTED
In addition to the National Association of Investors Corp., these resources can help investors get a club off the ground:
– “Starting and Running a Profitable Investment Club”–This is the official guide of the NAIC. It contains information on how to start and maintain a club, how to work with a broker and how to go about picking good stocks. By Thomas E. O’Hara and Kenneth S. Janke Jr., Time Business/Random House, $23
– “The Investment Club Book”–This book provides information on how to set up a club, and how to build and manage a portfolio. By John E. Wasik, Warner Books, $11.95
– Invest-o-rama (www.investorama.com/olclubs.shtml) –This Web site provides hot links to individual investment clubs around the country.
– Investor Guide (www.investorguide.com/Clubs.htm)–This site offers links to clubs in the U.S., Canada and parts of Europe.
– Wild Capital Investment Club (www.computerland.net/(tilde)missouri/in vestment–club.htm)–Beside offering information to current or prospective members of the Wild Capital Investment Club, this site contains a massive list of links to investment clubs all over the world.
– Knight-Ridder/Tribune.
