Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 26, 1990 TAG: 9003242265
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Medium
That was back in the 1950s. Since then, the investment club phenomenon has peaked and sputtered.
But the need for them hasn't waned, Brown said, because most people feel uncomfortable about entering the stock market.
His parents learned how to invest through their club, Brown said, and now there's a new generation hungering for help. So, when he couldn't find an existing investment club, Brown decided to "pick up the flag and lead the charge."
As a broker with J.C. Bradford & Co. in Roanoke, Brown is equipped for his mission.
He is creating two clubs, one for an organization of which he is a member and another for anyone who's interested.
Dean Penley, manager of the J.C. Bradford office here, said investment clubs were popular in the 1960s and early 1970s, but "they've been dead for years."
Their main advantage is the educational experience, Penley said. Members learn from each other, he said, as they contribute their differing ideas and knowledge.
As they do research to justify their choices, members learn the whys, as well as the hows, of investing.
Penley said members seldom make much money because each person's stake is usually only $25 to $50 a month. On the other hand, that limits the risks for a beginning investor.
There are some disadvantages, however.
Penley said clubs can suffer from the camel-designed-by-committee syndrome.
Members have to go along with the majority view, he explained, and the consensus opinion isn't always right. Contrarians often do best in the market.
Or the club may get carried away by the latest fad, such as overpriced high-tech stocks or gold, Penley said.
Brokers like to work with investment clubs even though the accounts are small, Penley said.
Over the years, he said, the clubs generate new accounts as members gain sophistication and venture out on their own.
William Sullivan, director of individual financial services at Merrill Lynch in New York, said a typical club nationwide has 10-20 members and a portfolio of $60,000 invested in 15 stocks.
Clubs that exist over a period of years, he said, regularly outperform the Dow Jones industrial average. But half fold within the first 18 months.
Tyler Pugh, senior vice president at Wheat First Securities, said clubs offer diversification as well as training.
By pooling their money, he said, members can buy a portfolio that none could afford alone.
Clubs are for people who enjoy getting together and studying the markets, according to Pugh. They are for learning and for small investments, he said, not for managing an individual's retirement portfolio.
Richard Wertz, assistant manager at A.G. Edwards, is "negative on them." He said he hasn't heard of one in years.
Enthusiasm is high at first, Wertz said, but then attendance drops off and the club withers.
Sullivan warned of potential conflict over investment philosophy such as short-term versus long-term gains.
Those who expect quick gain the first year may be disappointed and leave, Sullivan said, because new clubs often lose money initially.
All of the brokers said a club needs formal documents and procedures. Sullivan said the partnership agreement should be drawn by a lawyer and cover, among other things, investment philosophy and voting method.
Some clubs abide by majority rule, he said, but others use a weighted system favoring long-term members with the most money invested.
Pugh said the agreement should cover the payout and circumstances of people who join or leave the club.
Wertz pointed out that the routine accounting can be very complex.
Brown said he is forming corporations to operate the new clubs. He is drawing charters for registration with the State Corporation Commission, bylaws and a set of ledgers.
Brown hopes the members will go beyond the traditional stock market investments.
Operating in "a training mode," he said, the clubs will also take a look at investments such as tax-free municipals and mortgage-backed securities.
by CNB