Sun, Dec 29, 2002 page10

• Investment-club membership declines

  WIPEOUT The number of individuals participating in groups in the US that play stock markets have declined following a steady drop in share prices on Wall Street

  • NY TIMES NEWS SERVICE
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  Richard Perkins of East Sandwich likens the early days of the Wall Stock Investment Club to a poker group, where the members got together for some talk and some play and the hope of making some money.

  "Back in 1998 and 1999 and even into 2000, it was pretty easy," he recalled. "But once things began to get difficult in the stock market, our meetings got a little contentious. We were losing money, and even though it wasn't going to send us to the poor house, the whole thing just wasn't so much fun any more."

  The 10-member club lost three members prior to the start of this year; when three more wanted to leave, Wall Stock folded, cashing out members' shares in the club by the end of March.

  

  Judi McDonald, president of the National Association of Investors Corp's Massachusetts chapter and a member of two investment clubs, looking over a newsletter from one of the clubs in Plymouth, Massachusetts, in November.

  PHOTO: NY TIMES

  But Wall Stock is far from alone. Indeed, just as investment clubs began popping up all over the country in the late 1990s, so too are they folding today.

  Buoyed by the bull market and a popular book touting the financial success of a band of women from America's heartland, investment clubs sprouted like weeds in the mid-1990s. They were fun and, thanks to a booming stock market, successful. Today, they've been scarred by the claws of the bear market.

  Losses are the story for clubs right now. Many got too concentrated in technology stocks, had their collective pocketbooks bashed in for it, and are now retrenching or changing direction in an effort to survive.

  The number of clubs in the National Association of Investors Corp, the national group that most clubs join for support and guidance, peaked at 37,129 clubs in 1998. That number has shrunk by 22.6 percent, standing at 30,278 in August. There are 641 NAIC-member clubs surviving in Massachusetts, with an average of 8.5 members per club. Not all investment clubs decide to join NAIC.

  The average club has also lost nearly one out of every three members it has; NAIC statistics show the typical club having more than 16 members in 1998, but just 11 members today.

  "The stock market has weeded out the hobbyists, the people who joined an investment club so that they would have something to talk about at a cocktail party," said Judi McDonald, president of the NAIC's Massachusetts chapter and a member of two different clubs. She says her clubs -- like most that remain -- survive because members "came in hoping to learn. So while we're all disappointed, the people who have stayed have gotten what they expected from the sticking with it."

  Investment clubs are small groups of investors who get together regularly to learn about and invest in the stock market. They meet monthly to quarterly and require members to contribute a set dollar amount at each meeting and to research stocks for the club's portfolio. Meetings combine investing with social interchange, making the groups like a sewing circle where stocks replace needlework.

  The clubs function a bit like a mutual fund, issuing shares to members that represent a monetary stake in a club's investments. Those shares rise or fall in value based on the performance of the club's stock picks. NAIC data shows blue-chip and technology stocks were particularly popular with clubs as the market was peaking, which helps to explain why most clubs have had losses in recent years.

  Preaching quality

  Members of surviving clubs say their groups have been fundamentally changed by the stock market's decline. It's not just the stress of losses eating into the social aspects of the club. Some have had to evolve and change their investment philosophies so members felt comfortable remaining.

  NAIC encourages members to buy high-quality individual stocks at regular intervals and in all market conditions. Its clubs generally don't hold much cash, are reluctant to sell, avoid mutual funds, follow NAIC's time-tested formulas for identifying potential buys, and do their research with the help of its analytical tools.

  But the Richview Investment Club in Dorchester, for example, is deciding whether it should branch into mutual funds, said president Pat Kreger. The Commonwealth Investment Club in Westford has investigated how it can make more efficient trades and moved to make the most of its declines through tax-loss selling, said member Andy Wardell.

  At the Women of Wealth Investment Club in Marshfield, member Kathy Sullivan says the group stepped up its independent research while growing more skeptical of the NAIC investment software, because the program is colored by the national group's always-buy-more-stock approach.

  "With prices so low, we find that almost every stock comes across as a buy on the NAIC program," said Sullivan. "So we've lost some confidence in the way we were picking stocks ... We have a more jaundiced view of all research."

  That view differs from the happy-go-lucky, mid-1990s perspective of the Beardstown Ladies, the folksy Illinois women whose 1995 best-seller about their market-beating club experiences fueled the most explosive growth period in investment club history.

  Just another scam

  Today, the Beardstown Ladies' five books are all out of print. The club's success became something of a scandal when it was revealed that the Ladies miscalculated their gains and never earned 20-plus percent, but achieved a more-pedestrian 9 percent return on their investments. Many of the clubs spawned in the afterglow of the Beardstown Ladies' success have faded, too.

  The Cohasset Women's Investment Club opened with 14 members in 1999, less than a year before the market peaked. While it hasn't folded, the club -- which hasn't signed up with NAIC -- also hasn't held a meeting in months.

  "We're a classic case of a group that formed because the market was wild and the whole world was enthusiastic about investing," said member Bernadette Faulkner. "We were too invested in high tech, and then the market tanked and we started losing money ... We cut back on meetings, sold some stuff, and kind of went into a freeze where we're not doing anything because we're afraid that any move we make will be wrong."

  Investment clubs generally don't release their performance results. But NAIC chairman and chief executive Kenneth S. Janke noted: "The number of clubs always rises and falls with the market, and it's safe to say that people aren't closing clubs because they've had tremendous success these last few years."

  A Web site for the Bay State Investment Club of Holyoke shows a loss of more than 91 percent for the three years ending Nov. 1. Since its inception in 1996, the club has lost 77 percent of its members' money. The updated site suggests the Bay State group is sticking with it; no one from the club responded to e-mail requests to talk for this story.

  However, according to wildcapital.com, most Massachusetts investment clubs with Web sites stopped updating portfolio results almost two years ago, a sign that performance is floundering or the club has closed.

  Ultimately, diehard club members believe they will benefit from the hardships their groups have faced. Said McDonald: "We're certainly getting an education, and are probably learning a lot more now than when everything was so easy. Hopefully, what we're learning will make us smarter and better investors in the long run."
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