Investment Clubs?

[elessar78]

My mom belongs to a NAIC investment club and she loves it. Anyone else have experience with this?

13 out of 15 years of her chapter's existence they've outperformed the SP500, one of which was the first year of their existence. To me, that's pretty impressive.

The club's philosophy seems to echo mine. Except they dabble in individual stocks and I choose broad index funds. They do a lot of research into the stocks they buy. It's an interesting concept.

[jteezie]

I'm fairly skeptical.

How do they calculate performance and compare to the S&P? You should ask for their methodology and see if their model makes sense. Performance analysis is fairly complex and not a hard science either. Also, should they be comparing to the S&P500 if they're investing in say a tech heavy index? How do they compare to the tech benchmarks. They might actually be under-performing (while taking extra risk).

Also there's inherently a self reporting bias (and conflicts of interest) involved in this type of game.

Skepticism aside, the investing education might be worthwhile. The extra diversity is also worthwhile to mitigate risk. You may also save on some management expenses. These last 2 things do positively contribute to gains, but not necessarily market beating gains.

[elessar78]

I'm not trying to be argumentative because I don't have a skin in the game. But why would it matter if they are invested in tech heavy index funds (which they are not)? The SP500 is the benchmark and they are outperforming it.

From what I gather they only own individual companies, no index funds. From the conversation, I gather that their "portfolio" consists only of 10-12 stocks as that is the amount of companies they can monitor closely.

She said that some of their members follow the club's portfolio verbatim and have become "10th percentile" wealthy as a result.

I'm not trying to be convinced by the validity of this approach, I'm just curious about if anyone has had a similar experience. It makes sense.

My approach is pretty conservative: most equities are in broad index funds in US and International stocks with low expense ratios. A fifth of the portfolio is in bonds (TIPS or otherwise). It's pretty hands off and I just check the mix every 6 months or so. Constant contribution to benefit dollar cost averaging. It's a long-term conservative approach.

The club is more "actively" managed, but it's not daytrading either—they buy and hold for extended periods but they do sell if the fundamentals are no longer sound or some other metric is met. I find it akin to Buffett's style of buying a company that is simple to understand, good cash flow, low debt/well-managed debt, good leadership, and it's undervalued.

[jteezie]

I wasn't trying to be argumentative either. However, my interpretation of the post was "what is your experience with these because I want some knowledge to help me decide if I should join". In that vein, I was trying to inject some portfolio management theory into the discussion to add knowledge to your decision and explain my perspective that this group is likely beating the market (S&P500), but they are actually not beating the market (a more appropriate comparison would be an index that better matches their investment style and the 10-12 stocks they hold) if they used the right measurements.

Yes we can say that "they beat the S&P500", but they are likely taking a lot more risk than was necessary... which means they beat the market by luck. At surface, 13 of 15 years could hardly be called luck, however, you are making the wrong comparison. So here is an extreme example. "They are beating government t-bills consistently 15 out of 15 years". Is that an appropriate comparison?

Just another note, 10-12 stocks is not very diversified, hence why I also think there is a lot of luck involved.

[disneysteve]

I agree that the S&P 500 may or may not be an appropriate benchmark. it all depends on what their holdings are. That said, 10-12 stocks could make a reasonably diversified portfolio. That's enough to spread out over the various sectors: technology, financials, consumer goods, industrial, healthcare, etc.

I've never been part of an investment club though I've thought about it from time to time. If the members are doing their homework well and making good picks, it can be a good way to go. The issue is that you need to trust the research of your fellow club members.

[elessar78]

Gotcha. There isn't a chapter in my area of the country so I'm not considering it. I always just thought that it was some "hobby" (which it is) but it's, apparently a serious hobby.

I agree 10-12 stocks is not really diversified at all. Kinda flies in the face of investment theory that I've heard read. From what I know they each have "normal" retirment accounts.

[GrimJack]

There is often a mistake made by investing clubs where they do not handle additional contributions correctly. There was a book out by a group of older women that showed them having a really great return but after the book was vetted, it turned out they compared the starting balance with current balance to get return - forgetting that they had made additional over the years (beardstown ladies).

The research aspect of the investment clubs is good. Take a look at this site about investing.

[Joan.of.the.Arch]

An acquaintance was in an investing club. Yes, serious hobby, as you say. She really enjoyed it and talked about it often.

In spring of 2000 she spent some days looking haggard and mentioning their stock losses. I thought that she was suffering not just for her own losses, but that the losses of others were weighing heavy on her. I thought she may have been feeling responsible. She normally had an "in charge," "can handle anything" personality and is very smart. However, I think she was unprepared for the social results and emotions when some in the group lost serious money (I don't know how in worked out in the longer run--lost touch). Really I think she may have felt guilty and perhaps even felt accused.

I guess that kind of possibility is something to think about. It's not necessarily all business.

[jpg7n16]

I agree 10-12 stocks is not really diversified at all. Kinda flies in the face of investment theory that I've heard read. From what I know they each have "normal" retirment accounts.

Here's an interesting clip from Warren Buffett about diversification. Speaks about exactly this issue. About a minute and a half.

What Warren Buffett says about Diversification