Seven Keys to a Profitable Investment Club

These three clubs show high returns can be had by following the right path to investing

States as ranked by NAIC and Value Line Investors. The club’s portfolio soared in 1995 and 1996, posting an average annual rate of return of 32.2% and 52.7%, respectively.

Key #2
Buy Growth Stocks
It was regular social get-togethers-food, fun and family games-that spawned Minority Investment for Tomorrow in 1992. “We decided to bring something to the tableIt was regular social get-togethers-food, fun and family games-that spawned Minority Investment for Tomorrow in 1992. “We decided to bring something to the tablethat was long-lasting and prosperous,” says Dr. Reginald L. Parker, vice president of the Columbia, South Carolina, group, which has 14 members ranging in age from 21 to 53.

The club’s investment philosophy involves growth and value investing, as well as long-term investing. “We like stocks that are growing at a rate of at least 15%,” he says, “but we want to get them at relatively low price-to-earnings [P/Es].”

Investment clubs can almost assure solid returns by buying shares in companies whose sales and earnings are increasing at a rate faster than their industries in general. When it comes to growth, Minority Investment reviews each stock to see if it has the potential of doubling in value over a five-year period. Growth in a business comes in many ways. A company may be in a new industry or fill a need in a new market. Some new products or services spur growth. The most reliable and long-lasting growth is driven by management.

“We keep our eyes attuned to what is happening around us,” explains Parker. “Recent statistics have shown that two-thirds of the gross domestic product is primarily in consumer spending. And we as consumers like stores that have a lot of products at a good price. That’s how we ended up with Wal-Mart (NYSE: WMT) as one of our holdings.”

Another club favorite is Cisco Systems (NYSE: CSCO). “It’s a growing technology company and is a major leader like Intel. We believe there’s going to be a higher demand for the type of product Cisco offers [networking hardware].”

Minority Investment’s portfolio, valued at $13,222 (as of November 26, 1998), posted an average return of 43% in 1997 and was up 57.2% as of November 1998.

Key #3
Diversify Investments
By diversifying its portfolio, a club minimizes risks and maximizes returns. It may elect to invest in stocks, bonds, mutual funds and/or real estate investment trusts (REITS). More important, the club should invest in different size companies in different industries. “Aim for holdings in eight core industries: consumer staples, technology, consumer cyclical, capital goods, communications, healthcare, financial services and energy,” says Simone A. Thompson, investment representative with Brooklyn, New York-based Edward Jones. You can check size by the market capitalization or the number of shares outstanding times the stock price.

NAIC suggests a balanced portfolio where 50% of the club’s holdings are in medium-size companies, 25% in large companies with $2 billion or more in sales and the remaining 25% in small companies with sales under $400 million and rapid growth rates. This ratio may differ depending on a given club’s

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