Secrets of Successful Investment Clubs

When BLACK ENTERPRISE profiled the GrassRoots Investment Group L.L.C. in July 2002, the club consisted of a group of energetic, innovative investors who were relying on their individual expertise to improve their profits. “We have people who are in law school, who are engineers, some who work for Internet companies, who own their own businesses, as well as some in banking and sales, and we lean on those individuals,” says founder Phillipe Tatem.

Although GRIG had a rocky time adjusting to a volatile market that slashed its portfolio’s assets from $200,000 to $118,000 during the tech-wreck of 2000 and the recession that followed, the original idea of relying on the business savvy of its members has proven to be a winning strategy. Since 2000, the group has reorganized and turned that $118,000 into a portfolio worth more than $1.3 million that includes equities, real estate, and business operations such as a car wash and detailing franchise. All told, the club has had a 22% return over the last two years.

GRIG accomplished this by concentrating on making its members better investors and setting up a system that capitalized on the business knowledge of its members. This has translated into investment choices that have a greater chance of success. Instead of having every investment idea vetted by every member of the club, the club now has five distinct “operating teams.” Each team finds cash-generating opportunities with equity ownership and then delivers a comprehensive report on the opportunity to the general membership. A member of the management team sits on each of the other teams to make sure the goals of the team are reached.

As international events make the investment environment more challenging, coming to a consensus as an investment group has become more difficult than before. Adopting innovative approaches is one way growing investment clubs can improve their success. In fact, clubs of all sizes can implement strategies that strengthen investment habits among members and increase overall portfolio returns. Here are some secrets that successful investment clubs have used to do just that.

“The best investors are the best informed,” says Kenneth Janke, chairman of BetterInvesting (formerly the National Association of Investors Corp.). According to Janke, investment clubs have traditionally sought advice from financial advisers, but as the clubs gain more knowledge, their need for advisers lessens. Janke also says the best clubs use technology to acquire more information about the market, opting for discount brokers instead of full-service ones, and investing online.

Successful clubs understand that investment success takes time and perseverance. It requires investing small amounts regularly over the long term despite market fluctuations or cycles. “Getting rich is not something that happens overnight,” says Janke. “Some of the clubs that go out of business early do so because they try to trade stocks every month. Even the pros don’t do that.”

According to BetterInvesting’s 2005 membership survey, the average investment club has a portfolio worth $97,441. The clubs surveyed had an average rate of return of 4%, compared with