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Author: NechesInvst Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 7258  
Subject: New Clubs--Don't Do This (Long) Date: 4/7/2004 3:05 PM
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Here is the brief history of an investment club; or what not to do

In December, 1999 my boss and a few co-workers were sitting around having lunch when he commented that people were getting rich in the stock market, and there had to be away for us to get in on it. He made it my responsibility to find out how.

If you remember in 1999 the markets were shooting upward with, apparently, no end in sight. You could throw your money just about anywhere and make money.

I found the web site for the NAIC (National Association for Investors Corp) and knew I had hit pay dirt. It was January, 2000 and we began to form our club. In February of that year, we voted for officers, began collecting money, and joined the NAIC.

And so our decent begins. We picked 30 stocks, of which we would buy somewhere between 9 and 12. We didn't really bother to study stocks, and we really didn't know what we would look for if we did. One stock we looked at was NBCI NBC Interactive. It was going to be interactive side of NBC. The thought went something like: “If anyone can make it work, NBC can.” We did avoid buying that one.

From our 30 stocks, we picked those that had gone up dramatically in price over the last year or so. And that about sums it up. Revenue? We didn't have a clue. Earnings per share? We weren't sure what that meant. We narrowed our 30 stocks down to 9. Tickers:
ADCT, APA, CEGE, GPS, NATI, NT, PASA, TXLI, and TTP. And bought them at the end of April, 2000. One member wanted to stay away from big companies like Microsoft, McDonald's and 3M because: “Those are big companies. They go up a quarter and down an eighth—there's no excitement in them.”

As we got our feet on the ground, a few of use actually tried to figure out how to invest, but we didn't try to hard, since the market kept driving our stocks (for the most part) up. And things were looking good for many, many months. TXLI (an oil exploration company) got bought out, and we made a tidy profit. With that profit, we purchased Goodyear. Why? Goodyear had just finished an expansion project locally. They had to be doing well. PASA (quepasa.com-a latino gateway to the internet) dropped from just about the time we bought it, we sold it after losing 60% of our money. Luckily, we were able to purchase AOLA (America Online Latin America). Afterall, PASA might have failed us, but how could AOL not succeed in the Latin American market? A year-and-a-half later, and a loss of 70% we had our answer.

At our 1-year anniversary, and just over one year from the market hitting it's peak, and our portfolio down 37%, our club was decidedly split. Some thought that we needed to sell everything and start anew. Others thought that perhaps we should actually learn how to invest. Membership went from 12 down to 7. And some of those 7 didn't really want to learn, they just wanted to reap the rewards later on.

Four of the seven began to learn how to invest. We continued to buy into our stocks, and sell occasionally. We completed SSGs on most of our stocks and thought that since the companies were all in the BUY category we were doing well. Our portfolio at that time, consisted of 11 stocks: ADCT, AOLA, CEGE, C, DYNT, IMPH, NT, SEBL, SBC, TTP and OIL.

At our second anniversary, we held 9 companies, and had focused on larger, more stable companies with proven growth. We had: ADCT, CEGE, C, DHI, KMP, KKD, KRB, MO, SEBL and TTP. Even with proven track records, our portfolio was down 29%. Members that had left were welcomed back in, and we thought we had truly turned a corner. Enron had come to light, MCI was looming—and somehow we had NOT got caught up in these scandals. Well, not entirely. C (Citigroup) was loosely linked to Enron, and we voted on emotion to sell at 29. KMP (Kinder-Morgan Energy Partners) was rumored to work in much the same was Enron—even one of the owners used to work at Enron. Emotions ran deep and we sold out. Home building was in a frenzy that no one could keep up with, and we sold DHI. And after only holding KKD for 4 months we sold it because: “It's just not doing anything.”

In October of 2002 we hit our bottom. Having sold off many solid companies we still held the “losers” with only a few shining stars.
ADCT off 88.82%; CEGE off 41.73%, HD off 23.55%; JNJ up 5.11%; KRB off 19.31%; MO off 26.82%; SEBL off 90.49%(gulp) and TTP off 87.17%.
The biggest problem we had now was actually buying stocks*. We could buy new companies without a problem, but we had the mindset that whatever price we were buying at would (or should) be the lowest price. And many members would refuse to purchase any more shares of a company that was down. Not wanting to “buy more of a loser.” Our portfolio was down a staggering 49.56%.

* -- We used no form of portfolio management. We didn't really know if ANY quarter of any company was meeting or exceeding our expectations.

Over the next year, we purchased only one new company, WMT. Everything else went into building back up our portfolio…and it was an up-hill battle. But by Oct. of '03 were we down “only” 33.44%, with 4 stocks in the black—HD, JNJ, MO and WMT.

Somewhere around this point members realized that you COULD make money from the big companies.

Now, in April of 2004, as we close in our 4-year anniversary, our portfolio is still down. Down 23%. We still hold our big losers: ADCT, CEGE, SEBL and TTP. Though most of these have rebounded from their lows. All but SEBL we've held from the very beginning of the club. Both CEGE and TTP are bio-techs and we bought knowing that they were literally years away from putting anything on the market, and we hold them purely as speculative stocks. ADCT is a telecom. equip. maker, and the industry as a whole is down. If we had used ANY type of portfolio review, we would have noted years ago that sales were diminishing and could have gotten out, now we're hoping (and we shouldn't be doing that) that the industry will rebound and we can sell out later for a minimal loss, if not a slight gain. SEBL is on our chopping block.
We now follow most of the NAIC's guidelines. We do a Stock Selection Guide on each company. We will always want a Value Line report for every company. This month, as we renew membership in the NAIC, we are also joining the NAIC Online Premium Service or OPS. This will allow us to download quarterly numbers into the Portfolio Evaluation Review Technique or PERT (not to mention being able to download SSG numbers directly into the software). PERT allows clubs to see if a company is meeing the estimates established in the SSG.

Just important as studying a stock, and deciding when to buy is when to sell. Emotions run deep at times, and selling does not be a rational decision. A case in point for us is with Citigroup….and that one was my fault. Set guidelines for selling early, and follow them. If sales are declining, find out why and do it quick. Is it industry wide? Call investor relations.

My club has had some serious issues that we've had to overcome. And I don't want this to sound like EVERYTHING we did, we did wrong—but we've certainly had to learn from our mistakes.

Good luck to all.

Mike
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