One Way To Boost Your Stock Market Investing Now

Transcription PNC Podcast Episode 427

How to Boost Your Stock Market Investing Now - Part 1

John: All right, in today's show, I'd like to share my experiences as a member of an investment club for the past 32 years. We're going to get right into that. Let me say that the reason I'm doing this is that it's not that this is going to be a source of a large amount of ongoing income, but a club that's investing in the stock market it does become a valuable asset, particularly your share of this becomes a big asset over time.

And the earlier you start, the bigger of an asset it could be and a bigger part it might play in your, let's say retirement or your flexibility. And I'll explain why in a minute. So that's what we're here today to talk about.

It's something I'm very familiar with because as I said, I've been a member of two, actually two investment clubs. One's a family investment club, which is not really that active. And then this other investment club that's been going on for 32 years.

So let's start with the definition. What is an investment club? Well, it's just a group of people who get together on a regular basis to invest and to learn. And I'm taking it from the standpoint in what I'm talking about today, it has a lot of focus on the learning part. I mean, there are people that get together. I'm sure they just get together, a small group to invest their money in really big investments.

But we're talking about something that was designed 30, 40 years ago to help the average person. Most of the investment clubs, especially those related and connected with Better Investing, which is formerly the NAIC, are just local people, friends, relatives who get together, start putting in $10, $50, $100 a month. And they're not really focused on trying to amass a huge stock market portfolio, but they're there mostly to learn and to also make some money.

When I'm talking about that type of group, here's some of the common factors that we can know so that if we decide to pursue this, then we can apply this to our own club. So it's usually a small group of people, five to 20. I think ours started with seven.

Many start with five or three or four. Some will limit their growth above 12 or 15. There's probably a few that are much larger than that. And they meet regularly to talk about investing. I'd say the most common is monthly. Sometimes it's quarterly or it could be anything in between.

And the main purpose is to educate members about investing by forming this club that invests in the stock market. And what they do is they make collective investment decisions. So they're actually applying what they're learning as they go and they're voting and they're contributing every month a certain amount of money.

Like I said, it can vary from 10 bucks up to 100, 200, 500. And they invest that into a shared fund which is held in a brokerage account. And usually all of the members have access to that account.

But usually the brokerage firm is sending statements every month to the treasurer. Most of these groups will have a president, possibly a vice president, a treasurer and a secretary. The secretary takes the minutes and follows up on things.

The treasurer handles the funds, gets them deposited, receives the brokerage statements, balances everything, double checks everything. And then a lot of times we'll also have checks that can be written to pay small fees because there's always some fees when you put a group together like this. To make this official, the clubs typically will form a partnership or an LLC.

When we formed our club 32 years ago, we had seven new members that came together. Several were physicians. One was an attorney who put together the partnership agreement and I think the bylaws.

And then we had an accountant. And it was funny because the accountant actually didn't do the bookkeeping at the time. There was another individual who was in finance. He worked for the local newspaper and I think he became the accountant at that time.

Now, fast forward 32 years later, our current accountant or I would say our treasurer is actually that same accountant that helped found the club 32 plus years ago. You have this legal documents. You all agree that you're going to do things in a certain way.

You're going to decide how you're going to make purchase decisions. Typically, it's a vote of the members. Oftentimes, at least in my experience, those votes are unanimous. You pretty much present a case for it. It's usually a compelling case for a particular stock. Everyone will agree. You can take a vote and in some clubs, it's just the majority rules. In our club and many other clubs, it's officially depends on the ownership percentage.

The reason that's important is that if you have a club that's been around for 10, 15, 20 years or so, and you add new members, let's say you have six members, but three of the members have been in the club for 20 years and the three other members are new. Actually, in our case, it's determined based on the percent ownership of the club. So someone who's been in 20 years might have 25% ownership.

You might have three of those and then the other three partners might be splitting up the other 25%. So you can imagine it just takes two people out of the four to make any decision. But generally, we try to do things by consensus.

that most clubs include in either their bylaws or their partnership agreement is that given that the purpose of the club is to invest in the stock market, members are expected on a regular basis to do research, looking at different stocks, different companies, analyze them in a certain way, and then make their presentation based on that as objective as possible analysis. And the treasurer keeps track of the contributions, the investments, performance for tax and also for tax and reporting purposes. Nowadays, everyone has software which makes it fairly easy to do.

And it's not that expensive, but it's a small expense of the club. The secretary typically, again, kind of records everything. And what I do is I record everything, who attended. We have a standing agenda that looks at the minutes, that looks at certain other reports that come out every month that review the performance for the past month and also look at the results of maybe a quarterly or annual basis of the overall performance, although that's discussed at some level at every meeting.

Many clubs, from the standpoint of income taxes, they will become an entity that pays its own taxes and each member received a Schedule K-1. So, I guess what really happens is the club does a tax return, but actual payment of taxes are done individually by each member based on their Schedule K-1 where their income and losses are presented and recorded.

Now, there are some clubs that are not managing their taxes that way, but they just, at the end of each year, produce an allocation of income and expenses and provide that, it's kind of like a K-1, but it applies that, supplies that to each member and then they just use that form to then include with their annual income tax return. That includes things like gains that have been realized, long-term gains, short-term gains, any losses, if it's really losses rather than gains. Also, any income, and that can be in the form of interest or stock dividends.

So, that all gets handled one way or the other, as I mentioned, but it flows through and every member's responsible for doing their part. Now, most of the time, if you're just buying stocks and you're not selling a lot of stocks, you almost never have losses and when you sell, you usually have some gains you have to record. Long-term gains, of course, are taxed at a lower number or lower percentage than, let's say, short-term gains.

So, that affects the club's behavior in that we tend to not sell something until it's at least beyond the short-term gain period, I think, is a year. The benefits of this whole process is that you really push the member's financial literacy and investing confidence. And not only do we learn about the stock market, we learn about different ways to purchase stocks and different types of orders.

In general, we're just buying at the market while the market is open. And in most of the big brokerage firms, that's pretty much instantaneous. And many of the brokerages now charge very little, if anything, for buying US stocks, at least.

As you're doing this, you're learning how to select stocks, how to analyze companies, that kind of thing. So, that's the financial literacy part. And then you are investing. The investment is, like I said, a monthly contribution. And so, it compiles over time. And between that monthly contribution and the addition of new members, and hopefully, for the most part, the stock market is going up, you start to accumulate significant funds.

And I'll go through what we did in our club as just an example in a minute. Many clubs will combine the education with networking, friendship, just getting to know one another, hang out, maybe sometimes you'll even go to someone's house for a meeting and have a meal. All of our meetings were usually near or a place where we were working, like one of the hospitals.

And it is a way to diversify. As you go through your life, your career, building your family, buying a house, and so forth, you're putting money away for savings, you're putting money into IRAs or 401(k)s or deferred compensation plans, things like that. And this is just another place where you can start to build those assets.

Now, it won't amount to much if you're putting in only $10 a month. When all is said and done, 30 years later, investment club with 10 members might have a couple hundred thousand dollars. But if you've been putting in $100 a month or 200 a month or even more, and you've got 10, 12, 15 members, then you're really going to get into this seven-figure range, one to two million dollars if you do that for 30 years.

There are some issues which can arise that might be a challenge or a risk. You know, what if there are conflicts, what if people don't agree? Usually the solution to that is if there's one person in particular, they just leave the club.

But when they leave, they get all of their earnings and their percentage of the earnings and the stock purchases that were there since they joined. And so in our case, we had several. Actually, we had more people have left the club than are currently in it because we had a lot of people over the years come and go and we had two members die.

I was trying to get an idea of how popular investment clubs are because you can imagine when we started, it was actually something that was quite popular. And there was a reason, there are multiple reasons for that, but I'll explain one reason in a moment. But as I look back in the 80s, there were basically, from what I could tell, about 4,000 or 5,000 active investment clubs.

And then it just kept growing. There were some books written about this. And then in 1994, which was actually after we started our club, I believe, because we did start in 93, there was a book written and published called The Beardstown Ladies' Common Sense Investment Guide, How We Beat the Stock Market.

Now, when that came out, it was quite a thing. It was on TV constantly. And they were claiming that they had produced annual returns of 23.4% since the inception of their club, which had been, I don't know, at least five or 10 years before that. 24%, when I think what we usually hear is the stock market will produce somewhere around nine, 10%, depending on who you talk to and how you, whether it's the entire stock market, it's the Dow, it's the S&P. But they discovered about three or four years after the publication of the book that the formula that they used to calculate their returns was faulty because they weren't separating out the contributions that were being made. Even though they were making small contributions, I think it was just 10 or $20 a month.

But you can imagine if you're throwing money in and you don't count that as a cost, but count that as part of the earnings or the growth of the club, it grossly overvalued that. So what they found on redoing that analysis is that the returns were closer to 9% per year, which basically were at or slightly below the S&P 500 or the total market. So that was a big letdown, but by the time they found out that this thing was an error, there were already about 35, 36,000 clubs.

And you can imagine that the number of clubs then started to decline gradually. Probably there weren't that many new ones forming and the ones that were already existing, they have a normal life that can be five or six years, 10, 20 years, but over time, unless you're adding more clubs, the numbers are going to go down. And so the last number I have from 2024 is probably we're back down to about 2,200 active clubs.

Most of this information is from Better Investing, which is one place that has the most accurate information because betterinvesting.com is a website and an organization that produces a magazine and actually promotes the formation and the running of investment clubs. That's what they do, and they have software to help with that, which I'm going to talk about. Let me talk about some other resources then.

I think I might've said that was Better Investing and it's at betterinvesting.org. I might've said betterinvesting.com, but you can find betterinvesting.org. Some resources there. I think you can join for a very low price if not for free, but then you can't access a lot of the resources. So there is a small fee to be a member, but there's a lot of educational information at that website, how to start, how to run. There's even sample organizational documents.

There's webinars on there. There's events that you can attend or participate in. There's the library and there's online tools. Now, these online tools, at least one of them we use pretty much since we started. And we use, when we're doing a meeting, we present stocks using a stock selection guide. That's called an SSG for short.

And the tool is on the betterinvesting.org site. We use it right off the site. There's a basic version of it. There's a slightly more sophisticated version of that. They also have a stock comparison guide where you can input two stocks and it does a comparison side by side. So if you've got it down to two and you want to compare them across various metrics, you can do that and pick the one that looks like it has a better chance of going up over time.

There's a CR or company research tab that you can put the ticker symbol in and get some research on the stock. It's almost like a single page you get from S&P or what we use is a value line investment survey, but the company research on better investing is similar, probably just not as in depth as value line is. And there's stock screening tool there as well.

So that's all on betterinvesting.org. We purchase value line investment survey. I shouldn't say we, because I actually pay for that myself because it's something I want to use.

And so, but I share all of the reports on any stock that we're considered buying with the club every month. A value line is a very good survey. It comes out weekly, but it presents 1,700 large cap, basically stocks.

Maybe some of them are mid and smaller cap, but mostly are large cap, but all the big ones will be on there. All the ones that you're familiar with day to day will be in there as well as many that you've probably never heard of. And they report on each of those stocks every quarter.

So what that means is that every week, 1 13th of the 1,700 are presented. 1 13th, which is, I don't know how many that is of 1,700. You can do the math, but a certain number this week, the next week, next week, and then 13, 14 weeks from now, it'll roll over again because then the next value line will be out and it'll be updated and you can look at that.

I've also recently found something called the Investor Advisory Service, which is IAS. I'll put that in the show notes, the link for that. And they do follow and recommend stocks buy and sell, and they do a little more in-depth analysis than just a simple value line investment survey.

Interestingly, they use the same tools that we use in our club. They use the SSG, the Stock Selection Guide, so that if you subscribe to the IAS, Investor Advisory Service, you can just download their SSGs and use them at your meetings if you like to do that. Makes it very simple.

Now you might disagree with their assumptions, but those people that are doing those are actually trained finance and investment advisors and so forth. And then another one I would mention just because we've been using it for so many years is a guy named Bob Brinker. He used to be on the radio.

I'd listen in the Chicago market, but I think it was a national radio show and it was on every week. And he taught us a lot about investing. Now the radio show disappeared and Bob Brinker actually passed away, but his son, Bob Brinker Jr., continues to put out the Mmarketimer. So that gets posted actually on one of those online sites. One thing that Bob Brinker and Bob Brinker Jr. are really good about is trying to make adjustments in a portfolio when the market is getting under- or overvalued. They will typically, every year or two, put out a buy order.

And similarly, every few years, they'll put out a sell order. And it's a little more nuanced than that. Now in the clubs, in ours and most other clubs, we typically do not try to time the market, but sometimes what we do, particularly when the P/Es are getting high or getting a little nervous, we'll just keep contributing, but maybe not buy any new stocks.

So it's kind of a very, very minimalist way to time the market. We keep everything we own, maybe cut back on any new purchases, hold off. And then if we feel more comfortable with the P/E ratios, or maybe the earnings have gone up because the economy has improved, then we'll just start looking for new stocks to buy and jump back in.

So we don't typically sell. But for what it's worth, that's the one that I've seen and has a really, really good track record for identifying, selling and buying opportunities, accuracy, but nothing near 100%. I mean, if you were to be accurate in 70%, that would be good because anything better than a coin flip means that you might be at an advantage.