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Published: Tuesday, 11/7/2000

Late-to-form investment club gets crash course

Almost exactly a year ago a bunch of people decided to put idle talk into action.

After several years of talking about forming an investment club - years during which the stock market made unprecedented gains - we decided to put our money where our mouths were.

We held our organizational meetings at a VFW post in East Toledo, and that led to naming the club the East Side Pack Rats.

And what a motley crew we are: 22 people from vastly different walks of life - a lawyer, a banker, several reporters and editors, a couple of retirees, a bookkeeper, a fireman, several small-business owners, an auto worker, two truck drivers, a utility executive, a salesman, and a bookie. Well, he's only a part-time bookie, and he'll probably never be club treasurer.

All of is knew going in that the main purpose of an investment club should be education: to learn something about investing and how the stock market works. Boy, has it been an education!

We accumulated money for several months, studying stocks before making any investments. Our first two choices have proved to be good ones so far: SBC Communications and “Spiders” (index shares that emulate the performance of the Standard & Poor's 500-stock average).

But very quickly we got heavily involved in technology stocks. And why not? The tech-heavy Nasdaq composite hit its all-time high of 5,048.62 in March.

That was Mistake No. 1 - not choosing tech stocks, necessarily, but picking them at that time. The rapid rise of Nasdaq was followed by the rapid crash of Nasdaq. At times since March, Nasdaq has been down as much as 37 per cent from its peak. What are the odds? Perhaps we should have asked our bookie first.

We've been through the elation and dejection phases. At one point, our total portfolio was up nearly 20 per cent, and at one dismal point it was down almost 20 per cent. This in the space of just eight or nine months. Education, yes. Pepto Bismol? Yes, thanks.

At the moment, performance of the East Side Pack Rats' portfolio is just about the same as that of the Dow Jones industrial average - which in recent weeks has been under water by 6 to 8 per cent or so.

There's a good reason for that: About half of our portfolio consists of blue-chip stocks. Live by the average, die by the average. Some of those stalwarts, such as Wal-Mart, Microsoft, and AT&T, have been hurt by news and events.

All the major market indices have been in negative territory much of the year 2000. This is disturbing to any new investor, and it's equally disturbing to a new investment club.

After all, we're coming off a string of five great years for stocks, years in which prices gained from 20-some to 30-some per cent.

So, Lesson No. 1 for the Pack Rats: What goes up must (or at least probably will) come down.

Lesson No. 2 - and we learned this with AT&T, which is now selling for just over half what we paid for our highest-priced shares - is that bigness, greatness, and a reputation aren't enough. A company also has to have a viable business plan. Our hope for AT&T is that the bust-up of the company will free up enough value to make us whole. Millions of American investors are in the same boat. They're learning, too.

There are many others lessons we've learned: Dollar-cost averaging really works (buy more shares of a good stock when they're low, fewer when they're high); beware of “hot tips,” even those from the very popular CNBC-TV; and don't get too excited just because a stock appears to have good earnings and a low price-earnings ratio.

We learned that lesson the hard way via Owens Corning: We bought it at several stages, as the price fell and the PE ratio got ever lower.

Then came the Chapter 11 bankruptcy filing and the realization that our shares ultimately may be worthless (except as a capital-loss tax write-off).

Probably the best lesson we learned is that diversification is the only way to go.

An investment club axiom is that out of any group of five stocks, one may be outstanding, one will be a disaster, and the other three will be steady, if unspectacular, performers. A Pfizer or SBC Communications may make up for the occasional falling star such as AT&T.

At this point, a year into our experiment, the East Side Pack Rats are still learning and still faithful to a buy-and-hold strategy.

And we are all still aboard - only a sinking Rat would desert the ship.

The moral of the Pack Rat Chronicles could well be: He who hesitates has lost valuable time in the market.

We should have started this club five or six years ago.

Homer Brickey is The Blade's senior business writer.



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