BI > MAY 2001

Try 'Groupthink' To Focus Your Club on Judgment Issues

Ask Every Club Member To Do an SSG on the Same Stock

There are just a few key judgments to make in filling out the Stock Selection Guide (SSG). Once you and your club understand the mechanics of how to fill out an SSG, these judgment items are where you want to spend your time and energy.

Recently my club tried having every club member analyze the same stock, and our monthly meeting involved discussion of the results. I gathered the key judgment numbers from each club member on a spreadsheet, and we used that as a basis for our discussion.

How did this work? It was great! Everyone was very involved, talking about how or why they chose a particular number. We were interested to see how close most of our "bottom line" numbers were to the group averages, despite some substantial variations in predicted earnings and sales growth forecasts.

Click to enlarge.

This screen capture of a Windows Excel spreadsheet of Lewis' club members' SSG results provides a platform for discussing what led individuals to make the judgments on Tribune. (Note: Some members did not provide total return figures.)

I got this idea from Lowell Herr, a person I've only "met" through NAIC's I-Club-List (an online discussion group). Lowell has been collecting SSG data from I-Club-List members for quite some time, and comparing the results of different contributors for the same stock. After we discussed the idea of using this in a club setting, Lowell tried it with his investment club as well. He sent me email afterward summarizing his results, and the subject line of that e-mail was "Smashing Success."

If you're looking for a way to spice up an investment club meeting or you would like a way to get club members talking about how they make key SSG judgments, I suggest that you try something like this as well.

The Eastside Profits Investment Club, of the Seattle area, recently explored the differing viewpoints they all bring to the judgment portion of the NAIC Stock Selection Guide (SSG). Pictured are (left to right): Doug Franklin, Kevin MacKenzie, Lisa MacKenzie, Tim Paterson, Barbara Mann, Eric Mann, author Brian Lewis, Shawn Powers, Bruce Ramsey, Henry Cando, Steve Judd and David Leech.

How to Do It: First, Pick a Stock

It's worthwhile to spend some time up front in selecting a stock, as the company you select will affect the quality of this exercise.

• Choose a stock that your club will find interesting.

The more interesting it is, the more likely you'll get full participation.

• Your stock doesn't have to be in the "buy" zone!

This is a learning exercise; better to pick a stock that your club will learn more from than one that might be reasonably priced at a future club meeting.

• Pick just one stock.

When Lowell Herr did this exercise with his club (the Bull Run Investment Club in Portland, Ore.), he tried it with three stocks in one evening, but three proved too much, and most of their time was focused on just one of these.

• Do your prep work well in advance.

I chose the stock over a month in advance for my club (the Eastside Profits Investment Club, located east of the Seattle area in Washington). This allowed me to just hand each member a copy of the required stock info at the prior meeting. I explained the idea and asked whether everyone would be willing to participate. I also gave them a sample spreadsheet showing what our final results might look like, and told everyone exactly what data items I wanted from them.

• Study your stock before making a final choice.

I didn't do this when I chose Tribune Co. (NYSE:TRB) for my club, and as a result, we all had a more complicated analysis than I had intended. In June 2000 Tribune Co. had acquired Times Mirror, a company roughly equal in size on the basis of annual sales. I hadn't expected our group discussion to turn into a miniclass on mergers and acquisitions!

• Do some up-front work to make it easier.

If your club members use one of the SSG computer programs (perhaps Investor's Toolkit or Stock Analyst Plus), you can help ensure full participation in this exercise by filling in the data and exporting it as a .ssg file. That way they can focus their time and energy on the judgment decisions.

Everyone in my club is "e-mail-enabled," so right after the month-before meeting, I followed up with an e-mail summary, including a list of the specific judgment items I required, and I sent them the exported .ssg file. Floppy disks are very cheap these days, so as an alternative you might provide the .ssg file to club members in that way.

Key Judgment Items

To ensure that everyone was fully prepared for a lively discussion, here are the judgment items I requested (all from the SSG):

My club members simply e-mailed me their numbers for each of these, and I summarized the results in a spreadsheet. When Lowell did this with his club, he had members send him their exported .ssg files, and he took the data from the SSGs directly. You could choose to do it either way, but Lowell suggests that if you use his method, you may be better off if you're all using the same SSG software.

The educational value of having the entire club perform an SSG on the same stock is likely to influence how the club discusses and chooses stocks in the future.

Apples-to-Apples Comparison

To ensure that people are comparing things in the same way, it would be helpful if you ask them to do the SSG as if it were a particular day in the recent past, so everyone uses the same price. That way you don't have some people factoring in recent news releases or earnings reports that others do not. In my case, I just picked a date a few weeks before the meeting, and put that day's closing price into my exported .ssg data.

By the way, you might suggest that club members not discuss the stock with anyone until after they've made (and given you) their judgment summary.

I sent out reminder e-mail a couple of times during the intervening month, and this probably helped to get more complete participation. Getting full participation is important, not only so that you have a lot of data to form your average results, but also so that club members have a stake in the process. Whether by e-mail or telephone, a reminder is a very good idea, ideally at the start of the weekend before your meeting.

Creating the Spreadsheet

I used Microsoft Excel (see spreadsheet, page 59), which provides great formatting capabilities and statistical functions such as "Average" and "Standard Deviation" (StDev). You might want to remind your club members that "Standard Deviation" is just a measure of how far the average result came from the group average; bigger StDev numbers mean there was a wider variation among the group results.

If you're not comfortable working with spreadsheets, perhaps you can find another club member who would be willing to collect the data for the group. Note that you don't have to use a spreadsheet, and in fact you don't need a computer at all. Paper and pencil works great for this, and the simplest of calculators can be used to average the values in each column.

Analyzing the Results

This part seems obvious, right? Give a printed copy of the spreadsheet to each club member, and off you all go! In fact, though, there are some things you can do to make your discussion more productive:

• Ask club members to bring their SSG and notes.

It's very helpful if club members have a copy of their own SSG and data source information along with them (you might want to bring copies of whatever data source your club uses, i.e. Value Line, S&P, etc). Even better, encourage members to write down the logic behind their decisions, right when they make them, right on the SSG.

• Set expectations.

It's important that no one thinks the group averages are somehow the "right answer." Five years from now you could look back and find that a result that deviates widely from the group average was in fact an accurate prediction. The averages are just a point of departure for your discussion.

• Prepare a list of questions and points to cover.

It's possible for the discussion to lag, or to shift to aspects that don't help anyone improve their investing process. You can keep things on track with appropriate comments or questions along the way. In a pause during my club's discussion, I asked if anyone had noticed what Value Line predicts for future income tax rates, and things immediately heated back up.

• Don't let any one person dominate.
• Draw out members so that everyone participates.
• Look for specific "process" things to change or improve.

For example, perhaps some club members don't understand or use the SSG "preferred procedure," or you might suggest that people look at what Value Line predicts for the future average P/E ratio (as part of estimating high and low P/E numbers). As a group, your club can be a smarter investor than any individual member, so use your discussion to increase the club's collective knowledge.

Something that Lowell did for his club was to provide a printed SSG constructed using the group average judgments. This provides another way of looking at the consensus numbers, and can be helpful so long as, again, no one thinks of the averages as somehow being especially correct and valid.

Why Should You Try This?

As mentioned earlier, this might be worth a shot if you're tired of following exactly the same format every meeting. It also is a great way to get people looking at the logic and meaning behind the numbers, and to bring out ideas on how to be more effective at making the key judgments. It can also be a good technique when you really want to dig into a stock, perhaps an existing club holding that's controversial. Getting everyone to study a stock ahead of time can set a firmer foundation for group analysis.

While not "the correct answer," the group averages can help point out process errors that cause judgment items to fall far from the average. If just one club member finds and corrects one misconception in this way, it would be well worth doing.

Finally, an excellent reason to try this is that it's fun! Our group analysis discussion was an especially lively one, and Lowell reported the same result with his club. A healthy club is an active and fun club. Here's something you can do to inject some fun and energy into one of your future meetings.

A member since 1994, Brian Lewis is the President of the Puget Sound Chapter. He's a founding member of BetterInvesting's Online Investor's School and has presented a number of classes online. Brian has taught a variety of classes in the Seattle area since 1999 as well as at the BetterInvesting National Convention, and has published several articles in BITS and BetterInvesting Magazine. He can be contacted at brianle@nwlink.com.