BI > SEPTEMBER 2002

Parents, Their Kids and a $24,000 Portfolio

In Florida, Homeschooling Extends to Investing

This month I'd like to share the story of how some parents in Florida are giving their children a great investment education by forming an investment club with them. The article below is reprinted from the March/April 2002 issue of Homeschooling Today and was written by Bill Cormier, one of the initial partners in the club.

This is the story of how a dozen homeschool kids, grades six to 12, came to manage a $24,000 (real money) stock portfolio and earn a whopping 25 percent average annual rate of return for the past 3 1/2 years.

As I write this article in early November 2001, we are just on the heels of the terrorist attacks on the World Trade Center and Pentagon. Even with the resulting market downturn, the kids are at 25 percent. Just a few months earlier, their average would have been more than 30 percent per year. All of this, in spite of the fact that 2000 and 2001 have been disastrous years for most investors, including many professionals at mutual funds and 401(k)s.

Click to enlarge.

Christian Homeschool Investment Club. Left to right: Bill Cormier, Julie Cormier, John Martens, Mark Martens, Bronn Pav, Glenn Pav, Brody Pav, Breckon Pav, Daniel Gilford and Ken Gilford. Not pictured: Michael Cormier, Tom Marcic and Meghan Marcic.

These kids are members of an investment club, Christian Homeschool Investment Club. We'll observe how the club came to be, how it functions and the resources we use.

First let me start by stating that none of our members are investment professionals; there are no brokers, investment bankers or chief financial officers among the bunch. Only two of the original eight families had ever owned stock. We practice a very conservative and commonsense approach to investing -- what I refer to as "sleep at night" investing.

Before you ask if you can invest in the club, we have two rules that cover this. First, only members may invest in the club, and then only to the maximum allowed. Second, all club members must participate in the decision-making process.

This isn't a mutual fund; it is a partnership. Because all members participate in the decisions, any gain or loss rests on the shoulders of all members. No one can say, "They made a bad decision," because all were part of the process. We would, however, encourage you to consider starting your own club.

A key surprise was what our kids learned about being equally yoked. Most had not seen the issue of being yoked with your partners in a business. CHIC is a business, and we want our partners to be fellow Christians. We also want them to have a similar investment philosophy; two must be in agreement if they are to walk together.

How We Got Started

In mid-1997, another homeschool parent and I had a conversation about children and investing. We were not sure what we wanted for our kids, but we very quickly agreed on several parameters:

• We did not want our kids to see "get-rich-quick schemes" and day trading as sound financial approaches.
• We wanted a sound, simple and conservative approach.
• We wanted a process straightforward enough for a middle-schooler or a parent new to investing to be able to understand.
• We wanted rock-solid reference material and resources.
• We wanted the kids to do their own work and not rely on the advice of "experts."

The good news is that we met these objectives and more. The even better news is that there is no reason that you can't enjoy the same success. We had no special knowledge. Our resources and tools are openly available to all and well within the abilities of an eighth- or 10th-grade homeschooler. Startup isn't much more complicated than forming a 4-H club.

We found other interested homeschool parents and began to explore possibilities. We decided an investment club would fill the bill. We initially had a dozen interested families, with eight actually participating in the club's startup.

The parents met monthly for several months, working out details. Fortunately, we did not have to start from scratch. We used resources from the National Association of Investors Corporation as a starting point. We also decided to use the NAIC investment strategy as our approach.

How We Are Set Up

CHIC is a limited partnership, complete with a partnership agreement (a legal document). One parent of each member family is a partner. The agreement specifies what the partnership can and can't do; ours is very constrained.

All members benefit from the gain (or suffer the loss) of the club's investment results, based on the members' investments in the club. For example, a new member having invested less would have a smaller (but proportional) share of gains or losses than a longtime member with a larger amount invested.

We permit a partner's minor children to represent the partner's interests. The anticipation has been that over time, the children will take over the club. The partner (parent) owns the funds while the children participate in the management of the funds.

In one family, the parent may say to the children, "This is your money, but in my name," or another, "This is college money, and I control its distribution," and yet another, "This is my money, and you get to practice with it." Each family could be different in this respect, but the common goal is for the kids to grow to the point where they can manage the funds.

Why a legal agreement -- couldn't we do this informally? No, you need a formal and well-defined partnership agreement for several reasons. First, it minimizes misunderstandings by answering questions in writing. Second, you need it for dealing with the IRS, banks and brokers. Third, you need it if you ever have to deal with a lawyer (perhaps a member passes away and an attorney settles the estate).

We included additional items in our member agreement and operating procedures. We have a statement of faith and homeschooling requirements. A prospective member must visit three times as a guest before being considered for membership, and unanimous approval is required for new members.

Members must participate. If you miss three monthly meetings in a row or five in a year, we take that as a request to leave the club. (We have provisions for up to a one-year "leave" for reasons such as travel, illness or studies.) We have a "one person, one vote" protocol. While voting in traditional partnerships is based on the amount of a person's investment, we have agreed that all members have an equal vote.

The club formed in April of 1998, with each initial family providing $35 in startup expense. The first year, only parents met. We went through an educational series provided by the NAIC and began to understand what it was to function as a club. We started working with the NAIC stock selection process to understand how it worked.

1998 was a boom year, and several times we would study a stock for several months, only to have its price shoot up to levels beyond what we considered prudent. We didn't make our first purchase until six months later. After the first year, the children joined the club and worked with the parents. By the third year, the parents and kids are functioning as peers in the club.

Our plans were to reduce parental involvement even more. The interesting thing is that the children seem to enjoy the club functioning with parents and kids as peers. It looks like we will stay with this format for a while.

A Typical Meeting

Our monthly meetings start with prayer, a treasurer's report and approval of minutes of the last meeting. Next we may include several of the following:

• An educational presentation.
• A guest speaker.
• Research on a company being considered for purchase.
• Review of existing holdings.
• Visit from prospective new members.

On the first visit by prospective members, we explain what the club is and how we work. On visit No. 2, the visitor is asked to share her Christian testimony, and we provide a copy of our membership agreement and encourage her to review it and NAIC resources. On the third visit, we try to address any remaining questions. We encourage questions from both sides all along the process. After three visits, the visitor can be considered for membership.

We use an NAIC analysis process called the Stock Selection Guide and data from Value Line (available at the public library) to evaluate a company. The analysis can be prepared by hand or on a computer. Members use a variety of resources for investment ideas. But an idea is just that -- only an idea. The club doesn't move on a stock until we have a completed Stock Selection Guide in hand.

Also, when we review a company, we like to consider its two strongest competitors. Sometimes a competitor is the better buy. One thing we aren't big into is a hot stock tip. While a tip may generate an idea, it is the hard numbers and analysis that we want to see.

Once, when my son and I were speaking to a homeschool group, someone asked for a stock tip. My reply was, "While we are willing to put our own funds at risk after doing our homework, we are not comfortable with giving advice that would put your money at risk." With a bit of humor I added that my reply should have been, "Do your own homework." My son had a great stock tip: Don't listen to stock tips. . . .

. . . Our club goal follows the NAIC target of earning 15 percent per year. On a consistent basis, this will double your money every five years. My son and I were asked to speak at a homeschool support group. On the way there, I explained the Roth IRA. He quickly figured up that with 50 years to retirement and money doubling every five years, that $1,000 invested today would grow to more than $1 million by age 65, and with the Roth it would be tax-free. Each dollar makes a lot of friends along the way.

Jeff is director of educational development for BetterInvesting. Readers interested in sharing their experiences and stories about young investors are invited to contact Jeffery Fox at BetterInvesting or at jefff@better-investing.org