BI > NOVEMBER 2002

What Is Your Club's Educational Value?

There's one leading indicator every club member should be on the lookout for in the midst of a bear market. It's a red flag that's almost certain to signal that things aren't going the way they should be. And we're not talking about the red flag that waves when stock market performance goes south.

It's a flag that begins to wave when one of your club members makes a comment that goes something like this: "You know, I'm really not learning anything and see no reason why I should continue to be a member."

It's a flag that deals with the educational value, rather than the market value, of your club. And it's as important to your club's success as the companies in which you invest. Do you know the educational value of your club? Have you tried to measure it? Do you know how it compares today with a year ago, or when you first started to invest together?

Ask this question at your next meeting: "Do you feel you know more about investing today than you did a year ago?" Use a secret ballot if you think responses would be more candid. Even if there are only one or two No's, it could be a signal your club may not be addressing an important need -- the need to help members become more financially knowledgeable and independent.

There's much to learn in all kinds of markets, plus a couple of very important lessons the experience of surviving a bear market can bring. One of the most important is simply outlasting the bear -- living through a down market, using it to make sure you are in the best growing companies you can find at good prices, staying invested and then seeing the value of your stocks begin to rise again. It's a wonderful experience. Part of the beauty is that your "market timing" will be perfect -- your portfolio will benefit from rising prices beginning the first day the market turns.

Another valuable lesson comes much sooner -- it's the realization that bear markets are not the end of the world. There is life after prices collapse. Market prices in bear markets are set by a limited demand for a large number of shares -- the transaction market that is always short term. As the economy improves and market sentiment changes, more and more investors are interested in buying shares and demand increases significantly. Higher prices follow.

Another lesson that comes with bear markets is that it's an excellent time to improve future prospects by weeding and feeding your portfolio. We have featured a number of articles on the subject in recent months, including this month's cover story.

A final lesson that can be learned in bear markets is that the number of years you've been investing can make a difference in how the bear affects you. Younger clubs, for example, may be having a harder time surviving the current bear than clubs that have been in operation for six or more years. "We should be doing more to encourage the three- to six-year-old clubs to hang in there," said a member of BI's Editorial Advisory and Securities Review Committee at a recent meeting. "We should be telling them that they're not alone in seeing values decline -- it's not just them."

Another member wondered whether the timing of the market cycles has made it difficult especially for younger clubs to get a perspective on what they're learning and experiencing. "We've gone from a runaway bull market to a major bear, and that has created a challenge for younger clubs," he said. "The best thing a club could do is to forget about daily market reports and spend more time reading annual reports and proxy statements, focusing on such items as growth prospects and, in today's environment, corporate governance. Study the proxies and vote responsibly. There's much to learn. There's a need for educated investors to be heard."

Remember, your club is about more than making money. It's also about helping members become more financially knowledgeable and confident about financial matters, especially when it comes to building and preserving their wealth. Bear markets can help your club make money, but you must survive them to discover this. That takes a sound monthly educational program and the discipline to follow proven investing principles.

Don't wait for the market to turn to show your members that these principles work. Some may not stay around long enough to experience the shift. Their personal dollars may go into alternative investments like bonds, annuities, gold or silver, perhaps even a second home or other real estate ventures. Without a solid educational program, your club may lose the value of their participation and contribution at meetings, and they could come to realize, perhaps too late, that no greener grass was growing in today's economy than on the lawns of good quality, growing companies.

In all markets, patience, principles and commitment are what's needed the most to build wealth. There are no short cuts. When life brings you a bear, deal with it, but in the right way.