BI > DECEMBER 2001

Part I: All of the Fun, Less of the Fuss

An Investment Club Without Club Accounting?

They were a group of investors wanting to form an investment club to pool their stock selection knowledge and research. They chose to meet online since they were scattered across the country. They wrote their bylaws, elected officers, set up a system for voting on potential investments and started researching stocks every month. When it came time to actually invest as a club, however, they just said no.

No monthly capital contributions? No shared club brokerage account? No annual tax filings to prepare? You're probably thinking, "But this doesn't sound like a real investment club." You're correct if you think that it doesn't seem to be a traditional investment club -- but this type of club is as real as any other.

Technically referred to as a nonpooled assets investment club (NPA club) as opposed to a club in which members pool their assets in a shared club account, you might have heard such clubs described as "traveling," "study," "paper" or "self-directed" investment clubs. While these terms might not all mean exactly the same thing, clubs that don't pool assets generally share most of the same basic characteristics. Because club members won't be making monetary contributions to a shared club account, creating a legal partnership becomes unnecessary. Clubs may still elect someone to act as club treasurer, but the treasurer's duties will differ greatly from those in a pooled-assets club.

If you were to attend the monthly meetings of an NPA club, you'd be struck much more by the similarities to a traditional club's meeting than by the differences. The club president still leads the meeting, following a formal agenda. The club's education program is still the driving force for the club's existence in the first place. Members still share responsibility for presenting stock studies. Attendance and work requirements are just as stringently enforced.

Where you'll mostly notice the difference is in the treasurer's report. While most NPA clubs track a virtual portfolio (more on this in Part II next month), there's no club accounting to deal with. That means no time is spent collecting member contributions, creating valuation statements, running an annual audit, dealing with bank or brokerage accounts or assessing late payment penalties on the club's delinquent members. When clubs eliminate these monetary issues, they suddenly find themselves with much more time to devote to their education and stock study discussions.

If you're a member of a traditional club, the idea of ignoring all these time- and energy-consuming financial transactions may greatly appeal to you. Finding a club member to serve as treasurer can often be difficult due to the time and expertise involved with these financial duties. But before you turn your back on your current club and run out to start a new one with an NPA structure, familiarize yourself with the drawbacks to this particular type.

Pooling Your Work Without Pooling Your Money?

The biggest problem faced by clubs in which members don't make contributions to a shared club account is the same as with any investment club: dealing with members who don't fulfill their club responsibilities. But there's something about making a shared financial commitment with other club members that tends to keep people dedicated. If you have thousands of dollars invested in your club's portfolio of stocks, and you may face expulsion from the club (with all the tax ramifications that may accompany a withdrawal) as a result of shirking your stock selection duties or other member responsibilities, you're most likely very motivated to continue doing the work required of you. You feel a sense of ownership in the club, and you've made a lasting commitment to your fellow club members by pooling your money with theirs.

In an NPA club, members may not feel the same type of ownership or commitment. When no actual cash is commingled, members may not care as much that they're letting the club down if they don't attend meetings or prepare stock presentations. After all, what recourse do the rest of the club's members have? The threat of fines or expulsion doesn't carry the same weight when members don't share ownership in a common portfolio. The best solution to this problem is forming a club only with others as committed to the effort as you are. Wishy-washy potential members should be screened out before they're allowed to join (more on member selection in Part II).

Also, with the advent of club accounting software and online resources, the club treasurer's duties have never been easier. What once took hours to do every month now can take just minutes. Year-end tax form preparation has been streamlined by the wide availability of computerized tax resources. While the club treasurer's job may still not be considered easy, it's certainly much less complicated than it was even a decade ago.

Don't disregard one other important element of a traditional club, either. When club members pool their contributions into one big pot, they're also reducing their per-member investment expense. It's generally much more affordable to invest 15 members' $100 monthly contributions than one person's solitary $100 when you consider the percentage spent on brokerage commissions. While a member of a traditional club theoretically can start investing with as little as $10 a month, the same amount would be much more difficult or expensive for a member of an NPA club to invest on his or her own.

Determining when the benefits outweigh the drawbacks of either type of club structure is not so simple. The very aspects of traditional clubs that attract many investors send others running. While a traditional investment club with its shared club portfolio will probably appeal to most people looking to join a club, there are situations in which the advantages of an NPA club clearly win out.

Why Choose a Nontraditional Club?

One circumstance that naturally calls out for a nonpooled assets investment club is when club members simply aren't able to make an investment every month, for whatever reason. Youth investment clubs are a prime example. NAIC Trustee and Western Michigan Chapter Director Beth Hamm coined the phrase "traveling" club to describe the type of club she was hoping to create in her son's school.

One problem with youth investment clubs is that members rarely stay for more than a year or two due to family moves or other after-school activities. This constant membership flux, combined with the fact that students under age 18 must hold their stock in a custodial account, makes club accounting in a youth club extremely complicated. Beth envisioned a club in which students would come together to learn to invest, but then would make investments on their own, with their parents' help, if they so chose.

In collaboration with her son's high school business teacher, Beth started an NAIC-based club that focused on teaching the importance of long-term investing while emphasizing that investing can be fun as well as financially rewarding. The first stock they studied was Kellogg, since Beth knew that a familiar company (as well as extensive product testing of that company's food products) would draw the students' interest immediately. Beth continuously stressed to the students that by using a traveling club structure, they could recreate a similar club with just three or four friends even after they left their high school club.

In addition to the youth club, Beth helped create a model club for her chapter using the same traveling club concept. Member-ship was open to anyone attending the meetings. Mem-bers were expected to participate by presenting stock studies. Mentors helped new members learn to use the Stock Selection Guide (SSG), and education was a key part of the club meetings. Members did not pool their assets, but instead invested in their own personal ac-counts. Whenever possible, stocks from NAIC's Low-Cost Investment Plan were presented so that if a stock was deemed ripe for purchase, members could do so with small amounts and at a lower expense than through even a discount brokerage.

Offering Options for Every Investor

Individual investors may have many reasons for not wanting to join a traditional investment club. Some investors, although they'd like the opportunity to learn to invest in a supportive group environment, simply can't afford even a modest monthly member contribution. Others, like Susan Stewart, would rather avoid the time in-volved with club accounting altogether. "I very much wanted to have the experience of learning with others," she says. She visited a club she was interested in joining, but after a few meetings decided it wasn't for her. "After hearing about the complexity of the ownership of investments,I was reluctant to become financially entangled with a group of relative strangers. I was also discouraged because it seemed the club spent almost half of the meeting time on bookkeeping and valuation statement concerns."

After thinking more about what she wanted from a club, she decided that "it would be great to share the learning experience without the bother of the partnership and the bookkeeping." She was looking for a "study and research group with all the advantages of an investment club without the grief and hassle."

While many traditional club members might protest Stewart's opinion of their club structure, she's not alone in her desire for a more simple option. This isn't to say there's something inherently wrong with clubs that pool assets. It just means that for some people, especially those who currently lack money to invest or who move frequently, an NPA club may make more sense. Either type of club can be beneficial, depending on the needs of the individual investor.

Keeping Your Money to Yourself

Remember the club at the beginning of this article? That was the Studious Stock Group On-Line (or SSGOL), an NPA investment club formed by a group of investors who were active in the online NAIC Forum at CompuServe (go.compuserve.com/naic). Nancy Crays, a member of NAIC's Computer Group Board and a frequent teacher at national events, helped form this trend-setting club. She wanted a community in which she and others could focus on stock research and on studying NAIC methods.

Freed from dealing with member contributions and club accounting, the members of SSGOL were able to expend their efforts on the education they all desired. Instead of holding monthly meetings online, they posted messages and discussed their stock studies at the Forum. The club would vote on the stocks presented, but instead of actually investing in any chosen stock through a shared club account, the treasurer would record a virtual purchase in the club's pretend portfolio and leave the decision whether to invest real dollars up to the individual member.

As the group's bylaws stated, SSGOL's purpose was to "establish good fellowship and a friendly environment where members can enjoy learning about investing." Although the club closed up shop for good not long after the death of member Wen Burris, SSGOL remains an excellent model for others who'd like to form a similar club. SSGOL's bylaws, as well as many of the stock studies done by the group, are still available for viewing at the Forum (search on "SSGOL" to pull up the documents).

Not long after I first interviewed Susan Stewart, the NAIC individual member who had reasons for not wanting to join a traditionally structured investment club, contacted me to say she'd already taken steps to form her own NPA club. "I'm really hungry for the opportunity of shared learning," she said. "What I'm hoping for is the opportunity to compare SSGs and debate our judgment areas." And isn't that all that any investment club member wants, the chance to learn and work with other investors while taking advantage of the shared knowledge they'll develop together?

Most people will find that a traditional club serves their needs best. But if you'd rather invest your money solely in your own personal accounts, for whatever reason, you don't have to miss out on the investment club experience. A nonpooled assets club just may offer the flexibility and educational benefits you've been looking for, with a lot less fuss than you may expect.

Next month's "Club Dynamics" feature will detail the basics you need to know to start your own nontraditional NPA club.

Angele McQuade of New York state is the author of Investment Clubs for Dummies (Hungry Minds, 2001) and the revised version of BetterInvesting's Official Guide