BI > DECEMBER 1958

Investment Clubs and the Family

The key note today is INVESTMENT CLUBS AND THE FAMILY. Our movement has always been centered on the family. We know how knowledge of investing can benefit not only this generation but those to come. Investments can pass from generation to generation, enlarge opportunities for education and maintain the American tradition of individual security in an age when so much of the world seems headed toward collectivism.

I feel particularly confident in speaking on my subject today for one very good reason. Investment clubs weathered the 1957-58 market decline in a most gratifying fashion. Results were good. Moreover, the number of clubs continued to multiply because those in the movement liked their investment experience. They were glad of the opportunity to go through the bad as well as the good.

Almost every category of club, except those engaging in short-range speculation, came through the decline with flying colors. This was to be expected. The nature of clubs is such that long-range investing should be successful and short-term trading operations must inevitably fail.

1957 Break

One interesting aspect of the 1957 break in the market was the increase in clubs among experienced investors. These men and women found the NAIC approach superior to their former practices. There was a gratifying increase in women's clubs.

Before speaking to you more fully on the goals for this year, let me dwell briefly on our history. Let us start with the Chicago Council. I tramped Chicago's LaSalle Street many times trying to start the Chicago Regional Council. It was hard work and over one year was lost before Alex Carroll of Indianapolis let us have a good suggestion -- Charles Sayre. This young man did a marvelous job of organization and working with the many good people who have come to the fore in Chicago.

In the years prior to that, I had seen my first club start with Fred Russell, who was having trouble landing a full- time job, but who wanted to put away $10 a month from odd jobs, along with other fellows in the same fix, in order to buy a small business a few years hence. Instead of leaving it in cash, the group sought to invest it to hurry the day they could begin.

Aggressive Principles

Some of their former school acquaintances had just returned from fighting the Spanish Civil War on the communist (Loyalist) side. So there was every reason that Russell's capitalistic venture -- The Mutual Investment Club of Detroit -- should be started on the soundest of principles. Moreover, they should stick to them. This is how the safety factors of 1) invest every month, 2) reinvest dividends, and 3) buy growth companies came into being. Nearly 20 years later, you see these three principles running through nearly every long-range investment program designed to build a family's capital.

As time went on, it became evident that, besides providing safety, these principles in combination with one another produced a very aggressive investment account. We found members of the club, though not in high-paying jobs, were building modest fortunes in the club and through their own investments.

Perfect Economic Man

We found that these investment club members were what might be called the perfect "economic man." By investing small amounts in industry, they were able to spend nearly their entire income on raising their families. They were much better off than similar families that had never learned to invest. Their money was directed to building plants and maintaining consumption of goods.

By turning over their money to finance industry, they reaped a much richer life. They had an early view of the New American Capitalism -- and NAIC used that term many years ago. Just last September, Harvard University had a conference on that theme.

You will hear more and more of the New American Capitalism. It suggests many things. It could be described in many ways. It is vigorous. It is rising to meet the Russian challenge.

Essentially the New American Capitalism is placing the ownership of industry in the hands of the people -- all the people. It is the alternative to placing ownership of industry in the hands of the state.

People own industry as stockholders, participants in mutual funds, and as members of investment clubs. Of these three, investment clubs are the educational unit and hence of far-reaching importance.

In the clubs, people meet to discuss the future of industrial companies. They study what is going on in the world of economics. They come to understand the importance of money and fiscal policy, the dangers of the wage-price spiral, the total nature of the struggle with communism.

When you start another investment club, or aid one that needs help, you are doing something not only for the individuals and the families involved, but also for the nation and the free world. You are a part of one of the dynamic grassroots movements of the twentieth century. It is incredible how this movement has spread out over the world. It is unsubsidized. It has been functioning without even an "Executive Secretary."

Tom O'Hara of course does the work of three executive secretaries in his spare time, aided superbly by the strong mind of Mrs. Laura Stein. We hope Tom may soon devote full time to NAIC.

My major recommendation to you last year was to extend the system of regional councils. These councils hold fall and winter meetings at which industrialists and financial analysts appear before investment club members. This is the personal contact with top brains that is so essential to your understanding of investments. There are also other meetings held by the regional councils where the technical points of investment club operations are discussed and made clear to those in need of help.

I am glad to say that we have had our finest year in establishing councils. These include St. Louis, San Francisco and Milwaukee among the larger cities. Several other major cities are about to form councils. We hope eventually to realize our dream of a council in every county of the United States.

Recommendation

For the coming year, my recommendation is that we take the investment club story to the family in a better way than ever before. The material prepared for this purpose will be a start toward our goal of bringing the investment club message to graduating classes in high schools and colleges.

The purpose of reaching established families and those about to enter the work force is to give them perspective on how to shape their family finances in the years ahead.

Case Study

The first step would be to prepare a case study. Essentially, this study will present the various problems to be faced by the average person at the start of a business career. It will cause that person to think how he should arrange his financial affairs in respect to insurance, home buying, education of children, ultimate retirement, savings for business opportunities, and long-term investing. I know a similar case study many years ago at the Harvard Business School was very beneficial to me in charting my own course.

The role of the investment club would be detailed, so that many can be investing in this way from the beginning. They can increase their investment knowledge as they accumulate money. Investing $10 a month can accomplish wonders for most families.

After NAIC's experimentation with the case method, I have in mind a most important project. It will cost money. I hope you will all keep your eyes open for a person or corporation that would finance the project. I believe NAIC would be justified in giving the donor's name to the project, as it is quite important to this world in which we live.

I have in mind making a low-cost sound movie at one of the universities which would present, visually and in sound, the factors in the case study. It could be shown to all sorts of family groups as well as used in the schools, offices and factories. The Harvard Business School has experience in using sound-movie case studies. Maybe they would help with their experience.

The movie would be shown and the audience would be supplied with a workbook. Each person could then determine his financial program and keep this workbook through life.

I believe you can see what an influence this project would have on the family. I believe you can see also what a step this would be toward mass-producing successful investors. I am sure that you appreciate what a nation of good investors would mean to the welfare of all of us in this country and elsewhere.

So many economic projects require full understanding and support. Our living standards suffer in the United States because we do not always follow the wisest economic course. The problems become much more complicated as we are called upon to do worldwide economic thinking. Investment clubs here and abroad will do much to provide the mass education that is essential.

Club Warning

I would like to take this occasion to warn all investment clubs on the dangers of loose thinking in regard to the stock market. Times-earnings ratios are very high. This means danger not only for the short-term ahead, but also for a much longer one, especially if earnings do not pick up substantially.

The long-term danger lies in the effects of disillusionment. The careless must necessarily lose substantially in the end. Too many careless investors can affect the nation's economy severely.

Be "tough-minded" with your investment club's money -- and your own. Use the NAIC analysis sheets to spot real dangers. Do not hesitate to sell stocks in the top third of their range and replace them with those in the lower third. Check often to see that the upside/downside ratio remains decidedly in your favor.

In closing, may I again congratulate the Chicago Regional Council on their wonderful convention. I hope there will be other cities that will wish to undertake the task. With a sister association in Canada, a new one starting in Great Britain, and several others abroad in the planning stage, it would seem highly probable that we can have a world-wide convention within the next five years.

This will come about if all investment club people continue to spread the story of investment clubs and the family -- if you continue to give your services to help others. You in the investment club movement can spread investment education and mass-produce investors for the free world.

George Nicholson, Jr. CFA, is considered by many the grandfather of the modern investment club movement. He was a co-founder of NAIC's BetterInvesting and served as Chairman of the World Federation of Investment Clubs. He was also a vice president with Smith, Hague & Co.