How do you know you’ve invested your hard-earned money well enough to have a successful retirement? Can you be sure that your investments are going to grow into larger balances and be there right at the point of retirement? Have you spent enough time choosing the right retirement investments?
These questions are hard for most of us to answer with any degree of certainty. That’s because there is no certainty, except for uncertainty, in the world of investing. And, that makes most of us just a little concerned that we might not be financially prepared for a long retirement.
Do you make the time for investing?
When it comes to investing, most of us would rather not lose our money. But, we haven’t made the time to research investments and monitor them and establish good buy/sell discipline. We don’t understand investment risks very well and tend not to invest appropriately for market slides. Choosing the right retirement investments can be a challenge. But how is it really done? Who really “gets it” when it comes to making the right investment moves?
Meet the K-Club.
Bob, Paul and Diane are brothers and sister in a family that grew up in the Boston area; all are Baby Boomers. They are college-educated, but none is a finance or investment expert. Bob is a retired Chemist, Paul an electrical engineer turned professor, and Diane a bookkeeper who is a cake decorator on the side. In 1998 they banded together with another brother and created an investment club. Their goal: learn about investing and stock picking together. And, they focus on choosing the right investments for retirement.
The team graciously invited me to lunch where I spent two hours talking to them about how they started an investment club, how it all works, how it’s going and what they have learned in their nearly 20 years together.
Thanks to Dad and the Beardstown Ladies
They credit their dad with getting them interested in investing back in the 1960s and 1970s. They all had odd-jobs growing up and their dad would talk to them about the importance of saving and investing. There were things you needed to save your money for and investing is how your money can grow. Their dad cautioned that investing is like gambling and you had to think about investing only with money you could afford to lose. They sometimes referred to this as “Vegas Money.” Paul remembered that he bought his first stock with money from his paper route!
The siblings started their investment club after hearing about the Beardstown Ladies. This group of women from Beardstown, Illinois, garnered media attention in the mid-90s after writing a book about how they formed an investment club and beat the S&P. Paul and Bob were individually interested in investing, but quickly figured out that unless they had a healthy amount of cash to invest, it is a very slow process to grow assets. So, why not pool their cash so they could make larger investments and see faster growth? And four is better than two, so why not invite their other brother and sister into the club.
Setting the Rules for Investing
At the beginning they agreed that each member of the club would pitch in $100 a month. (Later, they bumped it up to $150/month). It took about two years to accumulate the initial $10,000 in cash to start investing. As of March 1, 2015, the K-Club’s total cumulative gain is approximately 165% since 2000, when they made their first stock buys. This compares to the S&P 86.5% cumulative gain for the same time period. (More on how they achieved their success in the next blog post, Part II.)
They put a formal charter and partnership agreement in place. To obtain a tax-ID for the partnership, they needed a name. K-Club was an early choice and it fit them perfectly: their goal for the investment club was to grow thousands of dollars, not millions. To get started they needed a brokerage house to place their trades. They chose one with discount pricing and easy to use technology. They came up with a manageable number of resources to track and monitor their investments. Value Line is their go-to resource for research and hot news on their stocks. The Wall Street Journal is a daily must-read. They have relied heavily on William J. O’Neil’s investor’s “bible”: How to Make Money in Stocks. Each sibling is an officer of the club and has an equal share in the partnership.
Choosing the Right Investments for Retirement Is a Well-Managed Process
They established criteria for the specific stocks they were going to consider buying. Any of the three can bring recommendations for companies to buy, but there must be 100% agreement before a stock is added. They limit their companies to 15 – a manageable number that they can monitor. If one of the siblings wants to add a new company and they all agree, they must first vote to sell off one of the existing stocks in the portfolio. From the earliest days they decided that they would deal with stocks only (not bonds or commodities) and each had to have a share price over $10/share. They could have chosen to play with penny stocks, but the return wasn’t worth the risk and the time they would have to spend.
Sharing Some Key Learnings
They were very open with some of the key things they’ve experienced. All three learned the hard way that if you don’t really understand the company and what it sells, you shouldn’t buy the stock. They are believers of Peter Lynch’s well-known advice – know what you own and own what you know. Like most investors, they have chosen winners and losers. But they learned the most important lessons on their Worldcom investment. This turned out to be a misstep, but as a result, they became highly disciplined, strict buyers and sellers. To this day, they live by the rules they set up after losing their entire investment in Worldcom:
- “If you can’t draw it with a crayon, you can’t own it.” They found that companies that don’t sell specific, tangible items are just too risky. If you can draw the products on a scrap of paper with a crayon, you know you understand it and can make a smart buy or no-buy decision.
- “It’s not how much you earn, but how little you lose.” A variation of the learnings from their dad, but it had a lot more meaning after they saw share prices drop from high dollar amounts to penny stock prices to zero.
- “Lock in a trigger and don’t deviate from it.” From the point of the initial buy, the K-Club has learned to set a “sell by” amount. They determine how much they are willing to lose on the investment before they automatically dump the stock. Every month they reset the triggers for each of their investments. They create a “watch list” for stocks that are declining and set automatic sell orders in their brokerage account.
The Balancing Act
The discipline and structure they have set in place is impressive. Each of them shared that they have learned so much by being this involved in investing. Looking back over the years, they are pleased with all they have accomplished. They have been able take what they’ve learned in the K-Club to make good investment choices in their retirement accounts and other personal accounts.
Maybe more importantly, they’ve stayed close as a family. They meet every month then hang out for dinner or a poolside barbeque, often with their spouses and kids. The camaraderie is wonderful to see in action. The brothers definitely pick on little sis, but she holds her own!
Look for the rest of the K-Club story in a few weeks…
For More Information:
Choosing the right retirement investments is key to your future happiness! Use resources such as these to get started. It’s not too late!
Value Line – straightforward, unbiased research. Terrific articles on the economy, too. Updated daily.
Starting an investment club – There are lots of good resources if you google “starting an investment club”. For a quick start, try out this article.
William J. O’Neil’s investor’s “bible”: How to Make Money in Stocks