May 15, 1998

Online Investment Clubs
by Rick Aristotle Munarriz (TMF Edible)

Would you color me a slacker? Fine. I have been in an investment club for more than five years, and I have never dressed up for a meeting. Ever. All this time, from an ambitious nothing to a respectable club portfolio later, and I have never spoken a word. If you want to know the truth, I have never even seen my fellow partners. But please don't call me a deadbeat.

Welcome to the brave new world of online investment clubs. In a revolution that has taken traditional investment clubs for a ride on the Information Superhighway, some investors are replacing living rooms with chat rooms, e-mail, and mouse clicks.

It all started long before the Internet went mainstream. At a time before America Online, stock connoisseurs were gathering on other online services. WCIC (Windy City Investment Club) was born on Prodigy in 1991 shortly after POLIC (Pioneer OnLine Investment Club) was launched on the investment forums of CompuServe.

My club, GOLD (GEnie OnLine Discoverers), debuted a year later on GEnie, the online service popular at a time when slow modems and text-only screens were considered user friendly and the Net was exclusively for those who wore lab coats. Pioneers? Discoverers? I guess we knew we were all treading new territory -- a trail that has had its share of potholes along the way.

Yet few may have bargained for how complex an online venture could become. The essence is the same as the traditional investment club, where members pool monthly contributions and vote on buy and sell decisions. However, the bonus was supposed to be that for an online club the meetings would be perpetual, with member interaction just an e-mail away.

"An online club meets 24 hours a day, 7 days a week," says Larry Warren, Presiding Partner of Model OnLine Investment Club (MOLIC). "If I have a question or comment I want to share with the partners, I do not have to wait for the monthly meeting. I just send the message in."

MOLIC is unique in that the club was founded last year by online volunteers from the National Association of Investors Corporation, or NAIC, the primary source of investment club information. At the MOLIC website the club has chronicled all proceedings to illustrate the hurdles and joys a typical group may encounter.

Tom Jameson, MOLIC's Vice President, was the founder of a traditional club as well and has found the startup pains to be "amazingly similar."

The wording of official documents, from partnership agreements to by-laws to operating procedures, is often laborious. Whether it is debated over cookies or through interactive e-mails, it is a time-consuming task. That is not necessarily a bad thing. Consider that MOLIC has been around for several months and, as of last month, has yet to make its first stock purchase.

Humble tortoise-speed beginnings can be a plus if done in the name of efficiency. In the process of forming GOLD, many lost interest and wandered away. Even with sample agreements from NAIC and using POLIC's by-laws as a cheat sheet, it took us a few months to hammer out some form of consensus. Patience is a virtue with online clubs and the more members with emotional stamina to see things through in the beginning the less likely you are to disband the following month or have to deal with cashing out departing partners during the club's infancy.

Yet while time may tick slowly at the beginning, and what would be a simple live club meeting can drag on for days when a club is at the mercy of e-mail, it is that very aspect that seems to be drawing investment clubs to convene online. The relentless, if not immediate, exchange of information an online club provides is more than just an attraction. Sometimes, it's the only alternative.

It's a cold Salt Lake City morning and Marty Greenlief is snowed in. He is one of the newest members of WCIC and his path is similar to many others who have chosen to bond together in investment clubs. Marty was recently laid off from work and realized that he did not know what to do with the 401(k) account that he had accumulated over 12 years. He wanted to learn about the stock market and figured the best way would be to do so with seasoned investors who continuously yearn for education through text and experience. He could have contacted NAIC to find a Utah club in his local area club to join. He could have, but...

Now it's Sunday at 6:45 a.m., and Marty has no choice but to stay home. He isn't even dressed. Yet as a member of WCIC he can go online to check the group's weekly performance and engage in a discussion on the merits of Wireless Telecom (AMEX: WTT), a stock the club is considering purchasing.

"Cyberspace is wonderful," he says, knowing most traditional investment clubs would have shown him the door if he dared appear for a meeting wearing only his thermal underwear.

Neither rain, nor sleet, nor snow can break up an online club meeting -- though a power outage or a downed phone line can certainly shut out a member temporarily. The downtime will pass, though, and a modem handshake later the club member is connected to fellow members who are miles, sometimes continents, away. That is the case with the ladies of Kiliminjaro Investment Club, who reside everywhere from Jamaica to Nigeria.

The regional diversification, of course, is just the beginning. While many live clubs consist of members with similar backgrounds, from office workers to church groups, the only thing online investment club members share is a passion for investing and a modem.

MOLIC's members include everything from computer programmers to retirees to attorneys. Each member brings a different set of career experiences to the table, along with varying local perspectives. Even in the High Seas Traders, a unique online venture in that it is open only to commissioned officers of the United States Armed Forces, each member has a unique background and the global diversity seems to offer a much broader think tank atmosphere than a traditional club. Grass roots investing takes on new meaning when the whole world is your lawn.

Disconnected

The once prohibitive pair of "I"s, Investing and the Internet, are now socially acceptable and accessible. So with more and more people entering the stock market and signing up for online services, cyberclubs must be booming, right? Not quite. Doug Gerlach's Invest-o-rama website has a directory of more than 120 club Web pages, yet only a dozen belong to online groups.

The majority of listings are from local investment clubs that have set up a site for novelty or informational purposes -- not to conduct monthly business. However, the few existing online clubs are not necessarily suffering from a lack of popularity. Many clubs have resorted to waiting lists as they have reached their set membership limits. WCIC boasts 35 active members. That would be one crowded living room.

It's interesting that there seems to be more demand for online investment clubs but fewer, ummm, pioneers or discoverers around to set them up. Beyond the lengthy initiation process, it might very well be the same inherent drawback that plagues many traditional investment clubs is holding back the online revolution -- apathy.

While Larry Warren believes that non-participating partners are a problem most clubs go through at some time, whether they are a face-to-face or an online club, it is clearly easier to eschew responsibility when you don't have a sea of glaring eyes on you.

"If someone doesn't feel like participating, no one is going to get on their case," Marty shamefully laments in light of the active WCIC members who "have a lot to teach and keep this great club going."

Keeping the attention of fellow partners is clearly a challenge for online clubs that do not have the luxury of serving food or playing interactive stock games to enhance the experience.

Still, online clubs, while few in number, continue to sprout. Just three months ago, Coast To Coast was formed on an I-Club List, an online group discussing NAIC's investing principles.

Like Tom Jameson, Coast To Coast's Barb Fatina has experienced both onland and online investment clubs and recognizes that the online venture demands more discipline than her traditional group.

"Since you can only type so much and so fast in a meeting, your meetings tend to drag on for a longer period of time and some of your members lose interest," she says, even though the club's 15 member maximum was reached long before the partnership agreement was even completed.

"You also have the aspect of personality differences. Since you have not met the partners face to face and don't really know too much about the likes/dislikes of your fellow members... you have to be cautious about what you say and what you don't say."

True. Text-based communication often leads to misunderstandings, although sometimes they are harmlessly amusing. When MOLIC was set to discuss its first three stock considerations -- Innovex (Nasdaq: INVX), Invacare (Nasdaq: INCR) and Atmel (Nasdaq: ATML) -- Larry sent out an e-mail with the subject line: "INVX, INCR, ATML or BUST." He was inundated with replies asking about the stock with the B-U-S-T ticker symbol.

Beyond the matter of BUST is the more serious matter of trust. Security issues weigh heavy in any kind of group that decides to pool capital together to invest, and that is even more complicated with an online club. What is worse than a treasurer running off to Brazil with a club's money? A nameless, faceless treasurer doing the same thing.

There are no perfect safeguards, but traditional measures like requesting dual signatures on all club account checks, having duplicate brokerage statements mailed out, and buying NAIC-offered fidelity bonds provide some degree of comfort to online club members.

The continuing empowerment of the individual investor will probably grow, based on the increasing popularity of investment clubs. Logic would dictate that as more people take their investments into their own hands, more online investment clubs will dot the cyberscape. The better-prepared clubs, those that took the time to gauge interest and interests, stand the best chance of surviving and thriving, thanks to the inherent advantages of the online medium. Bully for us. Quite frankly, we Discoverers and Pioneers didn't travel this far to find extinction.

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