"If you don't know where you're going,
it doesn't much matter how you get there."
-- The Cheshire Cat
My investment club recently voted to disband.
"I don't have time anymore for extensive stock study and analysis," one member explained.
"I need the money I've invested for my daughter's college tuition."
"We spend too much time on fundamental analysis."
"We don't spend enough time on fundamental analysis."
"But boy, have I learned a lot!" each agreed.
What happened to the 13 "Savvy Successful Women" who started this club some four years ago? Somewhere along the line, we stopped thinking about stock study and acquisition the same way. Maybe it was when our very first purchase, Bed Bath & Beyond
Not every holding in our portfolio performed so dismally. Our initial $12.44-a-share investment in Sunrise Senior Living
Not that we had actually articulated a useful mission to start with. Here is our "purpose" statement from our original partnership agreement: "To invest the assets of the partnership solely in stocks, bonds, and securities for the education and benefit of the partners." Now there's a rallying cry for you. That's like an individual investor whose goal is to "buy stocks and make a lot of money." No wonder we found ourselves floundering after a relatively short time.
So now there are four of us die-hard members left from the original 13, and we're planning to start a new club. The first thing we all agreed on: We must have a clear, practical, understandable, motivational mission statement or we'll be doomed to failure again.
"To boldly go where no one has gone before"? Catchy, but hardly specific. Although I think I was off on this mission myself when I tried to persuade the Savvy Women to buy Ctrip
So how should I formulate a good mission statement? What models should I use?
What do the stock advisory services say?
Well, first there's TMF's "foolosophy" in a nutshell: "to educate, to amuse, and to enrich." More specifically, the Fool site lists seven steps to follow to achieve this mission:
- Educate yourself.
- Invest in quality companies for the extreme long term.
- Ground your assets with ample holdings in large, stable American companies.
- Never assume you know what the market will do next.
- Share information.
- Have fun.
- Remember that the best time horizon for your investment plan is one that encompasses your entire lifetime.
And then there's the Chicks Laying Nest Eggs investment-club-turned-advisory service, a group of gals who got their start on the Fool message boards and whose investment philosophy consists of the "Chicks' Dozen":
- Buy what you know.
- Keep it Simple, Sister (KISS).
- What's going on in the industry?
- Is the company "top dog" in its industry?
- Is this a company that has an opportunity to make a profit from its customers time after time?
- Are gross margins at least 50%?
- Are net margins at least 8%?
- Does the company have more cash than long-term debt?
- Is the company's flow ratio better than 1.5?
- Is the growth of the company (and its industry) moving in a positive direction?
- Who are the people running the company?
- Is its stock on sale?
Ah, now we've getting somewhere specific. But is this too specific for a mission statement and/or investment philosophy? Do we want general guidelines or the Ten Commandments? Should we just emulate Warren Buffett (find undervalued companies, buy ownership in them, and hold them forever), or model ourselves on Peter Lynch (focus on fundamentals and ignore the market as a whole)?
Let's have a look-see at a few other statements:
The Cross Country Investment Club (an international online club) promises to provide "an educational platform for individual investors based on the investment best practices established by the National Association of Investors Corporation (NAIC)." More specifically, its goal is:
". to invest in stocks with the potential to double in value within five years, yielding a 15% or more yearly compounded return on investment. The stock must also have an upside-downside ratio of 3 to 1. Its current P/E ratio must be less than or equal to the stock's historical five-year average P/E ratio, and its current P/E ratio must be less than or equal to the company's future earnings per share growth rate."
Ah, that would have knocked my Ctrip recommendation right off the table. (Ctrip's current P/E is 52; its five-year average P/E is 34.) The Cross Country Clubbers are definitely conservative investors. (Not that that's a bad thing.)
I might find myself a better fit with the Belfast Regeneration Investment Club of Northern Ireland:
"The Club membership is made up of the adventurers and swashbucklers like Lawrence and Charlotte who want to dash in and buy shares for quick profit. Then there are those of a calmer, more sedate disposition such as Paul and Sean who don't mind waiting for the returns on their investment, or at least that's what they say! Gerry Mc (a.k.a. 'The Devil') and Ciaran are our real punters though, always ready to put a few bob on anything!! The Club has therefore agreed to accommodate everyone by structuring the portfolio to cater for speculative, growth and blue chip shares. These will be spread across all market sectors so that we aren't putting all our eggs into one basket."
But I think my favorite has to be the mission statement of The Ermyn Investment Club (also based in Britain):
"The relatively small amounts being invested and the shared nature of the exposure mean that the EIC will seek to invest in shares which probably none of its members would want to invest in individually because they will be more speculative in nature. This means, in practice, that when selecting shares, long term growth will not be a prime consideration. ... An EIC share should be expected to generate some interest and/or excitement!"
Ah, a club after my own heart! I'd bet this club would have voted to buy Ctrip! (Alas, the EIC itself seems to have disappeared sometime in the year 2000, leaving nothing but the ghost of a website behind.)
So what's it going to be for you, the individual investor, and for us, the not-yet-named new investment club members? Shall we subscribe to the safe (but potentially dull) philosophy of the NAIC, which says that "successful investment clubs adhere to the more conservative point of view that wealth building is a slow process, particularly in the beginning years"? Or shall we deem ourselves what the Complete Idiot's Guide to Starting an Investment Club calls "high-risk investors," who can take the heat and stay in the kitchen even though yea, one-fourth of our portfolio doth plummet?
That is, indeed, the question. More answers to come.
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Fool contributor Ellen Dowling owns shares of Ctrip, but lost her shares of Netflix, Sunrise, and Bed, Bath & Beyond when her former investment club disbanded. She's going to suggest that her new club's name be The Rio Grande Revenue Wranglers. The Fool's disclosure policy is on a mission.