Investment Clubs

[ February 8, 2000 ]

So, Are You Investors or Traders?

By Mark Goodson (TMFFatBlokeMarge)

Hands up all those clubs that took the bull by the horns last year and went into Technology and Telecommunications?

Now hands up all those who predicted a stockmarket crash and diverted all those funds into "safe" sectors like Banking and Finance, Retailing and Engineering?

The difference between the two groups will be enormous. The first group will have struggled NOT to have doubled their money since November. Even taking profits and getting in again would have had little effect if you picked the right shares. Huge gains in the fashionable sectors have abounded since the turn of the year, and bear in mind we have had several days when markets have crashed significantly.

Group two, on the other hand, will have done well to avoid losing 30% or more, and are probably now thinking, "is it too late to get into the Tech sector?"

Well, is it?

Who knows. I doubt it, especially if your club has been set up for the long term. Companies like Vodafone AirTouch (LSE: VOD), ARM Holdings (LSE: ARM) and NXT (LSE: NTX) look at this stage to be trailblazers in their respective fields and are probably good value, even at current prices, for long term purchases.

But, here comes the crunch. The one thing that most people are agreed on is that markets cannot go up at this rate for ever. Consequently, clubs may be tempted to get in and get out on a monthly basis, snatching profits, doing very well too (at the moment), and maybe selling the more boring stocks to get into more exciting ones.

Is your club guilty of this?

All very well in a rising market, of course, but this approach is much more appropriate for gamblers rather than investors. You could end up selling for buying's sake, and if prices actually drop, well, then you're in trouble. You realise losses you don't need to realise, buying stocks in the hope they go up, and then they don't. Disaster.

During bullish periods like this, it is all too easy to forget that prices can actually go down as well as up. At present the stocks are up, up, up, down and then up again.

But, dear Foolish friends, cast your minds back to an earlier article in this series, entitled "Curse of the Monkeys". This focused on one of my clubs, the Brass Monkeys, and the inability over the first 2.5 years of the club's life to make a profit.

We turned it around by selling our losers and buying various tech stocks, with the result that (at the time of writing) we have doubled our portfolio since November.

But the key issue here is that we sold our losers across three months; October, November and December. In January we had no losers, but we were uncomfortable about a couple of our holdings, so they were sold. Now, we have quite honestly a stonking portfolio, full of what we hope to be quality stocks, with a major technology bent. What happens at February's meeting will be crucial to the club; if we sell to buy, we will be guilty of trading rather than investing. The danger is that members have got used to buying £3-4 grand's worth of stock every meeting, and this month quite honestly (again at the time of writing) there is nothing I want to sell. I hope the other members see it that way, although I fear that the buying fever will have gripped the membership and there will be at least one proposal to dump something in favour of something else.

This carries additional risk with a club. A private investor can watch the market on a daily basis. Clubs usually only meet once a month, and so decisions as to when to get out may be inappropriate at the time of the meeting, and there is consequently a heavy reliance on the person actually doing the dealing to be at the club's beck and call throughout the month. I personally don't feel this is fair in a club environment. It is far better to remain as investors than traders, even if it means the possibility of missing out on big gains. Don' t forget, shares that go up at the rate of knots come down equally quickly, and I feel this is an additional risk that a club does not need.

The next article will focus on a "family" idea, and why perhaps individuals should set their sights on being members of more than one club.

Fool On!

Related Links
• Investment Clubs message board
• Investment Clubs: The Curse of the Monkeys