CHICAGO (Reuters) – At a time of high-frequency robotic trading, market volatility and elephantine economic uncertainty, joining forces with your family and neighbors for an investment club might sound like a sucker’s game.
The truth is that most investors won’t beat the market once they subtract transactions costs, timing errors and holding onto losers. So perhaps it’s no surprise that when finance professors Brad Barber and Terrance Odean of the University of California researched returns in the 1990s at the height of the investment club boom they found that about 60 percent of the clubs failed to beat a market index.
But there’s more value to pooling your resources than just comparing your returns to the S&P 500. Investment clubs still make sense because they bootstrap fundamentals. You focus on how to analyze a company for its sales, earnings and future direction. You scrutinize management for its ability to increase profits and earnings per share.
Instead of picking companies based on familiarity or gut feeling, you work with rational models of long-term stock picking. Over time, you figure out how to create a portfolio of solid companies, re-invest dividends and save money.
There’s a great deal of learning that happens in a social setting that you may not be able to do by yourself or by browsing online. That’s why even though membership numbers have plummeted since their heyday when there were 35,000 clubs in 1998, there are still some 8,600 local clubs across the country run through BetterInvesting.