For This Group, It’s Tough Selling

Recognizing that their financial future is in their own hands, Americans are increasingly taking greater control of their savings and retirement investments. This has created a growing need for study and education, and has inspired The Times’ weekly Money Make-Over column in these pages.

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A significant part of that education has taken place in discussions at the meetings of small investment clubs. The numbers of such clubs have exploded in the last decade as people band together to learn about investing. Today’s make-over column is the first of an occasional review of an individual club portfolio, focusing on specific challenges club members face and some potential solutions.

These lessons will apply not only to investment clubs but to individual investors as well.

“You guys agree that we should save money and not buy something this month, and accumulate some money?” asked Babs Goguen, seeking confirmation from her fellow investment club members.

“Well, how much do we have now?” several inquired.

“We have $5,” responded Goguen.

Laughter broke out.

With a big smirk on her face, Gerry Barrington, whom the other club members refer to as the Church Lady, answered for the group: “I think we should accumulate.”

If only all of their decisions were this easy.

Since forming the Professional Women’s Investment Club (PWIC) more than 3 1/2 years ago, these 15 women, ranging in age from 30 to 77, have been meeting like this once a month.

The group, many of whom live in the San Fernando Valley, typically get together on the last Tuesday of each month, sometimes at restaurants, other times at a member’s home. This time, they agreed to meet at the Los Angeles Times so that Times reporters and editors could observe.

By and large, the money invested has been “play money” for the members. After kicking in a $100 initiation fee, each member can put in as little as $25 a month.

But over time, as thousands of other investment clubs that sprang up in the mid-’90s have discovered, that $25 adds up to more than play money.

That’s where Goguen, 40, an employee benefits supervisor for Walt Disney Co., and her fellow club members find themselves. Right now, the total value of their portfolio sits at more than $25,000, spread across 17 stocks.

They’ve picked some big winners: Their Harley-Davidson shares have more than doubled. And they’ve had a great run in drug maker Pfizer.

But more recent purchases haven’t performed nearly as well. They’re currently losing money on their purchases of Invacare, a medical equipment supplier for the home health-care market; Wolverine World Wide, the maker of Hush Puppies shoes; Campbell Soup; St. John Knits, the women’s apparel manufacturer; and Prison Realty, a private prison company turned real estate investment trust.

They also put money into Diebold, a leading maker of automated teller machines. But they’re still waiting for it to spit out decent gains.

PWIC has yet to sell anything it has purchased, though last year, when Campbell Soup spun off its Vlasic Foods division, PWIC did receive two shares of that stock. The club in turn sold those shares. “None of us seemed interested in pickles,” Goguen said.

But as the discussion continued at their meeting with Times reporters and editors, it became evident that the club’s members are interested in setting some parameters for their burgeoning portfolio--including adopting some rules that might guide them in dealing with their losers.

The Club and Its Strategy

The Club: Professional Women’s Investment Club.

Club Goal: “To make money and have fun,” said Barrington, 77. Also, to learn a thing or two.

Although club members describe their $25-a-month dues as “lunch money,” member Fran Block, 52, who works at 20th Century Fox, noted that “it has certainly paid for the education I’ve gotten.”

Portfolio Performance: So far, the club has made money on 11 of its 17 stocks. The club doesn’t compare its overall performance with benchmarks such as the Standard & Poor’s 500 because members say they aren’t interested in that kind of horse race.

How and What They Buy: Goguen said they’re “basically buy-and-hold people investing for the long term.”

Given their devotion to two pillars of investment clubs everywhere--Peter Lynch’s “One Up on Wall Street,” in which the former Fidelity Magellan fund manager professes that investors can succeed by investing in what they know, and the Beardstown Ladies’ “Common-Sense Investment Guide,” in which a 16-woman investment club in Beardstown, Ill., detailed how it followed Lynch’s advice--it’s not surprising that many of PWIC’s investments are in companies whose products or services are familiar to members.

For instance, seven of the club’s members are current or former Disney workers. And what was the second stock the club bought, back in March 1996? Disney.

That same logic got the women interested in Avery Dennison, the Pasadena-based label maker. “We just personally use a lot of their products, and they were just exploding, coming up with new products for everything,” said club member Julie La Prath, 41, a production accountant at Disney.

Of course, just because you’re familiar with a company doesn’t mean you’re going to make money in it. For instance, Maddalena Ghezzi, 61, president of Disney’s office workers union, was the one who brought St. John Knits to her fellow club members’ attention a year and a half ago.

“My godmother worked at the St. John Knits factory in San Fernando,” she said. “It really is a sound company. It’s incredible what they’ve done” in the women’s apparel business.

Yet the stock has been a loser thus far. Now, they’re waiting to see what becomes of a bid to take the company private, club co-founder Ingelis Jensen, 32, said.

Overall, “We’re riskier than we thought we were going to be,” Goguen said about the portfolio the club has built up. “We started out thinking we’d be a little conservative, with Beardstown Ladies’ guidelines. But then Gerry, the Church Lady, she keeps saying she doesn’t have much time left to make money.”

Chimed in Gerry Barrington: “Buy, buy, buy!” as she pumps her fist into air.

But some discussion about St. John Knits--and the club’s uncertainty about the pending takeover bid--brought the meeting back to the main investment issue perplexing the women: the sell decision.

Noted La Prath: “We got thebuying thing down. I really think the sell issue is . . . where our learning curve is going. At some point, we need to do something.”

The Challenge: When to Sell

PWIC members emphasized that they aren’t interested in becoming short-term traders. They’d like to give most or all of their stocks the benefit of the doubt as long-term investments.

The club relies largely on investing software put out by National Assn. of Investors Corp. (an umbrella group for investment clubs) and supplements that with stock reports published in Value Line Investment Survey.

Up until this point, the members haven’t gotten a clear signal from either source as to whether any of their stocks ought to be jettisoned.

But The Times’ markets editor, Daniel Gaines, noted that the club members may have a better idea of which stocks to sell than they realize. For instance, the club has already distinguished between stocks in the portfolio that members want to continue buying, and those that won’t see another dime from them--at least under current circumstances.

Coca-Cola is an example. Early on in the meeting, Goguen said that though they don’t regret their 1995 purchase of Coke (the stock price has gained 62.2%), the consensus opinion is not to buy more. “We felt it became too expensive,” she said. The stock is now priced at nearly 43 times estimated 1999 earnings per share, even though earnings fell in 1998.

Gaines said that “you’ve already made a distinction within your portfolio. . . . Maybe the ones you’ve decided you don’t want to buy more of are the ones you may not want at all.”

The club seemed receptive to that idea.

To focus the group more closely on the need to create some general parameters for its portfolio, Times reporters and editors suggested the following strategies:

Establish a limit on the number of stocks to be held. Currently, there are 17 stocks in the portfolio, and club members indicated that the figure could go as high as 25. Tom Petruno, Times senior markets editor, and Paul J. Lim, Times mutual funds writer, suggested setting a specific limit on the number of stocks to be held.

For this particular club, that makes practical sense. Why? Because Goguen, the de facto leader of the group, ends up doing the lion’s share of the work in analyzing and reassessing stocks, although she does so happily. So every stock that gets added to the portfolio--or even discussed--means more work for her.

Goguen agreed. “I’m not looking to start the Babs 500,” she said.

There’s also a strategic reason to limit the holdings, Lim said. If the club decided to hold no more than 25 stocks, any new stock added to the portfolio beyond that number would force the sale of another.

Said Lim: “You know that a stock is worth buying if it forces you to sell another stock you absolutely cherish.”

Consider setting a “floor” for new stocks. A few of the stocks in the portfolio dropped fairly soon after purchase. Prison Realty (formerly Corrections Corp.) is an example.

Times markets writer Walter Hamilton suggested setting some kind of floor for stocks that fall immediately after purchase. Where that floor is--for instance, selling if the stock falls 10%, or 20%, after purchase--would depend on the group’s risk tolerance.

But the point of setting such a floor is to make sure the club’s capital isn’t quickly wiped out by a few unfortunate picks.

“A lot of clubs say, ‘If a stock goes down when I buy it, as long as the reasons why I bought it are intact, I’ll hang on,’ ” Hamilton said. Others might even average down, meaning they might buy more shares if the price falls, he noted.

“But my philosophy is, if I incur one or two big losers, then that’s going to really decimate my overall returns. The reason I buy a stock is [for] it to go up. If it’s not going up, than it’s not doing what I want,” he said.

Another reason to be concerned about staying too long with big losers: “If a stock goes down 50%, it has to go up 100% from there just to get even,” Petruno said.

Don’t let gains slip away. Some stocks climb for a while, only to see gains then bleed away over a long period of time. It’s easy for a club to say it buys and holds, but the idea is to make money--and if that money is made quickly, and a stock then looks like a poor bet, selling some or all of the holding might make sense.

“It’s that slow grind kind of thing that’s the risk for a lot of clubs,” Petruno said. “People say, ‘Let’s give it a few more months.’ Pretty soon, it’s five years later, and you haven’t made a dime.”

Club members acknowledged that this kind of analysis may be in order, especially for some of their longer-term holdings that have already made substantial sums for them. That list includes Coke, Disney, Harley-Davidson and Pfizer.

For instance, Goguen said she’s now inclined to give up on a stock--even a blue chip--that hasn’t made a positive move in two years.

Keep the emotion out of buy-and-sell decisions. It’s surprisingly difficult to sell a stock, even a loser, because “there’s an emotional issue to selling,” said Times personal finance writer Liz Pulliam. Selling a loser is admitting a mistake, and selling a winner can feel like deserting a friend, she said.

Lim said this is one area where the club could take a lesson from mutual fund managers. “In an effort to take some of the emotion away, many fund managers set target prices, certain parameters, saying, ‘At this price, I’d be willing to start shaving off my position in a stock.’ ”

If that upper limit is in place, it can always be revised. But it forces reanalysis.

The Wrap-Up: Keep It Fun

Petruno cautioned club members not to go overboard in focusing on the when-to-sell issue. In other words, don’t over-mechanize buy or sell decisions so that they take the fun out of the investment club--which is one of the main reasons the women got together in the first place.

Club members agreed. Even now, “half of our meetings are spent talking about those people who aren’t there,” Goguen said, laughing.

Still, they agreed they will develop a sell discipline.

For starters, although members said they will stick to their buy-and-hold approach, they will pay greater attention to whether stocks that have made money for them in the past are continuing to do so--or whether they’re giving back those gains, drip by drip.

In fact, Goguen said it might be a good idea for her to print out charts for each member, showing how each of the club’s stocks has moved over a two-year period. This way, each member will be “graphically” reminded about whether her favorite stocks are continuing to advance, going flat or declining, she said.

The women also expressed a desire to begin making more comparative judgments on stocks. Said La Prath: “What I’m curious about is at what point do I get rid of part of Disney to buy Fox?”

“We are leaving that buy-only era,” she said. “I’m actually really excited about the new era I think the club is entering.”

This special investment club make-over column was compiled by Paul J. Lim and other Times staff writers. Lim can be reached at [email protected].

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If your club wants to be considered for review, send your club name, number of members, phone contact and holdings to Investment Club Make-Over, Business Editorial, Times Mirror Square, Los Angeles, CA 90053; fax to (213) 237-7837; or e-mail the information to [email protected].

To to be considered for an individual or family Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over at the above mail addresses. You can also print or download the regular make-over questionnaire at http://ukobiw.net./HOME/BUSINESS/FINPLAN/make-over.htm.

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Club Profile

* Club: Professional Women’s Investment Club

* History: Babs Goguen, along with several fellow Disney employees, founded the club in September 1995.

* Members: 15, many from San Fernando Valley

* Primary research methods: Discussion, personal experience, software from the National Assn. of Investors Corp. and stock reports published in the Value Line Investment Survey.

* Buying methods: Discount broker (E-Trade) or directly from companies through direct reinvestment plans, or “DRIPs”

* Stocks: 17

* Portfolio value: $25,000

* Best performer: Harley-Davidson

* Worst performer: Wolverine World Wide

Portfolio Summary

Holdings of the Professional Women’s Investment Club, in order of original purchase date. Additional shares have been purchased later in some cases. Gain and loss below based on average price of all shares purchased.

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Original Avg Price % purchase price* per share gain Company name Ticker date per share as of 2/26 or loss Coca-Cola KO 11/21/95 $39.39 $63.88 +62.2% Disney DIS 3/28/96 22.48 35.19 +56.5 Avery Dennison AVY 6/7/96 39.26 53.69 +36.8 Diebold DBD 6/7/96 29.49 29.19 -1.0 Harley-Davidson HDI 7/24/96 21.94 57.88 +163.8 Oracle ORCL 1/29/97 28.23 55.88 +97.9 Prison Realty PZN 2/26/97 ** 19.94 Loss Intel INTC 2/26/97 74.54 119.94 +60.9 Pfizer PFE 8/6/97 60.32 131.94 +118.7 Wolverine WWW 8/6/97 12.11 9.94 -17.9 St. John Knits SJK 10/10/97 28.64 26.69 -6.8 Starbucks SBUX 2/2/98 37.92 52.88 +39.5 Campbell Soup CPB 2/27/98 56.32 40.19 *** Gap GPS 4/3/98 31.33 64.69 +106.5 Invacare IVCR 4/3/98 26.71 23.75 -11.1 Home Depot HD 7/13/98 47.94 59.69 +24.5 Lucent LU 9/24/98 93.92 101.56 +8.1

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* Average of original and subsequent purchases, including reinvestment of dividends

** Club purchased Corrections Corp. of America, which was acquired by CCA Prison Realty Trust to form Prison Realty Corp. on Jan. 4

*** Exact loss not calculated due to spinoff of Vlasic Foods.

Source: Babs Goguen, Professional Women’s Investment Club; Bloomberg News

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Club Make-Overs

Would your investment club like to meet at The Times and review holdings and club philosophy with reporters and editors of the Business section?

Send your club name, number of members, phone contact and a list of the club’s holdings to : Investment Club Make-Over, Business Editorial, Times Mirror Square, Los Angeles, CA. 90053;fax to (213) 237-7877; or e-mail to [email protected]. *

LEARNING TO SELL

Walter Hamilton offers some tips on the sell decision. C6