TICN In The Press: February 16th, 2003

"Play the markets without the amateur dramatics" by Fiona McGoran
Small-scale investors are being drawn to a growing number of investment clubs in spite of four gloomy years in which the bears have been on the rampage, writes Fiona McGoran

YOU can hardly turn on the television or radio these days without hearing some stockbroker proclaim that now is the time to load up on top-value, quality shares.

With the global bear market in its fourth year, there certainly should be ample opportunity for bottom fishing.

But if you're an inexperienced investor, how do you find your way through the silty depths? Where do you get information on companies and share prices? How do you find out how much transactions cost?

Maybe it is time to follow the path taken by thousands of amateurs and look at the advantages of joining an investment club.

The Investment Club Network is an umbrella group for the industry. Launched in Ireland in 1998, it has more than 300 clubs covering 4,500 members. Eoin O'Malley, its founder, says interest in the clubs has continued despite the poor returns of recent years.

Over the last six weeks alone, another 20 clubs have been formed. The network claims that the average monthly return for the top 10 clubs in Ireland was 6% last year.

Investments clubs usually involve groups of between six and 20 people who meet once a month to learn about, and invest in, the stock market. Small amounts, usually Euro 70-Euro 100 a month per person, are pooled to buy stocks. Often a larger initial sum, such as Euro 500 from each member, is invested when the club is founded to create a fund.

"Being in a club has several advantages for newcomers to the stock market," says O'Malley. "Pooling investments reduces brokerage fees and gives members stakes in a larger portfolio than they could afford by themselves. Investors also get experience of trading in the relative safety of a group before going it alone."

Safety is important, with world stock markets coming off the back of a terrible January. The FTSE 100 fell by more than 9% while the Euro Stoxx 600 index suffered a loss of 7.2% lopping Euro 320 billion off the value of its shares. Irish stocks performed better, with a fall of 1.7% over the month.

Simon Shirley, financial adviser at BDO Simpson Xavier, says those thinking of joining an investment club should wait to see how the Iraq issue develops.

"Novice investors should sit on the sidelines for the moment and experienced investors shouldn't join a club at any time because they reap higher profits investing on an individual basis," says Shirley. "The best outcome would be a short war between the US and Iraq which would see Saddam Hussein removed from power. If this happened, the markets would rally and although those sitting on this sidelines would miss out on 5%-10% growth, they would catch the rest of the rise once they jumped in."

Pat Lynch of the Rebel Club in Cork is thrilled with the success of his amateur grouping, which has made a profit of 39% since it was founded in November 2001.

The club's 19 members, who invest Euro 100 each a month, drew on the stock market knowledge of a network associate who offered his services in the club's first 18 months. The club uses charting tools for much of its research.

Members will pay the network 5% of their overall profits after five years for its services. "It's a win-win situation," says Lynch. "Many of us are now trading as individuals because we have learnt so much over the past year."

How do clubs work?

Investment clubs comprise three to 20 members with one often affiliated to a support organisation such as the network. An advance fee, which varies from club to club, is paid to create an initial investment fund, and a monthly subscription of Euro 70-Euro 100 is pooled to buy a portfolio of stocks.

A club bank account is opened to receive members' subscriptions, usually paid by direct debit. Most clubs are set up as general partnerships to avoid the expense of forming a limited company and potential problems with corporation tax.

Top Investment Club Tips Never place funds in the name of one member. If the person dies, the funds become part of their estate. To protect the rights of all members, the fund should be held in a brokerage or a bank account under the club name.

Ensure compliance with relevant tax laws and have a legal exit mechanism that allows members to leave with their funds. Make sure everyone has a say in how the money is invested and votes for the final decision democratically. Subtract transaction costs, stamp duty and contributions from profits in order to determine the real profit.

Reading guides

* The Motley Fool: the fool's guide to investment clubs, by Mark Goodson and David Berger.

* Investment Clubs: a guide to establishing and running a club for equity investors in Ireland, by the Irish Stock Exchange investment club.

* Investment Clubs: a team approach to the stock market, by Kathryn Shaw, Dearborn.

* Understand Investment Clubs in a Day: by Neil Poyner and Calum Campbell, Take That.