Thomas O’Hara may be the messiah, but the drab one-story NAIC headquarters in Madison Heights, Michigan, is no mecca. An unrenovated elementary school is more like it. Inside, beyond the brown wood paneling and sea of cubicles are the unadorned, circa 1960s offices of O’Hara and Ken Janke, the 64-year-old president, who handles the day-to-day operations now that O’Hara has officially retired from the NAIC. (Unofficially, he’s still as involved as ever.)
Unassuming as it may seem, however, NAIC headquarters serves as Ground Zero for the investment club movement. For one thing, this is a clearinghouse for the 2 million brochures, books and magazines that the association sells every year. It’s also from here that the group’s flagship manual, Starting and Running a Profitable Investment Club, written by O’Hara and Janke, is distributed. The 250-page paperback has sold half a million copies since the team penned it three years ago, and it has been published in French. [And subsequently in Portuguese and Japanese also.]
The O’Hara Building, as it is called, is also the home of the NAIC stock-picking tools that thousands of members use to build their club portfolios. Take, for example, the Stock Selection Guide, or SSG, or “The Guide” — the very backbone of the organization. O’Hara, inspired by George Nicholson Jr. CFA, his club’s original broker, [embraced the two-page worksheet developed by Nicholson] that forces users to review all of a stock’s fundamentals, from price-to-earnings ratios to profit margins. Members then use the results of the studies to calculate whether or not a stock has the potential to double over the next five years — a most important NAIC general criterion. [In short, the “Guide” determines quality by peer/competitor comparisons and uses the return forecast to determine whether a given stock is “on sale.”]
NAIC advocates are so devoted to this system that the notion of a “hot” stock is anathema. In San Jose, one conference registrant could be overheard asking the woman at the registration desk, “You can’t give me any investment tips? That’s OK. We’re not allowed to take them anyway. It’s against the religion.” One club in Illinois earmarks only 10 percent of its assets to invest in non-NAIC sanctioned stocks, calling the stash its “Lunacy Fund.” Explains club founder Mark Robertson, a former engineer, local volunteer and now, senior contributing editor for Better Investing … “Anything outside of the organization’s principles [for core holdings] we regard as lunacy.”
If members are loyal to the SSG, they are obsessed with Better Investing magazine. The title has become a mantra. (A Better Investing banner flies alongside the American flag outside the headquarters.) “Best Wishes and Better Investing’ is the favorite email/correspondence signature of Mark Robertson.
At first glance it’s hard to see what all the fuss is about. A recent issue looks more like an accounting trade magazine than a stock picker’s bible. But NAIC members clamor every month for one feature in particular: “A Stock To Study.” The story — recently on men’s apparel maker Nautica Enterprises — is a five page treatise complete with charts, tables and a partially-completed SSG explaining why that particular stock is poised to grow.
But don’t call this a stock pick. Despite the fact that NAIC officers know that members end up not just studying but actually buying these stocks, they are adamant that nothing in Better Investing — or any NAIC publication or educational event for that matter — should be construed as a recommendation. “We are in the investment education business,” says Robert O’Hara, one of Thomas’ three children and an NAIC vice president. “Our goal is to try and teach people to do things for themselves.”
Whether or not the NAIC calls them picks, members are buying these stocks. Etana Finkler, for instance, a Rockville, Maryland computer-graphic artist, bought shares of Clayton Homes earlier this year at $16.50. What did she use to persuade her club to go along with the buy?
“When I presented the stock, I mentioned Better Investing has done three features on Clayton in the last three years,” says Finkler. (Clayton was down $1 at the end of November.) Eric Delph, who started a club four years ago in Huntington Beach, California, must have read those same articles. “I never would have heard of Clayton Homes if not for Better Investing magazine,” he says.
Janke himself provides what is perhaps the most telling evidence that a “Stock to Study” should really be called a “Stock to Buy.” Years ago [back in the 1950s], the NAIC ran a story on a bad stock. Plenty of clubs bought the stock anyway. “I guess people read the headline and didn’t really read on,” says Janke. As a result, every new stock featured in the magazine must now [meet the organization’s quality and buying metrics.]
Just who is setting those criteria and choosing those stocks? It’s not exactly a group of Wall Street-trained money managers, but it’s not a bunch of market neophytes either. O’Hara, Janke, Better Investing editor Donald Danko and seven other investment professionals (mostly chartered financial analysts) whom O’Hara and Janke have gotten to know over the years through various Detroit-based financial-industry functions make up what the NAIC calls the Securities Review and Editorial Advisory Committee.
The group meets over lunch each month to discuss stocks — not unlike an investment club. Each person comes prepared with a name or two and makes the case for nomination as a “Stock to Study” or “An Undervalued Stock.” When everyone has had their say, the company that will be featured is selected by voting.
As for performance, the stocks to study have done about as well as you would expect an investment club to do — some good periods, some bad. In the 42 rolling 5-year periods since 1952, Stocks to Study beat the Dow Jones Industrial Average 26 times. In the past five years, the raging bull market has run past the NAIC. Stocks that were picked in 1993 are up an average of 17.8% annually compared with 20.3% for the Dow. Plenty of clubs do better. Nancy Isaacs, a Toms River, New Jersey, member and NAIC volunteer, has watched her personal portfolio return 24% annually over the past five years. Through the NAIC, she says, “I feel empowered.”
Better Investing has another highlight members have learned to rely on: “The Top 100.” This annual list names the stocks most widely held by NAIC investment club members. Of course, just because clubs are buying a stock doesn’t necessarily mean it’s a good pick. But that doesn’t stop members from treating the list like a tip sheet. If other members are buying a stock, members figure, then it must have passed the NAIC criteria and therefore, [may] make sense for them. Don Heyrich, a 32-year-old attorney in Seattle, admits that his club uses the Top 100 as a source of new ideas, figuring other members have already applied the NAIC analysis and concluded that these were good stocks to own.
It’s no coincidence, then, that three of the top 10 names on the 1998 list — Intel, Lucent and Merck — are also among the 10 stocks most widely-held in Merrill Lynch brokerage accounts, a common gauge of how popular a stock is among individuals.