the Sage of Madison Heights

In honor of this week’s BI National Convention, here’s a lengthy (but representative) Smart Money article about NAIC, investment clubs and Tom O’Hara. Smart Money is “extinct” and reprints of the January 1999 issue are scarce. The article is presented here, largely in its entirety, with a few edits for accuracy. I collaborated with the author, Emily Harrison Ginsburg, and was influential in the development of the story as she explored the organization and the investment club movement. First and foremost, Tom thought the article focused too much on him. Some of the achievements and contributions of the likes of George Nicholson, Ken Janke and a nation of volunteers were less obvious. But the facts are facts. O’Hara was chairman of the organization for more than 50 years. How many people — ever — have been able to say that? It’s also a fact that Tom paid his $20 monthly dues to the Mutual Club of Detroit every single month since February 1948. I watched him withdraw several hundred thousand dollars and still have a balance greater than $1,000,000 in the club. His account had an annualized total return of 13.4% from 1948-2004, beating the stock market by more than three percentage points. The San Jose convention was huge and featured the Motley Fools and a keynote by Fidelity Magellan’s Peter Lynch among other noted investors. Nicholson referred to the modern investment club movement as a “Grand Experiment.” O’Hara thought of his massive community as the world’s largest and most successful investment club. — Mark Robertson

It’s a full house in the main exhibit hall at the San Jose Convention Center, with several thousand people brandishing large name tags and carrying white Lucent Technologies tote bags, each of them here for what looks like four days of nonstop talk about the stock market. “Did you see what small caps did this week?” asks one attendee. “Those Internet stocks are perking up again,” says another.

Amid the crowd roams am 82-year-old man dressed in pants that are a bit too short and accompanied by an attractive red-haired woman who hovers solicitously at his side, steering him gently by the elbow as he makes his way through the crowd. She occasionally whispers some comment into his ear and even slips him a mint at one point. As the elderly gentleman progresses on his trek, he says hello to many of his fellow conventioneers, his raspy voice barely audible above the din of the crowd, and stops to collect some of the giveaways being handed out by the investor relations people who are here in San Jose to pitch their companies’ stock to potential investors.

There is nothing particularly remarkable about this scene. In fact, this man, his wife of 47 years by his side, seems barely distinguishable from the thousands of others in the room. But then, suddenly, you notice that this elderly personage is being interviewed by a TV camera crew, that someone else is asking to have her picture taken with him (“This will be my keepsake,” she gushes), and that a large number of onlookers seem to be gazing adoringly as Thomas O’Hara makes his way past.

That’s right. Thomas O’Hara.

The name didn’t mean anything to you? Didn’t think so. But this gray-haired, soft-spoken man is a key reason there is nearly an overflow crowd at this California confab — the annual gathering of the National Association of Investors Corp, the umbrella organization for investment clubs throughout the country. That’s because in 1951, along with the same old Army buddies who lived near his suburban Detroit home, O’Hara formed the basis of the NAIC, an investing movement that over the years has transformed the country’s investing landscape, spawned the bestselling book, The Beardstown Ladies’ Common-Sense Investment Guide, grown into an organization of roughly 37,000 investment clubs and a total of [478,000 active participants] and turned O’Hara himself into one of the most influential people in the stock market.

Whether it’s through conventions like this one — which increasingly draw investor relations executives from public companies well aware that a favorable nod from the NAIC can attract plenty of new shareholders — or whether it’s through the NAIC’s monthly magazine, Better Investing which points out stocks for clubs to consider, or through the so-called I-Club-List, an Internet-based mailing list that generates some 100 emails/day, the NAIC’s reach is broad and powerful. Members invest about $1.3 billion in the stock market each year and now represent a cumulative stake of $175 billion. That chunk of assets would place the NAIC 21st in Institutional Investor magazine’s annual ranking of the country’s largest institutional investors, just above such meganames as American Express and Chase Manhattan. The NAIC’s key tenets are:

  • Invest on a regular basis.
  • Reinvest your earnings.
  • Buy growth stocks.
  • Diversify [prudently].

The guidelines are basic which members have embraced with an evangelical fervor. “Our only religion is that of the NAIC,” says Candis King, a 46-year-old mother of two from Chicago. And Thomas O’Hara is their touchstone, their messiah — the one who has shown them the promised land of double-digit annual returns.

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.

O’Hara has been preaching the gospel of individual investing ever since 1940, when he plunked down his first $20 monthly installment to join the Mutual Investment Club of Detroit. When World War II broke out, O’Hara started corresponding with members who had been drafted — first from his post in Iceland, then in London during the blitz. Military censors, who as a matter of course intercepted and read the group’s letters, started writing back asking how they could join the club. Within a year the Mutual Investment Club of Detroit had doubled in size. After the war, with three other clubs on board, the NAIC was born and Tom O’Hara was in charge.

By 1958, O’Hara quit his job as the director of the payroll department at the Detroit Board of Education to run the NAIC full time. A graduate of Wayne State University’s business school, with a degree in accounting, O’Hara has no other formal financial training — no chartered financial analyst designation after his name, no brokerage house experience, not even a stint as a financial planner. Nevertheless, his years of devotion to the individual investor have earned him a directorship at the Financial Analysts Society of Detroit and an advisory role on Securities and Exchange Commission committees.

O’Hara has spent the better part of the last two decades devising ways to bring more clubs into the fold. In 1979, for example, he started up the NAIC version of seed money for investment clubs, buying one share of a company’s stock, then selling that share to a member without a commission. That way a club could start small, access dividend reinvestment programs, and minimize expenses early in the life of the club.

It was about this time also that O’Hara made a shift in strategy that would fundamentally shape the future of the organization. With the stock market going nowhere, the phones weren’t exactly ringing off the hook. The modest club membership fees and publication sales couldn’t cover everything, so O’Hara and Janke began soliciting corporate sponsorship. Advertising discounts in Better Investing and the chance to tell their stories to investors through NAIC conventions were compelling to investor relations charged with reaching retail investors.

Throughout the 1980s, the NAIC slowly grew as clubs continued to catch on with investors. Then, starting in 1995, O’Hara’s homespun organization exploded with the publication of the Beardstown Ladies guide. The Beardstown Ladies were NAIC members and said so, loudly, in their book and appearances. Membership doubled from 1995 through 1998, thanks in part to the well-placed plug. Even when it became clear that the Ladies’ 23.4% annual returns were a mistake on the book’s cover — the impact did not spread to the NAIC. “There was no fallout,” says Janke. “We already had so much growth because of the booming market.”

O’Hara has obviously benefited from the investment club craze and bull market. Aside from his residence in Bloomfield Hills, the toney Detroit suburb close to Madison Heights, he owns homes in northern Michigan and Florida. A water buff, O’Hara owns a total of seven boats. As far as he’s concerned, the good times will go on. O’Hara remains relentlessly optimistic about the market despite the recent volatility. “The fundamentals of the market are better now than they have been for 20 years.” Of course, as the lead cheerleader for individual investors, you’d expect such a positive outlook.

Back at the San Jose convention, Andrew Backman knows how to work the NAIC crowd. The director of investor relations at Lucent is at a coffee shop down the street with a bunch of members whose clubs all own Lucent stock. The group is probably in their 50s with occupations ranging from housewife to lawyer, to engineer. And these investors aren’t playing with Monopoly money. The average member has a portfolio worth $223,000. [O’Hara also liked to remind that 14-of-15 investment club members would establish their own personal brokerage accounts for their “real money.”]

Lucent’s share price has recently dipped, and Backman is braced for the group’s reaction. “Are you concerned?” he asks. He’s pleasantly surprised by what he learns is a classic NAIC response. “No. We’re invested for the long haul,” one person pipes up. Some investors even volunteer that they have accumulated more shares at the lower prices.

What is Andrew Backman, a savvy corporate executive who is far more connected to Wall Street than he is to Main Street, doing at a coffee klatch of investment club groupies? Getting together with members, Backman says, is the best way to keep up with Lucent’s shareholders. “We can find out what their perspective is on the market, our sector and our stock,” he explains.

Backman isn’t the only corporate executive who has discovered the power of the NAIC. Don Eagon, head of investor relations at Diebold, has been currying favor with the organization and its members for years. Back in 1990, when Eagon first started with Diebold, he was alarmed at the large number of institutional owners — then as much as 86% — was causing unnecessary volatility in the company’s stock price. Eagon was concerned that two-thirds of the stock held by institutions was in the hands of only five firms. He set a goal to reduce institutional ownership to 75% of shares outstanding.

One of the first steps Eagon took towards achieving that goal? He joined the NAIC as a corporate member. “If you really want to build a strong base of individual shareholders, that is the way you do it,” Eagon says. He used his discounts to run at least six ads in Better Investing. And Eagon, or someone on his staff, began mingling with club members at several of the 75 regional investment education events, or fairs, that the organization sponsors every year.

All that was preparation for what he knew would really lure individuals — a spot on Better Investing’s Top 100 list. Once he hit that, Eagon must have known that Diebold would pull in even more individual shareholders. But what most corporate members really aspire to is being chosen as a BI Stock to Study. While joining the NAIC is no guarantee to a company that the securities review committee will feature it in the magazine, it does seem to help. 16 out of 36 stories highlighted once of the 280 member companies. [Only to the point of visibility and awareness, I can personally attest as a committee member that — if anything — corporate membership could actually inhibit the potential for a magazine appearance. — Mark Robertson]

Corporate membership paid off for Diebold with a place in the 1995 BI Top 100 and a [deserved] feature as a stock to study. Institutional ownership dropped to 73% that year and by 1999 was down to 54%.

But does corporate membership really serve NAIC members? While Diebold’s stock is certainly no dog — it has risen 19.4% annually over the last five years — it has lagged the S&P 500. Strict as the NAIC is about its stock selection criteria, the organization is far looser when it comes to screening corporate members. If a company is publicly traded, has been in business five years and is willing to pay the sponsorship dues, it’s in. “Our people are not stupid. We tell them to make up their own minds,” says Janke in defense of the program.

And, of course, devout members see no problem with the arrangement. “I have seen the NAIC principles work for me and my club,” says Cy Lynch, a 39-year-old Atlanta attorney. Anyone who is willing to spend the time can pick stocks as well as a professional money manager. I do better than my own mutual funds,” he says proudly.

One fall day, sitting in his office in Madison Heights, O’Hara was waxing sentimental about the displays of gratitude that members show him whenever he travels. “There is hardly a place we go that somebody doesn’t come up and thank us,” he says, the “we” meaning himself and his wife. “Three weeks ago in Chicago, a man came up and thanked me because he had saved and invested, and had a million dollars for retirement,” he says, slowly taking off his glasses to dab his eyes. A visitor, not noticing that the old man is actually wiping away tears, asks what it is like to have such an impact. O’Hara responds simply, “It’s a thrill.” And then, “Oh, look what you’ve done. You have gone and made me cry.”

  • Smart Money was the Wall Street Journal’s magazine of personal business. The finance magazine launched in 1992 by Hearst Corporation and Dow Jones & Company. In 2010, Hearst sold its stake to Dow Jones. The September 2012 edition was the last paper edition. Its content was merged into MarketWatch in 2013.
  • The institutional stake for Diebold (DBD) as a percent of float is now 96%.
  • Those 11 Best Stocks for 1999 from this issue were: Wells Fargo (WFC), Compaq, Kohl’s (KSS), DR Horton (DHI), Guidant, Warner-Lambert, Bank One, Apple (AAPL), Dollar General (DG), Toll Brothers (TOL) and Pfizer (PFE).
  • Warren Buffett and Berkshire Hathaway agreed regarding Clayton Homes, purchasing the company in 2003. One of our favorite — and most memorable — I-Club-List moments happened when Jim Clayton (Chairman and CEO) “showed up” to field some questions. We only asked him if he was really the Easter Bunny twice before realizing he was really Jim Clayton.

Celebrating Heroes & Decades

Stocks to Study (5/23/2014)

On The Shoulders Of Giants

This past weekend, we (Ken Kavula, Hugh McManus and Mark Robertson) spent some time with over 200 long-term investors in Chicago at the 63rd Annual Convention for the National Association of Investors (NAIC). If you’ve been around here for a while, you know that we often pay tribute to the likes of Messrs. Nicholson, Graham, Babson, Schloss, O’Hara, Janke, Seger and place/phenomenon called Beardstown here on these pages. We’ll do that again here.

But first, a quick reminder about the screening results at the top of the page. This weekly screen was inspired by Irina Clements. In fact, we call it our Irina screen. Every week we present the companies in the current update batch. We do fundamental updates on 1/13th of the companies at Manifest Investing every week using the same cycle as one of our trusted resources, the Value Line Investment Survey. Warren and Peter (we’re on a first name basis with them) both regard Value Line as a veritable and trusted resource. We do too.

  • Irina asked us to collect the top ranked study candidates … and allow us to compare the opinions of Value Line, Morningstar (another formidable and trusted resource) and Standard & Poor’s side-by-side. So we do that. We list our aggregate results next to the three of them. Keep in mind that every company report and equity analysis is as if we put a whole bunch of rhinos in a padded room, including the analysts who collectively form the analyst consensus estimates, and locked the door. They continuously are completing stock selection guide-centered stock studies and continuously generating the results as prices change (daily) and fundamentals (growth, profitability and projected P/E ratios) blow in the wind. We feed them occasionally because we know better than to frustrate or disappoint a Wall Street rhino.
  • The column on the left provides the ranking within the MANIFEST 40, our listing and tracking portfolio of the forty most widely-followed companies by Manifest Investing subscribers. This week, Intuitive Surgical (#37) and ResMed (#29) are among our community favorites. Teaser: During the current refreshing of the website, Kurt Kowitz will make this listing continuously available on the home page.
  • It may not seem like there’s any order or sequence — but there is. We combine the return forecast (projected annual return) with quality to come up with MANIFEST Rank. The companies on this list are ranked, top to bottom, using this combination characteristic.
  • The Value Line entry is the Value Line low total return forecast (VLLTR) for the companies. We believe — based on extensive research — that the VLLTR is a great second opinion and this figure should resemble the results of a considered stock study. (Note: The reason this figure may be different from the one on the company page is that we correct for the change in price and time horizon.)
  • The figures for Morningstar and S&P are based on their current fair value estimates. A low price (but probably not too low) price-to-fair value ratio suggests potential attractiveness from a return perspective.

There’s often a divergence of opinion from stock-to-stock and this week is no exception. Take a look at those ranked high by one agency versus the outlook from the others. This week, there’s a HUGE difference in perspective between Morningstar and S&P on Intuitive Surgical (ISRG).

73 Years of Heroes In The Making

It was every bit a phenomenon. From the cornfields of Illinois came a group of formidable investors who became known as the Beardstown Ladies. Formed in the aftermath of an investing small group first championed by the Business and Professional Women Association, Betty Sinnock and her colleagues transcended brokers who wouldn’t return an investment-related phone call from a WOMAN. Fast forward nearly 30 years and we can literally point to thousands of clubs and likely millions of investors who have been inspired to discover long-term investing. They were nudged by the likes of Doris Edwards (a persistent school teacher who gives me another book to read nearly every time I see her) and Maxine Edwards and now, a new generation of Beardstown.

Betty Sinnock accepted the Nicholson lifetime achievement award on behalf of Beardstown and the legions they’ve inspired over the decades. Promises kept. Indeed.

For more, here’s my report, Thanksgiving 2010 – Of Heroes & Harvests from a fairly recent trip to attend one of their club meetings — which are still often open to the public. Did I mention they have a section in a museum dedicated to their exploits and adventures?

Speaking of Beardstown, it’s one of the communities on Route 66. Last year, we took a spin down Route 66 stopping at places like Springfield (IL), St. Louis and Oklahoma City. One of the beaming faces at the end of the road in Oklahoma City, home of the Heart of Oklahoma chapter for NAIC was Irene Jondahl. Irene has been serving investors, building programs, assisting her colleagues and inspiring the seekers in their quest to discover successful long-term investing. Irene was honored with one of the awards for excellence in volunteerism. Irene is a blessing and a gift to all of us.

A few miles to the east in Cincinnati, there’s a team of volunteers in southern Ohio nestled in a hotbed of interest (and success) in building programs and PORTFOLIOS. It’s a machine. And reliable machines are often held together by the best fasteners, glue and duct tape. In this case, the Oki-Tri State has benefited from a lineage of leaders, and Linda Miller has been there nudging them along for over 25 years. Linda Miller accepted this year’s lifetime achievement award for excellence in volunteer leadership. The award is named for Ken “Mr. NAIC” Janke. I’m sure Ken is smiling about Linda’s exploits and achievements.

Last but far from least, we come to Ralph Seger. Ralph passed away during May 2014 and will always be remembered for his contributions to Better Investing, decades of stock selection and for the Repair Shop in the publication for years. His friends knew him as Captain Blunt. Because he was. He was a grumpy old man — probably since the age of 10. But with a heart of gold. When I joined the NAIC team back in the 1990s, Ralph welcomed me with open arms and helped me learn long-term investing up, close and personal. We shared literally hundreds of breakfasts, lunches and dinners. I will treasure them all.

It had been a couple of years since we last had lunch. I regret that. But I don’t regret the group dinner we attended at his retirement residence with his friends the Dankos and Sobols and our spouses.

When I learned of his passing, I did a [Search] for “Seger” on Manifest Investing. Ralph made a solitary post on our Forum back in July 2008. You can check out the sage and timely and timeless comment that he made here. Bottom line? Ralph was duly concerned — with a duly amount of grumpy wisdom about conditions in the banking industry. We can now look back and appreciate that within a few months, he nailed it. Ralph was featured in a Better Investing cover story, highlighting his frequent sage advice … and a lifetime of generosity to a community of long-term investors. Thanks, Ralph — we couldn’t be doing this now and going forward — without you.

Companies of Interest: Value Line

Materially Stronger: Winnebago (WGO), Tata Motors (TTM), Nuvasive (NUVA)

Materially Weaker: Geospace Tech (GEOS), Mindray Medical (MR), Volcano (VOLC), Invacare (IVC), Mettler-Toledo (MTD)

Market Barometer

The average Value Line low total return forecast is now 4.2%, up from 4.1% last week.