When BLACK ENTERPRISE profiled the GrassRoots Investment Group L.L.C. in July 2002, the club consisted of a group of energetic, innovative investors who were relying on their individual expertise to improve their profits. “We have people who are in law school, who are engineers, some who work for Internet companies, who own their own businesses, as well as some in banking and sales, and we lean on those individuals,” says founder Phillipe Tatem.
Although GRIG had a rocky time adjusting to a volatile market that slashed its portfolio’s assets from $200,000 to $118,000 during the tech-wreck of 2000 and the recession that followed, the original idea of relying on the business savvy of its members has proven to be a winning strategy. Since 2000, the group has reorganized and turned that $118,000 into a portfolio worth more than $1.3 million that includes equities, real estate, and business operations such as a car wash and detailing franchise. All told, the club has had a 22% return over the last two years.
GRIG accomplished this by concentrating on making its members better investors and setting up a system that capitalized on the business knowledge of its members. This has translated into investment choices that have a greater chance of success. Instead of having every investment idea vetted by every member of the club, the club now has five distinct “operating teams.” Each team finds cash-generating opportunities with equity ownership and then delivers a comprehensive report on the opportunity to the general membership. A member of the management team sits on each of the other teams to make sure the goals of the team are reached.
As international events make the investment environment more challenging, coming to a consensus as an investment group has become more difficult than before. Adopting innovative approaches is one way growing investment clubs can improve their success. In fact, clubs of all sizes can implement strategies that strengthen investment habits among members and increase overall portfolio returns. Here are some secrets that successful investment clubs have used to do just that.
SUCCESS STARTS WITH INFORMATION
“The best investors are the best informed,” says Kenneth Janke, chairman of BetterInvesting (formerly the
Successful clubs understand that investment success takes time and perseverance. It requires investing small amounts regularly over the long term despite market fluctuations or cycles. “Getting rich is not something that happens overnight,” says Janke. “Some of the clubs that go out of business early do so because they try to trade stocks every month. Even the pros don’t do that.”
According to BetterInvesting’s 2005 membership survey, the average investment club has a portfolio worth $97,441. The clubs surveyed had an average rate of return of 4%, compared with 4.7% for the Vanguard Total Stock Market Fund. However, over the long term, they outperformed the fund. The 10-year average total return for clubs was 16.1%, compared with 9.5% for the Vanguard Fund.
As a member of a 66-year-old investment club in Detroit, Janke has witnessed the benefits of investing over the long run. When one of his club’s original members died in August 2005, after more than six decades of investing no more than $50 a month for a total of $13,800 out of pocket, the club paid his estate $1.6 million. “If that doesn’t exemplify the principles of regular investing for the long term, I don’t know what does,” Janke says.
GRASSROOTS INVESTMENT GROUP L.L.C.
Founded in 1997 as a general partnership, GRIG became a limited liability corporation at the end of 2000 to provide cash dividends to members every quarter. The L.L.C. status requires more extensive internal audits, so the organization’s streamlined operations structure makes business sense all the way around. GRIG now has 39 members across 10 states and Korea. New members make an initial contribution of $10,000, with another $10,000 due over a 15-month period, and they pay monthly dues of $175 each.
Tatem explains that splitting GRIG up into five operating business teams allowed the club to:
Maximize members’ skill sets and
Reduce investment risk by having teams conduct a higher level of due diligence.
Increase the return on investment (ROI) by selecting a key group of members to handle initial groundwork and negotiation on potential opportunities.
GRIG uses technology to communicate. “We post all information related to meetings, presentations, general information, and objectives on our Website,” says Tatem. “We have teleconferences to evaluate deals within the teams. The teams get final approval at the general meeting via online vote. We conduct online surveys to monitor how teams are meeting objectives and how the leadership within the group is performing.”
The new structure has proved successful; the organization’s asset value increased from $200,000 in 2002 to more than $1.3 million by 2005. However, growth hasn’t come without problems. Marck Dorvil, senior partner and a member of the Ventures team, says GRIG acquired a $20,000 equity stake in a copy center in Florida in late 2001, but lack of expertise on the part of copy center managers quickly forced GRIG to withdraw, losing about 60% of its investment.
After evaluating lessons from its first attempted deal, Dorvil says GRIG’s Ventures team proposed investing in a Carnett’s Car Wash, the largest full-service car wash and detailing franchise in Atlanta. The management team reviewed the deal, attorneys reviewed the contract, and financial analysts examined cash flow. GRIG paid $130,000, or 10%, of the cash requirement for the franchise and they borrowed the rest. The business, which sits on a two-acre site and is valued at $3 million, is one of Carnett’s 14 franchises in the Atlanta area.
Carnett of East/West Connector, opened in Oct. 2005. It grossed $186,000 in the first three months of operation.
GRIG’s other investments are flourishing as well. The Market Investment team has more than $164,000 invested in an array of securities. And GRIG’s Real Estate team invests with private investors who purchase single-family, multifamily, and commercial properties with the goal of generating a monthly cash flow of $5,000. Between 2003 and 2004, the team invested in about 15 short-term deals that averaged a 100% annualized return. “Money attracts ideas,” says Tatem. “We get a lot of people coming to us with opportunities instead of us seeking opportunities.” That truly is a sign of success.
OMGEN L.L.C.
Financial empowerment has been the main focus of the members of OMGEN L.L.C. since the club was founded in 1997. With a portfolio of 70% in real estate, the investment club boasts a $31,000 cash return over nine years.
The group owns and collects rental income from two properties; a four-bedroom home in Stockton, California, that it purchased for $150,000 in cash in 1999, and a $230,000 four-bedroom home in Merced, California, an affluent area near the University of California. The Stockton home is now valued at $350,000 and the Merced home has appreciated to $387,000. The group then entered into a partnership with Red Leaf, a black-owned, Oakland-based real estate investment company that buys, refurbishes, builds, and sells properties. OMGEN owns a 15% stake in the business it purchased for $50,000 in 2000.
The club began as two groups o
f 42 parishioners from local churches who had received instructions on investing and building wealth from a nonprofit organization called Power Learning System. OMGEN co-founder Larry Childress says the groups, originally called Omni and Genesis, banded together, with members making initial investments of $1,000 each and minimum monthly contributions of $50. Members are also committed to investing an additional $1,000 each year.
With Omni and Genesis merged, OMGEN’s other co-founder, Chester Hutchinson, says they started looking at investments at the height of the dot-com frenzy leading up to the tech wreck of 2000. The organization’s stock strategy was to buy companies that could yield the highest returns for its membership. Tech stocks were hot, so OMGEN aggressively bought shares of technology companies such as IBM, Cisco Systems, America Online, and Amazon.com to achieve higher gains over a short period of time. The club was riding high until the market softened and tech stocks declined. OMGEN quickly liquidated much of its portfolio before absorbing substantial losses.
To diversify its assets and avert another stock scare, OMGEN used the earnings it protected by selling securities to pursue real estate investments through a separate company, OMGEN
II L.L.C. “We started the L.L.C. comprised of those members who believed that real estate was a good investment and a way to diversify our portfolio,” says Childress. Members who disapproved of real estate investments soon left the organization and today all members of OMGEN are invested in the real estate portfolio.OMGEN members credit its advisory board’s ability to make sound investment deals with much of its success. Hutchinson says the group has placed a great deal of faith in the eight-member committee that includes a certified public accountant and other corporate executives. Members have given the advisory board full autonomy to make investment decisions on their behalf. So far, they’ve grown a portfolio that has assets valued at $850,000, even after cashing out the shares of more than 20 members over the years. “We have mutually agreed to what we want to accomplish, and the board strictly adheres to our mission statement,” says Childress. In fact, OMGEN is spreading its message of community development and economic growth by providing free financial seminars to community residents and scholarships to students.
OMGEN’s Advice:
Advice forInvestment Club Success
Leverage group knowledge. All members may not be financially able or have the business savvy to complete a deal, but leveraging the best everyone can offer in experience, passion and commitment will propel your group to new heights.
Challenge the “status quo.” Incorporate a regular review of group objectives, processes and goals into the club culture.
Be inclusive and entrepreneurial. Welcome the views of all members, strive for transparency and drive accountability and ownership at every level.
GRIG’s Advice:
Agree on financial strategy. Mutually agreed upon objectives that are strictly adhered to make it easier to select opportunities that are right for the group.
Establish an L.L.C. Creating a Limited Liability Corp. makes entering into business ventures and real estate deals easier to manage and maintain. Once an L.L.C. is established, apply for credit to help facilitate business deals.
Select members carefully. Create an application process that thoroughly assesses the financial commitment of members. Individual members with common goals can help foster a sense of trust and respect for one another.