Beyond the Crayola Challenge

In my last column, (Finding Great Companies in the Most Likely of Places), I encouraged your club to take on what I called the Crayola Challenge. Yes, I not only offered up the challenge, but I also actually assigned homework! Each club member was to identify three companies as possible long-term investment candidates for the club's portfolio. And there was a twist: though you were free to choose from any of the thousands of publicly-traded companies, the company's business -- product, service, or both -- had to be something you could illustrate for your partners in crayon.

Yes, that's right. I said crayon. This was not just a crazy idea that I dreamed up, but rather, this advice came straight from the mouth of investment guru Peter Lynch, whose mutual fund management results proved time and again that this maverick approach, well, it works.

So, how'd you do? If your club members took the challenge (and the homework assignment) to heart, you likely spent a good deal of time at your last meeting engaged in what felt like several rounds of the game Pictionary. It was probably a lot of fun and, for those of you who aren't so artistically-inclined, even a bit daunting. That said, what I'm really interested in is the answer to this question: Did the end justify the means?

If the experiment was a success, your club generated a list of potential stocks to study. Some of the ideas likely overlapped. Some of the ideas may have been off-the-wall. Still others may now seem so obvious that you don't know why you hadn't thought of them in the first place.

Back to the Drawing Board
So, where does your club go from here? If you haven't done so already, I'm going to recommend that you quite literally go back to the drawing board. At your next club meeting, list the names of the companies that the club generated on a dry-erase board or easel. If a recommendation for a company was made by more than one club member, be sure to indicate that -- perhaps by adding checkmarks after the company's name. Those companies may merit extra consideration.

Now, ask each club member to choose one company from the board that he or she will research before the next meeting. As you are making your selections, it's a good idea to consider companies that represent different industries, i.e., restaurants, insurance, air travel, as well as size: small (market capitalization of $250 million to $1 billion), medium ($1 billion to $5 billion), and large ($5 billion plus). (A company's market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. But don't worry; you won't have to get out your calculator. Each company's market capitalization/size can be located on the left-hand side of an investor report, such as Value Line report, on the company.)

Before you meet again, ask each member to gather and study the following information:
*The data report on the company (use StockCentral.com's Data Service under the "Data" tab)
*The company's annual report
*Two or three recent articles on the company from a trusted resource such as a financial newspaper or magazine

Then, at your next club meeting, ask each member to give a brief overview of the company he or she chose, along with a recommendation as to whether the stock is worthy of additional consideration. Keep in mind that this is just an exercise and that, due to the time constraints of the monthly investment club meeting, it really isn't feasible for each member to make a stock presentation each month. For this reason, most clubs rotate the responsibility of stock study and company updates among members.

Some clubs have an official Stock Selection Committee made up of three or four members whose job it is to follow the stocks in the club's portfolio and to present monthly updates. Membership on this Committee typically rotates between members on a set schedule, such as quarterly, so as to spread both the education as well as the work load among members.

Other clubs assign members to follow a certain stock -- particularly if that member is the one who brought the company to the table. One word of caution on this technique: club members who select and then follow a stock over a period of time may become "emotionally attached" to it and find it difficult to remain objective. For this reason, clubs will often rotate follow-up on the club's holdings among members.

Whatever method your club chooses, the Crayola Challenge and ensuing exercise should have generated a number of companies for serious consideration. Make a list of the strongest candidates, conduct any additional research needed to answer any and all questions on the companies raised by the club's members by the next meeting, then, at that meeting, take a vote and choose a stock to purchase.

Taking the Plunge
Yes, you read that right. I said purchase. Some new clubs wait for months or even a full year before buying that first share of stock. That's one way of operating a club, but it probably isn't the best way. Truly, a hands-on approach is a great way to learn about anything, including investing. And, buying that first share of stock for the club's portfolio can generate an atmosphere of enthusiasm and pride as the members realize partial ownership in a company. Believe me, purchasing a Coke from a vending machine or a burger from McDonald's takes on a whole new meaning after you've become a shareholder.

Next time, I'll discuss the plethora of ways to buy shares of stock and offer some food for thought that will help your club to decide which method is the best match. In the meantime, I'd love to hear your feedback as to how this experiment is working for your club.