Reining in Pushy Members, and Making Better Buy and Sell Decisions

Dear Doug:

- Rhone

Dear Rhone:

Your club seems to be suffering from a common malady: One Overbearing Member Syndrome (OOMS). The major symptom of OOMS is the presence of a single member who attempts to undermine the club's democratic principles through bullying tactics, who isn't happy unless things go her (or his) way--and who lets everyone know about their displeasure when, if ever, the club acts against their wishes. OOMS is often fatal for the club if not treated quickly, so it's important to find an effective remedy.

In most cases, the key to resolving OOMS is structure. In the example you provided, your club runs up against OOMS during votes to sell stocks. Here, you have two problem areas on which you should focus: first, your club's meeting structure and voting procedures, and second, your club's investment policies (particularly when it comes to selling, but also with regard to buying new shares and evaluating your portfolio).

Let's start by talking about your club's meeting structure. Every meeting should follow a set agenda prepared in advance by the club's president. Your club probably follows a general format for each meeting, but some clubs find it useful to require, or strongly encourage, that any business regarding the club's portfolio be specifically placed on the agenda in advance of the meeting. If a member believes that the club should discuss buying or selling a stock, then that member must let the president know before the meeting. The president can then put the business on the agenda for discussion at the meeting, or if the agenda is already too crowded, the president can defer the item until the next month's meeting.

This procedure tends to help meetings run more efficiently, ensuring that they don't stretch endlessly into the night and making it difficult for any one member to dominate the course of the discussion.

Ideally, the agenda should be distributed prior to each meeting, allowing members the chance to review each stock up for discussion on their own before they come to the meeting. The more information that your club members bring to the discussion, the better your club can make solid buying and selling decisions.

The standard guide for running club meetings of any sort is Robert's Rules of Order. To follow Robert's Rules to the letter, you must conclude discussion and take action on a motion before moving to the next item. Many clubs, however, leave portfolio votes until the end of the meeting, after all items have been discussed. At that time, they can review all the motions to buy or sell that have been made and look at them in the context of the effects on the club's overall portfolio. For instance, the club might vote on "sell" decisions first, and then move to the "buy" decisions knowing exactly how much cash is available. Considering all the buy and sell decisions at once also allows clubs to see the effects of changes in balance and diversification, which could also affect how members vote on any particular item.

In the case of your club, I think that establishing a concrete investment policy statement would be helpful. An investment policy statement can be very general or quite specific, depending on what your club wants. It can also change over time, especially if you're a newer club. As you gain experience, you can modify your statement to clarify and expand it.

It sounds like your club is basing its sell decisions largely on the opinions of one member, rather than on the group's opinion of the company's fundamentals and future prospects. I believe that every club should be able to articulate their reasons for buying or selling a stock, and should have clear procedures in place that define how the club considers those actions. For instance, some common reasons that long-term, buy-and-hold investors might consider selling a stock include a deterioration of fundamentals, a change in management, or increased competition.

Once a stock starts to show signs that there are valid reasons to sell it, your club should have a standard practice for how one member explains those reasons to others. No club should buy or sell a stock without first looking at a completed Stock Selection Guide (SSG), for example. You must also consider the impact of the sale or purchase of a stock on the overall portfolio balance; an imbalance caused by buying or selling could indicate the sectors or sizes of companies you should consider for new purchases. Before selling a stock, you should also have a completed SSG to review, as well as the Portfolio Evaluation Review Technique (PERT) form and graph developed by NAIC. Of course, you can't complete an SSG or PERT in a few minutes during a club meeting, so advance preparation is necessary--and spur of the moment decisions during a meeting can be avoided altogether.

Many clubs require that any proposed sell decision be accompanied by a suggestion for a better use of the funds made available by the sale. In other words, don't think of selling a stock--think of replacing it instead. It could be that you are replacing it with cash since you believe that collecting money market interest will more profitable than holding the shares. Since the stock market is so unpredictable in the short term, if you're uncertain about a stock's prospects, then holding that disappointing stock for a month or two until you find a replacement might actually work to your advantage. In my club, when we have decided that a stock wasn't living up to our expectations, we have often tagged it "AFC" (Available for Cash) rather than not selling it immediately. We only sell such stocks when we find a suitable replacement at a future meeting.

I think your club should spend some time articulating your investment policy statement, memorializing in writing general reasons to buy or sell a stock, as well as what to require (such as a completed SSG) before starting to discuss a stock during a meeting. This kind of structure and discipline will help your club's overall returns--as well as reducing the impact of OOMS.

- Doug