PROVO -- Buying stocks and then holding on for the ride has proven successful for an investment club made up primarily of Brigham Young University students.
Since its founding in October 1998, the Providential Investment Group has seen its initial investment of $10,500 grow to more than $41,600 -- or 208 percent -- as of Monday, said Daiju Kohml, the group's leader.The first full year -- from Jan. 1, 1999, to Jan. 1, 2000 -- the group saw a growth rate of 184 percent, Kohml said.
He says the key lies in buying the best stocks and letting go of stocks that aren't performing well. That aggressive strategy has resulted in some mistakes, Kohml said, but the gains have more than made up for the errors.
The worst mistake was selling a seemingly lackluster stock that later went on to phenomenal gains, said Jason Petersen, who is the club's vice president of finances. "We don't make many mistakes."
Providential buys only a handful of stocks at a time, watches the performance of each one and quickly sells if a stock's performance fails to meet club expectations.
Sometimes that means selling at a loss -- but the loss is made up by quickly purchasing what the club hopes will be a better performer, Petersen said.
"We don't buy more than six stocks. That forces us to keep the winners and get rid of the losers," he said.
Too much diversification dilutes the returns, club members believe, because the losers sap the returns from the winners.
Members of the club meet monthly, pitch stocks that they've researched and vote on the stocks the club will buy or sell. Because club members are students, they usually have little money to invest.
Members are required to buy club shares for a minimum of $25 a month, which is invested much like a mutual fund. Shares are $38 each, up from an initial $10. That increase reflects the group's growth, Kohml said.
The club keeps records of individual profit and loss. When a member wants out, the club buys back the shares for the individual's net profit.
Only two members have quit so far, leaving because they graduated, Petersen said.
The club trades over the Internet and doesn't use a stock broker. The return is better, Kohml said.
"If a stock broker can get you a 20 percent return," he said, "he's happy."
Kohml believes it's unwise to buy and sell rapidly as the price fluctuates. Not only may that strategy cause investors to lose in the long run, they also have to pay income taxes based on short-term capital gains, which could be as high as 39.6 percent.
If a stock is held for more than a year, income taxes are based on long-term capital gains of 20 percent.
Personally, he turned $7,000 he borrowed from friends and relatives four years ago into more than $300,000, he said. Recently, he sold much of it to buy a home.
Providential's winning picks currently are all technology stocks: Qubes, a technology tracker stock (QQQ); Gemstar (GMST); RealNetworks (RNWK); Qualcom Inc. (QCOM); and JDS Uniphase Corp. (JDSU). Stocks it has recently sold include Dell computers (DELL); Advanced Fibre (AFCI) -- now seen as an error; ExciteAtHome (ATHM); and AOL.