A Walk Down NAIC/BetterInvesting Lane
I recently presented at the 70th BetterInvesting National Convention (BINC) held in Dallas from June 23rd to 26th. Provident has been a long-time supporter of BetterInvesting (www.betterinvesting.org) and owes its existence to co-founder Ralph Seger, a tireless volunteer and board member who thought BetterInvesting principles could be applied to managing investment portfolios.
I was a member of an investment club in the 1990’s but didn’t know much about the organization behind it that, at the time, was called the National Association of Investors Corporation (NAIC), later renamed BetterInvesting. At BINC each of the more than 300 attendees received a book written by former Detroit Free Press newspaper columnist Mike Wendland. The 2001 book, From little acorns grow: MAIN STREET MILLIONAIRES, was a quick read and a fascinating historical account of NAIC/BetterInvesting.
The idea for NAIC came from a Detroit-area securities analyst, George A. Nicholson, Jr., a former football player under Fielding H. Yost at the University of Michigan and graduate of the Harvard Business School. During his time in Boston, he learned about clubs of individuals who got together to buy stocks. Nicholson was deeply concerned about the public’s lack of knowledge about securities and how to select stocks for investment. He thought that investment clubs would make an excellent program for mass-education of individual investors. I quote from the book a couple of his writings:
The great things in life cannot be bought. The heart of our movement is democratic capitalism. This is far more than the widespread ownership of industry for it includes, as well, a flexible concept of capitalism and socialism and the concept of an increasing number of economically stable families.
Without widespread ownership, public apathy is likely to develop. Public apathy abroad has led to government ownership of big business, competition has given way to government monopoly and high-cost inefficiency; government monopoly in the end has resulted in state control of the worker. However, economically stable families will give new meaning to what the free world can do.
Since his Harvard days, Nicholson dreamed of an association of many investment clubs, made up of everyday people who would own a stake in the nation’s leading corporations. He believed this would make for a stronger America.
Nicholson thought that if his idea was going to work it would need to be developed and brought to life through others. He convinced his subordinate, Fred Russell, to found what would eventually become the Mutual Investment Club of Detroit (MICD) in 1940. Through Russell, he provided the group three principles that would eventually form the basis of BetterInvesting philosophy:
1. Invest regularly, without trying to guess which way the market is going.
2. Make money on money by not taking out dividends or interest and letting it compound.
3. Invest only in companies that seem to offer the potential to double in value every five years.
In addition to these principles, Nicholson created what he called a Stock Check List for the club. From his securities work he reached two conclusions. One, for a company to be worth a lot more in the future it had to grow its sales and earnings per share. Two, it had to have a manager or executive with the knowledge, skill, and drive to both move the business forward and make money doing it. This philosophy would eventually become the basis of the Stock Selection Guide (SSG), a tool that can quickly examine a stock’s history of growth and valuation to help determine its prospects for continuing its previous success.
While Nicholson is credited with NAIC investment philosophy, the “Father” of NAIC is Tom O’Hara, one of the founding members of the MICD. A Wayne State graduate who always wanted to be a businessman, O’Hara loved studying the market with his investment club and had received positive feedback for the idea of an association of clubs as he talked to fellow soldiers during his war service. He also had proof that the concept worked to create wealth as in the Spring of 1946 the MICD portfolio was worth $9,844 on a total investment of $5,080.
Slowly and methodically, Nicholson and O’Hara created NAIC out of three investment clubs, one of which was MICD. The structure of the organization is a Trust, led by a group of Trustees, and a corporation with members electing the directors whose purpose is to serve the member’s needs while running the business. Volunteers, with their own Board, would provide the backbone of the organization and help spread its teaching and knowledge about how to form and manage clubs. One of the early volunteers was a young engineer, Ralph Seger, who would later co-found Seger-Elvekrog, Inc., now Provident Investment Management.
In its early days Tom O’Hara, with the support of his wife Eleanor and his children, crisscrossed the country talking up investment clubs. New clubs mushroomed, eventually causing the workload to become too much for a part-time role. NAIC became a business, charging for membership and making O’Hara the very first employee. As the organization expanded O’Hara divided his time between promoting NAIC and running the back office, but again growth facilitated expansion.
Enter Ken Janke, who would eventually become known as “Mr. NAIC.” A U.S. Army golf instructor, Janke worked for Bob Berger, an original member of MICD and manager at Household Finance. Berger recommended Janke to O’Hara when the former turned down a transfer to Texas. Janke quickly asserted himself as Office Manager and demonstrated his business acumen by securing new revenue sources and learning how to invest from O’Hara’s seminars and frequent meetings with Nicholson and O’Hara. Eventually Janke would become President and CEO while O’Hara took the Chairman role.
The 1970’s brought with it inflation, stock market selloffs, and poor returns. I found Nicholson’s take on inflation quite interesting, particularly his observation that worldwide governments pursued a “stop-go” economic policy. The U.S. “stop-go” period started in the late 1960s and ended with Fed Chairman Paul Volker’s ultra-high interest rates that ushered in the severe recession of the early 1980s. First, governments tried to “stop” inflation by raising interest rates to slow business. This appeared to work, at first, as the economy cooled, and inflation slowed. Then, governments reversed position and suddenly lowered rates until economic growth started to “go” again and inflation rose. Nicholson taught NAIC members to look for this “stop-go” pattern, recommending caution as rates rose and investing ahead of rate cuts. Today, this advice seems timely as the Federal Reserve and other worldwide central banks are raising rates to “stop” their economies and bring down inflation while stock markets try to figure out the “go” point when central banks start cutting rates to spur growth.
NAIC received national acclaim through the celebrity of its most famous club, The Beardstown Ladies. Founded in the small town of Beardstown, Illinois, by Elizabeth (Betty) Sinnock and 15 friends in 1983, the club promoted its market beating returns following NIAC principles over many years. The club became a national sensation after it published the 1995 book The Beardstown Ladies Common Sense Investment Guide. Unfortunately for the club, a detailed audit by Price Waterhouse uncovered a simple mistake that inflated investment results, leading to national criticism. Even so, over the 1984-1993 period The Beardstown Ladies saw annual returns of 15.3% versus 17.2% for the S&P 500. To the relief of NAIC, the bad press for the mistake didn’t have much of an impact on the organization as club membership continued to grow.
I joined Provident (formerly Seger-Elvekrog) in 2004. I never got the chance to meet George Nicholson, Tom O’Hara and Ken Janke, but everyone that knew them speak in glowing terms. Over time I’ve gradually contributed more to the organization, including co-authoring, with Scott Horsburgh, BetterInvesting Magazine’s Repair Shop column, an analysis of an investment club’s holdings. Even though I never met George Nicholson I feel a connection to him as he was the original author of the column.
Today, BetterInvesting continues its mission of educating the public through its thousands of members, reinforcing George Nicholson’s belief that democratic capitalism is the best system to build strong and stable societies.
Dan Boyle, CFA