Monitoring Committee for Emergencies
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Monitoring Committee for Emergencies A reader raised the question of whether or not a monitoring
committee should be set up to react quickly to unfavorable news about one of the
holdings of an investment club.
This would only be
for an emergency situation. We were thinking of a core group who would
be responsible
to contact all the members in a short period of time and even entrusting that
group with the power to take charge should some emergency occur. Can you
give us any advise on this? Has this kind of thing ever been
done before in other investment clubs.
Yes. Many clubs employ this technique. Many
other clubs have considered it and decided that it would not be a good idea. So,
I have to give you an unequivocal 'it all
depends'
<g>. The argument for setting up such a committee goes
something like this. An investment club meets only once a month so it is very
difficult to respond quickly to bad news about a company in which the club holds
a position. If a small group were to monitor the situation, they could call all
the members and get a verbal commitment to sell, or, in an extreme emergency,
they could act on their own and take action directly.
The argument against goes something like this. It
is true that an investment club by its very nature can not respond quickly to
bad news, so why try to do it. Actually, it is doubtful that individuals are in
a position to react quickly enough to bad news to take advantage of the
situation. The usual case is that 'insiders' get the bad news and start a
sell-off. Individual investors then react and continue the selling, with the
result that the stock takes a big hit. Later, saner opinions prevail and restore
the price to something like what it was before the individuals started to sell.
Investment clubs adhering to NAIC principles are in for the long pull. If they
pick good companies with good management, the stock will do well over the long
run, and they ignore peaks and valleys in the meantime.
As you can see, there is merit to both
arguments. I tend toward the latter view, but would hasten to admit that there
is no, one correct way to operate an investment club. For what it is worth, a club to
which I belonged voted another member and me a committee of two to react quickly
to bad news about any of our investments, including the right to sell. I was not
in attendance at the meeting the vote took place, and quickly declined the
honor, as did the other member.
I am familiar with another instance where an
investment club with such a monitoring committee sold Apple on bad news, only to
regret it later on when the stock more than recovered.
As you can see, I am leaving it up to you. I hope
this has been helpful in coming to a decision on the matter.
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