(MONEY Magazine) – Q&A

GRANDMA'S STOCK PICKS

Warren Buffett (see the story on page 106) has nothing on a certain group of women in Beardstown, Ill. (pop. 6,000). Ever since forming an investment club in 1983, these 16 ladies, ages 41 to 87, have cooked up average annual returns of 23%, vs. 15.9% for the S&P 500. In their new book The Beardstown Ladies' Common-Sense Investment Guide (Hyperion, $19.95), they share their investing secrets, plus down-home recipes, such as Shirley's Stock Market Muffins (guaranteed to rise). Betty Sinnock, age 63, the club's treasurer, gave Money senior writer Penelope Wang a few pointers:

Q. What explains your club's extraordinary success?

A. Discipline. We invest regularly, buy growth companies and stay diversified. We also do our homework--we research all stocks ourselves and we invest only in companies we know something about.

Q. How do you choose stocks?

A. We focus on companies with the potential to increase earnings 15% a year or more. We also look for low debt and strong management. To find good stocks, we study the Value Line Investment Survey [available at many libraries; subscriptions cost $525 a year; 800-833-0046] to determine the best companies within the best-performing industries. Our members also sometimes get an idea from a store or product that they like. We then find out which company owns it and analyze the stock using the National Association of Investment Clubs stock guides [$35 a year; 810-583-6242]. We buy a stock only if its price/earnings ratio is below its five-year average.

Q. Any recent hits or misses?

A. A recent winner has been Wolverine, a Rockford, Mich.-based manufacturer of work boots and casual shoes. We're up 184% since 1992 and are still holding it. On the down side, we currently have a 40% loss in Cifra, the Mexican retail holding company, because of the peso devaluation. But we think the company has excellent growth prospects, so we're going to hang on.

Q. How do you decide when to sell?

A. Each year we review our portfolio to see if analysts still foresee strong earnings growth for our stocks. If they don't, we sell. We will also review a stock if it moves to the upper end of its historical trading range or if there's major news that affects the company. Generally, we don't make many trades in our portfolio.

Q. What has your club bought recently?

A. One purchase was Heilig-Myers, a furniture retailer based in Richmond. The company is expanding through acquisitions: It opened a store in Beardstown, which impressed us when we visited it. The club also bought Walgreen, based in Deerfield, Ill. Value Line ranked drugstores as a fast-growing industry, and cited Walgreen as one of the best-positioned drugstore chains.

Q. Any advice for people who want to start an investing club?

A. Find people with like-minded investment philosophies to avoid potential conflicts. And you should have fun. That's what has held our group together over the years. We meet regularly just to socialize at a restaurant or for a potluck supper. Our club has become a second family.