Investment Clubs

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Stock MarketEvery month, my wife and some of her friends go to one of their houses, fires up the fondue set, and has “book club.” They usually have a book picked out, since it’s book club and all, but the whole event is more about socializing than it is about books (there’s nothing wrong with that). So, to counter this, the guys periodically have scotch night. We dispense with the pleasantries of calling it something else, it’s really about a bunch of guys getting together, enjoying some scotch, and hanging out. I don’t want to change that but I’m thinking we need a better counter event, something that at least sounds as productive as book club, and I fell upon the idea of starting an investment club.

I’ve never been in an investment club before but ever since I started investing in the stock market a few years ago, I’d been intruiged by the idea of starting or joining an investment club.

Investment Club Basics

Investment clubs can be as complicated or as simple as the members want it to be. You can get as involved as creating a partnership of the members, pooling funds, and collectively making decisions on which investments to put the club’s funds into. You can also go to the other extreme, simply getting a few friends together to talk about investing with no structured “partnership” and no pooled resources. For this posts’ purposes, I’m going to talk about the first kind of investment club where members has a vested financial interest.

In fact, I want to go as far as saying that you should only join an investment club if members have to put in a little of their own money because that represents a vested financial interest. It can be as little as a few hundred dollars, but enough so that members are willing to be vested in the process. If there is no financial interest, members have no incentive to make the club meetings anything more than a social hour. Having nto had experience in an investment club, that’s my opinion but I could be wrong.

Benefits of Investment Clubs

  • Shared wisdom: The biggest benefit of investment clubs is the shared wisdom of your small crowd. Whereas you only have time to analyze a number of companies any one week, you can multiply that by the number of members you have. The depth of your research is affected by how many companies you want to look at, by restricting it to only a few, you have the luxury of going as deep as you’d like.
  • Diversified expertise: Everyone in your club will have different interests and hobbies, which can help in analyzing companies. Perhaps you have a golf junkie that can tell you that a particular company’s plan to come out with a hot new driver is going to be a disaster. Perhaps you have a home theater guru who thinks the latest HD TV technology is going to flop. While you can’t make decisions based on that sort of information, it’s certainly better to know, from someone would would be a potential customer, than to not know. If you don’t play golf, you won’t have easy access to that sentiment.
  • Public speaking practice: In most investment clubs, members will be asked to analyze and report on a variety of companies. While you’ll probably be “publicly speaking” with your friends, it is an opportunity for you to practice your public speaking skills in a very unassuming, low-pressure scenario (depending on your investment club members!). Your presentation details will be scrutinized, analyzed, and questioned but all in a very low pressure scenario and will help polish your skills in a way only practice can.
  • Forces you to analyze your decisions: You can make decisions in the safety of your home all you want, without ever putting them up to public scrutiny. You can win in the stock market and tell your friends or you can lose and then keep it to yourself; that ability to hide makes your decision making weaker than if every choice had to stand up to the scrutiny of your peers. That alone will increase the rigor of your analysis and force you to be more deliberate in your decision making.
  • Improve your investment research and analysis skills: By virtue of having to research and analyze companies, then present that information, you get more practice and your skills will improve. Even if you never invest a dime, your ability to analyze a company will be much stronger and you will be better should the time come.

Drawbacks of Investment Clubs

  • Lack of expertise: If no one in your club has experience investing, you’ll have a steep learning curve and you might make some bad decisions that can derail your club before it starts.
  • False sense of security: This ties a little into the previous reason of lack of expertise but sometimes your club may vote to invest in something where people defer to the research of the person presenting it. Only one person is familiar with it, they made a good case, so the club simply “goes along” without much scrutiny. What seems like a group decision is really one person’s decision. This happens a lot more often if you have only limited investing experience.
  • Quite a bit of paperwork: Investment clubs, because financial transactions are involved, often require some paperwork.
  • Takes time: It takes quite a bit of time to do research on a company, especially if you’re going to risk your friends’ money. It’s one thing to read a few reports from analysts, scan the financial statements, and buy a stock; it’s another to risk your buddy Johnny’s money on something that could potentially go down in value. You probably don’t want to be the person that recommends a stock, only to have it fall 10% the next day. While it is a group decision to invest, it’s in part based on your research and so you will want to be thorough. Thorough takes time.

While my plans of an investment club probably will fall on deaf ears (I don’t think many of my friends are interested in that sort of thing), I’m curious to hear about everyone else’s experiences. are you part of an investment club? If so, you have any ideas or lessons learned you can share?

(Photo: thewalkingirony)

{ 12 comments, please add your thoughts now! }

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12 Responses to “Investment Clubs”

  1. Here’s how my investment club would work:
    Initial buy-in – $1,000.
    Each week one company is researched. Everyone does the analysis they prefer (fundamental, quantitative, technical) and presents their findings. Once everyone has presented the floor is open for discussion. The meeting will culminate with a decision to invest or not, and how much of the portfolio should be invested if the vote is in that favor.
    A simple written contract between all parties would hold up in most states.
    Someone call pull out at anytime, but their cut is reduced based on the transaction costs required to cash out their investment.
    Too bad I don’t have $1,000 or enough friends I trust to do the research. It could be fun down the road though.

  2. I was in an investment club in college managing over 6 figures.

    You hit it right on with the positives. Was good to hear how different people look at a single investment.

    The problem was we could never agree on anything. Each vote would be a 55-45 vote. Our portfolio changed strategies from stocks to ETF’s a few times. Overall I still learned a lot from managing money that’s not my own.

  3. frugalCPA says:

    I’d worry more about the friendships than anything else. Money can do weird things to people, especially if they feel like someone else is responsible for their losses.

  4. dong says:

    I would not do investment club that actually pools money, the idea of club that discusses investing is however a good one.

    I ran an investment club once with pooled assets. The amount of paperwork, tax filing etc really made it not worth it. I didn’t mind the accounting, but the tax filling were a nightmare. The appropriate registrations to make it all legit were worse. I folded it a couple year ago. However, I’ve been thinking about booting it up again just purely as a discussion group for a few friends to discuss investing ideas.

  5. Jason R says:

    I’m currently in an investmetn club. We each contribute $100 a month, and make a monthly decision. It’s all made easier by following a buy and hold method…

    The paperwork really wasn’t bad at first, but we’re switching from Zecco to Trade king in response to the fee changes, and that’s taking us longer than we would like.

    The pooled research is great when it happens, but a lot of the time half or more of the group doesn’t do their share. We’re pretty relaxed though, and even the folks not doing the research I think are learning a lot, so it’s all good. It helps too that although we’re losing money we’re beating the crap out of the S & P, which we chose as our benchmark.

  6. Mr. GoTo says:

    I was in an investment club for 7 years. We did well on the investment side but finally shut it down. Why? Because most of the members did very little, leaving the management and research to a handful of us. After having been forced to be the treasurer for 3 years straight, I said enough.

  7. I have seen a few of my friends get into these clubs and agree its good for those starting off to collaborate with others with a larger pool of money to invest and thereby dilute the risk ratio.

    However, like some have said, only a handful end up taking the roll of investors while others just seed money.

    Personally, I have started similar thing withing a sub-company that I created. I sold shares to friends at a set price and that would be their seed money. Since they want me to do all the leg work and investing, I take a commission and report quarterly how their money is doing. Profits are paid out twice a year and its worked fine so far. Its a lot of work but atleast I know I’m being compensated for my actions.

    For other investors, finding stocks and strategies are not hard to do if you are willing to put a little effort into it. Rather than joining a club and leaving the burden of having your money in a place you might not want it to be, follow some general sites/blogs, and invest your money and watch it grow. Its not hard!

  8. Tom says:

    I think starting an investment club is a great idea.
    The ‘experts’ don’t always have the answers and a club is a great idea for people to get proactive with their finances.

  9. I think another main point is making sure every single person in the club has the same risk tolerance, investment goals/timeframe, investment style, etc. Otherwise, you could end up with people unhappy with the investments.

    i.e. value investors should stick together, growth-at-a-reasonable price investors should stick together, modern portfolio theory asset allocators stick together.

    apply the same methodology to risk tolerance: high, medium, low.

    So many things can affect what a collective group invests in and it can get tricky with tons of people, so you want to make sure you’re all on the same page. (25 yr olds should probably not be in a club with 80 yr olds due to equity vs fixed income debate, investment timeframe, and stuff like that)

  10. HosTess says:

    Hi Jim! Since you’ve added so much to our show, I thought I’d contribute to your effort here. I did a whole year-long series of stories following three different investment clubs. Of course it was waaaaaay back in ’07 when people actually MADE MONEY (!) in the stock market. But I think it’s still interesting, nevertheless, to hear how different clubs work. Here’s the website with all of our stories:
    The ladies of the Virginia club were, I think, the most fascinating in terms of their learning process. I talked with them last December (’08) and was not surprised to learn that they’re not having quite as much fun these days. Best, Tess Vigeland

    • Jim says:

      Wow thanks Tess! Thank you for leaving these links, I remember the Fairfax story because my wife’s family lives one town over (Reston).

      It’s probably not been much fun, given the market, and even less so these days… but at least there’s still friendship right? 🙂

  11. Ray says:

    I started an investment club about a year ago so I can give some “insight”

    Depending on how you want to structure it, it takes a lot of paperwork.

    You need agreements, by-laws, and code of ethics at the least.

    You might also want to register the club as a partnership for tax purposes.

    you probably need a business bank account as well.

    I opened a discount broker account with questrade in canada.

    We have a initial fee of $150 and than monthly $40 fee. all the money goes to either bank or broker account and broker account and we make investment decisions.

    it takes some time to get it organized, some members drop out and others want to join and not everyone will be doing the required work.
    Its fun and time consuming, so far we have losses 2008 was probably not best time to start but lets hope things will change soon.

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