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Financial Literacy

Investment Clubs: Have they run out of fashion?

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How many times have you had to bite your finger at the disappointment of passing up a business opportunity for which you were financially ill prepared to take advantage of? Occasions probably too numerous to count I am sure.

Compounded to your seeming frustration might also have been the fact that a purposeful walk into any of our Nigerian banks lends no reprieve as most would gladly dance naked in the simmering Nigerian heat or unforgiving torrential downpours than take a second look at your well prepared business plan. Your savings just won’t cut it, plus, it also seems, unfortunately, like other avenues of independent fundraising in a bid to benefit from that seemingly ‘hot’ business opportunity looks abortive from every angle.

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Well, maybe there is one angle you failed to consider, and guess what, it’s one that enjoyed huge popularity at some point in the Nigerian business space. A casual discussion about it with a friend once lent the near heated response, “Investment Clubs are dead abeg! Let’s think of something else…” he said to my utter wonderment. Really? I mused, are Investment Clubs really dead or did we just see it as a passing fad which we were only too glad to drop at the first sign of ‘bump ahead’ we came by?

And now we scratch, unsuccessfully so, too far down the ‘well of opportunity’ for fundraising solutions that stares us right in the face? Hmmm, maybe it’s one or the other or it’s neither, but did you know that the Paris Club for which Nigeria and several other African and global nations always enthusiastically run to for financial aid is actually an informal group of 22 creditor nations, with no official global statues, who give concession–based loans to mostly poor nations.

And are today owed monies to the tune of half a trillion dollars by more than 50 global nations? I can’t even begin to imagine what could happen to the global economy if this group ever decided they needed all their monies, plus agreed interests, back. In other words, it would be bad news for the world, and good for the creditor.

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Believe it or not, the Paris Club is one of the highest forms of Investment Clubs there is in the world today, and though there may be others, such as the London Club – a private group of creditor banks that also loan monies to countries and other banks, the Paris Club is one of the oldest, most successful and popular Investment Clubs in the world.

Of course, there might never be anyway that you or your entire village could together ever match the kind of investments that has seen Paris Club rise to the pinnacle of global financial prominence as it has today, however, might the idea be one channel to reach your goals of financial independence without the hassle of loan repayments, displeased shareholders, a greedy creditor and/or some form of indebtedness for which you could have future regret? Maybe…

Alright then, let’s delve a little deeper into this financial crevice and reeducate ourselves about this once forgotten money spinner and see if it could have some exploitable hidden gems.

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What is an investment club?

An Investment Club is a group of individuals who come together to combine funds mostly for the purpose of investments, and with positive returns as an outcome. These members typically meet on a periodic basis to make investment decisions, mostly through, a voting process and then proceed with their investment objective(s). Investment Clubs are an excellent way of reducing the risk of financial losses, in the case of a bad investment decision, and are also good ways of meeting new friends and learning of new investment opportunities that exist and having a means of easily taking advantage of them.

Although people have been investing in groups for thousands of years, the world’s first investment club was allegedly established in Texas in 1898 back in the Wild West when few investments could be considered safe. Investment clubs were seen as an ideal way of spreading the risk away from just capitalizing in cattle farming, the popular business at the time. And one of the major reasons people, particularly Americans come together in investment club is to learn how to or other ways of investing their own personal monies outside of the group.

It is important that each Investment Club have ground rules, strict laws that must be abided by each and all members, a solid strategic business direction and firm investment objective and procedures otherwise its objective could be defeated from the get–go. Usually Investment Clubs do not have to be legally registered or offer or sell membership slots to interested persons, but most do and since each club is unique, each should, for best practices register at least as a private entity, a social club or find ways to abide by some statue governing the laws of the land which it finds itself.

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Investment Clubs can invest in next to anything, both legal or (believe it or not, illegal). But the most popular, legal, vehicles are shares (stocks), mutual funds, bonds, treasury bills, property, junk bonds and direct investment in ownership of companies. However, other Clubs have been known to stake in big oil and gas deals, farming/agricultural projects, next–generation pharmaceutical and/or medical solutions, weapons manufacture and sale, to mention but a few.

How to join an investment club

Joining an Investment Club may require a connection to an existing member or a vacancy in the club, but any group of individuals may start their own investment club. The process includes finding a group of like-minded investors, registering it with state and/or federal government, obtaining a taxpayer ID, and holding regular meetings. The investment club should also open a brokerage and banking account and maintain organized and strict banking and accounting procedures.

Investment Clubs are commonly formed as partnerships or limited liabilities, and investment income and/or losses are consequently passed through to its members through monetary or physical terms as agreed by its members.

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Contributions into investment clubs

Some Investment Clubs are gender or age specific and members may be required to make an initial minimum investment and then make regular contributions as agreed in its membership terms and conditions. Often, but not always, each member of the investment club contributes the same amount of money and is expected to do so periodically. Members are often always free to invest outside of the club, which makes an investment club a good way to diversify a portfolio.

Club meetings are usually held monthly but some Clubs meet more frequently, and most meetings involve reviewing existing investments, taking deposits for new investments, selecting new investments opportunities, and on some rare occasions, as a festive gathering. Members personally research existing and potential investments, and the group is often able to conduct more thorough research as a team than each member could do individually. A majority vote is normally required to buy or sell an investment, making it one of the safest investment options known to man…

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To be continued…

About the Author

Whenever he is up nights, faffing around the internet gathering material for detective novels he is not sure when he’ll ever publish, Brain Essien, likes to play investment and brand strategist in the mornings and website architect/builder in the afternoons. On the weekends he likes to throw on a few bouncing apparels and gadgets and go bounce people out of their own parties if they become a handful. Besides that, he loves reading detective novels, building muscle, daredevil racing, video games, shad

Patricia

Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform. To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

1 Comment

1 Comment

  1. Kenny

    April 25, 2020 at 11:26 am

    Direction for loan for farming

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Personal Finance

Emergency Fund: Can you raise N50,000 cash tomorrow?

Focus on building up your emergency funds before building a portfolio of assets.

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Emergency Fund

Can you raise N50,000 cash tomorrow? Yes cash, without selling any asset of yours; Can you? This is a very important question you need to ask yourself. One generally accepted lesson from the 2020 economic downturn for both corporations and individuals is to always have an emergency fund (EF). So, what is an Emergency Fund? How is it set up? How is it used? Let us explore.

What is Emergency Fund

An EF is a savings account set up to pool and hold a minimum of three months of calculated Non-Discretionary Income (NDI). The EF is advised as the first activity any investors should undertake. Specifically, before even investing a cent, set up and maintain an EF because this fund acts as an “insurance” or stop-gap for your income or investment portfolio.

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How is an Emergency Fund set up?

An EF captures a minimum of three months of Non-Discretionary Income (NDI). What is NDI? These are expenses incurred that must be settled irrespective of income. For instance, rent must be paid, groceries must be paid, we cannot simply stop paying utility bills because we lost our job and thus income.

Once we decide on an investment plan, the first thing to do is to list out all expenses we will incur and attach a cost to them per month or annual basis but corresponding to the period of payment. We do this to identify the necessary expenses which we refer to as the NDE.

List of expenses

  • Rent N1,500
  • School fees N500
  • Camping/Holiday N300
  • Go to Movies N100
  • Groceries N400
  • Cable TV N200
  • Gas for cars N200
  • Phone Bill N300
  • Eating out Dinner N200

Total expenses for the month are 3,500

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Next, decide which of the expenses listed above are Non-Discretionary. In other words, which of these expenses must be settled irrespective of income? Let us assume our client chooses the following as NDE:

  • Rent N1,500
  • School fees N500
  • Groceries N400
  • Gas for car N200
  • Phone bills N300

These expenses above come to a monthly NDE of 2,900, with a three months minimum of 8,700. This minimum sum means that should the client lose his job or suffer any other income interruption, these necessary expenses will be paid from the emergency fund, without the need to sell down investment assets at fire-sale prices just to raise income.

How is it used?

The Emergency Fund is simply a piggy bank. Once it is set up, you can increase the minimum saving from 3 to 4 and as high as you want to go. What is does is insulate your investment portfolio from losing any compounding or dissipation in principal because you must sell.  So, if there is income interruption due to job loss or you simply want to take a long holiday and write a book, you can do so and still meet your expenses from these savings.

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An EF is not only for downturns, as it is also good for opportunities. A friend of mine bought an almost brand new car from a work colleague that was emigrating abroad because he could pay cash immediately in short notice. Cash is always king when you are in a tight negotiation with a seller.

Your Emergency Fund should be kept in cash or near cash investments. Return on investment for the EF is secondary to access to those savings. Also, you want your EF in an investment class with fixed income with no variation in returns. this means in practical terms do not invest your EF portfolio in equities that pay a variable return or even any asset which may need documentation and visits before you can access your funds. I am also wary of a commodity like gold, which does hold value, but cannot easily be converted to cash. The recommended asset classes to invest your EF are:

  1. Call or Fixed Deposit in Banks
  2. Sovereign Treasury bills, they are easily discounted and converted to cash
  3. Certificates of Deposit with bank

If the asset call cannot be converted to cash in one activity should be avoided. Also, ask the institution if they charge fees for early withdrawal and what those fees are.

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What can I do tomorrow?

  1. Start an emergency fund immediately. Do the expense exercise, determine your Non-Distortionary Expenses, start to build up a savings pot.
  2. Focus on building up your emergency funds before building a portfolio of assets.

Patricia
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Investment Tips

What bad stocks have in common with bitter relationships 

The feeling you get from marrying the wrong partner is similar to that felt after buying the wrong stocks.

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I have always argued that stocks cannot be summarised into one statement for a newbie, until recently when a friend told me that it could.  

“Simply put, buying stocks can be likened to relationships, he said.  

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did not immediately agreebut over the next few minutes, he explained to me what he meant, and drew several analogies to back his claims.  

While he is no expert, I understand that he has drawn his conclusion from his experience buying stocks for himself over the past 5 years, so I took his points seriously. These points have been summarised in this article. 

READ MORE: Cocoa prices melt lower as COVID-19 weakens demand 

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When it crashes, there is no telling how far it can go  

My friend mentioned of some company’s stock he bought in 2016 in the hope of selling short-term. At the time he bought, there was a dip and he expected things to pick up within some months so he could sell-off.  

Two years later, the stock price had plummeted 50% down from the price at which he bought. Without saying, he became a long-term investor because he was not ready to sell off at a loss.  

 

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How does this liken to being in a bad relationship?

As the value plummets, you keep hoping it will rise again and then before you know it you are stuck for the long haul. Same thing can happen with a wrong partner. You remain there hoping things will be better but it gets worse. 

It could happen sometimes that a company’s stock market price comes crashing and it never goes back to where it was againThe factors which triggered its fall, may not even be able to return it to its starting price.  

 

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The stock price is not indicative of the company’s profitability 

For some reason, there are company stocks market prices that remain low year after year despite the billions declared in profits, and the dividends paid out to shareholders.  

Sometimes, the stock market price could still slump even when the company has positive records in its financials. Market experts are not always able to explain this, but it remains true. Some of the most profitable stocks are undervalued.  

 

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You can never take stocks at face value

That a stock has been on an upward trend in the last few months does not mean it will remain so. One must always consider several other factors before purchasing a stock.  

While it is important to look at past performance, there are other things that could point to the likely future of such stocks. 

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Say, for instance, the company has just announced a new board chairman who was implicated in some fraud cases in the past. It doesn’t matter how well the stocks have performed in the last 365 days, or the chairman’s competence, the stock prices are most likely to slump due to loss of investor confidence.  

There was a recent case where the CEO of an internet service provider company was alleged to have been involved in sexual harassment, and was eventually pressured by shareholders to resign. The pressure came not necessarily because they thought he was guilty, but because of the implications on the company.  

You have to probe to discover the real qualities.  

 

The most expensive stocks are not necessarily the best. 

If you ever heard a stock described as under-priced or over-valued, then you should understand that the price you pay is not necessarily suggestive of the value.  

Some great stocks, with good potentials, high liquidity, good company profile and adherence to corporate governance ethics, are not as expensive as they should be. While some other stocks are ridiculously overpriced, even when they do not have as much promise. Some of these overpriced stocks could still be basking in past glory or just positive media hype.  

This explains why investors must conduct due diligence before putting in their hard-earned money. Sometimes the media hype around a company’s stock might not be giving you all the information you need to make a decision, so you necessarily have to go the extra mile.  

Subscribe to newsletters from financial news websites if you need to, take courses if you have to, but ensure to learn all you can.  

Remember price is what you pay for the stock, but value is what it is really worth, and there is no law stating that one must justify the other.  

READ MORE: Global stocks records astronomical gains in Q2 2020

When you get the wrong stocks, you get stuck! 

You know that feeling when you are sure that you have made the wrong choice, but also know that there is no way out? That’s the feeling you get when you marry the wrong partner, as my friend said. And that’s the same feeling you get when you get the wrong stocks.  

You simply get stuck.  

No returns. No dividends. Probably, no way to sell either because no one else is interested in buying from you. And if you do succeed in selling off at this point, you would most likely be doing so at a loss.  

If you study trends in the stock market, you will see some dormant stocks that have remained stagnant for long periods of time. No rise in share price, no fall in share price, and no share is being traded either.  

READ ALSO: Best time to make money trading BTCs

It is not a nice position to be in, and that is why you want to be sure of the company, its management, and board members who take the decisions before you decide to buy or not, even more so when you are a long-term investor.  

And even then, with the wrong stocks, you could suddenly find that your proposed short term investment of 6 months will run into years because you keep waiting for things to pick up before you sell.  

Patricia
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MSME

130 farmers to receive seed funding of N100,000 each

The target of the programme is to adopt farmers in 774 LGAs across the country.

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The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receiv, e seed funding of N100,000Border Closure: Nigerian rice farmers are struggling to feed a rice-hungry nation. CBN to give Niger Delta rice farmers single-digit loan 

The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receive seed funding of N100,000. The programme will be supervised by the Federal Ministry of Communication and Digital Economy.

According to a statement from the agency, the National Adopted Village for Smart Agriculture (NAVSA) programme is in line with the government’s drive to lift 100 million Nigerians out of poverty, and it will start with 130 farmers in Jigawa state.

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The target of the programme is to adopt farmers in 774 LGAs across the country, open the platform to all agriculture ecosystem players with access to information, facilitate and improve productivity, reduce the cost of production, and facilitate access to local and international markets.

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READ MORE: President Buhari directs Ministries of Power, Finance, BPE to seal Siemens deal

With all of this in place, it is expected that the farmers will be able to build sustainable business models and digital business opportunities that will create not less than 6 million well-paying jobs in the next 10 years.

“NAVSA Platform is aimed at digitalising agriculture to drive Digital Economy, as part of President Buhari’s agenda to leverage on technology and innovation to revolutionise the agriculture value chain,” the statement read.

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Among other things, the farmers will be empowered with a digital platform, smart devices (tablets), connectivity for data and calls, Digital agripreneurship skills, and enrolment with telecom operators and the National Identity Management Commission (NIMC) for identification.

All of these will be given to them at the end of the programme, which will last from July 1 to July 13, 2020.

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Patricia
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