Try to think long term
This cannot be stressed enough. Don’t invest through an investment club if your time horizon is a year or less. Trying to make money over a shorter period of time is a wrong approach, not only for beginner investors, but also for investment clubs. A short time horizon makes it difficult to manage the club’s money because, for short-term outlooks, decisions to buy or sell need to be made very quickly. Most investment clubs meet only once a month, making it entirely impossible to make such short term decisions. Club members should probably spend their time analyzing the fundamentals of any business(es) held, or about to be held, in the club portfolio as opposed to concerning themselves with short-term movements in the club’s holdings.
Having a three to five year time horizon is a common strategy amongst investment clubs. As such, potential members should consider joining an investment club as something of a long-term commitment. It is generally not very healthy for a club if members decide to leave and pull their monies after a short period of membership. Most investment clubs specify the rules or penalties for early withdrawals from the club at its inception. Most specify a liquidation price, or early-withdrawal penalty, which members must pay when withdrawing their funds – usually slightly lower than the value of their contributions. Generally speaking, anyone interested in starting or joining an investment club should consider it a commitment for a minimum of several years, and ensure all members in the club find that level of time commitment acceptable.
Define your investment style
Just as individual investors vary greatly, so do investment clubs. It is very important for every investment club to have a clearly defined investment style, ideally with some amount of quantifiable rules or limitations on the club’s investment portfolio and purchases. For example, an investment club might specify that members can propose only stocks for purchase that have a certain minimum share price or market capitalization, or might place sector restrictions to ensure a certain level of diversification or concentration.
Also, for the benefit of members, it may also be useful for a new investment club to implement standardized criteria for reviewing any potential purchase. This will ensure that the club members increase their experiences in specific areas of business, while allowing all members to better understand the material(s) presented to them by asking pertinent questions.
Once an investment club has determined its style, it is essential that every member is aware of it and willing to follow the guidelines. It can be very damaging for an investment club when some members want to invest club funds in high-risk pennystocks while others gravitate towards blue chips or weapons manufacturing. When joining a club, make sure its investment style and preferences matches with yours.
Always value Education over Appreciation
While investment clubs should strive to make as much money as possible in whatever chosen business that is proposed, education is one of the primary reasons for joining a club. Clubs operating with the goal of educating their members will find that profits naturally follow. It is arguably more important that investment clubs provide members with the education and experiences that help them determine why the club’s portfolio has grown, instead of simply watching their net worth (which could also dwindle) grow. After all, if an investor has no interest in increasing his market knowledge, mutual fund managers or a full-service broker or investment banker could equally provide him with reasonable returns without the commitments and activities inherent in an investment club. An investment club should also focus on ensuring that all members receive a relatively equal level of educational value from their membership. In fact, it is a good idea to assess a club’s level of membership expertise before you decide to join. This ensures that there is a reasonable match with your own skill level. Also, all club members should participate equally. Some members will naturally have more leadership roles than others, but if some members do not contribute periodically to the club’s meetings, the atmosphere of the entire club is likely to suffer, thereby decreasing the value of being in an investment club in the first place.
Examine the chain of command
The offices usually include a president (chair-person), a vice, secretary, treasurer, and so on. Some clubs may even have an educational officer, a club economist or a stock selection committee. Be sure to check up (ask questions) on all these people and ensure that they are knowledgeable in their designated positions before joining in.
Read and understand the rules
Make sure to read every line of the investment club’s laws and by-laws very carefully and be sure you understand it, and probably can recite it offhand. Nothing could be worse than having an investment dispute and then finding out that you cannot have your money (and appreciations) back until next year simply because you did not take the time out to read the by-law that said, ‘All investments by members will be held by the club for a period no shorter than eight months before membership withdrawals’.
Investment clubs provide an excellent way to ease your way into investing without getting burned or ripped off by unscrupulous brokers or business ventures. Whether you start your own club or join an existing one, you’ll find that being a member of a club is an enlightening and fun experience.
Also, one of the most valuable ongoing benefits of an investment club, especially for beginner investors, is the ability to have investment decisions analyzed through different points of views and by people with varying life experiences. If properly founded and maintained, investment clubs can yield members excess returns on their investment funds year after year, while providing them with invaluable educational experiences that will last a lifetime.
In our next issue, we will look at steps you will need to take should you wish to start an investment club of your own. For now, do have a great week ahead.
Written by Brain Essien