Investment Clubs - An Overview An investment club is typically formed by a group of individuals who want to learn how to invest in the stock market by pooling together a small amount of money each month. Not all investment clubs invest in the stock market; some decide to invest in property, trade FX currencies, or art work for example. Investment clubs provide a supportive environment where investors can learn how to invest by sharing knowledge and experience, with the benefit of being in a social club with like minded people. Club members typically bring together a diverse collection of people and members take on various roles and responsibilities depending on their strengths and weakness. Typical roles within an investment club include: • Chair - co-ordinates the other club members and ensures that each club member fulfills their commitments to the club • Treasurer - manages monthly member subscriptions, withdrawals, unit valuation, income/expenditure book keeping and investment club tax returns, such as Form 185(new) in the UK. It is not uncommon for the treasurer to also act as the club trader • Secretary - keeps a record of club minutes and general club administration • Research / Analyst - researches and analyses investment opportunities • Trader - ensures that the investment transactions that the investment club agree to are executed as planned The Investment club members tend to meet regularly, typically on a monthly basis, to make investment decision, discuss lessons learnt and review past performance. They are typically organised as a legal partnership, however some investment club choose be self-directed, whereby the club members meet each month to discuss investment decisions and thereafter club members invest through their own brokerage accounts, rather than investing collectively. Typically investment clubs have a bank account in the name of their investment club, which requires multiple signatures, where all members pay monthly subscription into, typically via a standing order. History Investment clubs have been in existence since the early 1900s, with one of the earliest examples of a modern investment club being the Mutual Investment Club of Detroit, which was founded in 1941. The Detroit investment club was established when a group of individuals wanted to invest in stocks, however they did not have the money to do so individually, as trading costs were prohibitively expensive. As a result the group decided to form an investment club so that they could pool together their money to improve their buying power and benefit from economies of scale through lower trading costs per person. The Detroit investment club still lives on and it is said that their investment portfolio is now worth many millions of dollars. One of the earliest examples of a group of people who clubbed together to make investments was an art fund called, La Peau de l’Ours (The Skin of the Bear), that was set up in 1904 by a Parisian art lover called Andre Level. Level persuaded a dozen other art lovers to contribute 250 francs each year to buy modern paintings. In return the investors got to hang the purchased artwork in their homes, for a ten year period, before the fund was cashed in by selling off the collection. Over the 10 years, Level collected work from artists such as Picasso, Matisse and Braque. In 1914 when the First World War was about to break out, the collection was sold. One fifth of the sale was donated to the original artists, and the remainder was divided between the investors, generating them a 4 fold return on their investment. You can only try to imagine what that investment fund would be worth today if they had went for a buy and hold strategy! Why Start an Investment Club? • Reduced Risk: Each club member pools together a relatively small amount of money each month, while benefiting from collective buying power • Buying Power: Trading costs are typically fixed therefore investment clubs benefit from economies of scale through members pooling their money, which results in improved returns through proportionately lower trading costs • Education: For first time investors the market can be scary! Learn and grow together through education and the application of knowledge in a supportive environment • Collective decisions: Surveys show that collective investment decisions based on discussion and democratic choice are more likely to produce sustained profits (source NAIC). Club members come from all walks of life giving access to an immense pool of knowledge • Social: It is fun and is an excellent way of meeting new people with a similar mind set, while widening your social circle. Why Invest in the Stock Market? The main reason that unites all investment club members, is the desire to increase their wealth through investing in companies that will provide capital appreciation and potentially a source of income. Capital appreciation is achieved through increased share prices and income can be generated through dividend payments or investment strategies such as writing covered calls. Despite significant stock market crashes over the centuries the stock markets have consistently out performed inflation. Consider the Dow Jones index of 30 fundamentally sound blue chip companies that are listed on US markets. Based on statistics from the US Bureau of Labor Statistics Inflation Calculator, if you had simply invested money in an inflation linked investment account between 1932 and 2007, you would would have made a return of approximately 1,472%. Sounds great, however in reality all that you would have achieved is consistent buying power e.g. products, such as for food stuffs, that cost $1 in 1932 would cost $14.72 in 2007 if the price of those products increased in line with inflation for that period. If however you had invested in the companies, such as those listed in the Dow Jones index, you could have achieved returns of approximately 29,500% based on the increase in Value of the Dow Jones (30) Industrial Average for the same period between 1932 and 2007 i.e. for every dollar you invested in 1932, would now have now generated a return of approximately $295, as illustrated in the following Dow Jones (30) Industrial Average performance chart:
Posted on: Sat, 26 Oct 2013 10:29:44 +0000
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