This is the third and final post of a three part series discussing Investment Clubs, their formation, and operational realities. Part one discussed starting an investment club and picking the right group, while part two discussed investment club organization and administration. Be sure to check them out!
As expected with a post like this, none of the below should be construed as legal or financial advice. Please consult your own legal and financial advisors before investing or starting an investment club.
Making investment decisions
As discussed in part one, the most important aspect of an investment club is finding a group of like-minded and equally motivated individuals. As cash contributions come in regularly, each member will be required to participate in the investment decision-making process. I believe that this process can be broken down into three steps: providing research, critiquing potential selections, making the final selection.
Providing research: This is the first and foremost priority of the investment process. After selecting a group with similar investment goals, members will provide investment selections to the group supported by an agreed upon amount of research. This can be as simple as providing one or two examples per person, or cycling through in a rotation depending on the number of members in the group.
Part of the joys of an investment club is doing the research, however research takes work. This is going to be where you start to find cracks in the group. Some people will end up being freeloaders and non-participants. If people aren’t willing to as I have said before, investing with an investment club is NOT as passive activity. This probably will also crop up in the next two steps.
Critiquing potential selections: Step two of the investment process is actually analyzing prospective investments. Much like the research portion, the level of analysis will depend on the criteria and goals your particular club has decided upon.
Making the final selection: The third, and hopefully easy, final step of the process is making the final selection of an investment. When drafting and documenting the club’s operating/partnership agreement, it is best to clearly, and legally, agree to what qualifies as an investable decision. Will there need to be a unanimous agreement or just a 2/3 majority. Make sure this is set in stone and signed off by everyone in the group prior to investing a penny. Included in this is timeliness. Once a vote has been raised, there should be a set expectation as to how long this process is allowed to take.
Document the investment process!
As to be expected, each club will be different depending on the individuals involved, but a clear and written outline of the process in which the group identifies, votes, and ultimately invests, must be made. This process is important to the integrity of the group as it allows for a consistent decision-making process over the course of time.
In my investment club we keep things both simple and informal, while maintaining the rigid unanimous decision-making process. We have this flexibility because of our close personal relationships and small size. There are too many good investment options for anyone to be hung up on one, yet because we each have a vested stake we must get written or verbal approval by everyone prior to making an investment. Everyone provides potential investment opportunities and we strive to learn something at the same time as well.
Due to geographic limitations our investment process is entirely online. In the modern, digital age, it would be expected that this would be a common form of communication and discussion. We do strive to have an annual face-to-face for everyone to come together as a group to evaluate the overall direction of the club and our investment goals.
One thing that is extremely helpful in documenting your club’s digital activity is to set up an email account for your club. All communications by members in regards to club activity must include this email as a carbon copy. Some people also use Facebook for online communications, but I personally I prefer the more private nature of email as our email chains can be quite extended and involved.
Investment club rewards and reality
Investing with an investment club can be rewarding on many levels, but for me, the rewards far exceed any financial benefits in the long-term. There are two significant non-financial benefits to investing with a club, the education/group-think and the relationship building.
Education/Group-think: As I mentioned previously, part of the benefit of an investment club is doing the research, however research takes work. You have to love this work, and the associated discussion and learning that comes with a collective review of investments. This, for me, is one of the primary and biggest rewards of being a part of an investment club.
Relationship building: The second non-financial benefit is the overall relationship building, and corresponding fun, with taking part in something as a group. There are four members in my club, my two brothers and my best friend whom I met in college. Collectively we are spread almost 1,000 miles apart geographically, but have maintained close relationships and developed regular communication, in part facilitated by our joint venture.
In 20 years, I plan on still being close friends, and partners with these gentlemen. In fact, we have highlighted the importance of fun and relational impact of this by naming our club affectionately after our combined golf handicap (this is no small figure).
SHOW ME THE MONEY!: The final benefit of participating in an investment club is obviously the financial benefit. For my group, we have taken a slightly different approach to how we view the money that we invest. In our investment club all the assets are considered “fun” money. “Fun” money is money that we don’t rely upon, nor are overly concerned if we lose; it is a sunk cost for each of us.
Well how does that work? It changes our expectations for what we look to get out of the group. It provides us with the freedom to invest liberally while focusing on the education part of the process. If, over the course of 25-30 years, we developed sizable interests in with our investment club it will just be a pretty awesome added bonus.
But you haven’t told us how you’ve done! As a club we started small, investing less $50 per month, with a starting “buy-in” of $300 per partner. We have since raised the contribution to $75 per month as we have all progressed in life and have more disposable income. Since starting, our investment’s internal rate of return is approximately 12.2%. With some reasonable projections, we could each be potentially looking at six-figure equity accounts from 30 years of “fun” money investing. Not too shabby!
In full fairness, we have picked some real winners (YAY good luck and timing!) and we have picked some real losers. Most importantly, we have each learned a tremendous amount from our participation. I hope you have all benefited from this series on Investment Clubs, including parts one and two. Feel free to ask me questions and I’ll be happy to answer in the comments below!
Now get out there, find a like-minded and motivated group, and start your own investment club!
As I’ve said before, none of this should be construed as legal or financial advice. Please consult your own legal and financial advisors before investing or starting an investment club.