SIMON BROWN: How to set up an investment club

Back in the 1990s investment clubs were all the rage as the internet opened access to markets for a new wave of investors who wanted to pool their knowledge and money.

Most famous was the Beardstown Business & Professional Women’s Investment Club that was formed way earlier in 1983 (and which published a book in 1995 on their success). The claim was they’d made a 23.4% annualised return since inception.

Unfortunately, this return was not even close. After removing fees that members had been charged, and correcting for an error in the calculation (discovered by audit firm PricewaterhouseCoopers), the actual return was 9.1% — which  lagged the S&P500 over the same period. However, the club was still running 30 years after it was formed.

Even with the calculation errors the idea remains solid — an investing or savings club among friends, work colleagues or family. In SA, stokvels are legion: an estimated  820,000 of them, with a combined pool of about R44bn. Pooling your money and ideas has many advantages but there needs to be rules, lots of them.

Starting with a savings club, these are fairly easy in the style of a stokvel but strong social bonds are important. As an example: my sister was in one many years back where every member put in R500 a month and one member received all the money one month a year. There were 12 members, so once a year you got R6,000. The risk here is that somebody receives their payout and quits. So, in this example, they involved the company HR department, which debited the money every month. And if somebody left the company, any money owed could be deducted from their final salary.

Investment clubs, however, are different as withdrawals are based on money already deposited and profits earned. Here, there are a lot of factors to consider.

Namely: how much money should be deposited every month, what if somebody wants to withdraw money or maybe leave the club altogether, and what happens to new members joining. What about the strategy? Is it short-term trading, long-term value or maybe just diverse Exchange Traded Funds (ETFs)? All are viable options but there needs to be strong alignment between the members — in which case the club would need a constitution clearly detailing the strategy and member responsibilities.

This means that somebody has to be in overall charge, such as a chair, while you’ll also need a secretary to record meeting decisions. Then you’ll need someone to do the actual transactions and another to manage the club’s accounts.

None of this is rocket science, but it does need to be done properly.

You’ll also need a process of how ideas are generated and decided on. Is it simple majority vote or does it need to be unanimous?

Another important consideration to decide on before entering any positions is selling. Do you just let the winner run? What about losers, do you let them collapse, add more money or sell?

This may seem more effort than expected. But the rewards are real.

In my experience, these weren’t only social. Financially, members helped make each other smarter and, personally, kept me away from a lot of dodgy ideas.