It all started back in 2009 when a friend and I were talking over drinks about how it may be a fun/profitable idea to create an investment club. While I was excited about the idea of starting an investment club from that first conversation, my first club didn’t actually get up and running until February of 2013. The delay was due to some miscommunication at work, about whether I was actually even allowed to create such a club.
Once that was cleared up we were off to the races.
What is an Investment Club?
I think the SEC provides a great definition,
An investment club is generally a group of people who pool their money to invest together. Club members generally study different investments and then make investment decisions together—for example, the group might buy or sell based on a member vote. Club meetings may be educational, and each member may actively help make investment decisions.
Don’t need to add much more before going through my two clubs.
My First Investment Club
The idea was simple enough, every individual (9) would put in a set amount to start, and then we would all contribute same monthly amount thereafter. There would be no chasing of anyone’s money, no arrears, no promises to be made whole later on. Every month each member would automatically have a set amount deposited.
I think there are five reasons why this club has worked so well:
- Everyone is equal – No one can flex additional votes without convincing others that their idea has merit.
- There is always cash coming in – This was pivotal when we first started, it took away the conversation of having to sell something when a new, good idea presents itself.
- Good or bad people rarely get called out – Anytime someone tries a few select people are quick to squash that type of conversation.
- Our members are diverse – we have 9 very different guys with different goals, investment objectives, investment knowledge and experiences.
- Luck – We started this club at the beginning of a ridiculous bull run of which the U.S. Markets have never seen.
We have had our share of hiccups over the past 7+ years, mainly because of people’s highs and lows when it comes to their interest in the club. However, the above five items have thus far overshadowed the speed bumps we’ve experienced.
Investment Club One’s Returns Since Inception
While I am comfortable sharing a lot of information on this site, I can’t make that decision for 8 other individuals. Notwithstanding, I don’t think it is am issue to run through our results without using amounts.
The gap between the light blue and the dark blue is our gains vs just pure cash. Those two very painful drops were exactly when you thought they would be if you follow the markets – December 2018 and March 2020. Despite those drops our returns are impressive by almost anyone’s measure:
I am under zero impression that our 60% positive gap on the cumulative 5 year table above (comparing to the S&P500), doesn’t have luck included in it, but I think there is some synergy that has bled into that performance. Specifically, there are times where 5 or 6 members want to buy or sell when others won’t and this has led to some very interesting conversations. An easy example is that we have one member that just won’t sell for a loss if the stock is a large cap well known name. We don’t have the ability to test it, but my gut is telling me that has saved us thousands upon thousands of dollars (of course there could be a counter-argument that we could have used that money to make gains bigger than the come back in the stock).
My Second Investment Club
A few years back my brother was telling his friend about Club One, and the friend loved the idea, but for a few different reasons joining that club was not a possibility. For one, Club One hasn’t really been too keen on adding others to the mix – everyone is obviously going to have an opinion about another individual, or equally as bad, not know that person and not want to own a business with a stranger. The second is that our Net Asset Value has grown to a point over the years that joining would be cost prohibitive for most.
When my brother approached me with this idea I was particularly hesitant since I tend to love group businesses but have a hard time letting go of control, so I end up doing a disproportionate amount of the work. However, as we explored the investment mandate of the club I couldn’t say no. Specifically, their (my brother and his buddy) idea was to create a club where dividends were paramount. Any equity position created or built upon had to have a company that respected the dividend by growing it for a minimum of 5 years.
Investment Club Two’s Returns Since Inception
This club has not had as much success when it comes to actual returns. I am not sour on it at all, quite the contrary, just okay with the reality that we are trailing the broad market.
Since we are a dividend focused, reinvestment club, I thought the true test would be that bottom calculation (and will continue to compare us to that every time I do a review). We are trailing pretty substantially at this point, but I believe we are only in the first inning for this particular club. I think another interesting metric to look at will be the expected yield as time goes forward.
How We Started and Continue to Run Our Investment Clubs
Your investment club should be your investment club, so the below tips are not meant to tell you how to run the assets held/traded therein, but rather how to actually get an investment club up and running from someone that has had one for 7 years.
Create a Separate Entity
First thing is first, you are starting a business, and as such it should be treated as such. Create an S-Corp, LLC, formal partnership agreement, etc. This will solve problems later when taxes are due and provide at least a floor when discussing the addition and subtraction of members. Similarly, keeping transparent books for that separate entity will only help continued harmony.
Create Rules for Buying and Selling
All parties involved need to understand how buying and selling are going to work. For Club One our vote is a continued evolution. At first we started with simply 7 votes, then it went to 6 votes for an action within 24 hours & 7 for an action immediately. It has since morphed to a simple majority for action within 24 hours and 6 votes for immediate action. It doesn’t actually matter what works for your investment club, rather, it matters that everyone understands when actions ares going to be taken.
Understand the Investment Mandate
Discussing everyone’s exceptions may be the easiest, yet one of the most important parts of running a successful investment club. If you have 3 value investors and 2 penny stock investors then it is likely that your club is going to have a problem making any investment moves. This discussion goes beyond just asset allocation, do members have a basic understanding of the type of asset classes everyone is comfortable investing in? If 2 members want to get into real estate and 1 member does not that is a much bigger deal then having a disagreement on what publicly traded stocks to invest in.
When we created Investment Club One, our only mandate was to invest in publicly traded companies. While there has been discussions to expand that mandate to local real estate, it hasn’t happened thus far (and I am almost 100% positive it never will). This is different than Club Two which knew from day one, we wanted to only invest in companies that cared about dividend growth.
Figure out a way for open Communication to happen
Members need to be able to get in touch with each other about buying and selling. Maybe that is a facebook group, email, text messages, etc. In both groups we use Slack which is a separate program wherein each investment position is a separate chat room so ideas and conversations can be followed over days, months and even years.
I know it sounds cheesy and cliche, but if your investment club isn’t enjoyable, what are you doing?! Get out.
Future of my Investment Clubs
Honestly, if you had asked me 7 years ago if I would be entering into 2021 with not only one, but two, investment clubs I would have said you were crazy…but here we are!
I think Investment Club One is going to continue to truck along until one or two key people leave. I also believe we will continue to stick with publicly traded companies, I can’t imagine the group ever figuring out a way to invest in real estate or a business, but I guess it could happen. Investment Club two is completely too young for me to have a guess it’s future.
Notwithstanding their outcomes, as this site continues I will update results, thoughts, and ideas having to do with the investment clubs quarterly or semiannually!