I am honestly shocked that I am writing a 5 year update for my investment club experiment. If you were to tell me back then that we would have half a decade under our belt I wouldn’t have believed you. We had our ups and downs with regard to the viability of the investment club, but overall being involved in my investment club has been a fantastic experience. If you have a group of people you trust, and if have any interest at all in active investing, I would absolutely recommend starting an investment.
How We Started our 5 Year Old Investment Club
The original idea of the investment club actually dates back to 2008, however, due to some concerns with my employer the investment club didn’t officially start until early 2013. It wasn’t an ongoing thought during that 5 year period, it kind of just died down until one day over scotches a colleague and eventual co-owner of mine and I figured out how to work through those concerns.
Our original premises was fairly simple:
- One man – one vote
- Majority wins with regard to selling/buying
- Started with a one time $500 funding and $100/mo automatic deposit thereafter
- No Egos – no one was doing this professionally so we could all learn from each other and rely on different areas of expertise someone may have
- Active participation was necessary by all because of my employment
The first thing we (one other eventual owner and I) did was reach out to people we thought would be interested in the idea. Looking back now, I am shocked about a few people who rejected the idea, and there are few people I would have added to the invitation list at this point, but it is what it is. After we had a core group of 9, I created a limited liability company for ownership and tax purposes.
The next thing was to figure out where we were going to house our eventual millions – we chose Fidelity simply because they had a brick and mortar branch I could walk in and talk to someone. Truth be told, this was the biggest pain of the process. The amount of forms that had to have wet signatures was crazy. It was 2013 and investment clubs had/have been around over 100 years! This should not have been a problem.
After our initial deposits hit and our starting expenses were paid for we were off to the races! At first we communicated through a private facebook group, but quickly learned that wasn’t great for a few of our members and we moved everything to Slack.
How We Currently Run Our Investment Club
How we currently run our investment club is actually surprisingly close to the original idea.
Communication & General Activity
Everyone sort of chooses their own level of activity, and this actually works for us. There are times where I have to turn my phone on silent at work, and then there are times where no messages are put out there for weeks. I actually don’t mind this, as I truly believe if we were day trading the entire portfolio it would be inevitable that we would lose money.
Given that this is a “club” communication and activity level are very important. Communication is mostly done through the Slack Platform which has a mobile app as well that allows everyone to get a notification if something is happening. IF there is something that is needs immediate attention people will start texting/calling.
Contributions
Contributions are done automatically. If you are starting a new investment club this should be priority number one. No one wants to chase down their friends or family for the monthly contribution. This was the first year that we increased our contributions from $100 to $150/mo – this has been a process since it has caused people to find that automatic deposit and change it, but it’ll all work out.
Voting
We still adhere to the one man, one vote idea. However, we did change how a buy and sell happens. Some of the fellow members were understandably upset that buys/sells were happening while they were at work and didn’t even have a chance to think about the move. We changed the policy so that if 7 votes happen the buy/sell happens right away, but if there are 6 yes votes then it’ll have to wait 24 hours. We have had more than one instance where the majority has voted for something (5) but it was deadlocked with 4 No votes. I don’t think this is a bad thing, but something to think about if you are going to start an investment club.
Currently, when someone puts something up for a vote there is supposed to be an acknowledgement if the purchase is a:
- Gamble – As its name implies we are taking a flier
- Short Term Hold – Someone is expecting earnings to be good (a reason I absolutely hate – because no one really doesn’t original research) or it has recently taken a hit but should come back; OR
- Long Term Hold – We are going to have this for years. Our longest hold currently is a lot of Target from 2013 and some shares of Costco (amazing) and Ford (bad) both from 2014.
Members
Thankfully, we have not had to kick anyone out of the club. I dread the day that it happens since I have a personal relationship with everyone in the group that I would not freely give up because of a business decision. I doubt it’ll ever happen, but you never know.
What has been interesting was the push towards adding members. At our Biennial in person meeting it came up, and there seemed to be some interest in it. Personally, I am against it for 2 main reasons:
- I chose these individuals to start a business with – just because there is a majority does that mean I need to accept a new owner?
- What happens when someone offers a new member and that third party is rejected. There will be hard feelings.
There are other minor reasons that could be worked out (i.e. what do they buy in at, what do we do with votes, etc., etc.), but the 2 main points above are really my hold up. We’ll see if this ever changes, but the longer we wait the less likely it’ll be since the individual is going to have to put more and more to buy in (even if it is at NAV).
Asset Allocation
To be honest this is absolutely, hands down, the toughest part about running an investment club. We have members that have investment policies that are completely different than mine, we have members that agree with me, and then we have members that have no idea what they are doing. I, honestly, see this as a positive. Some of the best investments we have are because someone offered a company I would never have looked at (I have to mention to my later self there are also plenty of investments that I wouldn’t have looked at that also lost us a good amount of money).
We don’t have a cohesive investment strategy, but as I expressed to my other owners I actually like it! It doesn’t box us into ideas or group think. Will it work when we are 10x the size, probably not, but right now we are small enough to pivot pretty easily.
No Leverage
The majority has taken a stance against leveraging, options and shorting. Not everyone in the club is in the same financial place, and I don’t want to have the conversation with any member (who may not have it) and ask for $1,000, $5,000 or $10,000 because a trade went the wrong way.
The Investment Club Performance After Five Years
I doubt my other owners would want to share actual dollar amounts and even though I have done so in the past, I am going to refrain and just share percentages.
As you can see we have beat the broad market over the past 5 years – 107% vs. 85% from the S&P500. Before I give my reasons why I believe we have been able to do this let me first and foremost say a lot of the gain was luck. Let’s say most of the excess gain was luck. I am well aware that we started this club smack in the middle of an unprecedented bull run in the general market. That sort of tailwind should have helped most firms/portfolios.
With that disclaimer out of the way, lets talk about what has I believe has worked for us:
- We always have fresh capital coming in. Yes, that capital is becoming a smaller when compared to our general account size, but it is still capital nonetheless. This allows us to have a new investment discussion without forcing us to cut our losers we believe in for the long term, or more importantly, cut our long term winners.
- No one calls out losing investments. This is actually really important to me. Every investor has taken their shots on the chin, calling out a colleague will only serve to freeze future ideas which may be profitable. The few times it has happened it sort of gets shut down by the group in general which is huge for harmony purposes.
- While most members have strong personalities no one claims to be an expert. Similar to my point above, just because you have hit one or two out of the ballpark, it is likely you have a loser in your history. No one actively trades on their previous gains (I am sure it happens subconsciously when a vote comes up, but there is nothing that can stop that).
- We really are a diversified group by education, trade, experiences, socioeconomic status and political affiliations. It leads to very little group think.
Future of The Investment Club
I don’t know what the future holds for us. There are two situations that will be interesting to review over the course of the next few years. The first is If when we enter into a bear market I am not sure there will be the continued harmonious relationship. A lot of the members do not have experience with the market in general, nevertheless, market history, and as such they may be more inclined to slow down buying when it would actually be the best time to deploy that new capital coming in (and obviously the alternative scenario of selling when selling is the last thing we should be doing).
The second situation that may interrupt the continuity of the club is the interest in alternative assets beyond publicly traded equities. There has been some talk about real estate investing, but similar to options and leveraging, everyone’s personal finances may impede on this move. I can see that causing some members to take their equity elsewhere, but I could be wrong.
