Below are a few 'choice' pieces of advice to help you run a successful Investment Club and get the most out of your meetings.
The strength of a club is in the knowledge and enthusiasm of its members. Make sure every member has a say in every choice the club makes and - most importantly - knows and understands everything about the club's investment activities. You are all there to learn and earn.
Before the next meeting, your members should be sent the minutes from the previous meeting and the agreed agenda (both usually prepared by the club secretary), along with the treasurer's initial report.
There's always a chance that some of your share decisions will be worng and, in the early days particularly, the club may experience losses. This must be an aggravation, never a disaster, so keep club subscriptions at a level that everyone can easily afford. The long term purpose is to make each individual member an experienced investor who can start to build a meaningful personal portfolio.
It's all too easy to spend time at club meetings talking about matters that have little or nothing to do with the main reason you are there - to discuss and select shares that are going to enhance your portfolio. Set a time limit on gossip and discussion on 'internal' matters.
Every share in your club portfolio should have its champion. His or her job is to check on that single share's price at least once a day and, if there is a significant price movement, identify why it has happened. Then if necessary, in consultation with the chairman, the champion should have authorisation to instruct the club treasurer to sell the share.
As invest club portfolios begin to benefit from the shares upturn and increasing profits become commonplace, you may be tempted to put more money in each month. But be careful.
Monthly subs should be pitched at a level that every member can easily afford. We all have different demands on our regular income and it might be that increasing the subscriptions will put a strain on some members' pockets. But it is a peculiarly British trait that we are loathe to admit we can't afford something so those who are unhappy will either suffer in silence or, worse still, find an excuse to resign from the club. That's sad because you will be losing a part of the club's main asset, the collective brain power of its membership.
A possible solution for those members who are keen to benefit by putting more into the coffers each month is to have a variety of contributions. If your portfolio valuation method is based on the advice in the ProShare Investment Clubs Manual that's easy to implement. Higher subs buy more units in the club. An added benefit of the varied subscription system is that it broadens the potential of the club because young people, who maybe don't have the same spare cash as their more established elders, can bring a wider perspective to club discussions.
But remember, when it comes to voting on buying or selling shares, democracy rules. One member - one vote, no matter how big or small the individual holdings.
How many shares should you own? It is a question that provokes considerable debate at investment club meetings and opinions are firmly held and diverse. In the red corner there are those who believe, with some justification, that a wide spread of shares reduces risk because it eliminates the problems posed by sector sentiment, which can be volatile and unpredictable. In the blue corner are members who are equally adamant that clubs should contain their investments within their ‘circle of competence', and buy more of the same in the sectors where they have expertise.
There is, of course, right on both sides so here is the ProShare Investment Clubs guide to making your club's portfolio size decision:
- The number of shares in your portfolio should be manageable. Ideally it should correspond to the number of members so that each person can act as ‘champion' of a single share. (More about share champions in next week's Top Tip). So if you have ten members have a ten-share portfolio.
- When your portfolio reaches the ideal size create a ‘waiting list' of would-be replacements. Have a routine at every monthly meeting where (a) you consider whether each of the portfolio constituents are continuing to live up to your expectations (b) you compare them with the merits of those on the substitute's bench. And don't hesitate to make changes.
- If you feel your club's ‘circle of competence' is too small and there are areas you fancy but don't know too much about it is worth investigating the worlds of specialized unit trusts or investment trusts
It's a fact of life that in every club there are those who do and those who don't, those who will and those who won't. Some members are more than willing to play their part in club activities while others are content to let them get on with it. The usual slackers' excuse is that they are just too busy, although close examination will usually reveal that those who do the work often have the most active lives.
On the basis that you can't change human nature but you can bend it a bit, it is up to the willing workers to cajole the lazy bones into accepting some responsibility. One of the best ways of getting all members involved is to adopt a system of Share Champions.
Put simply, each member is appointed Champion for one share in the portfolio. Preferably, but not necessarily, it should be a holding in which he or she has an interest. The Champion's responsibility is easily defined: to keep a fatherly or motherly eye on the share, and to give an update – invariably no more than a couple of sentences – at the club's monthly meeting.
If something happens, there is some news about the company, the Champion should give a précis. If the share price moves up or down more than normal then the Champion should be find out why and report the reason.
The Champion's task is not an onerous one. Most of us nowadays have access to share prices, either via the financial information providers on the Internet, teletext or newspapers. A quick check on a daily basis is all that is needed to monitor what is going on.
Beware of Wally or Winifred Wotif. Most investment clubs have got one of them as a member (although they are probably using pseudonyms) and you will recognize them because invariably they start off by saying: “Mr. Chairperson, I hope you don't mind an interruption, but on a point of order…”
There follows a long and involved statement, usually unrelated to the subject being previously discussed, but most Winifreds or Wallys are wily enough to make their diatribe interesting enough to spark off a club discussion.
“What if (Wotif – gerrit?) the club chairman and the treasurer are traveling in the same car and there's an accident and they both break their right arms? Because they both have to countersign club cheques how will we buy shares?”
“What if the club treasurer, who instructs the broker to buy and sell shares on our behalf, cleans the portfolio out and runs off with the proceeds?”
“What if we refuse to provide personal details, such as our National Insurance numbers, to the Inland Revenue for the club's annual return? Can we still continue to trade?”
You'll probably agree that, while they are slightly obscure, the queries deserve an answer. The problem is that the solutions are never simple so Winifred and Wally watch gleefully as the discussion they have started escalates into a full-blown debate. Soon it is going-home time and there's been no chance to do what the club is in being for – proposing, considering and choosing shares that are going to go up in value.
It is up to the chairman to limit the meeting time spent on matters other than selecting shares. A good guide is no more than half-an-hour.
Rather like riding a bike, democracy is easy in theory but difficult in practice. And when it comes to voting on which shares to buy, the variations on true democracy can keep you arguing for hours. One person, one vote, is all very well but what if, on a show of hands, two shares are tied - is it fair that the chairman (who has already voted) gets the casting vote? And, supposing you like two or even three of the shares under consideration, can you only vote for one? Or are you so pessimistic about the short-term economic future that you would prefer not to invest at all?
If you are going to get anywhere, reason and compromise must rule the proceedings. Here, as a guide to reaching decisions that should be acceptable to everyone, are our suggestions.
However you decide to run your club, remember for democracy to work you must keep it simple.
Discuss each new share recommendation carefully. Go round the table to give ever member an opportunity to express an opinion on every candidate share.
- Go through your existing portfolio, share by share, and decide whether to sell, hold or add to each holding. You should be able make these decisions on a simple show of hands.
- Announce the amount of cash (including that from any potential sales) available for investment and decide how much the club is prepared to spend. Again, probably after some discussion and a couple of suggestions, this will usually be agreed by a show of hands.
- The secretary circulates small pieces of blank paper, announces the names of the shares that are to be voted on, and each member notes them down and allocates a total of six points to his/her preferences. Thus, if a member is very keen on one of the suggestions, it gets all six points. If another member likes two shares equally they receive three points each. If someone else feels there are three contenders the votes are three, two and one, with three going to the most favoured.
- The papers are collected, the treasurer does a quick calculation and announces the result.
- If there is a runaway winner it gets all the money. If the voting for two shares is close there is a relative division in the amount to be spent on each.
Understandably, mutual funds – unit trusts and investment trusts – are not on the shopping lists of every investment club. After all, clubs are themselves collective investments and work on similar principles to trusts in that they use their expertise to identify individual shares and thus build a portfolio where they have specialist knowledge.
However, the professional mutual funds should not be dismissed so easily. Used properly, they offer considerable added value to clubs, particularly when it comes to creating a truly balanced portfolio. The fact is that, no matter how broad the range of experience in your club, it cannot be completely comprehensive (indeed, one of the dangers of having a club of, say, work colleagues is that the focus, while well-informed, is very narrow). There are bound to be sectors, indexes and international markets where there is a complete lack of expert knowledge among your membership. It is important to minimise risk by spreading the club money over a wide range of investments and it is these gaps that the mutual funds can fill.
There are literally hundreds of specialist trusts available covering the whole spectrum from following the Footsie to the potential economic recovery in some obscure South American country. Each unit trust or investment trust is led by a professional fund manager who has been chosen for his or her experience of the particular subject, so it is perfectly reasonable for an investment club to use this expertise to give balance to its portfolio.
You can obtain details of trusts available from the Association of Investment Trust Companies (020 7282 5555) or the Investment Management Association (020 7831 0898)