Have you ever considered forming or joining an investment club? You should. Whether you're a novice or seasoned investor, a club can be a very effective investment tool. In investment clubs, members pool their money, their know-how, and their time to make investment decisions together.
There are many such clubs nationwide -- more than 25,000 alone are registered with the National Association of Investors Corp. (NAIC). Clubs typically have 10 to 20 members and meet once a month. Each member contributes small sums monthly to a pooled account, researches stocks individually or in groups, presents findings to the club, and votes on investment strategies.
Power in numbers
Clubs are ideal for first-timers since they create a comfortable group setting for learning. If you're new to investing, you likely have burning questions that you're either too embarrassed to ask ("What's a stock?") or don't know how to find answers to. In a club, as you learn about businesses and the stock market, you'll share your findings with those who'll share their discoveries with you.
Even savvy investors benefit by leveraging valuable resources such as time. Let's say that on average you can thoroughly research one company per month. That's not bad at 12 companies a year. Of course, not all will be winners, so your net list of worthwhile investments could be small. To cover more ground, you can band together with 12 like-minded investors and research 144 companies in a year's time.
Clubs can improve your discipline, too. Solo, you might be tempted to act on hot tips or trade frequently. In a club, you're usually bound by a partnership agreement to study a stock carefully before voting on whether to invest. The group will also discuss the company before taking action. NAIC's clubs typically own a stake in such solid, leading enterprises as General Electric
Members tend to have a good sense of perspective, as well. In recent market downturns, when Wall Street pros and hair-trigger investors scrambled to sell, Foolish shareholders and club members calmly held on. (In fact, they are excited about scooping up bargains.)
Form a club
If you decide to join an investment club, there are two options -- find an existing one or form your own. Starting a club is preferable because you have a hand in selecting investors to pool your money with. Your list could include friends, relatives, or coworkers. You'll want to be sure the group will get along and enjoy each other's company. If there's bad chemistry, you'll be in store for a host of problems such as poor attendance and participation.
Start with 10 to 15 people. You might invite the initial five or six and ask them to bring along a friend or two of their own. At the first meeting, have members discuss their investing styles, goals, and expectations, as well as workloads, to make sure they're compatible. If a few want to turn a quick profit by investing in penny stocks while others want to invest for the long haul in stalwarts, your club will likely run afoul.
Agree on the amount of the monthly contribution ($25 to $100) and where and when you'll meet. Small groups can gather in members' homes; larger groups can secure a meeting space in libraries, churches, or office buildings. Choose a name for your club, elect officers, and file for a Tax Identification Number via IRS form SS-4. Draft a partnership agreement and bylaws, and open a brokerage account. You'll find tips on doing so in our Broker Center.
Also, consider electing an education officer to plan lessons for the group. A few ideas follow:
- Expect members to study select books and articles so they can discuss them at the next meeting.
- Ask a member to learn how to calculate a stock valuation ratio and then to teach the group how to do so.
- Go on a field trip to a local company or stock exchange.
- Visit a library and ask where to find reference materials such as Value Line stock reports.
- Invite guest speakers, such as a veteran investor, a member of an experienced investment club, or an expert in an industry that the club is researching.
Once the club is up and running, ensure success by delegating and expecting active participation from each member. (A few souls doing all the work is not a sustainable plan and often leads to frustration and resentment.) Also, practice patience and focus on long-term rewards. Understand that learning takes time.
Have fun, offer refreshments, and socialize. Club meetings should be events that people look forward to. Just remember that you're there to talk about investing, so keep the meeting on track. You do need to talk business for much of the time.
As part of the club's ongoing routine, research stocks by studying companies' financial statements, competitive positioning, and business strategies. About all the information you need to evaluate a company is available online. Many resources in Fooldom can teach you how to scrutinize companies. NAIC details its own approach for evaluating companies (www.better-investing.org). Also, check out The Motley Fool's investment newsletters. A monthly subscription to one or more can be very handy and introduce your group to several promising possibilities for further research.
If the idea of pooling cash puts you off, then consider creating an informal club, where members research companies but stop short of investing as a group. This format has many benefits - it's straightforward and the club won't have to file any tax paperwork. However, if there are no actual investments, members are less likely to take the group as seriously, and the quality of participation, and research, can suffer. Still, this approach works well with the right, dedicated members. It's also an excellent way for younger investors, such as teens, to get into the swing of investing in a social setting. They could set up a mock portfolio, choose stocks carefully, and pretend to invest in them.
Learn all the time
For more details on investment clubs, visit our investment club nook. And check out my book Investment Clubs: How to Start and Run One the Motley Fool Way or NAIC's helpful text Starting and Running a Profitable Investment Club, by Thomas E. O'Hara and Kenneth S. Janke.
Need quick answers to your club questions? Drop in on our Investment Clubs discussion board.
Fool contributor Selena Maranjian produces the Fool's syndicated newspaper feature -- check it out . She owns shares of Pfizer and Microsoft. For more about Selena, view her bio and her profile . She has cowritten The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is investors writing for investors .