A story is told of a kid whose parents refused to buy toys for when he was young. He therefore vowed that once he had grown up, he would make money, join an investment club and use the proceeds to buy so many toys that they would fill a room. Well, he is now a big man. One of the questions that crossed my mind when I heard the story is whether one should contribute emotionally, psychologically or financially to an investment club.
Many people associate investment clubs, Mary-go-rounds, Tom-go-rounds, chamas, nyayos or groups (whichever name you choose) with the latest fad in the world of finance. Others believe they are the vehicles to wealth in the current wave of flight to financial freedom. This is a matter of conjecture. In the same breath, there are those who decide to pre-maturely join investment clubs without doing a thorough soul search.
Others join such clubs because they want to keep the comradeship power they had at college or campus. But for how long can these groups last after college? Most of them are similar to the kind of relationships or affairs which were common in campus- a good number fizzled after graduation. On a light note, those who were not lucky to win a soul mate while in campus may well be advised to join one or two chamas after college to make up for the wasted opportunity.
What’s so special about investment clubs? Why do you want to be part of one? Simply stated, an investment club is a group of people who regularly meet, either in person or online, to share opinions through discussions and consultations on how best to use a pool of money to which each member has contributed. Put another way, you and a number of your friends may get together once a month to help one another learn about investing in stocks for instance. In this regard, you collectively invest in those stocks that in your opinion have the best potential for future growth. Mathematically this would be:
Study+ stocks (investment project) + socializing = investment club.
The formation of an investment club can entail members with a common bond coming together to start a given project. If such a bond is the fact that they are unemployed, then it is not very strong. More often than not, as soon as the members start to get good jobs, their interest in the groups wanes.
I am sure you can identify with many investment groups that people have formed. They start on a very high note. The members are full of zeal like a balloon that is full of helium and want to fly through the roof. They are loyal to the group as long as its vision is clear. The formation of some of these groups can start from a simple discussion. Other times you might meet a friend or two while on a visit. One of them suggests that you can actually start a group so that you make visits to one another periodically. The rest of you buy the idea. At that point what binds you is the friendship. Then at some point you decide that you can provide some money for tea and snacks to the host. A suggestion is made that you can actually start saving some money. Very soon you realize that you need more members to save a good amount of money and so every member starts thinking of whom to co-opt into the group. It is at that point that you decide to put some structures in place like officials to run the club and an account for saving your contributions.
Investment clubs have been around in one form or another for the last century or so. The modern investment club movement traces its roots back to World War ii. A group of young men near Detriot began a club to invest in stocks; something that would’ve been prohibitively expensive if they’d tried to do it on their own. The club continued through the war years, as members in the service stationed overseas sent their contributions to the club members still at home, who’d research and then purchase shares.
Reasons for joining
A lot times, when you are invited to join an investment club, you do not decline. You accept the offer very fast without first verifying or finding its objectives and vision. Other times you may be ready to ask questions but you have no checklist of what exactly you need to find out from the group. Then once you join, you soon realize that you are in the wrong club and you don’t share in its vision at all.
Alternatively, you join and soon you realize that the perception you had of the group is not what it is on the ground. You are shocked to learn that things are not as rosy as they had initially appeared. Tasks are assigned to members and one month down the line, no action has been taken on them.
If a group is not well structured then it is very hard for it to deliver. Effective communication and frequent updates to members go a long way in strengthening the club.
Think of ‘the four wives (W’s) and one Husband (H)’ story. Get the answer to the following:
- What is the group for or what is it aiming to achieve? (vision)
- Why should you be a member of the group?
- Where will it take you, what is in it for you?
- Is it planning to wind up after a certain period of time?
- How will you input contribute to its success?
- How will the group achieve its strategic goals?
Managing investing Clubs
Some of the things that one needs to consider before joining a group include:
- Shared vision
All the members should be bound by a common vision. Managing small groups within the group brings division. Ensure that new members buy in to the original vision from the word go.
This cannot be overemphasized. There is need for strong and focused leaders for the group to succeed. In addition, there is need for a clear reporting structure of the financials so that all members can know how much they have contributed and how it is being invested, the returns and the safety precautions in place (observe the cardinal rule of safety, returns and liquidity of the group’s funds)
3. Clearly define the group’s time frame
Many groups don’t survive beyond their third birthday. This usually happens because there was no clear definition of their timeframe. It should be clearly spelt out when the group is expected to achieve its set goals. If the group has not achieved anything substantial after the set period, then it is likely to collapse. Most members usually give up very fast. Also as time goes, the income and needs of the members are likely to change.
4. Dedicated and self-motivated leaders
There is need for change of leadership in the club after a certain period of time so as to enhance democracy and productivity.
The group that is result-based lives longer. That is why it is important for groups also to develop workable strategic plans and performance contracts outlining the key deliverables that meet the principle of SMART.
6. Contribution that is in line with members earnings (not too little or too high)
If you start contributing 1,000 per month, then there is need that you review the figure upwards periodically. Many groups die because of competition. People come into groups to help them do what they would not do as individuals. The moment they realize they can do much more on their own than in groups, then they opt out. Others also join other competitive and focused groups. This brings in competition and only the best groups survive (survival for the fittest applies in investment clubs too). It can be documented that the contribution will be raised by 10% every year and this should be clearly communicated to the members.
Without proper communication, even the group with the best structures and strategies is likely to die. The secretariat should be up-to the task in regards to communication. A lot of groups overcome this by having frequent meetings with strict penalties. Meetings should also ensure that people are assigned responsibilities and they are closely followed by the leaders. This is when those sharing the group’s vision are identified.
8. Conflict resolution
It is paramount that conflicts are resolved as quickly as soon as possible. There is need to have a servant leader who can easily get along with the members and get clue of conflict as soon as it comes up, address it and move on. It is not unusual for groups to have misunderstanding but they will emerge much stronger if they are sorted out amicably.
For the investment clubs to succeed, the members should be ready to sacrifice their time, resources and expertise.