Tuesday, November 25, 2008

Why Join an Investment Club?

An investment club is where people pool their money and make investment decisions together. According to the Investors Association of Canada, the first investment club began in Texas over 100 years ago. Today, there are over 6,000 investment clubs registered in the National Organization of Investment Clubs in the United States (NAIC).

Many of the advantages available through an investment club stem from the various economies of scale that are obtained by bringing people together. For example, with multiple persons working on analysis, your club can research and present more opportunities than if you were working on your own. Hopefully by considering more opportunities, your club can invest in the very best ideas and benefit from the extra choices brought forth.

Another economy of scale made available by an investment club is the increased size of funds under management and the opportunity for diversification. Many smaller investors with limited funds may not be able to adequately diversify their holdings into individual stocks and so they consider other investment vehicles like ETFs and mutual funds, which charge recurring fees.

Administrative work is also made less onerous through the participation of an investment club. Tasks such as club accounting, reporting and transaction execution could be delegated on a rotational basis over a wider basis of individuals than if you were working independently.

It shouldn't be surprising that operating in an investment club does come with some drawbacks. One problem might be the difficulty in obtaining approval for an investment idea that you really believe in. However, I think this drawback has a silver lining attached. Defending an investment thesis and valuation can be a valuable exercise, both to widen your own perspective and to teach others about the merits of an investment thesis. The investment decision process is more difficult through a club (than on your own), but the hope is that the decisions are more sound because of the additional scrutiny.

I believe the largest drawback about joining an investment club is if your club allows untrustworthy people in as members. Someone will need to act as club treasurer and you will want to make sure your money is safe and only gets used to invest in ideas that the club has authorized. For this reason, its important to be comfortable with the members of a club and to be reassured that there are adequate checks in place to protect the integrity of the club.

All in all, I think the advantages of an investment club make it well worth looking into.

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