There’s more to investment clubs than starting a stokvel. Alex Brown explains how to get your savings on the stock exchange
`Give me an acorn and the passage of time and I’ll give you an oak tree.” So it is with money – but the problem is that few of us are Zen enough to stand by and watch the seemingly interminable process of shooting, budding and growing.
Yet both the oak tree and the long-term savings largely get on with it themselves – and we get on with the rest of our financial lives, earning and spending money and, hopefully, keeping up. It’s all rather dull, really.
But there is a lot to be learned (and fun to be had, and profits to be made) from proactively managing our own investments – which may account for the enormous and growing popularity of savings and investment clubs. Since the spin-off of these is a heightened awareness of how savings and investments work – and a more critical consumer results in better service from financial service providers – it’s a trend that is of long-term benefit to all of us.
Savings clubs are as South African as pap en sous, with a long and proud tradition of stokvels picking up where banks were slow to go in earlier years. Take Christmas clubs, for example: members who may otherwise live hand-to-mouth contribute each week or month, one person banks the money and, at the end of the year, each member gets his or her money back, with interest.
The more sophisticated investment clubs are a newer phenomenon in South Africa, although they are huge in the United States: there are thought to be about 35 000, with total investments (at last count) of about half-a-billion dollars.
The principle is the same as with the stokvel, except this time the money is invested, usually on the stock exchange. The group members meet and make contributions at regular (probably monthly) intervals. At these meetings, they decide how the new money should be invested and whether there should be any action on the existing portfolio. Often there will be a speaker, or a presentation from one of the members who has researched a particular area, for example the prognosis for the precocious information technology sector, whether stamps are a good investment or whether there is a case for going offshore. If it’s a good club, there will also be pizza and wine and a bit of a “have you heard?” quotient.
In the US, there is a National Association of Investors’ Corporation (NAIC), which publishes guides and offers membership support for investment clubs and their members. We have not yet reached that level of organisation in South Africa. So, here is a how-to guide for starting a club of your own.
Get the team together
Friends do not necessarily make the best financial partners – but this is all about fun, so you should like your fellow investors. You’re looking for people who will reliably be able to afford the monthly contribution and who are well connected, well read or will in some way make a concrete contribution.
First choices:
l someone who works in the investments division or is otherwise connected to a bank;
l a stockbroker;
l a lawyer;
l a tax adviser; and
l a financial journalist.
That is not altogether a joke – if you have likely candidates, invite them along to the preliminary meeting. For the rest, you need to find people who have enough enthusiasm to make up for what they lack in know-how – which means assiduous daily reading of the business news pages.
In terms of numbers, the optimum would be somewhere between six and 12 people. That way you get the diversity but the numbers are still small enough to allow meetings to be coherent. At the preliminary meeting, you will weed out the keen beans from those who aren’t entirely persuaded.
As a starter, you should all agree on the regularity of meetings, the unit price (what each member contributes) and the general investment policy. Are you looking for safe and steady growth or are you going to go the adrenaline route: a high-risk, high-return policy? The latter requires active monitoring of shares and quick reactions – do you have people who are able to do that?
If the aim of the club is to learn about the markets and, hopefully, make a bit of money on them, there is no point in belonging if you’re not an active participant. All members should therefore commit to being at all meetings.
Set it up
Let’s say you have decided on a R200 unit price. At the second meeting, you all have your chequebooks with you. Let’s go! But wait – to whom do you make out the cheque and where do you deposit it?
You need structures. You need a name and you need an account, preferably with two signatories (for security or in case someone’s away when a crucial transaction needs to be done). You need a broker to do your trading. You need a postal address. You need someone to take minutes at each meeting and you need someone to track the portfolio and bring everyone up to date at each meeting.
Basically, the message is that you can’t be casual. Even if the amount of money you’re handing over each month may be beer-and-chips money it still adds up to a lot. Find general tips on how to set up an investment club at .
Finalise a constitution
This is likely to evolve over a few meetings, but it’s something you ought to take seriously. You might like to invite a tax expert to fill you in on the legalities of what you’re doing and the broker you have appointed to explain the difference between The Bonfire of the Vanities and the real world.
Each constitution will be unique, but certain areas must be covered. The NAIC’s dummy constitution at is worth looking at, although the differences between South Africa and the US mean that it is of limited use. For some ideas of how clubs have thought through the process, you could also ignore the legalese and visit .
The constitution should cover:
l Office holders: responsibility should revolve at intervals.
l Life of the club: your investment strategy will differ according to whether you’re planning to run the club for 18 months or five years, so decide at the outset.
l Investment strategy: there is no science, no right and wrong, but there are principles. In order to keep assets liquid, for example, you might like to specify that there may be no investment in property. You may like to agree on a price limit on new shares, or a selling point (for example, when a share drops 40% below buying price or rises to 50% above). The world’s most successful investor, Warren Buffet, got there by sticking to rigid rules with which many might disagree, but it’s worth knowing what they are. You will also need to explore no-go zones – are you strongly opposed to investing in companies that are known to disregard environmental issues, for example?
l Due involvement:an investment club is no place for freeloaders. Decide what constitutes due attendance and enforce it.
l What’s in a vote? There may be members who have more than one share. Do they also have more than one vote? Also, what constitutes a decision? Are you going to go for unanimity or will a simple majority serve?
l Comings and goings: as time passes, your portfolio will become more expensive. Ten members at R200 a month means R2 000 a month or R24 000 in the first year (or let’s say you have had a good year and your 12-month figure is R30 000). Now other people want to join. They obviously have to match the money each of you has already invested, which makes it a joining value of R3 000.
But they are also benefiting from your hard work and experience, so you could charge a one-off premium for new members. Many clubs limit it to a modest 5 to 10%, used to defray the broker’s fees for the extra one- off investment, plus a bit.
If someone wants to leave, perhaps the fairest option is to manage the situation the way the market itself does: the departing member offers his or her share to other members for the best price, or puts it out to tender if there is a waiting list of new members.
The Johannesburg Stock Exchange isn’t a money mint. When it’s up, you’re cooking – and when it’s down, well, you can still enjoy the pizza and company. In the long run, it’s invariably kind to investors.
And here is a parting thought. If the 630 000 Standard Bank clients who receive The Money Standard and their partners all joined investment clubs and contributed R200 a month each, that would amount to R252-million in new investments every month. That kind of money really talks.
This article first appeared in The Money Standard, Standard Bank’s customer magazine