WTF is an Investment Club?
If you haven’t noticed, we talk a lot about investment clubs here at Sneaky Falcon. We are in fact an investment club ourselves, we’ve discussed starting an investment club, and we even interviewed the founder of an app company helping to make running an investment club easier. I’m guessing there are some of you still wondering, “Seriously, what is an investment club?”
It’s a fair question. I mean it does kind of sound akin to some high school extracurricular, like Chess Club. Trust me, it is WAY cooler…
But really, any time I mention to someone that I’m in this thing called an investment club, it generally provokes a blank stare; the kind of glazed-over, Krispy Kreme-eyed look that either means “I have no idea what you are talking about” or “I don’t care at all about what you are talking about”.
Well, here’s what I’m talking about.
What is an Investment Club?
The SEC (Securities and Exchange Commission, not the overrated college athletic conference) defines an investment club as follows:
“An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members.”
Better Investing, an individual investor resource and educational group, offers a similar definition:
“A traditional investment club is a small group of individual investors who come together to learn, share investing experiences and help each other become more successful investors. At group meetings, usually held monthly, members pool their investment dollars, review studies of stocks presented by club members and select one or more stocks to buy…”
Let’s break it down so you all can answer “what is an investment club?” the next time it comes up at some fancy party and you want to impress a girl. Half of the time, it works all of the time.
Group of Individual Investors
At its very core, an investment club is just a group of people interested in investing in the stock market. Generally, they take this interest a step further, but we will get there.
The Better Investing definition specifically refers to them as “individual investors”. All this means is that they aren’t “retail investors” or people trading for a financial firm or investment fund.
So far, we have a group of non-professional investors, gathered together ready to talk about stocks and such. Pretty straightforward.
Pool their Money
Next, both definitions reference pooling money. While there are investment clubs that just get together to talk about investment ideas and then go off to invest on their own, that is lame.
Generally, members of a club contribute money into a business entity (partnership or LLC) that the club has formed for a proportional share of ownership of the group. Based on the recommendations and votes of the group, that pool of money is then invested.
Pooling money opens up doors to investments (whether it be high-priced stocks, real estate, or others) that one may not be able to easily afford with their own cash alone.
In addition to pooling money, an investment club is also pooling intellectual resources as well. Different perspectives and backgrounds, and also the distribution of work and responsibilities are also part of having an investment club.
Study Different Investments
As I was just alluding to, the main efforts of an investment club are directed at researching and recommending investments.
By leveraging the diverse expertise of the members of the group, (hopefully your investment club has diversity and expertise of some sort…) a wider range of investment opportunities can be explored than if you were simply investing on your own.
Members do their research, and then bring proposals to the club’s meetings to…
Group Selects Stocks to Buy
…Vote on stocks (or other investments) to buy. Not much more to say about this part.
Deliberate. Vote. Buy. Or don’t, then repeat.
Share Investing Experiences and Help Each Other
This part of an investment club often goes overlooked, and you’ll notice it is completely missing from one definition. That being said, it may be the most important part!
Although making investment decisions together is great, the real key is education and continued learning. Having a dedicated group of people interested in the stock market is a great opportunity to learn about new industries, companies, and methods.
As everyone’s individual skills grow, the overall ability of the club can improve as well.
Bam! Investment Club
That, in a nutshell, is an investment club.
Despite the informal term “club” commonly used to describe this type of group, if you are investing together with real money, you will need a legitimate legal entity. Again, this will likely take the form of a partnership or LLC. You will also need to register as a real business with the IRS. That means record keeping, profits, and taxes.
A little more serious (and awesome) than Chess Club, yeah?
Now that you know the answer to “What is an investment club?”, you might be asking yourself “Why?” I have written in detail on why you should consider investing with friends and start your own investment club. There are overall benefits to investing as a group, collecting resources, and sharing diverse perspectives on investment ideas.
If you have a group of friends, family, or associates that you trust and that shares an interest in learning more about investing and the stock market, an investment club may be right for you.
At the very least, it’s a great excuse to bring together a group to BS about business and investing. It may even lead to planning a boondoggle to Vegas for a shareholders’ meeting!