| How to Setup an Investment Club? |
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Master of the Universe
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| How to Setup an Investment Club? |
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Hi everyone,
I'm interested in setting up an investment club with some of my friends, we have worked out a game plan as listed below, but we have no idea what the tax and legal implications are, or if we need to register with any regulatory agencies. Any guidance would be greatly appreciated.
Investment Objectives
1. To preserve capital by achieving after tax returns that are ahead of the inflation rate.
2. To outperform the market by having superior returns over the S&P 500
index.
Investment Strategies
1. Long-term investing (one year plus) in order to take advantage of the lower tax rate, and to minimize commission costs.
2. Low risk, balanced (diversified), negatively correlated investments. All securities are open for consideration; however, for every $1 purchased in a high risk investment, an equal $1 should be spent in a negatively correlated or less risky vehicle. Depending on market conditions, holdings should be rebalanced no more than annually in order to satisfy the long-term investing condition.
Securities Analysis
1. Peter Lynch: Personal valuation
2. DCF: Absolute valuation
3. Ratios: Relative valuation
4. Supply & Demand: Market valuation, volume
5. Technical Analysis: Historical valuation
Portfolio Analysis
1. Risk Calculation: Beta and Standard Deviation
2. Expected Return: CAPM (return based on risk), DGMs (price based on future dividend)
3. Actual Return (performance): Alpha (portfolio vs. market), Sharpe Ratio (risk to return)
4. Time: NPV and IRR
Risk Reduction Methods
1. Systematic Risk (market risk): Minimized through negatively correlated
investments based on beta.
2. Unsystematic Risk (diversifiable risk): Minimized through a diversification of 8 to 10 holdings.
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Sat Aug 12, 2006 3:26 pm |
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coaster
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I got quite a few hits on Google when I searched on "investment clubs" -- I'm sure you'll find some useful information there. I don't know anything about setting them up, but I have a few comments on your bullet points:
- your definition of "long term" doesn't really go with your other objectives. I suggest you redefine that to 10 years.
- to outperform the market you need to be willing to accept more risk, so your goals of outperformance at less risk are contradictory.
- if you balance everything with opposing correlations you end up with a flat line. It's been shown that a mix of different asset classes produces a better Sharpe Ratio; i.e. better risk-adjusted performance. But that's not done just by having negatively correlated assets in a 50/50 mix.
- I think your proposed methodology is much too complex for an investment club. It might be fine for an individual who's really into complicated analysis, but to get a consensus among a group of individual when all those factors have to be considered? It'll never happen. You've heard of "paralysis by analysis?"
Best wishes & good luck -- keep us posted on how the club works out. 
~Tim~
Eye Candy : Why Whimsy
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Sat Aug 12, 2006 3:43 pm |
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Master of the Universe
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Hey coaster,
Thank you for your insight. Good point about the risk vs return contradicton, I guess you can't really have one without the other, gonna have to redefine our strategy a bit. Looks like it's back to the drawing board. I'll definitely keep you guys posted.
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Sat Aug 12, 2006 4:13 pm |
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coaster
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I was thinking about this while I out doing some stuff and thought I'd throw out a few more comments for your group to consider:
Unless you're all retired guys, your main objective is to increase the value of your investment. So throw out "capital preservation." That's just a fancy phrase for "don't lose money." And nobody wants to lose money. But the only way to guarantee that is to put it in CDs or money markets, and then you don't achieve objective #1. So first of all, simplify your objective to: increase the value of our investment by achieving returns in excess of market indexes with minimum risk.
Now, think about how you exceed the market indexes. The S&P 500 is made up of 500 stocks. Some of them do better than the index, some do worse. So all you really have to do to outperform is to pick stocks that will do better than the index. You just have to pick the best companies; the stock price will eventually follow.
Now think about how to minimize risk. Risk is losing money. To avoid losing money, to just have to avoid investing in lousy companies. Because eventually the stock price tells the story when a company is doing poorly.
So, it all boils down to picking the best stocks to achieve maximum return with minimum risk. It's really not that complicated. Investing in the best companies will get you returns better than the market indexes. And if you really want to outperform, then you have to find what will be the best companies BEFORE anybody else finds them....now that's a bit harder. 
Now, how to do that: you're going to have a group of people, mostly likely with different talents, abilities, skills, and knowledge sets. Some will be new to investing, some more experienced. Just match up the person with the best combination with the type of stock. For example, maybe you have a person who works in a certain industry. He'd be best qualified to tell you which companies are the best companies in that industry. Then just have each person do the research and pick the one best stock that they know the most about; everybody takes their selection to the next meeting, and then members chew the pros and cons to death until they come to a consensus on whether they want to put their money in that stock or not.
Another way would be to assign everybody to research stocks in a certain sector; everybody takes their pick to the next meeting, and just buy whatever the group decides is the best stock.
Just keep it as simple as possible while using the resources you've got when you get a group of people together, and I think you should do well.
~Tim~
Eye Candy : Why Whimsy
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Sat Aug 12, 2006 5:12 pm |
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Master of the Universe
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Thanks again for your advice, Tim. Indeed, we are a diverse group; we have people of different gender, nationality, field experience, educational level, views and perspectives. This is just one of the many advantages an investment club has over solo investing as others are listed below.
Advantages of an Investment Club
As oppose to "do it yourself" (DIY) investing:
1. Learning from others.
2. Having different perspectives.
3. Splitting the cost of commission.
4. Do not need to have a lot of money to invest.
As oppose to mutual fund investing:
1. No management, 12b-1, and other fees.
2. Having control over turnover rates to better manage your taxes.
3. Having specific investment decision making abilities.
4. Gear towards your own personal goals.
5. Flexibility of working with people you already know.
6. No need to pay for advice.
What I'm still confuse, and don't have a clue of is the process of setting one up.
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Sun Aug 13, 2006 2:35 pm |
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Master of the Universe
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These links are perfect. Thank you so much!
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Sun Aug 13, 2006 4:48 pm |
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coaster
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You're welcome.
~Tim~
Eye Candy : Why Whimsy
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Sun Aug 13, 2006 6:31 pm |
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Hosannakk
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Whatever investments your private investment group decides to take in, it should be decided by the whole group. Do not expect financial yield in the first few years of the investment. Just like any investment tools, each member should be prepared to invest long term. It may not help your club if there will be members who seek immediate financial return on their investment or simply wants to cash out of the investment club the soonest time possible. With PICs, patience is always a virtue.
Stock Exchange Updates
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Fri Aug 27, 2010 2:27 pm |
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coaster
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Cash: $ 1318.80
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Please pay attention to the date on the last post. This thread is four years old, and even four years ago had run its course.
~Tim~
Eye Candy : Why Whimsy
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Sat Aug 28, 2010 7:37 am |
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Roksana
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The idea itself isn't new. The world's first investment club was established in Texas in 1898, back in the days of the Wild West when few investments could be considered safe. Investment clubs were seen as an ideal way of spreading the risk - away from just cattle.
While the first investment club on record dates back to the 1800s in Western America, Various online communities devoted to this type of investing have recently emerged and have contributed to the personal investing boom in the United States. One of the reasons that people come together in investment clubs is to learn how to invest.
south shore savings bank
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Tue Nov 09, 2010 5:48 am |
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nirob42
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I think your proposed methodology is much too complex for an investment club. It might be fine for an individual who's really into complicated analysis, but to get a consensus among a group of individual when all those factors have to be considered? It'll never happen. You've heard of "paralysis by analysis?"
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Sat Nov 13, 2010 8:03 pm |
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intradaytips9
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If you want to set up an investment club, you need to set some rules with the other members. You will be forming a partnership, so you will need the help of a tax accountant at some point. You can find out more information here:
" www.investopedia.com/articles/01/062001.asp "
Regards,
[deleted]
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Thu Dec 09, 2010 6:18 am |
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