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Investment Clubs

Recruiting Your Next Members, Keeping the Ones You Have

Pat Yarbrough’s investment club was in trouble. Members of the Women’s Investment Partners were caught up in a conflict over investment philosophies. Half of them were more conservative than the others, and every decision was tinged with strain.

“We voted by secret ballot, and there was a lot of tension at the meetings,” she remembers. “After the meetings, different members would talk about quitting. It was not fun.” 
That was two years ago. About half the Atlanta-based club eventually resigned, but Yarbrough and the other remaining members refused to let the departures destroy the club. “Those of us who were left have done really well and really enjoy the club now,” she says.
Not every investment club can endure similar struggles and still live to buy and sell another day. Whether it’s sharply different investing styles, members who can’t be bothered to do their homework or unproductive meetings that drag on and on, investment clubs can attract problems like the stock market attracts speculators.
If your club isn’t running as well as it should, knowing what to do can be difficult. But almost all investment club problems can be traced back to a few key issues. Address those and your club will be well on its way to being vibrant, productive and — can you imagine? — even fun.

Live Your Philosophy

One of the most important qualities of a successful club is a clear mandate. Clubs with a written investment philosophy — criteria that must be met before investments are bought or sold — and a detailed set of operating procedures or bylaws are often able to avoid misunderstandings and arguments simply by refusing to compromise these guidelines.
“Philosophy is the most important thing to discuss first,”  Yarbrough says. Jay Peters of the Mutual Friends Investment Club of St. Louis agrees: “Some clubs get impatient or abandon their strategy. Times like these, when the Dow Jones industrial average is dropping 150 to 200 points every day, require club discipline to hold the course, not panic, keep investing and look for bargains in the market.”
Nurture New Members

Carefully screening and supporting new members is another hallmark of successful clubs. Doing this is also an important factor in retaining quality members. People may be willing to join any investment club they can find when the stock market’s soaring, but as soon as they realize club membership involves work, watch out. Give potential members a clear idea of the rewards and responsibilities of membership. This weeds out the halfhearted applicants and prepares the more enthusiastic ones for the realities of club life. 
“They need to understand this is not a get-rich-quick scheme,” says Jim Vandersall of the Middle Georgia Investment Club of Perry, Ga. “Part of the educational process is dealing with the market ups and downs and learning how to take advantage. Convey that the No. 1 goal is to learn about the market, not to play the market.”
Another crucial component of successful recruiting is the packet of information given to prospective members. Include copies of your club’s partnership agreement, bylaws and investment philosophy; a list of criteria for stock research; a sample meeting agenda; and a description of member responsibilities. When new members join, have the club’s current partners shepherd them through the education process. 
“We just jump in and help them, give them jobs to do and assist them as much as we can,” says Libby Perry of the WISE Investing Club in Forsyth, Ga. “This is an understanding group.”
Yarbrough’s club does the same. “We have a copy of the Stock Selection Guide tutorial that we go over with them,” she says. “We make sure that they know about the resources that are available online.”
When the Middle Georgia Investment Club studies an industry, it often tries to assign a senior and a junior member to the same stock. “We have found that comparing notes tends to lead to discussion and a better learning process,” Vandersall says.
Vandersall sees BetterInvesting membership as a valuable asset when clubs are recruiting and welcoming new members. “It provides the guiding principles to how to operate a club, (with) a brand name behind the outfit,” he says. “It provides a level of comfort to prospective members that this isn’t just something started up by a couple of guys to make some money.”
Shelly Shuman, also of WISE, agrees that BetterInvesting tools are an essential part of a new member’s education. “We usually assign new members to an older member to manage a portfolio,” Shuman explains, “so that (the new members) will understand the BetterInvesting method of investing and following stocks.” The biggest mistake the club has made is letting new members join without knowing BetterInvesting methods and without stressing that members must use SSGs.

Stay on Target

Little frustrates a new club member more than poorly organized meetings that last far longer than necessary. You can avoid this by setting and following an agenda, discussing some club business by e-mail between meetings and sharing work responsibilities equitably.
The SSG helps focus stock discussion. “We teach the SSG to each new member,” Peters says. “Our first three years were wasted until joining (BetterInvesting) and using the SSG tools. Early meetings lasted three to four hours with a lot of B.S. Now they last one hour and 15 minutes max.”
Successful clubs also have a cheerleader, “a positive thinker who holds everyone on task,” he says. The WISE Investing Club has “a few members who seem to just say the right things when we get a little bored,” Perry says. “They aren’t afraid to change things a little or just admit we need to wake up a bit.”
Take advantage of technology to further streamline the work involved with your club. “When we started in 1973,” Peters recalls, “there were no personal computers. The change has been tremendous. Meetings are much quicker, (and the technology) holds members’ interest and saves members’ personal time, which is more valuable now.” Use computers to help with the club’s stock research and portfolio management, and make your treasurer’s job easier by employing accounting software and online resources.
Share the Work

When some investment club members feel like they’re doing more work than others, frustration and resentment can quickly snowball into defection. Everybody in the Women’s Investment Partners follows one or two stocks in the portfolio and takes turns being an officer, Yarbrough says.
The Mutual Friends Investment Club of St. Louis has wrestled with this problem throughout the club’s 35-year history.
“All organizations, including investment clubs, have a core group of about one-third of the members who do most of the work, one-third who do some work and one-third who do almost no work except for (making) dues contributions,” Peters says. “We finally realized this and changed our operations.”
One major change the club made is requiring each member to follow at least one stock in the portfolio. The member e-mails a monthly report on the stock to the investment committee, which consolidates the reports and sends them out three days before the meeting.
“WISE members stay involved by being assigned one stock to manage and report on,” Shuman says. “We also serve on a standing committee at all times. We switch committees and chairmen every three months.”

Head Back to Class   

A vibrant education program — one that both new and experienced members can benefit from — should form the core of your investment club’s efforts. Set aside meeting time to craft an education plan for the coming year and spread the teaching responsibilities among all members.
WIP has discovered a fruitful way to ensure that members’ education needs are being served. “We try to do a 10- to 20-minute education session at each meeting,” Yarbrough says. The club conducts an annual survey to determine whether there are any underlying problems and the members’ goals are the same and to see what members want for education sessions.

Lighten Up

Many successful clubs also take a break from data analysis to have a little fun every now and then. Social time before or after a meeting — or even an entire evening devoted to a party once a year — can increase a club’s longevity more than you might realize. Although fellow club members don’t need to become your best friends, there’s a lot to gain by cultivating camaraderie.
Tasty treats don’t hurt, either. “One of our presidents had a fun, short quiz each meeting and made a homemade cake as a prize,” says Perry of WISE.
Yarbrough also appreciates the personal connections in WIP.  “We like each other and have come to really respect each other’s opinions and judgment,” she says. 
“Choose members you’ll enjoy getting to know, spending time with and sharing laughter and friendship with as you all grow wealthier and wiser,” Shuman says. “Being together for 12 years, given the difficulties that we have been through, has taught us to trust each other.”

Take Action on Club Issues

If the time ever comes that club life no longer works for a member, releasing this person with grace and consideration is a way to respect the member’s past commitment. 
“All of us understand the desire to leave a club if we find it isn’t for us or life events make it difficult to attend,” Perry says. “It’s a club and shouldn’t be a burden.”
WIP allows members to take a leave of absence. “Several have done this, and it has worked very well,” Yarbrough says.
But for those who stay in the club, the benefits of membership are well worth the work involved, says Vandersall of the Middle Georgia Investment Club.
“Stay in it for the long haul,” he says. “Don’t fret the down times, but don’t get bubbly about the good times, either. There will be ups and downs. Through it all, remember the reason you’re in it.” 
After adding a bit of deliberate action and some informal fun, don’t be surprised if your own club soon adopts a similarly profitable attitude.

Decisions and Dissent in Investment Clubs

How investment clubs make decisions is the subject of a new book by Brooke Harrington, a researcher at the Max Planck Institute for the Study of Societies. In this portion of Pop Finance: Investment Clubs and the New Investor Populism (Princeton University Press), Harrington discusses the group dynamics at work when clubs debate and vote on investment candidates.
When investment clubs make decisions about whether to buy or sell stocks, they are entering socially risky territory. This is in part because discussion and voting may expose conflicts within the group. But there is an even more socially perilous aspect to the process, in that it necessitates a confrontation between the individual who makes a proposal to buy or sell a stock and the other members of the club. Because preparing presentations generally involves a minimum of several hours of work — gathering financial information and making calculations — voting against a proposal means disappointing, and possibly antagonizing, the presenter. The process is made even more confrontational by the use of a show of hands to take votes. This practice, which the vast majority of clubs employ, means that individuals who vote against proposals cannot do so anonymously; their relationship with the presenter may be hurt by a “no” vote.
Moreover, such votes are required at least once — and often several times — in the course of each club’s monthly meeting. Each vote is a “moment of truth” in which individuals must weigh not only the facts presented to them but also whether and how to express their views. In taking a position on the proposal(s) offered them, club members confront the tension between “getting ahead” and “getting along.” Some proposals are financially sound and do not force this choice. But investment decisions are judgment calls first and foremost; there are no certainties in the stock market, so there is plenty of room for disagreement, even on a proposal that has been prepared with care.
Given this context, the voting records of clubs in the qualitative study are particularly revealing. Of greatest interest are the proportion of decisions that pass unanimously and the proportion that fail to pass altogether. Since there is so much judgment involved in stock decisions, a high degree of unanimity is unexpected; the proportion of unanimous decisions is also a good indicator of group conformity and the importance clubs assign to social cohesion. And since dissent — particularly the failure of a proposal — is extremely socially threatening, the proportion of failed votes is a good indicator both of a group’s commitment to the task and of the leeway allowed dissenting opinions. Measures were operationalized in the following way: If a club voted on 10 proposals and five passed unanimously, the measurement of unanimity was 50 percent; if two of the 10 votes failed to win a majority, the failure rate was measured as 20 percent.
Table 4.5 shows the voting record for six of the seven clubs in the observational sample. The columns show how many votes each club took and, of these, how many votes passed unanimously and how many failed outright. The selection and recruitment pathways of each club are included for reference.
The results indicate that high-performing clubs sustain a great deal more dissent than low-performing clubs. The vast majority of votes in low-performing clubs are unanimous: So when a member’s proposal to buy or sell a stock comes up for a vote, the result is usually all in favor. In contrast, members of high-performing clubs are much more likely to openly debate each others’ ideas; far fewer of their votes pass without dissent. The column showing the number of failed votes indicates that while low-performing clubs almost never allow members’ proposals to fail, high-performing clubs do so routinely.
If low-performing groups were not debating investment ideas, how were they spending their two-hour meetings? As part of my observational study, I timed group meetings with a stopwatch, tracking the minutes spent on investing-related matters (such as the status of the group’s portfolio, stock purchase or sale proposals and brokerage arrangements) versus time spent on social topics (such as members’ personal lives and club social events). In addition, I tracked the amount of cash each group kept in its portfolio each month, and averaged that over the yearlong observation period. Table 4.6 shows how six of the seven clubs in the observational sample allocated their meeting time and investment assets.
I found the low-performing clubs spent, on average, less than half their meeting time on stocks and kept large reserves of idle cash in their portfolios — a significant drag on portfolio performance — not as a matter of strategy but as a consequence of not making investment decisions. In contrast, high-performing clubs spent more than half their time on stock presentations and discussions, and were nearly fully invested.

Fortifying the Clubhouse: 10 Tips for Keeping Members Happy

Live your philosophy: Avoid disagreements by setting your club’s investment criteria and operating procedures in stone and then sticking to them.

Share the work: Spread club responsibilities among members and consider working in teams.

Stay on target: Respect members’ time by keeping meetings short and not straying from your agenda. Discuss stock studies by e-mail to save even more time.

Nurture new members: Develop a mentor program to offer newcomers support and education.

Head back to class: Create a new education plan every year and rotate teaching responsibilities each meeting.

Take action: Deal with any problems immediately before they fester.

Turn on your computer: Increase the club’s efficiency by using e-mail, online resources, and investing and accounting software to minimize work and maximize research time.

Honor your efforts: Formally recognize club members for their service — no matter how small — at least once a year.

Lighten up: Add in a little social time before or after your meetings or have an annual party celebrating club accomplishments in lieu of a meeting.

Get involved: Attend BetterInvesting events — local, national and online — to make the most of your membership and meet like-minded investors.

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