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In Clubs, Capitalism Trumps Democracy

Of ‘Doug’s Law,’ Tallying Votes and Reasonable Solutions

 Douglas  Gerlach Bookmark and Share

We’re in the thick of election season and soon Americans will be going to the polls with an eye toward a) kicking the bums out or b) keeping the bums in.

As such, it seems a good time to review the democratic principles that govern — no, not bums —investment clubs, particularly as they apply to voting on club business.
BetterInvesting’s suggested sample partnership agreement allows for a single way in which members carry out club business: “Each partner shall participate in the management and conduct of the affairs of the partnership in proportion to his or her capital account.”
Translated, this means that club members vote in proportion to the percentage of each member’s ownership in the club. A member whose capital account totals 12 percent of the club has twice the voting power of a member whose shares come to 6 percent.
In the myICLUB.com program or Club Accounting 3 software, the Member Status Report provides the exact ownership of each club member.
The rationale behind this proviso is rooted in capitalism itself: One “share” in an investment club is just like one share in a public company, which gives the owner of that share one vote in the operation of the business. The owner of 1 million shares has 1 million votes. Anyone who wants a greater say need only put up a greater amount of cash, whether in a club or as a shareholder.
In an investment club, there’s another dynamic at work that supports this method of voting.
Those who own a larger number of shares in the club will usually be the members who have been in the club the longest, and though age doesn’t necessarily bring wisdom — I refer again to the bums in Washington we’re either throwing out or keeping in — experience does count when you’re managing a portfolio. Members of long-standing are likely to understand the tenets of long-term stock investing and may be (at least somewhat)
better-equipped to make wise investment decisions. If newer members wish to have a greater say, they must earn it through participation in club business. Oh, and by ponying up the cash.
That’s all well and good, you might say, but isn’t it harder to tally votes during a meeting when using the weighted capital account method, adding up all those percentages and messy decimal places?
I’m so glad you asked! There’s a solution that will help keep your voting procedures running more smoothly than a butterfly-ballot recount without disturbing the intent of the sample partnership agreement.
In Investment Clubs for Dummies, Angele McQuade and I proposed solutions to many common club conundrums based on what I called “Doug’s Law of Reasonableness,” wherein I proposed that where people are willing to be reasonable, solutions to problems could be found. (And to be fair to Angele, though I suggested the Law, she was reasonable enough to accept it!)
With regards to voting, the reasonable compromise we suggested was to allow each person to have a single vote on club business as a matter of course; however, any member could request a weighted vote at any time.
In practice, then, no calculators would be required when voting on most issues. Yet those with greater ownership are still protected if they wish to use their clout, which should be, after all, completely within their rights to protect their assets.

Douglas is ICLUBcentral's product manager, helping develop the company's programs including Toolkit 6, myICLUB.com, and the Investor Advisory Service. He is also the author of several investing books, including The Pocket Idiot's Guide to Direct Stock Investing, The Complete Idiot's Guide to Online Investing, The Armchair Millionaire, and Investment Clubs for Dummies.

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