How to start and run your own investment club

Ever fancied emulating the success of Warren Buffett, one of the most watched – and successful – stock market investors in the world? Popular blogger Enrico Liebenberg offers some practical tips for how you can club together with friends to invest in shares. In this excellent guide, Enrico covers all the main points, from how to manage the costs of investing to carving up profits and losses. – JC

Would you like to have your own Berkshire Hathaway? 

By Enrico Liebenberg

We all hear about those wonderful stories of a group of friends who saw an opportunity and made a buck or two down the line.

For anyone to identify that once in a life time opportunity, you would need to be tuned in on searching for such opportunities. You need to have an active process of researching and sharing opportunities. The proverb goes that two heads are better than one. Well, I am pretty sure that we all have friends who share the passion and curiosity for investments and the financial markets. Then why not combine your social interactions and love for investments and establish an Investment club.

What is an Investment club?

An investment club is a community of investors who pool resources, in principle the same as unit trust work, share knowledge and actively acquire assets for their mutual goal.

How to start the investment club?

Would you like to build your own Berkshire Hathaway with a group of like-minded friends? Blogger Enrico Liebenberg gives practical suggestions on how to run an investment club.
Would you like to build your own Berkshire Hathaway with a group of like-minded friends? Blogger Enrico Liebenberg gives practical suggestions on how to run an investment club.

Identify the potential members and get them together to pitch your idea of forming an investment club. Make it casual and relaxed but be assertive with your goals and expectations, and don’t promise anything. Ensure that you as a group understand and agree on the investment principles and why you want to start the club. It is very important that everyone agrees on why the club is established and what the common goals are. You can get very technical here, but with my experience, keep it simple! At the very least follow these simple principles, take a long-term view, stay away from anything you do not understand and never ever try to time the market.

Now that you have identified members and everyone agrees on the important stuff, you need to decide on the vehicle you would like to use to operate the club out of. The most sensible one would be a partnership but there are many different methods, each with its own tax implications. You can have a chat with your local tax consultant who will be able to guide you.

Regardless of the legal person used it is very important that a club constitution and a members agreement is setup and signed by all members before you even start investing. This will ensure that everyone knows what goes for what, and establishes a great document for how to deal with sensitive issues when the relationships are breaking down.

Some of the important points to touch include the following:

  • Name of the club
  • Membership
    • Determine the terms and conditions of membership; remember you can decide who can join and who not.
  • Initial Joining Fee
    • All founding and new members should pay a joining fee which most likely would be used to cover administration costs.
  • Monthly Contributions
    • Decide on this so that all members are in agreement of their monthly commitments to the club.
  • Additional Members
    • Agree now how new member additions will be dealt with so that no surprises jumps on you at a later stage. You can agree that all founding members have to approve new members.
  • Valuation
    • Agree on a method used to determine the value of each member.
  • Management
    • Determine who would be responsible for what duties and document that. This ensures that everyone knows who is responsible for what, and most important can be held accountable.
  • Meetings
    • Decide how often meetings will take place and how such meetings will be managed.
  • Elect Officers
    • Elect a club chairman, financial officer etc. The idea is that this needs to be fun – try to keep administrative duties to a minimum and be fair on distribution of responsibilities.
  • Sharing of Profits and Losses
    • Agree on a policy of how profits and losses will be shared between members.
  • Annual Accounting
    • The annual financial statements should be compiled at least annually to keep all members up to date of progress. If you can manage to distribute an update quarterly you are on the right track.
  • Bank Account
    • It is a good idea to have a bank account separate from any of the members’ accounts – this keeps the whole venture transparent and ensures all members are at ease knowing the cash is safe. Like with any business, have two signatories on the account.
  • Trading Account
    • Should the founding members accept a mandate of investing directly in equities, rather than equities via a unit trust, open a share trading account at the brokerage of choice.
  • Voluntary Termination or withdrawal of a partner
    • Setup a policy of how voluntary member termination would be managed. When a member decides to cash in his share of the venture, it usually goes with a lot of emotion and stress – by having decided on the procedure and policy in the honeymoon phase, will ensure that everyone knows what they are in for.
  • Death or Incapacity of a Partner
    • Agree on how the death/incapacity of a partner would be handled.
  • Disputes
    • Agree on a formal dispute resolution policy, there will almost certainly be periods of dispute, having guidelines on dealing with it decided on early one helps.

Another very important point to consider is, who will be responsible for all the work that goes into the administration and management of the club and investments, this will in most cases be the founding member. If you are not prepared or willing to do the bulk of the work, rather come up with a solution to distribute the workload than not embark on this very exciting venture.

You will soon find yourself sharing and finding very interesting opportunities everywhere you go, and before you know it, you might hit that special one. Be sure to share your success stories and tips with us by commenting on this, or tweet me @enricojnr.



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