Setting up an Investment Club

Setting up Investment Club

What is an Investment club? Investment clubs have been in existence for decades around the world. Investment clubs are formed by friends or colleagues who pool money together periodically and meet to decide how the money will be invested.
They exist as a means for members to grow their personal wealth and learn about investing.
In Nigeria, less sophisticated forms of investment clubs known as 'ajo' or 'esusu' have flourished in many of our societies for generations even till the present day; staff of many corporate organizations operate the same scheme with several variations. The participating members will pool together a fixed amount each month and the money is paid to individual members in turn. The incentive of participating in 'ajo' is the enforced discipline of deferring the gratification of spending money today for a lump sum payment in the future. However, 'ajo' or 'esusu' does not take the time value of money into consideration; in other words, the first couple of people who collect the pooled funds are probably the only ones who really benefit from the scheme. Subsequent collectors are essentially lending money to others interest free and bear the additional risk of default from other members.
Why join an investment club?
An investment club is an effective way of achieving the investment aims of its members. Unlike 'ajo' or 'esusu' where contributions are given to one member to spend as he/she wishes whilst the others wait their turn, members of an investment club contribute and invest the contribution in several investments available in the capital market. By so doing, compensation for choosing to invest rather than spend their money now is shared amongst the members. This compensation will usually come in the form of interest and dividend payments as well as appreciation in the value of their investment. Additionally, investment risk is also shared by the members. Participants can either invest or collect the return on investment in accordance with the laid down guidelines set by club members. Furthermore, ownership of common funds and proceeds is based on each member's level of contribution.
You may want to take advantage of the benefits of an investment club if:
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you are new to investing and looking for a way to get started
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you are a seasoned investor and want to share ideas with like minded individuals
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you have limited resources/money to spend on investing each month but would like to build your nest egg
Steps to set one up:
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Get together a group of people who are interested in starting an investment club. It is advised you keep the number between 6-15 people to keep the group discussions manageable.
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Write an operating agreement stating responsibilities of group members which will include information on important issues such as your investment philosophy, how members can liquidate their investments, how dividends will be distributed, and even mundane issues such as how snacks will be provided.
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Conduct investment club meetings and delegate roles to each individual. Meetings should be held once a month with each member coming up with research and recommendations for investments that are in line with what has been agreed in the operating agreement.
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Decide on how you will utilize and obtain external advice. This should include selecting a broker to facilitate your transactions, a bank to manage the cashflow, an asset management firm for a more holistic approach to investing, a lawyer for legal matters such as drawing up your agreement or incorporating your investment club.
Although ajo or esusu has helped a number of people to cultivate the habit of saving, investment clubs provide a more effective way of growing wealth.

-Business Day News Paper

Common Mistakes Investors must avoid

Common mistakes investors must avoid

By Ayo Olesin, Punch

The wealth of the world’s richest men is usually tied to the value of the stocks they hold, so it was no particular surprise that the Mexican investor, Carlos Slim, displaced Microsoft’s Bill Gates as the world’s richest man a few days ago on account of a recent 27 per cent surge in the share price of Latin America’s largest mobile phone network, America Movil.

Slim holds a 33 per cent stake in the firm and he is now worth about $67.8bn compared with Gates’ $59.2bn.

Such tales of immense wealth built on investments in companies are largely fascinating and it is the big investors, like Slim and institutional fund managers that make the news usually because of the size of their investments and returns.

But there are millions of others that have built relatively modest riches on account of investments in stocks of both small and large companies, and the potential for small investors to make huge returns in companies that are not even heavily capitalized or liquid is always there.

The advantage a small investor has really is that he has all the time in the world to research and focus on companies that will deliver value and superior returns over time, compared with fund managers who are under pressure from clients to perform.

Unfortunately, this is not usually the case, as small investors tend to follow the bandwagon, placing their bets, based on sentiments, in shares rising in value rather than seek out undervalued companies.

However, for an investor to avoid being lumped in the group of underachievers and boost potential for high returns over time, there are a few common mistakes, which must be avoided.

The first is market timing. This simply means being able to predict how share prices will move within a short time frame so the investor can buy low and sell high.

If this were possible, all investors would be rich in no time. Experts point out that stocks behave in a random manner within a short time frame with prices swinging up and down for no apparent reason. Monitoring stock price movements on the Nigeria Stock Exchange for just a week will prove this.

Any investor that tries to time the market could actually make some quick gains, but also make equally quick losses since his actions are made at random and there is no underlying strategy.

It is always better to focus on investing in companies that are selling at a significant discount so that expectations of good returns are realized.

Another mistake small investors make is discountenancing the cost of making trades. Fund managers and stock brokers are in the business of making money through the fees they charge. The beauty of their business is that they make money whether you buy or sell shares. Fund expenses, trading commissions, account management fees, and the spread between bid and ask prices on stocks are money spinners for such institutions and if there is any profit left after trading on your account, the government still collects its cut in withholding tax on dividends.

So any discerning small investor should always be aware of fees or commissions that come with trades, which effectively translate into lower returns for the investor. It is advisable to hold onto stocks that are performing. What real gains could be made in selling off shares in Zenith Bank to buy UBA, for example, when both companies are in the same industry, with similar market capitalization and growth potential? However, some fund managers will not hesitate to do that since they will get their cut.

Looking beyond the hype helps an investor avoid serious losses. Investors in the infamous Dot.Com bubble can attest to this. Many people bought heavily into Internet firms that sprang up about a decade ago, in an industry where business models are in constant flux. Some companies did well, most did not. Those that did well such as Google understood the market, and were able to see the future.

In Nigeria, the financial services sector is seen as the key growth area, and there is the hype that even insurers must necessarily do well just as the banks. Investors will help themselves by looking at company specifics and ask themselves if the company they are interested in has any real competitive advantage over others in the same sector.

Gambling. People gamble largely for entertainment, not as a source of income. An investor can buy a stock, which he knows nothing about and make money, fine, but he should not gnash his teeth in distress if he loses money.

Stock experts stress that investors should not buy based on speculation or sentiment.

The rule, especially for value investing is “buy because you understand the company and recognize that it’s selling at a discount to its fair value.”

Here, an investor should always have a good grasp of a company’s fair value, its growth strategy, and the challenges it is likely to face going forward.

Value expert opinion. Many investors would ignore advice of an expert not to buy into a stock that is rising fast on the market, but the truth is that stock markets are subject to cyclical movements. Boom and bust cycles characterize the market and any investor caught in between could have his fingers burnt, especially if he takes a position as the stock price is peaking, just on the verge of a downward slide.

An investor should realize that by purchasing stocks, he has become part of the company, and has entrusted his investments to the managers who are expected to generate profit and give returns periodically in form of dividends, bonuses or capital appreciation.

So it is better to get in when a company is young, as the stock market does not defy nature, it needs to grow. Also, it is better to buy stocks on the decline, not when it is rising.

Investment analyst, David Meier, points out that investors have to be able to identify some characteristics of stocks and use available information to take advantage of investment opportunities.

One can draw from the concept of the stock market according to the father of value investing, Benjamin Graham, who postulated that “Over the short term, the market is a voting machine; over the long term, it’s a weighing machine.”

He pointed out that a simple way to access stocks is to assume that the Return on Invested Capital is the key variable that the market uses to weigh a company’s stock price for it to rise over the long term.

If this is so, he says that it could be assumed that stocks with falling prices and falling ROIC are in turnaround or stocks with rising prices and falling ROIC are in the danger zone.

Also stocks with rising prices and rising ROIC are probably in for good times while stocks with falling prices and rising ROIC are value opportunities.

However, these are mere assumptions. The key issue is always to get expert advice and avoid joining the bandwagon, which could result in short-term gains, but subsequently result in serious burns. – Punch

Why Investors Lose in the Stock Market

Why investors lose in the stock market
By Bosede Olusola-Obasa

I have found that if you control losses when trading, the profits will tend to look after themselves. If I could only tell beginners what the destructive behaviours are before they start, they might be spared much financial pain,” says a renowned financial analysts, Colin Nicholson, in one edition of his articles published on the web.

Nicholson, who has written nearly 200 articles and columns about technical analysis, trading and investing since the 1990s, identifies some ways people set about losing money in the stock market. He faults the following ideas and urges caution in adopting them:
- Learn to pick the tops and bottoms.

Trading with the trend is for wimps. No wonder they don’t become rich, they leave too much on the table. You can capture it all, buy the low of the trend and sell the high. Yes, buying a new low is trading against the trend, but you do know when the trend is going to change.

- Take profits quickly and hold on to the losers
It is no wonder traders lose. They keep leaving their winnings on the table where the market can grab them back. They are just greedy. Better to take them straight away. But not the losers, after all, they say, a loss is not real until you sell. Besides, the experts tell you stocks always go higher after a fall.

- Do not waste time developing a plan of action
After all, everyone knows that he who hesitates is lost. If only you had bought a particular stock when it listed you would be very rich now. The problem with most people is that they know too much about the market and so confuse themselves. Since you know that most businesses fail for lack of a sound business plan, then it is not safe to go on without a sound-trading plan.

- Look to trading to provide the action you crave.

To succeed, you only need to get free of all those irksome restrictions. The market is a way to get free of all the things that have always held you back.

Even though many stock market professionals agree that an investor might not get it right all of the time, but with adequate attention paid to relevant market factors, a greater fortune awaits investors.

For instance, in his book: Timing the Stock Market, renowned author, Colin Alexander, provides a guide on how to identify when to buy, sell and sell short. To him, risk-conscious future traders would not think of trading without using timing techniques, adding that some professionals at times reject or ignore timing mainly because they do not understand timing or because they do not know how to use it.

He cautions against impulse investment while encouraging information-based investment decision-making, adding that fundamental and technical factors must be considered about a stock before funds are staked in it.

Before taking a step to purchase a stock therefore, he says the investor should attempt to find out about what he wants to buy, when to buy or sell it, the difference between it and the nearest alternative. He advises investors to take personal responsibility for his investments.

The Chief Operating Officer, CentrePoint Investments Limited, Mr. Jire Oyewale, asserts that many people have created wealth from the stock market because they were business minded in their approach to their investments.

He stresses that one of the pitfalls to avoid in stock investment is playing the absent investor who does not care about price movements, time and their implications. That way, he says, people easily lose money. He adds that a carefree attitude should be avoided rather there should be a desire to become more intelligent about the workings of the market.

He recommends that:
-You should avoid bandwagon effect, which is the syndrome of following the crowd in investment because it could lead to loss of money. This is because the buyer only bought because others were buying, refusing to understand its historic background, and possibly the expected performance because you are buying into the future of the company.

-You have to carefully consider your entry level (the price at which you are buying). You should avoid the mistake of thinking that a stock will continue to rise simply because it is currently rising because it is not always like that.

-You also need to consider when to exit (sell). The safe way to go is to learn to exit a stock when you discover that you have made a reasonable profit margin on a particular stock. You can exit it and reinvest in other good stocks that are trading at a lower price.

It is better to exit and make considerable profit than to eventually lose everything.

-It is better to trade in a stock with high price but with sound fundamentals and strong prospects than one trading at a lower price but lacking the prospect to turn your investment around.