In the article concerning the expectations and realities of Investment Clubs, we pointed out that Uganda has witnessed an exponential growth in these associations over the last decade. The Capital Market Authority places the number of Investment Clubs at over 8,000. Despite this growth spurt, a good number of Investment Clubs do not survive in the long run.
Eronie Kamukama, a business reporter with the Daily Monitor, offers some insight into why this might be the case “A number of investment clubs are collapsing due to mistrust and inability to track their investments, inability to mobilise members for investment decisions and absence of return on investment.” It goes without saying that if the bottom line is compromised, the group cannot stay intact. Kamukama then recommends thus, “It is crucial for every investment club to have a clearly defined investment style, ideally with some amount of measurable rules or limitations on the club’s investment portfolio”.
Eronie Kamukama, a business reporter with the Daily Monitor, offers some insight into why this might be the case “A number of investment clubs are collapsing due to mistrust and inability to track their investments, inability to mobilise members for investment decisions and absence of return on investment.” It goes without saying that if the bottom line is compromised, the group cannot stay intact. Kamukama then recommends thus, “It is crucial for every investment club to have a clearly defined investment style, ideally with some amount of measurable rules or limitations on the club’s investment portfolio”.
This article goes one step further to highlight things you must be careful not to do when in an Investment Club, to ensure that your Club survives and grows with time.
This article goes one step further to highlight nine things you must be careful not to do when in an Investment Club, to ensure that your Club survives and grows with time.
1. Select a group of people you do not trust. The most successful and longest-standing Investment Clubs have been built by people that respect each other enough to honour their commitment to reaching the predetermined goal.
For example, Hi-Gain Investment Club in South Africa has been in operation since 1984 and was started by eight friends. TransCentury in Kenya is another example of an investment and infrastructure company that has grown from a club of 29 friends who started their journey in 1997. In Uganda, Y Save one of the most successful Corporate Savings and Credit Society’s was formed by a fellowship of young professionals.
For example, Hi-Gain Investment Club in South Africa has been in operation since 1984 and was started by eight friends. TransCentury in Kenya is another example of an investment and infrastructure company that has grown from a club of 29 friends who started their journey in 1997. In Uganda, Y Save one of the most successful Corporate Savings and Credit Society’s was formed by a fellowship of young professionals.
2. Continue without a Constitution. The Investment Club Constitution is a written agreement or contract with your members. Most clubs operate under a general partnership agreement, establishing the Club’s purpose, objectives and structure. The constitution should include guidelines stipulating how the Club will be run; dealing with issues like club membership, recruitment and resignation; leadership structure which defines member roles such as president, treasurer, and secretary. The constitution should also establish a code of conduct and must map out the scope of each member’s financial responsibility.
3. Make decisions without developing an Investment strategy. Aside from the written partnership agreement, members must come to a conclusion about an investing strategy and how much time will be dedicated to meetings. Clubs may meet quarterly, monthly or every fortnight depending on the level of involvement they have in making decisions, and how far along they are in the process of Saving and Investment.
4. Think short term. A long-term buy and hold philosophy has proved to be the best approach for the majority of clubs whose goal is to build wealth. For example, in the Ugandan Capital Market, our trading platform is not as fast as those in developed economies, so this buy and hold strategy is pretty much your only course of action. Besides, our market is very illiquid so you would not be able to get in and out of a position so quickly in the first place. Therefore, Investment Clubs must decide on a goal and remain faithful to this even in the long term to see the best results. The Club may diversify its interests in time as long as it does not lose sight of the reason the members came together in the first place.
5. Disregard the benefits of forming a legal entity/ becoming an incorporated company. This status is preferable because: it allows owners to separate and protect their assets; the liabilities of a company cannot be attached to personal liabilities. Moreover, attaching Inc. or LLC. to your business instantly legitimises it and adds credibility to the investors as formidable Industry players. There also is tax flexibility since an LLC is taxed at the same rate as a sole proprietorship.
6. Get lax about maintaining accounting records: this is at the core of the Club, keeping tabs on how much money is coming in or going out, who is entitled to what and whether or not the accounts reflect the wisdom in investment decisions. Smaller Investment Clubs may not be able to afford professional bookkeeping and so will rely on the skill and integrity of the treasurer. However, as soon as outsourcing this function of the Club’s administration can be afforded, it should be enlisted. Bookkeeping software like what Kanzu Banking offers is the most efficient way to track the finances of an Investment Club.
7. Make investments without consulting an investment expert especially if you do not have one in house. If you (the members) are actively running the Investment Club, make use of Investment Advisory Services, but if the members’ involvement is passive, use a fund manager with a discretionary mandate over your portfolio.
8. Ignore the discipline of evaluating the Club’s progress annually. This diligence must also be extended to all of the Club’s Investments. This process is most effective when done with the help of an external audit. Any insights can then give direction on investment strategies moving forward. This evaluation process is greatly aided by bookkeeping software whose function includes providing auditable records
The success or failure of your Investment Club is directly linked to whether or not the members respect the operational guidelines, as well as how adaptable the investment strategy put in place is.
8. Ignore the discipline of evaluating the Club’s progress annually. This diligence must also be extended to all of the Club’s Investments. This process is most effective when done with the help of an external audit. Any insights can then give direction on investment strategies moving forward. This evaluation process is greatly aided by bookkeeping software whose function includes providing auditable records
The success or failure of your Investment Club is directly linked to whether or not the members respect the operational guidelines, as well as how adaptable the investment strategy put in place is.
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