This is a transcript of David Kuo's recent podcast with Terry Bond, the founder of ProShare.
You can listen to or download this podcast here.
David:
This is Money Talk, the weekly podcast from the Motley Fool. I'm David Kuo, and today I am joined by Terry Bond, who is regarded as the father of investment clubs. He is also the author of "The Company of Successful Investors", so welcome Terry to the Motley Food podcast.
Terry:
David, I'm delighted to be here, it's lovely to be in such palatial offices, I'm delighted Motley Fool's doing so well.
David:
You're very kind, we're doing OK, and it's all because of people like you, because I have to admit that yours was one of the first books I ever read about investing, the other one was "The Zulu Principle", and of course you are good friends with Jim Slater as well, aren't you?
Terry:
I am, and I would like to think that I would be mentioned in the same breath, but I really don't feel that I should be, because The Zulu Principle is one of the best books on investing that I know about, mine is very close second, but it really doesn't approach Jim's.
David:
Both very very good books, and of course you're also very good friends with Justin Urquhart Stewart as well?
Terry:
I am, yes.
David:
Is there anybody you don't know in the investing world?
Terry:
I don't know -- no, there's nobody, except those people in America who've stolen all the money, I'm not friends with them, my goodness me no.
David:
You're here today to talk about investment clubs, and for those people who don't know what an investment club is, can you explain to them, what is this thing called the investment club?
Terry:
Yes, it's nothing mystical at all, and it's a very informal arrangement, but it's based on very strict principles, and basically it is a group of friends or colleagues, work colleagues, or even family who have an interest in the stock market, they don't have to have a great knowledge about the stock market, who feel that they would like to get together with people that they know and trust, and talk about investing and put a small amount of money each month, and I'll come back to the word ‘small' in a moment, a small amount of money each month that they can buy shares with, and they'll choose the shares themselves, and they'll vote democratically on choosing the shares, so they start of with maybe putting in between £40 and £60 per month each.
Small is beautiful in the investment club world, because you don't want to make collective decisions that are going to be so onerous on your pocket that you're going to feel that you might fall out with the friends or the family that suggested the particular share, so it's a bit of fun, but it's a sensible bit of fun because you can learn so much from other people when it comes to investing.
David:
So who are the best people to recruit? If I were to start up an investment club today, who are the best people that I should be looking for to bring into the club? -- somebody who understands about investing? Somebody who has special knowledge about investing? Or just complete novices?
Terry:
In the ideal world, you would find 12 totally different people who had totally different life experience, because what you're doing is creating a bowl of collective experience of various sectors or various experts in various sectors of the stock market, so that you're going to be able to call on specialist knowledge when you make your investment decisions. So, what you shouldn't do, if you're a chemist, is invite another 11 chemists to join you, because you will know a great deal about pharmaceuticals, and nothing about anything else.
David:
But what if you only know chemists?
Terry:
Then you're a sad person, and you shouldn't be in an investment club.
David:
When I was at university, all I knew was chemists!
Terry:
Well, there you go, David, if the cap fits! You are bound to, there is …
David:
Were you getting at me just then?
Terry:
There is of course, Mrs Kuo who equally knows, I don't know whether she works or not?
David:
Can I just say, she's also a chemist.
Terry:
Oh God! Yes, well, as I was saying …
David:
Yes.
Terry:
… what you need to do is get a group of chemists together …
David:
Right.
Terry:
… you're looking for a wide variety of experience, there are people outside your ken, for instance, I come from a media background, and I also know about, because part of my life was spent in the building industry, so I know a fair amount about construction, so I am wise in two areas and you're wise in the media area, but probably not in the construction area, so you and I could choose something in pharmaceuticals and something in building, and hey presto, we've got the basis for a portfolio.
David:
Right, so the thing is, should you be recruiting just complete strangers? – is there anything to stop you from just bringing in somebody that you don't know at all?
Terry:
Don't do it, don't bring in people that you don't know. The idea way to get an investment club going is for two or three people, and we know two or three people, between us we're friends, we know two or three people that we could invite out for, either to your house or to my house, to a pub, to say, "Look, this is the basis on which an investment club is formed, now we want each of us to go out and find two friends, close friends, that we can trust" -- and that's what it's about, people you can trust.
Never introduce strangers into an investment club, because it usually ends in tears, and I've been in clubs where this has happened, where you get a stranger, and you don't know somebody until you know them, and so if they have very strong feelings about green matters, if they have very strong feelings about they're right, and nobody else is, then this is – you get a feeling that perhaps I don't want to be in this investment club, I won't go to next month's meeting, and then they make a decision when you're not there, and you're not happy about it.
This can happen, and in this climate it does happen, because you don't make money straight away, you're like any private investing operation, be it personal or a club, what happens is, you learn as you go along. The important thing is that you're focusing at least once a month, and usually every week, on what is happening in the stock market.
David:
So you wouldn't recommend anybody putting an advertisement in a small ad in the newspaper to say, "We're starting an investment club, would you like to come and have a poke around?"
Terry:
It's illegal, you can't do it, you are soliciting for investment purposes and you, in the majority of cases, you are not able to do that.
David:
That's interesting, yes, so could I put a notice up in a common room somewhere, would that be allowed? -- or is that treading on very thin ice there as well?
Terry:
No, it isn't treading on thin ice, I know that most clubs start that way, I suppose; if push came to shove, that is probably on the cusp of being illegal, but trust me, just try it -- I don't think you'd get sued.
David:
OK, so how many people should you be aiming for in an investment club?
Terry:
You can have as many as you like, but in an ideal world you would look for a dozen, and I'll tell you why that is, you have your meetings usually after work, you can have them during work, during lunchtime, but usually the friends or family or the club meets in an evening, very often in a private house, but equally possibly in a private room of a pub, or even in a small corner of a pub.
I have one that meets in a restaurant, and it's a public restaurant, and there's a dozen of us in it, and although there's a lot of fun, lot of laughter, they don't complain, and nobody really listens to what's going on on the other tables, so you meet once a month, and the way you get the people, as I say, is through word of mouth, get it spread.
David:
So are they sort of, bound by certain rules of any club, does there need to be a quorum before you can actually have a meeting, that kind of thing?
Terry:
Yes, all those things are important.
David:
It's getting quite serious now, isn't it?
Terry:
Yes it is serious, it has to be serious because you have to make annual tax returns, you have to abide by all the rules of the FSA, and there are rules governing the running of investment clubs. There is a manual available, I'm sure if you get onto the Motley Fool web site you'll be able to find where this manual is, and you buy it, I think it was £25.
David:
I think it still is around £25.
Terry:
And it gives you all the rules, all the regulations, all the pitfalls, and exactly how to keep the books, and that's the important thing – keeping the books. There's a system of valuations, so that you have people join the club after it has started, and they won't pay for the sins of what the members have done in the past, or benefit from the activities of them, you can slot a new member in, so it's all very well thought out, and that manual has been the bible of the operation since it started maybe 15 years ago, the movement started here about 15 years ago.
David:
So, on the very first occasion that you have a group of friends who say, we want to start up an investment club, how important is choosing the right name for the club?
Terry:
It isn't important at all, not one jot or tittle, but it is the biggest bit of fun you're going to have, because there are many unusual names, you'll find that there's probably 20 Minervas, because people think, "That's a good name"; you register your name with the National Association of Investment Clubs, which I think is now called ProShare Investment Clubs, and nobody cares what you call yourself.
David:
So you could have two clubs with the same name?
Terry:
Oh yes.
David:
And that's not a problem?
Terry:
Who's going to complain?
David:
I know in your book, in The Company of Successful Investors, there was one particular name that I needed somebody to explain to me, it was Elizabeth Swaylock?
Terry:
Oh really?
David:
Yeah, I didn't understand it until I got the editor to explain to me why ..
Terry:
I was going to say, I don't understand that either, David – says he, hoping that nobody's going to listen to this podcast. Yes, it's one of those things, you have to be quite careful about this, but the laws of libel mean that my answer is, "I've no idea why they call it the Elizabeth – I don't know why."
David:
So if anybody knows why, Elizabeth Swaylock is something that Terry and I don't know anything about?
Terry:
Yeah.
David:
You can email me at MoneyTalk@fool.co.uk.
Terry:
Yes, they most certainly can.
David:
And then we'll try to explain to them why. Now, earlier on you mentioned that the amount that people should be contributing is somewhere between £40 and £60, now, I make it if there's ten people in the club, you're only going to have £500 on the very first day? -- now, that's not really sufficient for somebody to go out and buy shares, so what should people be doing? It's very disappointing, when you're looking forward to it all, you've picked a name, you've done everything, and then you haven't got any money to buy the shares with?
Terry:
Right, there are two answers to that question -- some clubs decide that the best way to do it, and it's a very good way to get to learn without any pain, is to create a phantom portfolio of shares to start with, and maybe for three months operate on that basis, in order words, they choose a share just as if they were going to buy it, the only thing is that they don't actually buy it, and so they can choose in fact two or three shares, a little microportfolio, and you can watch how it grows over the three months, the members can watch how it grows, and also gain the experience of maybe winning, maybe losing, until they've built up enough money to be significant and to really buy a share.
Now, that's one way; the better way, in my opinion, is that you put in a lump sum – maybe £250 a head, maybe £500 a head – at the very beginning of your club's life. The reason I prefer it is, that if you decided, and there's a great deal of enthusiasm when you start a club, if you decided that you're going to enter into the stock market, and the vagaries and the fun and the triumphs of the stock market, when you've decided to do it, you want to actually do it, you want to get up in the morning and find out what the share price is and really it's going to hurt, and it's going to make it happy, whatever's going to happen.
So, put in a lump sum to start with. This whole question of contributions, monthly contributions and how much you put in at the beginning, is a very difficult question, because nobody -- we're British, we don't like talking about money, and I might start one in this room and there's three of us in this room at the moment, I might say, "Right, we're going to pay £50 a month" -- I know, because David, you're on £168,000 a year and your young friend here is on similar sort of money, so maybe let's put in that sort of money, £60 a month, and you might say yes, because you don't want to be seen to be a bit short of that sort of contribution, so when you have the original meeting to suggest this club, you ask people to suggest how much they think they'd like to put in, and then you privately, because you're the organiser, ring around and find out what is the acceptable amount of money. So I know clubs that put in just £10 a month, I know a club in Southampton that puts in £1,000 a month per member.
David:
Good grief!
Terry:
I know, these people are high net worth individuals, they're all of them fairly sophisticated investors.
David:
Do they have their own yacht in the bay?
Terry:
They do.
David:
Right.
Terry:
Yeah, and I know another club, in fact I belong to a club that's seriously investigated buying a property in France on the proceeds. After we'd been going for four or five years, we'd built up a lovely little pot, wouldn't it be nice, there were just 12 members, we could take that property and we could give everybody a month's use of that property.
David:
Is that allowed?
Terry:
Yeah, why not?
David:
OK, so you're not really committed just to going and buying shares?
Terry:
No.
David:
You mentioned something earlier on about the British people not really liking to talk much about money – what in your view is the difference between Americans and the British as far as investment clubs are concerned?
Terry:
That's an equally good question, because I've worked with Americans my entire life, it's all I do now, and they have a different approach to money, completely different approach to money; they're very happy – you get on a bus, you talk to them, "How are you? How much do you earn?" – and they ask you, and you'd be expected to tell them.
David:
And do you?
Terry:
No, I say, "Excuse me, I'm British! What? Move away, you Yank you!"
David:
Can I just say that is an American company that we work for, the Motley Fool is very patriotic towards the American flag, yeah?
Terry:
That's all right, you can always edit that bit out.
David:
No we're not, we're going to keep that bit in!
Terry:
As I say, the British don't like to talk about money.
David:
No, we don't.
Terry:
And it is one of those things, like serious illness, we just avoid it at all costs if we can.
David:
So, is it more difficult to get an investment club up and running here in the UK?
Terry:
No, it isn't, because I have been involved for some years with the American organisation that does exactly the same as ProShare does in the UK, and they have proportionally an equal number of investment clubs, because over here we've started around about 12,500 clubs in the last decade. They have proportionally a similar number; the difference between the Americans and us is that the Americans generally invest in mutual funds, and we invest in individual equities.
David:
What -- so you mean that the investment club actually invests in funds rather than in shares?
Terry:
Yes, but the Americans generally invest in funds rather than shares, I don't know what the proportion is, but well over half of American investment is in mutual funds, whereas here it's in single figures, it's below 10%.
David:
Yeah, so going back to the investment club, how do you pick the leader of the investment club? I mean, what makes a good chairman of the club? I presume they're called chairmen, aren't they?
Terry:
They are, oh yes, you have a chairman, a secretary, a treasurer and you have a social secretary, because you must, and this is another subject altogether, but you must have a social side to your investment club, you must do things. For instance, I'm going next week to Windsor Races with one of my investment clubs, and you must have a social side.
David:
Why is that?
Terry:
Because you don't want to be a boring old gentlemen! It's important also incidentally to make it socially acceptable to your family, because as you know and I know, investors can be the most boring people on the earth, and if you go up to speak to somebody and say, "What do you do?" and he says, "I'm a private investor", you look over his shoulder, you want someone else to talk to, so you've got to try to interest the family as well, so you have social events, and so you have a visit to the races, picnic, all sorts of things, not to do with investment.
David:
But doesn't that depend on how well the club is doing? I mean, if the club isn't doing particularly well, there's going to be no money there to go to the races, is there?
Terry:
You don't use the club's money to go to the races, that is really really risky. No no, you create a social event.
David:
So you don't use the club funds?
Terry:
No, you don't use the club funds, no, not unless you want to ruin the tax situation in Britain.
David:
OK, now the other thing I want to know about is, if there are unequal amounts of money being contributed into the investment club, does the person who contributes the most have the biggest say?
Terry:
No, he doesn't. Any democratic organisation is run on the basis of one man, one vote.
David:
Not the one who's got the most money?
Terry:
It isn't the one who's got the most money, and so it doesn't matter how much you put in, you can have an uneven amount of the pot that relates to the amount you've put in; if you put in 20% of the pot you can take 20% of the profits out, but you can't have any more say than the man who joined last week. This was impressed on me by the American organisation that runs investment clubs, and they have much more experience than we do, and the American equivalent of ProShare Investment Clubs has been going for some 40 years, and many millionaires have come out of the investment clubs in the States.
David:
So there is hope for me yet then?
Terry:
Absolutely, to add to the existing millions, you're right David, you're absolutely right!
David:
Now then, I have a couple of questions before we end this podcast, now one of them is, how do you handle disappointment within the club itself? Say for instance you have a member that brings up a tip or an idea at every monthly meeting, only to find that it gets voted down time and time again? – and after about ten years of this, the guy is saying, "Well, what is the point in me joining this club? – I bring you ideas and I get voted down every time, I might as well not become a member."
Terry:
That takes us back to, how much should you put in as the monthly amount, and you should put in a monthly amount that isn't going to hurt you if it all goes pear-shaped, and so the guy who comes, not with the same suggestion every month, because you'd expel him for being boring beyond belief, but who comes in with a loser, or if I come in and suggest a share that sort of bombs, I don't want to be frightened about going to the next meeting, and if everybody has put in a comfortable amount that they're going to miss, but only as much as the cost of going out for a night, then that's OK, I'll go to the meeting. If I've lost you thousands or hundreds, I'm going to be very worried. I'm in three investment clubs.
David:
Are you chairman of all three?
Terry:
No, no, no -- I have been chairman of all three, because you change the officers every year. The whole thing's run like a company, except that you change the officers, and I've been a member of all three for then years and more, and so I know that the bit about putting the small amount in is by far the best way of running the club, it builds up, you'd be amazed how it builds up. I don't know what your existing hobbies are, but …
David:
Investing?
Terry:
Right!
David:
And chemistry!
Terry:
Well, yes, you can make money at chemistry.
David:
Yes, you can.
Terry:
Yes, if you sell the right stuff, David. But with an investment club, you can make suddenly a lot of money, where it matters, and I have been in clubs that have got hundreds of thousands of pounds in assets, and when you look, and you think, "My goodness me, I've been in this club for eight or nine years, and I've built up a tremendous pot here, £20 - £30,000 is mine from this" – now it's become really serious, then you've got to decide what you do with that, because my situation may be different to yours; I may be a tired, worn out old fellow who doesn't earn very much money and would very much welcome a pay out of 20 grand, and it's going to suit me tax-wise, whereas you David, on your many hundreds of thousands of pounds, you're going to not want it because of capital gains tax and everything.
So each member should be able to take out what he can take out, and there is a system for valuing on the day that you take it out that you'll find in a manual that is available from ProShare that explains how you can take your share out without affecting the club, so it's all very carefully thought out. I'd like to claim, because I produced the manual, I'd like to claim total responsibility for it, because it is faultless in its explanation of how to run these things; however, I stole it all from the Americans, every single word I stole from the National Association of Investment Clubs in America.
David:
So what's the biggest cause of failure for investment clubs? What is the one thing that people should be looking out for, to make sure that their club doesn't fail?
Terry:
Right, poor officials – you've got to know the chairman, the secretary and the treasurer and the man who thought of the idea have got to understand that this has got to be fun. This has to be a pleasure to go to, and so you mustn't make the rules terribly onerous, so that is the prime thing to be careful of, is to make it fun to go, even if the club is losing money.
David:
So what happens if people don't turn up, can you fine them?
Terry:
No, please don't go down that road, that is not a bright suggestion. Many clubs have closed because people become officious, officials become officious, and think that they run the world, instead of what they're running is an investment club that, run properly, can provide great fun for everybody involved, and can be very profitable. On the other hand, there are people in this world, as you know David, who think that, because they've got the hat on, you're supposed to salute, and you don't want officials like that, so don't let people like me be chairman!
David:
I completely agree with you, but if you have a club of 12 people, and only 11 people turn up every month, and one person just says, "Well, I'm putting the money in -- why do I need to turn up?", at some point you must think, "Well what am I having him as a member for?"
Terry:
That's a very very important point, you've got to explain at the very beginning of an investment club (and it's in the ProShare manual), you've got to explain to them, you're not a member for your money, you're a member for your brain and your experience and your knowledge, and if you're not going to make at least 75%, and in the rules of the club, many clubs have this rule, you've got to turn up at 75% of the meetings, otherwise you can't be in the club, because you're there for your brain, for your experience. All you're doing is pooling 12 brains that have got a lot of experience; it doesn't matter if you are Lord Chief Justice of Britain, or a lowly housewife, Mrs Bond.
David:
How is Helen these days?
Terry:
Oh, she's fine, thank you, she's very well. She knows all about shopping, tell me -- she knows about retailing, much more than I know. She knows which supermarkets are going to do well this year, and she's always right about everything, but she's particularly right about investing.
David:
Good grief.
Terry:
I know, amazing.
David:
Is she a member of any of these clubs that you're a member of?
Terry:
No, sadly no.
David:
OK, so you just sort of use her as a sounding board most of the time?
Terry:
No, I use her to stay at home and look after the shop while I go out and have a nice time!
David:
OK, now I promise this is going to be the very final question, because I know you have a train to catch. Now, I want to know, are there any big risks for members of investment clubs? Is there anything that could go badly wrong that would put any of the members at risk?
Terry:
It's one of the old sayings of investment, "Only invest in what you know", and the danger always, if you have a success or a run of successes in your club, you will be tempted to invest overseas, you'll be tempted to invest in derivatives, in some strange form of investment that you've never heard of, but you think that, like in private investing, exactly the same, you begin to think your omnipotent, and you are able to do anything.
Only invest in what you know, only invest in companies that you've researched and researched and researched, until you feel almost part of that company, and when you've got a yearning to own the thing, then buy it. The other thing is to have criteria, and I know we haven't got any time, but every share in your portfolio should have met a set of criteria that we haven't got time to talk about, but every share should have qualified for a place in your portfolio.
David:
And then of course all the members just vote, and if, well out of 12 people, if seven of them say yes, then you go and buy the shares?
Terry:
Majority vote rules.
David:
OK, and that's it.
Terry:
And it doesn't matter if you've just joined and put your first £40 in, or you've got £4,000 in, you only get one vote.
David:
That's wonderful. Well, thank you very much Terry, for coming in today, I think this has been absolutely enlightening. Now, you may not know this, but I end each podcast with a quote, and I found a quote that I think sums up what the podcast is all about, and today's quote comes from Oprah Winfrey, and I think this is something that people who are thinking about investment clubs, when picking members for the club, should try to remember Oprah's very sage words. She says, "Lots of people want to ride with you in the limo, but what you want is someone who will take the bus with you when the limo breaks down". She's very good, isn't she?
Terry:
Sage words, sage words.
David:
Yeah, so everybody wants to be a member of an investment club when it's doing well.
Terry:
You've got to be able to laugh and well as cry at an investment club, and the members who want to dominate your club should be leaving. Make it fun, investment is fun -- make sure that you can afford it.
David:
That's very good. So, if you have a comment about today's show, you can post on our blog page, which you can find at www.fool.co.uk/podcast, and if you have a suggestion about future shows, you can email me at moneytalk@fool.co.uk.
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