FOOL SCHOOL
Investment Clubs - Part 1

December 10, 2001

An investment club is a group of individuals who join together to invest in the stock market. A club could be made up of families, neighbours, friends and colleagues at work. For many people, an investment club is their first experience of the stock market. A recent report found that around two-thirds of recent investment club recruits had never traded a share before joining the club.

The Motley Fool has often been referred to as the world's largest investment club and we like clubs so much we've even produced a book on them.

Back in 1995 there were just 300 investment clubs in the UK. Now there are around 10,000. Each month, normally at meetings, members contribute a small sum of money that is deposited in a joint account. They take turns researching and reporting on promising companies in which they might invest or companies in which the club has already invested.

Investment Clubs in the UK first started in the late 1950s under the tutelage of the National Association of Investment Clubs Ltd. (NAIC). These pioneers maintained a fairly low profile until the NAIC was acquired by ProShare in 1993.

Proshare is an independent, not-for-profit organisation funded by the London Stock Exchange and industry, which exists to promote the benefits of owning shares. It encourages:

• Investing money regularly, regardless of market conditions
• Reinvesting all dividends and capital gains
• Buying shares in companies that are growing faster than most of their peers
• Diversifying investments, not putting all the communal eggs into one basket

Successful investment clubs focus on learning as well as doing. There's often an education director elected and guest speakers invited. Club members seek to explore new ideas and discuss investing issues. One month a member might present her findings on the value of screening for low P/E shares. Another month, a member might report on a book he read about a great investor like Warren Buffett or Ben Graham.

In the early sessions of a club's life, education components might be very introductory, covering how to read a balance sheet or earnings report. A year or two later, the club might be learning new ways to value shares or discussing an interview published with a successful individual investor or influential businessman.

Why participate in an Investment Club?

Still not convinced? Here's a brief summary of why you should consider starting or joining an investment club:

• If you're new to investing, it's a good way to get your feet wet.
• If you'd feel more comfortable learning about investing with others than on your own, then this is for you.
• It's a good way of putting aside a small amount each month. The average monthly contribution is £25.
• If you've been putting off learning about investing and sense that having a responsibility to the group would provide some much-needed discipline, than a club could help immeasurably.
• If you think it would be fun to have a group of people with whom to share company research and discuss investing topics.
• If friends have gently suggested that it would be good for you to get out of the house once in a while!

Many members eventually find that the clubs guide their own personal investing. After a while, their equity in the pooled club account may be relatively small compared with their separate personal accounts. Club meetings will offer many good ideas about attractive shares in which to invest -- and while the club may buy a few shares, members often go home and buy more shares for their own accounts.

You may not have the time to research several shares each month on your own, but by participating in a club, you'll share in the research of others and have the extra bonus of a group setting in which to discuss investing ideas and issues.

Part 2 | Part 3

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