Pitfalls for Your New Club to Avoid

When we last spoke with Herb Barnett, long-time investment club treasurer and instructor, we asked him about the most important goals that new clubs should focus on. While focusing on those objectives is certainly important, might there also be some pitfalls to watch out for?

Herb explained that most clubs that aren't successful fail within their first year or so of operation. Typically, he says, the reasons for failure come down to the same problems, time and time again. If your new club can avoid these perils, then your chances of success are much better.

One of the most important considerations, maintains Herb, is that "you should be certain that all of the members of the club are on the same wavelength for investment philosophy." All the members of a club should agree on their investment objectives and strategies before you get started. "If some members of a club are interested in 'playing the market' rather than a more studied, long-term oriented approach," he cautions, "the conflict has the potential to tear the club apart."

Herb's recommended course of action is for the club to set their investment philosophy, and then be disciplined enough to carry our that strategy consistently. He recommends that the investment approached used in BetterInvesting's Online Tools be used as the primary tool for stock selection. "A completed stock study should be presented for each stock being considered for investment," says Barnett. "Preferably, each member should be provided with a copy of that stock study for reference during the discussion, as well."

Another problem faced by many clubs comes from not setting minimum attendance and investment requirements for members. Investment clubs are doomed to failure if the members do not participate, according to Herb.

In many cases, clubs are too eager to accept a new member into the club. This often creates problems, particularly if the new member doesn't share the club's overall approach to investing, or is not clear on what is expected of club members. Herb suggests that the prospective member should visit the club for a couple of months before being invited to join.

Finally, accounting issues often are problematic, even though clubs believe they are keeping things simple by trying to use the "every member has an equal share" system. "Eventually the club will discover that that equal share system has some significant disadvantages," explains Herb. "The 'everyone equal' system does not accommodate the partial withdrawal by a member, in case of a personal emergency, for instance. It also can be very difficult to find new members, since the amount that has to be invested for an equal share keeps increasing, eventually making the buy-in amount prohibitively expense." In Herb's experience, most clubs that start out using the equal-share system will probably convert over to the unit-value system used in myiclub.com. "It's far better to use unit values from the outset."