|TICN In The Press: October 22nd, 2000
|"Irish can enjoy fun of the market but share the risks with others" by Margaret E Ward
INVESTMENT clubs are the new rock 'n' roll, almost as trendy as sushi or sun-dried tomatoes. These days, pub talk centres on the twists and turns of the market instead of gossip.
Market-watchers say it is no surprise, as high inflation and low returns on savings are forcing people away from deposits, towards riskier share-based investments. And many thrill-seekers want to eschew the relative safety of unit-linked funds and invest directly in the stock market themselves.
But the thought of creating an investment portfolio alone is daunting. How do you choose a stock? Where do you get information on companies and share prices? What are the basic rules? How much do transactions cost? Given that few or no secondary schools offer classes on the stock market, most would-be investors do not even know the basics.
In the past several years, informal investment clubs, or share clubs, have been founded to meet these needs.
Owen O'Malley, who runs The Investment Club Network in Ireland, says they have almost 80 clubs on their books. The company is on track to have 100 by the end of the year and 500 in the next two.
"There's been a major increase in the popularity of clubs because so many people - over half a million - bought Eircom and it has heightened their awareness of the stock market," says O'Malley.
Clubs break down myths for those not used buying shares, allowing them to dip in before going it alone.
The concept travelled here from America and Britain, and has caught on quickly, particularly with people in their 30s and 40s. They are usually formed to allow members to learn about and invest in the stock market while having fun.
The Investment Club Network (TICN) in Ireland and ProShare in Britain promote and assistinvestment clubs. Although groups such as these are paid for their advice and assistance, investment clubs can be set up by ordinary people at a minimum cost.
Last year, a group of like-minded individuals in Dublin City University's executive MBA class decided to make a foray into the market with some friends. Armed with a sketchy investment theory, Pounds 200 each and a Pounds 25 manual from Proshare, they established the mba.ie investment club. After contributing the initial funds, each member pays Pounds 50 a month by direct debit.
The 17 members meet every two-to-three months in a university classroom. Initially, they rendezvoused in a pub.
The members discuss everything from investment sectors to management buy-out targets. Although it sounds complicated, they have learned the terms and strategies together. The group bought its first share, Eircom, on its way down from the high achieved soon after its flotation.
Joe Reid, a regional business development manager, said they thought they had a bargain because it was moving down. "Picking the point where a stock bottoms out is very difficult. Buying stock on way down is a bad policy - chances are it will keep going down." Since then, Reid has decided that momentum investing makes no sense.
Donal Minnock, 27, an engineer, is the youngest member. He joined to learn about the market in relative safety. "I don't want to dabble in shares on my own, but who knows - after a few years at this I might get good and take a chance on it myself," he says.
As of Wednesday, the club had a portfolio of seven shares - Eircom, First Active, Xerox, Baltimore, Glanbia, Parthus and Nokia.
Liam Brennan, e-business manager for Esat Business, says it's a portfolio he could never create on his own. "The club is a chance to get involved in many different stocks without having to make a large personal investment," he says.
The American market is particularly prohibitive because there is a minimum investment of Pounds 3,000. An individual making an investment in seven shares would pay a minimum of Pounds 21,000. Most people don't have that kind of money to gamble on shares, he says.
The value of the mba.ie portfolio reflects the volatility of the stock market. The club's investments have cost them Pounds 13,393, including broker's feesz and stamp duty, and is down 23.67% to date, making it worth only Pounds 10,223.
On Thursday, the portfolio's value increased slightly, thanks to upward movements in Nokia's price and the recovery of Parthus and Baltimore, two Irish tech stocks. Glanbia and First Active stayed at the same level, while Eircom and Xerox remained in the doghouse.
Since none of the club's shares have been sold, these are purely paper losses. After a year of investment, the members are sanguine, claiming to know this is what investing in stock markets is about.
Joe Reid says: "Sometimes I think we should stay out of the market because it's very volatile." Despite his misgivings, the club takes a punt every meeting. "We always go into the market because it's a little bit of fun and it's only Pounds 50 a month each," he says.
The size of a club, and members' level of contributions, often determine the chances it can afford to take. Minnock believes membership in the mba.ie club is ideal: "Near 20 is really the maximum number, because the risk is welldiluted between us."
Diversification is an investment basic and the mba group has spread its funds to reduce risk. The portfolio is spread over four industrial sectors - financial (9%), food (11%), telecommunications (37%) and technology (43%).
Members' fondness for technology and telecommunications shares explains the portfolio's recent underperformance as "TMTs - technology, media and telecoms" have fallen out of favour.
The investment straddles three geographic areas - American, Britain and Ireland. Due to their TMT bias, it's not surprising that the majority of the funds (44%) are invested in the tech-laden NASDAQ. The group is also comfortable with its local market, and has invested 35% of the shares in the Irish Stock Exchange and the remaining 21% in the London Stock Exchange.
Although members have "buy" transactions figured out, the club cannot decide how and when to "sell". Minnock says: "We're emotional about the shares for some reason and now they're down, so we're stuck with them. In future, we need to cut our losses and go."
He thinks they should multiply the commission incurred when buying a stock by 10 to determine the level at which they should sell to take a profit.
"In 2001, we'll get more stringent on our criteria about when to take profits," he says.
Investment clubs are not easy to run. The Dublin City University club found direct debits were the key to a fairly row-free existence. Reid advises: "In the very early stages, you should get everyone to set up a direct debit. It's vital because you spend loads of time chasing money."
Reid says the club chose Fexco, an Irish broker, because it was the cheapest - 1% for transactions under Pounds 5,000, plus a transaction fee of Pounds 6.
Between meetings, members stay in touch electronically. During a recent surge in tech stocks they had an e-mail conference on whether to sell.
Club members are in the market for the long-term, but want to take a profit on the ones that have increased. "It's one year on, and I think we're just getting the hang of it. Maybe in four to five years we'll be better, but we'll never be day traders," he says.
Public interest in the stock market has risen significantly, but would-be punters should beware - mistakes are easy, and costly to make.
Clubs can be fun and offer a cheap route to the market. After a few meetings, you may even be able to name-drop investment gurus to friends: "According to Warren Buffet, you should never invest in a company you don't understand." While the purpose of such clubs is to make money, they are also educational.
Members pool small amounts, usually Pounds 50 a month each, then use the money to buy a portfolio of stocks. A large sum, such as Pounds 500 from each member, is invested at the start to create a relatively large fund from which to draw.
Club membership has several advantages. It reduces the normal transaction costs and allows members to have a stake in a wide range of shares, something they probably could not afford by themselves.
Setting up an investment club does not cost a lot and enthusiasts can do so themselves without professional assistance.
If you have determination and some extra cash, you should buy an investment manual to guide all members through the pitfalls. The Irish Stock Exchange's guide provides the basics for Ireland, but a Proshare or Motley Fool Guide (see tips section at the end) would give more detail on strategy.
Next, gather a few friends together for a casual meeting. At this, you should decide how much you want to invest and in what. Give everyone a chance to think over the financial commitment before calling a second meeting.
Once everyone is on board, they should set up monthly direct debits.
The cry-babies will have to be separated from the risk-loving teenagers, because setting up a share club can be a complicated affair.
Unlike other types of social clubs, substantial amounts of money can be involved, so proper structures are important.
Investment clubs are a good idea provided the investors plot their investments carefully and are aware of what they may or may not achieve.
Members must be clear about the role of the club and ownership of shares. Legal, tax and accounting issues are paramount.
For legal reasons, most investment clubs are set up as general partnerships. This avoids the expense of forming a limited company and eliminates potential problems of corporation taxthat would otherwise be applicable. Generally, partnerships cannot include more than 20 people.
In addition to structure and legal issues, club members should explore the tax implications.
From the outset, they need to agree on a way of registering investments and on how to manage the finances fairly. All participants should agree to a set of rules that will govern the behaviour of all. A club constitution is advisable.
After three or four meetings, these structures should definitely be in place. The club should research stockbrokers and their transaction costs. The cheapest option - online trading - is in its infancy in Ireland because the Irish Stock Exchange only recently became automated.
Two popular online trading companies used by investment clubs in Britain to trade in American and British stocks have certain restrictions for Irish clubs.
E*Trade is only available to Irish investors with a British bank account and requires a minimum investment of Pounds 1,000 sterling.
The cost of transactions varies according to the number. For amounts under Pounds 1,500 during the first 20 transactions, it costs Pounds 14.95 sterling. Above that, it's Pounds 19.95 sterling. After a club has made more than 21 transactions, it's Pounds 14.95 sterling and over 31 transactions, Pounds 8.95 each. Online broker Charles Schwab offers a similar service.
Fexco, an Irish broker that executes deals without advice, charges Pounds 12.50 minimum per transaction or 1% for amounts of up to Pounds 5,000. Transactions over Pounds 5,000 are charged 0.35%.
Trades in American or Canadian stocks require a Pounds 3,000 minimum, and British or Irish stocks need at least Pounds 500. Investment club accounts are treated as nominee accounts.
BCP Stockbrokers, a full-service brokerage, has a minimum commission level, but will accept any transaction. Commission is on a sliding scale for all full-service firms.
Some investment clubs may choose to set up on a more formal basis through affiliation with an investment club organisation. The Investment Club Network (TICN) is an international organisation offering "Money Talks" evening lectures for Pounds 10 and weekend investment seminars, which, for between Pounds 624 and Pounds 699, teach participants how to set up and run a local club. TICN offers advice and support for members.
Those who feel they need more knowledge before setting up a club or investing their hard-earned cash may choose to take classes or attend seminars on the financial markets.
IFTI is a conference organiser in Dublin that also offers courses on investing in the stock market. Beginner classes give basic information on business and investment concepts and products. Intermediate classes explore investment strategies and the technical and analytical aspects of financial markets.
Many educational organisations offer similar, but perhaps less comprehensive, adult evening courses for a lower price.
Before you start investing in the markets, make sure your personal finances are in order. If you have already set up a pension, life and health insurance, a savings scheme and have cleared any debts, then an investment club may be worth a look.
Proshare Investment Club Manuals may be ordered by calling 00 44 207 394 5200 and The Investment Club Network may be contacted on 1800 367 693.
For information on IFTI stocks and shares classes call (01) 661 6997.
For further reading, try the following books, those that are available usually have to be ordered by bookshops and are usually priced in sterling.
Hodges Figgis, and Waterstone's on Dawson Street, Dublin, can usually order at least two: Investment Clubs - How to Start and Run one the Motley Fool Way by Selina Maranjian, Ingrams, 1998, Pounds 12 approximately; Investment Clubs, a team approach to the stockmarket by Kathryn Shaw, Dearborn, 1995, Pounds 15 approximately; Investment Clubs - the Low-risk Way to Stock Market Profits by Tony Drury, Batsford Publishers, 1995, Pounds 10 approximately; WHAT Investment Guide to Investment Clubs, Batsford Publishers, 1997, Pounds 12 approximately.
The Motley Fool UK Investment Guide, at Pounds 12.99 sterling is available directly from Boxtree Press at 00 44 208 324 5522. The Fool's Guide to Investment Clubs is expected from the publisher this autumn priced at Pounds 4.99 sterling.
Online book retailer amazon.com has at least 10 titles available. The Proshare Guide to Investment clubs may be purchased directly by calling 00 44 20 7220 1730 or by e-mailing www.proshare.org.uk. The Motley Fool books may also be ordered on the website, www.fool.co.uk.
INVESTMENT CLUBS: DOS AND DON'TS
1. Make sure you have your finances - pension, expensive debts, health insurance, life insurance - in order before investing. Think of it as gambling with money you can afford to lose.
2. Never, ever have the funds in the name of one member. If the person dies the funds become part of their estate. To legally protect the rights of all members, the funds should be held in a brokerage or bank account under the club name.
At least three people should be required to sign for any transactions or withdrawals. A copy of all members names and contact details should be provided to the bank or broker along with the articles of association of the club.
3. Ensure you are complying with relevant tax laws and have a legal exit mechanism that allows member to leave with their funds.
4. Make sure everyone has a say in how the money is invested and vote for the final decision democratically. It's not really a club if one person is making all the decisions.
5. Remember that it is extremely inexpensive to set up an investment club. The Irish Stock Exchange has a free Guide to Establishing and Running a Club for Equity Investors in Ireland. ISE may be contacted at (01) 617 4200 or firstname.lastname@example.org. For tax information and options, contact the Revenue Commissioners.
6. Subtract your transaction costs, stamp duty and contributions from your profits in order to determine your real profit margins.
7. Read as much as you can about the markets and investment strategies. There are many books which specify ways to set up such a club. However, they may not be Ireland-specific and some independent research may be required.