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Wednesday, 10 October 2012

Steps to joining and thriving in an investment club

And why being financially independent is all in the mind.

Joining an investment club might be one of the most important things you ever do. Why, you might ask? For starters, it will help you to start investing, it will educate you, etc. There are many important reasons to join, but I would like to focus on the main reason I believe you should join an investment club - it will help you to focus on creating wealth sustainably. Before I dive into why and how investment clubs work, let me start with some not so common knowledge about creating sustainable wealth.
Wealth is all in the mind
We all want to be wealthy, right? So why do so few people achieve it? And what does it mean to be wealthy? Let’s start with a simple definition. For me being wealthy is to be financially independent. Put differently, being independent means you don’t have to go to work to pay the bills each month because your net worth is large enough to sustain you today and into the future.
The great thing about this definition is that there is no universal net worth, no benchmark, by which you can consider yourself wealthy except your own benchmark. This is because one person, for instance, can survive on R20 000 per month whereas the next person requires R100 000 per month. However, although the actual definition or benchmark of financial independence will be different from one person to the next, there are common elements, or thinking processes that allow people to achieve financial independence.
So why do so few people achieve financial independence? The simple answer is that it requires a special type of thinking. Financially independent people think differently about wealth, money, themselves, and just about every facet of life, than people who don’t achieve independence. If you don’t believe me, read biographies of successful people from all walks of life and see the commonalities in their thinking. Here are some of the key ways financially independent people choose to think:
  1. “I create my life, especially my financial life.”They believe they are responsible for, and create their own success or mediocrity. Other people believe life happens to them, or even worse, they play the victim and believe that life owes them something.
  2. “I play the money game to win.” Other people play the money game not to lose.
  3. “I am committed to being wealthy.” Other people want to be rich.
  4. “I choose to focus on opportunities.” Other people choose to focus on obstacles.
  5. “I choose to associate with positive, successful people.” Other people tend to associate with negative or unsuccessful people.
  6. “I choose to focus on, and build, my net worth.” Other people focus on their working income.
Focus on net worth
I will assume that I have convinced you that it is your own thinking that creates the wealth, happiness and success in your life. For me this is great news. I like being in charge of my own destiny, I will certainly look out for myself much better than anyone else would. If you don’t agree then this article is not for you and good luck on your life journey. If however you continue reading, allow me to make my next statement – for most of us an investment club is the best vehicle to help us change our thinking and achieve financial independence.
To justify joining an investment club, I want to start by briefly discussing the last point above, i.e. creating wealth requires you to focus on your net worth, not your working income. Generating working income is important, but financially independent people know that that it is only one of the four key activities that determine your net worth. The activities are:
  • Generate income. Income comes in two forms, active and passive. Working income is active income and requires your time and energy to earn it. Working income is important because the more you earn the more you can save and invest. Passive income is money earned without actively working, which is again used for saving, investing, and disciplined spending. Your club investments will create passive income streams, and help you to learn a very critical money lesson, i.e. you should only work for money once, after that it should work for you.
  • Actively save. This is the tough one for most people. Although they earn a lot of money they never create wealth because they never take this first step (notice the verb, i.e. action required). Saving requires choosing long-term balance over short-term gratification and does not require a mind set of “it’s only money” or “what goes around comes around.” Pride and ego is your enemy here, but the peer pressure and shared identity of your club will help you create the required discipline. Without generating income, and savings to keep it there, you can never graduate to the next level of investing and wealth creation.
  • Continuously invest. Once you saved a decent portion of your income, you can move to the next step and make your money grow through investing. Wealthy people take the time to learn about investing and investments. Your club is a great place to learn more, helping you make better investments, which will help your money generate more passive income to be saved and invested again and thus create wealth faster.
  • Consciously simplify. This goes hand in hand with saving whereby you consciously create a lifestyle in which you need less and less money to live on and thus you can invest and grow more and more. Your club should challenge you to continuously invest a larger portion of your working income, thereby helping you to simplify your lifestyle.
Therefore, the only way to increase your net worth is to earn, save, invest, and simplify. Joining an investment club will support you directly with each of these four activities.
From investment club to wealth
Firstly, all clubs are not created equal and therefore I can only speak on behalf of my own club. Our focus is to teach our members about the principles of wealth creation, encourage them to take control of their lives, and help them invest their hard earned working income buying securities listed on the JSE each month, or as we like to call it, rolling the snowball. Our club is a well constituted organisation with procedures and governance. While the business of creating wealth is serious fun, working with people’s money requires respect and diligence and therefore we operate within strict rules.
Although we have rules, our operations are simple. There are four major activities of the club, shared by various members. They are:
  • Training, encouragement and focus on wealth creation. The number one objective is empowering people toward wealth creation. I believe that any area in your life you are not empowered in, you will be overpowered by.
  • The collection and management of the monies and members of the club. We outsource the bookkeeping to an accountant to ensure 100% transparency and accountability. We believe it’s a good idea to segregate certain operational functions.
  • The screening, investment analysis and investment valuations. I perform most of this function.
  • The actual investment decisions and capital allocation process. All members participate in this.
Each member in our club contributes R2 500 per month into the clubs share trading account. Because we manage the club on a unit basis, each member’s contribution buy’s the member a number of units each month.
So why not simply just give your money to a unit trust company? Well, then you are not in control of your wealth creation anymore, and you miss out on the focus, interaction, education and experience of the market, opportunities, risk diversification through the collective wisdom of the group and all the other things mentioned above. Members having to exit the club, for various reasons, sell their units to other members, or sell their units back to the club at the ruling unit value at that time.
Screening, analysis and valuation requires the most work each month. I follow a deep value investment methodology. To help me screen and identify investment opportunities I use a software package called Validea (www.validea.co.za). Validea highlights value investment opportunities and from here I perform a thorough analysis and valuation of the candidates using various sources (mostly annual financial reports). From each analysis and valuation I prepare a collective investment overview pack for the members.
Each month, during a two-hour session, I present the investment overview pack to everyone. The club members have the opportunity to question, or challenge, each share I present. At the end we collectively decide how to allocate the available capital to two or three of the candidates. Members can also present their own valuation, or request their candidate company to be added to the following month’s investment pack for discussion.
The same process applies when we exit a position, although this seldom happens. We buy companies with the intention to hold on to them forever, or at least only replace them when a better opportunity presents itself. However, I estimate that our average holding period will be between five and ten years, which allows us to unlock the value of our investments and keep our trading costs low.
In conclusion
Joining an investment club will allow you to start taking control of your financial destiny, keep you on the right track, and empower yourself. This first step is up to you, I challenge you to take it! It will help you to create the right mind set about wealth, the thrill of investing will keep you committed and actively involved in your wealth-journey, it will help you discover and take opportunities, it allows you to interact and exchange ideas with other people that share the same passion, and the discipline you learn will help you build your net worth through the four key activities. Join an investment club today - it might just be one of the most important things you ever do.

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