Musings on Starting and Managing an Investment Club

Introduction

In 2006, a member of my wife’s family started a family investment club, and this planted a seed of an idea in my brain.  It was shortly after this, that I decided to give an investment club, comprised of friends and associates, a try.

The investment club that I spearheaded, which began to be organized in the summer of 2006, and was officially kicked off, through a registration of the assumed named for the group with the State of Minnesota, in January of 2007.  The group was formed as a general partnership governed by the laws of Minnesota. Our checking account was with Minnesota-based bank (and continues to be with this company to this day).  There was also a business savings account and was opened as a place to put cash while the group figured out meeting cadence, general investment philosophy, and to build up enough money to make our first purchase of stock something of [subjective] significant value.  The brokerage we went with was a small firm in New York.  At the time, they had the lowest commissions at $6.95 per trade.

The investment club still exists and is quite active.

On to the musings and some nitty gritty things.

Group Governance

A lawyer-friend, who recently joined our group, was pleased to see that our operating agreement — the document that spells in dry terms how the group is to be operated – had a provision for both exiting the group voluntarily and exiting the group upon death.  There are other provisions that I feel were more instrumental in keeping the group together for over a decade, and these are the provisions that relate to disallowing loans from the group to members, provisions governing that if a member wants money from the group, that person must leave the group – there is no borrowing of money from the partnership allowed.  There is also a provision that governs the amount of time the group has for the return of an exiting member’s money that they are entitled to receive.  More on this, shortly.  As it has turned out, we treated and continue to treat our operating agreement a bit like a living document. We periodically update it through amendments to reflect how group is actually functioning. Much of this living document mentality is a reaction to how I saw other investment groups being managed.  This rigidity included votes on motions had to be in person, cash was collected at these in person meetings, and so on. 

The in person meeting requirement was in our original operating agreement, but when members started to move away from the home turf of northeastern Minnesota, it became apparent that we needed to update our documents that stated how the group was to function.  This was accomplished by amending our operating agreement to allow any and all business to be completed through email.  This was instrumental in allowing an adoption of no longer having members physically located near one another.

When a member wants to call it quits and exit being apart of the group, there is a requirement to provide in writing – email is allowed, of course – at least 30 days prior to when the member wishes to officially leave the group. In addition, the group has up to one year plus a day to return the exited member’s money.  This exceptionally long time that is allowed for the return of moneys was originally thought of as a way to keep the group financially stable. With five original members, each with 20% ownership of the group, it was seen as being potentially catastrophic for the group to need to sell a significant investment simply to quickly payout for a departing member.

This provision was cited by a person in the group as preventing them from exiting the group when this person was in need of money to repay a court fine.  It was also cited as a reason that this same member does not think or worry much about their ownership in the group — it is just out of arm’s length for them to touch it and feel that they could spend it on something.

In all, we have amended our operating agreement at least six times.  Aside from striking down the in-person meeting and voting requirements and opting for a more modern way of conducting business, after several years of operation, the original members had built up a tidy amount of money in the group.  Friends of members were interested in joining the group, but did not feel they could invest an equal amount to the original members. A compromise was thought up where members with a certain amount of money in the group would have a full vote on business matters, while others with an amount of money lower than this amount, would receive one half vote.  This amount is calculated first by finding the following ratio: one divided by two times the number of votes in the group.  Then multiply this ratio by the total value of the group’s portfolio.  Above this amount, people get a single vote on group matters, and below this value, people get a half vote.

This has normalized voting power.  For example, at some point in the group’s existence, we removed, through an amendment, the requirement for equal ownership amongst the members.   For example, if two people in group were to conspire with each other, and amass a significant ownership stake, the thinking was that they would have undue influence.  Instead, even if a person was to own 95% of the group, they would still only have one vote on group matters. Instead, someone with just over 5% ownership in the group would also have a single vote, while those falling under this percent, would have a half vote.  Without this normalizing, and bucketing of vote strength, it would be easy for one person to essentially take control of the group.

The group has two “official” leader positions, a Director, and Assistant Director.  The Director and Assistant Director are both elected positions.  There is no term length defined, however, if someone in the group feels that someone else should be in one of these roles, they can call for an election by way a motion, and recommend a person for the position.

Within the operating agreement, we have different levels of agreement.  We have a simple majority in the affirmative for an action – this is simply over 50% are in agreement.  We have a supramajority vote that is defined as over 66% are in agreement.  We also have a vote classification that requires an agreement of 100%.  General actions like buying 10th anniversary custom coffee mugs required a majority vote.  The action to buy or sell an investment position requires a supramajority vote in the affirmative.

Since the group has all of its business conducted through electronic means, it was important to capture “an official record” of communications and actions.  Since the beginning, the group has had a mailing list. When we adopted the amendments striking down requirements to physically meet, we also added provisions for keeping, maintaining, and making available to members all communications from the mailing list.

Monetary Contributions

We have no set contribution amount for members.  At one time, we did, but we eventually reached what we felt was a sufficient dollar amount in the group, and we removed that requirement.  In theory, someone could join the group, contribute nothing and still have a half vote on business matters. This has not been the case, however. We have two members, each with a half vote, that made one time contributions, and have contributed no other money.

How do monies make their way into the group’s accounts?  The majority of contributions are through direct deposit. 

One of the key takeaways from my wife’s family’s investment club and the one that I started was automate as much as possible with regard to contributions.  Handling of actual money and having to make regular trips to the bank, when that is not something that you might normally do, is time consuming.  With members now spread all over the eastern half of Minnesota (and one beyond), physical collection would be too burdensome.

Bookkeeping

We use spreadsheets.  Our general accounting calendar is on a six month period. January 1 and July 1, mark the starts and ends of terms.  At the start of a new term, the portfolio’s value and any cash held in the saving and checking accounts is added up, the regular contributions from the members are verified, and a percent and dollar ownership value is calculated for each person.  This gets carried over to the next term, and is used as a way to gauge that next term’s gain or loss.

At the end of each calendar year, I generally write A Year in Review newsletter. It contains my general thoughts on the previous year’s investments for the group, as well as any administrative things that I see coming in the next year — such as people who have expressed interested in joining the group.  January, by the way, is when we admit new members. It means no new tax related things until the following year, and it gives the new person time to settle into the group’s ways of communication. The newsletter is definitely not up to the Warren Buffett level of musings, but it’s an attempt, at a macro level, to communicate where I see the group heading.  Each member’s newsletter, in the introduction section of the letter, has a personalized summary of how much their ownership in the group is worth, and how much of the group they own.

The one issue with bookkeeping in this six month rolling time frame, is that most of the information you are able to give members is out of date.  If a member is used to being able to log into their Fidelity Investment account, and get a daily snapshot of their mutual fund holdings, the method that we use is sadly lacking.  The timeframe of six months could be brought down to a finer grained span of time, but the disparate accounts (checking separate from the brokerage firm) makes it so there is limited cross visibility.  There are programmatic means, like Plaid, but this service does not provide the who a deposit was made on behalf of, you just know that a $25 deposit came from the University of Minnesota and was made into the account.  When you have four people in the group who all work at the University, this is not a helpful bit of information.

Likewise with being cumbersome, the brokerage does not have programmatic access to accounts. 

The group has a domain name and some hosting space/services that are used for the communications archive, in searchable form, available to members, as well as enough information to give members an end of day snapshot of where the group’s portfolio sits.

Takeaways

At least for a time, consider treating the money as throwaway money.  It is not say that you only make moonshot investment choices or put all of the money into a Canadian penny stock, think of the money as being unavailable to use for other things, as well as initially not thinking of this as a retirement account, was important in the early days.  It has also been important to make withdrawing completely from the group a very long process. It helped shape people’s mind in thinking the money was too troublesome to easily get at when there was an impulse to quickly get money.

Make contributing as frictionless as possible.  Direct deposit or any other no to very low cost way to moving money into the group has really helped with people just setting it, and forgetting it.

Make communication and decision making as frictionless as possible.  You still want checks and balances (e.g. 66% approval on making a money decision), but you want communication to be easy, and facilitate discussions.  It could be a mailing list, it could be a Google Group, it could be a Facebook group, or other thing that allows clear communication. Requiring each member to say in an email, “Yes” or “No” on a given action can help to eliminate uncertainty when coming to making actions.

Be open to investment ideas from all, discuss, learn, and develop a general group philosophy.  Maybe that means, you trend toward growth stocks, or maybe more toward value stocks.

Speed Gibson of the International Secret Police

speedgibsonAs a young boy, I was fascinated with the Danny Dunn series of booksDanny Dunn, Time Traveler.  Danny Dunn and the Homework Machine.  Danny Dunn and the Weather Machine.  Danny Dunn, a young boy, in a fictional New England city, had a professor-friend at the local University who was always inventing devices and substances (there is an invisible paint-themed book in the series, too).  One way or another Danny was left alone with the invention, and, curiously, he turns on the machines or uses the substance that is the theme of the book.  Adventure ensues.  It is the kind of adventure that catches a young mind (or not so young), and takes the imagination along for that adventure.

A friend (also named Alex) and myself, for a little while, have been aficionados of old time radio.  Alex is a fan of Yours Truly, Johnny Dollar.  The series originally aired from 1949 into 1962, and featured a clever story device of reading an expense report.  It sounds boring, but the story unfolds from cab fares – you will learn why Johnny took a cab in the first place, to why Johnny needs to be reimbursed for a hotel.

I became hooked on old time radio by listening to the radio version of Jack Webb’s Dragnet. Webb cut his crime-drama-teeth in the film-noir, He Walked by Nightwhich helped kick start what would eventually be Dragnet.  The Dragnet radio program aired from 1949 into 1957, with 314 episodes produced. If you are familiar with the television version of Dragnet, you will know most of the radio versions’ storylines.  I hope everyone agrees that the stolen-baby-Jesus-Christmas-episode is an infuriating and all together inane episode — radio or television.

After Dragnet, I came across The Blue Beetle (terrible audio quality along with an annoying stereotypical Irish cop character), and pointed Alex at it, and through a bit of sleuthing, he came across Speed Gibson of the International Secret Police as a better series.

In that Danny Dunn sort of adventure-craft-way, Speed Gibson, is an intelligent, young teenager with a streak for adventure – and he has a pilot’s license.  Speed has an uncle, Clint Barlow, who, in the first episode, is revealed to be in the secret police along with his friend, Barney Dunlap.  The term secret is really only implied, as it seems that with every new person encountered, someone is blabbing about being in the secret police.

The series itself consists of two story arcs.  The first story, 100 episodes in length, you follow Speed, Clint, Barney and host of others along the way, travel to Hong Kong and other parts of Far East in search of the Secret Polices’ arch nemesis, The Octopus.   The second story, 78 episodes in length, you follow the gang to Africa to foil more of the Octopus’ evil plans.

As I listened to first story, I could not help but think about how the Octopus was a lot like Dr. Claw of Inspector Gadget.  As the story plays out, I feel that the creators of Dr. Claw had to, at bare minimum, take inspiration from the Octopus and his gang of inept henchmen.  There is little comparison on the protagonist side of Inspector Gadget, but the antagonist side, there is plenty to draw from.  The Octopus, like Dr. Claw, has a huge ego, and feels that at every move, he will easily trap his enemies with an overly complicated, yet, ultimately, easy to foil trap.  Upon nearly being captured by Speed and the gang, the Octopus slips away with a quip about ruing the day that Speed Gibson crossed him.

Aside from the simple plots, heavy reliance on coincidence, the use of shortwave radios, and having some of the worst “Chinese” accents of any drama, radio or television, Speed Gibson of the International Secret Police is a great serial to listen for at the office, or on a road trip.  Between the introduction music, the exit music and a recap of the previous episode, you get a solid 8 to 12 minutes of new, if slow moving, adventure.

You can find Speed Gibson of the International Secret Police on archive.org for free streaming or downloading.

Place

My last write-up was a while ago.  Shortly after that post, Melissa and I headed to Gray Summit, Missouri, for the Basset Hound Club of America’s annual gathering.  This gathering is usually in a different place each year; in 2011, it was in Kentucky, last year, it was in Massachusetts, and next year, it will be in Wisconsin.

The trip to Missouri kicked off a strange bit of travel – completely planned – for myself.  We drove to Missouri – it’s an eight and a half or nine hour drive from Saint Paul – on Saturday, October 5th.  On Monday morning, we were at Purina Farms in Gray Summit.  By mid-afternoon, I was heading to the St. Louis airport – a friend of Melissa’s was kind enough to give me a ride there.

I was flying to Hibbing, Minnesota; my hometown.  Meghann, my sister, was already back in Hibbing; she had arrived from Japan earlier in September.  Our grandmother was turning ninety years old and Meghann had made plans for a photo shoot with our parents and grandmother.

The last time I flew into or out of Hibbing was August of 2000.  I was still living in Hibbing at that time and I was heading to Colorado to visit my cousins.  I remember flying south and seeing Lake Mille Lacs pass underneath as I headed to the Minneapolis/St. Paul airport.  That flight was rough; it was in a twin engine turbo prop.

Flying north from St. Louis to Minneapolis, farm fields stretched out under the airplane; small streams dart here and there; now and again, a river whittled its way through the landscape.

I have flown into and out of the Minneapolis/St. Paul area many times; the trip to the west coast in July being the most recent prior to October.  By no stretch am I a frequent flier.  I fly more often than I did when I was in my 20s; as household income and my age have increased, the occurrences where I take flight have also increased.

For much of my life, the act of passing through the Minneapolis/St. Paul area was seen as an unfortunate have-to.  With Melissa having grown up in Saint Paul, and her parents having always lived there, the metro area turned into an occasional destination.  With move to the metro area now heading toward being eighteen months ago, it has turned into my new home and it’s a homecoming for Melissa.

The flight to Hibbing was odd; the doctor who had delivered me was on the flight along with several others who seemed vaguely familiar in that I’ve-seen-you-before-maybe-twenty-years-ago sort of way.  No turbo prop, this time.  It was a small jet.

The time in Hibbing was brief – around 36 hours – and then it was back to St. Louis; by the end of the week, we were back in St. Paul and soon there after, back to the daily routine.  Back to this place that is now my home.

 

Lawnmowers & Vespidae

Before leaving for Portland, I had been putzing with the lawn tractor and its mower deck.  The mower deck has a Rube-Goldbergian pulley system from taking power from the engine and directing it to the mower blades.  For a while (prior to traveling to Portland), I have been trying to get the right belt for the mower deck.  The mower itself is a Sears.  Its green color is not original, nor is the yellow mower deck.  The belt that was on the machine when my father-in-law was cracked and worn and continually slipped off. Amazon.com has been stellar with their selection of belts.  Props to Amazon for having belts listed by size and not simply the model of the machine they will fit.  I have bought several – different circumferences and different thicknesses.  Except for the last belt I tried, the others keep violently vibrating and slip off of the pulleys.  The last belt was simply too short.

With the far-back garage closed and the not-mowing-mower in said garage, Melissa was not able to get the grass cut while I was in Portland.  The grass also did not get cut the first week back from Portland.  This was more than nerve-racking for Melissa, and she had had enough.  We bought a new self-propelled push mower yesterday.

Melissa is a tomboy.  She likes things with engines – lawnmowers, tractors, fishing boats.  Whenever I would get the lawn tractor out to mow, inevitably, Melissa would wander out and ask if she could take over.

Like a kid with a new toy, I could barely get the few things I was carrying out and into the house; she wanted the new mower unpacked and working.

With the jerrycan of 92 octane gasoline empty after filling the new machine, I headed to a gas station; Melissa buzzed around the front yard with the new mower.

When I returned, she had moved into the backyard.  She had mowed in front of the entrance to the vegetable garden and was now mowing lengthwise in front of the chicken coop.

I had noticed a mole hole near the entrance to the garden several days ago.  I had made a mental note to fill it with dirt, but had since lost the mental note.  Walking to check the expansive Little Shop of Horrors-like squash plant (I have not had to feed it bodies, yet, but the plant is enormous, and, in the hot weather of several weeks ago, it was growing nearly 12″ per day) that had been looking dehydrated earlier in the day, I noticed activity around the mole hole – insects, flying insects, black and yellow flying insects.

A closer inspection revealed wasps.  Depending upon which entomology camp you follow, you call them Vespula alascensis, or you might call them Vespula vulgaris.  Either way, they are wasps.

Melissa had apparently, and unknowingly mowed over the mole hole that now contained the wasps.  Before I inevitably had to put wasp spray into their home, I set up a video camera and videoed them cleaning out the grass clippings that had landed at the entrance.

Take a Picture, It’ll Last Longer

For quite some time now, I have usually carried a camera with me.  The ubiquity of cameras in cellphones has helped. For example, I have an iPhone 4, which, in a pinch, can take quite nice photos.  For weekend excursions and trips that might have something interesting, I will take our Nikon D5100.  I purchased this camera before my 2012 trip to Japan.  Before that Nikon, it was a different Nikon – a D60.  But, for a number of years and prior to leaving Hibbing, it was a late 1970s Pentax ME 35mm.  I, more or less, usurped ownership of this camera from my father.  He had bought it new, and it was often part of outdoor summer outings in the mid-1980s.  Screen Shot 2013-01-19 at 11.36.11 AM

I remember standing on top of a mining dump (these are large hills of waste rock and dirt from a bygone era of iron mining), we were near Kelley Lake on the outskirts of Hibbing, MN.  A side note, in the map, above, Kelley Lake is the marker on the left.  I stared off in the distance; my father stared through the camera and its 205MM zoom lens toward the east northeast.  He was looking at Minntac, the mine he worked at, at that time, located 21 miles away.

The camera was kept in a closet under the steps at the house in which I grew up.  In the early 1990s, before I was old enough to drive a car, I rode my bike.  I rode miles and miles everyday; often north to trails that ran along mine-owned properties.  Occasionally, we would cross over onto mine-owned property and go swimming in the then-abandoned-and-water-filled pits.

Friends and I would take photos of many things.  Water running out of a distant, long forgotten mine shaft – from the days when iron mining was conducted below the surface.  We would also photograph weekly mine-blasts, the abandoned foundations of the city that moved, and sometimes, we would end up in front of the camera.

While visiting my sister in Japan this past year, I was looking at a bookshelf she had in her living room; on the top shelf, there was a photo of me – I was on my Raleigh mountain bike, and I was wearing a backpack.  The photo was in black and white.  I stared at the photo.  I could remember where the photo was taken, and the approximate time of the year.

I was fourteen.  It was the middle of the summer of 1995.  My friend John F. and I were biking around Hibbing and we were following the railroad tracks that still cut through Hibbing; we were just west of the old depot building riding through puddles of water.  I believe it had rained earlier in that day.

John and I took hundreds of photos that summer, and of all those photos that we took, that one photo of my young-self that is currently sitting on a bookshelf in Japan, is the only one that I know of that has not been lost.