How To Lose Money With Your Friends

There are plenty of fun ways to lose money with your friends. 

 You could go out for a night of socializing and drinking; you could spend some time with buddies in a local casino, or you could join an investment club.

What?  The first two money losers make sense, but the third one…the investment club?

Yep.  The average investment club, according to Dan Solin’s article in the Huffington Post, loses 3 percent per year to the market index.  That might sound like gerbil food, but check this out:

  • $10,000 invested at 0% for 20 years = $10,000
  • $10,000 invested at 3% for 20 years= $18,061

According to the investment club tracker at www.bivio.com, the average American club had a total portfolio of $84,238, as of February 11, 2012.  If you divided that sum by eight members each, you could surmise that the average investment club member has $10,000 worth of skin in the game.

But why do investment clubs perform so poorly?  There are two main reasons:

They like to buy what has risen

As I recently published in a Canadian Business article (February 2012) most people like buying investments after their prices have escalated.  They feel good about buying products that have become more expensive, and they shun products that have fallen in value.  In essence, people feel good about buying high and selling low. 

As it pertains to investment clubs, I can prove this.

Think of a stock that has quintupled in price during the past five years:  Apple.

At www.bivio.com the company tracks thousands of investment club holdings, including the 3M Investment club which I wrote about in my book, Millionaire Teacher, and in this 2008 MoneySense article.

On Bivio’s homepage, they reveal the stocks that are most popular among investment clubs, based on their percentage of ownership within the clubs themselves.

Apple didn’t used to show up on this list.  Ten years ago, when the stock was cheap, nobody seemed to own Apple shares.  But now?  More than 34% of American investment clubs own stock.

And when did the largest number of investment club purchases take place?  According to Bivio, it was January of 2012.

Here’s a one year chart of Apple’s share price below.  Check out the meteoric rise in price, and recognize that most investment clubs added shares late in the game.  Five years ago, this stock didn’t appear at the top of club purchase lists.  But today it does.

 

 I don’t know whether Apple will continue to do well, but I do believe this:

Most of America’s investment clubs haven’t made much money on Apple shares.  They could have bought shares for a fraction of the current price, just a handful of years ago, but most people are afraid of stocks that haven’t recently risen.

In contrast, it’s likely that most clubs felt really good (or safe) about paying a premium for Apple shares in January of this year.

The second reason most clubs underperform: group dynamics

It’s not hard to see why most investment clubs underperform the market.  Even if two or three members understand that they should be greedy when others are fearful and fearful when others are greedy, they’ll get outvoted, generally, by the fear and greed of the group.

That’s a pity.

There are more enjoyable ways to lose money with your friends.

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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2 Responses

  1. Hi Andrew,

    I always wonder about articles like this. Most investment clubs are about learning to invest. I'm not sure that anyone does their best when they are learning. In addition, looking at an average for a group of clubs can be very misleading because there is a significant variation in club results. There are bivio investment clubs that are doing very well.

    I don't think club investment results are unique. I'm sure the range of results of individual and even professional investors are similar.

    I also think you are misinterpreting a bit when you say the majority of club purchases of Apple were made in January. The club index rebalances each month to reflect the weighting of the value of different club investments. Since Apple has gone up so much, the index would need to "buy" more shares to reflect the increased weighting. That does not necessarily mean that is when clubs also bought their Apple shares.

    Investing is something you have to spend time on to learn to do well. An investment club can be an ideal learning environment as it allows you to experiment with what you are learning in a cost effective way. Putting a club meeting on your calendar also means you have put some discipline in your efforts to learn to invest by committing to spending time on it at least monthly. Doing that with friends makes it more likely you might stick to it.

    Obviously I am biased but it comes from my own personal experience from being in a club for 14 years. I can't say that each month we've met during those years that I was able to put maximum effort into studying investments, but I can say that over the course of that time, my knowledge and expertise as an investor has increased far more than it would have if I hadn't made the commitment to be in a club. I also have a group of friends whose opinions I value to discuss investment ideas with. In my experience, monetary rewards are not the only thing you get when you belong to a club.

    So I'm not sure what your intent was in publishing this article. I think, if a group of people find investing a common interest and want to learn more about it, that an investment club is a great way to do that. You don't really learn to invest unless you actually make real investments. A club gives you a very cost effective way to do that.

    Laurie Frederiksen

    COO
    http://www.bivio.com

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