An introduction to investment clubs

Updated 29 August 2012

Shaun van den Berg, ShaunvdB@psgonline.co.za Shaun van den Berg, has been with PSG Online for over twelve years now and heads up the client education department. Shaun is passionate about teaching people how to become successful investors and traders on the share market. He is particularly interested in using investment clubs as a medium for the man-on-the-street to learn about successful investing, while growing his starting capital in a fun environment with friends and family. Shaun believes that a successful investment club can only go from strength to strength but it does take time and effort.

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Table of Contents
Why invest in the share market? Why join an Investment Club? The Investment Club advantage Joining an existing club Why Investment Clubs fail Starting a new Investment Club Establish your club size Invitation to join an Investment Club The introductory meeting Your first official meeting Regular meeting date, time and location Regular meetings - the key to success Set your contribution amounts Membership responsibilities Register a company Passive income company Dividend Withholding Tax (DWT) in a company Setting up and running a company Form a partnership Tax implications Elect officers Safeguarding club assets Open a trading account Investment Club rules Education program Between the first and second meetings Your second Investment Club meeting Book of accounts Philosophy of the Investment Club The importance of a mission statement Choosing a strategy The investment club strategy The trading strategy The investment strategy Create a watch list Prospecting using the fundamental analysis method Prospecting using the technical analysis method The Share Selection Checklist Objectives of a share selection checklist Share selection shortlist Share selection using fundamental analysis Share selection using technical analysis 3 4 6 7 7 8 9 10 10 10 11 11 12 13 14 14 15 15 16 16 17 18 19 19 20 20 21 21 24 25 25 26 26 26 27 28 28 28 29 30 30 30

Appendix A Sample invitation form Appendix B New members form New members agreement Appendix C Declaration by joining member Appendix D Partnership agreement Appendix E Resolution of members Appendix F Mission statement Appendix G Investment club rules Appendix H Operating procedures Appendix I Share Selection Checklist

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Why Invest In The Share Market?

Investing in the share market can be exciting, even riveting. Prices jump wildly and can double or halve overnight. While investing can be a thrill-a-minute ride, is it really the right place for your savings? What if the markets take a dive? You could lose everything! Would you not be better off parking your hard earned money in a nice safe bank account, or stashing it somewhere secret in your home? The answer is no! Loud and clear! Are we nutty risk-loving maniacs who advocate investing as a thrilling, if not dangerous pastime? Absolutely not! We are cautious, sensible money makers who want to retire with a comfortable nest egg and have figured out that investing in the share market is one of the best ways to do that. So what is all the hype about? Let us take a look at the numbers.

2008 Sub-Prime Crisis

2002 Dot Com Bubble

1998 Asian Contagion

1987 Stockmarket Crash

Let us assume that you started investing in 1985. During 1987, the average return on investing in equities was only -46%. Ouch. So, if you had invested your life savings at the beginning of the year, things would not have been looking too good for you by the end of that year. However, if you had remained invested for the long term, your average return would now have been over 3 105% and that is including the three massive dips in value that your portfolio took in 1998 (-44%), 2002 (-37%) and more recently -46% (2008). This still gives you an average real return of 105% (i.e. working on 15% average inflation) over the last twenty five years!
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Do you think that a bank savings account can beat that? Think again. While a real return of 30% sounds very impressive, consider that this is the return on your investment after factoring in inflation. If you had put all of your money in a high interest bank account (e.g. 8%) by the time inflation has come into play (for the sake of argument let us say inflation is set at 15%) you may even be worse off! A return of 30% above and beyond inflation is pretty good news. Here are a few more reasons to consider investment clubs in the share market as a vehicle for holding and growing your savings: Only 5% of the people ever achieve financial freedom. Only 10% of private investors invest directly on the share market. No one cares more about your money than you do. You can gain the confidence through knowledge and experience to make your own well-informed investment decisions. For the added excitement of making an informed judgement to invest in, and share in, someone elses dream and see it unfold. You will learn more about the share market, make more profits and have more fun in a social environment! To have the opportunity for better returns than bank savings with similar liquidity of your investment. To diversify your savings and wealth from other stores of value like property, your business, or inheritance, or insurance products. A personal interest in business news and the business world. Enjoying a commonality of interest with other investors. Because you cannot rely on the government to meet your financial needs totally; now, or in the future.

Why Join an Investment Club?

Take one step back, and this question actually subdivides into Why invest in shares? Why do so through an investment club? You can pool your resources (i.e. time, money and skills) you can do much better than the large institutions. You can leverage off other peoples time and money.

The answer to the first is outside the scope of this document - suffice it to say that in the past shares have provided better overall returns for investors than bank deposits, and that most observers believe that they will outperform in the future too. The answer to the second question depends on your personal circumstances and viewpoint. People join investment clubs for all sorts of reasons, but the main ones are: Social - Membership of an investment club turns a solitary pursuit into a sociable one. Meetings take place at members homes, in restaurants or pubs, and the conversation is vibrant and convivial. It is more fun than agonising over decisions all by yourself. Education - Few people have had any formal education in picking shares and running a share portfolio. Pooling knowledge, brainstorming ideas, and subjecting decisions to the scrutiny of other investment club members is one of the best ways to improve your investing expertise. Diversification - A cardinal principle of investing is Do not hold all your eggs in one basket. Between eight and fifteen shares is generally reckoned to be sufficient to be properly diversified, but if you have limited funds that can spread you a bit thinly. Putting your money in an investment club is one way round this. Your money is pooled with others, and the investment club can invest meaningful amounts in a properly diversified portfolio.

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Of course, you can get these benefits without joining an investment club. On the diversification issue, for instance, unit trusts and Exchange Traded Funds (ETFs) exist specifically for that purpose. But investment clubs are unique in providing all these benefits in one go. Whereas a unit trust will charge you 5-6% of your capital when you buy units, and take 1-2% of the value of your fund each year as a management charge, with an investment club there are no charges as no one is paid for any work they do. This gives investment clubs an important advantage. Conventional wisdom dictates that the individual investor is at a major disadvantage in the investment arena against the professional fund managers. These big guns of the investment community arm themselves with sophisticated computer models, extensive research departments, and years of investment experience. However, conventional wisdom has been proven wrong on numerous occasions in the past and will be proven wrong again in the future. The thrust behind this How to start a successful investment club document is that private individuals can and do outperform their professional counterparts. Investment clubs are the unsung heroes of the investment world. An investment club is the coming together of people who want to actively participate in both the research and decision-making process of investing money. Typical working (or retired) men and women across the world are joining forces in investment clubs and use their talents and investigative prowess to outperform the markets top fund managers. An investment club is nothing more than a small group of individuals, generally consisting of between 10 to 15 members, usually comprised of friends, co-workers, church members, neighbours or family members. These people then pool a set amount of money and meet on a regular basis, usually monthly for the purpose of investing in an investment club portfolio. Some investment clubs are started primarily as a social club with investment interests, whilst others are started as a focused business group. While these investment clubs are certainly interested in making a profit, members should also find that investment clubs are a great way to learn about successful investing. In fact, it is recommended that these investment clubs focus on education first and foremost. If investment club members are too concerned about having their portfolio show lots of big numbers in the profit columns, especially when they are first starting out, their share selection is likely to suffer. Investment Clubs that follow this advice and maximise the educational aspects of their meetings usually find that profits follow. Investment clubs are a great way for novice investors to learn more about investment strategy fundamentals without putting a large amount of money at stake. In effect, you earn while you learn. The regular periodic investing approach allows you to build up a substantial portfolio over a period of time without having to make a large investment at any one time. You can become a top investment performer in your own right by learning from the amateurs that beat the professionals over and over again. Even more important than improved investment club performance is your opportunity to transfer what you have learnt in your investment club meetings to your own personal share portfolio to improve its performance too. The diversity of most investment clubs membership brings a breadth of investment experience and knowledge to the group. Remember, each investment club will be rich in diversity. You will meet people from all walks of life, such as medical doctors, engineers, telecommunications technicians, plumbers, accountants, financial directors and many more. Use this to your advantage to benefit from the research and investment opportunities brought to the investment club by the other members. Frequently this information would not have been available to a specific investor on his or her own. After all, there is only so much research and analysis that one person can perform. It is a win / win situation for everyone involved and committed to the investment club process.

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The Investment Club Advantage

Making profits is one of the main motivators for setting up an investment club and most investment clubs do make a good profit. But there is much more to an investment club than just making money. Do not imagine a group of people with their heads buried deep in the Business Day newspaper. Meetings tend to be lively, informal affairs normally held in the private room of a pub or at members homes. Everyone gets a chance to have their say before the latest investment suggestion is voted on. Although some clubs make staggering profits, for most investment clubs it is a case of getting rich steadily. Consider starting or joining an investment club if: You are new to investing and are looking for a good way to get your feet wet. You would feel more comfortable learning about investing with others than on your own. You have roughly R200 to R500 available that you can invest through the investment club each month. You have been putting off learning about investing and sense that having a responsibility to the group would provide some much-needed discipline. You think it would be fun to have a group of people with whom to share company research and to discuss investment topics. Friends have gently suggested that it would be good for you to get out of the house once in a while. Furthermore, investment club members derive a number of other benefits: Profit opportunities - Surveys show that collective investment decisions based on discussion and democratic choice are more likely to produce sustained profits. The pooling of investment money allows investors to own a wider range of shares than otherwise possible. Spread the load - Carrying out research into potential investments can be structured and spread amongst the membership. There is safety in numbers. Several people evaluating a share purchase are less likely to make that big wrong decision that decimates the portfolio. Informed investments - The collective brain power and experience of people who each have knowledge and experience of different market sectors will produce opinions and information that will guide you to sensible decisions. Sharing investment knowledge and research with others covers a lot more ground than an individual can. Low risk - Pooling a relatively small amount of money with others every month will be an ideal way to gain hands-on experience of how the share market works. The low monthly cash outlay is affordable by just about anybody, enabling one to build up an investment portfolio in small, easy pieces. Investment clubs are not just good for newcomers to investing, though. Also consider forming an investment club if: You are an experienced investor, but do not have the time to study as many companies as you would like. (A dozen people studying and presenting one company per month result in 144 company reviews!) You are confident in your investing decision-making, but you think it would help to be able to bounce thoughts off others and get some additional perspectives. You would welcome the chance to learn from other seasoned investors who have expertise in areas you do not know that much about.

Investment clubs serve as a terrific way for those new to investing to learn more about it in a friendly group setting. Many people are terrified of taking their first investing steps and investment clubs make this relatively painless, as members cough up modest sums and invest carefully together after deliberating over the pros and cons of any action. Many members eventually find that the investment clubs guide their own personal investing. After a while, their equity in the pooled investment club account may be relatively small compared with their separate personal accounts.
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Investment club meetings will offer many good ideas of attractive shares in which to invest and while the investment club may buy a few shares, members often go home and buy more shares for their own trading accounts. You may not have the time to research several shares each month on your own, but by participating in an investment club, you will share in the research of others and have the extra bonus of a group setting in which to discuss investing ideas and issues.

Joining an Existing Club

Most investment clubs occasionally seek new members. Perhaps a member is moving away or is just unable to continue. At times like these, new members may be invited to join. You might expect that if an investment clubs account has grown over a decade and its average members equity is in the thousands of Rands that a new member would be expected to contribute a huge sum of money in order to join. Not true. The accounting systems that the investment clubs use permit new members to merely begin contributing the standard monthly amount. Longer-term members will each retain bigger pieces of the pie, and everyones piece is calculated according to how much was contributed when. Now that you might be all fired up at the prospect of joining an existing club, but there is some bad news. It can be hard to find the right investment club that is looking for a new member. Members of many of these investment clubs probably already have some friends they plan to invite. Your best bet might be to ask people you know whether they are in an investment club, and whether they need or anticipate needing any new members. Once you find an investment club to join, take the time to learn more about it before signing up. Consider questions such as the following: Do you get along with the other members? If many of them seem too quiet, loud, obnoxious, young, old, aggressive, meek, or wishy-washy, this might not be the best group for you. Do you have goals in common? Perhaps you are risk-averse and want to invest in more stable blue-chip shares, but they are out to aggressively find volatile, quickly growing small companies. Is the regular contribution too steep for you? R500 per month, for example, means R6000 per year. This can be a lot for some people. Do you have the same basic investing philosophy? If you are a true long-term investor, you probably would not want to belong to an investment club that relies mainly on technical analysis or that just looks for shares that are going to split, or does not do its own research, preferring to rely on the recommendations of investment gurus. Look for a group where you will fit in. That is easier said than done, though. For many people, the best strategy is simply to start their own investment club.

Why Investment Clubs Fail

It is rare that an investment club is a bad experience. Most of them are fun and friendly places to learn. Most investment clubs that are not successful fail within their first year or so of operation. Typically the reasons for failure come down to the same problems, time and time again. If your new investment club can avoid these perils, then your chances of success are much better. Same Investment Philosophy - One of the most important considerations is that you should be certain that all of the members of the investment club are on the same wavelength for investment philosophy. Failure to choose an investing strategy and stick with it can lead to the demise of the investment club. All the members of an investment club should agree on their investment objectives and strategies before you get started. If some members of an investment club are interested in playing the market rather than a more studied, long-term oriented approach, the conflict has the potential to tear the investment club apart.

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The recommended course of action is for the investment club to set their investment philosophy, and then be disciplined enough to carry out that strategy consistently. The investment club that allows a share to be purchased without sufficient research will also land in trouble. We, again recommend a Share Selection Checklist to be used as the primary tool for share selection. A completed Share Selection Checklist should be presented for each share being considered for investment. Preferably, each investment club member should be provided with a copy of that Share Selection Checklist for reference during the discussion, as well. Failure of members to pull their weight, and an investment club that allows them to stay, can also be seen as another reason why an investment club will fail. Remember, respect that the investment club is a business. Attendance and Participation - Another problem faced by many investment clubs comes from not setting minimum attendance and investment requirements for members. Failure to show up, or pay on time is a major problem. Investment clubs are doomed to failure if the members only have a mild interest and therefore do not actively participate. All investment club members must endeavour to keep meetings interesting and focused on solid investment education. In many cases, investment clubs are too eager to accept a new member into the investment club. This often creates problems, particularly if the new member does not share the investment clubs overall approach to investing, or is not clear on what is expected of investment club members. We suggest that the prospective member should first visit the investment club as a visitor for a couple of months before being invited to join. Accounting Issues - Finally, failure to expect flawless record-keeping and accounting issues often are problematic, even though investment clubs believe that they are keeping things simple by trying to use the every member has an equal share system. Eventually the investment club will discover that that equal share system has some significant disadvantages. 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 expensive. Most investment clubs that start out using the equal-share system will probably convert over to the unit-value system recommended by PSG Online. It is far better to use unit values from the outset.

Starting A New Investment Club

There are many steps involved in getting an investment club up and running, but fret not, most of them are relatively straightforward. Below is a list of steps to help you along. It is fairly thorough, but it is not set in stone as we may well have left out a step or three. The following items are things that you should try to agree on. It might be good to go around the room and get everyones thoughts on each of these issues. Begin with the right people There are two schools of thought on how an investment club should go about recruiting new members. There is no right or wrong about this. It is really a question for each investment club. Keep it personal - The first school argues that it is best to bring in people who already know each other and who have some shared experiences. Theoretically, this minimises the risk of a personality clash. Cast a wide net - The opposing argument is that it is dangerous to mix friends with money, because if things go wrong you not only lose a member of your club, you also lose a friend. Better to find members outside your immediate social circle, and to build some diversity into the gene pool.

The most important thing in starting an investment club is to start with the right people from the beginning. If not well
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thought out, it could quite possibly be the beginning of the end. The last thing you want is someone who says yes to be in your investment club only because it was you who asked them. You want people who are interested in investing, interested in learning about the share market, if not downright excited. You also want people that are like you and easy to get along with. You need to be able to ask questions and feel comfortable doing so with these people. Your members are the key to the investment club. You want to pick the right people, people that you want to have a relationship with for at least several years. The great part about an investment club is that everyone is learning together, so do not be afraid to ask someone who has no experience in the share market. From the silly question to the intelligent, who better than your family and friends? New members wanting to join the investment club must be nominated for membership by an existing member. The new member must complete the New Members Form (See Appendix B), as well as the Declaration by Joining Member (Appendix C). Provided that there has been no objection, the new member is then warmly invited to become a member of the investment club by accepting the investment clubs agreement or constitution, consenting to the rules and paying the specified joining fee and monthly subscriptions in accordance with the rules. Attracting outside members can be done a number of ways. You can advertise in local newspapers, or in PSG Onlines weekly newsletter, or you can post a message on PSG Onlines Facebook page http://www.facebook.com/ PSG.Online. From a legal point of view, advertising for members does not mean that the investment club is offering an investment service, an important point, as you would not want the regulators mistaking you for an unauthorised unit trust! Subject to discrimination laws, it is up to founding members on who they allow to join the investment club and who they reject. To avoid insult, it is wise to put the formal criteria for membership in writing, so that there is an objective record of membership eligibility. The issues such a document would cover are: How much a member must be willing to invest per month. Where a member lives What past experience a member has How long a member expects to invest for The vital thing is that there is a meeting of minds among members. Investment clubs which start out with a fault line in their membership will quickly experience tremors and even quakes. Take care to build a membership that can approach its investment as a cohesive force, not a fractured one. It is important that the founder members of a club all attend the inaugural meeting so try to find people in a similar location

Establish your club size

As far as the number of members is concerned, there is no minimum, but investment clubs cannot have more than 20 members. Three or four people is sufficient, but most investment clubs work better with eight or ten, since that will build the investment fund up more quickly, particularly in the opening stages. Start by talking with family and friends and see who is interested. It is best to gather a variety of people who will bring to the investment club a variety of interests, experiences, and perspectives. Once you find a few interested friends, let them invite a few of their own friends. Aim to form an investment club with roughly 10 to 15 members, give or take a few. You want to have enough people for there to be a decent amount of money to invest collectively to make it worth your while. You also would like to have enough able bodies to share the workload, but if you get too many, it gets impersonal and you will have trouble having quality discussions and finding a place to meet. The recommended minimum is to have ten members. Ten is not too big and not too small. Do not assume that you are doomed if your group is composed only of utter novices. That can be a very good thing. Sometimes, if you mix in some sophisticated investors with novices, the sophisticates can get bored or frustrated, and the novices can get intimidated. Do not doubt that a bunch of novices can tackle learning everything together. (Remember, you have a lot of resources to help you). Distribute information about the investment club to anyone who has expressed an interest. You want people to learn what investment clubs
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are all about and think about whether they are really interested. Additional members - Additional members may be admitted at any time upon the unanimous consent of the members in writing or at a meeting so long as the number of members does not exceed fifteen.

Invitation to Join an Investment Club

The invitation to attend an introductory meeting should contain the draft partnership agreement and investment club rules, the membership requirements, joining fees and monthly contributions, as well as the draft investment strategy. Select a date for the introductory and informational meeting. You will need to secure a meeting place. A local school or library may have a meeting room available without charge. See Appendix A

The Introductory Meeting

The introductory meeting is the meeting at which founder members of the investment club get together to make some important decisions. In theory it is preferable for everyone to do some of the preparation work. In practice a few will be enthusiastic and take the leading role. If you mailed out information with the invitation letter, the prospective members should already be prepared. Gather all interested parties for an introductory meeting to discuss: Whether you have enough in common. How you will be organised and run. Whether people are still seriously interested in forming an investment club. Discussion and agreement on the name of the investment club. Discussion and agreement of the joining fee and monthly subscription. Election of Club President or Club Chairperson, Club Treasurer, Club Secretary, Club Trader and Club Auditor. Discussion and agreement of the partnership agreement and rules. Appointment of PSG Online as your online stockbroker and nominee to hold the investment clubs shares. Appointment of bankers. Discussion and agreement of the investment strategy.

Be clear on the investing strategy (i.e. trading or investing), and poll the members to make sure they agree. Answer any questions. Take a vote to see how many are interested. If there are concerns or changes to be made to any aspect of your original plans, the next meeting will be the second informational meeting to finalise the agreements and entry requirements. But if no one objects to the original plans or requirements, the next meeting will be the First Official Meeting.

Your First Official Meeting

The inaugural meeting of an investment club is always an exciting first step. It is also the meeting where a number of key decisions should be made. At the first official meeting, call the meeting to order and go over the materials you have provided. Have everyone go around the room, introduce themselves and explain why they came to the meeting and are interested in joining an investment club. Emphasise that it is not a get-rich-quick scheme. Explain the principles of slow wealth building. Ask for questions. If possible, have an experienced investment club member available to help answer questions that may come up. When the group is ready to move to operational procedures, you will find the materials in this document very useful. This is the last chance for anyone to bow out!

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Regular meeting date, time and location

You will need to decide on a regular meeting time, place, length and format for your meetings. Try and make them all the same time every month. Investment clubs hold their meetings in a variety of places. One reason to try and keep an investment club size to no more than about 15 people is that it permits meetings to be held in living rooms. Other possibilities are to seek out some other space, like a local library or church. A coffeehouse or local watering hole, clubhouses, community centres, workplaces and pubs might also work. It is worth giving some thought to this before you start. Will all members (and their spouses) be happy to have the entire investment club back to their house? Decide when you will meet, and how often. A lot of investment clubs meet on a monthly basis to discuss their portfolio, make buying and selling decisions, and consider changes to the strategy. Investment clubs that meet less frequently, say, quarterly, should give one person or a sub-committee the power to make investment decisions between meetings. Finding a time that works for everyone can be a real challenge, but attendance at meetings is very important to accomplish the investment club goals. Investment club meetings can be quite informative. Members can present potential share purchase candidates, or the investment club can invite a special speaker such as a stock broker, research analyst, tax consultant, estate planner or other investment or personal finance specialist. For the format, outline the various items of business you plan to cover at each meeting and allocate an amount of time for each. This will help you keep meetings running efficiently and prevent someones report from going on for an hour and dragging things out too long. Most meetings will probably last between one and two hours. Remember, there is also the social aspect of investment club membership. Members are encouraged not to miss investment club meetings. Some investment clubs establish a fine or penalty if members do not attend a certain number of meetings during the year. The investment club should meet once per month and serve refreshments after the business portion of the meeting to minimise disruptions. Agree on snacks. Snacks can be a very important part of any meeting. In unfortunate situations, it might even be what meeting attendees look forward to most. Your investment club can choose to bypass snacks or you can decide to take turns bringing crisps or cookies. Some investment clubs hold periodic get-togethers, such as a cheese and wine party or an annual meeting at Sun City or another intriguing spot for example, in addition to regular investment club meetings. Combining the serious investment and social aspects make for a great way to increase your wealth, in terms of both your financial performance and new friendships.

Regular meetings - the key to success

The key to the success of the investment club, both as a savings scheme and as an interesting hobby, is holding and controlling interesting monthly meetings. The typical agenda of a meeting will be: Minutes of the previous meeting and matters arising Changes in the portfolio since last meeting Club Treasurers report - appropriate reports for investment discussion Reports from people allocated tasks at the last meeting Discussion and decisions on investments Any other business Date, time and location of next meeting

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Set your contribution amounts

At this first meeting, you will need to establish the amount that will deposited each month by every member. Stress that the amount should be considered risk capital. Even though you will be studying hard and are expecting a good rate of return, members should expect losses and not anticipate unreasonable gains. Initial Joining Fee - Some investment clubs start out with an initial investment or joining fee of say, R500 per joining member, to boost the initial start-up capital. However, if your investment club decides to go with more money, just make sure that everyone is in agreement with the amount and is able to afford the monthly dues. Monthly Contributions - We recommend starting with small, equal amounts. Agree on the amount of the monthly minimum contribution. You do not have to set this as high as possible. Remember that this is a learning activity, and you can always increase the amount at a later date. To get an immediate feel for the mechanics of an investment club, consider the following example: ABC Investment Club is an investment club with 10 members. They agree to each put in R500 at launch, and to chip in a further R200 per month after that. At launch - The units of the investment club start with a valuation of R1.00, so members receive 500 units for their R500 investment. After receiving everyones money, the investment club has R5000 to invest (10 x R500). As long as it stays in the investment clubs bank account, un-invested, each members 500 units are worth R500. Day 14 - The Investment club invests all its cash in five different shares. By luck or skill, the value of the shares rises within a week to R7500 (we are being generous to the ABC Investment Club!). There are still 5000 units in issue, so each unit is now worth R1.50 (R7 500 value / 5000 units = R1.50 asset value per unit). Each member has 500 of them, worth R750 (i.e. 500 x R1.50). Day 31 - On the last day of the first month, the assets of the club are still R7500 and the asset value per unit is still R1.50. On the first day of the second month, the members each put R200 into the investment clubs account by debit order. (10 x R200 = R2000). Here is the clever bit: the number of units they get for their R200 is not R1.00, but R1.33. That is because the allocation is based on the net asset value of the fund at the end of the previous month which in this case was R1.50. (R200 / R1.50 = R1.33). Therefore the R2000 will now buy 1504 new units at R1.33 each). Each member will now get an extra 150 units (R200 divided by R1.33). There are now 6 504 units (5000 units plus 1 504 units) in the investment club, and each member owns 650.4 units. The assets of the investment clubs are its shares worth R7500 and its un-invested cash of R2000. The investment club decides not to invest the cash just for the moment. Day 62 - During the second month, the value of the investment clubs shares drops, and by day 62 (the last day of the second month) they are worth only R7000. The investment club still has R2000 cash so total assets are R9000. With 6504 units in issue, the unit asset value is R1.38 (R9000 value / 6504 units). On Day 63 - (the first day of the third month) the 10 members each put in their R200. In return they are allocated 145 new units (R200 divided by R1.38). On the same day, a new member joins the investment club. He pays the joining subscription of R500 + R200 for the current month, and receives 507 units (R700 divided by R1.38). The 10 founder members now have 795 units each (500 + 150 + 145). The 11th member has 507 units. In total the investment club has 8 460 units in issue (5000 + 1504 + 1449 + 507). Its assets are R7000 in shares and R4700 in cash. The unit asset value is therefore R1.38. And so it goes on. The units in the investment club are valued at the end of every month, based on the Investment clubs assets, and the unit price determines allocations in the following month. The advantage of this system, known as the unit valuation system (UVS), is that it establishes a basis on which new members can join and existing members can leave. It is simple, fair and flexible.

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Beginning investment clubs should make it a policy to discourage withdrawals within the first few years, but let everyone know they have access to their money if necessity dictates. If new members are added, they do not have to match the previous contributions of current members; they will have pro-rated shares in the investment clubs portfolio. Contributions to the investment club should not necessarily be the only investment you make. You might be contributing R200 per month to your investment club, but putting aside R1000 per month for your personal savings and investing. Use the investment club as a means of educating yourself, then as a source of investing.

Membership Responsibilities
Who is going to do all the work? An investment club is run for and by all its members, but in practice some members play a driving role and others take more passive roles. Each participant assumes a particular role. You may be the group leader, buyer, or part of a share selection committee. Perhaps you are not good at book-keeping or taking minutes, or you do not fancy being Club President. Answer: You will find other members who will be willing to do the jobs that do not appeal to you. And with an investment club accounting system and portfolio management program, as well as help from your dealer at PSG Online; no officers job should take more than an hour a month. Members should be aware that they are all expected to actively participate in the running of the investment club. Active participation can be specifically defined for a particular investment club. For example: group members may need to contribute dues / fees monthly, spend time researching and tracking companies etc., give reports to the other investment club members, or participate in other activities related to learning about investing in the share market. An investment club that just retains passive members may be considered as issuing shares and thus have legal and tax consequences. Make a list of member interests and expertise. Here is why. As you begin hunting for companies in which to invest, you will want to choose industries to study. As Peter Lynch likes to point out, it is a great strategy to buy what you know. (Actually, it is probably best restated as research what you know.) If you are in the chemical business, you might volunteer to look into companies in that industry, choosing a few for a closer look. It is a good idea to make a list of the industries with which your investment club members are familiar. Even if someones only hobby is hitting the shopping centres every weekend, that is a great boon, they will be familiar with many retailers such as Truworths, Foschini, Mr Price, etc. Investment club members are therefore responsible for: Researching shares and presenting the data to the rest of the group. Opening a trading account. Executing trades, either through a broker or online via the electronic trading platform. Making on-going buy and sell decisions. Tracking and reporting overall portfolio performance. Accurate management and reporting of taxes for each member. Maintaining buy and sell confirmation paperwork and other administrative tasks

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Register a Company
An alternative for an investment club would be to register a company with the purpose of trading in shares. Why? Because according to the South African Revenue Service (SARS), all the trading gains or profits in a partnership are taxable as ordinary income tax in your personal name. Every time that the investment club purchases a share and sells it within 12-months of buying it, each investment club member would then owe SARS taxes that could amount to as much as 40% of the total profit (depending on how much income each investment club member earns). Companies are taxed at a flat tax rate of 28%. So if each investment club member are at the top of the earnings scale, in other words they fall into the 30%, 35% or 40% tax brackets, they will be paying far more in taxes than a company would. This does not even consider that the investment club can also deduct any business expenses from the company to lower the amount of taxes it would pay. Normally, an individual would pay about R200 per month for internet access, which they would need to trade their shares online. This is R2 400 per year that they would pay out of their own pocket with absolutely no tax benefits at all. But if they used a company entity, they would be able to deduct the R2 400 annual expense from the profits to lower their taxes even more. Let us say that one of the investment club members is a stay-at-home mom or perhaps she is a teacher whose salary is taxed at an effective tax rate of 15%. To pay even less tax, the investment club could appoint her to be the company secretary and do the admin for the company (and investment club) and pay her R500 per month for the work. By doing this, any income she gets from the company is also a tax benefit because it will be taxed at a lower rate than it would in the company. That is another R6 000 that the investment club could claim as an expense against the investment gains tax bill. You could also claim the companys telephone bill, as well as the rent for the home office that the investment club or company secretary uses. Just bear in mind that this only works if she is on a tax bracket that is lower than 28%. You could, for example, also deduct the expense of a newsletter subscription, as well as the data download for a charting program, etc. Refer to the table below to see how easily the investment club could save another R3 390.24 a year in tax by just deducting expenses you would have had in the first place. Add this to the savings from the lower company tax rate and you are on a total tax saving of R15 816 a year. Telephone bill Newsletter subscription Data download for charting software Annual brokerage account admin fee Salary to admin person Total deductions Total tax savings @28% company tax rate R2 400 R1 200 R 2 028 R480 R6 000 R12 108 R3 390.24

Passive Income Company

An important SARS ruling to remember: SARS defines companies as a Passive Income Company if it: Generates more than 80% of its income from passive investments like shares in the form of dividend income, bonds (interest income) and other financial instruments. And has less than six shareholders. If SARS deems the company as a passive income company it will be taxed at 40% instead of the normal company tax rate of 28%. The investment club would need to avoid this if they are to take advantage of the tax savings a

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company can produce. To do this, the investment club needs to ensure: The company generates active income from trading (buying and selling shares in less than a year), and Income from dividends and interest amount to less than 80% of its income. If the investment club does this, they are safe from this ruling and all the tax benefits that a company can offer are theirs. Just remember too, that SARS can define the company as a passive income company in one year, but not in another year. It all depends on whether it meets the criteria mentioned above. So make sure that it does!

Dividend Withholding Tax (DWT) in a company

When an investment club invests through a company, all the dividends that the company receives are exempt from Dividend Withholding Tax or DWT, but it will be taxed as ordinary income (at 28%) in the company if the investment club holds them for a year. If the dividends are distributed within a year, then the investment club will pay 15% DWT on them instead. Investment club members must also remember that if they do want to take out any more cash of the company, they will need to either pay themselves a salary, which is then taxed at their personal tax rate, or pay themselves a dividend, which is taxed at 15%.

Setting up and running a company

Some investment club members may think that there is a lot of hassle involved in setting up and running a company. This is absolutely not true because the new Companies Act has made it easier and cheaper than ever to run. Changes to the Companies Act now no longer require that a company is audited. However, because there are more than one shareholder or investment club members in the company, they would have to have their annual financials reviewed, which means auditor fees. That also means that the investment club would need to keep the companys financials and submit the tax returns to SARS, as well as the Companies and Intellectual Property Commission (CIPC) every year. It is easy to register a company through someone like the Shelf Company Warehouse (www.shelfcompanywarehouse. co.za) and it can be done in a few days. It is not expensive either as it will cost around R665 to register a company online. All they would need is proof of residence and the ID document of the designated investment club member and they will help you with the rest. Once the company is registered, the investment club would then set up a bank account for the company and open a trading account in the name of the company. Documents required for a company Completed client particulars schedule Signed mandate for share trading account *These two documents are included in the registration steps when applying for an account online FICA required for a company: Copy of Certificate of Incorporation (CM1) Bank details of company Copy of utility bill of company (Notice of Registered Office & Postal address (CM22) Business name if different from registered name Head office address Copy of SARS (Income tax) of company Resolution on company letterhead signed by ALL directors nominating one authorized person to give instructions Original Certified copy of ID / Passport / Drivers license of authorized person and / or CEO Copy of utility bill of the authorized person and CEO (showing physical address) Copy of utility bill and Original Certified copy of ID of each person or corporation with shareholding of 25% or more in the company
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Form a Partnership
Agree on how you will be organised legally and operationally. This might sound scary, but you should realise that your R200 to R500 initial contributions will be growing into a significant pile of wealth. You will need to have formal agreements in place to protect yourselves in case one member turns out to be a dastardly demon. One decision to make is whether to form a partnership. For most investment clubs, forming a close corporation is way too expensive and complicated to be feasible. One of the most important documents in an Investment clubs life is its Partnership Agreement. Look at the example of a partnership agreement to get an idea of what your members would like. Assigning a committee to develop the potential partnership agreement works well as a starting place. Reviewing the agreement with the investment club members will force you to make decisions that will help the investment club function well in the future. In most cases an attorney will be necessary to finalise the legal partnership agreement. Do not neglect this paperwork issue. Many investment clubs rather choose the partnership route because of tax consequences. The partnership itself does not have to pay taxes, although it does need to file a partnership return with SARS each year. In a partnership, the investment clubs earnings are passed to each individual member, who must pay the taxes on their share. In a close corporation, both the investment club and the members will be taxed. Your choice as to which type of organisation should be based on the tax rates which apply to individuals in your investment club, compared to the tax rate that would apply to the close corporation. Becoming a partnership is easy. All your investment club needs to do is to get everyone in your club to sign a copy of your approved Partnership Agreement and Investment Club Rules. Use them as a guideline, but customise yours to your own investment club. They are lengthy documents which have been used by virtually all clubs in Britain as the basis for their activities and the PSG Online version is now accepted by the company. Indeed, most stockbrokers insist upon seeing a copy of the investment clubs approved Partnership Agreement and Investment Club Rules signed by every club member before they will act for the investment club in transacting share deals. The Partnership Agreement is the legal framework within which the investment club will operate. It rarely requires alteration and can only be changed with the agreement of all members. See Appendix D

Tax Implications
Does the Investment Club have to pay tax? Investment clubs are not charged Company Tax. The individual member is charged to tax on their proportionate share of any income or gains and is entitled to relief in respect of any share of capital losses. Do you need to register the Investment Club with SARS? The Investment Club Treasurer, Secretary or other official of the investment club should notify the local tax office of the clubs existence and of the address that office should use for official correspondence. The local office will issue the appropriate letters and forms to that person. How do you know what your share of the Investment Clubs income e.g. dividends from shares, and gains are? An appointed club officer, normally the Treasurer, will be responsible for keeping a record of the clubs dealings in shares. He or she will apportion any income, gains and losses between the members in accordance with the rules of the club, and should provide each member with a written statement of these for each tax year. How do you declare your share of income and gains from investments made by the club to SARS? Every Investment Club member should declare their apportioned share of income or gains received from investments made by the club on his / her tax return.

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Do you still have to declare your share of any gain arising from a disposal of shares held by the Investment Club even though the gain has been retained for re-investment rather than being distributed to you? Yes, Investment Club members will be chargeable to tax on gains whether such gains are retained by the Investment Club for re-investment or distributed to Club members.

Elect Officers
As your investment club begins to form, you also will need to make more decisions. You will need to elect officers, for example. The usual Club President, Club Vice President, Club Secretary, and Club Treasurer should suffice. Agree on what responsibilities there are, and what kinds of officers you will need to elect to take on these responsibilities. Remember that even regular, non-officer members have responsibilities. Typical investment clubs have: A Club President or Chairperson, who sets meetings, decides the agenda of meetings with the Club Secretary, presides over them, plans activities and makes sure that notices are sent out at the right time. The most important role he or she has is to control the meetings so that they are focused and do not waste unnecessary time in reaching decisions. The Club President or Chairperson should also make sure that the club is operating constitutionally and within its rules. A Club Vice President, who fills in when needed and might also run the education program. A Club Treasurer will be responsible for keeping a record of the investment clubs dealings in shares, which includes the investment clubs holdings as well as each members share. The Club Treasurer probably has the most work to do in administering the investment club. He or she is responsible for recording all the transactions of the club and sending out statements to members. Usually the Club Treasurer keeps the investment club accounting records in an Excel spread sheet, and the permanent banking and brokerage records, along with a record of the monthly club valuation and member statements and the annual taxes. (This needs to be a careful, detail-oriented, and responsible person). The Club Auditor - Once a year the auditor takes the previous years transactions from the Club Treasurer and checks on the accuracy of the records. A Club Secretarys role is often combined with that of the Club Treasurer. The Club Secretary is responsible for sending out agendas and minutes for meetings. They are also responsible for safekeeping the original partnership agreement and signature page, a concise record of the minutes of every meeting, along with any correspondence, i.e. resignation letters and letters requesting information from prospective new members. The Club Secretary also reminds members of meetings when necessary, and possibly emails out minutes to members who miss a meeting. A Club Trader (who can also be the Club President) deals with the stock brokerage i.e. PSG Online, buys and sells shares. All club members are required to track at least one company each. Tracking involves getting the companies news releases (i.e. SENS announcements), summarising it in their own words and presenting a quick ten-minute presentation to the other members. Each member is also required to track and report on one new company (not already held) as per the Investment Club Share Selection Checklist once per year. Each member shall participate in the management and conduct of the affairs of the partnership equally. It will take a majority vote of the membership to buy or sell a share. If you are not present at the time of the vote, you can vote via a proxy email addressed to all members. The vote should be sent in an email to all members. Any member wishing to buy or sell shares between meetings may obtain agreement of two-thirds of the membership and will then contact the Investment Club Treasurer.

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giving their approval of such transaction. A reasonable attempt shall be made to contact all members via phone and email. A reasonable attempt allows for two days of the email sent. The investment strategy committee - Some investment clubs, particularly those that only meet once a quarter, appoint an investment strategy committee. Its role is to take investment decisions between meetings. If the members of the committee believe that the investment club should sell a share, for example, they have the authority to do that without waiting for an investment club meeting. Investment club rules normally insist on re-election every year, but do not normally prevent any one individual from holding a position in successive years. The investment clubs that work best are those where members find roles that they are comfortable with and which fit their skills.

Safeguarding Club Assets

While certainly not a frequent occurrence, there are occasions when an investment club member absconds with the investment club funds. Safeguarding club assets can be accomplished relatively inexpensively. Bank Deposits - Assign someone in the investment club, usually the Club Treasurer, to look into choosing a suitable bank and for opening a joint bank account. It is also recommended that the bank account be linked to the investment clubs trading account as a beneficiary via the Internet to make the transfer of funds easier, as well as for accounting purposes. It is suggested that the investment club open a current account with a leading bank for direct bank deposits. It is recommended to use the SMS and email alert service on PSG Onlines website for deposits and withdrawals. It is recommended that the account is operated as a two-signature account. All deposited funds are transferred on a monthly basis with these transfers only done with both signatories present. Only the Redemption Balance is always kept in the current. No unauthorised withdrawals allowed. Open a PSG Online Trading Account - You will need to discuss the idea of working with a stock broker with the other members of the investment club. Since in an investment club your group should be calling its own shots, you do not need to pay hefty brokerage commissions to full-service stock brokerages. Discuss the differences between full-service and online stock brokers and decide which you prefer. Select a stock broking firm that will handle your trades and decide whether or not you want a broker dedicated to lending advice to the investment club. For ease of record keeping, share transfer, and safeguarding, all shares must be registered in a street name or Nominee account. This procedure involves having the broker establish a trading account in the investment clubs name. The purchase or sale of investment club shares will be registered in the brokerage firms name (Street name) but recorded in the investment clubs account. The investment club will receive confirmations of the transactions via SMS and email and a monthly statement detailing club transaction activity, plus a listing of portfolio holdings and any open orders. No withdrawals allowed. Take advantage of the services offered by PSG Online (www.psgonline.co.za). Assign a member of the investment club to look into opening a trading account at PSG Online. Each investment club member will have access to the investment clubs share portfolio through the regular communications sent via email or fax from the investment club secretary and at the monthly investment club meetings. However, only the Club President and the Club Treasurer (Trader) may have the authorisation to buy and sell shares.

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Open a Trading Account

Please visit the PSG Online website at www.psgonline.co.za Click on the LOGIN button in the top right-hand corner. Once the page has redirected, click on the REGISTER button in the top right-hand corner of the page again. On the registration page, find the section called REGISTER FOR AN ACCOUNT. Provide your ID number as a unique identifier for your web profile. As a new user, you will need to provide a username and password. As an existing user, you will need to verify your username and password. Confirm your chosen investment product. Enter your personal details. Enter your banking details. Accept the Terms and Conditions.

Documents Required - To open a trading account, PSG Online will need the following from the main member (Club President / Trader): Particular schedule Consolidated mandate Copy of ID of individual (i.e. main member (Club President / Trader) Proof of Income tax number (SARS) Utility bill that proves residential address e.g. water and lights account

The main member must complete a mandate to open a trading account. With the normal mandate a resolution (see Appendix D for example) must accompany the mandate which states: The main members name and identity number. The main members bank account A list of the investment club members with their ID numbers and their ORIGINAL signatures Copy of each members ID document

Investment Club Rules

The Investment Club should have a constitution and rules, to provide an organisational framework and points of contact for correspondence and official notices. A constitution is also essential to protect the interests of investment club members. This covers all aspects of the running of the investment club. They change from time to time. Many investment clubs require the agreement of 75% of the members to change the rules. It is up to members to decide what goes in these two documents, but it is safest to adopt tried and tested templates used by other investment clubs. The Club Treasurer will apportion any income, gains and losses between the members in accordance with the rules of the investment club, and should provide each member with a written statement of these for each tax year. Investment club members will be chargeable to tax on gains whether such gains are retained by the investment club for re-investment or distributed to investment club members. Every investment club member should declare their apportioned share of income or gains received from investments made by the investment club on his / her personal tax return. See Appendix G

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Education Program
It is very important that over the long-term investment club members want to learn about investing in shares. Investment clubs that operate with the main goal of educating their members about investing will find that profits naturally follow. Some investment clubs have a separate education officer or co-ordinator, which is usually the Club Vice President, who is responsible for planning (with the input of the group) an educational program. This will naturally change a bit over time, as you become more sophisticated investors. But it is important to start out with some kind of plan. So have some form of educational agenda, which might include presentations, field trips, guest speakers, and assigned reading. Perhaps you want to take the first few months to learn how to read annual financial reports. If you are already comfortable with that, you might delve into various valuation methods. Discuss topics of interest and set up a plan for learning. Provide information and homework for the first share study, or assign reading material such as books or articles for the first education program. To promote investment education, the investment club can ask that each member report on at least one share a year. The reports should be brief and to the point, and preferably accompanied by research information distributed to the other members beforehand. Take a look at the PSG Online Forum on www.psgonline.co.za and choose a share or subject for the first educational segment. A good way to start this discussion might be to go around the room and ask members to say what big questions they have about investing that they would like answers to. If members think this would be too embarrassing, you could all write down lists of these questions anonymously and then collect and discuss them. (No one should be embarrassed, though as your investment club should foster an open and unintimidating atmosphere). Finally, agree to have fun and to keep your meetings friendly and co-operative. Remember, that the main objectives of the investment club meetings should be to educate and learn, to make profits and to have fun! Schedule the next meeting two weeks away. Adjourn.

Between the First and Second Meetings

Split up the responsibilities and review everyones assignments. Each member of the organising committee should research their respective information and be prepared to explain it at the next meeting: The Club Secretary to file investment club entity (i.e. partnership) with SARS. Once received, the Club Secretary to handle publishing information. The Club Treasurer to file for Tax ID Numbers (after name is accepted by the SARS); The Club Treasurer to open bank account, as well as PSG Online trading account with initial dues. The Club Treasurer to set up the investment club accounting system in Excel. The Club Vice President / Education Committee to prepare to lead first education program. The Club Secretary to order the Wen Professional Plus technical analysis software from PSG Online (www.psgonline.co.za) Everyone should start considering names for the club. You can be straightforward and name the club after something like your geographical region, or you can be creative. One group of women named their club the Stroke of Luck because they all met at a doctors office. Their husbands had had strokes, leaving the women suddenly needing to take control of the family finances

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Your Second Investment Club Meeting

At the second meeting of club organizers: 1. Write a Mission Statement (see. Appendix G) 2. Develop and / or modify an existing Partnership Agreement. 3. Develop and / or modify an existing set of operating procedures. 4. Develop and / or modify a trading or investment strategy. It is NOT going to be possible to complete the above in one meeting, so schedule as many organisational meetings as necessary to fully complete these tasks, preferably one week apart. (Note: If you start with a small handful of people who have been involved with the entire process, you can skip to the First Official Meeting. If you choose to add members before the investment club is formed, mailing out the final draft of the Partnership Agreement and Operating Procedures will minimise the number of meetings required to get the investment club started. Keep receipts of all expenses incurred to start the investment club, including mailings. These can be reimbursed out of the initial funds.)

Book of Accounts
The Club Treasurers book of accounts is important because they give the discussion at the investment club meetings a reference point. The books of accounts shall be kept and be available and open to inspection and examination by any member at all times. The key reports are: The Cash Account - Movements in and out of the clubs bank account, and the current balance. The Capital Account - A statement of the units owned by members and the prices at which they were bought / sold. The Assets Register - A statement of the cash and shares which the investment club owns. It should be up to the date of the meeting if possible. The first two of these are administrative reports rather than reports which inform a what shall we invest in type of discussion. The third is useful to such a discussion because it shows the current make-up of the investment clubs portfolio. The cash account - A investment clubs bank account will show both inflows and outflows: 1. Inflows Monthly subscriptions from members Dividends from investments Interest on cash deposits Cash from shares sold 2. Outflows Purchase of shares Withdrawals One of the Club Treasurers most important tasks is to show all inflows and outflows on a cash account - a kind of ledger - and to reconcile it with the bank statement on a monthly basis.

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Two principles underlie the cash account: Every transaction that the investment club makes is recorded. There are two halves, Receipts and Payments, and they must always balance to the bank statement. Cash accounts can be kept manually, but it is a lot easier to use a spread sheet. The investment club can also purchase special software from a number of sources. Whichever method is used, the cash account should show the complete trail of transactions with enough clarity to satisfy the investment clubs auditor at the time of the audit. Although the cash account is updated monthly, the Club Treasurer does not have to run them from the last day of one month to the last day of the next. It can be easier to end each month on the 28th rather than the actual month-end, leaving the last two or three days to go into the next month. The treasurer can then order the bank statement for, say, the 7th of the month to ensure that they get the correct balance as at the 28th, the end of the accounting month. The capital account - The capital account is also prepared monthly by the Club Treasurer. It shows: The number of units each member had at the end of the previous month; The value of units in the current month; The number of units bought and sold by each member during the month; The number of units each member had at the end of the month.

The capital account is distributed to all members, so everyone knows what everyone else has bought and sold, and the total number of units they own. Remember that the abiding principle of the capital account is the unit valuation system. Under this system: When the investment club is launched, units are valued at R1.00, so members get one unit for every R1.00 they invest. The value of units is recalculated every month, to reflect the receipt of dividends and income, and changes in the value of the shares owned by the investment club. The Club Treasurer calculates the unit value by taking the assets of the investment club and dividing them by the number of units already issued. Purchases and sales during a month take effect at the valuation at the end of the previous month. There are a couple of refinements to this system, though, and the first is Investment Club brokerage. Many investment clubs charge a brokerage fee when members buy units. This fee, say 2.5% of the value of the unit then pays for the stockbroker fees incurred when the club purchases equities. Other clubs charge a brokerage fee only when members withdraw money by selling units The advantage of charging brokerage on selling only is that it covers the cost of selling shares if the Club Treasurer is forced to do that in order to pay the member making a withdrawal. If your club charges brokerage on purchases or sales, then there will be two unit values each month - one is the price for buying and the second is the price for selling which is lower than the first price by the amount of the brokerage fee. The other refinement is the treatment of surplus cash. Each month the members will subscribe a fixed amount, say R200. This divided by the sales price of a unit gives the number of units each member buys The odd amount left after this is called surplus cash, and the Club Treasurer must keep a note of this and add it to subscriptions the following month.

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The asset register - The third important ledger kept by the Club Treasurer is the Asset Register. This records the assets of the investment club, including cash in the bank account and its shares. The cash should match the Investment clubs bank statement, and the shares should match the Portfolio Holdings available on the PSG Online website. Note the following: Risk analysis - Many Club Treasurers divide the ledger into low, medium and high risk sections, and then list the investment clubs shares in the relevant section. This helps members monitor the overall risk profile of its portfolio, and compare it month by month. Sector analysis - Within the same register, it is useful to show the different industry sectors that the portfolio contains. Again, this helps members to get a quick understanding of the shape and balance of the portfolio. Valuations of shares - Most investment clubs use the mid-price of the share on the last day of the month to calculate its selling value. Surplus cash - Surplus cash (cash put by members into the investment clubs account for which no units have been allocated) belongs to members, not to the investment club, so it appears as a liability on the register. Shares not yet paid for - If shares are bought towards the end of the month, they may be in the share register but not paid for. In this case enter the amount owed in the Due from investment club item. Unit valuation - The asset register is what enables the Club Treasurer to produce a unit valuation. Divide the net assets of the investment club by the number of units in issue, and you get the value of each unit. At the end of each month the Club Treasurer should send a copy of the up to date asset register to each member, along with the months cash account and members capital account. Valuation - The current value of the share portfolio of the partnership less the current value of the debts and liabilities of the partnership, (herein after referred to as value of the partnership) shall be determined by the close of the market the _____________________(day) before the meeting. This value will be determined by the Club Treasurer and will be reported in the monthly email or fax the week before the investment club meeting. It will be discussed as the first order of business in the meeting so the Club Treasurers report can be passed. When a member wants to leave the investment club, the investment club will pay the member the value of their share of the clubs investments. And the occasion of the members departure represents a disposal of their share of those investments for capital gains tax (CGT) purposes. To calculate the chargeable gain on this occasion, the member will need to deduct from the amount they receive from the investment club the total of: The sums the member has paid into the investment club from time to time, and The amounts of income (net of tax or tax credit) and gains allocated to the member for each year they were a member, adjusted for Any losses allocated to the member each year, and any sums paid out to them by the investment club in the past.

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Philosophy of the Investment Club

When establishing an investment club, one of the most important things for the members to decide is the investment clubs purpose or philosophy. If all the members are interested in getting rich quickly, the investment club is not the answer. If, on the other hand, members view it as a chance to learn over the years about selecting and making wise investments, the investment club is a great way to accomplish this goal. To make your venture into an investment club successful you should commit to at least five or more years involvement with the club. Investing in the share market is a long-term proposition and one that should not be taken lightly. Forming an investment club means going into business with ten to fifteen other people you trust and will trust you in return. Some other goals investment clubs might have are to make new friends and to have fun. Opportunities for new and lasting friendships abound at the local investment club level and can branch out to activities at regional and national levels. Just as an individuals investment philosophies and strategies vary according to the persons age, financial status, financial commitments, investment goals, and risk posture, the philosophies and strategies of every investment club will also differ depending on its membership. Similarly, just as individuals adjust their share portfolios as they move through their life cycles, investment clubs also adjust their share portfolio selection process over time as members age, some people retire from the investment club, and new blood joins the ranks of investment club members. For those unfamiliar with life-cycle investing, it is an investment strategy that adjusts the risk posture of share portfolio holdings as the person moves through his or her career and life cycle. For example, younger people with many more years until retirement can afford to assume a higher risk position because they have time to recover from any losses suffered early in their investment cycle. On the other hand, people nearing retirement and needing current income to sustain a comfortable lifestyle should assume a more conservative risk posture, moving from a majority of growth investments to a larger percentage of fixed-income investments. Whether you are an individual investor or a member of an investment club trying to earn respectable portfolio returns, it is crucial to your success that you develop and implement an investment strategy aimed at achieving your investment goals. Too many investors purchase a share on the recommendation of other people without any consideration of how it fits into their overall strategy or how it will help achieve their desired investment goals. With this in mind, we encourage investment club members to adopt an investment philosophy that includes the following points: Invest a set amount regularly, usually once a month, regardless of market conditions. This helps you obtain lower average costs; Reinvest dividends and capital gains immediately. Your money grows faster when earnings are reinvested through the power of compounding; Buy growth shares i.e. companies whose turnover are increasing at a rate faster than the industry in general. These shares offer good prospects for continued growth and higher dividends and share prices; and Invest in different industries and different-sized companies. Proper diversification helps reduce risk and increase opportunity for gains.

While investment clubs are certainly interested in making a profit, members should also find that investment clubs are a great way to learn about successful investing. In fact, we sincerely recommend that investment clubs focus on education first and foremost. If club members are too concerned about having their share portfolio show lots of big numbers in the profit columns, especially when they are first starting out, their share selection is likely to suffer. Investment clubs that follow this advice and maximise the educational aspects of their meetings usually find that profits follow.

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The investment clubs that establish an investment philosophy, goals, and specific strategies for implementation can and do outperform the top fund managers and the market averages! It was reported in the Wall Street Journal, that more than 60% of investment clubs in the United States produce lifetime average compounded annual returns equal or better than the share market. That is impressive when you consider that 75% of all professional fund managers fail to beat the market averages every year.

The importance of a Mission Statement

Why is a mission statement so important for your investment club? If you are an experienced investment club member, you know the answer to this. If not, here are a few good reasons. When you get your initial investment club members together, it is important to have the same financial goals for the investment club. Some of your initial members may want to jump in and out of shares to make a fast buck. This is contrary to what an investment club should be as successful investment clubs buy and hold shares for the long-term. This is why the sample of the investment club mission statement below clearly states that investment club members must perform a share selection checklist and gain approval of a majority of partners. By performing an analysis of each company they look at, the investment club prevents someone from coming in and wanting the investment club to purchase a share on a hot tip. Without this process, no vote on whether to purchase the share or not can go ahead. It is also important that the investment club recognise the four investing principles. If your investment club agrees on these from the outset, it will save a lot of conflict in the investment club in the future. Make sure you put them down on paper and vote them in as a club. You would not regret it. If your investment club has a mission statement like the one below, things should go much smoother down the road. See Appendix F

Choosing a Strategy
Investment club members need to agree on what type of strategy they will use when buying or selling a share. There are tons of different strategies and in most investment clubs that have started, this step has required the most discussion. How should we invest? What is our strategy? How can we form a strategy when we do not know how to invest? First of all, make sure that all investment club members have similar or compatible investing goals. If some people want to double their money in two years and then get out, that is not only unrealistic, but also probably at odds with those who want to learn and slowly grow their savings. To the degree that you can, agree on some common ground regarding a general investing strategy and approach. We would sincerely suggest that the investment club first consider studying the FREE Online Trading Course available on the PSG Online website. The course theory covers everything that a novice investor would need to make an informed investment decision based upon fundamental and technical analysis, as well as prudent risk management strategies. If you want more knowledge, you can also read anything written by Peter Lynch or Warren Buffet as to their approach to investing. You may want to have each of your fellow members read a book and share the different strategies until you come up with one that works for your investment club. As an example, perhaps you agree that Warren Buffetts approach is one you would like to incorporate or emulate, as great books to start the conversation. Agree on a set of common-ground references, instructions, tools, and / or readings. Peter Lynchs One Up on Wall Street, Beating the Street, and Learn to Earn are some other fine works that is recommended reading. Perhaps some members want to find significantly undervalued shares, while others want to find high-flying shares. Differences do not necessarily represent a death knell, but it is good to start out knowing how everyone feels. And besides, many investment styles are not diametrically opposed.

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The Investment Club Strategy

We suggest using the Investment Club Strategy for at least the first year then tweak it as you learn more. Check it out and see if it works as well for your group. Maybe someone in your investment club has read something else that they found informative. Firstly, the members have to agree upon the initial investment or joining fee (e.g. minimum R500 per member), and then the monthly contribution (e.g. R200 or R500 per month). These decisions will determine the flexibility that the investment club has and ultimately how fast the funds in the investment club will grow. This decision will also contribute largely towards which of the two suggested strategies the club chooses. Next, there are investors and traders. Traders are in this for the short term and quick profits. Investors, on the other hand, use their share portfolios to build their retirement funds, and are therefore, in this for the long term. Investment club members should then all decide whether they will have a trading portfolio, an investment portfolio or a combination of both. It is sincerely suggested that for at least the first two years, the investment club build up sufficient funds or capital. For example, once the investment club has built up, say R100 000 in funds, members could then decide to split the share portfolio into two in a ratio of either 60 / 40 or 70 / 30. Allocate the majority of funds to the buy and hold or investment strategy and the lesser amount to a trading strategy.

The Trading Strategy

Some investment clubs have a short-term view. It may be to make a high degree of profits in a very short period of time, e.g. days, weeks or months. These strategies employed by such investment clubs can be classified as either jobbing or swing-trading. Jobbing or Day trading is a strategy enjoyed by bold speculators who seek a high degree of excitement from their stock exchange dealings. This strategy is basically the exact opposite of buy / hold, which is discussed later. Jobbing is the process of jumping in and out of shares, often taking advantage of very small price movements. With jobbing, you would buy in at 9.00 a.m. and sell out by twelve noon! It is, however, generally a very expensive way of operating for two important reasons. Firstly, the tax authorities will have no hesitation in classifying you as a share dealer. Furthermore, because you will be trading very actively, you will be paying substantial amounts in the form of brokers fees. Jobbing requires that you also keep your ear constantly to the ground and have an in-depth knowledge of the market. This can be very time consuming. Swing trading is a more leisurely approach to jobbing. In terms of swing trading you climb in at the bottom of the cycle and jump out at the top of the cycle, switching your entire equity investment to the money market, and awaiting the next opportunity to climb in at the bottom. With swing trading, you may do two to three trades per year. In this strategy, your timing must be spot on. In theory it sounds great, but in practice only the fortunate few get their timing absolutely right.

The Investment Strategy

Other investment clubs will have a much longer-term perspective and they aspire to steady growth in dividend income and dividend growth, as well as capital growth over time. This is done through ownership of a well-balanced and well-selected portfolio of shares that are considered to be reasonably secure. These investors can generally be classified as buy& hold investors. A share portfolio is constructed and adjustments only made when absolutely necessary. This is a very sound strategy for any investment club, provided that thorough research has been done and a well-diversified share portfolio has been put in place.

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Within this investor group, there are 3 investment types: Momentum Investor: The investor uses technical analysis to gauge price movements. Buy and sell decisions are based on investor sentiment, something very difficult to quantify. Growth Investor: Fundamental analysis is used to determine whether a company is a worthy investment, such as growing sales and earnings, solid profit margins, and future business prospects. Value Investor: This investor also uses fundamental analysis, but concentrates on different numbers. Value seekers are mainly looking for companies that have very low valuations (e.g. Based upon the PEG ratio or P / NAV ratio) or that have stumbled. Very cheap shares are sought with signs that they may be coming back. The most successful investment clubs prefer to use fundamental analysis to find very good-quality companies, that have growing turnover and earnings, and that have a future so bright that they can buy them today and not sell them for a number of years. Then they hold on through thick and thin, as long as the fundamentals remain strong. This is called a buy-and-hold, growth strategy. In the medium to long term a buy / hold strategy will almost always outpace inflation by a considerable margin. The investment club also avoids excessive brokerage costs and the possibility that the members are classified as share dealers by the tax authorities. This is the type of investment objective generally held by pension funds and long-term savings plans. These two strategies will help the members of the investment club decide on an investment strategy. Remember, do not start investing until your investment club has decided what their strategy is going to be. Take your time on this step. Once a strategy has been formulated and accepted, then the members of the investment club must stick to it. Everyone must vote.

Create a Watchlist
Many novice investment club members are at a loss at choosing their first shares. To simplify a complex topic like successful share market investment, we have designed a few simple processes or steps to help investment club members choose their first shares. To begin investing on the share market, members should ask themselves what they hope to gain by it or what is their main financial objective? Hopefully they answered that they would like to make money! In the share market, an investment clubs main objective should be to maximise wealth! So begin with the end in mind and then work backwards! How do you maximise wealth on the share market? On the one hand you maximise wealth by maximising returns, while on the other hand you maximise wealth by minimising risk. Before an investment club can make money on the share market, the members will need to create a share portfolio of good, quality shares that offer great growth potential. The goal of the investment club is to create a balanced portfolio, using portfolio management techniques that will help them maximise returns (i.e. portfolio strategies such as buy & hold, swing trading or jobbing), as well as to minimise risk (i.e. portfolio management to avoid losing money such as diversification, portfolio structure and stop loss strategies). Remember, that it is not as important to make capital gains as it is to avoid capital losses! Next, before the members of an investment club can have a balanced share portfolio they will need to gain more knowledge about share analysis techniques. There are two schools of thought - the one being fundamental analysis (i.e. looking at the financial statements of the company) and the other technical analysis (i.e. looking at the charts for the company). Combine the two forms of analysis together, and you have what can be called rational analysis. The more informed the members are about a certain industry, sector and share, the better their success on the share market will be! But before the members can do any share analysis, they will need to create a watch list of interesting looking shares. It is not so much the amount of capital they have to invest on the share market that is important, but

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more importantly, how much time they have available to invest on the share market! It is impossible to follow the events of every single listed share as an individual investor as you will feel overwhelmed with information and go crazy! Remember that leveraging other peoples time is one of the main benefits of an investment club. To create a watchlist, members will need to go through a prospecting phase. As they gain more knowledge and experience on the share market, they will start refining this prospecting process and adapt it to their risk profile, their available time and the investment clubs strategy that will help them to achieve the investment clubs financial goals. The whole process starts off with the prospecting process to create a watch list, from which members will do further share analysis to create a balanced portfolio that will maximise returns and minimise risk, so that they can make money or maximise wealth!

Prospecting using the Fundamental Analysis Method

This fundamental analysis method means the keeping of a financial diary, in which you would record the financial year-ends of all the companies that may interest you. It is suggested that a bi-annual book like the JSE Digest would be useful in providing this information. You would then anticipate what their financial results would be by first looking at their past five year performances and then estimate what the results would be like within the current economic climate. Would it be good or better than expected? If you anticipate good results and you believe that the market in general has not picked up on this yet, then you would get in now before the crowd. Remember, the financial results are usually only printed in the financial press two to three months after their financial year end. This gives you that short window of opportunity to make some money fast! Alternatively, you could subscribe to the research facilities available on the PSG Online website. Research tools such as the Value and Quality Filter save a lot of time as it helps to narrow down the choice by using 12 fundamental search criteria. The Company Analysis is a one page research document on every financial and industrial share, which provides all the pertinent research information an investor would require to make well-informed investment decisions.

Prospecting using the Technical Analysis Method

The technical analysis method of prospecting for shares involves the scrolling through of charts using various technical analysis indicators to find shares that are oversold or presenting a buying opportunity. For example, you may be looking for shares where the price must be above its 21 & 40-day simple moving averages (i.e. bullish), while the Relative Strength indicator is outperforming relative to the JSE Overall Index. Subscribe to the DataShare download from PSG Online and receive the Wen Professional Plus charting software absolutely FREE! This technical analysis software will help the Investment Club track the market, as well as all the shares that the Investment Club may be interested in. Visit the PSG Online website (www.psgonline.co.za) for more information.

The Share Selection Checklist (SSC)

Many investment club members are quite willing to part with their hard-earned money, invest in a share, without knowing even the basics about the company, its financial year-end, market capitalisation, etc. By now members of the investment club should have narrowed down their choice of shares and have included them in their initial watch list. Now they need to do some share market analysis and this is where the homework comes in! Share analysis consists of the two schools of thought - fundamental and technical analysis. The Share Selection Checklist (SSC) is a paper form that aids individual investors in the fundamental and technical analysis, as well as the selection of shares. The relatively-simple form enables investment club members to identify the characteristics of a growth shares, and plot
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potential future growth from the historical trends. The SSC also helps an investor determine a reasonable value for the share, suggesting purchase when the share is temporarily on the cheap side of a value assessment. The SSC offers simple steps used as benchmarks in helping investment clubs to determine which companies are strong shares and which ones are not so able-bodied and should be avoided. This is only what PSG Online suggest an investment club use, and is not the be-all and end-all method to getting into the share market. However, it is simple, and we think that investment clubs will be successful. It requires an investor to apply his or her own judgement to many factors in the analytical process. The SSC can be an important aid in discovering those shares which are most likely to increase in value over the next five years. While the SSC may seem simplistic to many seasoned investors, it is imperative that both novice and more advanced investment club members document their share selection criteria and details of holdings. Professional fund managers each have their own set of investment requirements and investment criteria. This is usually documented and forms the basis of their investments into listed shares. Likewise it is important that investment club members set out their specific investment criteria. If the investment criteria are We will only buy shares in companies that start with the letter Y, then do not even look at Barloworld or MTN Group. This will eliminate hot tips from the neighbour, or dart throwing. For each investment that a professional fund manager makes, the research analyst compiles a research report. This research report contains at the bare minimum the details in the SSC. The following tutorial attempts to demystify the Share Selection Checklist, to explain its components step-by-step, and to point out areas where an investors judgement should be carefully applied. While this tutorial focuses specifically on the SSC, a special effort has been made to emphasise the tenets of long-term, growth share selection that any investor may utilise.

Objectives of a Share Selection Checklist (SSC)

Two investors can complete an analysis of the same share, using the same data, and their conclusions might be so different that an outside observer would not recognise that the same company was being analysed. Why? Because share selection is highly dependent on the opinions of the person completing the form. There are many opportunities for investors to apply their own judgement, making decisions about the companys prospects that affect the final outcome. The Share Selection Checklist (SSC) is not a substitute for doing research on a share; it is merely a tool that narrows the focus on some of the most important aspects of successful companies. In addition, each investor will have different goals that the share must reach to be a candidate for purchase, which can affect the outcome of the analysis. Even when using the Wen Professional Plus charting software or the fundamental research facilities available on the PSG Online website to facilitate analysis according to these principles, an investor must always use his or her experience and knowledge in determining a reasonable expectation of a shares future performance. The keys to successful share selection are to understand the conclusions of your analysis, and to learn to apply your own best judgement to those areas which demand input. The rationale behind the SSC method of analysing shares can be summed up fairly simply in two parts: Companies that have performed exceptionally well over the past five or ten years can be expected to continue to perform well over the next five years. In practical terms, this means that it is possible to quantify (to some degree) the success or failure of a companys management. If a company has grown revenues and earnings consistently at an annual average rate of, say, 15% over the past ten years, and the same management team is in place at the company, then we can reasonably expect similar growth in the future. The second objective is simply to determine a reasonable or fair price to pay for a share with such prospects. This method of stock selection is ideally suited for investment clubs with a long-term, buy and hold strategy who are seeking shares that will return an average of 15% a year on initial investment. Share price appreciation and dividend yield are taken into account in determining the shares potential return on investment, and quantified on the form.
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Share Selection Shortlist

The share selection shortlist gives the investment club members a better idea as to how they should approach share selection. Through a process of elimination, the members have now arrived at a list of shares that show certain minimum winning characteristics. These are the shares that are the gold nuggets or the companies that show great growth potential!

Share Selection using Fundamental Analysis

Firstly, look at all shares that have operating profit margins greater than five percent. List all those shares which have produced an increase in headline earnings per share (HEPS) of over 15%. The best companies are those that are able to generate large increases in headline earnings per share. Next, list all those shares (which meet the first two criteria) that have a Price / NAV ratio of less than two. This will ensure that the shares included in the shortlist are not overvalued. Next, list all shares that have a ROE% greater than 15%. The higher the ROE the higher the P / NAV should be. Finally, list all shares that have an interest cover greater than three times. This means that there are sufficient profits to pay the current interest charge three times. This is normally the minimum cover required from an investment. This is one of the most important ratios to consider for financial risk. There are enough uncertainties regarding the future of a company and there is no need to invest in companies with a higher risk of possible bankruptcy.

Share Selection using Technical Analysis

We suggest that you use the Wen Professional Plus charting software to look at all shares that are trending up in price (i.e. bullish trend based upon cycle analysis, support & resistance trend lines, as well as moving averages) even though it may be at or near its 12-month price high. The last thing that an investment club would want is to invest in a share that is moving down. Review the price graph in order to see where the current price is trading. Within the bullish trend, find shares that are also at the bottom of a cycle (i.e. oversold based upon various technical indicators such as the Overbought / Oversold, Stochastic, RSI and MACD indicators). Next, look at the shares volume and calculate whether it is free-dealing or liquid, as well as confirm volume accumulation using the Volume Price Trend (VPT) indicator. Look at whether the share is market outperforming relative to the JSE Overall index based upon the Relative Strength indicator. (Note: The Wen Professional Plus is set up with this technical indicators already as a Quick Template, as well as HiLiter criteria), and finally, only if there is a buy signal on the Point and Figure chart, as well as a price consolidation of at least six (the more the better), then calculate a price target. This helps to calculate the reward / risk ratio. The result will be a shortlist of shares, which can be studied further. This is by no means a fool proof method of share selection, but it does give investment club members a better idea as to how to go about it. After studying the market for a while, the investment club may want to select shares using their own selection criteria

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Conclusion
Investment clubs are a sociable way to do your investing, they are a great way to brainstorm ideas and share knowledge, and they can also be good for your wallet. But, as with any enterprise that mixes friends and money, it is important that everyone understands the ground rules before you start. That means making sure that members are in it for the same reason, that they agree on the investing strategy and objectives, that there are no personality clashes, and that you have a competent Club Treasurer to manage the accounts and produce statements. If you get these elements right, your investment club has every chance of thriving as a unit. Then all you have to do is pick the best shares! We hope that this document has provided you with useful information to get your investment club started and on the road to making wealth. Happy trading and good luck!

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APPENDIX A - SAMPLE INVITATION

This is an actual letter written to prospective investment club members. It is very important to work on a non-threatening letter when starting an investment club. Hopefully this example will help. This letter can be used in conjunction with the New Member Information Sheet. (Appendix B) (INSERT DATE) For the following Prospective Investment Club Members: LIST OF NAMES To our Family and Friends: We are in the process of starting an Investment Club. Yes, that is right. The great thing is that we would like each of you to be the founding members. You may be thinking right now that you know nothing about shares or investing, so you cannot join. That is the beautiful thing about this investment club. We are all relative novices at investing, so we can all learn together in an Investment Club. But you do not have enough money. No problem there either. At our first meeting we will decide on monthly payments, but they will be no more than R500 per person per month. That is about average for an investment club. But you do not have the time? We will have one meeting per month that will last about 1 to 2 hours. Not bad, huh? You will be expected on occasion to do some share research. We will all learn how. That may take a couple hours at first, then about a hour when you know what you are doing. All the rest of the details we can figure out later. We both want this to be a fun activity where we can all learn together, and make some money in the stock market without much risk involved. The Introductory Meeting will be (DATE AND TIME) at our (ADDRESS). Please RSVP either of us at (PHONE) in the evening whether you can make it or not. Even if you think you are not interested, please come. You may be persuaded. If you want to join but cannot make the meeting for other reasons, we will get you the minutes from the meeting. Hopefully at least one person from every couple can make it, but I would like everyone to make it if possible. NO MONEY WILL BE NEEDED AT THE FIRST MEETING.

Looking forward to hearing from youthis will be fun!

SIGNED

____________________________

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APPENDIX B - NEW MEMBERS FORM

Full name and surname of joining member: ________________________________________ ID No: _____________________________________________________________________ Postal Address: Physical Address: Contact No: Work No: _____________________________________ _____________________________________ _____________________________________ _____________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________

_______________________________________ _______________________________________

Email Address ______________________________________________________________ The above named was nominated for membership of the ____________________________ investment club at a meeting held on __________________________ and there has been no objection is warmly invited to become a member of the club by accepting the partnership agreement, consenting to the rules and paying the specified joining fee and monthly subscriptions in accordance with the rules. Signed _________________________ (Club secretary) Date ________________________

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New Members Agreement

Full Name & Surname of joining member: Postal Address: Home Contact: Work Contact: Cell Contact:

Email Address: The above named was nominated for membership of the (_________________) Investment Club at a meeting held on __________________________________ and there having been no objection is warmly invited to become a member of the investment club by accepting the constitution, consenting to the rules and paying the specified joining fee and monthly subscriptions in accordance with the rules. Signed (Club Secretary) Date: Declaration by joining member 1. I have received and read the constitution of ( _____________________________________) Investment Club. 2. I agree that the affairs of the Investment Club shall be conducted in accordance with the letter and spirit of the constitution and I agree to abide by the rules and any amendment thereto made in accordance with clause 18 of the rules. 3. I agree to pay a joining fee of R_________ which entitles me to a number of units in the club as calculated by the Club Treasurer using the same unit price as applied to valuations for existing members for the relevant month. Thereafter individual valuations will be provided in accordance with the rules. 4. I agree to pay a monthly subscription of R_________ by standing order into the investment clubs account. 5. I will endeavour to attend and participate in the club meetings and respond to other written reasonable requests concerning club business. Signed (Joining Member) Date:

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APPENDIX C - DECLARATION BY JOINING MEMBER

1. I, _________________________ (new members name) have received and read the partnership rules of the __________________ investment club. 2. I agree that the affairs of the investment club shall be conducted in accordance with the letter and spirit of the investment club. 3. I agree to abide by the rules and any amendment thereto made in accordance with clause of the rules. 4. I agree to pay a joining fee of R ________ ____ which entitles me to a number of units in the investment club as calculated by the present club treasurer using the same unit price as applied to valuations for existing members for the relevant month. 5. Thereafter individual valuations will be provided in accordance with the rules. 6. I agree to pay a monthly subscription of R ________ ____ by a standing debit order into the investment clubs bank account and in accordance to the club rules. 7. I will endeavour to attend and participate in the investment club meetings and respond to other written reasonable requests concerning the investment club business.

Signed _________________________ Date ________________________

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APPENDIX D - PARTNERSHIP AGREEMENT

The Partnership Agreement is a binding agreement of rules and conditions between the investment club members on how the investment club will mutually operate and conduct its business for the purpose of joint investment in shares and derivatives. To be legally binding the constitution of the investment club has to be signed dated and witnessed by all investment club members. The following is a copy of the constitution and rules recommended by PSG Online for adoption by investment clubs. 1. Formation of Partnership: The undersigned hereby form a General Partnership, in, and in accordance with the laws of the Republic of South Africa (RSA). 2. Name of Partnership: The name of the partnership shall be the ____________________Investment Club, here after referred to as the Club. 3. Term: The partnership shall begin on _____________________ and continue until __________________, and thereafter from year to year unless earlier terminated as hereinafter provided. 4. Purpose: The purpose of the partnership is to invest the funds of the partnership solely in shares for the education and benefit of the partners. 5. Membership: Members to the investment club will hereafter be referred to as Partners. The number of people in an investment club shall be limited to a minimum of 3 to a maximum of 20 partners. 6. Additional Partners: Additional partners may be admitted at any time, upon 75% consent of all the partners in writing or at a meeting so long as the number of partners does not exceed fifteen (15). a) Acceptance of new partners into the investment club shall be proposed and seconded by two existing partners and adopted only if no other partner objects. b) The investment club reserves the right to refuse admission to any person without giving a reason. 7. Initial Joining Fee: On admission to the investment club, a new partner shall pay a joining fee, as decided by the partners at the inaugural meeting. 8. Monthly Contributions: The partners may make contributions to the partnership on the date of each periodic meeting, in such amounts as the partnership shall determine, provided, however, that no partners capital account (as hereinafter defined) shall exceed twenty percent (20%) of the capital accounts of all partners. 9. Valuation: The current value of the assets and property of the partnership, less the current value of the debts and liabilities of the partnership, (hereinafter referred to as the value of the partnership) shall be determined as of five (5) business days proceeding the date of each periodic meeting. The afore-mentioned date of valuation shall hereinafter be referred to as valuation date. 10. Capital Accounts: There shall be maintained in the name of each partner, a capital account. Any increase or decrease in the value of the partnership on any valuation date shall be credited or debited, respectively, to each partners capital account on said date. Any other method of valuating each partners capital account may be substituted for this method provided that said substituted method results in exactly the same valuation as previously provided herein. Each partners contribution to, or withdrawals from, the partnership shall be credited, or debited, respectively, to that partners capital account. 11. Management: Each partner shall participate in the management and conduct of the affairs of the partnership in proportion to his / her capital account. Except as otherwise provided herein, all decisions shall be made by the
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partners whose capital accounts total a majority in amount of the capital accounts of all the partners. The voting system is one partner = one vote. Investment club partners acknowledge that the sole ownership of all equity appreciation shall reside with only those investment club partners who have fulfilled all obligations as set out in this partnership agreement. 12. Meetings: Periodic meetings shall be held as determined by the partnership. An acceptable level of partners attendance each year shall be determined (normally 75%+). Partners are entitled to attend all meetings and vote on all matters. A meeting quorum (normally of half membership, plus one) shall be agreed. Those partners that attend the investment club meetings regularly will benefit more than those partners that do not comply with the expected investment club attendance of 45 out of 60 monthly investment club meetings during a five year period and the expected research of one company per month. A mutually agreed upon fine system will be instituted against any partner who constantly misses club meetings. 13. Research: As well as attending investment club meetings, all partners are expected to commit to researching at least one company per person per month using a recommended system of company evaluation. Those partners that complete their research assignments timeously will benefit more. 14. Minutes: Minutes of the investment club meetings shall be kept and issued promptly to partners at least two weeks or as soon as practicable prior to the next meeting by the Investment Club secretary via email or fax. 15. Elect Officers: Election of all officers (President, Treasurer, Secretary and other roles) needs to be decided. Also two internal auditors who are not office bearers can be appointed to audit the investment club accounts. a) The Club Treasurer at the AGM shall produce a statement of accounts. A report detailing the income, expenditure, investment club assets, arrears, end of year valuation of portfolio, and each partners total contribution / drawings with current value of holding shall be presented to investment club partners at all meetings. b) An auditors report shall be presented to investment club partners at the AGM. c) The investment club bank account / brokerage account can to be determined annually or at a special meeting. All meeting dates and venues for the year need to be agreed by members. Between five to ten days notice should be given for all meetings. d) The goals and financial aim of the investment club shall be stated including a comprehensive review of Asset Allocation. e) Members monthly contributions shall be stated and maybe reviewed upwards in line with inflation. 16. Sharing of Profits and Losses: Net profits and losses of the partnership shall inure to, and be borne by, the partners in proportion to the valuation adjusted credit balances in their capital accounts or in proportion to valuation unit balances. All members have an equal amount of shareholding in the investment club portfolio. No member is entitled to buy additional units. 17. Books of Account: Books of account of the transactions of the partnership shall be kept and at all times be available and open to inspection and examination by any partner. 18. Annual Accounting: Each calendar year, a full and complete account of the condition of the partnership shall be made to the partners. 19. Bank Account: The partnership shall select a bank for the purpose of opening a partnership bank account. Funds deposited in said partnership bank account shall be transferred by either of two (2) partners (i.e. Club President and Club Treasurer), designated by the partnership. Alternatively, monthly debit orders must be set up by all partners for payment of their subscriptions directly into the investment club trading account as soon as possible after joining and not exceeding three months of joining the investment club.
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a) All cheques drawn on the investment club account shall require any two authorised signatures. b) All income will be paid directly into the investment clubs bank account. c) The investment clubs bank account must be set up without overdraft facilities. 20. Trading Account: The investment club shall open an investment club stock broking account in the investment clubs name with PSG Online. Appoint between two to four traders (normally not the Chairperson / Treasurer / Secretary). None of the partners of this partnership shall act as the stock broker for the investment club. However, the partnership may select a stock broker and enter into such agreements with the stock broker as required, for the purchase or sale of shares. Shares owned by the partnership shall be registered in the partnership name unless another name shall be designated by the partnership. a) Any company or Transfer Agent called upon to transfer any shares to or from the name of the partnership shall be entitled to rely on instructions or assignment signed or purporting to be signed by one of two designated partners (i.e. Club President and Club Treasurer), selected by majority vote of the partners, without inquiry as to the authority of the persons signing or purporting to sign such instructions or assignments or as to the validity of any transfer to or from the name of the partnership. At the time of transfer, the company or transfer agent is entitled to assume (1) that the partnership is still in existence and (2) that this agreement is in full force and effect and has not been amended unless the company has received written notice to the contrary. b) Only the named traders are authorised to buy and sell investments on behalf of the investment club. c) No member is authorised to commit the investment club beyond the cash held by the investment club broker d) All cheques due to the investment clubs account are to be made out to the investment clubs name on non-transferable cheques. 21. No Compensation: No partner shall be compensated for services rendered to the partnership, except reimbursement for expenses. 22. Voluntary Termination: The investment club shall be wound up and all assets divided among members in accordance with a resolution to that effect if passed by at least 75% of the partners at a specially convened general meeting of the investment club. The partnership may be dissolved by agreement of the partners whose capital accounts total a majority in amount of the capital accounts of all the partners. Notice of said decision to dissolve the partnership shall be given to all the partners. The partnership shall thereupon be terminated by the payment of all the debts and liabilities of the partnership and the distribution of the remaining assets either in cash or in kind to the partners or their personal representatives in proportion to their capital valuation accounts. 23. Withdrawal of a Partner: Any partner may withdraw a part or all of his / her capital account. He / she shall give notice in writing to the recording partner. When a partner resigns they will receive their share of the investment club holdings (minus legal & brokerage fees) in full payment within 90-days of resignation. His / her notice shall be deemed to be received as of the first meeting of the club at which it is presented. If notice is received between meetings it will be treated as received at the first following meeting. In making payment the valuation statement prepared for the first meeting following the meeting at which notice is received will be used to determine the value of the partners account. Between receipt of notice and the withdrawal valuation date, the other partners shall have and are given the option during said period to purchase, in proportion to their capital accounts of the partners wishing to exercise this option, the capital account of the withdrawing partner. If the other partners do not exercise their option to purchase, then the partnership shall pay the withdrawing partner the value of his / her interest in the partnership as shown by the valuation statement in accordance with paragraph 20 of this partnership agreement. 24. Death or Incapacity of a Partner: In the event of the death or incapacity of a partner, receipt of such notice shall be treated as a notice of withdrawal. Liquidation and payment of the partners account shall precede in accordance with paragraphs 18 and 20. Their share value of the investment club holdings will be paid to their executor (minus legal & brokerage fees) in full payment within 90-days of the investment club meeting where the death was recorded.
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25. Purchase Price: Upon the death, incapacity or withdrawal of a partner, and the exercise of the option to purchase by the other partners, said other partners shall pay the withdrawing partner or his / her estate, as the case may be, a purchase price, when payment is made in cash, equal to ninety-seven percent (97%) of his / her capital account, if withdrawal is made within the first five (5) years of a partners membership in the Club, or 100% thereafter, less the actual cost of selling sufficient securities to obtain the cash to meet the withdrawal. Payment will be made within 60 days of receipt of the notice by the presiding partner. In the case of a complete withdrawal in liquidation of a partners entire interest, payment may be made in cash or securities at the option of the remaining partners of the Club. In the case of a partial withdrawal of a partners interest, payment may be made in cash or securities at the option of the withdrawing partner. If the partner desires an advance payment, the club at its earliest convenience may pay him / her 80% of the estimated value of his / her account and settle the balance of the account in accordance with the valuation date set in paragraph 18. Where payment is made in securities, the clubs broker shall be advised that the ownership of the securities has been changed at least by the valuation date used for the withdrawal. 26. Taxation: Tax affairs shall be dealt with accordingly to the law of the land. 27. Disputes: Any disputes to the interpretation of the partnership agreement will be decided by the Investment Club Chairperson / or at the AGM / or if requested at a special general meeting. Disputes relating to the valuation of a partners share shall be decided by a chartered accountant (appointed by the Investment Club Chairperson), whos decision will be final. Fees for the certified accountant will be met by the losing party or equally if no clear decision is made. 28. Dividend Policy: After five years from the formal inauguration of the investment club the members shall convene a meeting to decide upon and adopt a dividend policy for the next five years to be reviewed and adjusted annually thereafter. 29. Amendments to this Agreement: This agreement may be amended at any time by seventy five percent (75%) majority in amount of the capital accounts of all the partners. This Agreement of Partnership is hereby declared and shall be binding upon the respective heirs, executors, administrators and personal representatives of the partners.

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IN WITNESS WHEREOF the parties have set their hands and seals the year and day first above written. Partners Name Partner Signature

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APPENDIX E - EXAMPLE OF RESOLUTION LETTER

ABC Investment club We, the undersigned as members of ABC Investment club hereby nominate _________________________________ as the main member and contact person for trading. The banking details that will be used are: Bank Branch Branch code Account number : _______________________________ : _______________________________ : _______________________________ : _______________________________

Name of account : _______________________________ Investment Club members that resign have to give notice quarterly due to market fluctuations and the other members can decide whether to buy his / her shares in the club or nominate another member in his / her place. JOE BLOGS ID: 6234579455889660 SUSAN STROOMPIE ID: 5465457889798787 GERDA WERDA ID: 6454878776543265 SIPHO NGAKULA ID: 7258988445698254

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APPENDIX F - SAMPLE MISSION STATEMENT

The _____________________ (name) Investment Club follows these recommended investment principles, which are: 1. Invest regularly, regardless of the market outlook. 2. Reinvest all earnings. 3. Invest in growth companies. 4. Diversify to reduce risk. The investment objective of ____________________ (name) Investment Club is to double our money every five years. To do so, our investment club must average a 14.90% compounded annual growth rate. In order for a company to be considered for a purchase by the ________ (name) investment club, a partner must show: 1. A completed Stock Selection Checklist for the company. 2. Majority approval by the partners to purchase the said share.

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APPENDIX G - INVESTMENT CLUB RULES

1. The investment club will only deal with the investment clubs investment and for the benefit of the investment club only. It will neither advice nor deal on behalf of any person / group. 2. No partner shall be compensated for services rendered to the partnership, except reimbursement for expenses. 3. Have the right or authority to bind or obligate the partnership to any extent whatsoever with regard to any matter outside the scope of the partnership business. No partner shall make any commitment particularly financial on behalf of the investment club without the agreement of a properly constituted meeting 4. Without the unanimous consent of all the other partners, assign, transfer, pledge, mortgage or sell all or part of his / her interest in the partnership to any other partner or other person whomsoever, or enter into any agreement as the result of which any person or persons not a partner shall become interested with him / her in the partnership. 5. Purchase an investment for the partnership where less than the full purchase price is paid for same. 6. Use the partnership name, credit or property for other than partnership purposes. 7. Do any act detrimental to the interests of the partnership or which would make it impossible to carry on the business or affairs of the partnership. 8. All affairs (conduct, behaviour, attendance of partners, monetary, etc.) affecting the investment club shall be agreed by the partners at a constituted meeting. The meeting must have a quorum of at least 50% plus one. 9. Any partner who breaks these rules and conditions will be expelled after a warning has been issued and when 75% of partners at a constituted meeting support the decision. The expelled partner will be notified in writing and have their share of the investment club holdings returned (minus legal & brokerage fees) in full payment within 90-days of expulsion.

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APPENDIX H - OPERATING PROCEDURES

Investment Club Dissolution (Winding Up) Procedure
Complete the following steps before deciding on a method to pay off investment club members: 1. Review the Club Partnership Agreement to ensure that the terms of the agreement are followed. 2. List the payout options for each individual partner. 3. Calculate the costs involved with each option. 4. Select the best option for your investment clubs circumstances. 5. Note: The Receiver of Revenue South Africa (SARS) indicates that a final tax return for the Investment Club must be filed within 3-1/2 months of the final dissolution. This could present a problem if tax software is not available for the current year. One suggested alternative is to have one member retain money in the investment club account until the end of the year.

Payout Options
1. Sell all shares and pay all members in cash. 2. Transfer shares to members for most of their value in the investment club. 3. Sell any shares that are showing a loss so that all members participate in the tax advantage, and transfer appreciated shares to members for most of their value in the investment club.

Costs
1. Sell all shares and pay all members in cash: The direct cost is the brokers commission. In addition, if your investment club has large capital gains, members incur a taxable event in accordance with their percentage holdings in the partnership. 2. Transfer shares to a member for most of his or her value in the investment club: Transferring shares may involve some costs as well; however, the member can avoid an immediate capital gain. This method can be a real advantage although it is more complicated than an all cash payout. Question your stockbroker at PSG Online carefully about this option. If you are using an online broker, get instructions in writing that so you have documentation of the steps the broker requires.

Methods of Transferring Shares

1. The member receiving the transferred shares opens an account with the same broker as the investment club uses, and the broker transfers the shares to the members account 2. A broker can transfer shares to a members account at a different broker. 3. A broker can facilitate the transfer of shares to an account in the name of the investment club (which will be in a form similar to Jane Doe, Treasurer, XYZ Investment Club). Jane Doe endorses the transfer to the member receiving the shares. Option 1 is likely to be least costly (usually free), and other options will probably involve various fees for share transfers. Ask your stock broker what is required to complete a share transfer (notarized signatures from all investment club members may be required before a share transfer can be completed.)

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Withdrawal of member
A member wishing to withdraw from the partnership must submit a letter of resignation to any one of the officers at least 48 hours prior to the commencement of a scheduled monthly meeting. He / she will at this time forfeit their privilege of attending the scheduled monthly meetings. The withdrawing member will be obligated to pay their dues without fine for the three months following his / her resignation. He / she will be released from this obligation at such time as a new partner has assumed his / her financial position or the remaining partners have purchased the shares. When shares must be sold to pay the withdrawing partner, said partner is responsible for all fees and expenses pertaining to the sale of the share. It shall be sold no later than the _______________ following the third scheduled meeting after his / her resignation was accepted. The withdrawing partners funds will be transferred via electronic transfer within three working days of the Club Treasurer receiving the funds of the transaction. The share value will be the current value most recently reported before the settlement takes place minus any outstanding obligations. If a partner withdraws within the first year of the clubs inception, he / she will only be reimbursed the lesser of either 1/10th of the clubs worth (or their equal share if less members) or, of his / her total dues paid during their time. They will not be entitled to any market gains during the first year

Withdrawal of member
Upon the death of a member, the investment club will buy their membership. The members shall pay the withdrawing member or their estate, as the case may be, a purchase price equal to 97% of their capital account or their capital account less the actual cost of selling the shares, whichever amount is smallest. Settlement shall be paid within two weeks of the valuation date used in determining the purchase price.

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Share Selection Checklist # 1 - Fundamental Analysis

Share Info Share Name Share Code PE Ratio Valuation PEG Ratio P/NAV Profitability Operating Margin ROE Financial Risk Cash flow / HEPS Interest Cover Recommendation Buy / Sell / Hold Spec Buy / Buy LT

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Share Selection Checklist # 2 - Technical Analysis

Share Info Share Name Share Code Cycles Moving Averages Valuation Support & Resistance Levels Trend Lines Profitability Overbought & Oversold Volume Accumulation Distribution Relative Strength Outperform & Underperform Recommendation Buy / Sell / Hold Spec Buy / Buy LT

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Share Selection Checklist # 3 - Portfolio Management

Share Info Share Name Share Code Portfolio Structure (Number of Shares) Large Cap? Mid Cap? Small Cap? Portfolio Spread Industry Sector Portfolio Stop Loss Recommended Price Range

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Share Selection Checklist (SCC)

Share Name & Share Code Date: Nature of the business: Financial Year End: Sector: Share Price: Earnings Yield (EY%) Turnover Growth %: Gross Profit Growth %: Earnings Growth %: PEG (PE): Price / NAV: ROE %: Cashflow / EPS Interest Cover: Management Comment: Long-term trend (Weekly) Short-term trend (Daily): Support levels: Resistance levels: Moving Average Crossover: OB / OS: RSI Buy & Sell Zones: RSI Crossover: Stochastic Buy & Sell Zones: Stochastic Crossover: MACD: Volume Analysis: Free-dealing? OBV: Relative Strength Analysis: JSE Overall? Sector? Peers? Point & Figure price projection? Buy? Sell? Watch? Hold? www.psgonline.co.za Page 49 VPT PEG (NAV): Gross Profit Margin %: Date Financial Results Expected: Sector PE: Share PE: Dividend Yield (DY%)