Today, I am excited to have a guest post by, Sean, from Sneaky Falcon. Sneaky Falcon has some hilarious articles about investing; I suggest you read their content!
You can take a look at their site here: Sneaky Falcon Enterprises, LLC link.
By: Sean Sirianni
Just to be clear, this guest post is about investing WITH Friends, not investing IN “Friends”, the wildly popular sitcom from the 90s and early 00s, which as it turns out would have been a really great investment. As of the end of 2013, the “Friends” cast alone had taken in $944 Million just in syndication residual revenue.
While researching that joke (as one does when they are an analyst by profession), I was actually amazed at the number of blogs and financial outlets covering the sitcom. From Wall Street Survivor using “Friends” as a case study in portfolio diversification, to Money Inc breaking down the sitcom’s financial success, the internet is an amazing place.
Anyway, I’ve completely digressed…
Let me take a few steps back. My name is Sean Sirianni, and I’m the CFO of Sneaky Falcon Enterprises, LLC. Yes, that really is our business name, and no, we aren’t involved in some sort of black-market package delivery service using carrier falcons. We are a legitimate, 10 member investment club that has pooled our money together to learn and invest in the stock market.
We have been actively meeting and investing since December of 2015, and recently launched our own website to share our investment club journey with the internet. That is how we got connected with Robbie here at Stock Street.
All 10 of us were friends (or friends of friends) when we made the decision to start investing together. We have been at it for over two years now, taking time to agree on guidelines and form a company in the year leading up to our first investment.
I would say that we have definitely been “successful” in investing together, at least in the sense that we are still investing, are all still friends, and haven’t had to call our lawyers to handle any disputes… yet. The success of our actual investments, on the other hand…
So, have you ever considered investing with friends of your own?
This is by no means a novel concept. According the UK’s Independent, the first investment club was formed in Texas in 1898. Since then, colleagues, friends, and family in the United States and across the globe have been spreading risk and research efforts by investing as a group.
Robbie and I even discussed how our own fathers are both involved in investment clubs of their own.
However, despite their popularity a few decades ago, participation in investment clubs has been on the decline, with some in the financial media even pronouncing their death. It makes sense in a lot of ways: Brokerage costs have dropped greatly, free and powerful stock research tools are widely available, robo-advisors are making investment decisions for us, and Millennials are investing less in general.
All of these forces work against the need to pool resources and effort in the form of an investment club.
So are investment clubs just an outdated relic of the past? We certainly don’t think so, and definitely see a future to investing with friends, with key benefits (and some drawbacks) over going solo.
Benefits of Investing with Friends
One of the key benefits to making investment decisions as a group is the power of diversity. You may be highly knowledgeable about a certain company or industry, but your perspective is shaped by a distinct set of experiences, skills, and beliefs. When you combine your perspective with those of all your partners, you likely will end up with a much better-rounded point of view.
This not only applies to evaluating an individual investment, but also when building out a full portfolio. Insights and expertise into multiple industries can more easily be attained by a diverse group.
Although the internet has highly democratized access to information and online brokerages have low commissions, there is still a benefit to pooling resources when it comes to investing.
I’m not just talking money either. Spreading the work of researching new investments and monitoring your current portfolio holdings (and leveraging diversity!) enables the entire team to get more done.
But pooling money is great too. More capital opens up doors to investments (whether it be high-priced stocks, real estate, or others) that you may not be able to easily afford with your own cash.
For us, the biggest benefit to investing together has been the new opportunities brought about by having a group. We have collectively learned about new techniques, strategies, and industries that lead to investments because someone in group had an interest and took the initiative to share.
We also have passed on multiple opportunities to invest in start-ups founded by other friends of the group. This shared interest in starting a company even briefly resulted in work on a spin-off start-up with a few members of Sneaky Falcon.
Just as the power of networking can open up career doors, it too can open doors to new investment opportunities.
Drawbacks of Investing with Friends
Mixing Friends and Money
Unfortunately, starting an investment club isn’t all sunshine and rainbows, and there are some drawbacks. The main issue is mixing friends with money.
Some people strongly advise against getting into business with friends or family, and that is exactly what you are doing by starting an investment club.
Things will be great until markets change and the value of your investments decline. If the club starts losing money, tensions can rise, and friendships may be strained.
This all can be mitigated by careful selection of trusted participants to be members, clear and complete documentation and legal agreements, and open dialogue on investing strategy.
Taking on Increased Investment Risk
Another issue that can arise when investing with friends is taking on increased investment risk. If you are not clear upfront with the group’s strategy, you may have some members interested in buying and holding index funds, and some members wanting to more actively trade stocks. While both these approaches may be valid for a given individual, you’ll likely end up somewhere in the middle as a group.
Even if everyone is more conservatively minded, increased trading frequency is likely to creep in as the group’s interests ebb and flow. While evaluating more proposals will help the group learn more, buying and selling more frequently opens the door to more losses (not to mention more brokerage fees).
It is also much easier to become complacent when each investment made is really only a fraction of your own money. Just as with your own portfolio, discipline is key.
The last issue, potentially present in any group decision making entity, is group think. If a friend presents an investment idea that is absolute garbage, and people start agreeing with it, it may prove very difficult to speak up with your opposite opinion. Even if you do voice that opinion, if the majority rules, you still may be buying that garbage stock.
Although your viewpoints may not always align with the group majority, the most important thing is to be able to have dissenting opinions to begin with. Creating an atmosphere of trust and open dialogue will go a long way to getting the most out of your group’s diverse perspectives.
Tips to be Successful Investing with Friends
Starting an investment club and investing with friends may not be for everyone, and there are definite pros and cons to not going it alone. If you are still considering an investment club of your own, here are some final tips and things to reflect on.
Determine how your club fits into your own financial strategy
Before you dive in with your friends and start parting with your hard earned dollars, take a minute to understand your own personal financial strategy. Money you are contributing to your investment club should be secondary to your own retirement and emergency fund investments.
Also, make sure you are comfortable risking any money you put into the club’s pot. You shouldn’t be using your investments to pay your monthly bills, but to grow your long term nest egg.
I don’t think I have emphasized this enough, but use the entire investment club experience as an opportunity to learn. Learn new industries, new companies, new methods, and even about starting your own company.
While growing your investment club portfolio will be a great outcome if you stick with it for the long term, the short term gains in knowledge that can be applied to your own investments are even more valuable.
Be clear about your group’s strategy
As discussed earlier, the group needs to be crystal clear on what they are trying to do. While diverse points of view and backgrounds are an asset, conflicting opinions on how to approach investing will only lead to confusion and frustration.
I will leave it to you and your friends to determine the amount of risk, types of companies, or other investments you want to pursue, but make sure you openly discuss and align on this up front.
At the end of the day, an investment club is a business. As such, you will need legal documents, transaction records, and tax filings. Keeping track of all this, as well as meeting minutes, decisions, etc. is not only best practice for any business, but will cover your asses if any disagreements should ensue.
Lastly, and most importantly, have fun! If you don’t enjoy the people you are investing with, or the work you are putting in to find and analyze investment opportunities, you should definitely reconsider your involvement in an investment club.
A huge thank you to Robbie here at Stock Street for letting me come try to persuade you into considering an investment club of your own. We have had a ton of fun with Sneaky Falcon, and learned a lot as well (with some lessons being more painful than others).
If you would like to peer deeper into the inner workings of a real life investment club, you can find us on the twitter (@sneaky_falcon) or visit our website, www.sneakyfalcon.com.
I suggest you take a look at Sneaky Falcon. This is a particularly hilarious article written by, Sean. I am sure you will enjoy this one! Flaming Hot Stock Tip (Straight from My Spam Folder)
Thanks for reading Stock Street today!
Disclaimer: Stock Street is not responsible for the actions of those who read the posts on this blog. Each individual reader has a unique situation and unique needs. This blog is not intended to solve those unique situations of the readers. This blog is not liable for decisions made by the readers of this blog.