I am having a hard time explaining how units vary with the
value of the club's holdings to members. Several members
have noted that there are some members who own a few more
units than some founding members. I've read them the
appropriate passages in the iclub Club Accounting manual
when we used that software but of course their eyes glaze
over.

Does anyone have any tips on how to explain how number of
units vary and how the above scenario is possible?

Thanks in advance,

Alicia

Alicia Peycelon writes:
> Does anyone have any tips on how to explain how number of
> units vary and how the above scenario is possible?

This is difficult to explain, because it touches on the dual topics of
"fairness" and "trust". People often have pre-conceived notions about
what is fair, and they don't trust computer software that disagrees
with their expectations. While it's a good thing to trust your common
sense, it gets in the way when the "obvious" collides with a person's
past experience. For example, if you split up a dinner check, it
doesn't matter what time you put the money in or who finished their
meal first. Most money "pools" work that way in every day life.
Fortunately, an investment club doesn't work that way, or there would
be no point investing together. Your goal is for the "pool" of assets
in your investment club to grow over time. We'd like a dollar
invested in the club today to be worth more than a dollar tomorrow.

Another simple way to explain it is to use the mutual fund analogy.
Buying into a mutual fund is just like buying into an investment
club. (Units are the same thing as shares in a mutual fund.) You can
either choose the number of shares you'll be buying or the total
dollar amount, but not both, that is, the price of a mutual fund share
varies daily, and mutual fund share owners have no control over this
price (a.k.a. Net Asset Value, or NAV). The main difference between a
club and a mutual fund is that the accounting of a mutual fund is
closed -- you can't see what other people have invested or what they
are worth. A club is open-book accounting, which is a good thing in
general, but it means investment club members need to take more time
to understand the mathematics behind the numbers. The math is simple,
but it isn't necessarily intuitive.

Many experts have tried to describe this problem over the years, and
we've been fortunate to have some of the best experts writing for us.
Here are a few articles from our archives:

http://www.bivio.com/trez_talk/mail-msg?t=4688300003
http://www.bivio.com/trez_talk/mail-msg?t=1839900003
http://www.bivio.com/trez_talk/mail-msg?t=1733700003

I hope all this information helps. Don't give up. Keep explaining,
and eventually the club members will get it!

Cheers,
Rob Nagler
bivio Inc.

I always explain it in terms of a mutal fund. It just
depends when you made your investments. Obviously the
founding members made their investments at a higher NAV then
the new members. If the investments decline, your NAV will
be lower and you will purchase more units per dollar than
with a high NAV.
Alicia Peycelon wrote:
> I am having a hard time explaining how units vary with the
> value of the club's holdings to members. Several members
> have noted that there are some members who own a few more
> units than some founding members. I've read them the
> appropriate passages in the iclub Club Accounting manual
> when we used that software but of course their eyes glaze
> over.
>
> Does anyone have any tips on how to explain how number of
> units vary and how the above scenario is possible?
>
> Thanks in advance,
>
> Alicia

Scott McVicker wrote:
> I always explain it in terms of a mutal fund.

I think the problem with explaining it in terms of a mutual
fund is that most folks don't really understand how mutual
funds work either. Here's the story I tell:

"You paid in $100 in 1998. Then the stock market crashed
around 2000 and your $100 bucks worth of stocks turned into
$50 bucks worth of stocks. That's the risk of investing in
the market. Around that time a new member joined and paid
in their $100. At that point, you owned $50 and they owned
$100. You invested before the crash and they invested
after. Now that it's 2005 and the market has recovered a
bit your $50 bucks of stock has grown to around $63 and
their $100 bucks worth of stock has grown to $125. I know
you both paid in $100 bucks, but in the market as with life,
timing is everything."

Hope that helps.
-Eric