Liquidating Club Assets and Starting Over

Elaine Confino on

Our club is seven years old and has grown to the point where
it has become expensive for a prospective member to buy in.
The membership would also prefer that individuals own either
a full share or half share.

We've been thinking that it might be exciting to reinvent
ourselves, so to speak, and are considering selling all, or
at least a major portion, of our stocks and starting from
scratch. Perhaps this is something we would want to do
every three to four years, depending on the state of our
portfolio.

I was wondering if there were other clubs that had a similar
experience, and if so, how they handled the situation.
There will be capital gains taxes to consider also.

Any comments would be appreciated.

Thank you.

Gene Rooks on

Elaine, with the unit value system of bookkeeping, you can accept new
members at any minimum amount of buy in you want, even just one month's
contribution. Most clubs contain members with varying percentages of
ownership, equality is impossible if you ever want a new member, anyhow, or
if someone pays ahead, misses and has to catch up, etc. That is what the
unit value system of bookkeeping is for, your contribution buys units at
their value when paid.

If you want to rebalance your portfolio, you should do that every year, at
least, but that does not mean sell everything and start over. That means
examine all your holdings, sell those who have reached their growth
potential as determined by looking at new SSG's, or those whose fundamentals
are seriously declining with no reasonable expectation of recovery anytime
soon. Then buy newly researched companies who complement the
diversification of your portfolio as to sectors and company size.

Gene Rooks, Orlando

Rip West on

Elaine,

We've been thinking that it might be exciting to reinvent ourselves, so to speak, and are considering selling all, or at least a major portion, of our stocks and starting from scratch. Perhaps this is something we would want to do every three to four years, depending on the state of our portfolio.

To me, it is not at all exciting to pay capital gains taxes. Much more exciting to watch the stocks grow.

I support your desire to get new blood into the organization, but why do you want to make it hard for prospective members to buy in? I mean why insist on full or half share? Unit accounting for investment clubs was invented for just this situation. If you are worried about being outvoted by members with a small percent of the ownership, you can easily overcome this by wording in your partnership agreement.

Rip West
Saint Paul, MN

Lynn Ostrem on

Dear Elaine,

I would bet an entire year's contributions in your club that, if you were to
sell everything and start from scratch (and I assume you have a good reason
for that), you won't fix the problems the second time around. In fact, you
will probably repeat them.

I say this because, if you knew what the problems were, you'd simply fix
them as you go. It's very easy to become disenchanted with a slow-growing
portfolio. And if your portfolio is in such bad shape that you would want to
wipe the slate clean, an AWESOME learning opportunity has presented itself
to you. This could be the best education assignment your club has ever had.
Don't blow it by wiping it out.

Try to figure out and verbalize the areas where you are having the most
trouble, then reach out to StockCentral or NAIC on CompuServe or Club Cafe
or Manifest so that seasoned investors can help you turn it around. Don't
take the lazy way out simply because you don't know what else to do.

As far as club accounting, I was really surprised that your club would use a
unit-based accounting program, yet not take advantage of the most important
feature. That, of course, is the ability to allow members to join with
minimal dollars.

In our club, members' ownership ranges from 2.08% to 22.51%, depending on
how long they've been in the club. I founded the club and I'm only at 16%.
Some members pay more; some are new. It really doesn't matter because the
program does the bookkeeping.

Now, our club doesn't get hung up on politics. We have a one-member,
one-vote policy. However, many clubs who operate like we do also have a
clause in their bylaws that allows any member to call for a weighted vote,
anytime they want. Then, everyone's vote would be calculated using the
member status report % of ownership in the club. Frankly, we've never seen
a reason to implement such a clause.

Further, in our club, we have a $25 entry fee and require a minimum of $50
to fund a capital account, and the purchase of Toolkit at $224 (we dumped
our NAIC memberships) which brings the cost to join our club to $299. Most
clubs have similar requirements. You should poll other clubs here and on
other boards, find out how they handle this, and take the results back to
your club. Oftentimes, clubs stick only with what they know. Give them
some alternatives. You'll be glad you did.

Best of luck to you,

Lynn Ostrem, President
garbagecop@earthlink.net
Crow River Investment Club
www.bivio.com/crowriver

Mail