The Building Blocks For A Successful Investment Club

In the wake of Transcentury’s success from an investment club to a publicly traded multi million dollar company, joining an investment group or a chama as they are popularly called has become the default first step to investing for most young people. Chamas are a great way to get ahead because by pooling funds, you are able to achieve more as a group than you can do alone. Whenever I think of chamas, this African proverb comes to mind

If you want to walk fast walk alone, if you want to walk far, walk together!

Chamas are a great way to walk far financially. I do not think making a chama work is rocket science, but many fall on the wayside because people ignore the following two basic considerations during formation:

A chama is as good as its members

This seems obvious right? It is not always so. See, most chamas are born over a few frothy drinks among mates or over a light lunch with friends. You fellowship, enjoy each other’s company and one person asks, “guys, why don’t we start a chama?”, and a chama is born. Most  are based on the assumption that the fact that people are friends they would make great investment-mates.

While friendship is a good indicator of aligned objectives which is important for a chama to succeed, often the same friendships get in the way of success especially when members do not have a history of holding each other to account. When starting a chama with friends, look beyond the friendship/relationship and critically evaluate the character of your mates before starting off. A couple of questions to consider:

Can you trust them to make financial decisions that are optimal for the club and the members?

Are they reliable and dependable? How do they handle their personal finances? Do they demonstrate consistency?

It is also important to make sure that a good number of the people you are in the chama with are proactive and have leadership qualities. When you start out, everyone is on fire, excited and ready to contribute ideas and money. However as time goes by, the excitement is bound to die down and when this happens most chamas die off. The chamas that succeed often have one or two dream carriers who are willing to keep pushing and motivating everyone when the initial excitement has passed. The more the number of proactive members, the greater the chance of success.

The structure of the club

It is very important from the get go to agree on the structure of the club. Do not ignore this in the excitement to start contributing cash. First, agree on the legal structure of the chama. Will it be a limited liability company, a partnership, a self-help group or an informal table bank? Once you have agreed on this, you need an internal constutition that then governs the chama relationship. This constitution should outline the following:

• Your mission as a chama. Why are you forming the chama? Is it to save for retirement/to invest in real estate/ to loan members cash?
• How much you intend to contribute per month, and for how long do you intend to keep contributing?
• How your contributions will be allocated? Are all members supposed to contribute equally and therefore have equal shares, or is there provision for some members to contribute more and own more shares?
• Penalties for non contribution. What happens if a member fails to remit contributions? Is it excusable?
• How often will the chama meet, what will be the structure of the meetings and what happens when a member misses a meeting?
• Voting on investment decisions. Is it 1 share = 1 vote, or do all members have equal rights regardless of the shares held?
• Will the chama have officials and how will you determine who leads and for how long?
• What factors can make the chama wind up? How will it be wound up?

Withdrawal by existing members

Entry of new members who find the chama ongoing

With the above in place, focus on execution, and your chama should work as it is supposed to. Onto you, are you in a chama? What do you think I have left out that one should consider? Let us discuss in the comments section.