any advantages to pooling money with other investors?

[scorpioncapital]

If say 5 friends want to pool their money, trade together, what would be the advantage of this?

Seems if they each kick in a fixed amount, the total return is just the proportionate amount divided by 5 which is the same thing as if you did it yourself. You aren't really earning a return on the other 4 people's money unless they get a higher return than you.

 

 

 

 

[DTEJD1997]

I think there could be a few advantages of this:

 

A). diversification

B). lower fees & expenses

C). access to better brokerage products

D). potential to exert influence on management

E). More "eyes" watching positions

F). More ideas

 

Of course, there are problems...everybody has to get along, respect each other, and have a similar investment philosophy.  If you were investing in microcaps, I think the ability to contact & influence management might be one of the best benefits.

[benhacker]

What DTE said.

 

I have some experience with this in that I started an investment club with 8 buddies a bit over 10 years ago.

 

In addition to the negatives mentioned, you have to file joint taxes, transferring brokerages is a pain if you ever have to.  tracking account ownership is actually complicated unless you keep proportional cash inflows and outflows (for example partnership accounting is somewhat complex, and there are debatable judgements about the value of deferred gains and how those are valued for members buying in or buying out others' positions).  My club uses partnership accounting and files a tax statement for the partnership every year.  You either have to pay to do this, or have a member do this and then check that they are doing it right.

 

Some additional positives are that it helps a group stay in touch (my group is a bunch of buddies from college, and we wouldn't see each other or talk as much as we do otherwise).

 

I see no material "monetary" benefit unless you are huge though.  Drawbacks outnumber the benefits in number, but perhaps not in magnitude.

 

I don't regret starting the club with my friends, it's been great (and we've done pretty well), but I basically volunteered to do all the taxes and accounting to ensure that it would work well without any additional costs.

 

I think most would do well in this format actually as it requires a clear high bar to make decisions as you have to present your idea out loud to your peers (assuming they have a business mindset) which filters out some of the dumber stuff we sometimes do.

 

Again, my 2 cents.

[Guest Schwab711]

Buying controlling stakes in microcaps. PIPE transactions can be extremely lucrative and there are plenty of strong candidates. I have been actively searching for partnerships to do exactly this. The early Berkshire/Buffett partnership strategy is still extremely viable in my view and easily the best way to compound capital.

 

Many of these excellent microcaps are still profitable during bad years, so returns are fairly stable relative to what Mr. Market presents you (the liquidity situation doesn't really change while being able to save on filing costs!). Managers get to focus on their strengths of running the day-to-day business and you have someone (or a small group of someones) dedicated to capital allocation decisions. The best microcaps generally have way too much excess cash on their balance sheets, which could be used for investment purposes until it is truly needed. However, it is too difficult for small public companies to invest in LT investments of other companies these days. A like-minded group of investors with sufficient starting capital and shared vision could take advantage of this inefficiency to the benefit of everyone involved.

[ScottHall]

It depends. Some of my worst returns have come when I didn't have complete autonomy over my investing decisions; maybe 1 in 10 ideas would go in, so it ended up being an awful reflection of a track record. In this example my average investment pick beat the market by 10% over three years, but because I didn't have autonomy to buy all of them, the ones that got picked actually ended up losing to the market overall.

 

It taught me basically to never do something where I don't have 100% autonomy again. Perhaps you could make it work, but I think the others are right that you need to have the same philosophies, not just about value, but what types of value as well.

 

Good luck to you, if you decide to do it.

[bizaro86]

Buying controlling stakes in microcaps. PIPE transactions can be extremely lucrative and there are plenty of strong candidates. I have been actively searching for partnerships to do exactly this. The early Berkshire/Buffett partnership strategy is still extremely viable in my view and easily the best way to compound capital.

 

Many of these excellent microcaps are still profitable during bad years, so returns are fairly stable relative to what Mr. Market presents you (the liquidity situation doesn't really change while being able to save on filing costs!). Managers get to focus on their strengths of running the day-to-day business and you have someone (or a small group of someones) dedicated to capital allocation decisions. The best microcaps generally have way too much excess cash on their balance sheets, which could be used for investment purposes until it is truly needed. However, it is too difficult for small public companies to invest in LT investments of other companies these days. A like-minded group of investors with sufficient starting capital and shared vision could take advantage of this inefficiency to the benefit of everyone involved.

 

I agree with this completely. There are a number of micro-caps that generate cash that have no reasonable options for reinvesting it. A partnership of small investors could take controlling positions and pyramid by reinvesting cash/cash flow into other cash generative micro-caps.

 

One example of a company with potential for a strategy like that is here: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/awi-to-advent-wireless/msg190529/#msg190529 Cash is nearly the entire market cap, and the business is capital light and consistently profitable. (High ROEs, but no moat as Rogers could shut them down if they wanted).