The real reasons?

It is David Eagle, a Finance professor in Spokane, Washington, who is credited with coining the term indexing paradox. Mr. Eagle was trying to explain why so many investors continue to try to beat the market, while there are so many indications that most are likely to fail. Mr. Eagle attributed this to our innate sense of the game:

Just as an athlete may identify his / her worth based on his / her performance in his / her sport, so might an active investor's identity being tied to his / her performance in the stock market. For such investors, index investing would be too boring, it would not be a game. To them, actively investing in the stock market is a game. David Eagle, see on our site Document1 doc.896 and document2 doc.897

The comments I received during the evening support Mr Eagle observation. One becomes a member of the Optimus club for the educational value, but as much if not more for its social side, the camaraderie, what I would call its entertainment value. Securities Commissions requirements limit the number of club members to 50, thereby promoting a friendly and informal atmosphere; see AMF doc.1201. It seems clear to me that an investment club focused on an index approach to investing, would be very unlikely to survive for a long time, since this approach has two characteristics:

• Yes, it is an effective tool ( I would say the most effective tool) for the average investor to invest and realize a return approximately equal to the market as a whole; but
• It is a boring exercise, similar to watching water boil, in other words, it is without entertainment value.

The above reveals the index paradox with all its contradictions.

 Some Optimus club members working in financial services say they get a feeling for where the markets are going in their discussions at the club. Even for them club investments returns as such seem to be quite secondary; they seem to view their club investments like the concept of pocket money on our site. For those who can’t help from playing the stock market with their money, we recommend limiting the damage by only assigning a small portion of their portfolio to such use.

Conclusion

If you are looking for opportunities to discuss investing with friends, consider joining an investment club. You will add to your investment knowledge in a pleasant setting.

Be aware that the implicit objective of trying to beat the market (which is the basis of any method which involves individual stock picking) of most (if not all?) investment clubs will not necessarily (we would say it is quite unlikely) be achieved. Consider it your pocket money.

Our recommendation: invest your personal money on an index basis, and measure the value of your participation in the club as a learning experience in a friendly environment, whether or not it will ever be a profit making endeavor.

However, be aware that notwithstanding participation in a club you may well continue lack certain key elements for independent investing (unless your club aims to fill this deficiency).

One last word of caution: avoid dubious characters in your choice of a club; see AMF doc.1207, the BCSC doc.1208 and the SEC doc.1209.