Poor Man Investment Club uses the Unit Valuation System (UVS) to determine and track each member’s contributions and current share of worth. The Unit Valuation System has been used by Mutual Funds and investment partnerships for a very long time and only appears complicated at first pass. I will attempt here to provide a simple explanation of how it works and a few simplistic but explanatory examples.

The basic formula for calculating ‘Unit Value’ is:

UV =  (Market value + Cash + Income – Liabilities – Expenses) / # units

Examining the case of a newly formed partnership with 2 partners who each contribute $100 to starting capital. The partners can either attach any value they wish to a unit at this time and then ‘buy’ the units desired or probably more commonly done they pick a number of units to start with that simplifies the first set of math. In this case they agree that the partnership will start with 100 units of which they will have 50 each.

Now the partners wish to put their capital to work in investments. They decide to buy 10 shares of sprocket’s ‘r’ us (ticker SPACELY) at $10 each as their first investment. In purchasing the shares they incur a $5 commission charge. Let’s examine how the unit value changes. We can handle the commission in two ways for this example. We can net it against the remaining cash after the stock purchase or we can just put it in the expenses column until the end of month/quarter/etc and net everything then. Let’s use the second method for now as it demonstrates the concept well.

So our sum of all unit values declined by the commission expense and when attributed out to each unit it was a nickel per unit.  Continuing with this example, let’s assume that the market value of sprocket’s r us rises to $12 per share and our partners are so pleased with themselves that they wish to add another $50 each to the partnership. How do we accommodate the addition of new money? First we find the new unit value at the time of adding the new funds.

So the new unit value is $2.15. Each partner wishes to add $50 which will purchase 50/2.15 = 23.2558 . So now each partner has 73.2558 units at a value of $2.15 per unit. Easy enough. Note that the beautiful feature of this is that allows any partner to purchase any amount of new shares at anytime just by calculating the current unit value and ‘selling’ the units at that cost to the partner adding funds.  Let’s look at our values after the purchase in example here and pay particular attention that the unit value doesn’t change. We just create more units for the influx of new cash.

For the last example let’s assume that the shares of sprockets ‘r’ us keep going up and reach $15 share. At $13 a share the partners bought 10 more shares with another $5 commission. The original 10 shares issued a $1 dividend (income). The new table would be:

I hope this short write up has helped everyone understand. If you still have questions you can leave a note here or just catch me at the next meeting.

Poor Man Investment Club uses the Unit Valuation System (UVS) to determine and track each member’s contributions and current share of worth. The Unit Valuation System has been used by Mutual Funds and investment partnerships for a very long time and only appears complicated at first pass. I will attempt here to provide a simple explanation of how it works and a few simplistic but explanatory examples.

The basic formula for calculating ‘Unit Value’ is:

UV =  (Market value + Cash + Income – Liabilities – Expenses) / # units

Examining the case of a newly formed partnership with 2 partners who each contribute $100 to starting capital. The partners can either attach any value they wish to a unit at this time and then ‘buy’ the units desired or probably more commonly done they pick a number of units to start with that simplifies the first set of math. In this case they agree that the partnership will start with 100 units of which they will have 50 each.

Now the partners wish to put their capital to work in investments. They decide to buy 10 shares of sprocket’s ‘r’ us (ticker SPACELY) at $10 each as their first investment. In purchasing the shares they incur a $5 commission charge. Let’s examine how the unit value changes. We can handle the commission in two ways for this example. We can net it against the remaining cash after the stock purchase or we can just put it in the expenses column until the end of month/quarter/etc and net everything then. Let’s use the second method for now as it demonstrates the concept well.

So our sum of all unit values declined by the commission expense and when attributed out to each unit it was a nickel per unit.  Continuing with this example, let’s assume that the market value of sprocket’s r us rises to $12 per share and our partners are so pleased with themselves that they wish to add another $50 each to the partnership. How do we accommodate the addition of new money? First we find the new unit value at the time of adding the new funds.

So the new unit value is $2.15. Each partner wishes to add $50 which will purchase 50/2.15 = 23.2558 . So now each partner has 73.2558 units at a value of $2.15 per unit. Easy enough. Note that the beautiful feature of this is that allows any partner to purchase any amount of new shares at anytime just by calculating the current unit value and ‘selling’ the units at that cost to the partner adding funds.  Let’s look at our values after the purchase in example here and pay particular attention that the unit value doesn’t change. We just create more units for the influx of new cash.

For the last example let’s assume that the shares of sprockets ‘r’ us keep going up and reach $15 share. At $13 a share the partners bought 10 more shares with another $5 commission. The original 10 shares issued a $1 dividend (income). The new table would be:

I hope this short write up has helped everyone understand. If you still have questions you can leave a note here or just catch me at the next meeting.