GUEST AUTHOR BLOG: "Locavesting: A Grassroots Stimulus Program" by Amy Cortese author of "Locavesting, The Revolution In Local Investing And How To Profit From It."
In a deeply divided nation, the one thing we can agree upon is the need for jobs. The economy cannot recover until millions of people are put back to work and consumer spending once again flows. But it’s doubtful that any meaningful job-spurring policy will surmount the political gridlock in Washington.
Don’t look to Corporate America for salvation either: our biggest and most profitable corporations are sitting on piles of cash pile while focusing their investments overseas. And Wall Street is too busy chasing trading profits to engage in the kind of productive capital-raising that was once its mainstay.
So how are we going to begin rebuilding the broken economy and creating jobs? Where is the investment going to come from?
One answer is taking shape in dozens of towns and neighborhoods across the country, as citizens from Brooklyn, NY to Port Townsend, WA are figuring out ways to invest in the local businesses that create jobs and help build strong local economies. Just as locavores eat a diet sourced close to home, these locavestors are investing that way.
Small business is the true engine of job creation, responsible for two out of every three new jobs and half of private sector employment.
Small firms, generally defined as companies with fewer than 500 employees, are by nature locally-owned—they are not controlled by absentee shareholders, but are stakeholders in their communities. And with that local ownership come benefits that mega-corporations cannot match. Studies by Civic Economics have shown that a dollar spent at a locally owned enterprise generates, on average, three times more economic benefit to the community—measured in jobs, income and tax revenue— than the same dollar spent at a corporate peer. That’s because more money circulates in the local economy, rather than being sucked out to a distant headquarters or foreign suppliers.
This “local multiplier” is the driving force behind many of the Buy-Local campaigns cropping up across the nation that seek to shift 10 percent of spending to locally owned businesses. But its impact can be even greater with investment dollars, especially at a time when small firms are being starved of capital to grow and expand. Imagine if Americans shifted 10% of the $26 trillion they have invested largely in the stocks and bonds of publicly traded companies (through personal investments as well as pension and mutual funds) to locally owned firms. That would be $2.6 trillion injected into the Main Street economy—without costing the government a dime.
"A dollar spent at a locally owned enterprise generates, on average, three times more economic benefit to the community."
Unfortunately, securities regulations put in place in the Depression era make this difficult to do. Indeed, it is easier for most folks to invest in a company halfway around the world than one in their own backyard!
Despite the limitations, a grassroots local investing movement is flourishing within the narrow openings of U.S. securities law. The models being created—local investment clubs, community ownership, crowdfunding, direct “do-it-yourself” public offerings (DPOs) and local stock exchanges—provide alternatives to the Wall Street casino and promise a more inclusive form of capitalism. I discuss these and other models, along with dozens of examples, in my book, Locavesting.
Two things I’d like to make clear:
- Local companies are not just confined to mom & pops shops; they can be large, established employers or high growth startups. The distinction is that they are locally owned and rooted in a place.
- I’m not suggesting that people sink all of their money into the local hardware store. Small businesses are risky, to be sure. But local investments can help diversify a portfolio and buffer it from the global macroeconomic shocks that rock the market with increasingly frequency. Companies with a localized business model are also less likely to be hurt by rising oil and commodity prices.
Indeed, there is a very strong argument to be made for investing in companies that are familiar parts of your landscape and life. As legendary investor Peter Lynch has long advised, it’s best to invest in what you know. What’s more risky, a global firm engaged in complex activities (hello, AIG, Lehman and Enron, to name just a few Hall-of-Shamers) or a company that you know and love and has a reputation in the community?
Just ask the residents of Vermont that invested in Ben & Jerry’s 1984 in-state direct public offering, or the investors in Organic Valley and many less familiar cooperatives who received 6% annual dividends over a “lost” decade when the stock market delivered negative returns.
Local investments, I submit, can reap rich rewards for investors, their communities, and the nation.
Amy Cortese is an award-winning journalist whose work has appeared in the New York Times, Business Week and many other publications, and the author of "Locavesting, The Revolution In Local Investing And How To Profit From It" (Wiley & Sons). Find out more at www.locavesting.com or on Twitter @locavesting.