“Locavesting”: Capitalism for Main Street

June 7, 2011

You’ve heard of eating local and shopping local —  now a new book urges you to take the same approach to your portfolio.  Locavesting: The revolution in local investing and how to profit from it guides readers through the idea that investing in local businesses, instead of faceless conglomerates, can not only benefit your local economy, it can boost your bottom line, too.

The book, by freelance journalist Amy Cortese, evolved out of a story she wrote on local stock exchanges in the wake of the financial meltdown.

“People were coming up with new ways to funnel more investment capital to the locally owned companies that create jobs and healthy communities and are too often ignored by the financial establishment,” she says. Locavesting is about restoring the bonds between investors and companies. “It’s capitalism for Main Street.”

Cortese gives Reuters an inside look at the world of locavesting and how you can get started.

The book really exposes the cracks in today’s financial system — how does it highlight the need for “locavesting”?

I think what the financial crisis did was strip bare the inner workings of Wall Street and expose just how greedy and self-interested it had become. And there was a stark contrast between what was happening on Main Street — where people were out of jobs, homes were being foreclosed, small businesses couldn’t get funding — and here you had the big bailout, and shortly afterwards, Wall Street came roaring back. It really exposed, for a lot of people, the dichotomy of Main Street versus Wall Street. And a lot of people, myself included, were looking for alternatives. The fact was, Wall Street was not taking care of Main Street — and neither was government, really. So if something was going to happen, people had to take it upon themselves.

Early in the book you pose the question, “What would the world look like if we invested 50 percent of our assets within 50 miles of where we live?”  Any ideas?

I don’t think we’re ever going to get anywhere near 50 percent … but five percent, 10 percent, even one percent would make an enormous difference. Right now there’s an estimated $26 trillion that Americans have invested in the stock market. You could argue that very little of that goes to locally-owned companies, because mainly they’re small and private. And we’re just not set up to invest that way. So just imagine if only one percent of that $26 trillion was diverted to locally-owned companies, I think that would have a huge impact.

Socially responsible investing often gets a bad rap for high fees, low returns. Is locavesting up against that same pre-conception?

It may be too early to answer that. SRI is very different. One of the raps against it is it’s not very proactive  — you’re screening out undesirable companies but you’re not proactively seeking out the ones that you want to support and invest in. And that’s what local investing does. However, that said, there is an economic cost to investing in small companies. You have to vet them, you have to do all the legwork that you would do for a larger investment. So there is that cost built in, and that’s the challenge: coming up with models that make it economical and efficient to invest in small companies without spending so much to research them.

Is there money to be made in investing in local business — besides the contribution you’re making to the local economy? Is it actually lucrative?

There’s not going to be a one-size-fits-all kind of answer to that. I think it’s going to vary. But I would say yes, of course — small businesses can be very profitable. They can have very good revenue models and they don’t even have to be high growth to be a good investment. Every big company has started as a small company. That said, it will really vary. Some of the locavesting models and companies are, by design, providing a fairly modest return — maybe four to six percent. But that’s not so bad these days. And I would argue that local businesses can be much less risky. You know them, there’s a level of familiarity and there’s accountability that comes with a locally-based company that you don’t get with a big complex corporation.  Yes, small businesses can be risky — but no more risky than a giant corporation halfway around the world that you can never truly fathom.

What advice can you offer someone who wants to start investing locally?

The first thing I would recommend is to do your banking with a community banker or credit union.

Secondly, there are things called community loan funds. Most communities have something like this — they’re regional funds, kind of like a certificate of deposit, where you put your money in and usually the rates range from two to four percent. It’s a place to park your money, and the money goes to work in your region.

I would also suggest food co-ops, energy co-ops. They’re a good thing to join in general. You can claim a patronage rebate at the end of each year usually based on what you’ve spent. Often, these co-operatives, which are democratically run and very community-based, they look to their member owners to raise money. And here again is a way to lock-in rates as high as six percent on your money for a three- or four- or five-year loan.

There’s also something called direct public offerings, which are like an IPO except there’s no Wall Street middleman getting his seven percent cut.  What the wall street underwriter has traditionally done in the past is pre-sell the shares to their institutional clients. If you’re a company and have a loyal customer base, you can market those shares directly. And that’s a better deal for everyone — it’s taking a layer of cost out and a lot of companies that couldn’t afford to go public suddenly have access to public funds. And for the investors it’s getting in on the ground floor.

This interview has been edited and condensed.

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