You may have heard of locavores, those ultra-health-conscious folks who eat a diet of locally grown foods. Taking the same tack with your investment strategy -- called “locavesting,” or investing in local small businesses -- could be just as healthy for your wallet, not to mention your community.
Brooklyn-based journalist Amy Cortese, author of Locavesting: The Revolution in Local Investing and How to Profit from It, explains why the neighborhood bakery or bookstore could be the best place to put your money right now.
Amy Cortese: Locavesting is a more intimate form of investing; you’re investing in companies that you’re familiar with and that benefit your community. Besides that, there’s something called the local multiplier effect. It’s an term for the fact that when you spend a dollar at a locally owned business, it generates three times the local economic impact than if you spent that same dollar at a nonlocal business, like a corporate chain. That’s because the money is circulating locally and creating jobs locally. That’s the whole idea behind local investing. You can make a return on your money, but you’re also benefiting your local community.
IA: What kinds of businesses are looking for local investors?
AC: A lot of local investing started with food. We’re eating locally, we love our farmers markets and we’re realizing that if we don’t invest in these food producers there may be no one left at the farmer’s . But it extends to any sort of business: mom-and-pop shops, established businesses, light manufacturing, start-ups. The distinction is that they’re locally owned and truly rooted in their communities. These are people who live here, their kids go to school with your kids, they’re part of the community and they’re stakeholders, so they have a whole different relationship with the community.
IA: How does it work?
AC: In Fort Greene, Brooklyn -- this great little neighborhood with lots of writers -- they didn’t have their own bookstore. Two women decided they would open a bookstore there. The people in the neighborhood were thrilled; they threw them a party before the bookstore even opened. Then the financial crisis hit, and the women couldn’t get the rest of the funding they needed because the bank pulled their loan. About two dozen people in the community who really wanted this bookstore stepped up and lent them a total of $70,000 for a pretty modest interest rate. They could choose between 2 and 4% interest, and lots of people chose the lower rate because their main intent was just to have a bookstore. Today, Greenlight Book Store is doing so well. It was profitable its first year, and now in its second year, the investors are being paid back. Plus, they get a lifetime discount on books!
IA: So there are benefits beyond a monetary return on investment.
AC: I believe that investors do deserve a financial return. All of us have to retire someday, so if this is ever going to become mainstream we need to earn money on this. That said, there’s a range of softer benefits: You’re directly impacting and improving your community. A lot of people elect to take their dividends in things like cheese, eggs or poultry. For a business that’s raising money locally, the people who become your investors are generally your most loyal customers -- ambassadors who go out and tell everyone to try this great cheese. It’s a really nice win-win for all involved.
IA: Is it riskier?
AC: It’s always going to be risky to make an investment, whether you’re investing in a small business or the stock market. But as a local investor, you’re better able to make an informed decision. You know what will do well in your market. You may know the people who are running the business. If it’s an established business, you may know their product or be a customer. So you have a familiarity. Can we say that about any of the corporations that we invest in? Does anyone know what’s going on inside GE or JPMorgan Chase? With local investing, it’s a much more simple, direct relationship. It’s easier for people to grasp. That said, yes, there’s still risk, but there’s a very good argument to be made that it’s actually less risky than investing in things that you really don’t have a true understanding of.
IA: If I want to invest in a local business, what’s my next step?
AC: By nature, because these are local investing opportunities, they can be really hard to find. A lot of it is word of mouth, but there are some places you can go. Almost every area has a Community Development Loan Fund people can invest in that in turn takes that money and loans it to people and businesses that live in the area. There are also things called LIONs -- it stands for Local Investing Opportunities Network -- that are groups of residents who band together and invest in local businesses. That started in Port Townsend, ., but there are already almost half a dozen popping up in other places too, like New York City; Portland, Ore.; Seattle; and Madison, Wis.. For now, the easiest thing people can do is to move their money into a community bank or credit union, where their money is more likely to be put to use locally.
IA: Could this really boost our country’s economy?
AC: Yep. To put it into perspective, Americans have $30 trillion invested in long-term securities, everything from 401(k)’s to IRAs to pension funds to mutual funds. But almost all of that is invested in large corporations, and almost none of it is invested in small local businesses. If we shifted even 1% of that investment to local small businesses, that would be $300 billion. It turns out most of the jobs created in every state come from locally owned companies, while almost all job losses come from larger corporations that are headquartered elsewhere. So I very much see local investing as a way to rebuild the economy. I don’t to suggest that everyone should go out and sink all their money into the local hardware store. But think about locavesting as a way to diversify your portfolio. A little shift can make a really big difference in our local economies.