Book Review: Locavesting, by Amy Cortese
I recently finished reading Amy Cortese’s new book, Locavesting – The Revolution in Local Investing and How to Profit From It. It’s a great read on the development of the movement to build more resilient and sustainable communities by investing in our local economies. Locavesting takes the Buy Local movement to the next level – Invest Local – and poses the question: what if everyone invested 5-10% of their assets in local and community investments?
As Cortese shows, Local Investment offers many potential benefits. For one, it provides another category of portfolio diversification as protection against the increasingly volatile stock market. Investing in local communities is investment on a human scale and can restore a sense of personal connection to financial transactions that has been lost in the complex, impersonal investments of today’s financial markets. And, it encourages us to broaden our concept of returns beyond just financial.
Investing in small, community-rooted businesses is investing directly in the health of our communities and provides a vital boost to the kinds of businesses that are the true drivers of our economy. Small businesses make up 99% of all U.S. companies, employ half of all private sector employees, provide two of every three new jobs created, and contribute half of private GDP – about 5.5 trillion dollars annually. Money spent and invested in these businesses circulates within local communities, contributing to their prosperity. Cortese points out that “communities with a diversified economy comprised of many locally owned businesses have a higher quality of life, civic engagement, and income equality than similar communities that are reliant upon a few large employers.” Without strong local economies, we can’t expect to have a functioning global economy. And yet despite the fact that small businesses far outstrip large corporations in job creation and driving economic growth, they’re being increasingly starved of capital, seriously hampering our economic recovery.
Locavesting provides a superb history of the financial markets, outlining how we’ve arrived at the mess we’re in today. As the public markets have grown and moved toward extremely high frequency and speculative trading, large companies have been favored, resulting in a shrinking pool of small companies and a serious drop-off in new Introductory Public Offerings (IPOs) which historically have been the number one way for small companies to raise capital for innovation and expansion. Today, just 1% of the trillions of dollars flowing through the stock markets are sending investor dollars into the coffers of small or growing companies when they issue new stocks or bonds. (The remaining 99% is trading of existing shares on the stock market.) While most investors will continue to have significant holdings in larger companies, public markets are no longer the place for small companies to raise money and for investors to invest in them for the long term. Compounding the failure of public markets to support small businesses, large banking institutions which now hold the lion’s share of all depositors’ money, have cut their lending to small business down to a mere trickle. Without capital to grow, small business cannot play their critical role in the economic health of our communities.
Clearly, there’s a need to get money into small businesses. But confoundingly, it’s not so easy for the average investor to choose to put their money into local economies. Cortese points out the number of serious hurdles that get in the way. Most significantly, securities laws, originally created to protect individual investors from scams, have become a tangle of regulation that make it very difficult or outright illegal for businesses to take investments from average investors, including their customers, friends, and neighbors. As she puts it, “it’s easier for an individual to invest in a company halfway around the world than in a small enterprise down the street.”
And yet, despite the hurdles, Cortese identifies the most accessible ways for investors to begin investing locally and takes readers on a tour of some exciting models of local investment happening around the country. The easiest, least risky way for investors to invest in small business and community is simply by moving their money into a Community Bank or local Credit Union. These smaller institutions invest within their communities and lend to small businesses at a much higher rate than the big banks. She notes that if just 10% of money currently held in big banks were moved to community banks, it would generate up to $4.8 billion in new local lending. Wisely, Cortese directs readers to check up on the health of a community bank when choosing a new institution by using an analysis tool available on the Move Your Money website. She also points readers toward Community Development Financial Institutions (CDFIs), institutions that focus on making small business loans in low income and underserved communities. Natural Investors already participate in this type of community investment through Calvert Foundation’s Community Investment Notes.
Beyond these simple steps to engage in local investing, Cortese takes us on a walk on the wild side, sharing wonderful stories of communities and small companies doing some very creative things in support of local investment. All of these efforts fit within the few narrow openings within securities laws. It’s here that we get to hear the story of LION – the Local Investment Opportunity Network started in Port Townsend (with the help of Natural Investments’ very own James Frazier), and several other examples of community members coming together to invest in local businesses where they have personal relationships. She also introduces us to Crowdfunding, the Slow Moneymovement, Local Stock Exchanges, and the use of the Direct Public Offering, nicknamed the Do-it-Yourself IPO.
Cortese’s book is chock full of great stories, interesting tidbits of history, and hopeful developments for a revolution in Local Investment. For those interested in participating in this burgeoning trend, Locavesting is a must-read.
This article first appeared in the Winter 2012 Natural Investments newsletter
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