Think Locally, Invest Locally

by Mark Scaramella, March 4, 2010

Not long ago the Ukiah Daily Journal ran an unsigned "In Our Opinion" column entitled "Back to the market we go." The columnist advised readers that, although investing in the stock market involves risk, as demonstrated by the current downturn, "there may be some good deals out there for the smart buyer."

The Journal criticized a nebulous "they," perhaps workers with large sums invested in generic 401k plans or "amateur day traders [who] thought they could simply jump on their home computer and make a ton of money." The UDJ's anonymous Mr. Back-To-Market said these foolish greedbags had unwisely invested in "the infamous dot-coms" which "had no real earnings or worth, and yet people were buying their stock at exorbitant prices in the hope that they had found the next Microsoft to make them instant millionaires."

"Investing is a risky business," noted the Journal's insightful financial advisor, "yet it's good that a lot of Americans are doing it." And why is risky investing good? Because, Mr. Hype explained, "It's a vote of faith in our economy and in our business sector."

Hope, faith, confidence, trust… I call these people, Obama included, “The Hucksters Of Hope.”

There was one teeny cautionary note: "But those businesses have to be strictly honest..."

That would be nice.

Investing in business ventures is as American as apple pie. (Apple pie is American, isn't it?)

The whaling community of Nantucket Island was based on one of the earliest forms of risky American investment. They'd put up big sums of money for whaling ships, crews, and outfitting, on the hope that after several years at sea the ship would return with enough processed whale oil to make a profit. Talk about risk! Ships could get caught in storms and lost forever, mutinies could arise, pirates could take over the ship, the captain could cheat on the oil, whales could escape or (later) be depleted, the precious oil could be lost at sea... Just to cite a few.

But even with those enormous risks, the colonial investor had a big advantage: he could go down to the docks and see his ship being built, talk to the captain (who he probably knew personally), see who was being hired for the crew, and get together with other investors to discuss problems and reduce the well-known risks.

It's a different world now. Stock market investing is mostly done in the blind and even if the managers aren't corrupt thieves (as it appears many of them are), the investor must rely on information from people who have a financial incentive to hide bad news.

In the 1980s I worked as an engineer at a publicly traded high tech firm in Silicon Valley. We made the machines which made floppy disks, both the now obsolete 5.25-inch disks (remember them?) and the obsolete 3.5-inch disks. Our only serious competition was from Sony, which made machines that were faster than ours but much more expensive.

We in engineering frequently found ourselves reading about our company and our products in the financial press. Almost every week someone posted a copy of some arcane financial analyst's assessment of the company on a bulletin board. (This was pre-internet). Soon the design team would be standing around the board laughing, wondering if they were really talking about us.

"We're going to ship in June?" one would typically ask.

"I guess so," another would reply, "it says so right there. I guess they have a solution to the static electricity build up problem that we don't know about."

Most of the information was so unrealistically rosy that we were never sure who they were talking about. We assumed that the stock analysts got their information from our famously ill-informed and perpetually optimistic VP of Marketing. He, like the rest of our executive staff, didn't talk to engineering or manufacturing very much, making it quite clear they didn't want to hear any bad news, financial, technical or otherwise.

Another company I worked for made a habit of overruning their contracts then assuming that the customer would pay for 100% of the overrun -- declaring the overrun to be “payable” as future income! And our accountants approved. Our books looked fine -- as long as you believed the fantasies.

Bad as these kinds of individual situations may have been for investors, it didn't hold a candle to today's hyper-corporate corruption. Ralph Nader recently told Time Magazine that even he -- a long time chronicler of corporate crime -- was surprised at the level of criminality and corruption that's been revealed by the recent disclosures. Some of it's laughable. Companies nowadays routinely announce that they somehow mis-accounted for a few billion dollars... Then, OOPS! We just found a few BILLION MORE we missed!

These companies are audited by well-respected auditors for years and found to be compliant. They get nice AAAAAAAAAAAA ratings from the ratings services. The corporate execs produce slick annual reports saying how wonderful everything is. Blue Chip Wall Street investment houses tell investors that the dot-coms and the WorldComs and the Enrons and the AIGs are good investments (even though the investment houses and the banks knew of those problems).

If the Journal's mystery financial advisor really thinks that the problem is ill-informed, individual get-rich-quick investors and not hard-nosed, experienced pension fund managers and account execs, or that the stock market has suddenly been transformed into a model of honesty and integrity, then he's more naive than the dopey day traders he tries to blame.

To avoid ridiculous risk we don't need to put our money under a mattress, or even put it in some staid, government-insured bank account.

Mendocino County has a substantial amount of its pension funds and investment pool money in these same risky places. And almost nothing in local businesses.

Why not invest at least some of our public money in local operations where, like Nantucketers, we can not only do something with local benefit (like low-cost housing, revolving loans, water conservation programs, or small business incubation) but we can see exactly where the money's going and what the risks are? If such investment funds were established and managed locally, it's likely it would attract private investment as well.

It'd be a safer bet than Wall Street, and probably would produce a better return.

PS. Do you hear any of the current crop of Supervisor candidates – one of them even an MBA! – talking about Mendo’s millions of dollars invested in the stock market? Do you hear them talking about ways to invest locally to invigorate the local economy they say is so important? Do you hear them bemoaning the zero-to-negative rates of return that these conventional stock market investments now provide?

I don’t.

2 Responses to Think Locally, Invest Locally

  1. Michael Laybourn Reply

    March 5, 2010 at 9:30 am

    Exactly Mark. Maybe invest in a meat processing plant or, taking back our power from PG&E like Marin did. There is a big story there,,,
    but think about it: Every nickel we pay PG&E leaves the county except for those workers that might live here. ALL the profit leaves. Sure would be nice if all that money stayed in the county and recirculated.

  2. Michael Foley Reply

    March 5, 2010 at 8:05 pm

    Trouble is, as Michael Shuman points out (look up his Small Mart Revolution site), SEC rules make it virtually impossible to invest in local businesses except through the back door of local banks. There is no local (or state) stock exchange to facilitate investment, the SEC requires lots of expensive paperwork of any “publicly traded company,” and individual investors can’t put a dime in unless they’re worth at least a million. Lots of rule changing has to occur before we can invest locally. Yes, let’s find innovative ways to do it, but let’s start changing the rules, too.

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