Michael H. Shuman is an economist, attorney, author, and entrepreneur. He’s the director of local economy programs for Neighborhood Associates Coorporation and an adjunct instructor at Bard College’s business school in New York City. Michael recently sat down with The Tokenist to discuss the differences — and larger implications — of wall street vs main street investing.
What’s the Difference Between Main Street and Wall Street Investing?
Michael is a long-time advocate of Main Street investing. He has authored 10 books detailing the various methods of investing through Main Street.
His recently published book, Put Your Money Where Your Life Is, explains how self-directed IRAs and solo 401(k)s can enable individuals to invest where it matters — in their own community. The Tokenist recently intereviewed Michael to get his insight on a number of topics related to Main Street investing.
The Tokenist (TT): You’ve provided a significant amount of expert commentary on Main Street investing with a focus on the local community. How would you describe the difference between Main Street and Wall Street?
Michael: Wall Street investing means putting your life savings in companies you know little about on the assumption—the prayer, really—that they’ll pay you a significant annual return, one that’s hopefully north of 5% per year.
In contrast, Main Street investing means investing in people, projects, and businesses that you know, love, and trust, with the expectation that you’ll earn a private return of about 5% per year. But Main Street investing also gives you a social rate of return: a stronger community, a more robust local economy, a healthier tax base, and better schools and police.
TT: What sparked your interest in Main Street?
Michael: For 25 years, I’ve been writing books and articles about the underappreciated importance of local businesses for economic prosperity. These businesses are responsible for 60%-80% of the nation’s jobs and output (depending on how you define “local”), are highly profitable, and, in normal times, are remarkably competitive. And yet, as investors, we systematically have overlooked these opportunities.
Of the $56 trillion Americans have in stocks, bonds, pension funds, mutual funds, and insurance funds, almost nothing touches local businesses. This is a huge capital market failure. I’ve been keenly interested in how we fix our capital markets and, ultimately, shift tens of trillions of dollars from Wall Street to Main Street.
TT: Why is Main Street investing so important? What are the greater benefits of such a focus?
Michael: There’s a huge body of research that shows that communities with a diverse array of local businesses have higher per capita job growth rates and higher per capita income growth rates. These communities are more socially stable, see more volunteering, and have higher voting participation.
Communities committed to healthy local food have lower rates of Type II diabetes and obesity. We also know that local businesses are what attract tourists, draw in the creative class, and stimulate entrepreneurship. A more self-reliant community that depends less on long-distance imports tends to be environmentally more sustainable and more resilient in dealing with threats like COVID-19. In short, almost everything we care about in our daily lives is enhanced by the local businesses around us—which makes our failure to invest in them all the more stunning.
TT: Given such benefits, why is it the case that Wall Street has become—and remains to be—the primary focus of most investing strategies for Americans?
Michael: The failure of capital markets, I would argue, stems from the peculiar evolution of securities laws. These laws were written after the Great Depression to protect grassroots investors—roughly 95% of all Americans—from fraudsters. But the unintentional effect was to make it unreasonably expensive for small companies to raise grassroots capital. This is changing now, thanks to the recent legalization of investment crowdfunding. But it will take time for investment professionals to form the local stock markets, local investment funds, and local pension funds that are needed to make this new marketplace work just as well as the existing marketplace for Fortune 500 companies.
TT: What are the different financial instruments and investments that investors can utilize to access Main Street?
Michael: There are two kinds of relevant instruments: the securities you can invest in, and the tax tools you use to move your tax-deferred savings into these securities.
On the first point, almost every kind of investment that’s possible globally is also possible locally: equity, debt, royalty agreements, convertible notes, even futures. In recent years, there’s been an increase in the use of all of these securities for people interested in investing in their neighbors, in local real estate, in municipal projects, in church buildings, and, of course, in local businesses.
While it’s exceedingly difficult to find tax-deferred mutual funds or pension funds that invest locally, you can easily and inexpensively create a Self-Directed IRA (SDIRA), roll over your existing funds, hire a custodian, and then direct the custodian to invest locally.
If you have any self-employment income, you can set up a Solo 401(k), which allows you to transfer significantly more money each year and administer your investments out of your own checkbook. Moreover, with a Solo 401(k), you can give yourself a low-interest loan of up to $50,000, which you can then use for almost anything, like paying off credit cards or putting a down payment on a house.
Michael: Right now, these investments tend to be one-offs, rather than the cookie-cutter investing we’re used to. This means that every local investment takes more time to research, frame, prepare the paperwork, and follow up on. Local investments also tend to be less liquid; you may have to hold them for several years.
These challenges are one reason advocates are encouraging communities to set up local investment funds. It makes local investors’ lives easier when fund managers do the scouting and evaluation, put together diversified portfolios, and create opportunities for more liquid investments. Encouragingly, in the last few years, the number of local investment funds open to unaccredited investors has more than doubled.
TT: Are there any added risks to Main Street investments which are otherwise absent from Wall Street?
Michael: There are at least three additional risks for investors. You may not find enough options, which increases your chance of choosing wrong. You won’t find trusted third-party reviews of your choices, like those published on public companies by, say, Moody’s, which means you need to do the research yourself. And your local portfolio might be vulnerable to a localized downturn, perhaps a hurricane, that hurts every business in the community.
However, there are several ways local investing can actually reduce your risk.
First, remember that local investments give you a social return on top of the private return. So, even if the company carries the risk of a small private return, it’s social return might be significant.
Second, if you’re willing to do a little research, you can actually get better information than what you’d find with distant companies. You can walk into a local business, pose questions to the manager, and kibitz with the workforce.
Third, local investment presents opportunities for reducing risk. For instance, if you invest in an established food market that puts a second location in an otherwise dead downtown, you’ll bring in traffic that will help every other business in that area succeed. A smart local investor might invest in the downtown food market, and the pet supply store next door, and the takeout pizza place across the street.
Finally, the idea behind having a diversified portfolio of investments is if one fails, the others will be unscathed. We want our investments to be different enough so that they cannot fail in the same way, at the same time, or because of some common cause. The essential problem with your portfolio right now is that almost everything in it—stocks, bonds, commercial paper, mutual funds, even currencies—is tied to the performance of global companies. Truly local investments, in contrast, may be somewhat more insulated.
TT: COVID-19 has had a devastating impact on small businesses throughout the world. How has this impacted Main Street from an investing perspective, and how will this impact Main Street investing in the long run?
Michael: COVID-19 has had a devastating impact on most businesses, large and small, local and nonlocal. As of today, the stock market is down 10% for the year, and many observers see another crash coming once the market realizes that the post-COVID recovery will take years, not weeks. The unreliability of Wall Street is a huge incentive for investors to look at safer, local alternatives.
It’s also true that, because of the pandemic, thousands of beloved local businesses have died or are dying. But most local businesses will survive, and their recovery offers local investors terrific new opportunities.
I’m advising the cities I work with—places like Riverside, California; Las Cruces, New Mexico; and Washington D.C.—to do everything possible to mobilize their residents to begin local investing now. Cities can educate residents about emerging local investment opportunities and how to use Solo 401(k)s. They can list local businesses looking for capital on the city website. And they can provide tax credits to incentivize local investing. For instance, the Canadian province of New Brunswick offers local investors a 50% tax credit.
Crises often beget innovation, and I suspect that within the next five years, we’ll see the first trillion dollars move from Wall Street to Main Street. That’s when all kinds of mainstream investors may wake up and say, “Hey, this is an incredible new wave. How can I ride it?”