Bypassing Wall Street
Ron Lieber has a column in today's New York Times called "A Financial Plan For The Truly Fed Up" where he lists some alternatives to investing your savings with the banks and brokerages that make up Wall Street.
His roadmap is basically what the Gotham Gal and I have been doing since the aftermath of the financial market meltdown in 2008. We invested pretty heavily in the stock market as the market was melting down in 2008 and I blogged actively about that here at AVC. But we took our gains early, in the first half of 2009, and then have more or less stayed out of the stock and bond markets since then (we do use our portfolio company Covestor's service).
We are in cash, real estate, venture capital, and private investments centered around our neighborhood and city (retail, restaurants, etc). Other than cash, we are invested in things we can touch and/or impact and understand.
As Ron talks about at the start of his piece, the never ending blowups on wall street are eroding confidence in that system. It certainly has eroded our confidence in that system. So we are staying out of it for the most part.
We do have our cash at a large money center bank. Ron advises credit unions instead. We haven't made that move and I am not sure we will.
Ron also advises people to check out peer to peer lending markets and mentions our portfolio company Lending Club. I was very happy to see that Ron has come around on peer to peer lending. Our firm is a big fan of these markets, having invested in two of them and looking at others.
And he describes a movement he calls Slow Money described in this way:
“Let’s just take some of our money and invest it near where we live in things we understand, starting with food,” as the movement’s founder, Woody Tasch, puts it. He describes returns as being in the “lowish single digits,” ranging from roughly 3 percent to a few percentage points higher.
The Gotham Gal and I are big fans of this approach. We have invested in a number of busineses in our neighborhood and city with expectations properly set for the occasional loss and in general low returns on the portfolio. But we are helping folks start their own businesses and create establishments we can use and that we want to see in our neighborhood. It feels good and I think it will turn out to be as good an investment as cash in the bank. At least I hope so.
As one system seems to be failing on a regular basis, it makes sense that there are new systems that operate differently that are emerging. We are seeking to invest in the ones that can scale at USV and the Gotham Gal and I are also looking to support these efforts in our personal investing. I am optimistic about this emerging movement and I am pleased to see mainstream media starting to talk about it.
I have never left a comment here given that I can see zero.. I claim – first
I am not sure the regulatory environment makes it easy enough for even knowledgeable individuals to invest in private companies/businesses when they surely deserve to reap the same amount of benefits as “qualified investors” do.As an aside, equity investments, whether public or private, receive far more focus than other asset classes in my opinion. What about fixed income investments such as corporate bonds? They seem to have performed pretty well. It’s a pity the exchange-traded market for such assets is so small and so inaccessible to retail investors while equities that are highly volatile are so actively traded in exchanges.
I like the idea of investing locally in your community but this isn’t yet a valid approach for small investors. I think most restaurant (or other small business) deals look for minimum $50K or thereabouts chunks of money which puts it out of reach of most people.A new restaurant down the street from where I live launched earlier this year with a successful kickstarter project: http://www.kickstarter.com/…The backers got things like t-shirts and free drinks. Maybe someday the community can invest in more projects like this and get a % return on their investment. There needs to be some kind of mechanism to spread the risk around for smaller investors, like a mutual fund for community projects, but with greater transparency for which projects are being funded.Wall Street owns the 401(k)s, the IRAs and the pension funds. There won’t be big change until we find an alternative to those institutions.I think this style fits the American ethos better. We don’t like saving but we like investing. And people are once again becoming more community-focused and recognizing the importance of locality.(Really great restaurant by the way – try the pan-roasted skate).
Yup. I agree with all of this.
This is an excellent point… I was thinking this to myself when Fred discussed small single digit returns on local merchants… while that may not be a long term solution for many, these days individual middle-class investors aren’t getting more than 1% on short term investments and (maybe) 3% on longer term… so why not invest in something local and still get that 3-5% return? Of course there is more risk, but if everybody gave just a little bit, it would put a lot more working capital into local businesses.I agree with Fred’s comment regarding Credit Unions – I really don’t see them being much better/different than a bank… but here’s an area that could *really* differentiate themselves – have the Credit Union be the conduit for micro-investing in local investments in their town???
I disagree on credit unions.Credit unions are not-for-profit, member-owned and democratically controlled. This changes the philosophy from making money *from* depositors to making money *for* depositors. They are better than big banks for the “little guy”.Do agree however on opportunity for credit unions to become more involved in local investments, micro-investing, crowdsourcing.
Luke – I agree that Credit Unions *should* have a benefit for depositors, but I personally have not seen it. I do not get better rates and/or terms than I can get at a bank. They are excellent for loans, but I haven’t found any other substantial benefit.
If you look at average fees charged to consumers credit unions are way ahead of the big banks. And when your rate is less than 1% those fees are basically negative returns.
that has not been my experience… I pay $0 fees at the banks I frequent. And in fact, I have to deposit money in my credit union account every 6 months or I get charged a “dormant account” fee. It’s a hassle. But I do it because I like having the account for loans, and I would add another account if it was competitive. But I have yet to find that.
You are probably good at reading the fine print and avoiding fees, but overall bank fees tend to be higher. (the dormant account fee sounds really annoying).http://www.bankrate.com/fin…http://articles.latimes.com…http://www.usatoday.com/mon…
I am amazed when I walk into this small local community savings banBk ( they may have a total of say 12 branches) it is bustling people waiting in line for teller or drive through. And then I go down the street to the Chase branch were the company I work for also has an account and it is dead plenty of tellers and officer types just no customers.A few months ago I had breakfast w a loan officer of that local bank and he told me they had something like 50+% of deposits in that area
It’s great to hear this from you Fred. People of all income brackets should pay close attention to the stock market, and try when possible to stay out. We’ve all been burned multiple times by the “corrections” in our lifetime… so it’s very hard to trust wall street going forward.
Lending Club, proof that you can pretty much socialize any existing business model and bypass traditional behemoths.
Lending Club is a really great business. Several people on Team Riskalyze use the platform and are earning great returns.
what kind of returns are they seeing on average? and how active in monitoring do they need to be?
Haven’t heard specific numbers, but the experience has been “above expectations.”As far as I know, the trick is really to invest at least $25K and spread it out over 1,000 notes. Nobody has lost money so far in Lending Club’s history with that much diversification.
1,000 notes? that doesn’t seem very scalable. i imagine most investors who could commit $25k wouldn’t want to bother with managing 1,000 different notes?or does their system make that actually relatively easy to do?
Incredibly easy. You have their platform pick a basket of 1,000 notes spread across whatever set of credit scores you’re comfortable with. Same level of management work for 1 note or 1,000 notes.
that’s great. didn’t realize they made it so easy to diversify across notes like that
USV’s strategy is investing in large networks of engaged users that can disrupt markets.In kind, what is it that you look for in these local businesses?
USV doesn’t invest in local businesses. My wife and I do
where do we submit the proposals? It’s easy to pitch you but I feel like i never pitch GothamGAL….(help?)
I don’t want to sound harsh here but part of being an entrepreneur is figuring things like that out.
I could have been a little bit more clear. USV has an investment thesis.What is your personal thesis with regard to investing in local businesses? Or is your investment strategy for local businesses more broad?I ask because I have a great interest in community development [in addition to economic development and real estate development, which are all tangentially related].
in our local investments we invest in people we like and trust creating things we want to see in the world
“We do have our cash at a large money center bank. Ron advises credit unions instead. We haven’t made that move and I am not sure we will.”Ron says:”STORING YOUR MONEY It all starts with your day-to-day cash flow, so for a checking account, the opt-outters will want to do business with a credit union.”He gives no backup for that sweeping statement at all. I can’t think of any reason that someone would make a general claim to use a credit union instead of a bank in a piece like this and then not back it up.There are advantages of using a credit union over a bank, or vice versa, depending on the particulars.In general though the differences are going to be nominal relating to fees, rates paid and physical access which will vary depending on what you need to do.
At least with my credit union, the service has been incredible. Plus the money is local, invested back in the community via loans. Couldn’t be happier, much happier than I was with “BigBank.”
“We are in cash, real estate, venture capital, and private investments centered around our neighborhood and city (retail, restaurants, etc). Other than cash, we are invested in things we can touch and/or impact and understand.”I think your approach is great especially the “things we can touch and/or impact and understand.”.
That’s why we do it
My dad encouraged me years ago to buy a building in Old City Philly a neighborhood that he had a business in when I was growing up and my first business was located in.He said to me “I will buy the building back from you for what you paid if you ever want to get out”.I bought it in the early 90’s and by ’98 I wanted to use the money to buy something closer to where I was operating the business at that time. The suburbs.I hadn’t spent any time in Old City since I left, so I didn’t know how hot the area was getting toward the late 90’s.So I sold the building to my dad for what I paid (after collecting rent for maybe 7 years it was fully occupied so that part worked well). He immediately raised the rent on the tenant as well.My dad then sold the building at the high point in the 00’s for about 3.5x what he paid me (that’s right 3.5x). And gave a mortgage to the buyer for a high rate.He gleefully pointed out that if I had spent some time down in the area (he was there every week and had the beat of things) I would have known to never sell it to him. The funny thing is I’m always doing what he thought I should do I just didn’t do it in that situation. Knowledge and curiosity gives you a big edge.(Of course I could also spin this story as far as the time that I didn’t spend downtown and how that worked out well but we can leave it at lesson learned with this comment).
After recently getting married and opening a joint account at BofA my wife found out about McGraw Hill credit union from a fellow BK co-op member and we’re in the process of moving all of our banking over to them. We’re very exited to support a local bank and move out money out of “too big to fail”. They offer a full suite of online and mobile banking including photo check deposit, albeit their UI could use a lot of help. They offer 1% saving rate with their S3 account and extremely low fees (e.g. they only charge 1% for international charges over interbank exchange rates). I really loved that they posted thier balance sheet at their branch and it was simple enough that a non-MBA like me understood the health of their business in a minute.I really believe that this is the future of banking, moving from the opaque institutions that are addicted to maximizing profits through leverage to transparent institutions that trade those profits for a simple business that is fcused on serving the one constituent that matters, it’s customers.
although no one knows for sure i think the next couple months constitute the last chance to buy gold before the big move comes, the move all the gold bugs have been waiting for.investing local is awesome, though the economy is global. i.e. the US imports more than it exports, so even a local economy is largely dependent upon international trade. which in turn is related to international debt and currency values……..those who have stocks in meaningful quantities should take them in direct registration unless they are actively trading/speculating.VC is still dependent upon IPOs. when that model changes then the connection to wall street will be severed. that there is talk of lower valuations in light of facebook’s big sell-off illustrates the connection.to conclude with one of my oft-repeated refrains, the only solution to the global economic crisis involves significant debt cancellation in countries mired in debt, a balanced budget for virtually all governments, and a new international monetary agreement that most likely involves the return of commodity-backed money. there is virtually no chance of the plutocracy that controls nation-state governments to bring this about, and as people are more interested in talking about chickens and gay marriage it is unlikely demand will emerge bottom up. fortunately the market will conspire to bring it about, though the ride will likely be painful — doubly so for those unappreciative of the inevitability of it all. fortunately, economic collapse of the current world order does fuel the rise of the world beyond the nation-state — i.e. the rise of burbclaves to use stephenson terminology.
.When the Israeli Air Force takes off from Baku, swings out over the lake and bears down on Tehran at wave top height — gold and oil will both double.This will happen in the next 90 days.Chick Fil A will still be enjoying enhanced sales due to that marketing genius, Rahm Emanuel.Or maybe not? Hell, it’s Saturday..
lol emanuel really is a marketing genius, i wish he would try to ban the businesses i’m involved in……i live in chicago and there is a chick-fil-a near my apartment — place has been totally packed, way more than usual, over the past week!
Thank you for investing in Gabe and Little Wisco 😉
He’s got more coming http://m.ny.eater.com/archi…
Nice. Japanese, your favorite.
well actually italian is my favoritebut japanese is a close secondthis is really a crudo bar in my mind, which combines the two!!!
oh, remembering that favorite food post wrong then. I thought it was Japanese. Anyway… thanks god we don’t HAVE to choose. 😉
Lending Club looks great but there is plenty to digest on that site.My concerns are:1) Can’t tell very easily (to much to read) how they vet the borrowers. To me this is very important. This goes against the strategy of “we are invested in things we can touch and/or impact and understand.”2) I would fear that the high rates will lure (despite all the caveats) plenty of people to put all their eggs in this (uninsured) basket. Which from what I read isn’t liquid. At least stocks (which I am not a fan of) are liquid if you smell something happening you can bail.3) Lending Club is a perfect vehicle to put a small portion of your investments into that type of higher risk. Of course if you only have a little at risk you aren’t going to make much either. a) So my fear is that people will start small, get returns, and then slowly increase their exposure until they near a much larger percentage of their investable assets than they should. So they are then gambling. And the crowd effect of hearing the gains others have made with definitely lure in the money. (I think this is an excellent business idea by the way I’m speaking strictly from the consumer point of view.)I also question the financial model behind all of this. Bank can borrow for way less than LC is paying out for money. Bank can leverage that money. As much as you might think banks are legacy and can’t think out of the box it’s hard to believe they aren’t able to offer loans to the same group of people and make a killing if LC is able to do this paying much more for the money. The only reason they wouldn’t be able to is if the loss ratio would exceed what they are able to accept. So with LC that number is born as risk by the investors (see point 3a).
They only let high credit quality borrowers into the market. Credit scores in the top 10% or so. Default rates are very low and have been for about five years including during the financial crisis
This page indicates that they have “G” grade paying almost 22%.http://www.lendingclub.com/…The same page says “the average Lending Club borrower shows “715 FICO score” and some other details like debt ratio, income and loan size.So that’s the average. Obviously for the payouts of 22% or even 18% you not dealing with those FICO scores, credit history and debt to income ratio.Unless I am missing something my guess is that the typical person buying a note isn’t going to understand enough to see how the numbers relate to the risk they are taking.
Although not an investment aimed at making a strong financial return, I feel compelled to also mention kiva.org as a great may to invest in entrepreneurs all around the world to help them build a small business so they can sustain themselves. You make some interest, but the real win is knowing that a small amount of money can go a long way to help others.
I like kiva a lot but I see that as philanthropy which is investing of a different sort
This approach will benefit as people’s returns expectations reset to lower levels, making asset classes outside of public equity markets more palatable. We’ve grown accustomed to and are anchored to investment returns (in all asset classes really) that are largely a function of a massive secular decline in interest rates over the past 30 years. With rates as low as they are the bias is upward over the longer term and that will be a significant headwind to all asset returns, making, perhaps, low single digit financial returns with some additional qualitative (e.g supporting a business that benefits your city or neighborhood) more attractive.
Great comment. Lowering return expectations does have a bunch of positive impacts
.Return expectations are the financial equivalent of crack.Folks get addicted to historically high returns and are not willing to admit the financial markets have emerged from rehab and these historic returns are not possible.Not if you are being prudent and cautious..
@JLM:disqus Many investors are just like crackheads anyways, looking for the next fix, next high. Gamblers are not so interested in returns as in having skin in the game. Emotional rollercoastering is their norm. Makes me seasick.
.The simple truth of the matter is that any unleveraged returns north of a single digit are in a risk profile that mandates that the final return must incorporate some complete failures.If you introduce a goose egg into a portfolio of seemingly 12% returns, the actual portfolio return gets slimmed down like Jenny Craig.I remember when I could deliver 25-40% leveraged returns in real estate in my sleep. Those days are gone forever.Making a 15% leveraged return from a core 6-7% unleveraged return is a solid investment return.In spite of all of this, the world is still awash with cash.There is nothing wrong with leverage or speed (like fast airplanes, not like meth) — if you have a steady hand on the yoke. And you know what you are doing..
We’re trying to do some education on that exact point in Riskalyze.The process of capturing your Risk Fingerprint literally steps you through the amount of money you have, and when you’re willing to choose risk over certainty.Once you’ve captured that, it translates into “real life”…do you want 10% returns? That means you’ve got to accept $x in losses.Here’s an example: a high-risk portfolio I built with a six month projected range of -14% to +22%. https://riskalyze.com/#p/47253 You can’t see my dollar amounts, but you can imagine the level of $ risk I’m seeing when logged in.When you tie it back to the risk of real dollar losses, all of a sudden big returns don’t sound quite so appetizing.
Amen…in 2008 I think i might have coined ‘too small to fail’ http://howardlindzon.com/to… and have lived mostly this way like you but in coronado. local, one car, simpler investing, less stocks, more education and even more fun. All I hear from the billion dollar hedgies is their clients asking for liquidity so the money flows but the trust is so low that everyone ends up trading cash around. IBM is floating bonds at basically 0 percent risk so if you think 10 percent is easy, you are a deaf lunatic.I have also thought that as part of too small to fail, you might as well go vertical rather than horizontal. Interesting times.
I really like that. Too small to fail. I agree completely about keeping your accounting systems so simple that they show the real business not that they are part of the business.You know whenever you are using OPM it makes it easier to take big risks hoping for the leveraged rewards that come with the upside and ignoring the really bad downside. When you are only using your money failing become much more real.
which is where we are at with crowdfunding and new payment systems and banks….keeping it simple. the extended social graph will help with sales tools so everyone can work for themselves more than ever.
You are always a few years ahead of the curve Howard
the great thing about start up investments is you don’t really know what they are worth until they exit. When the market craps out, the company doesn’t! I have been involved with financial markets my whole life. I took my college loan in 1980 and didn’t pay for college, invested and doubled my money. Too small to fail is an interesting concept-but what you guys are really saying is invest in what you know and what you can leverage your network to aid. Mostly that’s stuff close to you. Hot money flows through markets. Right now, it’s all parked in treasuries. It’s anyone’s guess as to where it goes next. I am betting on small companies and start ups.
There is no doubt that Wall Street’s stability has become wildly unpredictable despite the high returns it often offers. But if less people invest in Wall Street, won’t that affect the exits prospects of the very companies you invest in?
Maybe. But it is what it is.
It is unlikely the local companies we invest in are going to exit by IPO.
What is the best mechanism for engaging in local investments?
Can you elaborate?
A better choice of words on my part would have been “community for engaging in local investments…”Is there an exchange community for investing in local businesses?(Similar to what @ccrystle:disqus is suggesting.)
I just came across this:http://www.fastcodesign.com…
not that i am aware of. there is some of that kind of thing on kickstarter but as you all know, kickstarter is not about equity, its a futures market for product
Fred you dawg you def bank with JPM 100% lol (sorry)
Thanks for sharing alternative investment options for the average individual . It seems that the stock market has returned the era of the Flapper 1920s where only insiders ( read qualified investors) can make money.
(read Goldman Sachs execs)
If you are a middle class person (the fancy term is retail investor) you can no longer purchase inexpensively. You don’t have the option buy LinkedIn shares on SecondMarket.
Yes, sorry. I just meant that, to me, the insiders circle is much smaller than qualified investors 🙂 I was agreeing with you (I think).I lost faith in the whole shebang around 2007, when it was obvious to me that a mortgage bubble was forming. How could an economic idiot like me see it coming but the Fed/Wall St not? My jaded answer now is, they did see it. They didn’t care.I live in a town heavily populated by Wall St insiders. They are tearing down their mansions to build bigger ones. They are not in foreclosure or under water. They are not sharing the pain. (Sorry – did I just rant?)
I sold cars for 7weeks and saw the same behavior. Getting people into cars they could not afford or do so at terms everybody would result in a repo. A 22K Avenger at $700+ a month really?
Why do think Profounder failed?
i thought it was that they were too early (pre-JOBS Act)
Kinda like a NASCAR star running out of gas on the last lap of the race.
fortunately there’s a whole bunch in development, and overseas there are already some launched (http://www.crowdcube.co.uk). there is also something called SCOR which enables firms to work around the JOBS act and get started with crowdfunding apps today. one firm has already gotten started on it: http://fundinglaunchpad.com/i'm very bullish on this space.
I have some friends working on crowdfunding for veteran owned businesses called http://repayvets.com/ Check them out!
that looks fantastic (although it seems to be more rewards-based like kickstarter rather than equity-based — but i tihnk there is plenty of room for both,and some rewards platforms are working on equity solutions now). i think there is going to be an explosion of these types of niche platforms.
I think the firm went out of business a month before the JOBS Act passed. I thought we would see a Sprouter play comeback from the dead.
Bought my first shares of stock in 1976: Digital Equipment.I lost a tremendous amount of faith in Wall Street back in 1999/2000 but then opportunities opened up in oil, commodities, and gold so I stayed in the game.But in 2007 I got out of the game totally over a sign I saw on the side of the road and I am staying out forever.I am glad to see that I am not the only crazy one out there. There is nothing wrong with the concept of “slow money” because 7% a year returns will double your money in 10 years. With 36 years of investing under my belt I can attest that my best investments were always the slow long term ones.This is a great post Fred!
But the real question is when you sold it.
Sold it when I touched my first personal computer, which would have been the early 1980’s.
I love to hear that you invest in local retail stores. We need more local small retail in this country. That is our focus at http://www.retailpitch.com.
Saying no to Wall St. is fine and dandy, but I would highly caution people against putting too much capital into highly illiquid assets. You need to keep dry powder/liquidity for everything from life events to future investing opportunities. You never want to be in the position where you are a desperate seller to raise cash. I can think of many real estate moguls that have gotten into a serious pickle or even one bust due to a facing a liquidity crunch in a bear market. The public markets have many, many flaws, but the one advantage they have is liquidity and most people underestimate the importance of liquidity until they need it. In my mind, investing in a broad, diversified portfolio of dividend paying stocks is a heck of an alternative versus getting all of your liquidity from cash in the bank, whether that be a money center bank or credit union.Rather than saying no the public markets, I would say no to ridiculous fees. There are alternatives to the public markets and they will continue to grow. Does your financial advisor provide you any real value? Is your mutual fund earning its fees? I would certainly be more skeptical and demand more performance from your public market investments than simply turn my back on the public markets.Fred and Gotham Gal have enough assets to shun Wall St. and I applaud them for investing in their community, but I would caution against this strategy for most individuals.
To clarify, I would caution people against an asset allocation of 10-15% cash and the rest in illiquid investments.
we are more like 40% cash
Exactly. Well put.
that’s why we have a lot of cash earning us nothing. i agree that if you are going to be making a lot of illiquid investments, you need to pair that with a lot of liquidity. i just don’t want my liquid assets invested in a casino called wall street
Food investing is the best thing there is now, and it’s totally underrated. The Process Food industry is a sham and needs to be rattled to its core, like the tobacco industry a few years ago. Processing food, modifying foods, using excessive fertilizers, adding preservatives, and picking fruit/vegetables that are still green to make them travel better are all bad things that we, as consumers end-up paying the price for with our health.Eat Local . Invest Local . That’s a great way to return to our roots, to things that previous generations took for granted.
The NYT had an article a few years ago about the local food movement in Brooklyn. I blogged about it at the time, “Lessons from Brooklyn’s new economy”.
ME, GRIMLOCK, ALWAYS EAT LOCALS.
LOL. Eat local, Think global?
EAT LOCALS.THINK ABOUT EATING THE GLOBAL.
That’s priceless, LOL.
Right on!Rooftop gardens. Why haven’t they caught on?
I thought NY was doing well with that?Definitely we need more local produce, and not just on the spring/summer.
My coop redid the roof space and could not manage to put in a pot of basil. My space on roof will have lettuce, tomatoes and more. It’s just so lame.
quite a good conversation brewing here about investing local and investing in the food industry. I think city farms a terrific idea and should catch on. I recently heard about this small company in Egypt which is helping low income families grow crops on their rooftops using hydroponic soil http://www.schaduf.com/ – a very interesting and could prove to be a disruptive movement in Egypt
Don’t forget composting!! I have composted in NYC for 5 years, putting all my eligible kitchen waste in a pot mixed with soil (no worms). I have very rich compost and can grow tomatoes unattended on my small roof space.The composting element plays such a big role in garbage reduction, and that mentality should be promoted, along with the idea that you can use your own kitchen waste to make your plant grow better.If only we could get McDonald’s and the food companies to compost their fruit and vegetable waste! Now that would be awesome!
I am big fan of composting. I have a friend in Toronto, Hala Choui, who is working hard on turning food waste into plant nutrients. Check out her website http://www.urbanfarmsorgani…
Cool site, thanks for sharing. I am a non worm composter so it takes longer. I have small space so not sure their system could work in my place, but it is giving me ideas!
@panterosa there’s also a business in Montreal that builds greenhouses on top of roofs,- a very successful story Lufa Farms @lufafarms Check out the TEDx video https://lufa.com/en/node/573
Agreed. But how is the average retail investor supposed to invest in food?
As consumers, by buying local produce, they can support these producers.
I’ll bet we all know someone involved in real food that could use some small investment. Friends and family level stuff.
@wmoug:disqus Nice meeting you in SF at the VatorTV event. I started Delicious Karma exactly for the reasons you state above. We need to help people realize how important it is to eat “real” foods made with clean ingredients that are not over processed. We are a social ecommerce startup that helps you find and buy these exceptional foods while supporting the ecosystem of small food producers. All the products we offer must conform to a strict list of ingredients and they are curated by our panel of food experts “Taste Gurus”. We are still in private beta, but here is an invite link for AVC’ers to check us out https://deliciouskarma.com/…Eat local and fresh if you can. We think we have some really cool ideas on how to reduce friction in this area as well that we hope to roll out after raising capital.
Thanks Jim. I’m a big fan of what you are doing with Delicious Karma. Yes, we need to celebrate and embrace “honest foods”. What you are doing will make these products available to a wider range of consumers. Once you’ve tasted the real thing, there is no going back.
Slow Investing, Remote Investing http://t.co/UGIrTSM
I’ll take the contrarian view of Ron’s piece. I like him and think he has a smart take on a lot of things, but the prevailing view at the New York Times seems to be that anything for-profit is evil. (This view seems to manifest itself in their own financials.)You know what is evil about Wall Street? It’s not the profits.It’s the lies. The opaqueness. The screwing over of individual investors with “disclosures” that make a mockery of the word (case study: 401K expenses).Government should use regulation to do two simple things: make companies tell the truth, and do what they said they would do.And the government’s utter and complete failure to do that is a case study for what happens when regulation is instead focused on “creating fair outcomes” and “helping the people who need help” and socially engineering the markets for a particular outcome (hello, housing bubble).
Great comment, the last paragraph in particular. Beware of the catastrophes and corruption (Fannie Mae, Countrywide, etc.) that can stem from well-intentioned government policies. And the larger the government subsidies involved, the larger the potential scale of both.
And as you know, this isn’t a partisan issue. It was President Bush’s well-intentioned “home ownership initiative” that led to the housing bubble. Social engineering in regulation doesn’t work.
Government promotion of home ownership went back before Bush, but he certainly stepped it to unprecedented (and disastrous) levels. A good summary post on that by Steve Sailer is here.
Certainly true. Clinton bears some responsibility too as Fannie and Freddie were regulated/incentivized into making very risky loans to people without adequate credit.
@daveinhackensack:disqusThe two of you make a great team on this topic. I learn by listening.No wonder I liked the banter of the two of you in your fist video interview a while back.
Thanks. Dave was a great guest. We will have him back on again soon, I’m sure.
I agree with all of your comment spot on. I would add one thing. Somewhere we lost control of the compensation systems at large publicly traded companies.Its heads you win tails I lose.I could write paragraphs on it but suffice to say, if a couple of us here started and built a business and had an outsider come and run it, we wouldn’t basically allow that person to get paid the lions share of the money when times were good and really not take a ding when times were bad.
I agree 100% with the road-to-hell-via-good-intentions hypothesis for housing, but don’t you think rent seeking by the financial industry is at least as bad?
There’s a connection between the two. And it’s not just the financial industry: it’s the education industry, the green tech industry, etc. The more money government throws behind its well-intentioned policies, the greater the incentives for rent seeking and corruption.
I think that’s covered in my comment. Restraining government to those two things would put rent seekers out of business.
It’s a case study for what happens when Wall St owns the gov’t. People have lost faith in Wall St because they see themselves as just cannon fodder for the insiders.
True. Make it useless for Wall Street (or anyone else) to own the government, and they won’t bother trying to buy it.
.This discussion has a large element of “socially responsible investing” something that interests me greatly. It is a growing phenomenon.Some “enlightened”(?) people are looking to know the character of their money AFTER they have invested it. They want to know the work that their money is doing and whether it is contributing to the greater good of things.In great measure, they are willing to receive part of their long term gain in the form of psychic currency — the social good works they perceive are being done by their money.In my current gig (which I will be more than a bit closed mouth about as I do not want to be a tout on Fred’s dime), I run a company whose mission is to assist worthy charities to harness charitable bingo as a mechanism to fund their noble causes.We are the largest such company in the US. I am trying to become the McDonald’s of charitable bingo or as my wife teases me, the King of Bingo. A fascinating business.It is particularly gratifying to assist veterans, fire departments, police fraternal organizations and other worthy causes.One of our charity partners is a sheriff’s benevolent organization. When a Deputy Sheriff was recently killed on a drug bust, that organization paid for his funeral and 3 months of his bills. They made that money in one of our bingo halls.That makes me feel good.Socially responsible investing is going to become a huge consideration..
+1 There is a lot of power in investing in what you know, and investing in what you care about. Your management of such investments is far more passionate and engaged.
The concept of “socially responsible investing” has been around for a long time and all of the big companies, even in my industry, are promoting themselves as socially responsible.I think a new term needs to be coined, something like “small picture” as opposed to “big picture.”I get a better long term return from taking an empty factory building and putting people in it producing something than I ever did from anything else I bought, and that includes having bought gold both times it has done its magic rise.Small picture investing; what I can see, touch, and be part of. Nothing is more socially responsible than putting yourself right in the middle of what it is you are investing in.
the King Of Bingo!!that is so greati am meeting your perfect daughter this week. i am looking forward to that.
.MPD and Mom are already in NYC and you have probably been able to detect the sudden surge in the local economy.MPD is quite psyched for the meeting. I have told her to “burn the boats” as she is not coming back to ATX for at least a year.It makes me very sad as I already miss her. But it will give me an excuse to come to NYC more often. And that is a good thing.K of B (JLM).
Love it, Fred.Mostly, our investments are in traditional locations, but my favorite investment is in my buddy Dave’s restaurant. I know the chance of a good return is slim, but I’m happy to help fuel a dream and a place that adds to the community. It’s not in my neighborhood, so I rarely visit, but a meal is on me next time you’re in Seattle!
there is something so great about eating at a restaurant you are a part owner of. i do it all the time as you have noticed on foursquare
Per Slow Money and investing in neighborhoods, very exciting.That said, locally, I see the tech community moving into one of SF’s poorer neighborhoods, the Tenderloin, (Twitter, Benchmark) and wonder aloud what will happen to existing businesses. Will higher rents and new (hip and well capitalized restaurants, etc..) push them out? How will we as a tech community take care of our local community holistically?In October, Mayor Lee and the the city will hold innovation month; tech events around the city… I hope we can galvanize folks around the idea that innovation includes more than just creating high salary jobs but rather providing opportunities for everyone.Perhaps we’ll see you out here in October. 🙂
@fredwilson:disqus have any of your portfolio companies like Lending Club experimented with micro loans? Either in the US, or abroad.
Micro loans are often $50-$100 and carry 30-45% interest rates. Neither legal or useful in the United States, imo.Lending Club is the closest thing we have to microloans, properly sized and priced for the US market. 🙂
In some countries, the average is more (like 60%). Some considerably less (sub 20%). The piece most people miss is that the cost to service those loans, even though they are small, is considerably more than in the western world. Instead of people driving to the local bank like in the US, microfinance organizations have to send loan officers to their clients in the field — some several hours from their offices. The interest payments need to cover their costs of operation, otherwise it’s not a sustainable model.My side passion is microfinance, which is why I asked. But I don’t want to take this thread off topic.
We share a passion. I’m involved in building some schools in our second homeland of Ethiopia, and we’re working to build sustainable business ventures to support their operations. So I’ve been reading up…but I think you’ve probably got me beat on knowledge in that area. 🙂
There are certainly many, many others who have me beat on microfinance knowledge. I’ve been kind of out of the loop the last year or so compared to how closely I used to follow it.Would love to learn more about your Ethiopia work at some point.
How it started: http://www.aaronklein.com/2… Launching the 2011-12 project: http://www.aaronklein.com/2… Getting 100% of the kids sponsored: http://www.aaronklein.com/2… We’re heading back in October to figure out the next phase.
Wow, awesome work Aaron. These are the types of stories that the mainstream media should spend more time covering instead of the endless coverage of politics, wars, the euro crisis, etc. But I guess the negative stories are what drive ratings and get people to pay attention for a few minutes. Meanwhile, I’ll just continue to not watch tv or read the mainstream media..
how do you define a micro loan?
A loan of less than $500 is generally what I consider to be a micro loan.
then not really
Fred Wilson’s Blog: A Gift That Keeps Giving http://goo.gl/fb/nQ1je
Diversifying away from publicly traded securities makes sense, if you have the resources to do so. Wealthy individuals and institutional investors (e.g., pension funds) have done so for years.Investors who need to keep the bulk of their money in traditional assets (publicly traded stocks, bonds, etc.), but are concerned about another market blow-up, should consider hedging. With the VIX (the Chicago Board Options Exchange market volatility index, or “fear index”) dropping to the mid-teens yesterday, it is relatively inexpensive to hedge now, as I noted in a tweet today:With the $VIX at $15.64 Friday, this was the cost of hedging a $500k position in $DIA against a >20% drop before 3/15. twitter.com/PortfolioArmor…— Portfolio Armor (@PortfolioArmor) August 4, 2012
Agreed. As much as they would like to, the average retail investor unfortunately can’t easily invest in their local restaurant, bar, retail store, etc. The resources required I’m guessing are at least what, $25k per investment? Until then, they are likely better off with diversifying.
Diversifying protects against an individual investment blowing up, but it doesn’t protect against the whole market blowing up. That’s why I mentioned hedging, as a way to protect against market risk.
Great point. Very important to do both.
I think hedging is a risk control that is often overlooked by entrepreneurs in smaller markets. There are as many different ways to hedge as there are people, depending on your perception (or appetite) for risk. It could be as simple as buying a duplex or as complex as investing in other startups.Hedges of these nature protect you in a number of ways (not just financially). If your deal tanked and you had invested (however small) in another deal you have a social tie and investment that is vested in helping you transition. If you do have to transition and are strapped for cash, owning real estate and having a place to fall into can be an incredible safety net that will allow you the opportunity of time to make the proper decision.
There will be a way for the average investor to do this soon, with regulatory hurdles lessening at the end of this year and technical hurdles overcome.Anyone with even a small amount of risk capital ($100) will be able to use CloudFunded.com to invest it in their local businesses.It should dramatically increase access to capital for small businesses, allowing them to raise seed rounds through friends, family and networks of trust. Local and sustainable businesses can also use CloudFunded to raise community capital based on their reputation and the attractiveness of their new venture.While such investments are still risky and should be diversified, this is balanced substantially by the human connection, the community support that comes from successfully fundraising this way (witness the star success of Gather Restaurant as a community capital case study), and in our case by the structure of the standard offering (using a loan with conversion terms for equity) which shares upside with investors and simultaneously makes repayment more likely.In this way, investors have the option to gamble a small amount of risk capital on their favorite local business, or to create a broader and more diverse portfolio of companies that directly align with their interests.
I would love a marketplace like this. Can’t wait to see what you are up to with @twitter-511112227:disqus. Just signed up for the invite list.
True hedging strategy for out-of-the-box investors: put a significant portion of your into local business that produce food that you want to eat. Ron mentioned the “emerging wild card” @SlowMoney.And no, you don’t to be wealthy. With Slow Money’s new service Credibles, you can prepay your food for ‘edible credits’. Credibles.org If you eat, you’re an investor.We may be truly fed up now, but we will continue to eat.
as the politicians say “i approve this message”if you want to understand hedging, give portfolio armor a try
Thanks for the endorsement, Fred.BTW, your mention of Covestor in this post reminded me of our recent correspondence about that. I was going to send you an email to follow up, but then I saw your post today about how you’re overwhelmed with emails now. So I thought I’d just mention it here as a follow up.
i blew that. i actually got the CEO of covestor to suggest some ideas but then i dropped it. send me an email. i do scan them all and i will see yours.
OK, thanks. Sending you an email now.
Mainly I invest in the main asset I can touch and see – my product and my vision. I am as local as it gets!PS In the future, I will invest in the planet more via species preservation and research, via my product, and my personal proceeds from product. I see the biosphere as very local.
I really, really, really disagree with this post. Putting a smallish portion of your portfolio in illiquid investments that usually require special expertise and a ton of work is fine for incredibly wealth people like Fred but it is horrid advice for most. The real problem here is stock picking…more horrible advice for virtually anyone. The rest of us should be in a diversified portfolio almost entirely dominated by indexes. After all, a 60/40 standard portfolio is above where it was in 2007. Posts like these are really just recency bias. A few year crushing bear market and a 10 year treading water is not all that uncommon. Stay the course and minimize fees. They are forever. Who remembers the zillion posts out there about how buy and hold was dead back in 2009/2010. Everyone jumped on the 10 year return of the market. Well look at the 10 year return going back from 2101 to 2002.
Last sentence was supposed to read : Well look at the 10 year return going back from 2012 to 2002.
I would consider this investment approach ultra-conservative and a bit fear based. I agree that the broader markets are showing signs to be concerned but if there is another severe meltdown, the fallout hits on everyone and that includes localized investments.The recent set of investment bank setbacks is to be expected; it’s part of the financial innovations process and these costs are associated with managing complexity. Going small could mean – choosing just one really good company stock; one that you have strong convictions for.
In the middle of this terrific article – http://www.theatlantic.com/… – is this terrific quote:Jim Rogers, who co-founded the legendary hedge fund Quantum with George Soros, told me …… “Throughout history, we’ve had long periods when the financial sectors were in charge,” he said, “but we’ve also had long periods when the people who have produced real goods were in charge—the farmers, the miners … All of you people who got M.B.A.s made mistakes, because the City of London and Wall Street are not going to be great places to be in the next two or three decades. It’s going to be the people who produce real goods.”sounds like you agree.
I don’t usually comment so late, but one point in the original article really stood out:”After all, there is no Morningstar for buildings that are up for sale.”There are lots of consolidation vehicles for just about every investment class – mutual fund and ETFs for equities and currencies and commodities (etc. etc.); VC and PE funds and funds of funds for private company investments, etc.But there is very little standardized research and financial ratings system for the non-traditional and somewhat illiquid assets out there. Is there an opportunity here?
Those with cash are buying chance-of-a-lifetime rental properties at undervalued prices across the country. Invest in rental property if you want to be able to actually influence your returns and manage your risks. Invest in the stock market if you want to play roulette with your money and *hope* that high frequency prop trading algorithms go long with your stock (until the second that models indicate to sell or go short).
So smart money is moving away from equities and other Wall Street instruments.Meanwhile the proponents of the “ownership society” are advocating for even stronger ties of ordinary people’s retirement savings into Wall Street controlled institutions and financial instruments.If I was prone for conspiracy theories, it would be quite easy to find one here.
I am guessing after 2008, most of us are past the “ownership society”! But, I still think that we need a level playing field on Wall Street, and it’s the best place for the little guy to build wealth for themselves over the long haul. Eugene Fama has proven it.
I think that the breakdown of the regulatory structure that has lead to predatory practices on Wall Street is detrimental to the fabric of American society. For accredited investors, and people with money, they can do the invest local approach. They can utilize their personal networks to advantage their investments (and should). Let’s think about the average lunch pail guy on the street. Wall Street might be the only way for them to put together a nice retirement nest egg. They can utilize the efficient market hypothesis, put money consistently into the market their entire life and have it grow so they have a nice chunk of change to last them the rest of their life at age 65-70 when they hang it up.That’s why I am so dismayed at the people that say capitalism is dead-it isn’t. I am also very upset with the regulators that bailed out the banks, and the continuous fleecing of the average investor by Wall Street.This is a problem that most people don’t understand-so we get blanket statements like “kill the greedy bankers” etc. But the fact is, having institutions like Wall Street operate like they currently function with complicit regulators begins to chip away at the foundations of the society we have built.It’s very important to look at the economy in terms of Joe, the guy who works, but isn’t going to innovate the next big company.
It’s a complete bastardization of what capitalism stands for. It’s nihilism.
I think “Crowdfunding” will likely accelerate investment into local small businesses as well as “things we can touch and/or impact and understand.” This is potentially very democratizing.
That’s exactly what this post made me think about.
I would recommend leaving large amounts of cash in Canadian banks. Just take a look at the international rankings for safety–Canada number one. I’m from NY, not Canadian.The problem is you can’t trust the large US money centered banks not to blow you out with the risk they take. Why risk the hassle?
Reading through this post was enlightening. Though, I am still new to investing, I believe that there is much to be said for investing within what you know. I will make a point to learn more about the ventures that were discussed here such as CrowdFunded and LendingClub. The personal touch of being able to invest into a business or product that I frequent/use on a regular basis is exciting. As a new entrant into investment, this removes a lot of fear of the unknown that comes with putting my savings into a business I am separated from due to lack of personal connections or distance.Thank you for the insight and I look forward to continue [email protected] – As a native San Diegan, though currently abroad, do you have any additional suggestions of localized methods for investing that were not mentioned in Fred’s post?
When I attended an event with GothamGal recently (she was the guest of honor), she commented that you two had nothing in the stock market. We talked about a lot of things that night, and I noted everything she said. But that particular comment still rings in my ears because she’s clearly smart as hell and does her homework.
She is one of a kind
I’ve been developing regional stock exchanges, like the Philadelphia Regional & Independent Stock Exchange (PRAISE), dedicated to regional green business. http://www.greenjobsphilly….
I agree with most of the comments here that all investments can be a tough decision. The trick that isn’t really described is that investments require some level of understanding of macro and micro level factors and affecting the investment. For your food investments – Can the chef deliver? Are there neighborhood factors that would influence success? Is eating out going to increase/decrease? Is there a bubble in trendy new restaurants? – Here in Seattle for example we have had three Hard Rock Cafe’s over the years – which one would have been the “right” one to invest in?The same holds true for Lending Club – I invested a test account and returned -27% due to 100% defaults on the loans. Of course I optimized and have an account returning ~5% there now.The point is though that it is just as easy to get wiped out when you are investing off Wall Street as it is when you are investing on Wall Street. Don’t get me wrong, I am a huge fan of investing out of the stock market and have found it pretty easy to find other folks in the area interested in investing in local Real Estate projects. I think this level of diversification should be in combination with investing in the stock market though.I talked a bit about this on my blog – http://joshmaher.net/2012/0… and outline some of the thoughts behind the macro factors of the investment. I didn’t outline as much of the micro factors (the tenants looking to expand the number of units they were in, the relatively cheap repairs that can be used to increase rents, etc.)
Pure cash. Effectively no yield.Startups should optimize for preservation of principal not yield
a marketplace where you could invest online with local businesses in your area would be pretty slick. execution would be tough, but the concept has legs i think.
LanX is an interesting model. Thanks for mentioning it. Would be interested in others you may know as well.