You live in Chicago, you shop in Chicago, you entertain yourself in Chicago. Why not invest your money in Chicago?
“I feel that just the fact that we are here makes it a good idea to invest in local companies,” said Christopher Hartman, a Chicago resident who is vice president of the Wild Onion Investment Club.
Hartman, who owns stock in McDonald’s and is trying to convince his fellow club members to buy stock in other Chicago companies, is the type of investor who believes locality should be among the key criteria for choosing investments. These people don’t eschew normal investment guidelines such as past performance, but when all else is equal, they believe buying a local company gives them an edge. What are the advantages? Beyond the mere sentiment of owning a piece of the local scene, investing in local businesses may allow you to more easily attend annual meetings, visit the company headquarters, meet employees and other investors, and keep better tabs on the company through local news media.
“For the small investor who can’t hop on a plane to interview management as mutual fund managers do, it is very advantageous to be able to assess the `fire in the belly’ of locally known entrepreneurs, their past history, reputation, etc.,” said Barbara Lapidus, owner of investmentclubdoctor.com, an investment consulting Web site based in Huntsville, Ala. “These intangibles can be a great edge in the decision to invest.”
Living in a large metropolitan area like Chicago allows you to choose among a great number of blue-chip investment opportunities, so you generally don’t need to sacrifice quality and diversity to build a local portfolio.
“Total diversification is the first priority, but if I had the chance to pick a local company over one on the West or East Coast, I’d rather buy here,” said Lester Blair, chief investment officer of Blair Capital Mangement Corp. in Chicago. “We love to invest in local companies.”
It’s not hard to make the argument that investing in Chicago-area companies makes good financial sense, whether you live here or not. Bradley Drake, a portfolio manager with Rothschild Securities in Chicago, said his firm examined the historical performance of Illinois public companies and found that they have outperformed the Dow and the S&P 500 over the past 25 years.
Why? Drake theorized that Illinois companies do well because the state is the hub of the industrial Midwest, is a central transportation center and has outstanding academic institutions.
“The Midwest appears able to ride out business cycles better than coastal communities,” Drake said. “And we’re not dependent on any one particular commodity or industry.”
(For a list of Chicago-area public companies and their performance, visit www.chicago.tribune.com/business/businessnews/ and click through the Chicago Top 50 link at the left side of the window.)
Let’s examine the advantages of buying Chicago-area companies.
First, there is a certain “comfort level” to owning local stocks. You shop at Sears, your neighbor works there, and you see the Sears Tower every time you drive downtown. So what if Sears doesn’t own its namesake tower anymore and the stock hasn’t performed well recently? You’re comfortable owning Sears because it’s part of Chicago.
The rest of the advantages are more tangible.
For one, you may be able to attend an annual meeting or two if you own local stock.
“Attending annual meetings is sometimes helpful in terms of seeing management in action,” said David Coolidge, CEO of William Blair & Co., a Chicago-based brokerage. Coolidge, who said he generally doesn’t advise a local bias when making investment decisions, pointed out that annual meetings don’t always reveal much information of value to investors. “Some companies are much more forthcoming than others.”
Even if you don’t get much out of the formal presentation, you can still mingle with other shareholders and executives. This can give you a sense of the mood of the company, if not industry secrets.
Being able to visit the headquarters is another advantage of owning local stock. Don’t expect a meeting with the CEO of Motorola (it won’t happen), but visiting the grounds can give you a sense, albeit superficial, of the company’s strength. Is the grass a foot high? No receptionist at the counter? Employees grumbling in the elevator? Don’t buy the stock.
Speaking of employees, your chance of knowing what’s really going on inside a company is much greater if you own local stock because you may get to know employees personally.
“If you are lucky enough to know top executives in companies and have the opportunity to talk to them and get to know them, that can be a big confidence builder in making an investment in their company,” Coolidge said.
This is particularly pertinent if you plan to invest in smaller companies, where the executives are local folks.
Tom Adair, a personal financial planner in Chicago, has clients who have invested in private stock issues when they knew the executives running the company. “I suppose they made those investments because they know those people, and trust them and feel confident in their ability,” Adair said. “If you have a personal connection, you may want to get involved in something like that.”
Finally, owning local companies means you can follow them in the local media. Sure, the Internet can help you keep tabs on companies worldwide, but the daily business sections of local newspapers and magazines can provide timely information that out-of-towners are likely to miss.
These advantages are probably never going to put stock analysts out of business, but they do tend to affect many invididual stock portfolios. Heber Farnsworth, an assistant professor at the Olin School of Business at Washington University in St. Louis, says folks who study such things refer to local buying as the “home bias puzzle.”
“If you look at the stock holdings of invididuals, people tend to invest more in their home area than the diversification model would suggest,” Farnsworth said. “That means people are giving up diversification for we don’t know what.”
Some experts might not know what, but investors do.
“I think the biggest thing for me is that I was born and raised in Chicago and it’s always good to give back to the community,” said Hartman, who said he appreciates the fact that McDonald’s contributes to local charities.
Speaking of giving back, many people make local investments out of genuine philanthropic feelings. They don’t just invest in blue chips like McDonald’s that donate a small portion of their profit to charities, they invest in organizations that make local assistance a priority.
Whether you invest out of sheer philanthropy or the potential investment advantages, or because you simply want a chunk of Chicago, investing locally can help you meet your goals.
