For our family, Whole Foods (WFM) is a nice treat every once in a while. We like the Tuesday night pizza special, buying the prepared foods and dining in, and their fresh breads and produce. I love the seafood selection too, and all the interesting products that are not sold at most of the big name grocers. Oh, and that freshly crushed honey-roasted peanut butter! Mrs. RBD very much enjoys the greater selection of organic foods for our kids, the hormone-free meat and dairy products, and that smelly aisle of unproven vitamin supplements, colon cleaners and neti pots. We do not feel guilty spending a little extra money at Whole Foods on occasion because we appreciate the quality and selection of their products.
In recent years, Whole Foods has started to display locally sourced labels with some of their fruits and vegetable items, saying things like These cantaloupes were grown at Fred’s Farm in East BF, Virginia, just 89 miles from this store. This sign is supposed to make you feel good because you are supporting area farmers and the foods have a smaller carbon footprint than buying fruit shipped in from Florida or Mexico. I like to eat cantaloupes year round, and I am grateful that modern agriculture and logistics allows me to eat them more frequently than only when they are in season. Carbon footprint does not usually come into mind when I shop for groceries, but when I buy a cantaloupe directly from Fred at my local farmer’s market or see Fred’s sign at Whole Foods, I get that warm fuzzy feeling that I am making a better consumption decision (if the price is reasonable).
But does it make sense to buy locally when it comes to your investments?
Pros of Buying Local Stocks
Buy what you know is an old investment adage. Naturally, investors will understand the businesses in their local market and will be more likely to read about them in the newspaper and local business journals. Since prudent investing already takes up a lot of time, it helps to learn about business news passively through reading newspaper headlines, watching the local news, and listening to the radio during your commute. You are likely to hear about how companies are doing in the area, especially if they are hiring more, laying off workers, or making/losing lots of money. I find that local radio programming usually discusses the quarterly earnings of the area’s largest employers, and I get this news without spending the time looking for it on Yahoo Finance.
Another advantage of owning a nearby public company is that you may know someone who works for them who has a good grasp on how the business is doing. Let’s say a month earlier a company publicly announced a large purchase order and the stock did not react much. Your friend might tell you they are ramping up hiring and production to meet the greater demand. The public announcement tells the world about the order, but the local perspective can put the sale into context, translating the news to help understand future profits. Of course if your friend told you about the large purchase order before it was announced publicly, AND you made an investment based on that information, that would be illegal and the SEC could soon be on your tail.
Local macro trends may also help your ability to gain an advantage over Wall Street when investing in hometown stocks. My local newspaper frequently reports on the growing population and urban sprawl in the coming 10-30 years. This trend bodes well for homebuilders, engineering firms, real estate companies, and utilities. For example, my watch list includes two of the local utility companies, Dominion Resources (D) and WGL Holdings (WGL), both companies with a strong history of paying and increasing dividends. The macro trend of an expanding urban footprint tells me that the demand for electricity and gas and will grow steadily over time. But then just this week, the region suffered from an ice storm with numerous power outages (including my house). This is not good in the short-term for Dominion and it could negatively impact quarterly earnings. On the other hand, power outages trigger natural gas powered home generators to turn on, which could be a positive for WGL. I can take this knowledge I learned from merely listening to the radio and my own loss of power to supplement fundamental financial analysis of this stock, and then compare that to peers operating around the nation. This particular storm will not have a major impact on either company this quarter, but a bigger storm could have.
Cons of buying locally
The biggest risk with investing locally is your own emotions. It would be a mistake to say, I am going to buy stock in this company because it is local and I know it well, and it turns out that the fundamentals of the company are unsound. In this case the emotions and familiarity wrongly outweigh the fundamental analysis of the company. This scenario would impact you if you buy the stock and the company runs into difficulty, but could be a double whammy because the problems could be so broad that they negatively impact your local economy. For example, someone in Rochester, NY, may have bought shares of Eastman Kodak (KODK) earlier last decade because they knew the company well, thinking that film was still the future of photography instead of digital. The demise of Kodak not only hurt their investment portfolio, but also as one of the area’s largest employers, seriously impacted the local economy and possibly the investor’s own job prospects. The same thing applies for stock in the company you work for. Common personal finance advice tells us not to overweight a portfolio into one holding, including your employer’s stock. As an employee, you are already at financial risk if the company begins to falter aside from your stock. Another problem with buying stock in local companies is that the area you live in may not have a good selection of them.
Your Financial Advisors
You can apply buying local stocks to utilizing your local financial advisor and mutual fund companies. Let’s say you live in Boston. Are you more likely to use T. Rowe Price (TROW) as your preferred mutual fund company over Fidelity? Probably not. Baltimoreans would act the opposite. Again it feels good to use your local company or advisor and you can justify generally that people in the city that you live in share similar values and economic interests as you do, and the fees you pay would go back into your economy. Conversely, if you live in a small town in middle-America, you may have a different view of both Fidelity and T Rowe Price and would likely steer toward another company.
More broadly, US citizens are more likely to invest most of their money in US companies. It’s easier than investing abroad, and the tax consequences are simpler to understand, not to mention it is patriotic to invest in the good old US of A, much like Warren Buffet declared when he purchased Burlington Northern railroad.
This applies to other countries. If you look at the Dividend Ninja, he invests in a number of Canadian stocks and ETFs because that is where he is based and what he knows best. US based Aussie expat The Financial Integrator holds many Australian stocks because of his familiarity with that country and its markets.
Before the buyout, I owned shares in Heinz because I knew the company well from growing up in Pennsylvania. Today my portfolio is not particularly skewed to my geographic location, but the two utilities I mentioned earlier are on my radar. At a better price, I will also consider some government defense contractor companies that operate in my vicinity. I am familiar with them because of the local economy.
Is This a Prudent Strategy?
Is buying local stocks a sure fire way to lock in good returns? Of course not. But you can use your knowledge of the local economy as an advantage when choosing stocks to buy. You can also feel good about patronizing your local companies, financial advisors, or mutual fund companies instead of those based in another urban area. In an increasingly interconnected world, the buy local trend you see at your supermarket is expanding because of a desire for people to maintain their sense of community. For food, shorter transportation distances make good business sense as well as environmental sense, and buying local keeps your dollars in the local economy which is good for the overall prosperity of the community you live in. For stocks, the benefits are very similar. BUT, you cannot let your emotional sense of community misguide your investment analysis. Proper due diligence must weigh more heavily on a stock purchase than your local knowledge or comfort with a company.
Do you own any stocks that are local to your home? Was the locality a primary reason you bought that stock? How does buying local impact your investing?
Disclosure: The author does not hold any long or short positions in any of the companies mentioned above.