Jim Place, a salty investment adviser, is skeptical of the political economy run by Uncle. In the hour prior to our interview in his office in a Brainerd business complex, he is on his daily show on WGOW talk radio, Lets Talk Money.
He’s mystified at how the federal government accounts for savings:
“Because we’re not going to be in Afghanistan, or we’re not in Iraq, they’re going to count that money for the next 10 year savings — as if we signed up for that war and it was going to be the Hundred Years War you saw between France and England in 1382. How can they say, ‘If we had stayed in Iraq, we would have spent another F$2 trillion over the next 22 years; therefore, since we’re not going to be in Iraq, that counts toward savings’? *** The tax stuff is always immediate, and the spending stuff is always crap. There’s always some formidable reason why we don’t [get around to cutting spending].”
The lunacy of U.S.-controlled national economy leaves us to consider escape to a potentially saner ground where honest books are more likely to be kept and the abstraction level sharply reduced — that of local economy.
Mr. Place is a well-known local and national speaker on financial topics. He has been active in the financial world of Chattanooga since 1982. He has also spoken before many national associations and corporations, educating and motivating people with his straightforward and humorous style. He has taught courses on financial planning at the University of Tennessee at Chattanooga and Chatt State.
Let’s Talk Money is on WGOW FM at noon on weekdays, where Mr. Place is joined by his business partner and daughter, Jayme O’Donnell. He has hosted the show for 14 years.
You’ll have to forgive my sounding like such an amateur in this interview. I’m the slow man in the Joseph Conrad novel trying to catch hold of a spinning whirligig, and I’m doing my best. Our story picks up as I summarize what he is in the middle of saying.
Up front problems in investing locally
David Tulis Jim Place is explaining how difficult it would be to set up a local electronic stock exchange such as that proposed by Michael Shuman in his book [Local Dollars, Local Sense; How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity]. ‡ Can you tell us why that would be so difficult, Jim?
Jim Place Probably not! I would not consider myself an expert at forming some type of exchange. The concept is how do we collectively invest in the community, period? We are talking about investing in companies that are not necessarily publicly traded companies on their own. It’d be Joe Smith’s flower shop or Mary Jane’s shoe store. Well, if we think about the premise of a stock, in order for that company to be included, revenues from that company would have to be included. Where does the dividend come from? Where does the growth of the stock, how does the value of the entity collectively increase?
Who deserves cash?
So, let’s take two examples there. The woman running the shoe store is an incredible businesswoman. She needs capital to grow so she can own two more shoe stores. She is 60-hours a week crosses her t’s, dots her i’s, grows her business, she goes to the right kind of shoe marts, buys the right kind of stuff, gets on the front of — everything.
The guy running the flower shop is horrible. He’s buying cheap stuff, old stuff; he doesn’t have somebody doing a real good job there; is this entity invested in both? The entity that we would be talking about setting up.
There is a reason why you have angel capital, or venture capital or mezzanine financing where people can — you could take groups of investors — and unfortunately, those groups of investors are normally made up of high net worth people. But I would assume you would be saying, “Could you take somebody take two thousand or ten thousand or fifteen thousand and they could put it into this pool and they would participate in the overall economic growth of the community? I don’t know whether that is utopia, or whether it is some kind of commonsense approach that’s somehow could get done, or whether it’s behind the curtains of the Wizard of Oz, period.
Q What about the idea of a co-op? In one of the chapters I’m reading right now he discusses how co-ops are a way of getting around the federal monolith which requires everything to go through the lawyers, the accountants, the filings with the SEC and so on. Is it possible that either an exchange or a local capital venture group could be a co-op, which is a different operation?
Jim Place I don’t know. *** Credit has gotten restricted in this country post-fiscal crisis 2008. Could you build a pool in which you could invest in to make money available for people borrow money to grow businesses? Whereas the banking industry and the financial industry in general, credit constriction, access to credit, has been enormous on small business.They can’t get money to grow. So, whether you ended up doing it with an investment pool or whether you did it in a pool of money where people could put money into the plan and could get an interest rate and return — so let’s say we take 100,000 people in Chattanooga, and they put in F$10,000 apiece. So now we’ve got F$10 million in capital or whatever the number, and we could make loans available at competitive rates. They might be 1 or 2 or 3 percent more than what they could get at the bank, but there would be a flow of capital for Mary to grow the shoe store, kinda like the equivalent of a community SBA [Small Business Administration, one of Uncle’s children] type of plan.
Because the other way — if you were going to make an equity situation —
Q That’s what I’d rather talk about than lending.
Might a co-op work as a concept?
Jim Place It might be rather what you’d talk about, but I’m not sure you can get growth in any kind of equity is dependent on the underlying growth of the companies you have invested in. I mean, to simply say: how do you harness it — you don’t own the real estate — how do you participate in the increase in the value of the real estate. You could put a pool of money together and get individual investors out there, and you could own entities, or you could loan money to entities. But the city of Chattanooga, in and unto itself, is not a public exchange. It’s a municipality. It’s not designed in — it’s not a private city, where you can participate in its growth per se.
So, in essence, I don’t know what the answer to that is going to be. Could you have a co-op? A co-op may include, we see farm co-ops. We see them Iowa and in Nebraska, where people belong to the co-op, they set money aside in the co-op and that allows them to get better prices when they bring it to market, or if they have a horrible market for a year that allows them to hang on to have access to dollars and cents in bad years to level out the good and the bad. How you turn that into stone-cold investment structure I don’t know, David, I really don’t.
Q Well, I don’t either. That’s why I am asking you, since you are so familiar with the idea of capital and creating capital. Mr. Shuman says the real increase in the national equities market is 2.6 percent. He calculates that it’s not more than that, and he argues that the profitability of a local company, small, maybe under 50 people, could really be much greater than 2.6 percent. And what he’s exploring in his work as a lawyer and an entrepreneur is how to bring that about, given the structure of the economy which makes anybody, not myopic, but far-sighted; they only see far. When they invest — you never think of investing in your town or your county. You always think, ah! — New York, Wall Street, Valley Forge where Fidelity has its headquarters and so on.‡‡ No one thinks about, I would like to invest in somebody I know, say, like at church, who has a flower shop and he just can’t get ahead. He’s always behind. He can’t get ahead. He’s got tax debt. He needs to have a platform that will let him do what he knows best. Or maybe the bike shop. Help me think this through.
100% loss? Could happen here, too
Jim Place Are you willing you absorb — are the people involved in the investment willing to absorb 100 percent of the loss if it goes under?
Q Well, if you invested in Enron you accepted that.
Jim Place Well, first of all, the premise would have to be that you’re buying something that sells for X amount of shares in some way shape or form, whether it’s in a co-op or whether it’s an open exchange.
Jim Place — There’s potential for growth and there’s potential for loss in that type of environment, where you can have capital losses or you could have capital gains. If — to do that, you have to find a way to mark the whole entity to the market.
Q What do you mean “mark to the market?”
Jim Place At the end of the day, at four o’clock in the afternoon, we’re going to know what Microsoft is selling for. Let’s say Microsoft is closing today at F$32.42. If I have a client that wants to sell Microsoft the next morning, we can look at the price of it, we can sell it, we can liquidate. Is the investment going to be a liquid investment, OK? You have to be able to evaluate all aspects of that investment. You can just arbitrarily say, well, we think the Chattanooga community is now worth XYZ, because the investment doesn’t necessarily own the Chattanooga community. It may own the flower shop, it may own the shoe store, or it may have loaned money to them. But, otherwise we are left to arbitrarily say we think the future value of this community is XYZ, but somebody’s gotta —
Q But no one invests in a community, Jim. You always invest in a particular entity. You always invest in a flower shop, a flower shop, a small factory —
Jim Place Are you talking about loaning money? Or owning a percentage —
Q No, I’m not talking about about loaning money. I am talking about owning. How can people like me — I’m an investor — I might engage you for advice, I might engage you to help me with a portfolio — so, I’m an investor and this is a question I have. I want to invest locally, I want to avoid the national economy, how do I think in the direction of local investment? My options seem very limited.
Jim Place You say limited. But you can buy shares of a company that is already publicly traded in the community. You can buy shares Volkswagen, Miller Industries, UnumProvident. But if you were to create — it almost appears to me, whether it would be an open exchange or not. Because I’ve had a version of this conversation with a friend of mine who does massive developments around the country. And his investors are large insurance companies and banks worldwide.
So to be involved in a capital project of his, that entity would have to have a capital net worth of F$50 million or F$100 million. What he’s always talked to me about is he’d like to get 10 to 20 financial advisory firms, our size, firms that manage F$100 million to two to F$300 million of local money in maybe in Chattanooga, Huntsville, Nashville, Knoxville, wherever it would be. And when he goes and does a major project in Brooklyn, N.Y., that’s going to be a piece of rental property — they’re doing a rental property out there. They’re going to redo it and rent ‘em out — that thing is going to throw out income for a 15- to 20-year period of time.
Now his is a Tennessee-based entity. If he’s dealing with Prudential — Prudential can say at the end of two years, they can come back to them and say, because they’re the big investor, they can say, “We’re selling this building.” Whereas my clients might love to have a building of that nature *** that would throw off that kind of rental income for 10 to 15 years, that would give you a 7 percent rate of return.
Investees would need accurate books
Q Would they have to sell, too, if the big boys do?
Jim Place Yes they do, because the big boys control. All those different deals end up being limited partnerships. But we’re really saying is, “We really want to own a percentage of the flower shop. We want to own a percentage of the shoe store.” That means at some point, everyone of those entities has to have a viable set of books, the accounting procedures have to be done. We have to able to value the profitability of each individual store in some regulated standard.
We can’t let the guy running the shoe store and the person running the flower shop use a different level of accounting, or different procedures, because — assuming there were 100 different Chattanooga businesses in this co-op or in this exchange, every one of these would have to be valued on an ongoing business with the same set of standards. Now that — that incurs a level of cost to it. Because it wouldn’t be just the accounting of that one store.
It wouldn’t be a lot different than a mutual fund. If you think of a mutual fund having maybe 300 different stocks in it. Well, every day at the close of the market all 300 of those holdings have to be valued and they have to be marked to the market so they can tell you what the share price of the mutual fund is going to be the next morning. Now, in a co-op of this nature, I’m assuming we wouldn’t be marking to the market on a daily basis, which would certainly mean that this isn’t going to be as liquid a fund, from the standpoint of your ability to get in and out of it. You’re going to have almost a hedge kind of —
Q I would think so.
Jim Place — scenario to it where you could buy in and out of it on a some time of annual basis based on an annual evaluation.
Jim Place Quarterly. Then, obviously, every store would have to agree to sell a percentage of that store to this entity.
Q If I want to buy your shares of your shoe store, which maybe are F$100 a share right now (because I have an inheritance, let’s say, or I have sold IBM or Southern Co.) I buy from you for F$100, the fact that we come together on this electronic exchange there would be some sell offers and some bid offers, all that — is that not possible to do in a co-op?
Jim Place What would be the closest example I could think without even going the way through all the process, the shoe store can’t sell for $100 a share. It’s not getting evaluated that way. It would be Berkshire Hathaway. Berkshire Hathaway is hundreds of companies, some of which you know — Buffett may go out and buy share of Coca-Cola, but there are hundreds of companies in there they own — Mohawk, a variety of different things where they own the stores involved. Well, there isn’t a separate, there isn’t a publicly traded Mohawk anymore. Mohawk is just a part of Berkshire Hathaway.
Could you conceivably have percentage of these companies, all involved in one company?
If you thought of it, the shoe store is reporting, the flower store is reporting to equivalent of a — instead of a Berkshire Hathaway — a Chattanooga Enterprise. Well, somebody has to run Chattanooga Enterprise just like they run Berkshire Hathaway. Someone has to determine whether we want to own this particular flower store or that particular flower store. We don’t simply say, “You get to be a part of this simply because you are a flower store in Chattanooga, Tenn.” Otherwise, you’re going to end up with as many failures — somebody has to evaluate each entity that would be coming into the co-op, just as Berkshire Hathaway evaluates just what they want to own.
Q And when they come in — why? Because they need capital to increase their profitability.
My thought is the bike shop needs F$150,000, so he comes in hoping to get the money. So he is looked at by the advisers. He pays some fee for that, what the value of the business is. He gets the money. He starts profiting, or he makes a profit, he does more than just support his family. Then, in the out years — he’s not going to be able to pay a dividend for several years.
Jim Place Right.
Q His business doesn’t generate enough money for him to say, “Now I can start buying back, paying the investor.” Is anyone going to want to do that?
Jim Place Yeah, you got to ask me what my return as an investor going to be?
Jim Place Because I have to value that.
Q How do you do that?
Local investing fuels other aspects of local viability
Jim Place First of all, when someone says in a book that the market have averaged no more than 2.6 percent, I don’t know what planet he’s on. I’ve been in the S&P 500 for more than 30 years right now, and I can tell you my own rate of return inside my own personal portfolio is a whole lot more than 2.6 percent on an ongoing basis. So I find that number — I don’t know how he calculated, what he threw in or what he didn’t throw in that. But I always, as an investor, have to gauge what else I would have done with the money otherwise. The premise behind the book is there’s potentially more money by being a local investor involved in say — Chattanooga Enterprise, like Berkshire Hathaway like we were talking about, versus being somewhere else.
Plus I’m fueling my own economic viability, the worth of my own home, my own subdivision, because we have more vibrant general economy, maybe we have a better airport, maybe we have a better school district, maybe, but we have all those things which increase our net worth and makes Chattanooga more attractive than XYZ — Knoxville, Huntsville or whoever.
The evaluation process of that, the liquidity provisions connected with that, the advisers connect with it — because we know we’ve got X amount of expenses, because somebody has to do the evaluation of the bike shop. Because we have to determine — because we can’t — Berkshire Hathaway made a lot of money for a lot of shareholders for an extensive period of years because they figured out what bike shop to buy. The fact that there is a bike shop that needs F$150,00 to grow has nothing to do with whether that bike shop’s going to be economically viable in five to 10 years. We’re hoping that he can double or triple the size of that shop that does become incredibly valuable. And I’m also making the assumption here that that bike shop didn’t go another route for capital. Either it couldn’t approach the bank, it couldn’t find mezzanine financing, it couldn’t find venture capital financing. Or maybe we perceive this entity, Chattanooga Enterprise, or whatever it is as a type of angel capital.
Enron risk among Chattanooga oufits? Local dangers
But, if you start looking at venture capital firms, if you go back to the previous election and all the attacks on Bain Capital, there were different divisions of Bain Capital. There were divisions of Bain capital that were doing highly risky loans to entities that weren’t going to make it otherwise. And then there were other entities that just needed mezzanine financing to get from stage A to Stage B, but they were already profitable.
If we were doing 150 speculative bike shops and flower shops, we may be creating a very risky subprime kind of portfolio.
Q Why would you say that? Think about it, the people who —
Jim Place Because 80 percent of business that open fail within the first five years, David.
Q I understand, but there are many businesses that have been here for a long time, the families have been here a long time, like the Stewards, that is a privately owned company ****. People like that have a commitment to live here, their families are here, their land is here, their churches are here, their relations are here, their children go to school here, they come back from college here. The people who run these businesses have a stake in Chattanooga, in their hometown. And so —
Jim Place Are you assuming these people don’t have access to capital right now?
Q Partly. But I am also trying to think of the local person who wants to invest locally. How can he do it? I’m trying to figure out how that person can connect to the bike shop. What entity would be — maybe it could be your company — what entity could be kinda between the man who needs capital to create a profit — new profit, added profit — and me the investor who has F$10,000, F$100,000, F$200,000, some amount of money that I want to invest locally — because of my patriotism. The shop is going to prosper because he’s here, the man knows the business, he’s been here for years. He’s been fixing bikes since he was a teenager; he knows people, he knows bikers, he knows clubs, in this example. So, I would think I would like to invest in him personally.
Jim Place Then why wouldn’t we be opening a local venture capital firm?
Q Well, we have already about four, don’t we? We’ve got Lamp Post Group, we’ve got Renaissance Fund, we’ve got Four Bridges Capital which arranges debt and so on — DeMoss.
Jim Place A lot of those companies invest in things in a lot other areas. We’re talking about something exclusive to the greater Metropolitan Chattanooga North Georgia area.
Q To enable the local minded investor to invest locally for greater profits — and so you say, why, my question is, don’t you think people would value the local experience of this man, they can go to talk with him, they can go and have lunch with him. In my theory, the man says, “I am not a money man, I am a bike man. I just need to have F$150,000 or F$200,000 to run my shop better, to make a profit, to actually expand in the marketplace. How do I do that?”
How do I help him?
Do you fit into this category of investor, saver?
Jim Place Who do you envision the investor being?
Q Someone who’s been burned in the national marketplace, one I think that faces grave, grave problems of the kind you talk about on your show. We face a long-term catastrophe; this catastrophe will be probably going from 20 to 30 more years, unless, unless we get onto some hard money, but — and so these people are tired of negative returns or losses, and they are patriotic, they have a sense of local identity and they would like to invest locally. The people who read [Nooganomics.com] are people who are thinking in this direction. I don’t have the answer. That’s why I am asking you.
Jim Place. Umhum.
Q What’s the general direction of the prospect of this idea? It’s just an idea. [Michael Shuman is] theorizing about it. But he does mention co-ops around the country.
Jim Place What I have always seen in the general investment process is that it tends to be an expensive way to do business — the structure. Some very good friends of mine took a large pool of private money and transformed it into several mutual funds.
Q They created mutual funds?
Jim Place Yes, they created mutual funds based on a private investment concept. That cost several million dollars to do. Somebody’s got to front that process. And the fact that they’ve done it doesn’t necessarily mean that its going to be incredibly successful. Because that fund, as the author says here, has to be able to compete. This investment pool has to compete against every other potential investment in the world [into which] I could otherwise put my money.
Opportunity costs of investing in Chattanooga small shops
Q I would disagree with that. The local investor, he’s not purely driven by profit.
Jim Place Really? [laughter] I don’t know.
Q Well, maybe, if you have a geocentric idea —
Jim Place If I have XYZ investment that gives me 7 percent, would I be willing to take 5 percent to see Chattanooga flourish? Well, yeah! Would it be more fun to invest in something that you could see, that you could put your hands on. I mean, I think one of the advantages of Berkshire Hathaway — we’ll go back to that example. If I live in Omaha I can drive down the street and see Berkshire Hathaway. I know Warren is up there in the building, buying and selling, and there’s something that makes me, in the city of Omaha, excited about that process. And that’s kind of what you’re driving toward.
Part II of our fascinating interview with financial adviser Jim Place will open up the local economy idea further as the founder of Evergreen Advisors in Chattanooga speculates about how his industry could bring together small local investors, such as you and me, and small local businesses we discuss. Investing is not charity, and there is a danger in my mushy thinking about local economy to underestimate the power of the profit motive even among people with a lococentric perspective. Come back and hear Mr. Place give his verdict about whether Chattanooga is a city whose people and businesses are worth investing in. And, please, send out links to this interview to your friends, and recommend Nooganomics to them. — DJT
‡ As for Mr. Shuman’s book, Local Dollars, Local Sense, F$17.95, I am still in the middle of reading it, and will review it, in God’s providence, soon. To get a copy, order it from David Smotherman (423-413-8999) at Winder Binder Gallery & Bookstore on the Northshore. When you drop by to pick up the book, make sure you give yourself time to wander the stacks. Tell him I sent you.
‡‡ Correction. Vanguard Group has its P.O. box in Valley Forge. Fidelity is headquartered in Boston.