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“Do only the work you love and love the work you do.” With Jason Hartman & Michael Shuman

I think that one of the most important types of investment opportunities involve investing in ourselves — and in the people we love. Given how uncertain the market is, we should be investing in one another: to pull people out of debt, to pay your kid’s student loan, to help your nephew get a house, […]

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I think that one of the most important types of investment opportunities involve investing in ourselves — and in the people we love. Given how uncertain the market is, we should be investing in one another: to pull people out of debt, to pay your kid’s student loan, to help your nephew get a house, or to help a neighbor install solar-electric cells on his roof. All of these investments pay better than Wall Street has delivered historically, and now, with the market so wobbly, these investments are (relatively speaking) home runs!

As a part of my series about “Investing During the Pandemic”, I had the pleasure of interviewing Michael Shuman. Shuman is an attorney, economist, entrepreneur, and author of the just-published book, Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAs and Solo 401(k)s. This is the fifth book Shuman has written on local economies, and many consider him the architect of legalized investment crowdfunding.

Thank you for doing this with us! Before we dig in, our readers would like to learn a bit more about you. Can you tell us the “backstory” about what brought you to the finance industry?

When I was at Stanford Law School, in the early 1980s, I should have studied securities law but never did. It was 25 years later, while working on my first community economics book called Going Local, that I realized how the capital markets have been shaped by the law to favor global, publicly traded companies.

Here’s a stunning fact: Locally owned businesses account for about 60%-80% of the U.S. economy (depending on how you define “local”), have profit rates exceeding those of Fortune 500 companies, and in normal, non-pandemic times are highly profitable — and yet they receive almost none of our long-term investment. Americans have about $56 trillion in stocks, bonds, mutual funds, pension funds, and insurance funds — and they are 99% invested in nonlocal businesses. To me, this represents a huge capital market failure, and I’ve spent the last two decades trying to fix it. Every American community would benefit enormously if more if its residents invested locally.

Your book brings an interesting new perspective to investing, suggesting that investing in yourself is as important as investing in businesses or other securities. How did you come around to that view?

Let me share two stories. One of my favorite Gary Larson cartoons is of a crisis clinic on fire, floating down a river, about to plunge over a waterfall. That’s what my life was like in 2008. That was the year I had decided to divorce, start paying child support for two young children, move into a new house, and take a new job. Then the financial crisis hit. My new job vanished, and opportunities for consulting work dried up.

The one financial bright spot was that my spouse had accumulated a significant pension, and we agreed, as part of our divorce settlement, that half would be transferred to me. Normally, you cannot touch tax-deferred funds like these until you retire, and if you do, you’ll be sacked by the Internal Revenue Service (IRS) with a 10% penalty. But when a court orders the redistribution of marital assets, you can use them immediately without penalty. Ordinary taxes are taken out of the money you withdraw, and then the funds are yours. I decided to use the proceeds to pay off all my debts: credit cards, my automobile, and various personal loans. I thought it would be smart to begin my new life with a clean financial slate.

About a year later, as I was doing my taxes, I learned something the divorce attorneys never warned me about. The transfer of funds pushed me into a substantially higher income bracket, and the much-dreaded alternative minimum tax kicked in. Suddenly, I owed Uncle Sam about $80,000. I paid some of this debt with zero-balance credit cards, and the rest went into an IRS payment plan. By the time I finished paying several years of 20+% interest and penalties, my debt situation was far worse than it was before I divorced!

In the years since, I learned about an option that could have saved me this grief. A Solo 401(k) is a retirement savings account designed for self-employed individuals, which is what I was in 2009. I could have transferred my former wife’s pension into that account and given myself a five-year, $50,000 loan to pay off my debts. There would never have been an awful tax bill from the IRS.

In fact, no taxes would have been taken out of the transfer at all, because I would have rolled it over into another tax-deferred account. Instead of paying 20+% interest to credit card companies for years, I could have paid my Solo 401(k) back, at 5% interest over five years, and the tens of thousands of dollars of interest I paid to Visa and Mastercard would have instead gone straight into my retirement account. Rather than being broke with massive debts in front of me, I would have paid everything off in five years and had a healthy nest egg for retirement. Smart local investing in myself would have paid huge dividends.

The second story is how I wound up paying that debt. I convinced a half-dozen dear friends to lend me money so I could pay the credit cards off. I agreed to pay them back over five years at 5% (though one friend refused to accept interest payments). This offered them a rate of return much better than bank CDs and commensurate with Wall Street, while enabling me to get back on my feet financially. One of these friends made the loan to me through his pension savings, and I helped him set up a Self-Directed IRA to do this. I’ve since paid these people back and reckon I’ve saved $80,000 in credit card interest payments. Again, all thanks to local investing.

Are you working on any exciting new projects now? How do you think they will help people?

My mission is to get as many people as possible to move their retirement savings from Wall Street to Main Street. That’s why I wrote my book. And that’s why I helped set up, along with the Sustainable Economies Law Center and LIFT Economy, a nonprofit called the Next Egg (www.thenextegg.org). We are now helping hundreds of people use Self-Directed IRAs and Solo 401(k)s to move their money into safer, better-paying local investments.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful toward who helped get you to where you are? Can you share a story about that?

The person who really inspired my book is a retirement investment adviser named Wes Dye. He attended a workshop I gave in Fort Collins, Colorado, maybe 15 years ago. I said something like, “It’s too bad it’s impossible to invest tax-deferred pension funds locally,” and he immediately corrected me. He then began educating me about the Self-Directed IRA and Solo 401(k). In my book’s acknowledgments, I thank Wes for “a decade of cheerful agitation” to write it.

Let’s shift a bit to what is happening today in the broader world. Many people have become anxious from the dramatic jolts of the news cycle. The fears related to the coronavirus pandemic have understandably heightened a sense of uncertainty and loneliness. From your experience, what are a few ideas that we can use to effectively offer support to our families and loved ones who are feeling anxious? Can you explain?

As my own stories underscore, I think that one of the most important types of investment opportunities involve investing in ourselves — and in the people we love. Given how uncertain the market is, we should be investing in one another: to pull people out of debt, to pay your kid’s student loan, to help your nephew get a house, or to help a neighbor install solar-electric cells on his roof. All of these investments pay better than Wall Street has delivered historically, and now, with the market so wobbly, these investments are (relatively speaking) home runs!

Ok. Thanks for all that. Let’s now jump to the main core of our interview. As you know, the stock market and the economy in general have become extremely volatile and uncertain. Many people “dollar cost average” and put aside a monthly sum into a long-term savings plan for retirement, college, or a home purchase. If a loved one or a client came to you and said, “I have been saving and investing $500 every month in an S&P 500 index fund. Over the next few months until the dust settles, should I be doing something else with my money?”, what would you say to them?

I would say: Set up a Self-Directed IRA and start investing locally. Or better still, if you have any self-employment income, set up a Solo 401(k), which has the advantages of allowing you to tax-shelter more each year and administer the whole thing from your checkbook. With the Solo 401(k), you also can give yourself a low-interest loan and make all the local investments I mentioned above. With a Self-Directed IRA, you can’t invest in your kids or your parents, though you can invest in your siblings, their kids, your aunts and uncles, friends, and neighbors.

I would also look for local businesses you love that might be looking for bridge loans to get moving again, post-COVID. Or local real estate projects. Or local investment funds. Or municipal bonds. You get the idea.

Eventually, the economy will recover and rebound. Certain sectors, like travel and hospitality, might be hurting for a while. But other sectors, like technology and healthcare, might do very well. If someone wanted to prepare today to take advantage of the future recovery, what would you suggest they do?

Businesses come and go, but you’ll be here for the rest of your life. That’s why you should start with investing in yourself and the people you love. Real estate is also pretty durable, and it’s interesting that even before COVID arrived, investment crowdfunding was shifting from business investment to real estate investment.

But bigger picture, the most remarkable economic trend during my lifetime has been the shift in household spending from goods to services. Services account for about 70% of the economy right now, and many service occupations, like finance, health care, and information services, pay better than manufacturing. These services are inherently competitive at the local level — customers want service providers they know and trust — and I believe they will be good bets for local investment in the future.

Are there sectors that provide exciting and lucrative investment opportunities today, specifically because of the volatility and uncertainty?

Honestly, I would say food. People will always need food. For the first time in a hundred years, farms and farmers are expanding, and they are increasingly focused not on growing commodities, but on producing fresh produce, meats, eggs, and spices for local markets. All around the world, we are seeing the expansion of all-year greenhouse growing, with hydroponics and aquaponics. The growth of local food systems across the country is one of the unsung heroes of the COVID pandemic. We have learned about the value of local self-reliance in food, and more and more communities will move in this direction. Ditto for local renewable energy, local finance, and small-batch local manufacturing.

Are there alternative investments that you think more people should look more deeply at?

If you’re not debt-free and don’t own your own home free and clear, investors absolutely should focus on these self-investments first. They pay significantly better than Wall Street and enable you to become, effectively, your own hedge-fund manager.

If you’re in good shape, I would look at local businesses near you that are raising capital. A good resource is called Investibule (www.investibule.co), which enables you to plug in where you live and find good local investment opportunities. If a local business listed there draws your fancy, do a little due diligence — meet the CEO, talk with the workers, try out the goods and services — and if you’re still impressed, make the investment.

If a person in their thirties and forties came to you today and said that they have $10,000 they want to put away today for a long-term investment, what would you advise them to do with it?

Again, it depends on his or her financial situation. Start with yourself and the people you love. Once you (and they) are financially secure, focus on businesses around you that you love and trust.

My partner and I recently invested $1,000 in our favorite restaurant in Washington, D.C., called Busboys and Poets. I said to the proprietor, “Hey, I’m worried about your cash flow and your losing employees. This is what we estimate we spend each year eating at your place. I hope this convinces your other fans to do the same.” He was so pleased he gave us $1,200 in gift cards. That’s a 20% rate of return on our investment — with the long-term payout being the survival of our favorite restaurant.

Ok, thank you! Here is a more general finance question. You are a “finance insider.” If you had to advise your adult child about 5 nonintuitive essentials for smart investing, what would you say? Can you please give a story or an example for each?

(1) Avoid debt like the plague. (My earlier story explains it all!)

(2) Always think of yourself as an entrepreneur. (My decision in law school to not become a law-firm drone and fend for myself as a self-employed do-gooder was the most empowering decision I ever made. I’m certainly the lowest-paid member of my Stanford Law School class — yet one of the most satisfied with my career.

(3) Do only the work you love and love the work you do. (I cannot imagine myself ever retiring. I’m having too much fun doing writing, teaching, and advocacy on behalf of local economies and local businesses.)

(4) Invest in the people, places, and projects you know and love. (Again, my professional life is a testament to the value of doing so. You can then enjoy a private return and a social return: more jobs, a stronger tax base, better schools, etc.)

(5) Reflect on everything your money is doing. (Is the company you’re supporting reducing the risk of climate catastrophe? Is it paying its workers well? Reducing racism and inequality? As I teach my students at Bard Business School, business is the opportunity to not just profit but to create the world we want.)

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

Here’s the final quote in my book from Sir Francis Bacon, and it more or less sums up my life’s choices: “It would be an unsound fancy and self-contradictory to expect that things which have never yet been done can be done except by means which have never yet been tried.”

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. 🙂

It’s a movement that I already helped start and am continuing to push forward: Move your money from Wall Street to Main Street and help your community prosper.

Thank you for the interview. We wish you only continued success!

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