--- Page 1 ---

ALL ABOUT...
INVESTMENT

BY

HENRY LOWENFELD

POPULAR EDITION, WITH
INDEX AND SIDE-NOTES

Price Three Shillings and Sixpence

Published by
THE FINANCIAL REVIEW OF REVIEWS,
2, WATERLOO PLACE, LONDON, S.W.

Copyright] {All rights reserved.

pee A
pe

--- Page 2 ---

i
Ry
Q.-
E,
ad.
cs
Ce
A |
* -u 2
a
POE €

DEDICATION

RITISH Banks have conclusively proved that
the general public is capable of being financially
educated. Formerly people used to hoard | their
spare cash, now they know that tt ts wasteful to do so.
Thus, by means of the education of the public, the
finest banking system which has ever existed has
been built up by the Managers of British Banks.

Bankera do not usually take charge of @ customer's
permanent investments in the same way as they take
care of his actual cash, otherwise they would have
taught the Publio to invest in a similarly effictent
manner to that in which they have taught it to deal
with money ttself.

Bank Managers are not only wn constant com
munication with those who own spare cash, but, in
addition, each customer’s account shows them where
financial knowledge would be useful.

Thie book ta written with the object of explaining
sound Investment Principles ; the Author therefore
most respectfully dedicates it to the Managers of
British Banks, in the hope that it may prove of use
to them in diseeminating investment knowledge in
a concise form.

4, Hype Park TERRACE,
Lonpox, January 1909.

--- Page 3 ---

CONTENTS

CHAPTER I

CARELESS INVESTMENT AND ITs CONSEQUENCES

CHAPTER II
INDISPENSABLE REQUISITE TOWARDS SUCCESSFUL
INVESTMENT . . : . . .
CHAPTER IIt
On CapiTaL : . . . .
CHAPTER IV
On Incoms . . . . > . .
CHAPTER V

THe RELATION oF CariraL to IncomzE oo, .

CHAPTER VI

On Stock ExcHaNncE SECURITIES. . .
CHAPTER VII

On New Issues . . . . ’ .

Paar

1

21

59

96

116

168

--- Page 4 ---

viii CONTENTS

CHAPTER VIII

Tus MANAGEMENT of ComPANIES
Meetings, Balance Sheets, and Reports

CHAPTER IX

Tae Wor.ip’s Stock Markets,

CHAPTER X

On SpecuLatTion . . .

CHAPTER XI

THe READER’S owN INVESTMENTS

INDEX

PAGE

198

222

250

264

283

wpe

“tetera rman srt ee mee

Sane aries att

[ES GN ER I FE NII Ty :

ALL ABOUT INVESTMENT

CHAPTER I
CARELESS INVESTMENT AND ITS CONSEQUENCES

T is success that colours all in life. A taste
of success is the brain’s best tonic, and to
obtain so valuable a stimulus is of incalculable
worth. The most successful of men are dispro-
portionately downcast under the gloom of some
partial failure, and, temporarily, their creative
power is thereby impaired.

In order to achieve even a modicum of
success, it is essential that man should cultivate
constant perseverance. Nothing kills persever-
ance so quickly as failure, therefore even small
failures must be sedulously guarded against if
the mental powers are to be exerted to their
full advantage.

To the idealist, worldly possessions are of
but small account, dear though they are to
the materialist. Yet even the idealist must
live; and to live means to spend money. No

1

--- Page 5 ---

Money is
accumulated
Energy.

Work is
measured
by Money.

2 CONSEQUENCES OF CARELESSNESS

one is independent of the assistance of others,
and this outside assistance must be paid for.
Therefore we are all compelled to provide our-
selves with ample means to remunerate our
fellow-men, who minister to our requirements.
In fact, services received must be compensated
by services rendered in return.

In a state of civilisation, service is mostly
paid for with money, and money thus becomes
a concentrated form in which latent energy is
accumulated, ready to be converted into active
energy at any moment.

No matter how lofty or how artistic the
creative aim may be, its pecuniary com-
pensation can only take the form of money.
A great thinker writes a book, an imaginative
artist paints an epoch-making picture, a
gifted musician composes an immortal opera
—all these creations are bought and paid
for like the output of the most prosaic manu-
facturer. In truth, the most wondrous pro-
duction of the brain and the most insignificant
results of manual labour receive material com-
pensation similar in quality and differing only
in quantity. So that the tangible return for
human effort is measured by money, and money
is latent energy, which in its turn commands
the exertion of human effort.

Any one who expends his money without

wg nreemennes

CONSEQUENCES OF CARELESSNESS 3

receiving an adequate return for his outlay, is
guilty of causing useless exertion. People who |
possess capital should regard it as the stored-
up result of their own or of others’ efforts.
This being the true aspect of accumulated
wealth, the capitalist is in duty bound to
husband it, not only in his own interest, but
also in the interest of his fellow-men.

A reserve fund of strength is an assurance
that a man will accomplish his life’s ambition.
No one knows when he will be called upon to
put forth an extraordinary effort. The larger a
man’s store of reserve energy, the more easily
will he surmount a sudden emergency. It is
noteworthy to observe how frequently the actual
creator of some gigantic human achievement is
an undersized and physically weak being. Some
of the greatest creative triumphs have been the
work of physical weaklings, whose force of char-

‘acter has been assisted by their ability to store

up the energy of others, and put it to timely
use. A rich man who advantageously employs
his wealth commands respect and brings work,
happiness, and contentment to his fellow-
creatures. On the other hand, the poor man
who is never able to make both ends meet is

in a constant dilemma. Comparative wealth wealth within

is within ‘the reach even of people with the
smallest of incomes if they will learn to regard

--- Page 6 ---

ponsibility
wning
ital.

tal
valent
ersonal

4 CONSEQUENCES OF CARELESSNESS

money as stored-up energy, and to treat it with
proper care.

It is a foolish but popular fashion to regard
the man who dissipates inherited wealth as
displaying a generous disposition; whereas any
one should be an object of general contempt
who, without personal effort or exertion, obtains
wealth, and has not the good sense to husband
his possessions for the advantage of himself
and others. Whether accumulated capital be
the result of personal effort or of the efforts
of others, it carries with it a responsibility
which under no cizcumstances should be lightly
treated.

That money is, perhaps unconsciously, re- |

garded in everyday life as accumulated effort,
is easily proved. Two men jointly enter into
a commercial undertaking. The contribution of
one of them, to the partnership, is his personal
efforts, whilst the other merely contributes his
capital; the ultimate profit they divide be-
tween them, thereby confirming the fact that
Capital, or accumulated wealth, is commonly
accepted as the equivalent for personal effort.
The use of Capital is paid for in interest; the
use of labour is paid for in wages—a distinction
without a difference. ~

If the ownership of money is to become
profitable without active effort on the part

a ee eet mega nett Oe IR EMRE ip! ore ems te cota cane

CONSEQUENCES OF CARELESSNESS 5

of its owner, it must be intrusted to others Profitable

who will employ it. It is only when the means ¢
of rendering capital productive has been wisely
chosen, that the original possession [Capital]
remains unimpaired and that the result which
its employment produces [Income] becomes
stable and regular.

Thus the owner of accumulated effort—that
is the capitalist—although he does not propose
actually to work himself, is nevertheless bound
to exert himself to the extent of seeing that his
capital is properly employed, and he is thus
performing a useful occupation. This act of
putting money to profitable work is commonly

wnhership
f Money.

called INVESTING ; so that the care of money is Definition

in itself an enterprise, which, like every business,
must be learnt by those who have been fortunate
enough to accumulate, earn, or inherit wealth.
No business can possibly succeed unless it
is well looked after, and any carelessness in
the conduct of a business is bound to entail
serious consequences. At first sight it would
seem that putting money to profitable employ-
ment is a complicated matter, in which no
one can excel without a special training. The
field of activity appears to be too wide for
an amateur to comprehend its range, at least

that is the view of the diffident investor ; The aitident
Investor,

but there is also the over-confident investor,

of Investing.

--- Page 7 ---

The over-
confident
Investor.

6 CONSEQUENCES OF CARELESSNESS

who is convinced that, without any investment-
knowledge whatsoever, he can so intelligently
cope with the problem of profitably employing
his capital as will suffice for his own personal
requirements.

To the over-confident investor it appears that
the very width of choice which lies before him,
in the numbers of individuals and companies who
require money, is in itself a proof that investing
must be easy. He imagines that his general
worldly experience will guide him to make a wise
selection, where the choice is practically limitless.
Besides, with so many readily accessible advisers
at hand, in the shape of bankers, brokers,
solicitors, and others, it hardly seems worth while
attempting to acquire any personal knowledge.
Indeed there are many worthy people who
would consider it presumptuous to attempt to
master the art of investment. They would as
soon think of studying law and medicine for
themselves, and dispensing with the services of
their lawyer and doctor, as endeavour to solve
an investment question on their own responsi-
bility.

In this way owners of accumulated energy
[capitalists] tend to fall into two groups, the
first of which does not even attempt to
understand the principles of investment, while
the second possesses just sufficient knowledge

fi

CONSEQUENCES OF CARELESSNESS 7

to be a source of danger to itself. Naturally,
neither class is ever more than rarely successful
in putting its money to profitable employment.

The fact is, that there is a wide difference
between the necessity for the personal study ofr

. In
investment and the necessity for the personal s Necessity

study of either law or medicine. A lawyer is
required only when there is legal business to be
settled, and a doctor’s services are requisite only
in the case of illness. When such emergencies
arise they are self-evident, and skilled advice is
promptly resorted to. But the necessity for
investment-knowledge is continuous.

Constantly occurring events in politics, and
commercial and social developments, work great
changes in the position of even old-established
investments. The investor who relied solely upon
the investment-knowledge of his financial adviser
would really require to be in continuous touch with
him. Unfortunately, it is the custom of some
investors to acquire no financial knowledge of
their own, and never to consult financial advisers
until some irretrievable disaster has made a
serious inroad into their capital account. Invest-
ments, when once acquired, are left to take care
of themselves, with the result that, so far as
the successful management of capital goes, there
is little to choose between the investor who
relies solely upon the financial advice of others,

--- Page 8 ---

8 CONSEQUENCES ( “ARELESSNESS CONSEQUENCES OF CARELESSNESS 9

and the investor who is guided by a smattering

: however, never attempt to interest themselves
of financial knowledge of his own.

in these recurring crises, in spite of the fact

TEN ENTE Ca et ee

topes

Cause of This lack of investment-success arises from L that they are the people who have assumed
Failure. the fact that the various influences which i. practically the entire risk.

control the comparative value of each individual
security are constantly changing, and conse-
quently the realisable price of the security
changes likewise. Investments, in short, require
looking after.

Weak indecision has induced the average
shareholder to abdicate his right to exercise an
intelligent control, until Company Directors have Autocratio

- . . attitude of
assumed an attitude which almost amounts to Company

eter cS aCe
r

Directors.

That there is a light but necessary work
periodically to be done in connection with in-
vested capital is understood by few investors ;
and yet upon the regularity with which this
work is performed depends the whole question
of investment-failure, or investment-success.

Invested Capital The slightest consideration paid to the subject

must be
supervised.

will suffice to reveal the danger of leaving in-
vested capital to take care of itself. Practically
all the great commercial enterprises are now-
adays based upon joint-stock enterprise. This
means that these important concerns are the
property of thousands of investors, and that
they are only very partially the property of
the few men who conduct them. Yet all these
vast undertakings suffer at times from trade
depression, acute competition, and other detri-
mental effects. Circumstances perpetually arise
which call for the greatest care and attention in
sheir management. The generality of investors,

despotism. It is only fair to admit that in many
cases this despotism is benevolent enough. But
at times the actions of a Board of Directors are
the very reverse of benevolent. However, it
can scarcely be wondered at that Directors
should regard themselves as the omnipotent
masters of the situation, when the real owners
betray a callous indifference to business details.
How many shareholders are there who are
capable of extracting the kernel from a balance-
sheet, or how many are able to form an intelli-
gent opinion upon a Directors’ Report, when
they receive these documents? In some cases
no attempt is even made to read and much
less to understand the highly important in-
formation which they contain.

Shareholders’ meetings have long since des-
cended to the level of formal farces, simply
because the business of thousands becomes no-
body’s business. Every shareholder is possessed
by the comforting, but erroneous, idea that if

--- Page 9 ---

Indifference

of Shareholders.

Far-reaching

result of

Investment-
O83,

10 CONSEQUENCES OJ “‘ARELESSNESS

anything were radical. wrong, some public-
spirited person would take the floor at the meeting
and openly challenge the policy of the Board.
Even when a shareholder is prompted by his
own misgivings, and feels that he would like
publicly to raise some point which causes him
uneasiness, he knows himself to be incapable of
doing so. Want of accurate financial knowledge
is his stumbling-block, and in some instances
he is in the pitiful plight of not even knowing
how to raise the question he wishes to ventilate
without running the risk of transgressing the
etiquette of a Company’s meeting.

Such information as to Company-meeting
procedure is easily obtainable; yet how many
shareholders possess it ?

The supineness of the average investor would
be extraordinary if his own private interests only
were at stake. But any one is grievously mis-
taken who may imagine that diminished Capital
or diminished Income is a purely personal matter
to the investor himself, and to those directly
dependent upon him. It is true that the direct
sufferer will doubtless have to curtail his personal
expenditure, and put down certain luxuries
which hitherto have made his existence a pleasant

nsnineibedneneme a een Spent rae ptt charge ym HN

one gpeptyenctemsin pena rte se

cheba none

CONSEQUENCES OF CARELESSNESS 11

diminished tailor’s bill. The tailor’s income is
prejudicially affected, and, having less work to
do, the tailor has less employment for labour :
he buys less cloth, and his Bradford firm of cloth
manufacturers receive a diminished order; and
so the chain of consequences could be almost
indefinitely prolonged until it extended to the
station-hands employed on a sheep-run in the
Antipodes.

The loss of this individual investor has been
shown to be a loss to other members of the
community; in fact, a fatality affecting the
nation.

It is quite contrary to the fact to suppose that Annihilatic

of Wealth.

the loss of any one individual is bound to result
in a corresponding profit to another individual.
Wealth does not always merely change hands
when it is injudiciously invested; it is either
absolutely annihilated, or else it is so perma-
nently diminished that it may be said to have
pulled up at the half-way house on the road
towards annihilation.

A convincing example of the annihilation of
wealth by injudicious investment is afforded by
the failure of the Liberator Building Society and
its group of allied companies. It is a well-known

one. This curtailment of expenditure, however,
cannot fail to react upon the whole community.
For instance, a diminished Income may entail a

fact that tens of thousands of small, thrifty in- Example

mnihilate

&
vestors suffered cruelly by the Liberator crash ; Woulth.
now let us ask who made a profit out of that

perenne rene et ages

--- Page 10 ---

12 CONSEQUENCES OF ¢  “ESSNESS CONSEQUENCES OF CARELESSNESS 13
failure, corresponding in any way with the I ago inherited and continued to hold some
amount of the actual sums lost? Certainly i London and South-Western Deferred Ordinary
the wirepullers made no money, for they were F stock, when this stock was readily saleable at

about 90. To-day this stock is selling at 45,
so that one half of the inheritance has been
lost by the owner without any compensation
having been received by him. It would be
possible to multiply such examples indefinitely,
for the fact that injudicious investment leads Example o:

nearly all compelled to go through the Court
of Bankruptcy; neither did the building con-
tractors amass fortunes, for they shared the same
fate as the promoters. Nobody, in short, did
materially benefit by this great financial disaster,
so the question naturally arises: What be-

petecerirstienaenentarriprimeane ern

ns yest eine So npn emine et

Longe ., 7 dissipated
came of the money which these unfortunate to the annihilation or the dissipation of Capital Wealth.
investors lost 2 has been proved in every single market in the

DangereofOver- The answer is that it was disadvantageously Stock Exchange, beginning with Consols, and
mepieaiation expended in a number of over-capitalised i _ concluding with the most hare-brained gamble

building schemes which never had a chance that ever was perpetrated in the Mining Market

i
i
i i i here.
of producing an adequate return upon their or elsew.
original capital-outlay. As income-earners, the Were a careful account made of the losses Extent of
i
{

. “ae : . bli Investmeni
undertakings proved barren, and the properties sustained by the ents aryeoting a . _ Losses.
acquired with the buildings erected thereon through the annihilation o elr capital,
proved to be assets incapable of realisation at

result would show that the sum so dissipated

anything approaching their cost price. A large would in no long period of time an he
proportion of the subscribers’ capital had, in | off the National Debt and provide ge
fact, been annihilated. Pensions for the entire nation.
An even greater disaster, which has approached : For many years past, Legislature has made
almost to the dimensions of a national calamity, : spasmodic efforts to check this enormous waste
Depreciation has been the depreciation of British Railway : of national financial strength H eel i
Railway Stocks, stocks during recent years. This is an example | grandmotherly legislation, designe to Patek.
of Capital being dissipated through a want of the ~formation of public companies. Patch-
proper understanding of investment questions. co work legislation, however, must always prove

Let us take the case of a man who ten years : abortive: the only legislation which is ever

--- Page 11 ---

istakes of
sgislators.

14 CONSEQUENCES OF CARELESSNESS

of any practical value is the type which elimin-
ates an evil at its source.

The problem which Parliament has vainly ©

attempted to solve contains two factors: the
first is the too wily promoter, and the second
the too credulous investor. Parliament, how-
ever, failed to grasp the fact that the credulity
of the investor was the source of the evil, and
that when once a practical cure had been found
for the public’s credulity, the wiles of the
promoter would become practically innocuous,
and therefore, in its wisdom, preferred to
believe that by throwing obstacles in the path
of the promoter the grievous annihilation of
Capital could be put an end to.

To accomplish this excellent object, various
restrictions were gravely debated, and finally
the law enacted that the way of the company-
promoter should in future be obstructed by
certain regulations, affecting the form and the
clauses of the prospectuses issued for the pur-

pose of attracting public subscriptions to new
companies,

CONSEQUENCES OF CARELESSNESS 15

knew what amount of explicit information
a reliable prospectus ought to contain, had
never fallen a prey to the insidious promoter,
who withheld essential facts in his prospectus.
On the other hand, the unskilled investor
never understood which facts were material, and
was always content to subscribe his capital to
any venture which was put forward in a reason-
ably attractive form.

Parliament failed to see that the general
diffusion of financial knowledge was the root-
cure for the nation’s reckless tendency to

annihilate Capital. Even to the poor man the A Care for

possession of sound financial knowledge 18 & Ignorance.

valuable asset. Why, then, should not the
broad principles of profitable investment be
made an educational subject, and form a part
of the ordinary school curriculum? For it 1s
almost impossible to measure the amount of
evil which results to the nation and the
individual from investments ignorantly entered
into and ignorantly persisted in.
The great want from which the English

tile Laws. This proceeding was very like erecting a

investor peculiarly suffers, when compared. with Need for
number of finger-posts in a country where none

- British
i all other countries, 18 standard of
the investors of almost Standard of

of the inhabitants could read, or, perhaps the
analogy would be closer, if the Home Counties
were liberally equipped with sign-posts in the
Gaelic tongue. In the past, the investor who

that in England there is no standard by which yajues.

investment-values can be measured.
Such a standard, to be of any practical use,
must consist of some type of security which is

--- Page 12 ---

Foreign
Standard of
Investment-
Values.

Carelessnesa
of British
Investors.

16 CONSEQUENCES OF CARELESSNESS

free from any but the very smallest fluctuations.
England possesses no such standard, because
British Consols fluctuate violently in sympathy
with every movement of the money market,
and English Railway Debentures sluggishly
follow the movement of the too rapidly fluctu-
ating Consols, which are the leaders of the
market in Trustee Investments. In conse-
quence of this, the Perpetual Debentures of
the London and North-Western Railway have
depreciated 25 per cent. in the short period
of a decade.

In nearly all other countries, Railway
Debentures, representing as they do loans
made to permanent commercial enterprises of
great magnitude, constitute the standard by
which the value of money for permanent invest-
ment can be gauged. In those countries where
the railways are owned by the State, some other
type of stock of great stability of value takes
the place of Railway Debentures. For in-
stance, in Germany Land Mortgage Bank Bonds

constitute the standard by which all other

permanent investment-values are measured.
As Great Britain is the solitary example of
a country which possesses no standard of
measurement for investment stocks, there must
be a good cause for the deficiency. The reason
is, that Britons as a rule are careless investors.

f CONSEQUENCES OF CARELESSNESS 17

who never take the trouble to ascertain the
real character and soundness of any investment,
with the result that they permit themselves to
drift in a happy-go-lucky fashion, very different
from that in which every other nation treats
investment-questions.

If British investors as a class had taken the
trouble to inform themselves fully as to the
merits, and also as to the limitations, of London
and North-Western Railway Perpetual Deben-
tures no investor would have been so rash as
to pay 1204 for a stock whose rate of interest is

permanently fixed at 3 per cent. Further, if vaive of an

this debenture stock had never been allowed
to climb to this absurd price-level, it would
never have depreciated to the extent of one-
fourth of its previous market-value. If the
British investor had possessed a clearer sense
of investment-values, the price of this stock
would have remained somewhere near 88, or
on a basis of value at which it would have
yielded an investor about 3} per cent. Further,
on a permanent basis of value in the neighbour-
hood of 88 this stock would have served as an
excellent standard of measurement for invest-
ment-values generally.

All the world over, except in England, sound Relationship

Investment Stocks move in close relationship to
the value of money for permanent investment
2

--- Page 13 ---

Business of
Investment
easily learnt.

18 CONSEQUENCES OF CARELESSNESS

on mortgages. This standard of value alters
but very slowly and gradually in each country.
This same stability of value will prevail in
England so soon as the great body of investors
fully realises that investing is exceedingly
simple, but that it has to be effected according
to fixed rules which are easily learnt. The
business of investment, incomplex though it
is, requires a sound rudimentary knowledge,
which every one should seek to acquire,
whether he is earning money or whether he
has come into the possession of money through
the exertions of others.

On the face of it, the study of the subject of
investment seems to cover an enormous field.
There exists so bewildering a mass of stocks
of so many grades of safety and of income-
producing power, while these stocks appear to
alter in their realisable value so frequently
and to such an extraordinary extent, without
apparent rhyme or reason, that it is small
wonder if investors become settled in the con-
viction that the study of stocks is too intricate
to be attempted by other than professional
financiers. a

But the most complicated subject becomes
clear when it is reduced to fundamental
principles and when the objects with which it
deals are lucidly classified and explained.

CONSEQUENCES OF CARELESSNESS 19

‘Fortunately, in the case of stock and share

investments the explanations and classifications
are so elementary, that any one who devotes
some attention to the subject will soon find his
way through all its difficulties.

An attempt will be made to furnish invest-
ment-knowledge by means of this book, and
it is hoped that its perusal will be found
both interesting and profitable. Interesting
—because the great majority of our great
modern Commercial and Industrial Institu-
tions are based upon joint-stock enterprise ;
and profitable—because every one who is 3
worker, be it in art, science, or commerce,
is bound to become an investor as soon as
his work obtains recognition and he achieves
success in his calling.

Many investors lose in a few short weeks, more
than it has taken them years to accumulate ; and
had they applied only a very small fraction of
the time which they devoted to earning money
to the subject of how to take care of money,
they would now be much wealthier men than
they actually are.

Let it be clearly understood from the outset
that we treat here of the subject of investment
pure and simple, and that we have nothing
encouraging to say on the subject of specula-

Investment

u
interesting
and profitable.

Speculation
should not be

tion. If any one takes up this publication in encouraged.

--- Page 14 ---

Ensuring
Safety and
Increase of
Capital.

Capital bought
and sold as a
Commodity.

20 CONSEQUENCES OF CARELESSNESS

the hope of finding some safe plan for making
money rapidly, by imperilling capital in the
hope of large profit, he will find himself sorely
disappointed.

The questions to which we shall principally
devote our attention will consist of how to
avoid risks to capital, and how gradually to
increase invested capital by sound and natural
methods.

To enable an investor to do this, it is requisite
that he should understand simple and common-
sense principles which are based upon plain
rules of comparison. Capital is a commodity,
and, like every other commodity, it must be
disposed of in the most advantageous markets.
To attempt to invest money without first
ascertaining which are the most advantageous
markets, and the nature of the different wares
which in these markets can be exchanged for
money, is to be guilty of careless investment,
the corisequences of which we have described
in this chapter.

CHAPTER II

INDISPENSABLE REQUISITE TOWARDS SUCCESSFUL
INVESTMENT

ONEY, to be made remunerative, must
be converted by its owner either into
property, or into a security such as a public or

-private loan or a share in a public or private

enterprise. The opportunities for investing
money in this manner are innumerable, and cover
a wide range of degrees of capital-safety, in-
come-producing power, and chances of increase
or decrease in capital-value. Thus, the first
point, which presents itself to every thoughtful
investor on starting to employ capital is, what
sort of an investment would be most suitable
to his personal requirements; and here he is
immediately confronted by a great difficulty.

He finds that whilst his bank might pay bim Investors’

from £1 to £3 per annum upon every £100
deposited, private traders are ready to pay a
higher rate. On mortgages he might obtain
from 4 to 5 per cent., and on the securities

of public companies the rate varies from 2?
21

--- Page 15 ---

Income- Yiela
versus
Capital-Safety.

22 SUCCESSFUL INVESTMENT

per cent. to almost any reasonable yield, as every
extensive stock and share list informs him.

The first instinct, naturally, will be to accept
as high a rate of income as is obtainable; but
every investor, before deciding on any form of

SUCCESSFUL INVESTMENT 23

dividual who has to choose. In investment,
above all other matters, a start in the right
direction is the keynote to future success or
failure; so that the first selection should be
made with the greatest circumspection.

It will be shown later on in this book, that

investment, is likely either to consult a friend
who is assumed to understand these matters,
or to draw on his own memory for what he might

every reasonable investment-object is obtain- All reasonable
« . nvestm -

able, provided that the right sort of investment Aims are

; obtainable.

Investing
for increase in
Capital-Value.

have heard people say about investments. In
either case he is likely to be reminded of the old
saying that “ Large interest means bad security.”

Thus a conflict arises between the amount
of income to be made, on the one hand, and the
degree of safety demanded, on the other. But
there is a further and still graver matter,
which increases the difficulty of decision.
He has undoubtedly heard of large fortunes
having been made by buying stocks at very
low prices and selling at very high ones.
In fact, the money article published by any
newspaper informs him that stocks rose or
fell on the previous day. As he is now taking
up his position as an investor, surely, he tells
himself, he should not neglect such chances of
making money. .

Any difficulty of selection from a large num-
ber of widely differing investment-opportunities,
must invariably be settled in accordance with
the wants, tastes, and inclinations of the in-

%
f
;
i
i
ij
E

f
i

i

isselected. The investor must, therefore, firmly
make up his mind as to what his real investment-
object is, and must begin to invest in a manner
calculated to realise this object.

Although most people, when embarking upon
any kind of undertaking, do so with some
particular object in view, experience shows that
investors form the almost solitary exception to
this general rule. In the majority of cases in-
vestors are but dimly conscious as to what their

ultimate investment-aim may be; and this 18 Necessity for

one of the chief causes of investment-failure.

A very cursory investigation would show tha
all investors have much the same investment-
aim, for they all wish their capital to be quite
safe and their income adequate; while they
also desire that there should always be an
opportunity to sell the investments held without
trouble, and at a price higher than that
which they originally paid for them. This is,
perhaps, the wide general idea with which

t Aim.

--- Page 16 ---

Dangers of
indefinite
Investment-
Aim,

Investment-
Similes,

24 SUCCESSFUL INVESTMENT

some investors commence their investment-
career, but they very soon discover that such
a state of perfection is practically unattainable.
Investments which seem to be quite safe
to-day often become most dangerous to-morrow :
the income varies, stocks which have com-
manded a ready market for years gradually
become difficult to negotiate, and finally, in-
stead of rising in value, they display a most
disappointing tendency to fall.

After having suffered from several such dis-
appointments, investors who started with an
investment-object based upon wide ambition
become discouraged. They lose confidence in
their own or their adviser’s powers to discriminate
between good and bad; and so, having been
defeated in a general engagement, they now
confine themselves to mere skirmishing. In the
vain hope of retrieving losses already incurred,
they now dabble in a few speculative ventures,
and so their capital becomes split up among
a number of stocks’ which neither fit in with
each other nor give their unfortunate owners any
chance whatsoever of regaining that smooth road
which leads towards investment-success. _

Investments should be looked upon as so

_ many kinds of building material, which must

}
'

be properly chosen and welded together to make
up a strong and lasting edifice; or as so many

a
a
q
i‘

eens

25

weak twigs, which, tied up with a strong cord,
make an unbreakable bundle.
Every investor should firmly make up his
mind that there is no single investment, no
matter what its nature or quality may be,
which can be relied upon to remain unchanged
in its realisable value; and that it is only by
furnishing himself with a selection of invest- an bnportant
ments which in quality and quantity match yesment
each other, that capital-safety, income-stability,
or any other investment-object can be attained.
This investment-axiom has now been con-
clusively proved to be true, not only in theory
but also im practice, by putting thousands
of actual cases to practical tests.
After having well considered the above funda-
mental principle of sound investment, it will
so amalgamate itself with every intelligent

SUCCESSFUL INVESTMENT

_Investor’s own habit of thought, that he will

wonder why he did not originally discover it
for himself. In fact, this principle will become
a guiding star throughout his whole invest-

- ment-career.

Lhe advantages of working upon such a rule
are obvious, for by its aid the vast field of
investment, which at the first glance seemed
too _Wide for any investor to comprehend,
narrows itself down into a very sme'l area of
selection,

--- Page 17 ---

Advantages of
settled
Investment-
Aim,

The
Possibilities
of Stocks
ascertainable.

26 SUCCESSFUL INVESTMENT

Without such an axiom, the investor has to
search among Government, Municipal, and Cor-
poration Loans, the securities issued by Railways,
Tramways, Waterworks, Banks and Breweries,
investments in Gas, Shipping, Telegraph, In-
surance, Electric-lighting Companies, and the
endless number of other commercial and
industrial enterprises. Many of these, to his
further bewilderment, he will find, have issued
all kinds of stocks, such as Bonds, Debentures,
and Preferred, Ordinary, and Deferred shares.

At the outset it appears that systematic
selection is impossible amidst such an embarrass-
ment of choice. But as soon as the investor
has learned to apply the axiom already referred
to, and has made up his mind what his real
investment-object is, he will find that, not only
is the class of enterprise suitable to his purpose
definitely settled for him, but also the kind of
stock which he must select. The result will
show that his difficulty regarding selection is
at an end, and, in addition, he will make that
selection with the absolute conviction that the
stocks chosen are the actual stocks which he
wants.

Every class of stock is subject to a certain
ascertainable class of risks, and has a number of
equally well known qualities. Thus, there are
some stocks which fluctuate widely in value,

SUCCESSFUL INVESTMENT 27

whilst there are. others whose investments are
generally small and slow. There are some stocks
which can be relied upon always to pay 4
certain and fixed rate of interest; whilst there
are others which are supposed always to pay
a fixed rate, but may fail to do so. There are
others again which vary in the rate of dividend
which they pay from year to year; and
there are stocks possessed of solid intrinsic
merit but paying no interest at all, which repay
their holder solely through their gradual rise in
value as they steadily approach the period of
income-earning. Further, amongst non-dividend-
paying stocks there are others possessing no
solidity of value, which are purely a speculation
e future possibilities.

ater on in this book all these different
qualifications of stocks and shares will be con-
sidered, and it will then be shown how the
probable future development of a combination
of stocks can be foretold with sufficient accuracy
to enable investors to know what they may
reasonably expect the future to produce.
Without such knowledge, investing even in the
soundest securities in no way differs from mere
gambling.
‘As it has been asserted that the future possi-
bilities of every investment-combination can be
foretold with tolerable accuracy, and as the

Combinatio1
of Stocks.

--- Page 18 ---

The Investur’s

Firet Decision.

Classification
of Investors.

28 SUCCESSFUL INVESTMENT

assertion will be proved in this book later on,
the first and fundamental question which every
investor has to decide is which class of invest-
ment will best suit his particular purpose.

This is a matter which entirely depends
upon the results which he requires his stocks
to produce. Now, there is quite as large a
variety of investors as there is of investments,
so it is necessary to classify the various types
of investors with the same accuracy as will
be required later on to discriminate between
the various types of investments.

It will be found that investors naturally group
themselves in the following manner :

Group I.—Investors who rely entirely for their
maintenance upon the income pro-
duced by their investments.

(a) Rich people who have more than
sufficient income.

(6) Well-to-do people who need not
strain their investments. —

(c) People moderately well off who
must make a large income.

(d) People who are compelled to make
their investments produce the
largest possible income.

Group I1.—Investors who live partly on their
. present efforts and partly on the

SUCCESSFUL INVESTMENT 29

income produced by their «nvest-
ments.

(a) People with ample means.

(b) People with insufficient income from
earnings but ample income from
investments.

(c) People with insufficient income from

earnings and a small capital.

Group Il1.—Investors who live entirely on the
results of their present efforts.

(2) People with surplus earnings, which
they apply towards increasing their
capital, the income from which is
already sufficient to provide for
their wants.

(6) People with surplus earnings, which
they apply towards the building up
of a capital, the ineome from their
present capital being still insuffi-
cient to keep them.

(c) People with a moderate surplus and a
very moderate capital, or no capital
at all.

In the above three main sections, with their
respective sub-divisions, nearly every investor
will find his own position described. Should he,
however, not readily recognise his own classifica-
tion, he most likely belongs to a class which will

--- Page 19 ---

30 SUCCESSFUL INVESTMENT

Respective Aims be covered by two sub-sections. An endeavour

of Investors
considered.

Geographical
Distribution
vf Capital.

will now be made to inform every class of
investor, as grouped above, what his attitude
towards the investment-market should be, and
what classes of stocks are most suitable for his
requirements.

In the following explanation, the words “ Geo-

graphical Distribution of Capital,” and “ Geo-
graphical Division,” will be frequently used.
The Geographical Distribution of Capital is the
division of capital into equal portions, and the
investment of each portion in a separate part
of the world; whilst the Geographical Division
means that particular part of the world in which
a portion of the capital is invested. This system
of investment is fully described in a book called
“ Investment an Exact Science.” *

Group I.—Investors who rely entirely for their
maintenance upon the income produced by their
envestments.

(a) Rich people who have more than sufficient
income.—This type of Investor should hold
nothing but the very safest class of securities, such
as the Loans or Debentures of Municipalities
and Corporations of undoubted credit and
standing, or of Railway and Gas Companies,

* “Investment an Exact Science.” Demy 8vo, cloth, price
2s, 6d. net. Published by the Financial Review of Reviews,
2, Waterloo Place, London.

SUCCESSFUL INVESTMENT 31

Waterworks, and Industrial enterprises which
have been established at least fifteen years prior

to the date of investment. The last-named safest Class

must be either unquestionably guaranteed by a
third party, or have at least three times the
amount of their loan-issues represented by im-
movable property which is realisable at that
value. They must also, during the seven years
preceding the date of the proposed investment,
have earned and distributed in the shape of
dividend on their share-capital, at least three
times the amount necessary to pay the interest
on their loans.

of Securities.

' A combined investment consisting of securities yield ot

on the total invested sum, and the total capital-
value and income will remain quite stable, if the
system of Geographical Distribution is adopted
when selecting the securities of which the com-
bined investment is composed. The above plan
of investment applies, of course, only to those
Investors who have no ambition to increase their
capital. Should they have any such desire, then

the plan outlined later on under Group III., sub-

section (b), should be partly adopted by them.
(b) Well-to-do people who need not strain their
investments.—This type of Investor is in a similar
position to Investors who are rich, wealth
having, after all, only a relative meaning. But

of this type will return from 3} to 44 per cent. Safest Class

Investments

--- Page 20 ---

Consideration
of higher
Investment-
Yield.

Cases where

Government -

Stocks are
undesirable.

32 SUCCESSFUL INVESTMENT

they will most likely be forced to aim at the
attainment of a slightly larger yield on their
capital, and consequently will be compelled to
content themselves with a somewhat inferior
class of security, such as Loans and Debentures of
Municipalities and Corporations of lesser repute,
and of Commercial undertakings which are not
secured to the extent detailed above. They may
also find themselves unable to procure suitable
Debenture stocks in certain Geographical Divi-
sions, and be forced to content themselves with
unquestionably safe Preference shares. Govern-
ment stocks should not be held, for reasons
which will be explained later on. If really
belonging to the type of Investor to which this
sub-section applies, and not to the next sub-
section, they should not attempt to make a
larger yield than 42 per cent. on their capital.
If their capital is properly distributed Geograph-
ically, they will find no difficulty in obtaining
this yield without running any undue risk.
Investors of this type who are anxious to
increase the realisable value of their capital are
also referred to in Group III., sub-section (6).
(c) People moderately well off who must make a
large income.—This type of Investor is forced to
make a much higher rate of income, and must
therefore be satisfied with a lower type of in-
vestment. In no case, however, should capital-

“”~

SUCCESSFUL INVESTMENT 33

safety be sacrificed to a large income-yield, and Large yield

it will be found quite unnecessary to run any Cs
special risk. The apparent lack of unques-
tionable security can be substituted by addi-
tional care being exercised in the distribution
of risks, and in the supervision of the invest-
ments held.

The difference between types (a) and (6) of this
Group and the present one corresponds with; the
comparison between a rich housekeeper who does
not mind how much she spends on a dinner, and
a lady of economical habits who is desirous of
procuring an equally good repast at less expense.
The choice quality of the food provided by the
former requires to be set off by the additional
care exercised by the latter in the composition of
her menu, and in the skilful preparation of her
dishes. For, as inferior viands more carefully
served frequently result in greater satisfaction

than the most expensive food less carefully careful

treated, in just the same way do many Investors
manage to achieve greater capital-safety and a
far larger income with inferior securities.
Investors belonging to type (c) should princi-
pally concern themselves with Debentures and
Preference shares of well-founded commercial
undertakings carrying on a non-speculative
business. In the case of Debentures, the age of
the Company and the actual money earned by
3

--- Page 21 ---

Combination
of stocks
yielding 5 to 6
per cent.

Danger of
fashionable
stocks.

34 SUCCESSFUL INVESTMENT

it, need not be so closely considered as the
margin of safety offered by the assets upon
which the Debentures are secured. Thus, sup-
posing a Company has issued £50,000 Debentures,
there should be security represented by assets
of at least twice that amount at a break-up
valuation. The annual earnings of the Company
should cover the amount necessary to pay
the Debenture-interest at least twice over.
Government, Municipal, and Corporation Loans
should not be held by this class of Investor
unless the rate of interest current in the country
which issues these loans is over 6 per cent., or
if the Municipalities or Corporations are so small
that they are forced to pay over 42 per cent. on
their loans. Countries which have made default
during the last fifteen years, or Municipalities
and Corporations which are situated in countries
where the Investor does not enjoy ample legal
protection, should be habitually avoided.

All very large and frequently quoted stocks
are dangerous to an Investor of this type. For
if these issues were really desirable they would
yield under 43 per cent., and this yield being
too small, would make them ineligible; whilst
if they yield more, there is some half-hidden
danger lurking behind them although the Investor
may fail to perceive it.

Well-secured stocks in less known companies

SUCCESSFUL INVESTMENT 35

are infinitely preferable to insufficiently secured
stocks in well-known companies.

Preference shares should only be selected in
cases where no Debenture-debt exists, or can
be created so that it ranks in front of them;
unless the Company is of old-established
respectability and has habitually distributed
such large amounts for years past in the shape
of dividends on the issues standing behind the
Preference shares, that their safety can be con-
sidered as undoubted.

In the case of Debentures, the age of the An important

factor

concern issuing them is not of paramount concerning

importance; but with all Share-issues, the age
and non-speculative character of the business
is all-important. It is impossible to fix an age-
limit, as some concerns settle down to solid
business faster than others; but the concern
must have a well-established record before its
Share-issues can be accepted as a sound invest-
ment.

Share Issues.

Ordinary shares in any undertaking should Cases where

only be purchased if there are no Debentures ©
or Preference shares in front of them or can be
placed in front of them, if the Company has a
stable business, is free from debts, possesses
ample working capital, and enjoys at least ten
years’ record as a steady dividend-payer. To
hold Ordinary shares in any undertaking which

safe to buy
rdinary
shares,

--- Page 22 ---

36 SUCCESSFUL INVESTMENT

do not yield at least 54 per cent. on their sale-
able value, simply as an investment, is bad
finance.

Investors of the type now under consideration
should make from 5 to 6 per cent. on their money ;
such a return is quite feasible and possible
without indulging in reckless finance, provided
that the distribution of risks is perfect, and no
part of the capital yields under 43 per cent. or
over 64 per cent. If any portion of the capital
gives too small a return, the yields from the
other portions have to make up for this, in order
that the average yield may be maintained ; con-
sequently the purchase of risky stocks may

- become a necessity. In the case of this type of

Building up a
Reserve Fund.

Investor, also, the stocks held must be closely
supervised, and any substantial profits which
accrue on a portion of the holding should be
taken, so that a reserve-fund against invest-
ment-losses may be built up.

Jt is inadvisable for Investors who are forced
to make from 5 to 6 per cent. on their invest-

SUCCESSFUL INVESTMENT 37

he at present occupies, into the type to be next
described.

(d) People who are compelled to make thewr the most
investments produce the largest possible tncome.— tnvestment-
This is the most difficult type of Investor to “"™

cater for, because, as his capital is small at
the outset, every decrease in its quantity is
dangerous ; whilst it is quite impossible to make
the required income without holding inferior
securities. Furthermore, the Investor having
no other income or other means of increasing it,
his capital becomes the very sheet-anchor of his
existence. For these reasons, every attempt to
increase capital-value should be considered to be
highly dangerous, involving, as it must, a pos-
sible loss, and being calculated to increase the
risks to which the Investor is already exposed.
Men who have no power to earn money, or
women who have a number of others dependent
on them, are usually included in the present class;
and it is at times quite useless to tell them that
they should be content with 5 per cent. on their

ments, to attempt to increase their capital by
undertaking undue risks, for every speculation
in stocks which offers a chance of profit also
involves a risk of loss which is as great if not
greater. Losses, therefore, being not only pos-
sible but probable, the Investor runs the risk of
slipping out of the investment-category which

money, whilst 6 or even 7 per cent. is the smallest stock
return which will satisfy their necessities. In- oem ton
vestors of this class should be most careful not ®Pe ce
to hold a single stock which does not produce

over 5 per cent. ; while they must confine them-

selves to Ordinary stocks in well-established

Companies, and to Preferred stocks in under-

--- Page 23 ---

Investment-Aim
which requires
special care.

38 SUCCESSFUL INVESTMENT

takings which are less securely founded. Some
Geographical Divisions they will not be able to
cover, as all of them do not offer sound stocks
which yield 54 to 6 per cent., but in other Geo-
graphical Divisions they will be able to obtain
a high yield on desirable securities.

The utmost care should be exercised in con-
structing such an investment-scheme, and the
securities held should be kept under the strictest
surveillance.

Whilst it is specially desirable that Investors
of this type should use their best endeavours
to master the principles of investment, they
should not trust entirely to their own judgment,
unless they are really experts, or at least have
always a really competent adviser at hand to
check their proceedings. They should constantly
bear in mind how very sad their case would be
if they incurred a heavy loss, and such a con-
tingency they must guard against with untiring
vigilance.

Their position is by no means hopeless, and
there are a large number of investments obtain-
able which, if properly selected, matched, and
welded together, will produce the income-result
which they desire; but only if the greatest
circumspection be exercised and unnecessary
speculations scrupulously avoided.

Group II.—Investors who live partly on their

SUCCESSFUL INVESTMENT 39

present efforts, and partly on the income produced
by their investments.

(2) People with ample means.—This type of
Investor differs but little from the class described
under Group I., sub-section (a), provided that his
earnings from personal efforts do not form too
large a proportion of the total annual income.

Everybody’s personal earnings are contingent
upon good health, energy, and security of posi-
tion. These, unfortunately, are always to some
extent uncertain, therefore every Investor belong-
ing to this type should constantly keep before
him the possibility, which may become a stern
reality, of his earnings suddenly or gradually
ceasing to exist.

If the income which would then remain to
him is considered sufficient, there is no danger
to be feared. But if this is not the case, and
a loss of the income derived from personal
exertions would be seriously missed, then
timely preparation should be made to meet
such a contingency. This can be done by
making the investments held yield the return

: . . ersonal income.
described under Group I., sub-section (b), viz.”

4% per cent., and investing annually the addi-
tional income so gained. This is in order that
the capital may eventually assume sufficiently
large proportions, and that the income from it
may alone suffice for the Investor’s entire needs.

Karnings from

personal
exertion.

Investment of

--- Page 24 ---

Heavy
expenditure of
professional
men.

40 SUCCESSFUL INVESTMENT

It is only too frequently the case that pro-
fessional men of repute, with a fair amount of
capital, neglect the prudent course of procedure
here outlined. It is sometimes their habit to
rely unduly on their large professional incomes.
They accustom their families to a lavish scale of
expenditure which is quite out of proportion to
the income which they derive from investments,
with the result that, in the winter of their lives,
or after their death, those dependent on them
have to live on a reduced scale which amounts
almost to privation.

Such unfortunate occurrences can be avoided
only by timely economy, assisted by a settled
investment-plan and a fair-sized life-insurance
policy.

(6) People with insufficient income from earnings
but ample income from investments.—This type
of Investor is perhaps better off in the long
run than the type last described, provided
that a satisfactory investment-plan is rigidly
carried out by him. His earnings do not form
the all-important part of his income, and there-
fore if they should fall off or discontinue, the
breach is not so difficult to fill up. The pro-
portion of income from investments to annual
expenditure, settles in this case whether the
investments should be of the kind described
under Group I., sub-section (a) or (6). Pro-

SUCCESSFUL INVESTMENT 41

vision, also, should be made for a gradual
increase in capital, so that the income derived
from earnings should, as soon as possible, be
no longer required to assist in meeting the
annual expenditure.

(c) People with insufficient income from earnings
and a small capital._—_tnvestors of this type no
doubt realise daily that their position is in-
secure, and dread the day when their income
from earnings may become impaired. The

only advice which can be given in this case is Small Investor

to exercise the utmost caution, and to treat the

capital in hand with that care and circumspec-

tion which its importance to the Investor
peremptorily demands. For should the capital,
or any portion of it, be lost, most serious con-
sequences are bound to follow.

The selection of investments and the general
treatment of them for this type of Investor,
is indicated in Group I., sub-section (c) or (d),
the proportion of capital to usual expenditure
indicating which of the sub-sections applies.

Group ITI.—Investors who live entirely on the
resulis of their present efforts.

(a) People with surplus earnings, which they
apply towards increasing their capital, the income
from which is already sufficient to provide for their
wants.—This type of Investor is in the most
fortunate position, and with a proper investment-

--- Page 25 ---

Geographical
Distribution of
added Capital.

To some
Investors
income-yield
unimportant.

42 SUCCESSFUL INVESTMENT

plan, fairly accurately followed up, is safe from
material want. The class of investment . to
be held by him should be selected either from
those described under Group I., sub-section (a)
or (b), and the investment-plan adopted should
be so constructed that stocks may be added
annually to each Geographical Division covered.
It is essential that the Geographical Distri-
bution be not impaired, owing to the investment
of any additional capital earned.

By closely following a scheme of this descrip-
tion, the Investor naturally changes from
Group III. into Group I. as soon as his
earnings from personal efforts discontinue, and
with a little care he is bound to fall into sub-
section (a) of this group, namely the rich.

(b) People with surplus earnings, which they
apply towards the building up of a capital, the
income from their present capital being still in-
sufficient to keep them.—This type of Investor
should be extremely careful, so that on the
day on which his earnings cease, during his
lifetime or at his death, he or those dependent
on him may find themselves possessed of a
capital-sum large enough to support them out
of the income which it earns.

The question of interest is of no very great
importance to Investors of this type, because
the income earned will naturally be treated,

SUCCESSFUL INVESTMENT 43

year after year, as an additional sum to
invest and increase the Capital Account. All
that this class of Investor is working for is a
gradual but sure capital-increase ; and whether
this increase results from dividends or from
the growth in value of the investments held,
is quite immaterial.

Investors of this type can provide for the
wants of those who are dependent upon them,
by means of a Life Insurance Policy. In the
employment of the surplus income, then remain-
ing, they should chiefly confine their attention
to sound classes of enterprise which are in the
making, such as the Ordinary stocks of younger

public-utility undertakings in industrially grow- Enterprises

in the making

ing countries with increasing population. In
the Geographical Divisions in which commercial
developments are more advanced, they should
seek to invest in enterprises which are gradually
coming to the front, or which, for the time
being, have become unpopular. In making
such a selection they must learn to distinguish

between the dying undertaking which has no Unpopular
chance of recovery, and the live undertaking Pr"

which is temporarily under a cloud; specially
stocks which have depreciated through causes
which are outside of the undertaking itself,
offer good chances of this kind.

A strong conviction of future possibilities is

--- Page 26 ---

Latent
Investment-
Possibilities.

Calculation
showing
Capital-increase
at compound
interest.

44 SUCCESSFUL INVESTMENT

always a necessary outfit for an Investor of
this type, as in most cases his opportunities to
buy will occur at times when no one has a good
word to say for the depreciated security which
he selects. If people did not think badly of an
undertaking, its stocks would not be selling at
prices which made little or no allowance for
future potentialities. An Investor belonging to
this class should invariably attempt to buy
latent possibilities, when others do not even
admit their existence. He has an enormous
pull over all other Investors for the reason
that any immediate return on his outlay is
immaterial to him. Consequently, he can
afford to wait years, if necessary, for his
stocks to improve in price.

Arithmetic plays a leading part in invest-
ments of this description, it being necessary to
know that at compound interest capital doubles
itself in 172 years when invested at 4 per
cent., in 144 years when jnvested at 5 per cent.,
and so on. With this knowledge to assist him,
he must compare the possible rise in a non-
dividend-paying stock with the sure increase
to be obtained from a dividend-paying stock,
when the interest derived therefrom is con-
stantly reinvested at compound interest.

Gambles of any kind should be avoided.
The real difference between this sort of in-

SUCCESSFUL INVESTMENT 45

vestment and a gamble, is that the investment Difference
must display a probability of increase in value rowing and
on the occurrence of certain clearly defined and &™>"™*
strongly probable events based on well-known
and ascertainable facts; whilst the gamble has
only a chance of increasing in value through the
agency of possibilities which cannot be foretold.
Thus, for example, Waterworks, Gas, Railway,
and Tramway Companies, or other stocks repre-
sentative of works of general public utility, tample of
situated in a growing district, the growth of (07 t8 outs
which is founded upon permanent factors, do
not constitute a gamble, even if the stock is
bought at a heavy discount.

As the population increases, the use for the
services of this class of undertaking must
also grow; consequently, the revenues and
also the price-level of the stocks of these
enterprises tend to improve steadily. The
growth of a population is an ascertainable fact,
so are the terms of the monopoly enjoyed
by a Company, and these factors, when care-
fully considered, remove the purchase of such
a stock from the category of a gamble. Geo- Importance of
graphical Distribution of Capital is of the utmost Distribution
importance for Investment-schemes of this kind, 7°,.0°*"
as it tends to reduce considerably the risk of
non-success and makes for a gradual but steady

Capital-increase.

--- Page 27 ---

Land Companies

are not always
Investments,

Difficulties of
Investment-
discrimination,

Profit on
non-dividend-
earning Stocks,

46 SUCCESSFUL INVESTMENT

Land Companies are not always an invest-
ment, because the ownership of land always
entails an annual outlay and sometimes pro-
duces little or no revenue. For example, the
British South Africa Company is a Land
Company, yet its shares never were anything
else but a pure gamble, because the expenditure
has always greatly exceeded the revenue and
the population barely increases.

It would be quite impossible, here, to do
more than give an indication of the direction
in which Investors of this type should seek
their securities, for a whole volume could be
filled with the potentialities of investments
suited to them. Therefore, Investors must
learn to discriminate for themselves, between
reasonable probabilities and wild possibilities,
and in cases of doubt should consult a really
competent adviser. They should proceed to
study closely the history of several stocks
which are selling at a heavy discount, and
after having formed their own ideas, submit
them to an expert for confirmation. In this
way they will very soon acquire a sound
judgment on such questions,

_ It will repay them handsomely to do s0,
because there is more money to be made on
these lines than perhaps on any other way. The
number of Investors who can afford to entirely

SUCCESSFUL INVESTMENT 47

disregard income, and are ready to wait five
or ten years for their stock to develop, is very
small; for this reason there is but little com-
petition for the purchase of non-dividend-paying
stocks, and fine opportunities are consequently
numerous.

In the rarest of cases only should Investors Premium

of this type buy stocks which are quoted at
a premium, but they should favour securities
which are procurable at the heaviest possible
discount ; if they have to select from a number
of stocks, they should always give the palm to
the cheapest, provided that this stock possesses
real vitality. Life in stocks of this type con-

sists of fair future probabilities, supported by varying

present working capital of substantial dimen-
sions. Stocks rise much faster from 30 per
cent. to 60 per cent. than from 60 per cent. to
120 per cent. There are only 30 points differ-
ence between 30 and 60, whilst there are 60
points difference between 60 and 120, and yet
for the Investor both events produce the same
result, namely, the doubling of his capital.

Here again is another example of the
importance of simple arithmetic in this class
of investment.

Another, and most vital point, for Investors
working for an increase of capital without
regard to income, is to avoid becoming in-

--- Page 28 ---

Investment-
infatuation
to be avoided.

How to act
when
values fall,

48 SUCCESSFUL INVESTMENT

fatuated with any one of their stocks. Any

Investor who endeavours ‘to obtain the utmost
advantage out of an increase in value is doomed
to failure.

It is quite wrong to try and make more
than a reasonable profit, and no remorse of
any kind should be felt by the Investor, who,
having bought at say 50 and sold at 80, sub-
sequently sees the same stock rise to 110. A
study of highest and lowest records covering
a number of years teaches the lesson of the
zigzag of price-movements.

A profit secured is always a good profit, and
a wise Investor will learn to recognise this truth.

It is equally unwise to wait for the stock to
fall still lower before purchasing, provided that
at the ruling price the Investor sees his way to
good future possibilities; and if, after having
bought the stock its price should fall still lower,
no discouragement need be felt. This further
fall should only urge the Investor carefully to
check again the soundness of his original calcula-
tions. If it is then discovered that some vital
point has been overlooked, and this point
is important enough to endanger the future
prospects, then the Investor should promptly
sell at a loss.

There is a saying on ’Change that “top and
bottom quotations are made by fools for fools,”

SUCCESSFUL INVESTMENT 49

so one should never try to buy at the bottom
or sell at the top. It is necessary to look
after one’s own business and not after that
of the rest of the people who hold the same
stock. As soon as a stock is done with, it
should be forgotten, and new ventures planned.
Whoever follows these rules will be a wise
and rich man in the end.

This type of Investor should rigidly adhere
to a definite Investment-scheme, but instead
of always covering all the main Geographical
Divisions, as he should do at the start, he must
be prepared at times to reduce the number to
eight, and in exceptional cases to seven.

This reduction in Geographical Divisions will Reduction of
Geographical
Divisions of

Capital.

be caused by periods of great investment-pros-
perity in any one or more of these main Divisions.

If, for example, the United States of America
experience a boom, during the course of which
the Investor has sold out all his American North
stocks; and if, after having done so, he should
fail to find any really good Investment-oppor-
tunity suitable to his purpose offering in the
same Division, then he should examine the
stocks of all those main Divisions which embrace
several countries, and invest in one of those
countries which he has as yet not covered. The
ten main Geographical Divisions really represent
over 25 separate trading influences. Thus,

4

Consider your
own business

only.

--- Page 29 ---

Example of
Geographical
subdivision
of Capital.

Averaging

Investments.

50 SUCCESSFUL INVESTMENT

for example, America South is one main Division,
but it includes Argentina, Brazil, Chili, Peru,
Uruguay, and Venezuela ; and every one of these
countries has a trade of its own, which is only
slightly influenced by that of all the other South
American States. Similarly, the Divisions re-
presenting British Colonies, Europe North and
South, Asia, and Africa, are subdivisible.

There will always be some stocks in the pos-
session of this type of Investor which show a
large loss. Therefore, when he has secured a
profit, and is consequently possessed of capital
to reinvest, he should, prior to the purchase of
a new stock, overhaul all his holdings which
show a loss, and if they are found to be still
promising he should average them.

Averaging is one of the most important
operations in connection with investments.
Supposing £100 of stock is bought at 60, costing
£60, and then a second £100 of stock is added
at 40, costing £40; then £200 stock has cost
£100, and the average price of the total holding
is now 50. By this means, a purchase, originally
comparatively dear, is put into a much better
position. Great discretion should be used in
averaging at all times, and no more than 15
per cent. of the Investor’s total capital should
be entrusted to one stock unless that stock is
one of great inherent safety.

SUCCESSFUL INVESTMENT 51

It has been previously explained that an
attempt can be made to employ capital at
compound interest, and so to add to its quantity
annually. This can be done in two ways, namely,
by buying safe dividend-paying securities and
investing the dividends as an annual addition to
Capital Account; or by purchasing securities
without regard to the income which they pro-
duce, relying on an increase in their realisable
value to produce the desired growth of capital.
Of these two methods the former is the easier
and safer method, although the latter is in
reality the quicker and more profitable mode of
procedure. But increased rapidity is almost
invariably accompanied by increased difficulty ;
and the care requisite to build up a Capital
Account quickly is so great that investors are
warned not to try the more complicated method,
unless their ability and temperament fit them
for it.

There is always a certain excitement to be
derived from buying a stock at 30, holding it
for a time, seeing it drop to, say, 22, and then
gradually rising to, say, 40; watching it drop
again, and ultimately rise to, say, 50, at which
price it is sold. This excitement is the hotbed

Two methods

of adding
to Capital.

in which the germ of speculation thrives; and 'The germ of
to have this germ developed in the consti-  ™

tution of any Investor might prove to be so

--- Page 30 ---

52 SUCCESSFUL INVESTMENT

dangerous to his capital as to outweigh the
value of the resulting increase to his Capital
Account.

For this reason, those who are speculatively
inclined should not venture to adopt the method
of increasing their capital by the purchase of
stocks with a view to a rise in value. Only

The cool-headed cool-headed Investors, who can tutor them-

Investor.

selves to look upon stocks as income-producing
machines, should attempt it. This latter type
of Investor will only be guided by cold reason,
and will never yield to the temptations of hot
impulse. Our luck is inside ourselves, and not
outside ; we use our chances when they come,
or else we neglect our opportunities; and the
so-called unlucky ones are those who do not see
their chance when it is staring them in the face.

To render this book complete, it was necessary
to give an explanation of the method in which
a Capital Account can be built up by the pur-
chase of low-price securities. This method of
investment-procedure depends so entirely for its
success upon the possession of a fine financial
judgment, coupled with a nice discrimination
between trading collapse and trading depression,
that it is far too dangerous an instrument for
the average Investor’s use.

SUCCESSFUL INVESTMENT 53

surance Companies have been principally insti-
tuted to enable people, so situated, to provide
without delay for those depending upon them.
Life Insurance Policies are costly, as they are

calculated at a very low rate of interest, and Uses of Life
. , + 1, Insurance,
the companies have very large expenses, which

must be paid for out of the pockets of the
insurers; but the advantage of being able to
provide a comparatively large sum, which is
payable at death, at once, is well worth the
additional expense. Whether it will be possible
to accumulate such a sum during one’s lifetime
is uncertain. The ability to pay the premiums is
possible to any age. Life Insurance is, therefore,
the provident step to take by all those Investors,
of this class, who have obligations to others.

Every man, no matter what his position may
be, should have immediate command of a cer-
tain sum, however small, to carry him over
any unforeseen emergency. If he does not yet
possess such a sum, he should use his utmost
endeavour to obtain it.

This sum should be considered as one of his
most important possessions, and should be
guarded with the sedulous care which it deserves.

Not having the command of a sum sufficiently
large to be called Capital im the accepted sense

of the word, the owner of a small sum will be the Investme:

c) People with a moderate surplus and a » - . nest-ee
(©) P P nd disinclined to bestow any thought on the subject ***°S*

moderate capital, or no capital at all. Life In-

--- Page 31 ---

A warning
to small
Capitalists.

Advice to
small
Capitalists

54 SUCCESSFUL INVESTMENT

of investment, and for this reason this all-
important nest-egg may not be treated with the
extreme caution which is essential to its welfare.

Experience has shown that, in the aggregate,
owners of small sums lose much more in propor-
tion to their individual wealth than people with
larger means, and a hundredfold more than really
rich people. Whenever there is any financial
crash, it is always the small man who loses most ;
all the money swallowed up by bogus banks is the
property of small Investors, who seem to require
a financial earthquake to rouse them to exercise
even a modicum of caution. Only when they
are face to face with absolute loss, do they seem
to realise how very important their little nest-
egg is to them. The truth is that the smaller
the capital-sum, the greater should be the
caution in disposing of it.

A small capitalist’s first savings up to £100
should be placed in the Post Office Savings Bank.
There is no danger of losing capital so disposed
of, but this cannot be called investing at all.
As soon as the second £100 commences to
accumulate, the science of investment must
be acquired; from that moment investment
becomes a necessity to the growing capitalist,

If the owner of that sum is too indolent to
acquire the fundamental principles of sound
investment, let him purchase Consols, although

‘SUCCESSFUL INVESTMENT 5D

they are, in point of fact, the most ‘unsuit- Consols as

able stock for any private Investor to hold.
Their sole recommendation lies in the fact
that the income which they produce is always
paid, and that they always possess a realisable
value of some sort. There are, of course, many
investments which would be more suitable to
the embryo capitalist; but to find out for
a certainty which they are, and at what price
they are good to buy, requires some real
knowledge of the fundamental principles of
finance. Therefore, before this knowledge is
acquired, Consols are the only possible stock for
the financially ignorant to buy and to hold.

As soon as the Investor has mastered the first
principles of investment, he should, up to his first
£1,000, strictly adhere to the principles of in-
vestment which were advocated as suitable to
Investors of Group I., sub-section (qa).

The Income obtained will be small, but his
Capital will be safe.

By systematically covering a fresh Geographical
Division with each further £100 of capital accumu-
lated, the completion of the first £1,000 in Capital
Account will witness a complete distribution of
investment-risks upon a scientific principle.

The accomplishment of this first stage on the
road to the acquisition of solid wealth will doubt-
less occupy some time, and during that time, on

Investments.

Scientific
Investments.

--- Page 32 ---

56 SUCCESSFUL INVESTMENT SUCCESSFUL INVESTMENT 57

nine separate occasions it will be necessary to
buy stock. Each one of these purchases will
require study, and in this way, gradually, and

How Investors perhaps quite unconsciously, the Investor will

Pecome expels become an expert. By that time he can decide
for himself to which of the other nine classes
of investors he rightly belongs, and which plan
of investment he should adopt in his own best
interests.

But if, through an alteration in his circum- alteration
stances, which may come upon him suddenly ciroumetances,
or gradually, he finds that his membership

of the Group originally selected has, through

these occurrences, been cancelled, and that he

now belongs to another Group, the investments

held should be gradually altered to suit the

changed circumstances.

Although, if it is to be successful, the invest-
ment of Capital must be carried out according
to certain fixed rules, there is fortunately no
difficulty in gradually readjusting any existing
List of Investments in accordance with these
rules.

Such a transaction involves but a small Readjusting
outlay, and it can be carried out at any time. Lists.
Most investments, however bad they may be,
can, as a rule, be sold, and the proceeds invested

The most usual types of Investors have
now been described, and any Investor who
does not find his precise case depicted among
them should use his best endeavour to ascertain
to which combination of sections he belongs; and
consequently, what his tactics should be, before
he attempts to settle upon a definite investment-

plan.

To commence investing on a wrong plan is
tantamount to taking a wrong kind of medicine,
for investment-success is] absolutely dependent
upon the right kind of stocks being selected, so
that the individual investor’s definite investment-
object may be achieved.

in the very stocks which an Investor should
hold. In doing this no actual loss is incurred,
for every investment has its market value. On
the contrary, the Investor’s position is changed
for the better, and not for the worse, when he
equips himself with a properly balanced Invest-
ment-Scheme, instead of vainly hanging on to

Having settled the Group to which he belongs,

an indiscriminate medley of incongruous stocks No loss
and thereby ascertained the class of stock he

; . incurred in
in the hope that, through some miracle, the readjusting
; vestments.

requires, the Investor should proceed to invest
in the stocks advocated as best for that Group.

whole of the Capital, which originally was in-
vested without due care, will be restored.

--- Page 33 ---

Losses must
be faced.

Capital
distinguished

from Income.

58 SUCCESSFUL INVESTMENT

The only point, which is bitter to Investors
who have bought unsuitable stocks at higher
prices than they now command, is the definite
fixing of the exact sum of money which their bad
mode of investing has cost them in the past.
The realisation of his undesirable stocks must
disclose the amount of the Capital so lost. An
Investor must be prepared to look facts in the
face, instead of imagining them, as he would
like them to. be; otherwise he is a lost man
from an investment-standpoint.

It is hoped that no such irresolution will deter
the readers of this book from promptly putting
their investment-position on a sound basis.

To properly understand the art of investment,
it is requisite that the reader should clearly dis-
criminate between what is Capital and what is
Income. In the recommendations which have
been given, all sorts and classes of stocks have
been mentioned, further particulars regarding
which will be found fully explained in the
chapters which follow. But as the reader has
by this time quite made up his mind to which
group and sub-section of Investors he really
belongs, he will be able to read the passages
referring to the stocks which interest him most,
with additional care and attention.

CHAPTER III
ON CAPITAL

OLITICAL economists have written whole
libraries on the subject of Capital. It is

not intended in this book either to give subtle
definitions or to deal with the subject in any
way exhaustively. The aim is simply to give
the reader a practical idea of that aspect of
Capital which affects everyday life, and for
this reason many points have been left
untouched.

The real inward nature of the business of invest-

ing, a8 this word has been defined in a previous
chapter, can only be thoroughly grasped by |
capitalists if they accustom themselves to dis-

tinguish closely between Possessions,—Money,— Bostarions,
and—Capital. These three expressions are only and Capital.

too frequently accepted in ordinary conversation
to express one and the same thing, and yet they
have widely different meanings as applied to the
science of investing.

"Thus, ordinarily it is said that a man has large

possessions, or that he has lots of money, or that
59

--- Page 34 ---

Definition

of Capital.

60 ON CAPITAL

he has a large Capital, or a large income ; one and
the same thing being meant by these four expres-
sions, yet property and possessions are certainly
not money, and they are only Capital in certain
events; while Capital itself is rarely actual
money. It is true that possessiens and Capital
can be converted into money; but so long as
they remain in their original form it is necessary
to draw a sharp distinction between them and
money.

Possessions are all that any person owns,
including, of course, his money and his Capital.

Money has already been defined as stored
human effort which is convertible, either directly
into human effort again, or into any produce
of human effort, or into one of nature’s pro-
ductions which has become valuable through
human effort.

Capital is that part of any one’s possessions
which either directly produces an income for its
owner or is a necessary adjunct towards assisting
its owner in the earning of an income.

It is this particular definition of Capital
which every Investor should make quite clear to
himself, so that he may make the most profitable
use of his possessions.

Two men start with £50,000 in money; the
one of them applies £30,000 towards buying a
house, fine furniture, horses, motor-cars; and

ON CAPITAL 61

devotes only £20,000 to the purchase of land A comparison
and stocks, which yield him, say, an average of Tene,
of £5 per annum on every £100 invested. Then
this man has £50,000 worth of possessions, only
£20,000 of which is Capital, and his income
is £1,000 per annum. The other man also buys
a house, but a moderate one, and furnishes it
modestly ; this absorbs, say, £5,000. £25,000
he expends in buying business premises, and
equipping them for the purposes of his trade;
£15,000 he invests in land and stocks, producing
him.5 per cent., and £5,000 he retains in cash,
which remains unemployed for the present. Then Interchange-
this man also has £50,000 worth of possessions, but Posstatons
£40,000 of this is Capital, whilst £5,000 is money. Mom Capital.
Then assuming that the business produces the
moderate return of 10 per cent. on the capital
invested therein—most private businesses pro-
duce more—he has an income of £3,250 per
annum.

In common phraseology, the position of both
these men might be taken as being equal, as
both of them have £50,000 worth of possessions ;
yet, in reality, the actual facts differ very widely
from each other, for an annual income of £1,000 The same

utla:
cannot be compared with an income of £3,250. may bring
Endless variations of this example could be results.
given; one man, for argument’s sake, apply-

ing £1,000 towards the purchase of jewellery,

--- Page 35 ---

Another
example in
monetary
outlay.

The three main
classes of
Possessions.

62 ON CAPITAL

another spending £1,000 on a motor-car, and
a third investing the same sum in sound stocks.
All these men may imagine that they have made
INVESTMENTS because the jewellery, the car,
or the stocks, are all saleable, while the money
thus sunk in their purchase is to some extent
tefundable by a sale which could be effected
atany time. Yet, although the articles purchased
are to some extent saleable, only the money
placed in stocks has been invested, because the
jewellery produces no income, while the motor-
car not only produces nothing, but involves a
heavy upkeep. Only the stocks produce an
income.

We are thus dealing here with the three
main classes of possessions, the first of which
—jewellery—is the type which produces no
income and involves no annual expenditure ;
the second—typified by a motor-car—also
produces no income, but, in addition, causes
expenditure; and the third—stocks—which
involve no annual outlay, but produce an
annual income. The income produced by this
third class of property need not be receivable
annually, for it can result from an increase in
realisable value, like building-land, non-dividend-
paying stocks, or vintage wine, which increases
in value year by year.

Any one who desires his possessions to produce

ON CAPITAL 63

the largest annual income, should endeavour to Expensive and
. . non-¢é: enslive
own only a sufficient amount of that kind of possessions.

property which involves no up-keep, like furni-
ture, books, pictures, and such like; as little
property as he can do with of the kind which
costs money to maintain, such as houses, parks,
horses, yachts, motor-cars; and as much as
possible of the kind which produces an annual
income, in the shape of houses and lands leased
to others, stocks, bonds, mortgages, and other
income-producing property.

The first and second kinds of property
enumerated are merely possessions, and only the
last is Capital in the properly applied sense of the
word. In fact, only that kind of property which

‘ produces income, be it in the form of actual

money received annually, or in the form of in-
creasing value, is Capital. Capital thus becomes
the root of income, and, for this reason, its
maintenance and augmentation should be the
first consideration of every Investor.

All saleable possessions are convertible at
any time into Capital, by the simple process of
realising and applying the proceeds towards
the acquisition of income-producing property.
Capital is always convertible into possessions
by selling the income-producing properties, and
purchasing with the proceeds anything which
either involves no expense in upkeep or which

Capital the
root of Income.

--- Page 36 ---

64 ON CAPITAL

costs money to maintain. Therefore, every one
has it entirely in his power so to adjust his status
that he owns the proper proportion of possessions
of both classes as here distinguished in relation
to his Capital. He can also ensure that the pro-
portions are appropriate to his station in life
and real wants.

It is now clear that the same property can at
one time be a mere possession, and at another time
capital, without this property itself altering in any
way or changing its owner. For example, a
house standing empty, is property; as soon as
it is let on a rental it becomes capital. A yacht
used for the owner’s pleasure is property; if
permanently let [for the pleasure of others] it
becomes capital. A book in a private library
is property, in a circulating library is capital.
So that by converting idle property into income-
producing Capital the Investor may increase the
sum-total of his Income.

The question of money has, as yet, not been
touched upon. Money, in its proper meaning, is
only actual cash, and this cash can either be
a property—when it produces no Income—or
Capital when it is lent out at interest; and, in
the latter case, it only then remains money when
it is convertible into cash without any process of
sale. Thus, money deposited with a banker at
interest, or lent privately, or lent on a mortgage

ON CAPITAL 65

which is terminable, is tantamount to cash 3 Distinction
whilst stocks or bonds are not money, as they ond cash.

have to be sold before the cash can be obtained.
It is very necessary to understand this subtle
distinction, for the simple reason that money lent
in a safe way cannot diminish or increase in
amount, whilst money invested in stocks or bonds
can and does alter in amount when converted into
cash again by a sale.

By means of these examples, it has been made
clear that there are two ways in which Income
is derivable from Capital, namely, by either

employing Capital oneself in a manner which Two ways of

produces Income, or by letting others have
the use of it and obtaining income from them
in return.

In all cases where Capital is used in business,
either directly or indirectly by its owner, no
one is responsible for its repayment, so that its
permanent safety solely depends upon the success
of the undertaking engaged in. But whenever
Capital is lert to others, there is some one
responsible for its ultimate return. Therefore,
in such a case its safety depends in the first
place upon the borrower’s solidity, and, in the
second place, upon any special security which
has been pledged to the lender. It does not
depend in a direct way upon the success of the
business in which it may be employed.

6

--- Page 37 ---

66 ON CAPITAL ON CAPITAL 67

Risk attending 4 No matter whether Capital is used in active

conjointly} rise in value. From the owner’s Total Invest-
on oy participation in a business, or by lending to

ment-Results

of Capital. point of view only the total result obtained from done important.

others, there is always a certain amount of risk
involved and some portion may be lost in the
long run. For this reason, it is self-evident
that it would be highly unwise to place the
whole of one’s possessions in any one concern,
unless the owner of the Capital were to
look after that concern himself, and has
sufficient confidence in his own business ability
to make loss improbable. On the other
hand, when Capital is intrusted to others, no
matter how closely and carefully any investment-
chance may be investigated and considered, the
unforeseen may still possibly happen. There-
fore, it is wise to guard against this risk also,
by spreading the Capital over a number of

all investments is of importance. To have some
of the investments rise, whilst others simul-
taneously fall to a larger extent than the
first named have risen is tantamount to spending
more than has been received ;—therefore, a
arudent Investor will never consider the results
obtained from any one of his investments singly,
but will always consider all of them as a corporate
whole, and will accept as a guide to his true
investment-position only the total results
produced by them all.

All investments held are in this way placed
on one side of a scale, on the other side of which
is the original Capital. The turning of these

Balancing scales indicates the actual position. In fact,
Tnvostpent: separate investment-opportunities, so that the a balance sheet is established, and if both sides

failure or partial failure of one of them may be
counterbalanced by a greater or smaller success
in another.

Every single investment may either rise or fall
in realisable value, or it may remain stationary.
Therefore, if a number of investments are held,

are equal, then no Capital has been lost. If the
total realisable value of all the stocks held is
larger than the capital invested in them, a profit
has been made, if vice versa, a loss has been
sustained. For these reasons, the vital point
aimed at, when Capital is spread over a number

and some of them fall in value, whilst the others
remain stationary, there is a loss of Capital.
There is also a further loss if all fall simultane-
ously, or if some of them [when taken con-
jointly] fall more than the rest [when taken

of investments, is to maintain an even balance How tomaintain
of value. To accomplish this all investments oti”
held must not only be well matched in quantity and V*™*-
quality, but must also be so selected that no two of

them are likely to move in an identical manner.

--- Page 38 ---

68 ON CAPITAL ON CAPITAL 69

then, again, no equilibrium is possible, and, for Stocks held

. . {
this reason, each of the stocks held must be subject to different ee
to an entirely different set of influences which ™™™*

causes them to rise and fall.

Main principles Supposing that of two stocks held, one falls
of Geographical Chile the other rises: equally in value, and
of Capitsl. that the holder has twice as much of the first as

he has of the second, then the balance has not

been maintained; for the fall in the first case
represents a larger sum than that covered by

the rise in the second. This explains why an —

even division of Capital amongst all the stocks
held is indispensable.
Suppose, further, that equal quantities of two

The sentences printed in italics in the last
four paragraphs embrace the main principles
of Geographical Distribution of Capital.

Formerly, it was imagined that by splitting
up Capital over entirely different industries, the
Investor could guard against similarity of
price-movements. Inspired by this idea, the

equal quality stocks are held, but that the one is a Debenture
and quantity. stock, which moves but little in price, and the
other is an Ordinary stock whose altering pro-

same Investor would buy stocks of Brewery, Diflerent
Cotton Mill, Railway, Banking, Gas, Water, necessarily

different

spects and varying dividends cause considerable
fluctuations. Then it is quite likely that the
Debenture might move 2 per cent. against a
simultaneous movement of 8 per cent. on the
part of the Ordinary stock. But, as the
quantities held in both cases are equal, the cash-
value of the movement of the stock would be
four times as large as the cash-value of the move-
ment of the Debenture ; and although the quan-
tities held have been identical no equilibrium
has been established. For this reason, all stocks
must be matched in quality and width of fluctuation.

Suppose, lastly, that Stocks of equal quantity
and equal quality are held, but both securities are
subject to the same market influences, so that
they rise and fall together, in close sympathy ;

Telegraph, and Insurance Companies, and of
other industrial enterprises, which seemed
on their face to represent totally different in-
terests. But practical experience has proved
that such a splitting up of Capital is, under
certain circumstances, quite unavailing. Under
certain conditions all these investments, though
they actually represent industries which are not
subject to kindred influences, will invariably
move together in the same direction.

The reason for this extraordinary phenomenon
has been scientifically investigated, and, after
laborious researches, it has been conclusively
proved that it is not the dissimilarity of trading
interests nor the varying internal developments of
individual companies which really cause sound

--- Page 39 ---

80-9 | °° g6 | tTe0T
1-23) °° 88 394
Lve| 7° | tee FOT
** lget| tot] 16
ge | °° FL| YT
ge | ** 86 | o9-T0T
** Ir.ep | $96 | 9
be | 96 | 02-66
@.g1) °° | 8 | 001
*8 18.8 99 | 4$F9
LO | °° | 98-LOT] 808
9%) °° Z0L) #FOT
** 1 o¢ 90T| F20T
6s | ** fto1L| ¥#S0T
Q.LT| °° PLL iss
60-6| °° 96 ¥OT
“| ea! 86 79
Le | ** got] _TIt
"* lope] 06 | OL
** 18 | 406 98
92 | °* Z0L| FOrt
ge | °° 66 | 01-201
** 165 vOL| I0T
"+ 1a.cp| $6 rg
Te | °° 66 | SOT
6-9T| °° 9g | #801
“*leo5! pe | oo
gic 96 O0L
"* 1 eet] TOL! 06
z|°° oF | 09-809
“* 16.9 s6 | 428

023 sg | fal

“* | OGLPPL «6 OLF
Wea | ost | gost | 968T
ua) 29d) -eog qso08tH

senuerey ICI

70

Real causes of INVeS

price-

ON CAPITAL

tment-stocks to fluctuate in value, but that
the all-predominating influence, which creates

Stocks

Govern:
differing

fluctuation.

moveme

is the temporary position of

the Money Market and the state of the

these movements,

t-

inves

“18,

ment-demand in the country in which these

stocks are held and c

“UOFeNTS
yeoyqdzasoep)

hiefly dealt in.

+++ nog edomiy
«oes muon edomg
sees wynog edoing | *
+++ TRION BOLOUY | °
*s> yemueg edommy | *
sere gynog adorngy
c++) yynog edomia
ss) qqion edomg | *
*se* uqnog edosngy | *
oes gqion edomg | °
pro AfreuoensoquT | *
so qqagon edoang | °°
see WAnog BOLIOUTY | *
PET GAN | *
s's° Uqnog YOLBUY | *
ores uanog edoma
s+°* qyon edoamg | *
zqteQ Boysoury | *
* yynog edo.my | *
se) GLION adoangy .
see" qqion edomag
‘es gynog edommoy
sees gqon edoangy
see uqnog edomy | °°
less ygnog eopoury | °°
cee? Uqnos BOLIEMY

eerereoseaes

In “ Investment an Exact Science,” which is

the companion volume to this book, this conten-
tion has been amply proved by a lengthy

argument supported by statistical charts and

ere.

seeseeee

ea nevaccscnre

to go
t is of the

ion

it would therefore be repetiti

.
>

to it here, but, as this sub
utmost importance to every Investor,

tables

ee eseorervoeneces

%e sour

Yoke ure 4827D
** Hp vissny
+ ke ApeqT

eee eecenrennerore

seceeee

act ee en encersene

jec

in

sees

WP 809078 DAUD
* ‘BY UAMOIN %p BLPERV
+ +-soquey “seg parses Jay uludg
UMOIN %p Ares un,
cons We ondugy UBUIeZ)
Be resnqi0d
Ws vniser
Sy LOND,
269 BUND
%q weder

Wks pusjioy

“peut Mie ydAsy
++ Fy oupuesry
sees OFe epeuep
EP esa
MP vlureuMoy
sre Oo, sU0;ON odeD
** Y$e puspiozpss
%q oomew
Suarpun,7 %¢ 900014)

te uspoag
%e LeMION
o? Mp BAI0g

*ssOUPEIQOPUT OT JO O21
oy} 0} Suppiocoe pesasily

‘sROOIG qUeUITIGACH)

we will

oO
co
ES

A)

oO
Lal
ao}

sg
~~

®
—

Gu
£

m

°

5
~~

B
wQ

ad

eH.

o
|
»
om

o
+

&
~~

wn

3
bam
ort

%¥g Yreuraed
** %q epesng
waee “Ss sjany,
%¥e MO
%e Aonduwegd
reree dog epaary

a selection of British stocks which

one gives

PERSE WN AoW

G81

DCADLSEAODMS
AYMwBWAWwAGA

29
POE

*g08T TIqQuUIBAONT 03 dn ore BIDITT SGT CNL —"BION

pol
BST | *

Ted 98te) SOT | 968T

“queO Jed
eoueJeg1C

3

Government stocks of

pal countries of the world, arranged

important branches of investment.
according to the size of the indebtedness of

the other shows the

covers all the

MC1

the pr

It will be seen from these

tables that whilst all the British stocks have
slavishly moved together, although thirty-three
different industries are represented, the Govern-
ment stocks of the various countries have widely

Bad and good each Government.

Capital-

wee seesee

poe enan

ara eeaaeee

eneese LemrmpayT | coeeee

distribution.

imultaneous

sim

in

differed from each other

were eee n saves

so yarg qoazeg eazeads
s yaig Leye a quedag,
eee sees kreq BIARIZIOT
seeee *poag souuryg 2p Leq1TT
Se[PUBO 8,207
‘Jorg deog ,sreedg
* *yarg sireuody
“* peoag paqaiey
** Tog @ aoRsNED
** Jord 9a “OD 2 MosupHO}d
sonceeweves * *so109g SPOLIBH,

a enensoeee

"JaIq vay, JMOL

eet eid %9

Pooeveeovene

svanuereeene

-movements.

price

is in

It

teresting to note how large some of the

“sy00j8 YER IV

tven

tions of the Government stocks g

price varia
the table have been.

‘03 ‘sume NT
* 'Joid A0T1}D 2 SUE
‘9200 “d VL
"pig sqoousy
eeeeeeorary suog @ La[s6019
cecoeee® sary paIOH UOPIOH
** ‘Jorg UIXVA ® "5 ‘SORA
suryieg ‘Avupreq
STIQIMIO [Bleta~) UOpUoO'T
PIO SMELL, [BpULAoI
JId 4387 euoyda[ay, "9ST
“pag jeueg Toyouns puszy
Sxood TRA
‘sosey e8ueyorg pedo
° "yoag FOAL, e[Huso7T
* yusg pepUpAorg “FEN
sees £iddng ‘4007q UopuoT "pg
“SqaC, B¥E) pezUp joodsearT
%s ‘1078 A\ TOPUOT “HT
“eqeg “ATH AN ® "T
Me ‘oVysuMoN |

in

--- Page 40 ---

Government
stock as
indicator of
price-movement.

Insuring
dissimilarity
of risk.

72 ON OAPITAL

The price-movement of the Government
stock of every country governs the main direction
of the price-movement of all other important
investments chiefly dealt in in that country.
Therefore, as it has been shown that the various
Government stocks contained in the table differ
from each other in their respective price-move-
ments, the industrial stocks of all these countries
must also have similarly varied in the amounts
of their realisable values. In ‘“ Investment an
Exact Science ” charts are given showing that
a similar selection of the stocks of every other
individual country move in consort similarly to
the British stocks given in the table overleaf.

In this way, statistical evidence has proved
that the only method of insuring a dissimilarity
of price-movement amongst all the stocks
which an Investor holds, is to invest in various
countries of the world in such a way that every
stock held is controlled by the separate market-
influences of a different country. The best results
are obtained when each country included in an
Investment-List is as widely different as possible
in its trading interests from all the other countries
represented in the same List. So, for the guid-
ance of Investors in the selection of their
countries, the earth’s surface has been split up
into nine main divisions, the tenth being assigned
to investments which are not peculiar to any

--- Page 41 ---

et BE co

7

Aw

OR of OO KB

“—S @ @ ™“ fy

INDICATES THE MAIN

‘+ amo we

ea nr J

THE COUNTRIES COMPRISED IN EACH DIVISION.

Arahia
China

. '
Japsn
Korea
Persia
Siam
Turirestan
Turkey in Asia
Malay
Philippines
East; Indies

Vi
AFRICA.
Algeria

Cape Colony
Congo F. State

Egypt

Gold Coast

*. Morocco

Natal

Orange :
River Colony

Rhodesia

Transvaal

‘INVESTMENT ZONES BETWEEN WHICH CAPITAL SHOULD BE

DISTRIBUTED SO AS TO OBTAIN A GEOGRAPHICAL DIVISION OF RISKS. BELOW ARE GIVEN

IX.

. AMERICA

Soutu.

Argentina
Brazil
Bolivia _
Colombia
Chili
Ecuador
Guiana
Peru
Paraguay
Uruguay
Venezuela

X.

INTERNA-

TIONAL

STOCKS.
International
trading
interests, like
Trusta,
Shipping,
Telegraph, and
Marine
Tneurance

Shipping
Cables

[aut Bights af Reproduction Reserved, :

--- Page 42 ---

ON CAPITAL 73

Gove one country. These last named represent in-
indic dustries which embrace two or more parts of the
price.

world in their trading activities, such as Tele-
graph, Cable,. Shipping, and Marine Insurance
Companies’ stocks. ,
_ By these means a natural division of the Geographical
earth’s surface into ten main groups has been gap gme and
arrived at and seven of these main groups can
again be subdivided ; and the annexed chart of
the world explains the details of these sub-
divisions. .

To summarise, the three main essentials re-
quisite for maintaining capital-stability are as
follows :

1. An even division of Capital amongst all summary of
the stocks held. for Capital. ites

2. All the stocks held to be similar in intrinsic ">t:
merit and in width of fluctuation.

_ 3. Every stock held to be under a different
external influence.

As long as due weight is attached to these
three points, every one of which is exceedingly

~ simple in its application, the maximum of attain-

able capital-stability will result.

As has already been said, Capital is the
root of all Income which does not result
from personal exertion, therefore, the larger the
Capital the larger should be the Income. It has
been shown where the difference lies between

Insur
dissir
of ris

--- Page 43 ---

74 ON CAPITAL

Possessions, Money, and Capital, and that every
Investor has it in his own power to make his
Capital the predominant part of his possessions.
It is the wise apportionment of an Investor’s
Property amongst these three items which
constitutes investment-strength, and it is by
means of the subsequent scientific distribu-
tion of the risks, inseparable from the act of
investment, that a sound and permanent Income
is built up.

CHAPTER IV
ON INCOME

LM its predecessor, this chapter will also
treat of finance in its purely practical
and not in its theoretical aspect. Otherwise
its contents might lead to endless controversy.

- There are some writers who assert that to

pay interest on borrowed money is improper ;

there are others who hold similarly impractic-:

able theories. The discussion of such points of

‘doctrine would lead this handbook too far afield

from the practical conclusions it proposes to
establish.

There are three ways of obtaining an income:
the first is by personal exertion without the use
of Capital; the second is by personal exertion,
coupled with the use of Capital; and the last is
by Capital pure and simple, without personal
exertion and unassisted by grant or gift.

‘The first of these methods need not be here
discussed; the more or less accidental way of
obtaining income by grant or gift has also no
place here, so our area is limited to income

75

Three sources

of Income.

--- Page 44 ---

Modes of
employing
Capital.

Shareholders
are sleeping
partners.

76 ON INCOME

derived from Capital either with or without
personal exertion.

As already stated in the last chapter, the
owner can either directly or indirectly use
his Capital himself or he can lend it to
others, on their paying him interest for its
use. Where the owner uses his Capital himself
there is no one under an obligation to repay
him the Capital employed. This can occur
in a variety of ways: by using it in business,
by purchasing properties of all kinds which the
purchaser believes to have a chance of improv-
ing in value, by a sleeping partnership in any
enterprise, and, lastly, by the acquisition of
shares in any company or corporation. Here
again only the last mode, namely, the holding of

shares in an enterprise, is of importance for the

purposes of this chapter.

A share in any limited liability company or
corporation is most nearly akin to a sleeping
partnership. The directors and managers are
the working partners, and the whole body of
shareholders are the sleeping partners. When-
ever profits are made they are distributed by
the directors among the shareholders; if the
profits diminish, the dividends diminish also,
or cease entirely when no profits are made. This
shows that whenever an Investor buys shares
he does not thereby obtain a right to a stable

ON INCOME 77

income; and his chance of obtaining an income
at all is dependent upon the prosperity of the
enterprise.

As every shareholder has to run this risk Uncertain
of uncertain income, he should naturally Shares.
receive some compensation for it; and there-
fore, it is only wise to hold shares when the
income which they are likely to produce—be it
in the shape of dividends or increasing value—
is greater than the fixed rate of income obtain-
able from allowing other people to have the use
of the Capital.

This is a point which every Investor should
thoroughly understand.

There are many companies which have regu-
larly paid steadily increasing dividends to their
shareholders for years. This fact has led many

Investors to fall into the mistake of believing Common
miustaxce

_that such a happy state of affairs is bound to of Investors,

continue indefinitely. On this false assumption
they have invested their Capital. In other
words, they have laid the foundation of their
income on a wrong conception of the material
facts which control the realisable value of
invested Capital. |
Every share, whatever its nature, is a specu- Onieary Share
lation on the business-future of the enterprise # Speculation,
which issues it. As there is no certainty that

the best established business will continue to

--- Page 45 ---

The use of

balance sheets.

Relation
between
directors and
shareholders.

Division of
company’s

profits,

Te ON INCOME

prosper, every holder of shares is a speculator on’

a future event. For this reason, shareholders

are bound to follow closely the forcunes of ~

their enterprises, as disclosed periodically iz
Directors’ Reports and Balance Sheets; other-
wise an unpleasant surprise may some day be
sprung upon them. They should not, however,
merely content themselves with perusing these
documents, but in addition, they should demand
from the directors such further information
as is necessary to form a correct opinion upon
their company’s actual position. The directors
and officers of a company are the stewards of
the shareholders’ Capital, and, as such, they
should always endeavour to present the actual
state of affairs, so that neither the existing
nor possible new shareholders may be misled.
This is the only real and proper view of the
relation between directors and shareholders.
At the time of their formation or flotation,
companies and corporations can make all kinds
of bargains with the various groups of partners
[shareholders] which constitute the enterprise.
For instance, they can arrange for one group
to rank in front of the others for dividends,
and issue Preference shares to them. Again,
they can arrange with another group of share-
holders that, provided the Company is successful,
they shall receive the remaining profits after

ON INCOME , 79

certain stipulated sums have been paid to other
groups of shareholders. On these terms Deferred
shareholders are content to rank behind every-
body else in their claim upon the divisible

profits. In this way many varieties of shares Share-income

are created, all of which will be separately be b

dealt with in a subsequent chapter; the point “°°™

which is here insisted upon is, that every share,
whatever its special rights may be, constitutes
a partnership, and that the income to be
expected from it depends entirely upon the
business-success of the company which issues it.

Shares can produce income in two ways,
namely, by the dividends actually paid by the
companies, or by displaying an increase in their

realisable value. It very frequently happens Tncome as

that the increase in value is a much greater ¢,

at all actually produce in the shape of rising
value a much larger rate of yield than the best
dividend-payers.

To be able to make income out of increased
value is, however, by no means easy; it requires
a close knowledge of figures and a clear compre-
hension of future chances and prospects; there-
fore, only experienced Investors who possess
sound financial knowledge should attempt to
employ their Capital in this direction. It is

rom Capital-
source of i income than the dividends distributed, *PP™°!stion.

and in many cases shares which pay no dividends

--- Page 46 ---

80 ON INCOME

merely trifling with the responsibility attached
to the ownership of Capital, to follow rumours
or act on tips or special information. An
Investor should never be swayed by - these,
unless they are supported by indisputable
actuarial evidence which he is fully able to
grasp, and the market-effect of which he fully
understands.

Quite different from the position of a share-
holder who personally employs his Capital
is that of an Investor who lets others have
the use of his Capital in consideration of
receiving interest from them for such loan.

The shareholder receives dividends, the holder
of Bonds or Debentures receives interest; and
all Investors should thoroughly understand the
difference between these two words, which many
persons wrongly imagine to mean one and the
same thing. Dividends, as has already been ex-
plained, are payable out of profits, and if there
are no profits to divide the law prohibits
directors from paying dividends. Interest in
no way depends upon profits or prosperity : its
payment falls due on regularly recurring due-
dates, and on those due-dates it must be paid,
no matter whether the borrower [Company,
Corporation, or Government] finds it convenient
to meet its obligation or not. There is, of
course, a vast difference between being obliged

~

ON INCOME 81

to pay and only paying when it is convenient
to do so. .

This is the main point of difference between a Difference
Company’s obligation to its Bond or Debenture- py tier
holders and to its Shareholders. The former 22 snotaer
lend Money at a fixed rate of interest, and so
long as this interest is punctually paid, they have
no concern in the success of the business. The
latter, however, are partners, and some of them
receive larger or smaller dividends, according to
the prosperity of the undertaking. The prudent
bondholder should ascertain prior to purchase Duties of
that his Bond is well secured. Subsequently he pondholder.
should check the Company’s Balance Sheets

_ as they are issued, so as to make sure that the
. original security and the Company's income is

not diminishing, either in quantity er in value.
The shareholder, being directly interested in the Duties of
business, must constantly keep his eye upon the sharehorder
Company’s position and the general state of
trade. These facts have now been repeated
several times, and it is hoped that no Investor
will overlook them, as they form one of the
first principles of investment.

Money can be lent either for a short period,
to bankers and others, or for a long period,
to Governments, Corporations, Municipalities, or
Joint-Stock Companies; and it can be lent either
against any security which is specially set aside

6

--- Page 47 ---

Different ways
of lending
money.

82 ON INCOME

to secure the loan, or without any such special
security. In the case of short loans, the lender
receives either a simple acknowledgment, a bill,
a mortgage deed, or an IO U. In the case of
loans for a long period, he receives a scrip certifi-
cate, which is called a Bond or Debenture. To
purchasers of British Consols and some Colonial
loans, an entry in the books kept for that purpose
by the Bank of England is the only evidence
of proprietorship which exists, as the stock
receipt is never called in when a transfer of
the stock is made, and afterwards the transfer

ON INCOME 83

in the case of Governments, because these cannot
be sued in any court of law for their national
debts. Later in this book all types of loans will
be fully discussed ; here it will suffice to point out
that the incomes which they respectively yield
vary in amount according to the credit which each
particular Government or Municipality enjoys.
Nearly all other loans, be they raised by
Companies which work under special Acts of
Parliament, or Companies which are registered
under the Limited Liability Acts, are specially
secured either by a direct hypothecation of some

becomes a valueless document.

specially earmarked property or by mortgaging Specifically
Two classes Short loans do not interest us here; we will mortgaged

of Bonds the entire assets of the concern. Of the two, a securities.

Security of
Government
stocks,

therefore confine ourselves to the Bonds and De-
bentures issued by Governments, Corporations,
Municipalities and Joint-Stock Companies.
First of all, we will divide these into two classes,
viz., those with special security and those without
special security.

Most of the Government, Municipal, and Cor-
poration Loans are not guaranteed by special
security, except in the case of young Govern-
ments or those older Governments whose financial
past has not been so clean as to earn them a

reputation for promptly meeting their engage- —

ments. But, as a rule, these loans are solely
secured upon the honesty of the borrower.
This point is especially important to remember

special mortgage is the better security ; because
in that case the lenders [Debenture or Bond-
holders] rank in front of all other creditors,
so far as the specifically mortgaged assets are
concerned. Therefore they run no risk, if only
they are careful to see, before investing, that
the property which is mortgaged to them is
worth considerably more than the total amount
of the Debenture or Bond-issue.
It will be seen from the above explanation, that
it is not only easier to ascertain the safety of
a Debenture than in the case of a Share, but that
the surveillance of the security is also much less
complicated, The borrowing Company must pay
its interest regularly, or it is liable to be forced

--- Page 48 ---

84 ON INCOME ON INCOME 85

into liquidation ; and from failure nothing need
be feared by the Debenture-holders, so long
as the value of the realisable assets consider-
ably exceeds the amount of the Debenture-

not strictly belong to this chapter, which deals
mainly with Income. But it was impossible to
explain the gradations of Income-safety with-
out this partial digression.

debt. h being simol _There is another extremely important point Realisable
ban holter’s A. Debenture or Bond- older, omg Town Ye which should be considered in this connection, intrinsic valu
rights. lender of money, is In & position to enforce his . namely, the temporary popularity of a stock. of stocks.

rights. In fact, in case of a default in interest- Investors should make up their minds that

payments, all shareholders standing bebine at the actual selling-price of a stock has nothing

would be compelled to look on patiently whist whatever to do with establishing the relative

the Bondholder realised a sufficiency of the assets value of that stock in comparison with other

to recoup himself for the money ne had lent securities. Coldly and impartially considered,

to the Company. For this reason Ve enture- it would seem that no fancy value could ever

interest is, as a rule, promptly paid, except in attach itself to a stock returning a fixed rate of

such cases where the Debentures have not been interest. It would appear inevitable that the

amply secured in the first instance, or where some _ market-value of such stocks would be fixed by

exceptional disaster has overtaken the concern. the rate of interest charged on permanent loans

In short, if there is a substantial surplus of assets at that time; but this isnot the fact. There are

remaining, after the claims of the Debenture- some stocks which the newspaper articles keep

holders are satisfied, the shareholders naturally constantly before the public eye. These stocks
sharchold strain every effort to preserve the assets in their become what is termed “ well-known,” and
shareholders 3

assist
bond-holders

own interests. In order to do this, they are
prepared to make every sacrifice to avoid a forced
sale on the part of the Debenture-holders. In
any event, there is much less chance of losing
either Capital or Income on Debentures than
on Shares. z
_ This brief distinction between the respective

positions of Share and Debenture-holders does

owing to their popularity, they command a
fancy value. Investors prefer to buy stocks
which they believe they would be able to sell at

any time. In many cases, however, the popular Popular stoc!

fancy for stocks proves a very expensive hobby.
If Investors were aware that they had to
sacrifice frequently a fifth of their income to
their indulgence of this fancy for fashionable

--- Page 49 ---

' 86 ON INCOME

Example
illustrating
drawback of
popular stocks.

stocks, they would pause before they gave way
to it.

A very pointed instance of this indiscrimin-
ating method of investing exists at the time of
writing. So far as security is concerned, there is
absolutely no difference between Consols and
Irish Land stock, because both these securities
are unconditionally guaranteed by the British
Government. Yet during the current year
(1908) at one time the 24 per cent. Consols
sold at the same price as the 23 per cent. Irish
Land stock. Or, in other words, the same sum
of money invested in Consols to produce an
income of £100 per annum would have been
sufficient to buy as much Irish Land stock as
would have »roduced £110 per annum in the
shape of Income.

ON INCOME 87

is better advertised, better known, and conse-
quently more highly esteemed than the other.

If any competent stockbroker is asked
whether it has ever happened to him that, with a
little patience, he has failed to find a purchaser
for any good security at a fair price, his answer

would be in the negative. All good securities, Good securit
always saleal

be they quoted, or unquoted, widely market-
able or only locally marketable, are always
saleable at a fair price. Therefore but little
weight should be attached to the question of
marketability when appraising the respective
values of little known but good securities issued
by fair-sized companies of repute in comparison
with fashionable and much-advertised stocks.
It would hardly seem necessary to mention
that holders of stocks should not calculate the

What would happen if any bank were to say
that all its bills were equally secured and that

yield which they obtain from their invested Yield of sto

: : : . ured b
Capital upon the cost prices which they ori- merket valu

Reason for
comparative
dearness

of stocks,

it charged the same rate for them, but that bills
printed on green paper would receive 10 per
cent. more income than those printed on yellow
paper? Why, no one would take yellow bills
until they had fallen to such a price as would
bring their yield into harmony with the yield
obtainable from their green competitors. Why,
then, did not the holders of the £577,342,000
Consols rush to sell, and buy the Irish Land stock
in exchange? Simply because the one stock

ginally paid for their stocks, but upon the
current prices at which these stocks can now
be sold. This is clear, because if a 5 per
cent. stock originally cost £100 it yielded its
holder 5 per cent. at the time of purchase. But
as soon as it can be sold for £125 it only yields
4 per cent., because its realisable capital value
has risen to £125. Therefore its owner has now
£125 of realisable Capital instead of only £100,
as he originally had. Of this £125 £100 is his

--- Page 50 ---

Profits should

be taken to : . :

build up income, which has been made in the shape of self to treat every point in connection with stock
increased value. There is no difference between and share-investments as uncertain, and never
receiving dividends and investing them in non- to assume that there is any mathematical
income bearing stocks and leaving increased value certainty of any kind in connection with
unrealised, or, in other words, invested. If the them.
addition to Capital through invested dividends It is not difficult to spend more money than Discounting
produced no additional income, dissatisfaction one is accustomed to, but it is always a hard-orineme.
would be felt, and an equal feeling should result ship to be forced to reduce one’s habitual ex-
when increased value produces no equivalent divi- penditure. For this reason, no Investor should
dend-increase. This is a very important point deliberately place himself in the position of
in connection with the building up of an In- possibly having to face a reduction of income.
vestor’s income, as will hereafter be explained. Such an end is most easily arrived at by

To all those Investors whose sole object it is _ discounting beforehand the future uncertainty ;

to build up their Capital Account, it is quite im- which can be done by one’s making it a rule
material whether this result is achieved by an in- to live well within his means.
crease in the realisable value of the stocks which The larger the yield on the Capital, the more tncome-
they hold, or by reinvesting surplus dividends risk is there of one or two of the stocks held
or interest as fresh Capital. This type of In- reducing their dividend or interest, or some of ™°™meviel4.
vestor is also indifferent as to whether or not them stopping dividend-payments altogether.
the total amount of his dividends and interest For this reason, those who receive a total yield
is maintained on a steady basis year by year. of 4% per cent. on their Capital run a smaller

Regularity of To all those Investors, however, who rely on the risk of income-losses than do those who receive

aa orite, produce of their Capital for their maintenance, a yield of 54 or 64 per cent. So that it may

88 ON INCOME

original Capital and £25 of it is part of his

it is of the greatest importance that the in-
come-payments should be regular. These points
have been treated already in Chapter II. of this
book in the discussion of investment-objects,
but here a few additional hints will be given.

ON INCOME 89

Every investor will do well to accustom him-

be roughly said that regularity of income varies
in inverse ratio to Income-yield.

Any one who has carefully considered the
means advocated in Chapter II. for obtaining
certain given investment-objects, must have

--- Page 51 ---

A Remedy for
Income-
irregularities,

Income-
irregularities
met b

Reserve Fund.

90 ON. INCOME

been struck by the fact that it is possible to
make income-yields varying from 4 to 7 per
cent. It is this elasticity of possible income-
yields which serves as a remedy against pos-
sible income-irregularities.

Supposing a capitalist has £10,000 to invest,
and he is satisfied with an income of £400. Then
he should not lay his plans to. make an income
of £400 per annum only, but his aim should be,
£425. If he adopts a systematic plan of dis-
tributing his investment-risks scientifically, he
will in all human probability make this income
of £425 for many years without any reduction.
But as the possibility exists that such a reduction
might occur on any dividend-date, he should
only spend £400 of his income, and place £25
to Reserve for contingencies. This Reserve he
should, of course, invest, and only draw on it
when one of his stocks has failed to produce the
full income which it was estimated to produce.

In this way the uncertainty of income is
insured against and some provision is simul-
taneously made against any future Capital
depreciation which might occur.

Likewise, a capitalist who determines to
make an income of £475 on a capital of £10,000
should invest to obtain £525. His stocks are
slightly lower in grade of safety, therefore his
annual contribution to Reserve should be £50.

ON INCOME 91

Whilst £25 annually placed to Reserve is
sufficient to provide against the risks attaching

to a £400 income, in the case of an income- How to build

requirement of £475 the Reserve-contribution
should be correspondingly increased to £50 per
annum. On an income-requirement of £550
per annum from £10,000 invested, the Investor
should try for an annual income of £650, and
he should place £100 per annum to Reserve; in
fact, the amount of annual contribution to the
Reserve should never be less than 5 per cent. on
the income required; and such contribution
need never be more than about 15 per cent. of

_ the annual requirement.
On this principle, an income-requirement of Treatment

£650 should be backed up by an annual con-{

tribution to Reserve of about £130 per annum;
that is to say, the total yield tried for should

_ be £780 per annum on £10,000, or 72 per cent.

This would be an unreasonable income to expect.
Thus it becomes obvious that to attempt to
make more than 5% per cent. per annum in the
shape of income which the Investor may safely
spend, is to court disaster.
Every one who invests his money in accord-
ance with the principle of the Geographical

Distribution of Capital will from time to time whent

be able to sell some of his stocks at a profit.
Of such opportunities the Investor should in-

--- Page 52 ---

A 10 per cent.
Reserve-Fund
against

Contingencies.

lIncome-

92 ON INCOME

variably avail himself, whenever he sees the
opportunity of advantageously reinvesting the
Capital liberated by such a sale in some other
Geographical Division where general depression
temporarily reigns supreme. The income thus
accumulated by realisation-sales at a profit
should be added to the Reserve-fund, which
has already been opened with annual contribu-
tions out of revenue, as explained above.

It will be a pleasant and most welcome sur-
prise to many to find how comparatively fast
such a Reserve-fund will grow, if it is regularly
fed in this way, out of income. As soon as the
amount of the Reserve-fund is equal to 10 per
cent. of the total original Capital with which the
Investor commenced operations, then the owner
of so respectable a Reserve has amply provided
against every contingency.

At the time of writing, Geographically Dis-

ON INCOME 93

interest between the two extremes of 44 and 7
per cent.*

It has already been explained that to some
extent the yield obtainable from a security
indicates its character; also that it is one of
the main essentials of an efficient distribution
of risks that all the stocks comprised in the
same Investment-List should be identical in
character. Therefore Investors should, under no

consideration, hold low-grade and high-grade Separation of

securities simultaneously, nor endeavour by
such incongruous means to obtain a high aver-
age of income-yield. If it is at all possible,

Investors should try never to hold at one time

securities which differ more than 1 per cent. in

their respective yields, as otherwise there is a

strong tendency to upset the perfect equilibrium
which is characteristic of a scientifically con-
structed Investment-List.

yields of

I = howing A proper
The keeping of a proper account-book showing A proper

at a glance not only what stocks are held, what indispensable.

Geographically tributed Lists of Investments will yield on
Capital absolutely gilt-edged securities 44 per cent.

on an average; very safe Debentures and Pre-
ference shares will yield 5} per cent., and
Debentures and Preference shares of medium
quality 6 per cent., whilst Ordinary shares of
fair quality are producing 6} to 7 per cent.
These are the extreme present yields of the three
principal categories of securities, and Investment-
Lists can be compiled to yield any rate of annual

they cost, and at what price they have recently
been saleable, but also what income was originally

_ expected, and what income has actually come

to hand, is an indispensable adjunct to every

* In “Scientific Investment in Daily Practice,” by Sir John
Rolleston, published at 2, Waterloo Place, London, a number of
charts and tables-are given showing the actual results at present
obtainable from Geographically Distributed Investment-Liste
varying from 4 to 6} per cent. in their yields.

--- Page 53 ---

Special]
knowledge of
book-keeping
avoided.

94 ON INCOME

properly conducted investment-account. In order
to meet this requirement, the present writer has
designed such a book, which is published under
the title of the “‘Hyar’ Investor’s Account-
book.” This book has been so modelled that
no special knowledge of book-keeping is neces-
sary for keeping it up; it gives at a glance,
and without any laborious system of re-entry,

ON INCOME 95

The rises in value on stocks still in hand
should, as already explained, only be treated as
@ prospective income-estimate. The profits on
sales of stock, as also part of the dividends
and interest, should be placed to Reserve, and

‘only from 85 to 95 per cent. of the actual sum

received in the shape of dividends and interest
should be expended.

a complete bird’s-eye view of the Investor’s
entire position.

If an effective distribution of investment- How wr to assure
dy
risks has been arrived at and these rules are Taso

Three sources
of Income.

Any Investor who uses this book will periodi-
cally have his attention called to the realisable
value of his investments. As an increase in
total realisable value is treated as part of the
sum which makes up the net income, the
Investor will perhaps be inclined to treat all
rises in value as actual income made. To do
this would not be wise, for stocks still in hand
are always liable to go down again. For this
reason, only those increases in value which have
actually been realised by sales should be treated
as income proper.

- There are thus three possible sc sources of income
from investments :

1. Dividends and Interest; and of these the
dividends may vary in amount, whilst the interest
will in most cases remain stable.

2. Profits made on the sale of stocks.

3. Rises in value on stocks still in hand.

u

strictly observed, the Investor. will not only
enjoy a steady and increasing income, but will
also be enabled to make provision against the
contingencies of Capital-Depreciation and In-
come Failure,

--- Page 54 ---

CAPITAL AND INCOME 97

the sum lent or not paying the interest thereon.
These risks are insured against by retaining an Insurance
adequate margin of safety. If, for example, a toyetment

sack of wheat is selling for 25s. itis quite safe to ****

No fixed ratio
of Income-yield
to Capital-
safety.

CHAPTER V
THE RELATION OF CAPITAL TO INCOME

ik has already been pointed out that the

yield of income obtainable from the use
of money varies very considerably in different
classes of investments. This of course must be
so in all those cases where the owner uses the
money himself, as bis skill and business experi-
ence play an important réle in producing the
ultimate results. But as soon as the factor
of personal effort is eliminated, the yield of
Income should be almost the same the world
over, provided that the risk of losing Capital
be also the same. In reality, this universal
equality of yield does not exist on account of
the uneven distribution of wealth over the
earth’s surface and the, as yet, imperfect
understanding of the local risks attaching to
the safety of Capital in those quarters which
are geographically remote from Europe where
Capital is more abundant.

lend 12s. 6d. on it, because there is no likelihood

_ of wheat falling below that value. So that

in case the borrower does not pay the interest
or does not return the capital, then the wheat
can be sold by the lender, and by this means
he can reimburse himself for his capital and
interest.

The nearer the sum lent is to the selling price
of the wheat, the less safe does the loan become.
Because the sale of the wheat by the lender might
then result in the realisation of a sum of money
smaller than the principal and interest due to
him. This example explains the manner in

‘which lenders insure themselves in the cases of

loans upon a special security. A great many
loans, however, are made without special security
being deposited, and in all such cases the whole
fortune of the borrower is considered to be the
security on which the lender relies. Thus it
is quite safe to lend £1,000 to any one who is
possessed cf £50,000, but it is less safe if he owns
only £5,000, and hardly to be called safe if he

Wh is put out ¢ . h has no more than £1,000. Difference
. . . ween
op money iS Pub Out 40 earn interest there In those cases where special security is de- General

and Special

posited, the lender knows that he has a first Security.
7

is always the risk of the borrower not repaying
96

--- Page 55 ---

98 CAPITAL AND INCOME

charge upon the value of the deposit. In the
case of an open credit, without deposit, the
lender is quite in the dark, because a person,
who had £50,000, might have borrowed £1,000
from each of sixty separate people without any
one of them being aware of the rest of the
borrower’s outstanding liabilities. In such a
case, the total liabilities would be £60,000, and
each of the loans so raised would be very
doubtfully secured.

It will be seen that the gradations of safety
attaching to loans is infinite, so that it would
be reasonable if there were a standard rate

CAPITAL AND INCOME 99

borrowed upon. The security is unquestion-
able and absolutely equally good in all the
towns mentioned, yet the borrower will have
to pay 6 per cent. in Tokio and Bombay,
5 per cent. in Cape Town and Buenos Ayres,
4} per cent. in Toronto, 4 per cent. in Berlin,
and 33 per cent. in London for the loan of money.
Now the question will be naturally asked, Why
does not the London lender send his money to
one of the other cities, and thus obtain a higher
rate, or why should a loan in Toronto cost less
than a loan in Cape Town? Simply because
the London or Toronto lender knows his own

Example of
Interest-
Variation.

charged for the use of the money lent, and if
an additional premium were also charged com-

town, but does not know the conditions which Reason for

ar . anomaly
prevail in the other towns; therefore he is notin Interest.

Rate of Interest
varies

in different
countries.

mensurate with the extra risk incurred in special
cases. Such, however, is not the practice, and,
as the subsequent argument will show, Capital
does not by any means command the same
rate of interest the world over, although
employed in loans of precisely the same degree
of safety.

Let us consider the simplest and safest form
of loans, namely, those secured on freehold
property, mortgaged up to one-half of its
realisable value, and let us take land in
the choicest positions in London, Berlin,
Toronto, Buenos Ayres, Cape Town, Bombay,
and Tokio respectively, as the security to be

able to estimate the risks attached to lending ****

money in distant lands. There is also more
money to lend in one place than in another, and
as money does not readily travel from place
to place, different rates prevail.

A similarly chaotic charge for interest is made
in the case of loans without security. Thus a
London firm of merchants can borrow from their
bank at 4 per cent., whilst the Calcutta house
of the selfsame firm will simultaneously be
compelled to pay 6 per cent., there being more
available cash in London than in Calcutta. The
London lender could make 2 per cent. more
with equal safety if he were to send his money

--- Page 56 ---

Cepitalists
afraid of
unknown risks.

100 CAPITAL AND INCOME

to India, but he does not do it, because he is
not directly in touch with the credit-conditions
which prevail in India.

Every capitalist, being afraid of an un-
known risk, endeavours to employ his money
on a security which he personally knows, and
thus an inhabitant of Birmingham would con-
sider Corporation Street property the finest
security, a Berlin man the Leipsic Strasse, a
New Yorker Fifth Avenue, and a Londoner
Piccadilly Circus. The Birmingham man will
not willingly lend on Leipsic Strasse or Fifth
Avenue property, nor a German on Piccadilly
Circus or Corporation Street, although investi-
gation would prove all these risks to be equal.

Factor effecting Similarly, bankers the world over will only

Interest-rates.

lend to people whom they know, and in this
way Capital becomes tied to the place where
it is owned, and does not freely migrate from
one centre to another. So that, where there is
more Capital and less demand, interest-rates are
low, and where there is little Capital and much
demand for it, rates are high.

In this respect money differs from the
staple commodities of the world. Wheat, rice,
skins, cotton, and every other great article of
commerce have practically the same price the
world over, and only freight, storage, and duty
make up the difference between the various

CAPITAL AND INCOME 101

quotations. This was not always so, but the
fine development of commercial interchanges
has ievelled down all real price-differences.
Although the local methods of dealing with
money have been brought to a high state of per-
fection, the international exchange of spare cash
amongst nations is still in its infancy. Until
it is perfected, the present enormous differences
in the interest-rates charged on borrowed money
in different parts of the world will continue.

Interchange

of Commoditic:

wider than
of Money.

Every country has two distinct rates of Ditterence

interest; the one, the permanent rate, is that
which prevails on permanent loans on first-class
security ; the other, the ever-changing rate, is
that charged for short loans. The latter rate
depends mainly upon the state of actual cash in
the country, and the question of floating supply
and demand at the moment; the former alters
very slowly with the financial development of the
country. Thus, whilst the London bank-rate
may be at 6 per cent., people will lend per-
manently at 4 per cent., and whilst the bank-
rate may be 3 per cent., yet for permanent
investment 4 per cent. is still obtainable.

‘The Government borrows in most countries
at the lowest rate, and for this reason the interest
paid on the Government Loans of each country
gives the keynote to the scale of rates prevailing
in that country, and the other securities follow

between
rate of

Interest
and Bank-rate.

--- Page 57 ---

Varied
Interest-rates
of different
Governments.

Relation of
Government
to Local
Securities,

102 CAPITAL AND INCOME

suit in the order of safety in which they are
regarded by the great mass of Investors. The
following examples show how vastly the rate
on different Government stocks varies :

Consols yield at the time of writing 2% per
cent. ; French loans, 33/5 per cent. ; Dutch, 355;
per cent.; Swedish, 32 per cent.; German, 4
per cent. ; Hungarian, 4,3; per cent.; Spanish,
4°; per cent.; Chilian, 5 per cent.; Argentine,
5 per cent.; Japanese, 53 per cent., and these
rates are directly reflected upon the local se-
curities of these countries, first-class Debenture
stocks yielding about 4 per cent. more than the
Government Loan, Debenture stocks of lower
quality 1 per cent., and Ordinary shares 2 per
cent. and more, above the rate yielded by the
Government Loan.

Here, again, there is no difference between
the safety of the relative stocks of the various
countries which have good and enforceable laws,
as a well-secured Dutch, German, or Japanese
Debenture is as safe as an English or French
Debenture of the same quality, yet the in-
vestment-yield obtainable differs in each case.
It might be said that the Government Loans
of the various countries vary in safety, al-
though the inhabitants of each country are
likely to consider their own Government stock
the safest; but this argument does not apply

CAPITAL AND INCOME 103

in any way to large commercial enterprises
which issue Debentures.

There are a large number of examples of stocks stocks in

issued by enterprises situated in one country
selling at a valuation based on the rate of in-
terest ruling in another country. Thus, for
example, first-class Debentures held in Canada
yield 5 per cent., first-class Preference shares
54 per cent., and good Ordinary shares from 6
to 8 per cent., these yields being based upon the
supply and demand of money in the Dominion ;
yet the fixed income-issues of the Canadian
Pacific Railway sell in London to yield under
4 per cent., this being from 1 to 1} per cent. less
than the lowest rate paid in the country where
the railway is situated. Similarly, Argentine
Railway Debentures quoted in London yield 4
to 44 per cent., whilst the rate in that country
is from 5 to 6 per cent. Japanese Government
stocks quoted in London yield 43 per cent.,
whilst precisely the same Government bonds
sell in Tokio to yield 54 per cent.

one country

which are
influenced by
conditions in
another;

These anomalies are caused in the following cause of

Investment-

manner. It has been stated that information gnomalies.

in respect to real property and commercial
credit does not readily travel. Thereby a
difference in the loanable value of money in
various countries is called into existence. But
information concerning stocks and shares does

--- Page 58 ---

Stocks

held chiefly
in other
countries.

° 104 CAPITAL AND INCOME

travel easily, for the balance sheets and reports
of companies are issued in very much the same
form throughout the world; they are easily
translated from one language into another, and
Investors have now become used to consider
enterprises in every part of the globe.

So free has the interchange of securities
become, that the stock of a German Gas Com-
pany is principally held in England, the stock
of an Austrian Railway in France, and the
shares of an African Trading Company in
Holland. The British markets especially are
full of all kinds of enterprises situated in every
part of the globe, and the British Investor
seems, to his cost, to be unaware that these
stocks should yield him a rate proportionate to
the rate ruling in the country where the enter-
prise is situated. The London Stock Exchange
measures the capital-value of these intruders by
the value of money which prevails in England.
In this way the British Investor is a great deal
of money out of pocket, for whilst his Canadian
Pacific Preferred only produces for him an in-
come of £4 per annum on every £100 invested,
this £100, if put into a first-class Canadian De-
benture, as yet untainted by the British money-
rate, would produce £5 per annum for him. -

Endless examples of a similar nature the
reader can find for himself by glancing at the

OAPITAL AND INCOME 105

London Share List, and comparing the yield on
Government stock of any country with the
yield on securities situated in that country. Rolative yield
The Government stock of a law-abiding civilised Government
country should, in normal cases, yield from "°“""**
4 to 2 per cent. less than the other securities
of that country.
In this way the ruling rate of interest in every
country influences all the stocks principally
dealt in in that country, and this is one of the
reasons why all the principal stocks of every
country rise and fall in price simultaneously, a
certain fixed distance of yield from each other
being perpetually maintained. This distance of A country's
yield is settled by the quality of the stocks and principal ‘Stools
the manner in which they rank in public esteem. in unison.
Every Investor is, of course, anxious to derive
the largest possible income from his Capital
which is compatible with safety. It has

_ been shown that there are some places in

the world where money is cheap, and others
where it is very dear, and that the quality of the
security offered is in most of them more or less
alike. Thus, of two equally well-secured Deben-
tures of the same commercial standing, the one
would yield 4} per cent. per annum, because
it is held in England and valued by the money-
rates ruling in our country, whilst the other,
being a Japanese Debeuture, and valued by the

--- Page 59 ---

Folly of
risking Capital
for sake

of Income.

106 CAPITAL AND INCOME

rates current in that country, would yield 6}
per cent. The largest profit is made by taking
the goods which any one has for sale to the best
market. The goods in this case are money,
therefore the first inclination would naturally
be to invest all one’s money in Japan, and such
other countries where money-rates are high;
but this would not be wise, as capital might have
to be realised and it would then be exposed to
violent fluctuations.

In Chapter III. of this book it has been ex-
plained that all the stocks of any one country
move together; therefore, by investing in a
limited area the Investor would endanger his
capital, A simple arithmetical example will
show how very unwise it is to risk Capital for the
sake of Income. The lowest rate which Capital
should yield, when the Income from all stocks
is added up and an average struck, is at the
time of writing 4} per cent., whilst the highest
rate should not exceed 64 per cent. The differ-
ence between the highest and lowest rate is
therefore 2} per cent. per annum, and it would
take 44 years [without compound interest] to
make up the whole Capital by means of this
difference, 22 years to make up half of the
Capital, and 11 years to make up a quarter of
it. A quarter of the invested Capital is very
easily lost through a faulty distribution of

CAPITAL AND INCOME 107

risks, viz., by trusting the entire Capital to Result of
the stocks of one country. All holders of ex- exclusive
clusively British stocks of the best kind lost # Bvt
nearly a quarter of their Capital between the
years 1897 and 1907; and what has happened
in a highly civilised country like Great Britain
could, of course, happen at least with equal
ease in any other part of the world.

Capital, being the root of all Income, should

-never be risked in order to obtain a high yield.

Therefore, however alluring it might appear,
in theory, to take all one’s Capital to the concentration
best market, such a course should not be Pape
adopted, because the ensuing concentration of *
the individual Investor’s Capital could not do
otherwise than impair the safety of that
Capital.

Investors should always keep a careful watch
on their Capital, and be satisfied with the yield

. which a proper distribution of risks affords.

By distributing his funds Geographically on the

principles which have already been explained,

the Investor obtains the average rate which is

ruling the world over, and he should not aim

for more. On first-class securities he would

be compelled to accept 3? per cent., if he held Advantages of
all British stock. But by taking a first-class Deseo
stock in every Geographical Division, he can ©*Pit#l-
obtain an average of 44 per cent. on this class of

--- Page 60 ---

108 CAPITAL AND INCOME

security. From a safe but slightly lower grade
stock in England he would obtain 4} per cent.,
and from similar stocks if geographically dis-
tributed the world over he would derive an
average yield of 5} per cent. Good Ordinary
shares in England yield 5 per cent. ; a geographi-
cal assortment of similarly good Crdinary shares
will yield 63 per cent. So that the Geographical
Distribution of Capital actually tends to increase
the income considerably, as the following table

CAPITAL AND INCOME 10)

stant standard, because the price-levels, and
consequently the yields of income in all these
countries are liable to constant alteration on
account of the ever-changing value of money
at the various trading centres covered by this
list. Thus, on some future occasion it may
occur that the African Division will only afford
a yield of 5 per cent., or the International stock
4% per cent., but in all such cases the yield in
some other countries will have advanced, so

shows : that the average ratio of yield will be found to Worla’s
: : . av ft
. ., _— £8. d. correspond closely with that displayed in the of Interest.
Geographical £1,000 British Debentures yielding 4} %. Income 42 10 0 constant,
Distribution £1.000 Coloni 0 table.
increases 000 Colonial » » 5% 4 680 0 0 gage . .
Income. £1,000 KuropeNorth ,, ,, 44% ,, 45 0 0 The practicability of increasing income with-
£1,000 Hurope South ,, ., 44% 4, 45 0 0 out increasing risk by adopting Geographical
el obo Ae 7” 46. ” eo . Distribution of Capital is as yet not so fully
£1,000 America North ° : 43 0% "4710 0 understood by Investors as the importance of
£1,000 America Central » 54% 5, 65210 0 this subject warrants, and it should therefore
£1,000 America South ,, » 53% , 55 0 0 Il ie
£1,000International ,, ,, 42% 4, 4710 0 be carefully studi d. . .
———__— When shares in any undertaking are either
£10,000 Total Income .. £500 0 0

bought or sold, the yield which they afford to
the purchaser is one of the important items
which helps to decide the wisdom of the sale or
purchase. The value of an investment should Share-value
‘be measured not by the price at which it was rate of yield.
originally bought, but by the rate of yield
which it affords to its owner, calculated at

The yield on the British stock is 44 per cent.,
on the other European stocks it is 44 per cent.,
but the average yield obtained is 5 per cent. The
individual risks attaching to all the stocks in
the above table are practically identical.
This table applies to the yields of income

obtainable at the prices current at the time of
writing; but it must not be taken as a con-

the stock’s current quotation. A share which
originally cost £10 and pays 34 per cent. in

--- Page 61 ---

Necessity for
examining
Balance Sheets.

Break-up value
of a Share

110 CAPITAL AND INCOME

dividend might sell for £6, and another £10 share
which pays 20 per cent. in dividend might sell
for £32. In the issuing Companies’ Balance
Sheets, both these shares stand at £10, there-
fore the £6 share is bought £4 under its Balance
Sheet valuation, whilst the £32 share is bought
£22 over its Balance Sheet valuation, and the
Investor is neither putting his £6 nor his £32
into the Company, but simply steps into the
shoes of another person who originally paid £10
for his share.

This is a point of extreme importance which
should be thoroughly understood by Investors,
and before they purchase shares of any kind
they should examine the Balance Sheet, and
satisfy themselves from the figures therein
given what is actually the break-up value of
the share which they propose to buy. This is
done by adding up, first of all, the Company’s
Liabilities, including all the Debenture and

Share-issues which stand in front of the shares -

which are being inquired into; then adding
up the Assets at a fair valuation, and finally
deducting the Liabilities from the Assets. By
this means the actual Balance Sheet value of
the shares which it is contemplated purchasing,
is arrived at.

When making such investigations Investors
will frequently find, and especially so in the

CAPITAL AND INCOME W

case of high-priced shares, that they are asked
to pay twice or three times as much as they
obtain in tangible property through their pur-
chase. They must understand that in all these

cases this excess of valuation is paid for Goodwill,

pure and simple. If they are still satisfied to
pay a large sum for Goodwill, they should
buy; but if they are in the least doubt, they
should refrain, because Goodwill is a very mer-
curial property, frequently depending upon a
solitary manager or director. It is invariably
a better policy to buy under the original cost
[that is, below par value] than over it, provided
that the Company is well established and has
ample working Capital, and it is highly dangerous

~ to buy ata large premium. In all cases where a

considerable premium which is not represented
by Balance Sheet assets is paid, a very high yield
ought to be the compensation for the risk which

. the buyer runs.

In the case of Railway, Gas, Water, Tramway,
and several other classes of shares, it is impossible
to arrive at the selling value of the assets; and
here the dividends paid, their steadiness and
the Companies’ future prospests, are the only
guides to real value.

To pay a high premium for shares of any
kind is a dangerous proceeding; the purchaser
not only pays to the former owner in full for

Goodwill
@ mercurial
property.

Buy below

no
above par

--- Page 62 ---

Danger of
partly-paid
ares,

112 CAPITAL AND INCOME

the tangible property, which is represented
by the shares, but also a large proportion of
the purchase-money for Goodwill, which is a
very unstable form of investment and liable
to diminish in value without timely warning.
Nearly all Companies and Corporations are
constituted with the liability of shareholders
being limited to the face-value of the shares
originally subscribed for. In most cases this
liability is paid up in full, shortly after the
formation of the Company ; in some cases, and

' principally in the shares of Banks and Insurance

Companies, a certain amount of the liability is
left outstanding. It is always dangerous to
hold shares on which there is a liability, and
especially so when this liability is likely to
remain outstanding for a large number of years.

Shrewd financiers have invented this mode of
obtaining additional credit for their institutions ;
as a rule, the now living generation of share-
holders receive no compensation for thus
guaranteeing the solvency of the Company,
for partly-paid shares in large Banks yield no
better return of income on their current quota-
tions than fully-paid shares in similarly safe
institutions, These liabilities are never called
up unless the institution is near bankruptcy, and
in that case not only is the original investment
in jeopardy, but the freshly called-up Capital

CAPITAL AND INCOME 113

is equally endangered. There are innumerable

cases on record where partly-paid shares in

Banks and Insurance Companies fell so seriously

in value that the owners paid large premiums shares which
to speculative buyers and, in addition, gave orev"
them their shares for nothing, in order to rid
themselves of the serious responsibility of being

perhaps compelled to pay up the uncalled

liability.

Government, Municipal, and Corporation Moasuring
Loans, Bonds, and Debentures in commercial Tre value of
enterprises are also, like Shares, sold according Debentures.
to the yield which they afford to the purchaser.

When this yield is calculated, care should be
taken that the date when the ptincipal is re-
payable be taken into account. There are
some Bonds and Debentures which are perpetual,
and in all such cases the purchaser should
understand that he is buying an annuity, and
that he can only then demand the return of
his Capital when his interest is not punctually
paid. There are other Bonds which are repay-
able on a certain date at their nominal value,

others which are repayable on a certain date Redemption

; important
ata premium. If a6 per cent. Bond is bought factors bona.

at 120 it yields 5 per cent. upon the purchase- *"ustion.
price, but if that Bond is repayable at 100 in
ten years, then the £20 difference between the
purchase-price and the £100 capital sum which

8

--- Page 63 ---

Buying Bonds

at @ premium.

Bonds subject
to annual
drawings.

114 CAPITAL AND INCOME

will be received in ten years’ time in exchange
for the Bond, must be made up out of income
during the ten years of the life of the Bond.
This will require about 1? per cent. per annum
in the shape of a Sinking-fund, therefore this
Bond does not really yield 5 per cent., but only
3} per cent. If this same Bond had been
redeemable in twenty years, then about # per
cent. would have sufficed for a Sinking-fund,
and the Bond would then yield 4} per cent. net.

Had the Bond been repayable at a premium,
a still smaller sinking-fund would have
sufficed.

When Bonds which are repayable at a fixed
date are bought at a premium, great care should
be taken to ascertain the terms of their repay-
ment, otherwise the Investor might be living
upon part of his Capital without being aware
of the fact.

There are also a considerable number of
Bonds which are repayable at par by annual
drawings, so that the whole of them are drawn
and repaid within a certain fixed period. To
purchase such Bonds at a premium is a specu-
lation, as at any of these recurring drawings
the particular Bond held might be drawn, and
the premium paid for the Bond thereby irre-
vocably lost.

If we now proceed to sum up the true relation

CAPITAL AND INCOME 115

of Capital to Income, we find that the magnitude
of the Income is saly, to a very slight extent,
related to the Capital-safety afforded, and
that in one country it might be impossible to
obtain a certain high rate without imperilling
Capital, whilst in another country that same
high rate could be obtained with a high degree
of safety.

We find, further, that Income should in- teome

variably be made subservient to Capital, and
that every Capital-risk which is accepted should
be counterbalanced by an adequate chance of
gain, be it in the shape of a high yield of Income
or in the shape of a chance of improved Capital-
value.

It has been established that the issues of
any concern should yield an adequate rate as
measured by the value of money in the parent
country of the undertaking, and not by the
monetary conditions of the country where the

stock is held; and lastly, that to buy stocks at Maximum

& premium, or partly-paid stocks, is unwise and
calculated to cause a Capital-loss in the long
tun. By distributing Capital over the earth’s

surface, the average rate ruling for money the

world over forms the basis of the Income-calcu-
lation In this way the maximum of Capital-
safety compatible with the maximum of Income

‘should result.

--- Page 64 ---

Shareholders
are Partners:
and Bond-
holders are
lenders.

No practical
difference
between Stock
and Share.

7

CHAPTER VI
ON STOCK EXCHANGE SECURITIES

Qrock Exchange Securities are divided
into two main groups, the one denoting
a partnership in the concern, and the other
signifying a loan made to the issuer of the
security. The latter main group comprises all
Government, Municipal, or Corporation Loans,
Bonds, Debenture Bonds, Debenture Stock,
Mortgage Debentures, and Debentures—all
these words signifying that a loan is meant.
The former main group comprises stocks
and shares of all kinds, such as Guaranteed,
Preferred, First, Second, Third, etc., Pre-
ference, Ordinary, Preferred Ordinary, Deferred
Ordinary, Founders’, and other shares.

There is practically no difference between the
word “stock” and the word “share,” for
both these words are frequently interchanged
at random, one person describing the same
security as a Preference Stock, the other as Pre-
ference Shares, and both being equally correct.
It is sometimes said that a security is a “ atock ”

116

ON SECURITIES 117
-

when its nominal value is £100, and a “ share ”

when the nominal value is another multiple of
money. Others make the definition that “ stock ”

can be transferred in any multiple of the coinage

of the realm, whilst a “share ” can only be trans-

ferred in multiples of single shares; but in

reality no specially distinctive meaning attaches

to either word. All that is important to know

is that “stock” is usually quoted at so much

per cent. and that “shares” are usually quoted

at so much each.

There is, of course, a vast distinction between Difforence

a Debenture or loan on the one hand, and agni'snae
Share or participation on the other, so Investors

will not only do well to thoroughly comprehend

_ the real difference which exists between them,

but also to familiarise themselves with all the
various kinds of Loans and Shares which exist.
Such a knowledge is quite indispensable, be- tportance o
cause the mode of ascertaining the safety of distmsushins
one kind differs so vastly from the methods °"4 Shar.
employed to value the others, that certain
points which are all-important in the one case
are of no consequence in the other.

Let us assume, for example, that a shopkeeper
owns the premises in which he carries on his
trade, and that he has two distinct business
propositions to make, the one being to raise
money on his premises, the other to take a

--- Page 65 ---

118 ON SECURITIES ON SECURITIES 119

Difference partner into his concern. Under such circum-
between Share- :

and Debenture- Stances the prospective lender would devote
holder

The oldest and, quantitatively, the largest form Government

of Stock Exchange Security, is a Government and their

explained. his attention to the house offered to him as Loan. It is originally created by any Govern-
such, namely, its value to anybody, and not ment being driven to the immediate expenditure
only to this particular shopkeeper. The in- of a larger sum than it is able, or considers
coming partner, on the other hand, would con- it prudent, to ask its taxpayers to contribute
sider the goodwill and reputation of the business, there and then. Therefore the Government
the saleability of the stock of goods on hand, borrows the necessary funds in the first instance
and the past profits made in the business, as the and repays them by suitable instalments at a
items which should chiefly engage his attention. future period. In some cases a fixed plan of
The premises themselves he would regard as repayment is adopted from the start, so that the
an important, but secondary, consideration. Loan becomes extinguished automatically within
The lender of money on the house would be, a specified period ; in other cases, the Loan is
in such a case, in the position of a Debenture- so large, and the possibility of repaying it such
holder, whilst the intending partner would be a very uncertain quantity, that no period of
in that of a shareholder. Both these men had a repayment is fixed. In these cases, the Govern-

Method of ds totally different matter to consider, and in the ment reduces its indebtedness as and when

and Shares majority of cases the purchaser of a Debenture the collected taxes leave a surplus in hand.

differs from a purchaser of Shares in precisely
the same way. Hence, to thoroughly under-
stand the meaning of the description of a

The Loan of the French Government, for
example, is quite indefinite as to the repayment
of the principal sum lent, and therefore it

security, is tantamount to knowing what point
is of the greatest importance in the estimation
of its value.

It is hoped that the reader will, in his own
best interests, not skip this chapter, which,
owing to the nature of its contents, is bound to
take the form of a descriptive catalogue. In any
event, the chapter should be used for reference.

takes the shape of an Annuity. In England zritisn
there is a Sinking Fund in operation, but, govne
unfortunately, the Sinking Fund—like an un- *™*
- certain watch—is more often out of use than
in full working order.
“Some people are under the impression that geourity
Consols, being such a valuable property, are ° nm
- represented by something. As a matter of

--- Page 66 ---

Government
Loang
secured on
Revenue.

Security

of German
Government
Loan.

120 ON SECURITIES

fact, they are not represented by anything

stronger than a moral obligation on the part
of the Government of England to repay the
sum of money lent to it. The money itself,
which has been raised by the Government by
means of this issue, was spent as soon, or
even sooner, than it was received. Beyond
its Army, Navy, and a few Crown properties,
the Government, as such, owns nothing. In
fact, Consols are nothing better than a note-
of-hand backed by the nation’s credit, and nearly
all other Government Loans are in the same
position.

There are some minor Governments which
are obliged to pledge as security certain specific
revenues, so that they may be enabled to borrow.
But these special hypothecations, as they are
termed, invariably take the shape of some
special obligation on the part of the subjects of
the borrowing nation to make payments, such
as Custom House revenues, certain monopolies,
and such-like, so that the floating security offered
is again of an intangible nature. In a few iso-
lated cases Government Loans are well founded,
as, for example, the majority of the German

’ Loans which are secured upon a vast network of

State-owned railways; but, as a rule, a Govern-
ment Loan has no real security behind it.
No Government can be sued in a Court of

ON SECURITIES 121

Law for its obligations to its creditors, so that Investors

on any Government deciding to stop its in-@>
terest-payments, the unfortunate lenders have
no real means of enforcing their rights. Govern-
ments also can impose taxes upon the interest
which they have to pay.

This is a form of legalised robbery for which Governments

any private individual would be put in jail.
Nevertheless, the Italian Government did impose
a tax of 20 per cent. on the coupon-payments
against its State Loans. Governments can
also reduce the rate of interest which they
originally contracted to pay. Thus, England
declared that after a certain day Consols would
pay only 2% per cent. interest instead of the
formerly agreed rate of 3 per cent. A great
pretence is made in such cases that the lender
can have his money back if he does not like
the terms of the new contract. But, since the
law insists that certain funds must be invested
in Consols, this is analogous to the case of a
school-boy, who is told he is at liberty, but that
he must remain in the class-room during his
hours of freedom.

When closely analysed, the relative positions
of borrower and lender in the case of unreasonable
Governments are, that the borrower, having
obtained the money, can give or not give the

‘agreed equivalent, just as he likes; whilst the

--- Page 67 ---

122 ON SECURITIES

lender must be thankful for anything which
he receives, and is obliged to accept it with a
smile of satisfaction.

ON SECURITIES 123

Cabinet, or one of the innumerable ups and Rumours

downs which occur daily and make up the life of
a nation? So, on the score of rises and falls,

Drawback of In addition to the lack of real security and a Government stock is almost a champion
Stoke” the inability to enforce the lender’s rights, there amongst all other Stock Exchange securities.
is another highly important drawback to the Asa result, in most countries the Government
holding of Government stocks. stock is the football of an army of professional
Gambling in Stock Exchange values was manipulators who, year in, year out, make large
invented simultaneously with the creation of incomes out of the gambling spirit of the general
the first Stock Exchange and of the Stock Ex- public. Grave statesmen, wealthy bankers,
change securities dealt in thereon. It has proved highly respectable merchants, and professional
an expensive pastime, the world over, ever since. men join the spendthrift, gambler, and ne’er-do-
Since ordinary public gambling and _ lotteries well, in trying to define the possible future price
have been suppressed, a fresh impetus has been of Consols when the German Emperor storms or
given to the game of guessing what a stock is the Prime Minister threatens to expropriate all
likely to fetch to-morrow; as this is the only the apple trees in the country at the public
seemingly respectable public method of staking expense, so that, in the cause of temperance,
money on wagers which is now left. the manufacture of cider may be suppressed.
Government All gamblers must have counters to play The Government of England is not only The Govern.
eeobling with, and the larger the amount of such directly or indirectly the largest holder of busines
counters.

counters, the merrier the game becomes. As Consols, but also has by far the largest cash °"™°™

Government stocks not only represent the
largest nominal value, but as real business in
them must take place daily, speculators convert
them into one of their “happy hunting-grounds.”
Besides, it is always well to give some
semblance of reason to every price-variation ;
and what better motive could there possibly
be than @ war-rumour or a change in the

turnover of all the business concerns in the
kingdom; for its annual revenue amounts to
over 150 millions. In the daily course of its
business, men in charge of the administration of
the country buy and sell the largest amounts
of Consols, whether these transactions be for
the Post Office Savings Bank, the Law Courts,
or any other public office. Furthermore, the

--- Page 68 ---

How to regulate
the price
of Consols,

124 ON SECURITIES

Government constantly borrows money on bills.
In short, the Government not only has practically
any amount of Consols at its command, which it
could deliver to buyers, but also has abundant use
for any cash which may come into its possession.

Government could, therefore, regulate the
price of Consols with the utmost ease, without
speculating in any way.

Whenever a demand for Consols springs up,
Government can supply it out of its holding
of stock, and invest the proceeds in some other
first-class security. Whenever Consols are
offered in abundance, it can take them up and
provide the purchase-money by the issue of
Exchequer Bills. Whether the Government

chooses to increase its liabilities by selling

Exchequer Bills and simultaneously to reduce
its liabilities by purchasing Consols is quite
immaterial, because the bulk of the nation’s
indebtedness would remain unaltered.

This proposition must not be gauged by the
past history of Consols, for they would imme-
diately become stable in price, and the Govern-
ment could regulate and control the Consol
market absolutely. The price of many articles
is regulated in this way; why, then, should
not the Government so regulate the price of
its loans, of which, in reality, it is the master ?

Not only would public confidence in Consols be

ON SECURITIES 125

increased, if this were done, but the gambler Asvantages of
: Government
would be prevented from using the property of contrcl over

Consols,

widows and orphans as a counter in his game.

The Financial article in the newspapers would
inevitably lose certain sonorous paragraphs with
which it customarily opens its description of the
previous day’s doings, but a healthier and
cleaner atmosphere would be introduced into
all investment-questions.

In England, the Government Debt enjoys
the distinction of being blended by the Bank
of England with its stock of gold to form
the security against the bank-note issue.
This fact has most likely originated the idea

with English bankers of using Consols as the Consols

not need at the moment, but which they might
want to use at any time and on the shortest
notice. As all banks share this idea, a very
free market is created, and Consols can be
bought and sold more readily than any other
stock, and at less expense. Consols thus serving
as the bankers’ cash reservoir, they, as a con-
sequence, yield, as a rule, about 15 per cent.
less in interest than any other security.

It is hoped that the above explanation will
make it plain that Government stocks of any
kind are the most unsuitable form of security for
any Investor who is not nolens volens obliged to

repository for any spare funds which they do voch resoeee.

--- Page 69 ---

126 ON SECURITIES

Dr. Siemens ot hold them. The famous Dr. Siemens, founder
Government of the Deutsche Bank of Berlin, has made a
calculation that £50 invested in Prussian Consols
would, over a period of twenty-five years, have
yielded £25 less in income than if it had been
invested in well distributed Foreign securities ;
and £12 less than if it had been invested in
good Prussian securities. In this calculation
he has allowed for a number of losses which
would have been made on the foreign holding.
Proof of In the case of British Government stocks,
Connie ot either Bearer Bonds of certain denominations
Fonds. are issued, or the ownership is proved by an entry
in the books of the Bank of England. In the
case of nearly all other Government Loans Bearer
Certificates only are the proof of ownership.
Municipal, Corporation, County, Provincial,
and Dependent State Loans are, in their origin,
and the security which they offer, quite similar
to Government Loans, and yet there is, as a rule,
a vast difference between the two. For, whilsta
Government cannot be sued for its State Loans,
Advantages of Towns, Corporations, Counties, Provinces, and
Soe reration Dependent States can. Here we have not only
an enforceable bargain between borrower and
lender, but, in addition, in most countries of
the world the State exercises a control over the
finances of the public bodies above enumerated.

The State is under no such control, and is”

ON SECURITIES 127

thus free to incur any liability for which the
supporters of a democratic Government may
clamour. Public bodies, which are subservient

to the State, work under laws which settle the
maximum which they can borrow, and this
restriction shelters the lender behind a protect-

ing barrier, making these Loans much more
desirable. If a Dependent Government or a Cor-
poration does not pay its interest promptly, or

does not repay the principal, it can be sued in a

Court of Law, and the judgment thus obtained Corporations
can be enforced. Examples of this kind have to the law.
occurred, and have, as a rule, resulted satisfac-

torily to the lenders. In those cases where they

did not, it was, as a rule, due to bondholders

having neglected to ascertain that their rights

were properly set forth in the bonds which were

issued to them.

The Municipal, County, Provincial, and Security of
Dependent State Loans are secured upon the Leen.
rates of the issuing Corporation. In some
instances they are, in addition, guaranteed by
the Sovereign Government. This extra guar-
antee is'looked upon as additional security, and
makes the Loans so guaranteed rank in quality
with the issues of the guaranteeing Government.

Some Loans of this class are secured by the
special hypothecation of a specified part of the
revenue of the borrowing Corporation.

--- Page 70 ---

128 ON SECURITIES ON SECURITIES 129

Corporation Municipal, Corporation, County, Provincial, Whenever the country has a gold currency, ’
cks . . ,
free from and Dependent State Loans do not attract the no fluctuation in the rate of exchange need be
speculation. .
speculator, and this is another reason why they feared.
should commend themselves to Investors. Com- It is quite a common occurrence for the Corporation
. . ocks not
paratively very little money has ever been lost Government stock of a country to fluctuate 5 fiuetuate ike
by investing in Loans of this kind at a fair or 10 per cent. in value in any one year, whilst, °°"
price, and whenever the issuing authority works at the same time, the Municipal, Corporation, and
under a settled Government which enforces County issues of that same country have hardly
respect for law and order, they are really fluctuated at all. Thus, for example, in 1907 the
one of the finest forms of security. Even in Chilian Government 5 per cent. Loan varied
new countries, and when issued by quite eight points in value, whilst the Loan of the
small townships, they offer generally but capital city, Valparaiso, only moved to the
little risk, and in the entire history of the extent of four points during the same year. This
development of Canada, only two cases have is the more remarkable as Valparaiso was
been known of townships defaulting. In damaged by an earthquake in the summer of
neither case did the holders of the Loans lose 1907, and proves how stable a stock can become
any money ; in fact, with the exception of a few so long as the speculator’s deadly influence does
instances, defaults have been very rare indeed. not interfere with it.
British Insurance Companies make it a practice TABLE SHOWING HOW WIDELY THE Prices or GovEnnuent
to take up entire Loans issued by small munici- LoaNs HAVE FLUCTUATED DURING THE PAST SEVEN YEARS IN
we . COMPARISON WITH THE PRIcE oF A LARGE Municipan LOAN oF
palities and to hold these Loans for investment. THE SAME COUNTRY DURING THE SAME PERIOD.
Currency The denominations of the bonds representing Pointa
i ° . . re) ) . J °
Specie Loans. these Loans vary considerably, and some of them City of Bergen t 9p Lown ~“— Huctuation ‘ Governmont sad
are issued in the local currency of the country. J ° Stoneration
Wh h ] Japanese 5 % Bonds, 1895-6 do. do. 283
enever . ae country has a s ver or paper City of Yokohama Waterworks 6 % do. do. 103
currency, it is unsafe to hold specie Joans, as Chilian 44% Loan, 1886 do. do. 234
the rate of exchange between a gold currency, City of Valparaiso 54% Bonds do. do. 6}
such as England possesses, and a silver or paper Brazilian 45 % Loan, 1883 do. do. 234
currency is liable to fluctuate widely at times. City of Santos 6 % Bonds do. do. 6

--- Page 71 ---

Corporation
Stocks secured
on public work:

130 ON SECURITIES

There are a number of Corporation Loans
s. which are not guaranteed by the rates but are
secured upon special works, such as Harbours,
Land Reclamation, Water, and other public
works. In all such cases it is necessary to
examine the annual earnings of the special
works, as these earnings represent the sole
security offered. Most of the other Municipal,
etc., Loans which are secured on the rates, are
so well protected that it is hardly necessary
to examine their special merits; in fact, mm 95
cases out of every 100 they constitute the finest
form of investment in existence.

Company Loans. The next form of Loans which has to be

Classes of

Company Loans,

considered is that issued either by a Company
which is working under any Charter or Act of
Legislature, or by a Company formed according
to the laws of any country.

Every Company, no matter how constituted,
is a legal entity, and can, as such, contract
debts; these debts can either be secured
upon some special property, or they can be
general debts without any special security.
The debts can be either perpetual or repayable
at any specific period, or by instalments. |

The name of the security issued in respect of
a Loan as a rule indicates the conditions under
which the indebtedness has been contracted.
Thus, a5 per cent. thirty-year Furst Mortgage Gold

oe

ON SECURITIES 131

Bond would be a bond secured by first mortgage ‘me grading
‘ . Mortgage Bo.
upon some special property, the Loan being

repayable thirty years after the date of its issue;
the rate of interest would be 5 per cent., and the
principal and interest would be payable in some
gold coinage. A Second or a Third Mortgage
Bond would be secured by a second or third
charge upon a certain property. A General
Mortgage Bond would not be specially secured,
but would form a floating charge upon the entire
undertaking. In all these descriptions the word
“ Debenture ” can be substituted for the word
“ Bond,” without altering the meaning. When-
ever a security is simply known as a “ Deben-
ture’? or “ Bond,” without any additional
description, it is necessary for the Investor to
ascertain prior to purchase how this particular
issue is secured. This can be done either by
reference to a statistical text-book or by inquiry
at the issuing Company’s office.

Debentures and Bonds are issued in €VETY Various types
: * : of Debentures
type of coinage and every kind of nominal

value. They are sometimes transferable in
multiples of the coinage in which they are

issued, and at other times in multiples of a

certain stated nominal value. Debentures or
Bonds are sometimes to Bearer, sometimes
Registered, and, on many occasions, the same
Debenture is issued in both forms, so that

--- Page 72 ---

How payments
on Bonds
are made,

Bonds
redeemable by
annual
drawings,

132 ON SECURITIES

Bearer Debentures can be registered, and Regis-
tered Debentures can again be re-exchanged
for Bearer Bonds.

It is necessary to find out all these details
prior to the purchase of any Debenture, as they
differ in almost all cases.

The interest on Registered Debentures is
paid, as a rule, either quarterly or half-yearly
by cheque, which is forwarded direct to the
registered holder. On Bearer Bonds or Deben-
tures it is paid by coupon. The coupon is a
small part of the ‘Bond which requires to be cut
off from the Bond on the date of maturity, and
handed in at the place of payment against the

amount of interest due. As soon as all coupons

printed on the original Bond are exhausted by
being cut off in this way, the issuing Company
or Corporation provides the bondholder with a
new coupon sheet in exchange for a so-called
** Talon,” which forms part of the coupon sheet.

At the date of maturity of a Bond, viz., the
date on which it is paid off, the Bond itself is
exchanged for the amount due for it. Bonds
which are subject to annual drawings are paid
off as soon as their numbers are drawn. In the
case of Bearer Bonds the fact that any number
has been drawn is announced by advertisement
in the newspapers, and it is very necessary that
all holders of Bearer Bonds which are liable to

ON SECURITIES 133

be drawn should either watch these advertise- some countri

ments carefully, or instruct their bankers to do
this for them, otherwise they will lose interest,
as from the date of the drawing, up to the coupon
date next following. Then, the presentation of
a coupon belonging to a drawn Bond will lead
to an official notification that the Bond has been
drawn, and that interest ceased on the date of
the drawing.

In the case of certain Government Bonds the
neglect of this matter leads to still more unfor-
tunate results. It sometimes happens that the .
coupons of drawn bonds are cashed, but the
amounts paid are deducted from the capital sum
which is due for repayment, and the Investor
eventually discovers that he has been not living
upon his Income, but drawing upon his Capital.
Russia treats its creditors in this way.

There is a great and grave distinction between The uso of a

Debentures which are either secured by Trust
Deed or have some specific charge upon certain
assets and those which are not so secured, for
in the first case no legal claim can be placed in
front of the Debenture, and in the other case it
can.

If a Company owns certain immovable assets
and desires to give its Debenture-holders a real
security, these assets are mortgaged to Trustees
for the total amount of the Debenture-issue,

--- Page 73 ---

134 ON SECURITIES

and they are then held by the Trustees for the
Debenture-holders. Jn this way the Company
loses control of the legal title to the property,
and no one can obtain a charge on it in front

ON SECURITIES 135

any one on an I O U; the Debenture with a
special charge is like lending money on the
deposit of a man’s watch.

Whenever Debentures are issued on a special Veluation of

mortgage, the value of the property which

Disadvantages of the Debenture-holders, without the consent ; .
Dobenture. of the Trustees. If this same Company were secures them should be examined, and if
not to vest its assets in the names of Trustees, there is an ample margin between the total

but were to issue Debentures without a special issue of the Debentures and the break-up

charge, then to the uninitiated the security value of the charged property, then no

would still appear to be the same. But the further inquiry is needed. In all cases where
well-informed Investor knows that the Company this is not the case, the remaining assets and

can, in such a case, take its assets to a bank or the general standing of the concern must also

to any other lender and specifically mortgage _ be examined; and only so long as there is a

them, and in this fashion it might deprive very ample margin left after paying the trade

its Debenture-holders of their security at any creditors should the Debentures be looked upon

future time. as safe. The net earnings of the Company,

Many Companies, in times of prosperity, have after paying all trading expenses, must also

issued Debentures not specifically secured, and be taken into consideration, and there should
subsequently, in times of adversity, have mort- always be ‘at least twice as much of net

gaged their properties in the interest of their earnings as is necessary to pay the Debenture-
shareholders and to the detriment of their interest. In addition, these earnings must
Debenture-holders. With a special charge, display stability, year by year, before a not fully

properly secured at the outset, the Debenture- secured Debenture can be pronounced eligible.

holders are certain of their security. Without Should a Debenture fail to satisfy all these

Distinction such a charge, their Capital might be excellently requirements, it falls into one of the lower

between General

categories of “fairly safe” or speculative.
It is the margin between the capital sum Fixing tho
. ll i?)
ultimately repayable to the Debenture-holders Debenture.

and the break-up value of the mortgaged pro-

and Special * secured to-day, but their security could be taken ~
Debenture, away from them at any future time.
To give a homely example, the Debenture
without special charge is like lending money to

--- Page 74 ---

136 ON SECURITIES

perty, which settles the quality of a Debenture

ON SECURITIES 137

Jebentures For instance, there are Debentures which
hould . . : . :
o covered or Bond. If there is twice or three times as. are three times covered as to Capital and only

t least one-
nd-a-half times.

much property as the amount of the Debenture-
issue, then the latter are well secured If there
is less, they become merely fairly well secured ;
but in all cases, where there is not at least one-
and-a-half times as much property as the amount
of Debenture-issue, then the security is so in-
sufficient that the Debenture descends to the
rank of a Preference share. The possibility of
the Debenture-holders receiving their money
back in full, in the event of liquidation, then
becomes very remote. The proportion between
annual net earnings and the amount necessary

one-and-a-half times as to Income, and vice
versa. In all such cases the Capital-security
should be the first consideration, the Income-
safety being subservient to it.

To hold Debentures which are, say, ten times
covered as to Interest by earnings, and only
one-and-a-half times as to Capital, is only safe
in cases where the business which produces
the income is stable and non-speculative.

In the case of Railways, Canals, Docks,
Tramways, Gas, Water, Electric, and other
permanent and immovable works which have

‘aluing to pay the full annual Debenture-interest, should only a value for the purpose of carrying on the

‘ebenture. be the same as the above-described proportion particular trade for which they have been

terest between the realisable assets and the whole Loan. constructed, there is no break-up value at-
That is to say, if the annual net income amounts taching to the assets. The solidity of the capital
to twice or three times the sum annually due for security for any Debentures issued by such pout
Debenture-interest, the Debenture is well secured undertakings rests solely upon the earning “°"**
as to Interest ; and if nearly twice, fairly so. If power of the works which they own, and the
the annual income is only equal to one-and-a-half permanent nature of the business carried on
times the amount of Debenture-interest, then by them. Due regard should also be paid to the
the Debenture cannot be regarded as secure. terms on which a property of this kind may be

It is thus seen that there are two factors taken over by the corporation of the district
wo factors Which decide the safety of a Debenture—viz., which it serves.
beatae the margin of property and the margin of It is well to look very carefully into the Dangers of

income, and these two factors should be con-
sidered conjointly.

real permanence of the business in cases of
this kind, as all businesses are liable to com-

--- Page 75 ---

Factors ensuring

stability of
Interest.

Advantages of
& growing
population

138 ON SECURITIES

petition. Who, for example, would have im-
agined sixty years ago that Canals, which were
then the traffic highways of England, would
one day become obsolete properties? Or that
the North London Railway would lose its traffic
through tramway competition? Yet these ap-
parent impossibilities have come to pass.

No industry exists which has a really per-
manent trade, with the sole exception, perhaps,
of Waterworks, for there does not seem any
chance of this necessity being superseded.

In ascertaining the stability of the income
of any undertaking of a permanent character,
which has no assets with a break-up value,
there are two main factors to be taken into
consideration, viz., the size and permanence of
the population served, and the working costs.
A permanent and increasing population is the
all-important factor, for even Waterworks, in an
abandoned city, are valueless; while any town
which has suddenly sprung into existence from
a mining camp, is liable suddenly to return to
its original state.

In Europe such depopulations are rare; but
in certain districts they occur. Many Italian
cities have fallen to one-third of their original

population, and Ireland at the present moment _

is losing its inhabitants at an alarming rate.
In the case of new Railways, Gas, Water, and

ON SECURITIES _ 139

Electric Light undertakings, it is not necessary
to insist upon a large margin between the net
profits and the Debenture-interest; provided
that the population served be steadily growing
as shown by past statistics, and that, conse-
quently, the business of the Companies be
steadily expanding.

Working Costs are important, as they not Importance of
only indicate the margin of profit made, but Vn Costs.

also the degree of rapidity with which profits
might entirely disappear through a rise in the
price of either labour or raw material. This
danger is especially present where labour and
coals form an important proportion of the cost
of the finished article. Any trade working with
a very small margin of profit is dangerous, and
it is, for these reasons, always wise to compare
the annual turnover with the gross profit and
the net profit, and choose such undertakings
as show a considerable difference between the
turnover and the gross profits as well as
between the gross and net profits.

It very frequently happens that Companies One Company
or Corporations have incurred several Loans mney

and, therefore, have issued several classes of

- Debentures. In all such cases it is of the greatest

importance to ascertain with certainty, not only
how the various Debenture-Issues rank in
telation to each other, but also whether some

--- Page 76 ---

Investigating-
safety of
Debentures.

Capital-safety of

Second and
Third
Debentures.

140 ON SECURITIES

part of the Company’s property has not been
specially mortgaged for the benefit of a specific
Debenture-Issue.

Investigations of this kind should be most
carefully made, for they touch upon the first
essential towards establishing the safety of
any Debenture, which is one among several
Debentures or Loans, issued by the same
Company.

In some cases the various issues of Debentures
are distinguished from each other by the year
in which they were issued; in others they are
alphabetically arranged as A, B, C, etc., De-
bentures. Sometimes they are called First,
Second, Third, etc., Mortgage Debentures;
while in several cases the words “ Prior Lien
Debentures” are used. The same rule applies to
all these types of Debentures, viz., to ascertain,
first of all, the total value of the assets and
income ; secondly, to fix the rank of the various
Debentures, and to settle in this way the margin
of safety offered by any individual Debenture-
Tssue.

Second or Third Debentures, before they can
be considered as safe, require a great deal more
Capital and Income behind them than First
Debentures. or, supposing a Company has
£100,000 of 5 per cent. Debentures, and a pro-
perty worth £200,000, then these Debentures are

ON SECURITIES 141

covered twice as to Capital; and if the Com-
pany were wound up and the property sold for
60 per cent. of its value (equal to £120,000) the
Debenture-holders would be paid in fuli. But
supposing that a Company had £100,000 5 per
cent. First; Debentures, £100,000 5 per cent.
Second Debentures, and a property worth
£300,000. It would seem as if the Second
Debentures in this case were as well secured as
the First Debentures in the former case, for
after deducting £100,000 from the £300,000 worth
of property, there would still be £200,000 left to
secure the £100,000 of Second Debentures. But
this is not so, for if this latter Company were
wound up and the property sold for 60 per cent.
of its value, then the sale would produce 60 per
cent. on £300,000 (equal to £180,000). Out of
this sum £100,000 would have to be paid to the
First Debenture holders, and there would only
be £80,000 left to pay the £100,000 Second
Debentures.

As it is with Capital so it is with Income.
If net earnings amount to £10,000 and the
First Debenture interest requires £5,000, then
the Income is doubly secured, and net earnings
would: have to fall over 50 per cent. before
there would be any failure to earn the full
Debenture-interest. But supposing that net
earnings were £15,000, and the First Debentures

Increasing
Income-safety
of Debentures.

--- Page 77 ---

Special
security

for Second
Debentures.

142 ON SECURITIES

required £5,000 for interest, then there would be
£10,000 left for Second Debentures, and if these
again require £5,000, the interest on the Second
Debentures is seemingly covered twice. If net
earnings were, however, reduced by 50 per cent.,
then only £7,500 of the original £15,000 net
earnings would be left, consequently the Second

Debenture-interest could not be paid out of ©

earnings. In fact, a reduction of over 33 per
cent. in net earnings would endanger the income
of the Second Debenture-holders.

Third Debentures are naturally still worse off
than Second Debentures, as they have two prior
charges in front of them. For these reasons all
Second and Third Debenture-charges require a
very ample margin behind them before they
can be pronounced safe.

Whenever a Second or Third Debenture-issue,
or some other exceptional kind of Loan-issue,
is secured on a special property which is not

otherwise mortgaged, then, on this special se-

curity, the particular Debenture-issue ranks as
a First Mortgage. In such a case it is quite
possible that the Second, Third, or exceptional
Debenture might be better secured than the
First Debenture. Such a case would arise if
the first Debentures were only partly secured,
and if the special property, which secures the
exceptional Debenture, were worth over twice

ON SECURITIES 143

as much as the total amount of the particular
Debenture-issue specially secured on it.

Sometimes Railway or other Companies pro- Guaranteed
mote a subsidiary Company for the purpose of "°°"
constructing a bridge or a railway station, or
some kind of work necessary for the development
of the parent Company, and the promoting
Company guarantees the Debentures of the
new Company. In all such cases it is im-
portant to consider the value of the guarantee;
and if this guarantee be good, then it renders
the subsidiary Company’s Debenture secure
whether or not the subsidiary Company’s
own property is either saleable or valuable.

In America, particularly; Railway Companies Position of

: : . -_ Guaranteed
pay for new rolling stock by issuing Car Equip- Bonds in
ment Bonds, which the Railway Companies “"*™
guarantee. The American Law Courts have
decided that such Debentures are trade-liabilities
of the Railway Companies, and therefore rank
in front of such of the Railway Companies’
Bond-issues a8 are not specially secured.

On occasions when Railway Companies have Income Bonds

: . generally
been unable to pay their Debenture-interest, ¢ bad security.

‘they have compromised the matter by paying

this interest in bonds instead of in cash: such
bonds are called Income Bonds, and they are

_ In many cases bad security.

_ If it occur that one Company has leased pro-

--- Page 78 ---

Rent-charges.

Investigating
safety of
Rent-charges

144 ON SECURITIES

perty from another at a rental, or if a Company
has borrowed money by vesting some part of
its own property in the names of Trustees—
agreeing to pay the Trustees a certain annual
sum, secured upon the rent receivable, from the
property which has been vested in the Trustees
~—-the Bonds which represent loans of this de-
scription are called Rent-charges.
To investigate the safety of such Rent-charges,
it is necessary to ascertain the solidity of
the Company which has mortgaged its future
rent-receipts; this inquiry practically settles
the safety of the Rent-charge Bonds. Be-
cause, it must be understood that Rent-charge
Bonds have, as a rule, no margin of safety.
So that if the Rent is not promptly paid, the
holders of the Rent-charge have, as their prin-
cipal recourse, the solvency of the Company
guaranteeing the payment of the rent.
Shipping Companies sometimes issue Bonds
on single ships, and the safety of these Bonds

ON SECURITIES © 145

are very valuable. Thus, for example, certain
Union Pacific 4 per cent. Debentures are con-
vertible inty Union Pacific Ordinary shares
and these Ordinary shares command a high
premium. The value of this right of conversion
entirely depends upon the future prospects of
the stock into which the Debentures can be
converted.
‘This privilege of conversion of Debentures
into. Shares at the will of their owner forms a
Pleasant potentiality of a prospective profit
and is a valuable adjunct to an otherwise good
Debenture, but is of very little value when the
future prospects of the undertaking are limited.

Having now dealt with all the most usual types
of Loans, Bonds, and Debentures, the second
main group of securities, viz., that of Shares of
all classes, comes up for consideration,

It has already been stated on several oc-
casions that whilst the interest on Debentures
must be paid, no matter whether the Issuing

depends on the saleable value of the ship. Such
Shipping Bonds do not, in reality, differ from

Company makes profit or not, the dividends ON. Dividends

shares of all kinds are entirely dependent upon Sopeniont

Vaine of con-

version rights

any other kind of Debenture, and the same
rules respecting soundness apply to them as
apply to the more usual type of Debentures.
Some Debenture-holders have the right to
convert their Debentures into Shares in the
same Company, and in many cases these rights

profits. This point so completely explains the Proms

shareholder’s position that it is here repeated
once more.

Every Company or Corporation is—subject to

such limitations as may be comprised by its

Charter of Incorporation or its Memorandum of
10

XX

--- Page 79 ---

Company may
issue different
types of Shares.

Assessment of
value of Shares,

146 ON SECURITIES

Association or by prior contract—at liberty to
issue either one kind of shares or a consider-
able number of share-issues. For example,
the London and North-Western Railway has
only four stock-issues, whilst the Great Central
Railway Company has no fewer than 18, every
one of which has distinct rights of its own,
which differ from the rights of all other classes
of stock.

- A Company with a single share-issue is very
easily understood, especially if this Company
has no Debentures or Loans outstanding. To
value the tangible assets of such a Company,
it is only necessary to total up the trading
liabilities as they are disclosed by the Balance
Sheet, to deduct these from the total assets,
when appraised at a fair valuation, then to
take the sum of money representing the excess
of Assets over Liabilities and divide it by the
number of shares issued.

In this way the individual break-up value of
each share is ascertained.

In every case where a Company with a solitary
share-issue has also an issue of Debentures or
Loans, the sum-total of the ultimate redemp-
tion-value of these must also be deducted from
the assets before the individual value of the
shares can be ascertained.

Only such part of the net profits of a company

ON SECURITIES 147

is divisible among its shareholders as remains
after the Debenture or Loan-interest has been
paid, and after the necessary provision has been
made for Reserve Funds or for Sinking Funds
to provide for the redemption of Debentures
or Loans.

In case of the liquidation of a Company its
Debentures have to be paid off first and in full,
whilst the shareholders only participate in any
residue which may remain thereafter. So that,
as a natural consequence, the shareholders are
entitled, after satisfying creditors, to divide all
the assets in any Company in which no Deben-
tures exist. If there are Debentures, the shares
only rank second both in the division of profits
and in the division. of assets.

Rights of
Shareholders
on Liquidation.

Whenever a Company has more than one Different

° «, 6 . classes of
share-issue, it is well first of all to consider all Shareholders

isti i have different
the existing Debenture-issues as one whole, and sermc

deduct their total nominal amount from the
assets. Then the sum remaining should again be
considered as a whole, and this sum represents
the property of the shareholders. The various
share-issues have respective rights, both as to
capital and income priority, and these rights
are strictly defined by the terms of the issue.
In fact, various share-issues rank behind each

other. in practically the same way as the
various Debenture-issues.

rights.

--- Page 80 ---

Articles of
Association
show rights of
Shareholders,

Classification
of Shares.

Disadvantages
of Preference
Shares. :

148 ON SECURITIES

In some cases the special names given to the
various share-issues indicate the order in which
the different issues follow each other in right
of priority ; but it is not safe to rely on these
names alone, as there are many exceptions to
the general rule. It is always better to make
quite sure, by reference to the Articles of
Association, and the terms and conditions of
each issue, how the shares do rank.

The following is the most usual order in
which shares follow each other in priority.

Guaranteed Shares.—These are usually fixed-
income shares, and should be guaranteed by
some one who is fully responsible, and is the
owner of some assets which are outside those
of the issuing Company. A guarantee by the
issuing Company alone would be valueless:
because this Company can only then fulfil its
guarantee when its profits permit of it.

Preference Shares.—These bear, as a rule, a

fixed rate of interest, and cannot receive more .

than that fixed rate. The drawback to them
is that they suffer if the Company does badly,
for they then are compelled to forgo their
dividends ; whilst they do not correspondingly
share in any special prosperity, because their
dividends are fixed.

Cumulative Preference Shares.—These are
similar to Preference shares; but if the dividend

ON SECURITIES 149

on them is not paid in any one year, this dividend
accumulates, and the unpaid arrears must be
satisfied out of the earnings of future years
before any profits can be divided among the
shareholders ranking behind them.

Non-cumulative Preference Shares.—These are
similar to Preference Shares, and have also no
claim for unpaid dividends which have not been
earned in any one year, and therefore have not
been paid.

Preferred Shares, Cumulative Preferred Shares,
Non-cumulative Preferred Shares.—This is a
description sometimes used in America, the
shares are in every respect similar to Prefer-
ence shares.

Ordinary Shares.—These have, as to dividends, ordinary Sharos

no special rights or privileges. They never carry

a, fixed rate of dividend and are merely entitled ish.

to receive that portion of net earnings which
may belong to them after the Reserve Fund and
the Debenture Redemption Fund have received
such contributions as were stipulated for in the
Articles of Association or elsewhere.

Preferred Ordinary Shares.—These rank behind
Preference or Preferred shares, but in front of
Ordinary shares. They carry, as a rule, a
fixed rate of interest. Participating Preferred
Ordinary receive, in addition, a share in those
surplus earnings which remain after the shares

--- Page 81 ---

rdinary
1ares are

metimes split.

150 ON SECURITIES

standing behind them have received certain fixed
dividend-amounts.

Deferred Ordinary Shares.—These rank behind
the Preferred Ordinary and Ordinary shares, and
receive a certain fixed rate. But if there is a
surplus still left after the dividend on them
has been paid, they usually share this surplus
with the Preferred Ordinary shares.

Note I.—In some Companies the original Ordinary shares
have been split up into Preferred Ordinary and Deferred
Ordinary. This splitting process could not be made com-
pulsory, so that a certain portion of the original Ordinary
shares have remained intact. Such Companies thus have:
Ordinary shares, receiving the originally stipulated share of
profit; Preferred Ordinary and Deferred Ordinary, receiving
that share of profit which the Ordinary shares, out of which
they have been created, would have received.

For example, the London, Brighton and South Coast
Railway still has Ordinary, Preferred Ordinary, and Deferred
Ordinary issues, of which the Ordinary stock is-the old
undivided Ordinary.

Note 11.—In many cases there are various classes of Pre-
ferred, Preference, Preferred Ordinary and Deferred Ordinary
shares, and these are distinguished from each other either
by the year of issue being placed behind the word Pre-
ferred or by letters of the alphabet, viz., Preferred A,
Preferred B, etc., or by numbers, viz., Preferred No. 1,
Preferred No. 2, ete.

Deferred Shares.—These, as a rule, rank behind
all other classes of shares, and only receive the

tail end of any sum divisible in dividends.
Founders’ Shares.—These are similar to De-

ON SECURITIES 151

jerred Shares, and are given to the promoters of
a Company. They have, as a rule, no right to
participate in the division of assets, but receive
a certain proportion of the profits. This pro-
portion of profits, and the manner in which it
is calculated in relation to the dividend-rights of
the other shareholders of the Company, differs
in each individual case. In some instances

Founders’ shares receive large profits, and there Founders’

are instances where Founders’ shares are the
basis of a subsidiary Company, which holds
them. Such subsidiary Companies have no
tangible assets, and rely solely on their right
to participate in the profits of the parent
Company for their sustenance. .

Leased Line Shares—In some instances the Leased-line

entire assets of a Company are let on lease to
another Company, and this leasing Company
guarantees a certain fixed rate of interest on the
shares of a Company which owns the property,

. let on lease. Such an arrangement particularly

applies to railways, and in many cases the
Ordinary shares of a small Railway Company,
which is leased to another large Railway
Company, are so safe, that the Trustee Acts
have recognised their eligibility to rank as
Trustee Stocks.

Trust Certificates.—It happens at times that
it is deemed desirable to vest. the entire control

--- Page 82 ---

Trust
Certificates
carry no
voting-power.

How to value
an Issue of
Shares when

one of a series,

152 ON SECURITIES

of a Company in a Committee. In such cases a
sufficient number of shares to carry any resolu-
tion proposed at a meeting are deposited with
that. Committee, and the Committee, in exchange
for the share certificates, issues Trust Certificates
to the depositing owners. These Trust Certifi-
cates are to all intents and purposes similar to
the shares which have been deposited against
them, except that they carry no voting power.

It will be gathered from the above long list
of various classes of shares that at times it is very
difficult to arrive at the true position of any
particular share-issue which is one of a long list
of other issues. The best method of arriving at
an unquestionably sound valuation of shares so
situated is, to treat all the issues which stand
in front of any individual share-issue as one
whole: that is to say, to add up their total
nominal Capital-values and separately to add up
the total Annual Interest and the total Annual
Dividend sums to which they are severally en-
titled ; then treat these totals as if they repre-
sented the Capital and Annual Interest of one

first charge. Deduct the total Capital-sum from |

the Assets, and the total Annual Interest and
Dividends from the Profits, and consider the
two amounts then left as the Security respec-
tively for the Principal and Interest, of the
share-issue which is heing inquired into.

ON SECURITIES 153

It must here again be pointed out, as was Groater
done in the case of Debentures, that the margin Security.
of security for any issue, which ranks behind foayyet
a large number of prior charges, should be very i
much greater than the margin of security for
an issue which has little or nothing standing
in front of it.

Any stock or share which has no charges in
front of it naturally enjoys an undisputed priority
of claim on the assets. In this way Ordinary
shares, with nothing in front of them, are fre-
quently safer than Debentures or Preference shares
shares with charges ranking before them. Simi- Someqyne"
larly, Preferred or Preference shares in a Company Pe?en*es.
which has no power to issue Debentures, are
just as safe as Debentures in such a Company
would be, except that their holders cannot
claim to be paid off at some future date.

These shares are practically on all fours with
Perpetual Debentures.

All shares have a certain nominal value, this
being the amount which the holders of the shares
ate liable to contribute towards the Company,
and the total nominal value of all shares which What
are issued constitutes the Company’s capital. a Company's
If a Company has issued Debentures or Loans, “*Pi**"
the proceeds of these Loans are, of course, also
employed, as Capital, by the Company in its
business. But these Loans, belonging to

--- Page 83 ---

Danger of
holding partly-
paid Shares.

Shareholders’

control depends

on voting-

power of Shares.

154 ON SECURITIES

persons who have no direct interest in the
Company’s business, do not constitute a part
of the Company’s own Capital.

In Limited Liability Companies, as soon as
the shares are fully paid up the shareholders’
liability on them is at an end; shares which are
only partly paid up can be made fully paid on
the legal demand of the Directors. In the case
of most banks there is a reserved liability, pay-
able only in the event of liquidation.

To hold shares which are partly paid is always
dangerous, no matter how solid the Company
may appear to be at the time such shares are
acquired. Prudent Investors should never
hold or purchase partly-paid shares unless the
income-yield afforded by such shares amply
compensates them for the undeniable extra risk
which they thereby incur.

Shareholders control the business of a Com-
pany by means of the voting power which their
shares carry.

This voting power is settled by the Articles
of Association of the Company, and it varies,
almost in every case. As a rule, Investors do
not understand how very important this voting
power should be to them, and they therefore
carelessly invest even in shares which actually
carry no voting power.

It is quite unnecessary for a Debenture-holder

ON SECURITIES 155

to possess voting power, because he simply
lends money upon stated conditions, and he
has the right forthwith to demand the repay-
ment of his loan if these conditions are not
fulfilled. The holder of shares, whatever their
class, is not so situated: he cannot demand
the return of his money in any event, and
he is only entitled to receive his dividends
when and if the Company has earned them.
It is clear, therefore, that any shareholder is
very directly interested in the welfare of the
Company; and, this being the case, he has a
right to demand a voice in the conduct of the
Company’s business.

Tnvestors’ failure to rightly understand the

responsibilities of shareholders has in many

cases been abused by promoters of Companies.
The tangible assets they sold to the new Company

for cash, and raised this cash by the issue of

Preference shares, which had no voting power.
Simultaneously they sold the goodwill of the
concern to the Company for Ordinary shares,
which had a voting power, and these shares they
retained. Translated into plain English, this
bargain means that the Preference shareholders
furnish all the money, for the owners of the good-
will to do what they like with. In exchange
for providing all the tangible assets of the busi-
ness, the Preference shareholders take a rigid

Adequate
control by
Shareholders
is important.

Some Company-

Promoters’
subterfuges.

--- Page 84 ---

Directors
benefit some-
times at
Shareholders’
expense,

Prospective
Shareholders
showd look to
voting-power.

156 ON SECURITIES

maximum of dividends, which may dwindle
down to zero, the Ordinary shareholders taking
all the rest and being masters of a concern in
which they have no money invested. There
are always more ways than one of making a
legal profit out of a Company, and it is quite
possible for the directors and managers to
benefit more by salaries, fees, discounts, and
such like privileges, than by dividends which
may be paid on the shares. The holders of
votes regulate the business. So that in all
cases, where the Preference shareholders possess
no voting power, the real bargain is “ give us
your money and we will give you in exchange
whatever we please.”

An excuse for one-sided bargains of this kind
is frequently made by stipulating that the Pre-

ference shareholders shall have votes, as soon

as their dividends remain unpaid ; but itis rather
cool comfort to have permission to lock the stable
only after the horse has gone. Instances have
been known where Preference shareholders have
even been denied the right to attend meetings
or inspect Balance Sheets. Yet the unsus-
pecting public took up such issues, and even
paid premiums for the privilege of occupying
such an exceedingly dubious position. It should
be the future resolve of every reader hereafter
to carefully inquire into the voting power which

ON SECURITIES 157

the shares, which he proposes to acquire, carry,
and regard the privilege of voting on the subject
of the welfare of his invested Capital in a some-
what more serious light than he may consider his
voting rights at County or Municipal elections.
Most Companies send out proxies and ask the
shareholders to hand over their voting power
to the Chairman or one of the Directors. Many
Investors have become so indifferent to their
own interests that they sign and return these
proxies, without even taking the trouble to find
out on what subject a vote is to be taken. Sucha
procedure is almost equivalent to signing a cheque
in blank and giving another person permission to
filk in any amount which he pleases. Although
every one has the right to do what he likes with
his own property, it is the duty of every share-
holder to consider not only himself but also his
fellow-shareholders. It frequently happens that
the Directors have entirely mismanaged a Com-
pany’s business, and that a certain small section
of the shareholders, being aware of this fact, are
desirous of bringing the guilty parties to book.
Such a reasonable endeavour on the part of a

Danger of _
signing Proxie
without inquiz

small body of shareholders to save their own

money is often defeated by the large number of
proxies, which other thoughtless. shareholders
have sent to the Directors without troubling to
ascertain the point at issue.

--- Page 85 ---

158 ON SECURITIES

In such a case, to sign a proxy without
thoroughly understanding its purpose is culpable
negligence of which no right-minded person
should be guilty, and a conscientious share-
holder has really only one of two courses open
to him :—namely, either to make up his mind
that he does not care what happens, and in that
case not to vote, or else to study the case and

- ON SECURITIES 159

and do not hesitate to describe themselves as very
badly used individuals, The proverb concerning

the horse and the stable door is so feebly lacking

in personal condemnation as to be inappropriate
to such conduct. “ Don’t lead your Directors
into temptation, and don’t shirk your own
share of the work,” would fit the case far more
closely.

Any Company, which so locks up its assets, or sumcient

. . Working Capit
so squanders them that sufficient Working iiisouable.

to vote as his judgment and his own interests
direct.

Shareholders
lack proper
interest.

A small boy once said :—‘ Serves my parents
right if I get chilblains ; why don’t they provide
me with proper gloves?” Unfortunately, many
Investors adopt a similar attitude towards the
persons whom they entrust with the manage-
ment of their capital. As long as the Directors
manage to pay dividends, no one cares what
happens, nor pauses to inquire whether these
dividends are being paid out of Capital. A
matter of such vital importance as whether
the assets are being judiciously nursed or care-
lessly dissipated, does not seem to trouble
shareholders as a rule.

There are many Companies which pay regular
dividends, and at every annual meeting experi-
ence difficulty in collecting a quorum of share-
holders, although their lists of shareholders
number many hundreds. But so soon as the
dividends cease, armies of shareholders attend,

Capital is no longer available to carry on the
business, is compelled either to wind up entirely
or else to undergo a process of reconstruction.
In the case of a winding-up, the assets are
used to satisfy trade creditors and to pay off
the Debentures first of all. Any surplus which

_ may remain is then distributed among the

shareholders in accordance with the respective
rights of the various issues. The winding-up of

Companies has become a very profitable business, Priority of

and there are many firms of accountants and
solicitors who do nothing else.

Investors have only themselves to blame for
the enormous sums of money which are annually
lost by them through Companies winding up.
In the first place, they take up shares without
due investigation, and, as soon as they have
acquired an interest in a Company, they take
no further trouble to protect their capital.

--- Page 86 ---

160 ON SECURITIES

Unfortunately, in Great Britain the excellent
laws which have been passed to regulate the
acts of promoters, directors, and liquidators, are
very loosely applied. This laxity results solely
from the fact that the actual owners of the
concern—the shareholders—do not trouble to
enforce their rights. If shareholders would only
exercise an intelligent supervision over their
capital, there would be fewer liquidations to
start with ; and such liquidations as were inevit-
able would return fairly substantial surpluses
to shareholders.

The reconstruction of Companies is perhaps
still more unsatisfactory than the winding up of
Companies. Directors first of all collect Capital
from Investors, next they waste this Capital,
and, having done so, they express their sorrow
for what has happened. Finally they propose a
scheme for the wholesale writing-down of the
Capital Aecount, accompanied by a further
scheme for raising a supply of fresh Capital.
Occasionally the shareholders may grumble a
little at first. But they subsequently send in
their proxies and cheques with marvellous
docility, and the same set of incompetent
Directors remain in office, perhaps to repeat

ON SECURITIES 161

is it sad, but highly instructive, to follow
the history of reconstructions. There is one

case on record of a Mining Company which Example of

was started in 1882: it never paida dividend

or did any real mining, yet was reconstructed ‘om™tions.
"no fewer than eleven times. In each recon-

struction fresh Capital was provided by some
sanguine spirits. The last reconstruction took
place a few months ago, and the shareholders
who attended the meeting which sanctioned
it, actually congratulated the Chairman and
Directors upon the splendid prospects which
they had been able to put before the shareholders,
It should be added that the most hopeful
speakers at the meeting were absolutely indepen-
dent Investors, and that it does not seem to

have occurred to their relatives forthwith to

apply to the magistrates for power to place them
under restraint. ,

Legislation has been at work since the year

- 1862 devising laws for the protection of Investors
in public companies. But legislation will prove

unavailing until the investing public realises
that holding shares in Companies involves a

’. responsibility which cannot be neglected with

impunity.

the same operation on several subsequent
occasions.
Especially in the case of Mining Companies

i

Holders of Loans, Bonds, and Debentures, Bond- ana
being merely lenders of ed hoes ieee

ng y rs OL Money, need only see that have different
their claims are secured by valuable assets in the ™*re®

1l

--- Page 87 ---

162 ON SECURITIES

first instance and that the value of these assets
is subsequently maintained. Owners of shares
of all kinds are partners in the concern, and as
such should recognise their responsibility, not
only in their own interests, but also in those of
their fellow-shareholders. Proprietors of well-
secured Preference shares incur but a remote
personal responsibility, but holders of speculative

CHAPTER VII

a ON NEW ISSUES

ETWEEN 100 and 200 million pounds? Annual

unts

Preference, Ordinary, and Deferred shares, are ; Amo
worth of new issues of Capital are annually of new

almost directly responsible for the conduct of a Capital Issuea.

Directors the
servants of
Shareholders.

Company.

It is their duty to watch the undertaking
throughout its career, to understand and appre-
ciate the extent of the rise or the fall in its
fortunes, and actively to co-operate in warding
off any disaster which may threaten it. The
Directors of the concern are their servants, and
as such should do their bidding. .

So soon as this spirit of mutual help and
assistance among shareholders shall have begun
to display itself, there will be no more Capital
wantonly squandered, and our Railway, Dock,
Canal, Water,Banking, and Insurance Companies,
Tron, Steel, Coal, Cotton, and other works, which
employ more than three-quarters of our entire
working population, will be more prosperous and
more capable of earning and distributing wealth
than they have ever been in the past.

offered to the British investing public for sub-
scription, and the majority of the stocks so
offered a:e either publicly or privately taken up.

Some of these new Capital-creations are
constituted on a sound basis and are offered to
Investors on exceedingly favourable terms ;
others are so faulty in their conception that any
financially trained mind can foresee, almost at
a glance, that the Capital ventured in them
will most probably be lost.

The framing of a prospectus is a fine art, which The Art of

consists of bringing every favourable point into fr
the greatest prominence, covering up all elements
of weakness and slurring over, so far as the law
will permit of this being done, all the unfavourable
features of an enterprise which is endeavouring
to attract public subscriptions. The most allur-
ing form of prospectus is that which is framed
with the greatest apparent wealth of detail, and
163

raming.

--- Page 88 ---

Simplicity of
Prospectus
@ good sign,

.Form of
Prospectus
often
misleading.

164 ON NEW ISSUES

the least dangerous consists of a few simple

statements which make no appeal to the In-
vestor’s imagination.

To the financial student the reading of pro-
spectuses is a most instructive pastime ; because
frequently the soundest and best securities are
offered in so clumsy a form that they appear to
be unattractive, whilst at other times Bonds
or Shares, which are quite unfit to be called
securities, are so skilfully described that even
an expert is obliged to examine the statements
and figures repeatedly before he can arrive at
their true meaning.

Investors who have no financial skill will
find the reading of prospectuses a very expen-
sive amusement. For in most cases the sound
propositions will strike them as uninteresting,
while in all probability the most dangerous of
speculations, in which the chances are ten to
one against ultimate success, will prove the most
attractive. A sound investment is considered
by its sponsors to be of such obvious merit
that little or no effort is made to proclaim its
attractions. So that really good securities
often fail to arrest public attention. On the
other hand, new issues of a dubious nature
make their appearance to the accompaniment
of such a flourish of trumpets that the investing
public are led to overestimate their true merits.

ON NEW ISSUES 165

The average Investor has a craving for vague
possibilities. This hankering after the untried
and the unknown investment is at complete
variance with the business-prudence which
guides mankind in other matters. As a rule,
people prefer to purchase a well-known article
of proved merit. The flourishing condition of
many old-established manufacturers and dealers
is usually due to 4 long series of years of honest
trading, whereby they have won the con-
fidence of the public. As soon as the question
of investment is approached, however, the es-
tablished article, the quality of which can be
gauged to a nicety, no longer seems to prove
attractive. Unconsciously, perhaps, Investors
are possessed by an inborn yearning to gamble.
A sound security which will bear the most
searching scrutiny the Investor rejects as un-
inviting. He wants to buy a stock at par
and to see it ultimately rise to some fabulous
price. Such a possibility is only offered by the
crude and untried venture: and it is the crude
and untried venture which the average Investor
appears to prefer.

Such immoderate investment-cravings are
deserving of small pity. They are the outcome
of an attempt to gamble, cloaked under an
outward display of decorum. It is only when
an Investor has, however unconsciously, thrown

Investor’s
attitude
towards

New Issues.

Untried
ventures
a gamble.

--- Page 89 ---

Fascinations
of Prospectus
to small
Capitalist.

166 ON NEW ISSUES

prudence to the winds that he yields to the
temptations of a flamboyant prospectus. ~

Really sad is the case of the perfectly innocent
Investor whose financial horizon is limited and
whose knowledge of sound securities is scanty.

To a small capitalist of this type new issues
prove an irresistible attraction. He has money
lying idle. He does not care to ask advice, nor
does he believe in the financial discrimination of
his friends. The few stocks which are quoted in
his newspaper are either uninviting to him or
the particulars given of them are so very sketchy
that he cannot understand them. To him a
new prospectus is like an oasis in a desert, or
like a spring of fresh water in an Australian
bush. There he can have his fill of detail:
everything seems so nicely explained and so
full of prospect.

There are tens of thousands of such In-
vestors distributed all over the country. It
is principally their money which makes up the
millions of pounds which are carefully recorded
by the Registrar of Joint-Stock Companies as
lost in new ventures.

There is another point also which is of great
assistance to promoters, namely, the inborn
dislike of the public for second-hand articles.

Merits of new The Investor asks himself why he should buy

and old
Investments.

a share, which no one seems to want, when

ON NEW ISSUES 167

there is a nice new article of the same kind
offered to him, so to speak, fresh from the mint.

The public fails to understand that well-
established or tried investments are somewhat
like pictures by old masters, or the early
editions of classical books. Many pictures are

painted, many books are written, but the vast

majority of them disappear in time, no one
knows where. Only the works of real merit
survive to be admired by future generations
and cherished in art collections.

Every Investor is bound to hold several stocks,
so he, too, is a collector of a kind. Why, then,
should he not purchase properties which have
been approved and which have stood the test
of time? This brings us to the first important

axiom in connection with new issues of stock, An important

namely, that no part of a new issue should be
bought unless it is cheaper, safer, and more re-
muneratiwe than a similar stock of tried merit
which can be bought at the same time in the
market.

‘The prospectus of a new venture can give no
more than probabilities and possibilities. The
position of an old stock is based upon actual
facts.

Therefore, only when the probabilities and Possibilities

possibilities of a new issue after a thorough
examination appear likely to become realities,

--- Page 90 ---

168 ON NEW ISSUES ON NEW ISSUES 169

widest choice of investments is to be found in
some statistical periodical which gives full in- How to obtai
formation regarding the largest possible number £2? widest |

of stocks; for example, the Financial Review ™vestmente.

should its purchase be considered. Unless he
had every confidence in his own judgment no
one would buy an expensive article from an
itinerant pedlar, yet this is the folly which

Investors are prepared to commit. They are
frequently without the slightest conception of
the quality of the various types of investment
which are on offer daily. Yet they will hastily
subscribe to a new stock without understanding
its true comparative value.

At the same time, it must be understood that
the Investor must exercise great caution even
when purchasing stocks of old standing. If

of Reviews gives details of 5,000 securities,
so that Investors are always able to con-

“sult, an extensive catalogue of investments.

This Review, consulted conjointly with the
Investor's Shilling Year Book, lays before the
Investor the largest selection of stocks which
has ever been printed in any periodical. For
the price of 2s. both these books can be pro-
cured, and no one should invest even so small

Btockbroker’s he relies upon the judgment of his broker or a sum as £50 without first consulting them
as Investment. SOME other financial authority, he must satisfy or some other similarly extensive and compre-
authority. .

himself that the authority so consulted has
familiarised himself with all markets by con-
stant study, and that he is therefore capable
of selecting the cheapest, safest, and most
remunerative stocks of their kind. A wide
field of selection is essential to judicious in-
vestment. A prudent housekeeper does not ask
her tradesmen to submit to her a few samples
for selection. She is aware that it is invariably
more satisfactory to go to the largest emporium
and make her own choice from the greatest
assortment.

In the case of investments a broker’s office
does not constitute such an emporium. The

hensive record.

But the reading of books entails trouble, and Investors’

trouble of any kind most Investors are loth
to take.

Curious as it may seem, nevertheless it is
a fact that many people will laboriously collect
sums of money by studied economy. They will
frequently work hard for a whole week and
make perhaps only £5 by their exertions. Yet
when it comes to the investment of £50 or £100,
or even more, it seems to them to be too much
exertion to see that this sum is securely invested.

Rather than take the trouble to develop
their own judgment, they prefer to leave the

--- Page 91 ---

The self-reliant

170 ON NEW ISSUES

responsibility of making a wise investment-
selection to the judgment of others. These
others are prone to lightly regard the duty
thus thrust upon them, and so the money
is dissipated in imprudent investment. Only
those things are really well done which are
done for one’s self; consequently only those
Investors who learn to become self-reliant are

ON NEW ISSUES 171

methods is employed when issues of this sort are
made, namely, either an issuing house buys the
whole issue outright, or the Government, etc.,
employs the issuing house as its agent. In the
first case the issuing house runs the risk of

failing to place the whole issue, in the second

place the Government, etc., assumes the risk

itself. In the case of British Government issues, Now Issuca

ye . bscribed
subscriptions are generally invited by tender, ty tonder.

Investor
succeeds. permanently successful.

The whole of this lengthy argument is based
upon the present writer’s quarter of a century
of experience among investors. This advice to
acquire a knowledge of the principles of sound
investment is given with a warm feeling of
sympathy for all those who part with their
hard-earned savings without due consideration,
and who gamble. recklessly with a laboriously
collected sum of money without being aware
of their own imprudence.

and allotment is made to the highest bidders.
This form of offering new stock is highly
unsatisfactory to the private investor and the
issuer alike,

In the case of Joint-Stock Companies, as soon
as the terms upon which the issue is to be made
have been settled, a prospectus is drawn up, and
then the promoters decide as to whether the
intended issue shall be underwritten or not.

Underwriting means that a number of persons, Underwriting

Methods New issues are made either by Governments, in return for a certain fee, guarantee the success
or m - . .
ducing Dependent States, Provincial Governments, Cor- of an issue in the following manner. Every one

ew
Issues,

porations, Municipalities, existing Joint-Stock
enterprises, or by New Companies.

The Governments, Dependent States, and Pro-
vincial Governments as a rule employ a banker,
broker, or financial agent to make the issue for
them; Corporations and Municipalities sometimes
make the issue themselves and sometimes pursue
the same course as do Governments. One of two

of the underwriters makes himself responsible
to take up a certain amount of the issue. The
public is then invited to subscribe. If the
public take the whole of the issue, or over-sub-
scribe it, then the underwriters are free from
any further responsibility. If the public takes
only part of the issue, then the total amount
subscribed for by the public is deducted from

--- Page 92 ---

Underwriting
a profitable
business.

172 ON NEW ISSUES

the total intended amount of the issne, and the
underwriters are bound to take the unissued
balance in proportion to the amounts which they
each individually underwrote. For example,
supposing the total intended issue to be £100,000,
and that the public subscribes £60,000, then it
falls upon the underwriters to take up £40,000
between them. In sucha case any one who has
underwritten £1,000 of stock is bound to take
up £400 of it.

The underwriter is paid a percentage which
varies from 1 per cent. on the amount under-
written, up to 6 per cent. or even more in the
case of issues of new companies which are
speculative. .

The business of underwriting is rather pro-
fitable, for if £1,000 has been underwritten at
a 3 per cent. underwriting fee, and the public
has applied for 60 per cent. of the total in-
tended issue, then the underwriter has to take
40 per cent., or £400 stock, out of every
£1,000 which he has underwritten: his under-
writing fee is 3 per cent., or £30 on the £1,000
underwritten. His £400 stock, therefore, will
have cost him £30 less than the public has paid
for a similar quantity, or, in other words, he
has bought his supply at a discount of about
8 per cent. In many cases the public applies for
a far larger proportion than 60 per cent. of an

ON NEW ISSUES 173

intended issue. On such occasions the under-
writer obtains his stock still cheaper, because
he receives the same underwriting fee and he
has to offset the same fee against the smaller
unissued balance of stock for which he is re-
sponsible.

As soon as the underwriting arrangements are Underwriters’
responsibility

completed, the prospectus is advertised in the
public Press. The underwriters are either Stoc
Jobbers, Banks, Trust Companies, or minor
Financial Houses who are capable of exerting
a market-influence on the Stock Exchange.
By these means transactions in the new
stock are passed through often at a premium.
These transactions are recorded in the Money
Article of the newspapers, and in this way the
public is induced to believe that there is a
great demand for the new issue. Accordingly,
they fill in application-forms to obtain the
stock at par, in the belief that it is saleable
above par.

In many cases, of course, new issues are
genuinely over-subscribed and the dealings at
a premium are perfectly legitimate. But, un-

fortunately, in some instances such dealings
are quite fictitious. The possible chance of snatching a

snatching a premium frequently induces stock
gamblers to apply for especially tempting new
issues. This operation is called “ Stagging.”

for fictitious
k quotations.

--- Page 93 ---

Requisites for

174 ON NEW ISSUES

As these men have no use for the stock, they
sell it immediately in the hope of obtaining
an allotment. Such sales frequently interfere
with bona fide premiums being maintained.

As soon as the public applications have been
received, the issuing house closes the list and
issues letters of allotment to the applicants.
All the documents in the case, including the

ON NEW ISSUES 175

on the prospectus, and the cost of the under-
writing fee, These expenses are very heavy in
any case, and hardly ever amount to less than
£2,000, even on a modest issue. But as there
are some firms of brokers and solicitors who
consider themselves but poorly remunerated
by a fee of 1,000 guineas for merely giving the
promoters the right to print their name on a

Te ahenge prospectus, the applications, and proof of the prospectus, their work and out-of-pocket ex-
Snotation: receipt of the application-money, are now sub- penses being paid extra, and as it is quite easy
mitted to the Committee of the Stock Ex- to spend £5,000 on advertising a prospectus, the
change, and are examined by the Share and cost of launching some issues very considerably
Loan Department of that institution. If all exceeds the smallest sum which can be expressed
is found in order, the Committee of the Stock in five figures. Whenever the issue is large
Exchange appoints a special settling day, on this does not matter, as even £25,000 is only
which all the bargains which have taken place 24 per cent. on £1,000,000 ; but on small issues
in the stock are settled. If the application of £50,000 or £100,000 the expense is propor-
for a special settling day is refused, then all tionately burdensome.
bargains contingent upon the granting of a It is extremely easy to ascertain whether an How to judge
special settlement are void. Whenever applica- issue made by a Government, Corporation, or new Loan Issue
tion for an official quotation is made, and the Municipality is cheap or dear, desirable or un-
case warrants it, this request is also granted by desirable. There are but few borrowers of this
the Committee of the Stock Exchange, and the class who have not borrowed before. Of these,
stock is then quoted officially. the past statistics of former issues indicate | to
Expense of The cost of an issue depends entirely upon the a nicety between what extremes of quotation

Issuing Stock.

number of prospectuses sent out, the amount
spent on advertising, the fees paid to the bank
which receives the applications, to the brokers,
solicitors, and accountants whose names appear

the new issue is likely to fluctuate in the future.
If a borrower has ever made default in the past
he is likely to do so again, unless his financial
conditions have greatly changed for the better.

--- Page 94 ---

Effect of
new Loan Issues
on old Stock.

First Issues
of Stock
judged by
comparison.

176 ON NEW ISSUES

A prudent Investor will insist upon very strong
proof of such an altered state of affairs before he
will entrust any part of his capital to a dubious
borrower.

The dearness or cheapness of the price at
which a new issue of this kind is offered, depends
rather upon the normal price-levels of former
issues, over a period of years, than upon the
prices ruling for such issues at the date of the
fresh flotation. For it is a well-known and
frequently practised manceuvre, temporarily to
enhance by artificial means the ruling prices of
kindred stocks or of stocks ranking part passu
with a new issue, in order to float the new
stock ata high level.

If a borrower appears who has never made
an issue before, then the stock-lists should
be examined, and a parallel case of a similar
borrower, hailing from the same part of the world,
should be found, and the terms of the new issue
compared with the terms upon which the similar
issue hag been dealt in in the open market over
a period of years.

In fact, a new issue of any kind should
not be judged merely by the particulars given
in the prospectus, but the surrounding cir-
cumstances must also be taken into account.

The remarks made in the preceding chapter
respecting Government and Municipal Loans

ON NEW ISSUES 177

should be constantly borne in mind before new
issues of this kind are applied for.

Whenever the underwriters have been obliged
to take a considerable portion of an issue, owing
to the lack of applications on the part of the
public, the amount of stock in the hands of the
underwriters is certain to come to market sooner
rather than later, because it is no part of an
underwriter’s business to hold stock permanently.

An effort is therefore made to get the under- “ Makinga

writers out by what is technically known as Ni
“* Making a Market.”

In such circumstances several jobbers are
given the right either to buy from, or sell to,
the underwriters at a certain price, which is
fixed beforehand, so that these jobbers can
deal freely without running any risk of being
landed with any stock. Firms of brokers are

_ pressed into the service, being induced to offer

the stock to country brokers and other large
clients at a price which is below the ostensible
market quotation, so that country brokers can
apparently secure exceptionally advantageous
terms for their clientéle. Purchases and sales
are passed through the Stock Exchange which
equalise themselves by the same firm sending in
one broker to buy and another broker to sell
simultaneously. “In America bargains of this

sort are called Wash Sales: such dealings result « Wash Sales.”

12

--- Page 95 ---

178 ON NEW ISSUES ON NEW ISSUES 179

in the marking of business done, and cause
an artificial tree market and close quotations.
In this way the public is gradually induced to

Investors do not take the trouble to find out Reason

. . why Investor
what a security really is worth, but much succumb to

prefer to lean on the judgment of others. The Dele

The “ Premium
Dodge ” as
Underwriters’
bait.

absorb the entire issue, and as soon as this
object is accomplished, the hitherto interested
promoters are no longer concerned in the stock’s
welfare, but retire from the scene, and let the
stock and its quotation take care of themselves
for the future.

Making a market is thus a perfectly legitimate
way of disposing of stock. Provided that the
stock is a good investment, and is sold at a fair
price, this process of making a market is harmless
enough ; but it deteriorates into a most objec-
tionable procedure when a worthless or specu-
lative security is thus retailed at high prices.
The more reluctant the public to take the
stock, the worse it is for thoughtless investors,
for in such a case they are whipped in by what
is known as the “ Premium Dodge.”

Man has ever been, and will ever be, an
imitative animal who dearly loves to follow a
leader. Many people are indifferent to a stock
which is offered at par and would not take
any notice of anything quoted at a discount;
but at a premium they eagerly buy, and the
higher the premium goes, the more anxious
do they become to join in the game. This
is easily explained by the fact that most

reasoning with them seems to be that there
are many shrewd judges of stocks in the City,

so that, if it is good enough for these experts
to pay premiums, it is surely good enough for

private Investors to do so too. The idea that
this is a kind of mock auction, in which the
owners themselves bid up their wares, with a
view to inducing an outsider who is a poor
judge of value to make a bid, and so become
the purchaser, does not strike them at all.

It is really pitiful to see some highly specula-
tive and ill-secured shares, which are dear at
their original issue-price of £1, being sold a few
weeks later at 30s., or 50 per cent. premium,
and to know that innocent Investors are actually
paying this exorbitant price: but it does not
seem possible to assist light-hearted and light-
headed Investors in retaining their money.

Any one who does not inquire what is the
real comparative value of the stocks which
he acquires, hardly deserves to retain his
capital. Perhaps, after all, pity is only
wasted on those who succumb to the Premium
Dodge.

In the case of an established Company making
a new issue, be it of Shares or Debentures, the

--- Page 96 ---

New Issues as

180 ON NEW ISSUES

procedure adopted is, as a rule, precisely the
same as in the case of Municipalities, Corpora-
tions, or Governments issuing loans. In such
cases the offer to the public is made either by
the Company direct, or through a house of
issue.

The public has sometimes a good chance of

ON NEW ISSUES 181

off any existing liabilities and provide additional Reading

plated extensions ; what degree of security the
new stock offers; whether the business is in-
creasing or decreasing; whether the margin of
profit made has risen or fallen—in fact, the

Investment: skis, hvosin ahen | nce whole of the necessary details for appraising

opportunities. DP g up a bargain when issues of this kind the value and safety of the new stock should be
are offered, because the new stocks are usually clearly set forth.
sold under the ruling market price of the Com- Whenever a prospectus fails to give a full
pany s existing securities ; also an opportunity list of the details above enumerated, then the
is given to purchase, free of market competition, prospectus is either badly drawn up or the Com-
a stock which is well known, which has an pany is anxious to conceal some material fact.
established record of extreme quotations, and Frequently the inexperience of the draftsman
men can be valued a nicety in every respect. of a prospectus is responsible for such omis-
kind nhecld di 1. * ering a new stock of this sions, and this is easily remedied by writing a

, By tet anes letter to the secretary, and asking for the ad-

Essential 1. The existing liabilities of the concern. iti i i

Content 3 A detailed lish of th ditional information. In many cases, however,

Prospectus. ; etailed list of the assets held, and the material facts are withheld, and the Investor

price at which they stand in the balance sheet.
3. A reliable and independent valuation of all

must then judge for himself whether he will,
in such circumstances, risk his Capital.

Company

Working Capital, or defray the cost of contem- Pr

ogpectus.

assets which have a break-up value.

. The main point which the Investor must Capital Safety
4, A clear and explicit Profit and Loss Account.

. . he I
always keep before him is capital-safety, there- tein point.

5. A statement of the turnover and net pro-
fits made during the last few years, covering,
in the case of old-established concerns, a period
of not less than five years.

With such a statement before him, the Investor
can ascertain how far the new capital will clear

fore a statement of assets and their break-up
value, together with full information concerning
existing liabilities, is indispensable in every case.
It is also very necessary to know how the busi-
ness has progressed in the past, and how each
year’s turnover compares with the net profits.

--- Page 97 ---

When new
Stock may be
valued as old
Stock.

Valuing

new Issues
with a .
guarantee.

182 ON NEW ISSUES

In the case of Corporations or Companies
which are paying dividends on a vast amount
of Capital which ranks behind a new issue, it
is only requisite to ascertain what the shares
behind the new issue are selling at, and how
much dividend has been paid on them during
the past few years. In fact, in such cases the
new stock can be valued like an old stock. But
whatever the prices of the stocks may be and
whatever dividends may have been paid, it is
always more satisfactory to have the above
described detailed statement of the Company’s
realisable assets.

Investors should always bear in mind that a |

Company, when attempting to raise fresh capital,
is anxious to put its position in the best
possible light, and that, if material facts are
withheld, it is only reasonable to conclude that
there is a concealment of items which might
prove detrimental to the success of the issue.

Whenever a new issue is guaranteed by
another Company or by a State or Corporation,
it isas well to inquire carefully into the value
of such a guarantee; and if this guarantee is
found to be good, then it is not necessary to
inquire so closely into the merits of the issuing
Company.

It is a good plan to examine the list of share-
holders of the Company offering new stock, either

ON NEW ISSUES 183

at Somerset House or at the Company’s office, Advantages of

before making an application. This list any list of
Shareholders.

member of the public is entitled to inspect,
on payment of a fee of one shilling, at
either place. The list not only shows how
much money the Directors have personally
invested in the concern, but also who holds the
shares, and how they are distributed. Tf it is
found that the Directors are but small share-
holders, there is the risk that the management
may not display active intelligence. If there
are large blocks of shares held in a few hands,
then the price of the shares is uncertain, aS an
avalanche of stock may descend upon the
market at any time. In an ideal list of share-
holders the Directors should have large personal
holdings of old standing, and the rest of the
shares should be distributed in the smallest
possible lots among bona-fide Investors who
have no City address.

The most difficult task in the whole field of
finance is to be able to gauge the merits of an
entirely new creation, and no Investor should
attempt this truly puzzling problem unless he
either has access to an experienced adviser, who
is able to point out the existing difficulties to

him, or unless he is possessed of a great amount
ot practical financial knowledge. .
It is necessary to make an attempt to draw

amining

Difficulty
of gauging
new enterpri:

--- Page 98 ---

184 ON NEW ISSUES

up some general rules of guidance, by the aid
of which an Investor may subject prospectuses
to a searching analysis. In applying .these
rules it must be remembered that there is such
a vast difference between various prospectuses
that it will be quite impossible to frame any
rules so widely as to cover all the points which
possibly may rise.

Comparative First of all—if at starting the prospects of
length of .
aurvival of success of all new Companies are taken to be

new Companies. equal—there is a chance of 5 to 95 against the

new Company surviving its first year of exist-
ence, a chance of 1 to 9 against its surviving
the third year, and a chance of 22 to 100 against
its surviving its fifth birthday, these ratios
being based upon the mortality figures published
by the Registrar of Joint-Stock Companies,
so that it is hardly necessary to insist upon
great caution in the selection of a new Company’s

shares.
Rules for We will now take the salient points of a
analys . . .
Company prospectus in the order in which every In-
Prospectus.

vestor should consider them.

1. The Class of Enterprise——There are but
few Investors who have a special like or dislike
for any particular class of enterprise. They
should gradually acquire an instinctive taste in
this direction, and learn to discriminate between
those enterprises which have the germ of per-

ON NEW ISSUES 185

manency in them, and those which come and go
like gnats, whose span of life is a single summer’ |
day. The best way to acquire this knowledge is
to examine a share-list which gives the year of
birth of the securities which it contains, and to
single out those classes of enterprise which have
seen the largest number of winters.

‘Tt will then be seen that Railways, Banks, Relative life
Insurance Companies, Breweries, Telephone, classes of
Waterworks, Gas, Telegraph, and Shipping°°P”
Companies as a rule live long, whilst Mineral
Water, Drapery, Cycle, Mining, and Oil Com-
panies generally have short lives.

The list here given should by no means be
taken as exhaustive, but purely as indicative,
and it should also be remembered that, by
examining a share-list, the inquirer is moving
among the living, and that mortality inquiries

should really be made on burial-grounds. There
are but few old men who suffer from consumption,
because consumptives usually succumb to the
malady while they are young; in the same way,
if there are not a good number of old and pros-
perous concerns carrying on any particular form

of enterprise to be found, the inference is that

the nature of that enterprise does not permit of
Enterprises

longevity. i based on new
. 1 inventions
Entirely modern types of enterprises base inventions

. . . ald
upon new inventions, like the manufacture of avoide

--- Page 99 ---

Reason for
forming
Company

on important
factor.

186 ON NEW ISSUES

motor-cars, or wireless telegraphy, should be
shunned by careful Investors, as every new
industry involves large losses before it settles
down to the steady profits of a stable trade.
Venturesome spirits have their imagination
roused by the potential profits accruing to
the pioneers of a new industrial development.
But it is more prudent to remember that every

business must pass through its dangerous ex-

perimental stage.

Every Investor who has reason to doubt the
solidity and permanent character of the class
of enterprise to be exploited by a new Company,
will do well to lay that Company’s prospectus
down unread, lest perchance he may fall into
the clutches of a clever draftsman who may
deftly succeed by the aid of a few neatly turned
sentences in removing this first and all-important
objection from his mind.

2. Reason for forming the Company.—This
should be quite clear from the first few lines
following the word “ Prospectus,” and it must be
a good and valid reason. Whenever it is said .
that the Company is formed “ for family reasons,”
or “to reduce Working Expenses through an
amalgamation” of trade-competitors or “ to:

unite opposing interests,” the Investor must —

exercise great caution, and he must make quite
sure that receding trade is not the real reason

ee ON NEW ISSUES 187

for the formation of the new Company. When-
ever the reason is “to obtas fresh Working
Capital,” or “ to make extensions,” these osten-
sible objects should never leave the Investor's
mind.« He should carefully ascertain whether the
new Capital asked for will really accomplish its
stated object.

He must on no account forget that the real
reason for forming private businesses into

_public companies is only too frequently a falling

off of trade.

j ise is started, be Timo required
If an entirely new enterprise >be Timo required

it to build a railway or a factory, to exploit now enterprises,

land, a mine, or such like, then the Investor
should bear in mind that almost all of these
enterprises would require from two to five years
to attain their full development, and that if

. such enterprises are to be really honestly worked,

no dividends can be paid during this period of
development, except out of capital and by the
depletion of Capital Account. If the prospectus

gives statements or calculations to the effect

that a new enterprise is likely to earn dividends
immediately after starting, this prospectus is
not likely to be straightforward, for there are
extremely few new enterprises which can spring
into maturity through the magic wand of the

promoter.
Ts launch a new venture or to form a sound

--- Page 100 ---

Company
Promoters’
Profits should
be looked for.

188 ON NEW ISSUES

existing business into a Company is not a
work of philanthropy: in all such cases the
promoters are the sellers and the investing
public are the buyers. Also where a going
concern is converted into a public company the
promoter usually makes his own terms, and
then tries to add a substantial profit for him-
self—a fact which he manages to conceal so far

ON NEW ISSUES 189

is an everyday business. As a rule, the
chief point which affects them is the respect-
ability, and only secondarily the ultimate
success of the concern. As a guarantee of
respectability, all the firms occupying official
positions are a useful indication, but in no way
do they form an index to the future prosperity
of the undertaking.

i he new Success of
The directors and manager of i Company
i who W1 crea dependent
enterprise are the persons ton ltctors
success or failure; hence they should be most end managers

as he possibly can behind a screen of verbosity.
All entirely new enterprises are speculative,
no matter what their nature may be, so that

Relative

importance of
officers named
in Prospectus.

only an ultimate pronounced success can com-
pensate for the inevitable original risk.
3. The People connected with the Enterprise.—

Of these the directors and managers are the —

most important, and the bankers, brokers,
auditors, solicitors, of the least importance.
It is not the province of banks to inquire
into the possibilities of an enterprise for
which they are prepared to receive subscrip-
tions, and they never pretend to do so; neither
is this the auditor’s duty. The solicitors act
as a rule for the promoters, and are there-
fore not retained in the special interest of
the Investor. The brokers look upon the new
stock as new merchandise in their own special
line of trade, while all these functionaries are
appointed by the promoters, and in_ their
case the matter of a Company’s formation

carefully considered, not only from the point of
respectability, responsibility, and social standing,

but principally as to their business ability and
* former business success. A glance at the Direc-

tory of Directors shows in which other Com-
panies the directors hold office. If these other
Companies are successes, then the prospects
of the new enterprise should be good, as far as the
management is concerned ; if there are failures
in many of the Companies managed by the same
directors, then caution is more than necessary.

The saying that “birds of a feather flock
together ” is nowhere more strongly exemplified
than in the case of company directors, and really
good men of business will only most reluctantly
join an enterprise which has not a germ of
success in it, or where they will have to
collaborate on the Board with colleagues who

--- Page 101 ---

Directors
should possess
business
knowledge.

Bargain
between
Vendors and
Shareholders
must be just.

190 ON NEW ISSUES

have proved themselves to be commercial
failures. Applicants for shares in new enter-
prises should make certain that the directors
who will manage the Company thoroughly
understand the business in hand, and that
they have not been placed on the Board solely
on account of their social position.

The vendors of a business frequently join the
Board of a new Company; and in cases of
established businesses it is desirable that they
should; but if their number predominates
the new shareholders’ interests are inadequately
represented.

4. Is the Proposed Bargain Fair ?—After having ©

ascertained that the enterprise is likely to be
permanent, that the Company has been formed
for a valid reason, and that the directors are
capable of making the business a success, the
proposed bargain between the vendors on the
one hand and the new shareholders on the other
hand, should be inquired into. This will in
many cases be found a very difficult task, as the
statements which bear upon this part of the
proposition will crop up in various parts of the
prospectus.

The best plan is to imagine that the | ap

plicant for shares intends to purchase all the
shares offered for subscription, for which
purpose he puts down the value of all the

ON NEW ISSUES 191

property which is being sold to the new Company,
while against that total he places the price
asked for the property. Such a simple state-
ment discloses at once the probable future
value of the shares offered and the real
intentions of the vendors.

‘Whenever the assets sold are valued by a
person of repute, and the past earnings are
certified by an accountant’s certificate, it will be
easy to ascertain the true meaning of the in-
tended. bargain, and to estimate the real value
of the goodwill which is included in the purchase.
But in all cases where no such reliable data are
given, to apply for any of the new shares involves
a great risk.

The future division of profits is disclosed by share

wee ; _ PY Share i
the division of the Company’s Capital into other
hd ti . .
Preference, Ordinary, Deferred, and Founders’ i profts,

shares. Whenever the Preference shares are
more than twice covered by the actual break-up
value of assets, it is fair that they should partici-
pate to a small fixed extent in the profits only,
because in such a case these Preferred shares
carry no appreciable Capital-risk. Tf no such
security is given to the Preference share-
holders, then the bargain is unfair, and such
Preference shares are undesirable. If there are
Debentures in’ front of the Preference shares,
then the remaining assets, after deducting the

--- Page 102 ---

192 ON NEW ISSUES

amount of the Debentures, should cover the
Preference shares at least two and one-half
fold.

The Ordinary shareholders run most of the risk,
therefore they should receive most of the profit.
The Deferred shares run a still greater risk,
therefore, provided that cash has been paid for
them, or tangible property transferred in con-
sideration of them, they should receive more
of the profit in case of great success than the
Ordinary _ shares. Ordinary, Deferred, and
Founders’ shares which are obtained for good-
will or form part of the promotion profit, are
not entitled to the lion’s share of the
dividends. :

A guide to The following axioms should serve as a guide
of future profits. to @ reasonable distribution of future profits.

Debentures and Preference shares, if they are
fixed dividend stocks, should run no Capital-risk
of any kind, and if they are asked to take some
Capital-risk, they should receive a counter-
balancing addition to their fixed interest in
times of great prosperity.

Ordinary shares should first of all rank for a
fair rate of dividend. This should be calculated
to amount to at least one and a half times the
yield of interest allotted to tha Debenture
and Preference shares. In addition, they should
receive one-half of the remaining surplus profits

ON NEW ISSUES 193

until these amount to, say, two and a half or
three times the rate which has already been
allocated to them.

Deferred shares, if paid for in cash, should Deferred Shares
have the lion’s share of all large profits; but large profits
shares of this type merely representing good-
will or promotion should never receive more
than the Ordinary shares.

Founders’ shares should only receive what is Founders’

Shares should
left after all other classes of shares have been rank iast.
provided for as above explained.

With these axioms in his mind, the applicant
for shares in a new Company can easily ascertain
whether the proposed division of profits in the
new Company is fair.

The distribution of the voting power is quite Voting Power
ou. a

_ as important as the division of future profits. regulated

. : . «4 by valuo
As a fair bargain, all the shares which are paid invested.

for in cash or acquired through the transfer of
tangible property, should, as a combined body,
have two-thirds of the entire voting power
distributed in fair proportions between them.
The remaining one-third of the voting power,
but in no case more, should be held by the
sellers of the goodwill or the promoters.
Whenever it is found that the new Company
acquires its property for a high price, or that
the future profits are not distributed in pro-
portion to the risks undertaken, or that the voice
13

--- Page 103 ---

Importance of
sufficient
Working
Capital.

Investors’
protection
against
insufficient
Working
Capital.

194 ON NEW ISSUES

in the future conduct of the Company, as deter-
mined by the voting power, is not proportionately
balanced, then to apply for shares is imprudent
and is attended by undue danger.

5. The New Company’s Business Prospects.—
There should be a clear conception in the mind
of every applicant for new shares as to the
financial position which his Company will occupy
in the future. He should carefully inquire into
the amount of Working Capital which will be
left, after paying the vendor and providing the
preliminary expenses. A great many Companies
fail because the Working Capital is insufficient,
the Companies’ financial plan, as explained in
the prospectus, having been based on the as-
sumption that all the shares offered would be
taken up, and the directors having gone to
allotment on a smaller amount. It is a good
plan to state on the subscription-form: “I

subscribe on condition that the minimum amount ;

of £—— has been subscribed for by others.”
Through this simple precaution individual
Investors would protect themselves against
numerous losses.

Any one who is interested in ascertaining how

far the law is capable of assisting inexperienced
investors should make a study of the minimum
amount of subscription upon which some new
companies propose to go to allotment. The law

ON NEW ISSUES 195

now forces promoters to state this amount in
the prospectus. Cases have been known where
the directors proposed to go to allotment on
a sum which was smaller than the estimated
preliminary expenses, so that such a company

‘might have started as a bankrupt. Yet small

investors have subscribed to such concerns,
and the directors did go to allotment on
applications which they knew to be quite
inadequate.

6. The Chances offered by the New Issue.—After

being fully satisfied on all the above points, the New Shares

applicant should carefully examine the estimates
of possible future profits given in the prospectus,
and after making a large allowance for dis-
appointed hopes, calculate what in that case
his shares would be worth, when compared with
the prices of similar shares in already established
Companies.

If he finds that in the most favourable
event new shares compare with shares which are
quoted at about 50 per cent. premium, and that
after making a liberal deduction from the
estimated profits they would still be worth
20 per cent. premium, then the chances of the
subscription are fair. Should he find that he
could purchase similar shares at the same price,
or for, say, 10 per cent. more, he should buy
shares in the established Company rather than

must compare
favourably with

old Shares.

--- Page 104 ---

Risks of
Investment in
new Company.

Established
Stocks safer
than new Issues.

196 ON NEW ISSUES

take up the new shares. The chances against
the best-founded new Company proving itself °

to be a good investment cannot be taken at less
than 7 to 5 against.

7. New Guaranteed Stocks or New Debentures
secured on double the value of Assets.—If a new
stock is unconditionally guaranteed by a
really responsible party, and if new Deben-
tures are doubly secured by assets, it is
not necessary to make very elaborate further
inquiries, as in that case the Capital is safe.

It will be seen from the above explanation
that taking up new issues is by no means an
easy business, and that a great deal of careful
analytical reading has to precede every prudent
investment in new stocks. There are a large
number of minor details to be observed .when
taking up new issues which it has been found
impracticable to enumerate here. Hardly ever
are there two prospectuses which are really
similar, and this prevents the possibility of
giving full directions in a short sketch.

It is invariably safer to buy an established
stock than to take up a new issue, unless this new
issue takes the shape of a Government, Muni-

cipal, or Corporation Loan of ascertained quality, _

ON NEW ISSUES 197

a Guaranteed stock, or a fully secured Deben-
ture, or unless the new stock is offered by
a well-established Company at a lower price
than the already existing issues of that Company
can be bought for.

--- Page 105 ---

MANAGEMENT OF COMPANIES 199

which are open to the inspection of share-
holders. Their main points should be familiar
to every shareholder, so that he may under-
stand the terms which govern the partnership
of which he is a member. The names of all the
owners of shares are kept in a share register,
and this register is also open to the inspection
of shareholders.
Directors and Managers are not only morally, Duties of

but also legally, bound to afford shareholders Shareholders,

CHAPTER VIII

THE MANAGEMENT OF COMPANIES

MEETINGS, BALANCE SHEETS, AND REPORTS

[Te management of a Company is vested

in &@ Board of Directors and a Secretary,
who have entire charge of the Company’s busi-
hess progress. In most cases the Directors are
only eligible to hold office so long as they are
shareholders; so that they act in the double
capacity of the personal superintendents of
their own invested capital and of the salaried
stewards who are paid to safeguard the interests
of the other shareholders. Whenever a share-
holder is a business-like person and is not likely
to divulge any of its working secrets to trade
competitors, that shareholder has a right to
know as much of the inner working of the
concern as any director, secretary, or other
official, for he is in every sense of the word a
full partner.

full information as to the position of the Com-
pany and its business progress. But as in
some Companies there are as many as 30,000
shareholders, these moral and legal rights could
not be enforced without gravely interfering
with the Company’s routine of work. An in-
telligent shareholder will only exercise his rights

when any real necessity arises.

The Directors and Managers should, by means
of circulars, keep the shareholders well posted
on every extraordinary occurrence which may
affect the Company’s business, whilst they are
bound by the Companies Acts to furnish
them at certain fixed intervals with a state-
ment of account setting forth the Company’s

- position and trading progress. A concise

Shercholders The relation of the shareholders to each other Report, issued by the Directors, should tend
governed and to the Directors and Managers is governed to elucidate these periodical accounts.

om; (1 ; . .
Articles’ «by «the Company’s Articles of Association, Every Company must appoint an Auditor,

198

--- Page 106 ---

Auditors and
their functions.

Meetings of
Shareholders
must be held
annually,

200 MANAGEMENT OF COMPANIES

whose function it is to verify the Directors’
accounts in the interest of the shareholders. He
is bound to insist upon the Directors making
a lucid and full statement of account to him
as representative of the shareholders, and to
report to them any point upon which, in his

opinion, the accounts are not explicit. Thus,

the Directors are responsible for the Company’s
books being fully and lucidly kept under the
Auditors supervision, and the Auditor is re-
sponsible for the true position being embodied
in the Statement of Accounts which is sub-
mitted to the shareholders.

At least once in every year a meeting of share-

holders must be called by the Directors, the |

idea of these meetings being that all parties
interested in the enterprise should have an
opportunity of ascertaining how the Company
is progressing, and of discussing all questions
of general interest to the Company. These
meetings are by no means called for the purpose
of giving individual shareholders a chance of
publicly ventilating any personal grievance which
they may have, and any shareholder who does
this at a meeting is abusing his powers. Per-
sonal questions should be put to the Directors
privately, or when they assemble for the pur-
pose of transacting the ordinary business of
the Company.

MANAGEMENT OF COMPANIES 201

‘The profits made by a Company are ascer-
tained by the Directors and verified by the
Auditors. The division of Profits among the Enterien |
shareholders, as proposed by the Directors, mrt be
requires to be confirmed at a meeting of share- gharcholders.
holders. Interim divisions of Profits may be
made by the Directors, if the Articles of Asso-
ciation give them power to do so.

Alterations in the general constitution of the
Company, and acts of vital importance to it, are
decided by the shareholders at special meetings,
which are called “ extraordinary,” in contrast “ Bxtreordin
to the “ ordinary ” meetings which must be Mootings of
held in accordance with Statute. These ex- ;
traordinary meetings may be called either by
the Directors or must be called at the request
of the number of shareholders specified in the
Articles of Association. The voting-powers of
shareholders at meetings are settled by the
Articles of Association, and votes can be given
either personally or by proxy.

The above are the general fundamental prin-
ciples which govern all Joint-Stock Companies,
and whenever they are faithfully carried out,
all parties concerned should be satisfied. But,
‘unfortunately, through the lethargy of share-
holders on the one hand, and the want of
consideration on the part of Directors on the

other, they are rarely complied with strictly.

--- Page 107 ---

Companies fail
through
Shareholders’
apathy.

How to read a
Balance Sheet.

202 MANAGEMENT OF COMPANIES

Shareholders are too prone to leave everything
to the Directors, and Directors are inclined to con-
sider the shareholders as a necessary evil, which
has to be dealt with, firmly or even brutally.
Through the want of co-operation between
Directors and shareholders, many otherwise
sound enterprises fail.

One of the principal points which tend to
make shareholding precarious, is the want of
explicitness in Companies’ Balance Sheets and
Reports, and the manner in which Companies’
profits are first of all calculated and subsequently
divided.

A Company’s balance sheet, when once
properly understood, is an extremely simple
document. On the one side there should be
scheduled everything the Company owns, valued
at its estimated realisable market-value; while,
on the other side, the Company’s Capital and all
its obligations should be stated. The Asset side
should be larger than the Capital and Liability
side, and the difference between these two sides
constitutes the Company’s undivided profit.
Unfortunately, balance sheets are sometimes
rendered obscure by the Directors putting on
the asset side items which are not assets at all,
and on the liability side items which are not
liabilities. The whole situation is often further
obscured by various items which should be set

MANAGEMENT OF COMPANIES 203

forth separately being lumped together in one
sum.

When reading the subjoined argument, it is
suggested that the reader should have open
before him any balance sheet which he may
have handy and that he should follow the
items as they are here discussed. It is also sug-
gested that on subsequent occasions, when any
special balance sheet is investigated, this same
course be adopted.

When treated in this way balance sheets will Proper

construction

be found to unfold their true meaning readily of « Balance

enough. Taking the asset side first, it is futile
to insert values which are incorrect. For ex-
ample, a Company owns works and machinery,
which originally cost the Company a certain
sum; but in the course of time the works have
depreciated, and the machinery has worn out.
This depreciation and wear-and-tear is a trading
expense, and should be duly met out of each
half year’s profits, for to value works and
machinery at their cost in a balance sheet is
to obscure the true state of affairs. No item of
real or immovable property should ever figure
in a balance sheet at more than its fairly esti-
mated realisable value. It sometimes happens
that certain parts of a Company’s immovable
property become useless to the Company’s
business and cease to be revenue-earning, and

Sheet

Assets and
their valuation.

--- Page 108 ---

204 MANAGEMENT OF COMPANIES

although they are still entitled to appear in
the balance sheet at the price at which they
could be sold, they should never do so at a
higher value. Perishable stock, particularly
stock which is likely to go out of fashion or
out of use, should be put in a balance sheet at
what it would fetch, less the Company’s ordinary
trading profit. To value such items at cost,
if that cost is above the valuation here ad-
vocated or below it, is misleading. Invest-
ments in other Companies should be carried
into the balance sheet at their selling value,
and debtors should be written down to the
actual amount which the Company has a fair
expectation of being able to collect.

In America there is an admirable system
in vogue of separating out assets which are
convertible into cash at any time from assets
which could not be sold without impairing the
Company’s business. These are called “ quick
assets,” as distinguished from assets which are
difficult of realisation, and this point will be
closely considered when the financial position,

MANAGEMENT OF COMPANIES 205

i together and to give a Assets should
To lump items tog g Amote shoul

final total is improper and misleading. Sup-
posing a Company has the following assets:
Freeholds £200, Leaseholds £800, Machinery
£1,100, Patents £40,000, and the Directors
give these in the balance sheet as: By
Freeholds, Leaseholds, Machinery, and Patents,
£42,100, then the balance sheet becomes quite
useless as a means of affording information.
A balance sheet is meant to show the true
state of affairs, and this item of £42,100, when
lumped as above described, is open to any
number of different hazardous guesses. Thus,
the freeholds might be worth £20,000, the
leaseholds £10,000, the machinery £11,000 and
the patents only £1,100. Yet on again adding
the last-mentioned very much more substantial
items, the same result of a total of £42,100 would
be arrived at.

No Directors have a right to fog their share-
holders in this fashion, and _ shareholders
should strongly protest against attempts to put
before them such inexplicit accounts.

as disclosed by a balance sheet, is discussed.
Every item of realisable asset’ having been

In cases where the Directors refuse to furnish shareholders’

. : . . remedy
important details, and the objecting share- for obscure
l Balance Sheet.

-

properly valued, these values should be set out
in detail in the balance sheet, so that the share-
holders may have a correct idea as to what
the Company’s property consists of.

holder is not influential enough to compe

them to do so, his remedy is simple. The
Auditors, when verifying a balance sheet, are
furnished by the Directors with a detailed

--- Page 109 ---

Object of
Balance Sheet
frustrated by
incorrect
valuation.

206 MANAGEMENT OF COMPANIES

statement setting out minutely how each item
of the balance sheet is made up. This state-
ment is open to the inspection of every share-
holder, and by insisting upon seeing it, he
obtains the information which the Directors
may attempt to withhold from him.

To settle the values of the assets ag they should
appear in the balance sheet is a very serious
business, and, as has already been explained,
the placing of an improper value against these
entirely contradicts the intention of a balance
sheet, which is to give a true and correct ac-
count of the Company’s actual position. If
the assets are overvalued, then the Company
is worse off than the figures show; while if the
assets are under-valued the Company is much
better off than it appears to be. Either pro-

MANAGEMENT OF COMPANIES 207

stating the value of the assets. The true Shareholders
position of affairs is bound to see the light unimparted
knowledge,

of day at some period or other, and then
some shareholders lose heavily, those with
inside knowledge personally having protected
themselves against the inevitable disaster;
or, many shareholders do not obtain the full
benefit of their position, again owing to insiders
profiting by an impending disclosure of surplus
values, of which the majority were entirely
unaware.

To have inside information which can be
turned into £ s. d. is a temptation which, un-
fortunately, but few can withstand, and share-
holders have only themselves to blame if they
permit their Directors to subject themselves
to such a temptation.

The liability side of a balance sheet is much How to

estimate

cess of valuing frustrates the true purpose for ;
simpler than the asset side, as here there the Company’s

which balance sheets have been instituted ; Liabilities,

hence, shareholders should not only insist upon
their Directors valuing at fair prices, but they
should also stipulate that from time to time
competent independent valuers should be called
in to corroborate the Directors’ opinions on this
point.

Tt has only too frequently occurred, that
shareholders have been kept either in a fool’s
paradise or in a state of suspense for years,
by the Directors wilfully overstating or under-

are but few chances of over-valuation or of
under-statement. We find, first of all, the
Company’s issued Capital, then the Company’s
permanent indebtedness in the shape of Deben-
tures or Bonds, and lastly the Company’s current
liabilities. All these items, except the liabili-
ties, perhaps, are fixed, and therefore not
subject to a valuation. The liabilities might
be understated or overstated, by either ex-
cluding items for which no account has yet

--- Page 110 ---

Reserve Fund
must be
separately
invested.

208 MANAGEMENT OF COMPANIES

been rendered by creditors, or by including
items which are not likely to ever become
claims.

It is rarely that such over-estimates or
under-estimates are of real importance, there-
fore the liabilities as disclosed by a balance
sheet can, as a rule, be safely accepted without
much inquiry.

The majority of Companies have a Reserve
Fund, or sums set aside to meet contingencies or
for any other purpose. This Reserve Fund
should be separately invested in securities
unconnected with the Company’s operations,
and should not be utilised in the Company’s
business.

The idea of a Reserve Fund, as the word im-
plies, is a certain sum which can be made avail-
able at any time, to meet special emergencies.
If the Reserve Fund is invested in the business,

1 itpotet te efabtiAtlk int

MANAGEMENT OF COMPANIES 209

shareholders can put a stop to such practices Importance
. - oe — of Li
is to insist that. whatever sum is called “ Reserve Resor,

Fund ” be so invested that it can be made liquid
at a moment’s notice. It is desirable that every
Company should have such a fund, however
small it may be.

The Reserve Fund appears on the liability
side of the balance sheet. It is, however, not a
claim on the Company, and every one should
learn to distinguish between sums due to credi-
tors, which are real liabilities, and sums which
the Company has set aside, such as Reserves or
funds to meet special emergencies, which are
not liabilities, and only count as such as between
the partners [shareholders] themselves. In ana-
lysing a balance sheet, these items, as will be
shown hereafter, can be entirely disregarded.
The balance brought forward, if it be a credit
balance, and the profits made during any period,

it becomes quite impossible to realise it at any
time, and therefore it fails to fulfil its object.

also appear on the liability side of a balance Balance Shect
sheet. These represent undistributed profits may be ignored,

Reserve Fund
as mere
undivided
profit.

A fund which is invested in the business is in
reality a profit which has not been divided, but
reinvested, and such an item should be called
“Undivided Profit.” Many Companies fog
their shareholders by not writing off deprecia-
tion but by placing the item which should be so
written off on the liability side of the balance

sheet as a “ Reserve.” The only way in which

which have, as yet, not been set aside, and are
also unimportant for the purpose of analysis.
Both on the asset and liability sides of
balance sheets items frequently appear, which
are difficult to express in £ s. d. and represent
mere book entries of no real value. It is necessary
to insert these items, as otherwise the account

would not balance. If, for example, a Company
1d

--- Page 111 ---

Intangible
Assets should
be written off.

210 MANAGEMENT OF COMPANIES

has incurred an expenditure for preliminary
expenses at its formation, it would hardly be
possible or fair to pay this item out of the first
year’s trading, but this would be necessary if
the item of expenditure did not appear in
the balance sheet at all. This expenditure
has to be met out of the profits of several
years, so, for this reason, it must be kept in
the balance sheet, although it is not a tangible
asset; it must be inserted on the asset side of
the balance sheet until it is paid off, although
it does not represent any value.

Similarly, a Company spends an extra large
sum on advertising. The benefit of these adver-
tisements will only gradually accrue in increased

trade turnover. Perhaps a mine has spent.

large sums of money on development work which
has no selling value. In fact, there are endless
cases of expenditure having been made upon work
which does not represent any break-up value,
and this expenditure must be gradually met out
of several years’ profits. In the meantime,

these items must figure on the asset side of ©
the balance sheet. Goodwill is also an item of

this kind, which has been purchased and must
be gradually written off; but in the meantime
it, must appear in the Accounts.

It is quite impossible to make any general .
rule as to the amount which companies should |

MANAGEMENT OF COMPANIES 211

write off annually out of profits, from the items
in its balance sheet which do not represent
tangible property. The general tendency should
be to write them off as fast as profits will permit
this to be done. No Company should ever pay
more than 5 per cent. in dividends on its Ordinary

shares until all imaginary items have disap- Rule for

peared from its balance sheet, while Deferred
and Founders’ shares should receive no dividends
at all until these items have been wiped out. It
is quite easy for a Company to distribute divi-
dends which have really not been earned unless
sucharuleis made. Supposing £20,000 annually
is spent on advertising, and only £15,000 of
profit is made, then the Company is trading at
a loss. But, by placing the £20,000 to Goodwill
or special advertising account in the balance
sheet, a profit of £15,000 is fictitiously shown, and
this profit can then be paid away in dividends.
This example shows how very dangerous fictitious
Reserve or large Goodwill items may become.
A young and growing Company may have an
excuse for holding book assets, but any dividend-
paying Company which has such assets in its
balance sheet on its tenth birthday is improperly
distributing imaginary profits.

Tf a Company has issued shares at a premium,
or obtained any other item which the Acts of
Parliament declare to be Capital, these must

--- Page 112 ---

212 MANAGEMENT OF COMPANIES

also be carried on the liability side of the
balance sheet, merely as a book entry.

All such items, on both sides of the balance
sheet, can, for all practical purposes of valua-
tion, be disregarded, with the exception of those
which make up Goodwill in any way, be it as

MANAGEMENT OF COMPANIES 213

three or five years, the interest calculated, at,
say, 5 per cent., upon the Capital invested
in the business, and multiplying the sum so
resulting by a number of years. The number of
years to be taken into calculation depends upon
the stability of the business.

advertising expenditure, development work, or
the actual Goodwill item which the Company
has bought.

Goodwill can The Goodwill of almost every business has a
selling value, and even doctors sell their prac-
tices. The basis upon which Goodwill is valued
is the amount of profit which the business
produces after the Capital which is employed
in the business has received a fair rate of
interest. Thus, a business which only returns,
say, 5 per cent. upon the Capital sunk in it,
has no Goodwill of real value, as this same
Capital can be made to produce 5 per cent.
without this Goodwill, and perhaps with less

Thus, in average trading concerns, Goodwill Stability of

would be conservatively estimated at three factor in
years’ and extravagantly at six years’ purchase ; Sood
an hotel at seven years’ purchase; a well-
established newspaper at eight years’ purchase ;
a gas, electric light or waterworks, which has
a monopoly, at twelve years’ purchase ; in fact,
every particular case would have a ratio to
itself. This ratio can easily be ascertained
from an estate agent, a partnership negotiator,
or any man having daily to deal with the
transfer of Goodwills.

It will be found that in most cases the Goodwill

enerally

Goodwills, Patents, Trademarks, and Copyrights overvalued.

Capital-risk ; whilst a business which produces,
say, 10 per cent. upon the Capitai used for its

purposes has a distinct and valuable Goodwill, :

for the Capital alone could not produce such
a return.

Thus, the value of Goodwill (including patents,
trademarks, copyrights, which are really Good-
will) is ascertained by deducting from the
average annuai net profit made during, say,

are over-valued in Companies’ balance sheets,
as in most cases the purchase-consideration
paid for them has been excessive. This fact
should not deter Investors from making their
own valuation, based upon sound business
lines.

Attached to most balance sheets is a Profit.
and Loss Account, showing how the items of
profit which have been already dealt with in the

--- Page 113 ---

214 MANAGEMENT OF COMPANIES MANAGEMENT OF COMPANIES | 215

balance sheet. It is important to know the
amount of gross turnover and compare it with
the net profits made. The gross turnover not Gross tumover

be
only discloses how the Company’s business compared with

Profit and balance sheet were arrived at. There are two

Loss Account :

should show Ways of making up such a statement. The one
t profit. . . . . .

men pro is to give the entire gross takings of the period

on the one side, and the expense incurred in

making this profit on the other side, in detail.
Whenever this plan is adopted the entire trading
svstem of the Company is disclosed. This is
not always desirable, therefore the second plan
of deducting from the gross profits all actual
trade expenses, and giving the difference of
these two items only, as the basis of the Profit
and Loss Account, is frequently adopted.

It is not possible to obtain a real insight into
a Company’s trade without seeing the entire
‘gross takings and the kind of trade which has
produced them, on the one side; and the princi-
pal items of expenditure on the other side.
Therefore, a knowledge of the full details of
the Profit and Loss Account is indispensable
to all those who have a large stake in the
Company, but it certainly is detrimental to
many businesses to publish such a statement,
for trade competitors to see. So, in many cases,
shareholders will have to be satisfied with
fewer particulars.

From the difference between takings and
expenses are ultimately deducted such items
as directors’ fees, etc., and the final balance,
being the actual net profit left, is carried to the

compares with former years, but also on wha
ratio of profit-margin the Company is working.

There are many kinds of undertakings, which
issue, in addition to the Balance Sheet and Profit
and Loss Account, separate sets of working
statements, and also accounts showing how the
annual profits are appropriated. These are
exceedingly important, especially in the case of
railways. But the object of this chapter is to
give a general fundamental idea of the inner
working of balance sheets, and not to go into
the very large subject of Accounts, as applied
to all kinds of enterprises. Therefore, no further
reference to special forms of Accounts will be
made.

If the reader understands that on the Asset Balance Sheets

side of the Balance Sheet he sees a schedule of
all. that the Company owns, and that only the
tangible portion of these items, in addition to
moderately valued Goodwill, are of substantial
value; that the Liability side of the Account
need only be noted as to current debts or
liabilities temporarily incurred ; and that, finally,
the total real value of assets, with all liabilities,
including Debentures, deducted therefrom, con-

t previous years.

--- Page 114 ---

216 MANAGEMENT OF COMPANIES

stitutes the shareholders’ existing Capital, it will
suffice for all ordinary investing purposes.
Many have assets which cannot be separately
sold, such as Railways, Tramways, Gas, Water
Electric Works, Docks, Canals, etc. It has been
stated in a previous chapter that in cases of
this kind it is almost immaterial at what figure
these assets appear in the Balance Sheet, and

that a valuation of them can only be arrived .

at by ascertaining the average annual revenue
which they produce.

Having, therefore, now defined how a balance
sheet should be drawn up, and how it should
be dissected, the practical use of such a docu-
ment will be apparent.

MANAGEMENT OF COMPANIES 217

Company has, and whether it is able to meet its

liabilities with ease and comfort. The realisable
assets are the quick assets already referred to, a
namely, those assets which the Company can
realise without interfering with its business to
provide funds for paying its way. If there
are more liabilities than quick assets, then the
concern’s business is hampered ; the Company
will therefore not only trade at a disadvantage
but will also be unable to pay cash or meet its
bills promptly, and might, on the slightest stag-
nation, become involved. In fact, the Company
suffers from insufficiency of Working Capital.
If the quick assets exceed the liabilities,
then the Company has ample Working Capital

Cc im oy . . « i with
Soa en eae are two separate and distinct points and is able to meet its liabilities promptly and
efined. of view from which every Company should be efficiently. Investment in Companies which are

considered, namely, the Company’s position as
against the persons trading with it, and the
position of the persons directly interested in

short of Working Capital is always dangerous. Danger of
ayn
In making the calculation as to the actual dividends wit!
Orro we

financial position of a Company, the dividends money.

Ascertaining
measure of
Working
Capital.

the Company as debenture or shareholders.
The outside position determines the financial
solidity and trading prospects of the Company ;
the inside position, the value, capital, and

Income safety of the Company’s stock-issues,

By ascertaining what the Company owes, and
by deducting this sum from the immediately
realisable assets of the Company, it is ascer-
tained how much actual Working Capital the

declared at the last annual meeting must be
included as a liability, and deducted from the
quick assets. Many Companies declare divi-
dends without having the actual cash in hand
which is necessary to pay these dividends.
The money is then borrowed, and the Company’s
financial position weakened. This is not sound
finance, and frequently leads to disaster. The
history of Joint-Stock Companies shows that

--- Page 115 ---

A test of
sound trading.

A test of
steady trading.

218 MANAGEMENT OF COMPANIES

insufficiency of liquid assets is the cause of
70 per cent. of all liquidations.

The soundness of a Company's trading is

shown by a comparison of the stock of goods
and materials in hand with the Company’s
annual turnover and Capital.
Whenever there is a comparatively large stock
in hand, the trading is precarious, and especially
so when the stock-in-trade is perishable or
liable to go out of fashion. It is quite impossible
to give any actual data in this connection, for
a draper would naturally have a larger stock
than an engineer, and a fishmonger would have
no stock at all, so special inquiries on this
very important point must be made in each
Separate case.

Steadiness or otherwise of the trading is dis-
closed by a comparison of the annual turnover
with the Company’s debtors and creditors. A
cash business, which is the safest kind of
business, has no debtors and ought to have no
more than six weeks’ turnover of creditors.
The larger the list of debtors comparatively
becomes, the more hazardous is the business
unless those debtors are exceedingly safe, and
consist entirely of Governments or substantial
traders. Whenever the creditors are consider-
ably larger than the debtors, and the Company
has not the difference in actual cash in hand,

MANAGEMENT OF COMPANIES 219

the trading is unsound. In all such cases the
Company is not trading with its own Capital,
but with Capital which it has borrowed in the
shape of goods.

Any Company which has one or more very Many small
better than few

large creditors which it is unable to pay off at large customers,

any time, is in a bad position, for it depends
upon the goodwill of these creditors for its
solvency. Similarly any Company which has
one or more large debtors may be forced into
liquidation by one of these debtors not meeting

- his obligations. Any business which is too

much in the hands of a few of its customers
is dangerous, and only those businesses are
really safe which rely on a trade which is
done with a large number of people.
- It is extremely important for every Investor
to consider his own and his contemplated invest-
ments from all these points of view, so as to
know, as an absolute fact, what the future has
in store for him.
The position of the debenture and share-

holders of a Company is ascertained as follows : Debenture and

Here again the total value of all tangible assets
and the goodwill is taken, and from this the
eurrent liabilities are deducted, the balance
representing the property in hand. From this
sum the nominal value of the Debentures is
again deducted, and the remainder is the

--- Page 116 ---

220 MANAGEMENT OF COMPANIES

margin of safety of the issued Debentures.

From this margin the nominal value of the -
issued Preference shares is deducted, and the *
sum now remaining is the margin of safety :
of the Preference shareholders. In a similar :
way, the margin of safety of every following
class of share is ascertained, until the final ©
margin, left after the shares which rank before -
the last issue of shares, shows the amount of :
tangible assets which this final set of shares

represents. ;

Propermarginof In a previous chapter it has been said that
CepitelSafety. Debentures and Preference shares, which rank

first, should have at least 100 per cent. margin
behind them before they can be pronounced
to be safe, and that shares which have issues
in front of them must have an additional
margin. It has also been explained previously
that any premium paid for shares is not
tangibly represented in the Company’s balance
sheet, and that such a premium is another
mode of making a payment for Goodwill.
Investors should not only study a Company’s
actual position before they purchase an interest
in it, but should continuously follow the Com-
pany’s development throughout the period

in the Accounts. during which they hold them. Every year’s

trading produces a change in the affairs of a

Company. Failure seldom comes suddenly; in ~

MANAGEMENT OF COMPANIES 221

most cases it makes itself felt very gradually,
and generally future disasters cast strong shadows
before, and are easily discernible by comparing
previous with present balance sheets.

i unmis- Advantage cf
Most Investors do not discover these Advantage cf

takable signs because they are careless, and thus analysis.

the careful student of balance sheets and reports
obtains a perfectly legitimate advantage over
his fellow shareholders. There are numbers of
shares now selling above their comparative
value, and a very large number selling under
their comparative value. It is by shunning the

former and buying the latter that money is

most legitimately made on investments.

The investigation of values is simple and
follows rigid lines, so that any one can acquire
this art. Careless Investors never take the

trouble to learn it, and for this reason their

Capital gradually wastes away.

--- Page 117 ---

A Stockbroker’s the average stockbroker consists principally in

qualifications.

CHAPTER IX
THE WORLD’S STOCK MARKETS

()* all business pursuits dealing in Money
is the most stable and profitable, hence
most bankers are rich, The next branch of
business which offers the best chances for making
the maximum of money with the minimum of
risk is that of a well-established stockbroker
who transacts a non-speculative business.
The general public frequently have a slightly
mistaken idea as to the special knowledge of |
their brokers. It is not quite fair to compare .
the mental outfit necessary for a stockbroker
with that required by a doctor, lawyer, architect,
engineer, analytical chemist or, in fact, any
member of the learned professions. Whilst
any one of these cannot be successfully pursued
without years of special training, the outfit of

solid business habits, coupled with tact and

a fair amount of common sense. The most

recent developments of scientific methods of

investment have of course produced Stock Ex-

change experts, but the knowledge required by
222

223

these is not that which the ordinary stockbroker
possesses.

The opportunities for dealing in stocks are
usually seized upon as soon as they occur, and
almost simultaneously with the creation of stocks
in any part of the world, a crop of stockbrokers
is produced, the new recruits hailing from almost
every branch of the trades and professions.

Stockbroking means “buying and _ selling “Stockbroking”

defined.

stocks” as agents or brokers for others; there-
fore there must always be at least two parties
to each bargain, the one buying from the other.
Stockbrokers congregate for the purpose of their
business, as it would be waste of time to be
constantly calling upon each other, and a com-
mon meeting-place is arranged, where all stock-
brokers can assemble daily.

So long as there are but few people who Development
habitually deal in stocks in any town, these Exchange.
meet in the existing corn, cotton, fruit, cattle,
or other market, and there are no special rules
or regulations which govern their transactions,
the necessary stipulations being made when
each contract is entered into. As soon as the
number of stockbrokers is sufficiently large,
they form a kind of club, draw up rules, hire,
purchase, or build a meeting-place, and then
what is known as a Stock Exchange has come
into existence.

WORLD’S STOCK MARKETS

--- Page 118 ---

224 WORLD’S STOCK MARKETS

In this manner stockbrokers and Stock
Exchanges are created as soon as there are
stocks to deal in anywhere, and in many mining
camps a Stock Exchange is erected before a
church or a school has been contemplated.
This process of creating brokers and Stock

Exchanges is constantly going on the world
over. :

WORLD'S STOCK MARKETS 225

Exchange is constantly waxing or waning, a8 Rise ana rah
. . . . of Stock
is exemplified in the case of the Vienna Bourse, Exchanges.

which played an important part in international
finance some thirty years ago, but whose in-
fluence is now gradually disappearing. On the
other hand, the Brussels Stock Exchange used

to be of secondary importance, but is now

gradually advancing into the front rank.

Origin of The origin of the present governing financial As Stock Exchanges gained in power and
Exchange. centres of the world, namely, the London, Paris, commenced to exercise an influence upon

Berlin, Amsterdam, Vienna, Brussels, and New
York Stock Exchanges did not differ in any
material way from that of the new and crudely
organised Stock Exchanges now being born.
English stockbrokers originated in the days of
Charles II., when the first foundation of the
present National Debt of Great Britain was laid.
They commenced by congregating in the Royal
Exchange; they then adjourned to Change

national life, they gradually began to attract
the attention of Governments, who saw in
them not only a means of raising public
loans, but a factor which determined the
use of the national savings. So important
did some Governments consider the power
which the Stock Exchange could exercise,
that they nationalised these institutions and
used them as a lever for their external politics.

It is said at the present day that the Power of the

Alley, and ultimately built a meeting-place Powor
influence of France upon the world’s political ““ “°""*

of their own. No one can foresee whether

the Stock Exchange in Bulawayo, which was
started but yesterday on similar lines to all
other Stock Exchanges, or the Stock Exchange
of some other at present quite unknown hamlet,
will not some day become a leading unit of the
financial Republics which now play so important
a part in every nation’s trade and commerce.

The influence and importance of every Stock

development is not caused by its Army, Navy,
or diplomatic relations with other nations, but
principally by the Paris Bourse.

The French Government has gradually erected
such barriers against free trade in stocks that no
stock can be freely dealt in in France unless it is
officially quoted ; and no stock can be quoted on
any French Stock Exchange unless it is passed

16

--- Page 119 ---

226 WORLD’S STOCK MARKET» WORLD’S STOCK MARKETS 227
Grench by the French Government. In this way the the manner in which the stocks are to be delivered
controls ++ Government exercises a complete control over and paid for, the cost of stamps and transfer
Nation’s «5 . : Pp >
Investments. the employment of the nation’s savings, which

amount to over £200,000,000 per annum; and
us the major part of this sum is available
for foreign investment, the goodwill of the
French Government is coveted by all borrowing
nations. French diplomatists are exceptionally
well received by all of these, and French
trading interests are as carefully protected as
is the interest of the brewer in an English
tied public-house.

All nations do not receive a similar indirect
benefit out of their position as international

fees, the question of interest or dividends accrued
on the stocks sold, and such like.

These differ slightly in every Stock Exchange,
and as it would be too complicated to agree
specially on all these points for every single
transaction, a code governing the transactions is
drawn up by the Government, or the Committee
of each Stock Exchange. It is also necessary
to establish a clearly defined relation between
the members themselves as to the manner
in which they should conduct their business,
the way stocks should be quoted, and many °

lenders of Capital, and in Great Britain, although
British Stock the London Stock Exchange has been a world’s:
Machonges or? power almost for centuries, and the Provincial

other points. These are settled by the loca] Rules and

ustoms of
Committee, and, as a result, every Stock stock
Exchanges.

private clubs.

Necessary
incidents to
Purchase and
Sale of Stocks.

Stock Exchanges are quite important factors,
all the Stock Exchanges are still private
clubs quite unfettered by any special Govern-
ment regulations. Thus, British accumulated
wealth can come and go as it pleases, and the
country, as a whole, does not reap the slightest
indirect benefit from financing the world’s trade
and commerce in that truly British liberal
manner.

There are certain simple, but necessary, details
which govern the completion of every purchase
and sale of stocks, such as the date of settlement,

Exchange has its own rules and regulations,
which differ slightly from those of other Stock
Exchanges ; but in every instance they conform
closely to the laws of the country in which
the Stock Exchange is situated; for Stock
Exchanges cannot effectually frame any
regulation which is not in accord with the
laws of the country in which they are
situated.

Private Investors are only affected by Stock
Exchange rules when they buy and sell stocks,
and the questions which govern these trau-
sactions are few and simple.

--- Page 120 ---

Questions
governing
Private
Investor's
Stock
Transactions.

Every Stock
Exchange

available to
the Investor,

228 WORLD’S STOCK MARKETS

‘There is, first of all, the price which is
to be paid and received for the stock. This is
settled by mutual agreement and not governed
by any rule. Then there is the date and
mode of settlement. The date is also a matter
of mutual agreement, and, as all deliveries
of stocks are settled for in cash on delivery,
only the agreement as to the actual place
for exchanging stock for cash is of importance.
The next question is the payment of transfer
fees and stamps [if any]; here, usually, the
buyer pays the expenses, but on this point
special inquiries should be made. Finally, there
is the question of dividend or interest which
has accrued on the stock at the time of its
sale, a point which also must be inquired into.

Thus, with the exception of the place of com-
pletion, the expenses of transfer, and the
accrued interest, deliveries of stocks are not
subject to special rules; and as soon as these
three points are settled satisfactorily, every
Investor can freely buy and sell on any Stock
Exchange in the world, without reference to the
special rules which govern these institutions, of
which it is quite unnecessary to treat in detail
in this book.

The¢ other British Stock Exchanges have
framed their rules somewhat on the model of the
London Stock Exchange, «nd as this institution is

‘

WORLD’S STOCK MARKETS 229

of especial interest to English readers, its con-
stitution and regulations will be briefly described.

The London Stock Exchange is, in every sense Principal Ruler
of the word, a private club. Its members are Stock Exchang
admitted on certain conditions, and they elect 2recti7s
a Committee which frames the rules and regu- ™v*t™
lations. Of these rules only the following are
of special interest to non-members :

1. No stranger is admitted into the Stock

Exchange. Members must not advertise or

send circulars, except to their business con-

nections.

2. Every member must be either a dealer

-in stocks [jobber] or an agent who acts for

the public [broker]. The broker’s function

is to obtain instructions from his client and

then transact the business in question with

a jobber. As remuneration, he receives a

commission from the client who instructs him.

Theoretically, the jobber’s function is to be a Distinction

constant market for the securities in which he oad Breet

specialises, and to be always ready to buy or

sell these securities. He buys at one price and

sells at a higher price, the difference between

the buying and selling prices constituting his

profit. »Jobbers, who are members, must not

deal with the public, and are supposed to

confine their transactions to brokers.

3 All bargains are settled on specified days,

--- Page 121 ---

Stock quoted

“ex div.”

Business of
Stock Exchange
Settling Days.

230 WORLD’S STOCK MARKETS

which occur twice a month for all stocks,
except the Consol Settlement, which occurs
once a month. The buyer pays all transfer
expenses and stamps. He also receives all
accrued interest, or dividend due on the stock,
up to a specific day, as from that day the
accrued dividends are excluded from the
purchase. The date on which the dividend
is thus separated from the purchase is
publicly announced, and from that day the
stock is dealt in without dividend [ex div.].
4, There are three preliminary and one final
settling day. On the first day mining stocks
are carried over; on the second day arrange-
ments to continue all other bargains which it
is not convenient to settle by actual delivery
or by actual payment are made. On the third
day the names and addresses of all those
purchasers who are taking up registered stocks
are given out, so that the transfer documents
may be prepared. On the final day all
stocks which are’ ready for delivery are
handed over to the purchasers against cash,
and all differences which arise out of bargains
which have been postponed in their delivery
are settled. All stocks to bearer must be
delivered on the final day of settlement.
Registered stocks may also be delivered on
that day; but as the completion ov transfer

SR eT RT

WORLD’S STOCK MARKETS 231

documents frequently includes the obtaining
of several signatures to be given by persons

‘who sometimes reside in different parts of

the country, ten days’ grace is given for the

. delivery of registered stocks.

5. If the selling broker or jobber fails to
deliver bearer stocks on the final settling day,
and registered stocks within ten days of it,
an official of the Stock Exchange can be
called into requisition to bid for that
stock, and thus the bargain is enforced.
Unfortunately the Committee of the Stock
Exchange has framed most effectual regula-
tions, which make the operation of this rule
ineffectual and uninforceable.

6. An Official List is issued, which gives the Oficial am

quotation at which it is supposed that the ¢
stocks included could be dealt in; but this

quotation is frequently arbitrary, and it often
happens that the price of a stock remains

_ unaltered for months, and that when a pur-

chase or sale of it is contemplated it is found
that the existing quotation differs widely
from the price at which business is possible.
Every stock has two prices set against it, the
lower one denoting at which price jobbers
might buy, and the higher price at which
jobbers might sell. Brokers who care to do
so can have any bargain transacted by them

--- Page 122 ---

Registered
Stocks versus

Bearer Stocks.

Some
Distinctions
between

232 WORLD’S STOCK MARKETS

permanently recorded, as “ a mark of business
done,” but this mark does not indicate
whether in that case the jobber has sold or
the jobber has bought the stock. As there
is frequently a difference of £2 between the
jobber’s buying and selling prices, these
“marks of business done ”’ lose their value as
an indication of what has really taken place.
In Great Britain the delivery and taking up
of stocks becomes a slightly complicated busi-
ness, owing to the large quantity of British
stocks which are registered and require transfer
documents before they can pass out of one
owner's possession to another. In other parts
of the world most stocks are to bearer, and one
settling day a month suffices to settle all current
transactions, -
In some countries, like the United States
of America, there are no settling days at
all, and all bargains are settled forthwith.
The institution of jobbers and brokers is also
peculiar to England. Other countries do not
find it necessary to have two distinct’ classes
of members of the Stock Exchange; all of them

WORLD'S STOCK MARKETS 233

In fact, in London the business of buying Drawbacks

of B

ritish

and selling stocks is quite unnecessarily com- Method of

plicated. A monopoly, as far as possible, is
maintained, the public being kept out of the
precincts of the ‘“‘ House,” and mystified to an
uncalled-for extent. This is not in keeping with
the general development of twentieth-century
trade tactics. Simultaneously, the members of
the: London Stock Exchange are hampered
by fatherly internal regulations and prevented
from legitimately extending their business by
openly competing with each other for public
favour.

These conditions exercise an unfortunate
influence upon British Investors, and prevent
them from appreciating the fact that there is
absolutely no difference between the buying
and selling of stocks and dealing in any other
commodity.

There are Stock Exchanges in every part of
the world, wherever there is a sufficient number
of Investors and a sufficient quantity of stocks
to deal in. But the principa} Exchanges are
in the commercial capitals of each country.

Stock Dealing.

are brokers, and these brokers naturally deal
British and

While most of the European Stock Exchanges Extra Buropen
Foreign Stock direct with each other: Except in England,

deal in securities which represent enterprises n Exchanges

i confined
Iexchanges. mainly confine:

all Stock Exchanges are open to the public,
and members of all these institutions may also
advertise their businesses,

all parts of the world, the Exchanges of the to jocal Stocks.

other four Continents deal principally in their
own local stocks.

--- Page 123 ---

234 WORLD’S STOCK MARKETS WORLD’S STOCK MARKETS 235

How the chiep | The locality of an enterprise does not deter-
particular Stock mine the Stock Exchange on which its stocks
is determined. sre dealt in, for the principal market of each

stock adjusts itself naturally to the locality

where the largest number of holders of that

is how large imports influence the seat of the
market in a particular security.
A country gradually becomes richer, and there Example

f change in
is more money in it seeking permanent invest- chie Merkel
or a OC.

stock reside.

A Gas Company, for example, is floated suc-
cessfully in England for the purpose of supplying
a number of German cities with gas, and the stock
of that Company is principally subscribed in
England. Then, although the seat of the enter-
prise is in Germany, and the management may
be German, England will be the principal market
for this stock until the Germans, or some other
nation, gradually buy up the major portion of

it, and, in this way, shift its market to another
locality.

ment. Then that country gradually reimports
such of its own securities as it had previously,
in time of poverty, sold to other nations. Thus,
the principal Italian stock used to be held
chiefly in London, Paris, and Amsterdam, until,
during the last decade, it has been gradually
bought up by Italian brokers and sold to Italian
Investors, thus shifting the weight of the market
from the north of Europe to Italy.

Sometimes large issues are made in several
countries simultaneously, or several countries
commence to import the same stock at the same
time from its native country; then that stock

The Market There is a constant interchange in invest- has as many markets as there are countries in
or & OC ° . ° .
frequently ments among nations, which is caused either

alters.

by wholesale imports of stock, or by the
gradual and constantly altering ratio of the
value of money in different countries, as com-
pared with other countries.

A French bank discovers what it considers a
very favourable American investment, and buys
large quantities of it, for import into France and
sale amongst French Investors. These purchases
remove the predominant amount of stock from
an American city to a French town, and this

which it is held in sufficient amounts.
The importation of large quantities of stock
in bulk is usually done by banks or large

1 1 . Arbitrage
financial houses. The sending of stocks hack tia’

wards and forwards, in a constant stream of
individually small amounts, is done by ordinary
brokers, and this class of business is called
Arbitrage Dealings.

Let us suppose that there is a stock which
is held in New York, London, Paris, and Berlin ;
then four firms of brokers—one in each city—

--- Page 124 ---

236 WORLD’S STOCK MARKETS WORLD’S STOCK MARKETS 237

understood that ordinary investment trans-
actions are hardly ever sufficiently large and
frequent to make them attractive to the arbi-
trageur.
In many instances, in fact in all those cases Arbitrage
Dealings

where investments are dealt in as investments, rare in Pure
Investment

Bromple of agree among themselves daily, nay hourly, to
Dealings. communicate the selling price of that stock to
each other. Whenever there is a larger amount
offered for sale than there are buyers to absorb ~ ;
it in any one of these four cities, or whenever

there is a demand larger than the local supply,

the price of the stock rises or falls in the centre
of the disturbance. In the other three cities
the price may in the meantime have remained

stationary, or, whilst there is a rise in one place.

there might be a simultaneous fall in another.
These price-variations are, of course, very
slight as a rule, but as soon as they are large
enough to permit of a profit, the Arbitrage
dealer buys in one place and sells in another.
To such perfection have these Arbitrage trans-
actions been brought, that it now takes only
a few minutes to buy a stock in London
cable this fact to New York, sell the stock in
New York, cable the result of the sale back
to London and receive this reply completing
the transaction in London.

Arbitrage dealings account in this way for

the very small difference in the price at which
the: same stock is quoted simultaneously in
various cities which are thousands of miles

and in the really legitimate way, the arbitrageur gioo.

is conspicuous by his absence, and consequently
the same Japanese Government Bonds, for
example, are frequently selling in London several
‘points higher than they can be bought in Tokio,
and similar examples occur daily the world over.

This brings us to the highly important and
rarely understood subject of the marketability The

° . . Marketability
of investments. Most Investors imagine that of Investments

when they see a stock quoted in an Official List,
this mere fact is proof positive that the stock
is not only always saleable, but that it can be
bought or sold at that official quotation. This
entirely erroneous notion creates in them a
preference for officially quoted stocks, frequently
to their own detriment. Therefore an attempt
will be made to explain clearly the inner work-
ing of Stock Markets. and the consequent
‘marketability of all Stock Exchange securities.
None of those persons who act ss inter-
mediaries between the actual holders of stocks

pecs apart, but these dealings are confined to a ; bi
Dealings. few stocks in which there is, for the time —be they brokers, jobbers, or arbitrageurs—

being, a fever of speculation ; for it must be

absorb securities.

--- Page 125 ---

Price-level

of Stocks
dependent on
Public
Demand.

The Jobber’s
raison @étre.

238 WORLD'S STOCK MARKETS WORLD’S STOCK MARKETS 239

They.may buy and temporarily hold, in view
of a subsequent advantageous sale, or they may
sell without having the stock, in the hope of
obtaining it at a cheaper rate later on; but,
sooner or later, bona-fide buyers must absorb
the supply or the actual owners must fill the
temporary want.

It naturally follows that the real ultimate
exchange must take place between two investing
members of the public, and that the jobber or
dealer can buy only when he has a good chance
of selling again soon, and can only sell when he
is fairly certain to be able to repurchase quickly.

Whenever the public is slow in buying,
selling becomes difficult, and whenever the
actual holders are reluctant in parting with their _
investments, there is no purchase of them
practicable. In this way the Official Quotation
becomes entirely dependent for its reliability
on what the investing public decides to do,
Jobbers and brokers may say that there is a
certain ruling official quotation, but unless the
public support them in this view they are power-
less in making it a reality except by themselves
becoming permanent holders of that stock, and.
this they hardly ever desire to do.

Jobbers have been instituted in London with
a view to creating permanent markets for
securities, but practice has proved that no

possibility exists which can make such artificial
means of permanent practical value.

‘As long as the public is constantly changing Where the |
its investments, the jobber institution seems to
work admirably, but as soon as the public come
in, predominantly as a buyer or predominantly
as a seller for any lengthy period, the jobber
proves to be an unqualified failure.

For many decades the British Railway Market
was normal, and buyers and sellers equalised
‘themselves ; then the jobbers flourished. In Example
1898 there commenced a preponderance of selling Inutility.
by the public, and almost from that moment the
free market in Home railways disappeared, and
the jobbers became useless. It became just as
much a matter of negotiation to sell, say, £5,000
‘Caledonian Railway Preference stock as it was
to sell 100 unquoted shares in a small trading
company.

The small value of an official quotation has
long ago been recognised, principally through
~ the introduction of the very large number of
South African Mines in 1895, very few of which
have an official quotation. Through the hun-
dreds of these stocks it has been conclusively A Market -
proved that the market does not in any way upon oficial
depend on a quotation, and that the not
officially quoted stocks are, if anything, more ‘
teadily bought and sold, and at a smaller dii-

--- Page 126 ---

Dangers of
a Free Market
in Stocks.

Free Market
often created by
speculators.

240 WORLD’S STOCK MARKETS

ference between the buying and selling price, than
the officially quoted:securities of the same kind.

Whilst there is no actual advantage in an

official quotation, and the free market does
not in any way depend upon it, there is a

very considerable danger and drawback to an -

officially quoted stock.

It is quite impossible to centre a speculative

movement in a security in which there is

no free market, therefore securities without a.
free market do not attract speculators and tend -
to sell at their true relative value. It is quite |
unnatural for a safe investment stock to have —

a free market, for a stock of this kind is firmly
held and not bandied about.

As soon as the speculators take up a stock

they create a free market for a time, but they

ignore the true relative value of the stock, and

there is no knowing how far they may succeed
in inflating or depressing it, or where they may

ultimately leave it, for the speculator only

remains so long in a stock as his money lasts,
or so long as he can induce others to gamble.
As soon as either eventuality occurs he leaves
the stock again, and simultaneously with his
exit the free market disappears. The stock is
then left either on a disproportionate height,
quite out of breath, or in a sad hollow, with
broken limbs, .

WORLD’S STOCK MARKETS 241

The free market of to-day becomes the stag-
nant, discredited, tedious negotiation of to-
morrow ; and any one really instructed in finance
need only read up the history of stocks which
were the free markets of, say, thirty, twenty,
and ten years ago, to satisfy himself how very
pernicious speculative influences are to sound
investments.

There are over 35,000 investments in Great
Britain, of which only about 5,000 are officially

‘quoted on the British Stock Exchanges, and

of all these less than 400 have at any time a free
market. These 400, however, are constantly
changing, some dropping out and others taking
their place. The free markets are the stock-in-

trade of promoters and speculators, and every
' Investor should feel glad if they have left his own

particular holding untouched. Besides, if the
securities which ever had or now have a
free market are analysed;-it will be found

that with the exception of Consols, which are,

unfortunately, a constant gambling counter,
and a few other isolated instances, they are not
stocks suitable for permanent investment.

The 30,000 stocks which have no quotation,
and the 4,600 which have quotations but not a
free market, are firmly held and but rarely
change hands; yet each one of them which is a
really good security invariably can be sold.

16

Inconstaney
of Free Marketa
in Stocks.

Free Market

C.
generally
unsuitable for
permanent
Investinent,

--- Page 127 ---

242 WORLD'S STOCK MARKETS

If any reader desires to satisfy himself on this
point, let him call on a large number of brokers
and ask whether they have for sale any not offi-
cially quoted stocks or good investments which
have not a free market. He will then find,
perhaps to his astonishment, that these brokers
will be eager to sell him any quantity of free-
market securities which will, in most cases, be
comparatively dear and not very safe, but that
he will have no good unquoted stocks or good
stocks with a stagnant market to offer.

Having thus made sure that there are no
suitable unquoted stocks on offer, let him ask
among his circle of acquaintances whether they
have ever tried to sell a really good not officially
quoted security at a fair price and not succeeded
in soon finding a purchaser.

The result will be that he will find no fair

instance of inability to realise.

The only occasions upon which any consider-
able quantities of not officially quoted securities
are purchasable are at public auctions of
stocks which certain highly respectable firms of

auctioneers arrange from time to time. Letany -

votary of officially quoted securities attend one
of these sales and see the crowds assembled and
the spirited bidding which ensues. Let him
subsequently interview the members of these
firms of auctioneers, who have been constantly

WORLD’S STOCK MARKETS 248

‘ conducting auctions of this kind for decades
past, and ask whether they have ever failed in
selling a good security at a reasonable price.
The reply will be that such an occurrence is
quite unknown. These facts will tend to alter
his mind on this important point.

Some Investors have an idea that an official
quotation, or the market price, or the then realis-
able value of a stock is bound to reflect the in- mtimsic
trinsic or comparative value of that stock. If

this were so, it would be impossible to pick up
bargains i in Investments and, as a matter of fact,
it is in a great many cases not so.

The price or “ vealisable” value of a stock
depends upon the supply and demand of the
‘moment. If frequently happens that an ex-

ceedingly good stock has for some reason to be Forced sales
sold immediately in large quantities. If, for ° Steck
example, money has been borrowed upon it, and

_ the borrower does not meet his engagements, or
' aif @ large Investor finds himself in monetary

difficulties and has to realise promptly, or if a
trust estate is forced to realise: in all such cases
a sort of Dutch auction ensues. The existing
demand is satisfied first at normal prices and
every subsequent purchaser pays less and less
for the stock until the entire quantity has been
sold.

On stocks which have no Official Quotation a

Realisable and

values distinct.

--- Page 128 ---

244 WORLD’S STOCK MARKETS WORLD’S STOCK MARKETS 245
Defects of disastrous sale of this-kind has but little effect, can alter its intrinsic value. Neither of these
guoted y as it is not recorded, and it is quite possible to changes can be brought about by any one selling
Stocks,

deal on the next day at the normal relative value.
On a stock with an Official Quotation the effect
is quite different, for a permanent record of the
disastrous sale is maintained, and this record not

- the stock, and thereby depressing its price, or
any one buying the stock, and thereby raising its
price; and this establishes the fact that intrinsic Intrinsic ond

. Market values
value and market value need not be in any rela- compared.

Meaning of
Intrinsic value
of a Stock.

only prevents transactions at normal relative
prices until the Official Quotation rises again,
but also establishes a permanent slur upon the
future history of the stock. In fact, an abnormal

occurrence, which had nothing to do with the —

true relative value of the stock, has created a
precedent which adversely influences the future
of that stock for years to come.

The so-called “ intrinsic ” value of a stock is
settled—similarly to every other value—by a

comparison of the capital-safety and income- —

producing power of that stock with those of
similar securities. Every investment has two
functions : the one is to be a depository for capi-
tal, the other is to produce an income. As soon
as the quality of these two functions is alike
in two stocks then they are equal in ¢nérinsic
value ; if the qualities differ the intrinsic values
differ, and the degree of difference settles the
difference in intrinsic value.

This explanation proves that only a change in
the safety of a stock, or a change in the com-
parative amount of yield which it produces,

tion to each other.
The intrinsic value influences the market
value, because every one desires to buy as cheaply

_as he can, and every stock which sells below its
intrinsic value is a bargain; but it is quite im-

possible for the market value to influence the
intrinsic value.

There are innumerable instances where official
quotations have been permanently depressed
by causes which had nothing to do with the
intrinsic value of the investment, whilst hardly
any case exists where not officially quoted stocks
have similarly suffered; and this is one of the

_... many reasons why there are bargains to be found

in almost any official list.

As it is in England, so it is the world over ;
really good investments find ready markets
everywhere, not by means of official quota-
tions, marks of business done, and Arbitrage
dealings, but through the constant and never-
failing public demand for a good and sound
investment at a fair price.

The transactions of the Stock Exchanges of the

--- Page 129 ---

Different
Interests
of Speculator
and Investor.

Fluctuation
in Stocks
mainly due to
speculation.

246 WORLD’S STOCK MARKETS =~ --——

world are locally and internationally recorded -
by all the principal newspapers; but these
references principally interest the speculator.
The difference between the information required
by the speculator and that which is of real in-
terest to the Investor is very great. The specu-
lator does not care what may be the real com-
parative value of the stock in which he deals;
he is not interested in a permanent, but merely
in every temporary improvement in the position
of an enterprise. Neither does he care whether
the stock which for the time being attracts his
attention is gradually decaying; there must be
sensational developments if he is to benefit.
Dividends must jump, bridges must fall in, world- —
moving inventions must be made, railway trains
must collide, frauds of magnitude must be un-
veiled, new mineral veins must be discovered,
Governments must quarrel with each other,
amalgamations must take place, rates must be
cut, strikes must commence. Only occurrences
of this kind can form the plausible pretext for
violent fluctuations.

If good investment-stocks are left to them-
selves, no great sudden change in price“ever
occurs, and only very gradual rises and falls can
ensue. It never happens that a large number
of actual holders of stock simultaneously desire
to sell their investments suddenly, and only such

WORLD’S STOCK MARKETS 247

an occurrence could cause a violent fluctuation.
It is solely through speculative influence that
stocks fluctuate daily, and speculation is whipped

up by sensational news. The reason which the

newspapers give for rises and falls hardly ever
are that the holders wanted money and there-
fore sold, they mostly refer to some purely specu-
lative development ; and hence we used to read
that because Napoleon III. sneezed, Brighton
“A” fell.

The speculator, further, has no interest in the speculator

depends on

- relation of the real comparative value of securities sensational

news.

to each other. All that matters to him is
whether his stock is selling a point or so above
or below his purchase-price. A speculator will
tell you, “I bought at 53 and sold at 64.”
Whether this means 55} or 75} hardly interests
him, and frequently he has quite forgotten to
look. Thus, sensational news and constant
up-and-down movements are as the life-blood
of the speculator.

The Investor is principally concerned with the investors. sound
safety of his Capital and Income. To ascertain statistical facts.
these facts requires a lengthy expanse of figures ;
to show any difference between an investment-
position as it was and as it is now, demands
extensive comparative statements. A slight
difference in the price which he pays for a stock
is not a matter of great moment to him, for he

--- Page 130 ---

Newspapers
mainly cater

for speculator.

248 WORLD’S STOCK MARKETS

does not consider the chance of selling again
very soon, but looks upon stocks from an In-
come point of view. Whether a 4 per cent. stock
yields 4 per cent. or 44 per cent. is determined
by a price-difference of six and a half points;
and sound investment-stocks yielding 4 per cent.
sometimes do not move so much im a couple of

years. Therefore small variations are of no.

interest to real Investors, who prefer com-
parative yield and Capital-safety, and look to
figures, together with sound statistical facts,
proving this or that investment to be com-
paratively cheaper or dearer, safer or more
speculative.

The Financial Article in the newspapers is
compelled to deal with the news of the day,
and can devote little of its space to statistics
and comparisons ; it therefore gives principally
the changes in quotations which the day’s busi-
ness has produced, and the rumoured reasons for
such changes. The details of the stocks quoted
are of necessity scanty, and the selection of
the stocks is limited to those which fluctuate
most, and which, for this very reason, are un-
suitable for Investors.

In fact, the very nature of the Financial Article
forces its editor to cater for the speculator, and

he can give little to interest the Investor. This _

fact is gradually being realised by the most

WORLD’S STOCK MARKETS 249

important financial writers of the day, and the
Money article is undergoing a slow but sure

change of front. The compilers are becoming

aware of the unwholesome influence which the
old-fashioned Money article used to exercise
on the public mind, and are making strenuous
efforts to give to Investors—who, after all,
form the majority of their readers—the solid
investment-statistics and comparisons which
they require.

Investment is a child, with statistics as father, An In Investment

common sense as mother, and speculation”
as a dissipated family relation. The closer
the union between father and mother for the
purpose of boycotting this reprobate relation,
the larger will be the heritage of the legitimate

heir,

--- Page 131 ---

The spirit of
venture a
beneficial
. element.

CHAPTER X
ON SPECULATION

‘he spirit of Venture, which is inborn in
humanity, has made the world what it
is to-day. Without it America and Australia
would be unknown Continents; no steamboat
would be crossing the seas; no railway would
traverse the long stretches of magnificent
prairie; no factory-chimney would be smoking
to-day. We owe a debt of deepest gratitude
to the strangely reckless and_self-assertive
instinct which Nature has so strongly planted
in our hearts, for it has made us masters of
that portion of the universe which is our
domain.

It would seem almost ungracious to raise our
voice against this all-powerful influence, which
urges us on from glorious achievement to further
adventure. Nevertheless, just as the strongest
light casts the deepest shadows, so the spirit
of adventure, directed to wrong purposes, is
converted from a boundless blessing into a
disastrous curse.

250

SPECULATION IN STOCKS 251

There is a vast difference between the ven-
turesomeness which is likely to be productive
of good to a portion of the community, and the

mere speculation which, in the best of cases,

only results in some personal monetary gain.
Thoughtless people frequently subordinate their
inbred love for new and striking develop-
ments—an inclination which, if properly
applied, might make them leaders of men—
to the pure desire for gain. It seems to them

-that it is the love of victory, of success, of

personal enrichment, for which their better
self prompts them to battle; but when they
have obtained success of this kind it is
like the seizure of a nest from which the bird
has flown. That achievement only is worth
striving for which is beneficial to the victor and
to his fellow-man alike, but such an achievement
can only be effected when personal exertion is
joined to right opportunity.

It is a duty which every man owes to his

: fellows to develop his instinct of venture and

speculation, so that he may assist in enslaving
the forces of nature and bringing the products
of the earth into use for the general advantage ;
but he must apply these instincts in a positive
and personal manner, and not by merely staking
part of his accumulated wealth on some under-
taking in which he takes no personal interest.

Right and
wrong use of
venturesome-
ness,

--- Page 132 ---

Legitimate
speculation
versus reckless
gambling.

252 SPECULATION IN STOCKS

Business instinct and ability must be employed
as well as capital.

Every new enterprise is a speculation, be it.

a railway, a mine, ora factory, and every one
should assist in fostering undertakings of this

kind, for they bring work and consequent —

happiness to many, and at the same time
afford employment to make capital useful.
No one should be content merely to venture
bis money; his mind and brain should also
assist in procuring the hoped-for success. It
is this combination of capital with personal
eflort which creates the true difference between
legitimate speculation and reckless gambling,
He who carefully studies the chances oi
success of any venture, analyses the factors
which are likely to result in failure and those

which tend to be advantageous, and, with the

full knowledge of the facts, joins an under-
taking, is a tower of strength and in no case a
gambler, for he knows what difficulties have
to be met, and why success or failure results,
On the other hand, he who does not appreciate

the risks, and merely ventures on the chancr

of making money, without any personal under-

standing, is in no way different from the gambler

who stakes his money on the turn of a card,

Most of us are born with the love of risk, |

but not all of us are capable of giving it a proper

SPECULATION IN STOCKS 253

application. The test as to whether we are The true

adventurer not

capable of using this instinct for venture can o gambler.

be applied by endeavouring to grasp fully
and to enter into the real object and ultimate
aim of a given enterprise. If we are capable
of doing this, and in doing it become imbued
with a desire to aid in the work and to follow
its progress constantly and intelligently, then
we are true adventurers and capable of right
speculation. But if we cannot follow the root

-idea of an enterprise, and merely desire to stake

our money so that it may increase in quantity,
then we are gamblers pure and simple, and should
shun every kind of financial risk. For a pure
gambling instinct is as dangerous to Capital
as the germ of yellow fever is to humanity.

The first essential to successful speculation Essentials

is in progress. He who speculates under the

_ impression that he is merely investing is lost

from the start.

The second essential to successful speculation
is a proper appreciation of the extent and
nature of the risks which are undertaken; for
one who is inclined to make light of unfavourable

' contingencies and to consider favourable possi-

bilities as the more likely to occur, is bound to
be unsuccessful. Only the forewarned are fore-
armed.

oO successful

* t
’ is a full recognition of the fact that speculation spe

culation.

--- Page 133 ---

254 SPECULATION IN STOCKS

The third essential to successful speculation
is the ability to realise facts as they are, and
not to imagine them to be as would best suit
one’s purpose.

The fourth and cardinal essential to successful
speculation is the power to rise to an emergency,
to meet difficulties with effective remedies, and

to appreciate the first signs of proved failure,

so that as many planks as possible may be
saved from a financial wreck.

Successful speculation is thus no easy under- —

SPECULATION IN STOCKS 255

year, and the premiums received will more
than cover every probable loss. Thus, whilst
each individual insurance is a grave risk, a large
number of insurances are not only no risk, but
a safe business which produces a profit. But if
a large number of houses, which all abut upon
each other, were insured, then their number
would not lessen the risk, as then they would
all be lable to burn down simultaneously,
and such an imsurance would again become

. risky.

difficulty of . . . In the case of the insurance the fire is the An Investment
successful taking, and requires a number of essentials , . -, _ simile.
speculation, risk ; in the case of stocks the alteration in capital-

which but few possess. This is the true reason

why failure so often dogs the steps of those

who are speculatively inclined.

Every Stock Exchange security, no matter '

what its nature, is a speculation, for it is liable
to rise and fall in value, and to a greater or
lesser extent may fail to fulfil its promises.
The speculative element which every security
contains can only be successfully eliminated by

a proper distribution of risks. To insure one —

house against fire would be risky, for this house

might burn down, and the insurance premiums -

received would not be sufficient to make up

the damage caused by the fire. To insure a —
large number of houses, which are distributed.

over a wide area, is not risky, as only a few of
them are likely to burn down during any one

value is the danger which makes every invest-
ment a speculation. More than one house is
likely to burn down at any given moment when
all houses insured stand close together, and
more than one stock is likely to go down in
value if it be subject to the same trade-influence
as the other stocks held. Thus, by holding
stocks, every one of which is under a different

_ trade-influence, the same distribution of risks

is effected as by insuring houses which are dis-
tant from each other. All insurance companies
are based upon this principle of distribution of
risks, They are eminently successful, although ©
every single insurance which they undertake
is a grave risk. Similarly, investing becomes a’
very safe and profitable business if the risks are

--- Page 134 ---

oe

Unknown risks
run by
Investora,

256 SPECULATION IN STOCKS

properly distributed, although every single in-
vestment held is a risk in itself.

Many Investors imagine that there are some
Stock Exchange securities which are purely
investments and can be safely held without any
investment-risk being incurred. This unfor-
tunate fact leads to a very large amount of
unconscious speculation, and it is, for many
reasons, the most dangerous form of investment-

hallucination which can possibly be imagined.

To hold stocks without realising the fact that

each one of them is a speculation, is like handling -

a revolver without knowing that it is loaded.
How many Investors are there who bought
exclusively Consols and other British Trustee
securities a few years ago and realised at the time
that they were speculating ?
vestor have placed the major part of his capital
in British securities if he had known that by so
doing he was risking fully 20 per cent. of his
outlay in a speculation ?
out intending to speculate, would pay a high

premium for shares in a trading company if he ©

were aware that he was paying this premium

entirely for Goodwill, and that the slightest .

adverse turn in the company’s trade might
cause him to lose part of his capital? Would

any doubtfully secured Preference shares in new

companies be taken up if the applicants realised

Would any In-"

What Investor, with- . . England who are in this position.

_Teceived less in the shape of interest and divi-

SPECULATION IN STOCKS 257

that they were staking their money on a great
chance of probable loss and a remote chance
of possible gain ?

Reference has already been made to the Danger of not

quotation that “forewarned is forearmed.” trestemnte
Any one who buys a speculative investment
which does not fit in with his general Investment-
Scheme, with the full knowledge that he is specu-
lating, naturally watches that stock and sells
out when he finds his venture turn out badly.
But most unfortunate is that man who imagines
that his money has been safely invested whilst
it is actually exposed to serious risk. His stock
reposes in a strong box, he is lulled into a feeling
of security by receiving his dividends regularly ;
but when a crisis arrives and he does look into
the matter, he finds that he would have been
much better off if he had kept his money in a
stocking and had not invested it at all.

There are at present innumerable Investors in British
They have unconscious
speculation.
dends during the last few years than they have
lost in actual Capital. These investors attempt

‘to disguise the fact of their failure; they desire

to find some plausible reason which will account
for such misadventure. Nothing was farther
from their mind than to speculate; in fact, they °
assert that they have not speculated. How,

17

--- Page 135 ---

Losses due
to improper
distribution
of risks.

Geographical

Distribution of

258 SPECULATION IN STOCKS

therefore, could the money have been lost?

It must have been some unforeseen calamity, _

for which neither they nor any one else can be
blamed.

Yet this is not so. They did speculate, although
they held the safest securities and never had the
slightest chance of making a profit. Their money
was distributed over many ventures, every one
of which was sound, yet, all the same, they lost.
The reason behind the fact which appears to
them so mysterious is shown in the long table
of stocks, embracing over thirty kinds of enter-
prises, all different from each other, which has
been given in Chapter III. of this book. Actually,
their risks were not distributed, and thus,
unconsciously they speculated. If the British
Investment Market had been favourable during
the last decade they would have made large
sums. Unfortunately, the reverse took place;
hence they lost.

The essence of speculation lies in the fact

Capital the only that there are chances of gain and chances of loss,

safeguard
against logs,

and the mere fact that such chances exist is ©

proof positive that a speculation is in progress.
He who desires to invest and not to speculate
must so distribute his risks that the chances of
gain and loss are small. Geographical Distri-
bution of Capital enables him to do this, and
whether he has adopted it effectually is easily

SPECULATION IN STOCKS 259

found out by ascertaining the total selling
value of all securities held at the end of each
of a number of years, If the result is steady

_ and shows but little variation year by year,

then the risks are well distributed. If there are
considerable variations year by year, then the
risks are badly distributed.

One of the most important objects with which
this book has been written is to make Investors
realise when they are speculating and when they

are investing. If they desire to speculate, and
can afford to do so, there is no reason why they
should baulk their fancy. By realising that they
are speculating, and also where the speculation
is centred, they will greatly improve their chances
of success. Should, however, investment be
their aim, and not speculation, then a road is

opened up before them which leads safely to
that goal.

Successful conscious speculation in stocks Conscious

consists (a) in buying a stock under its relative analysed.

value and selling it at its relative value, thus
making the difference between both prices as a
profit, or (6) by selling a stock at above its relative
value and ultimately repurchasing it at or
below its relative value, and again pocketing
the difference. ~

When stocks are bought for ‘a rise, they

_are either paid for outright or the purchase-

--- Page 136 ---

260 SPECULATION IN STOCKS SPECULATION IN STOCKS 261

money is borrowed from or owed to another,
who holds the stocks in the meantime. When
stocks are sold for a fall. they are either
borrowed in the meantime or owed to the
party who has bought them. Whether the
True distinction purchaser pays for his stocks outright or buys
between . ?
Investment and them with other people’s money, does not make
Speculation. one iota of difference, if he does not overstep

his credit and stake a larger sum than he can

not fall if there is a sufficient number of wealthy

people behind it who assist to maintain its price.

In this way the surest calculation may be Temporary
_ frustrated, but in the long run all these arti- 2yvre of

ficial methods of preventing prices from going Stock-values,

to their proper level are as ineffective as the

strongest dam would be to permanently stop

the flow of the smallest river. Just as, sooner

or later, the river will overflow, so it is only a

legitimately afford to risk. The sole difference
between investment and speculation is whether
the stocks bought fit in with the existing In-
vestment-Aim and the adopted Investment-

question of time when a stock will come to its

-proper selling price.

This is wherein lies the real advantage
enjoyed by the speculator who pays for his

Scheme. If they do, then their purchase is not stock outright, over his confrére who speculates Dangers of
a speculation ; if they do not, then a speculation on borrowed money. The owner who has paid torowed =
is in progress. | for his stock can calmly await events and ig ™™"°y:

There are always two parties to every trans- independent in his actions, whereas the specu-
action, and the cleverer and more powerful of lator on borrowed money has to conform to the
the two wins in the end. Thus in all Stock dictates of his creditor, and might be forced

Cause of Exchange speculations the best founded ideas to realise on the very eve of success.

Steels values. lead to loss if there is an opponent in the field. To speculate in stocks is a pastime in

who understands how to annihilate their legiti-
mate and proper consummation. A stock may
be selling much under value, and this fact may
be quite conspicuous, and yet it will fail to rise
in price if there is a strong clique at work who
keep up a steady stream of sales of stock which

they do not own. And, vice versa, a stock may:

be selling much above its value and yet it will

which a great many indulge.

at stake.
_certain extent responsible for fostering the

The turf is
responsible for a ‘considerable amount of
gambling, but horse-racing wagers are insig-
nificant transactions compared with the bets
made on the Stock Exchange, both as to
number and the amount of money which is
In both cases the Press is to a

--- Page 137 ---

262 SPECULATION IN STOCKS

gambling spirit, owing to the manner in which
the turf and the Stock Exchange news has to
be given. Nevertheless it is true that a vast
improvement in respect of the Financial articles
has taken place, and Editors are now endeavour-
ing not only to extend their information, but to
give it in such a form that Investors can readily
use it.

Stock Exchange ‘There is such a fascination about Stock

speculation .
fascinating § Hxchange speculation that almost every owner

pat deneoron® of accumulated funds falls a victim to this
expensive pastime in a greater or lesser degree
at one time or another. The present writer
was once just as much engrossed in this subject
as most people, in fact, he endeavoured re-
peatedly to invent such improvements and new
methods as would make Stock Exchange specu-
lation a certainty. He was young then, and
full of energy, but as he grew older and his
experience matured, his ideas changed, until he

turned his back for ever on this unfathomable.

quicksand, in which so many fine fortunes have
been engulfed. If a Royal Commission were
appointed to inquire into Stock Exchange specu-
lation, and that Commission had the power to
force all the stockbrokers in the country to
produce their books, it would be found that for
every thousand speculators who lose money by
gambling in stocks, hardly one makes a per-

SPECULATION IN STOCKS 263

manent profit. The reason why it sometimes
seems that people do make speculative profits
is that the winners boast of their success,

while few, if any, are sufficiently candid to

narrate their losing experiences.
It is quite useless to inveigh against gambling ;
it is like the wild oats which every young man
has to sow, and as long as gambling is conducted
within proper limits no one is really hurt by it.
Gambling, however, must not be confounded Legitimate

with legitimate speculation, where money is shee sant

not a gamble.
staked on sound ventures with the full knowledge

of the risks incurred. Immense and permanent

fortunes have been and will continue to be
made in this way.

--- Page 138 ---

CHAPTER XT
THE READER'S OWN INVESTMENTS

4 hie art of purchasing to the best advantage

consists : first, of making up one’s mind
clearly as to what is really wanted; second,
finding out where the required commodity is
obtainable in its largest and best selection;

OWN INVESTMENTS 265

invest their money, very rarely state what they
really need; and they thus lay themselves open
to the danger of receiving advice other than
they actually require, although the bankers and
brokers endeavour to serve them to the best
of their knowledge and ability.

It has been explained in the pages of this book
that safe investment is only possible when the
Investor knows his ultimate alm, and has
decided upon the class of security which is best

suited to attain his investment-object. He

should then divide his capital into equal

parts, and invest each of these parts in the Every new
securities which will answer the purpose; but {ae o™*
these securities must each be equal in quantity, aia by
quality, and width of fluctuation, and every one Javertment-

third, clearly establishing the relative value and
Investments utility of all the commodities of the required
ccsamodities. Kind which are offered ; and last, purchasing the

one which is the most advantageous.

These simple rules apply to purchases of all
kinds, and especially to the purchase of in-
vestments.

In almost every kind of trade there is a large
selection of similar articles, and there are
merchants who keep a stock of them open to
the inspection of intending purchasers. Similarly,
there is an endless variety of stocks and shares
constantly on offer, but there are no warehouses
in which they are collected and displayed.
Investors who call upon their bankers and

brokers asking for advice as to how they should
264

of them must be dissimilar from all the others
in the external trade-influences which govern
its price-movements. To add successfully to
existing investments, therefore, the Investor’s
object must first be considered, and this
naturally decides the quality of the stock

which he requires. This selection must also

be influenced by the type of securities already
held. and the Geographical Divisions already

_ covered by the Investor’s Capital.

If the owner’s investment-object is explained
to a banker or a broker, and he is shown the

list of stocks held, he would then be able to

--- Page 139 ---

The soundest
Stock may
prove an
unsafe holding.

Stocks need to
be matched.

266 OWN INVESTMENTS

suggest a new investment after due consideration.
But if either of these persons is simply asked
what an Investor should buy, he cannot tell
what is actually wanted, and he is just as
much at sea as any Investor would be who
had not considered his own position. Under
such circumstances the banker or broker can
only suggest what seems to him a cheap and
desirable investment for the time being; but
the cheapest, safest, and most desirable in-
vestment of its kind may become dear, unsafe,
and undesirable, unless it fits in precisely
with the investments already in hand.

The cardinal point of safe investment is that

all stocks held must match each other in
several ways; and it is quite impossible to
match anything unless a complete knowledge of
the article to be matched has been previously
obtained. For these reasons, the Investor must
give to either his banker or broker a clear
definition of the quality and class of invest-
ment required, with its Geographical Division
particularised, or he must ask him to decide
these points from a copy of the existing list of
investments held. Otherwise the Investor
cannot hope to buy to the greatest advantage.

It is a simple matter to give such in-
structions as, “JI require a sound Debenture
or Bond which never fluctuates more than

_namely, no one is compelled to continue holding Lista,

OWN INVESTMENTS 267

5 per cent. in any one year, yielding 44 per cent.
and situated in Asia”; or, “I want a 5 per
cent. Preference share situated in America
North, which never displays a difference of
more than about 8 per cent. between its
highest and lowest price annually.” Such
orders are clear and distinct and they are
likely to be accurately carried out.

There is one advantage regarding invest- No difficulty
ments which can be utilised by all Investors, Investment
a list of stocks which does not fulfil his re-
quirements. Therefore, the most ill-assorted
list can be put into proper working order in
a comparatively short time and with little
expense.

It has been pointed out in a previous chapter
that all stocks are saleable at fair relative
prices, and that there is no such thing with
investments as stale goods or remnants which
no one cares to buy. It is true, of course,
that investments cannot be always sold at or Cost-price of
near their cost price, and that they must be holdings
realised at the market-price of the moment 5 fect
but this point is not one which holders of ill-
assorted lists should consider, unless they are
prepared to continue occupying their present
speculative position. ‘

Beyond the purchase-expense it is quite

--- Page 140 ---

Holding on
to unsuitable
Stocks is

@ speculation.

268 OWN INVESTMENTS

impossible to establish the fact that there is |

a difierence between a person who now holds

a stock and one who !1ow purchases it. « Both.

these persons are in precisely the same pouition,
for there is nothing to prevent any one buying
any stock at the market price. Every Investor
can at any time put himself in the position of
any other Investor who has held a certain stock
for years. It may be that the holder of long
standing has paid a very much higher price
than the new purchaser, but this does not alter
the fact that the Investor who has just appeared
on the scene has quite equal chances with the
holder of long standing, although he may have
paid far less for the stock.

It therefore naturally follows, that to hold
on to a security which is unsuited to a given
Investor’s purpose is, in effect, precisely the
same as if that Investor were now to buy that
unsuitable stock. This irrefutable logical con-
clusion may be very unpalatable to many
holders of investments which have considerably
receded in value. They naturally like to believe

OWN INVESTMENTS 269

minds to get out of the unsuitable investment
as soon as they can do so without a loss, but
in the meantime they prefer to wait.

A short analysis of these reasons will show

that they feel inclined to rely on future possi-
bilities, and this conclusion proves that they
are simply speculators.
- Buying a stock which clearly does not fit in
with an Investor’s object, is a speculation ;
buying a speculative security which does so fit
in, is no speculation at all. Investors who know
that some of their present holdings do not fit
in with their investment-objects, are speculating
in this hazardous way.

The purely practical application of the teach- The practical

ings of this book to existing investments has
now been reached.

Every reader who is an Investor should first
of all consider the various investment-objects
which have been divided into ten sub-divisions
in Chapter II. of this book. He should select
from these the sub-division which applies to his
case, and then read the description following

that their investments technically represent
the price which they paid for them; they try
to find some reason why the present ruling
market-price is untenable, and hope that sooner
or later the price which they have paid will
prevail again. They definitely make up their

, that sub-division. This will inform him what quality of
kind and quality of stocks are requisite to be cordoned.
enable him to attain his individual investment-
object. As the next step, he should examine
his existing list of investments, and aseertain

roughly and approximately at what price each

--- Page 141 ---

Proper division
of Investor’s
Capital.

270 OWN INVESTMENTS

of them could now be sold. The selling values
should be added up, and the total will give
him the amount of Capital he owns.

The explanation accompanying his particular
investment-object as given in Chapter II. of
this book has shown him what percentage of
yield he may expect, and by multiplying his
Capital by the percentage and dividing by 100
he ascertains his future income. His Capital
can then be most advantageously divided into
even proportions on the following scale :

Number | Number | Number of
of Sub- of Geograph-
divisions | Stocks _ em
of Capital. | to hold. | Divisions

Size of Capital.

to cover.
Up to £1,000 .- ee 4 4 4
Between £1,000 and £2,000 6 6 6
” £2,000 and £4,000 8 8 8
” £4,000 and £8,000 10 10 10
” £8,000 and £16,000 | 10 or 20 | 10 or 20 10
»» £16,000 and £50,000 20 20 10

£50,000 and over 20 or 80 | 20 or 30 10

Whenever this table indicates that more than ten stocks
should be held, the investments must not only cover the
ten main Geographical Divisions, but in all those divisions
which contain more than one country, they must cover
various countries of that division. In the case of the Inter-
national Division separate industries should be covered.

Exceptions.—To the following investment-objects given
in Chapter IT. of this book, the above table does not apply,
and the division of capital for these should be as follows:

Group I. (c). Divide capital up to £5,000 into 10 equal

OWN INVESTMENTS 271

portions, capital between £5,000 and £30,000 into 20 equal
portions, capital over £30,000 into 30 equal portions, and
cover the 10 Geographical Divisions in each case.

Group I. (d). Divide capital up to £3,000 into 10 equal

. portions, capital between £3,000 and £10,000 into 20

equal portions, capital between £10,000 and £30,000 into
30 equal portions, capital over £30,000 into even multiples,
the maximum amount in each stock not to exceed £2,000,
but never less than 30 securities should be held.

Group IT. (c). Divide capital similarly to Group I. (c)
or (d) as above explained.

Group IIT. (6). Divide capital similarly to Group I. (d)
as above explained.

Having divided his capital into the portions How to

indicated in the above table, the Investor has
now ascertained the following main facts:

1. The present size of his capital.

2. The class of investments which he should
hold.

3. The number of stocks which he should
hold and the income which they ought to regu-
larly produce in each year.

4. The number of Geographical Divisions
which his stocks should cover.

In fact, with the aid of an extensive share-list
he can now construct an ideal investment-scheme

for himself, which he can rely upon to fulfil

his investment-object in the future.

He should now continue the examination
of his existing investment-position. If any
Investor should find it difficult to make a

--- Page 142 ---

272 OWN INVESTMENTS

clear statement of this, be it for want of time
or lack of statistical facts, he is recommended
to ask either his banker or broker to do the
work for him, or, failing them, to consult the
publishers of this book by sending them a list

OWN INVESTMENTS 273

would, under any circumstances, divulge their
contents. As a final safeguard, by marking
the investment-list and its accompanying letter
as “Private and Confidential” strict privacy
is ensured.

It is always preferable for Investors to in- Rules tor

vestigate for themselves their own investment- Invostenent-

position, as the researches which they make Position.

of his holdings and stating his investment-object.
Expert The suggestion is made so that the teachings

investigation of

Investment. Of the book may not only be of practical use

Lists,

to all its readers, but in order to bring its
precepts within the reach of all Investors who
are without the means of arriving at statistical
facts. The publishers of this book not only
insert in their monthly publication a form on
which investment-lists may be submitted to
them, but they also include the charge for in-
vestigating such lists in the annual subscription
to that publication.

Investors need feel no hesitation in submit-
ting their actual investment-position to others
for investigation, on the ground that they
have invested unsatisfactorily in the past. The
majority of Investors are in precisely the same
position, and it would have to be an extra-
ordinarily bad case indeed to excite special
attention in the mind of any one whose business
is to habitually and daily investigate private
investment-lists. Besides, all communications
of this kind are treated as strictly private
documents, and no banker, broker, or adviser

clear their minds and give them valuable
experience. All readers who are inclined to
fall in with this suggestion should proceed ag
follows :

‘1, All stocks held should be classified accord-
ing to their Geographical Position; the value
of the stocks held in each Geographical Division
should be added together, and the Geographical
Distribution of the Capital will thus be
ascertained.

2. The various qualities of all the stocks held
should be investigated upon the principle ex-
plained in Chapter VI. of this book. It will
then be seen how closely alike they are in quality,
and whether that quality is in keeping with the
investment-objects of the Investor.

3. The income received during the last few
years should next be ascertained, and compared
with the amount which the Investor would

_Teceive regularly if he followed the investment-

scheme which suits his case best. The actual
18

--- Page 143 ---

Realising
Capital
without Joss.

Advantages of
Geographical
Distribution
when realising
Capital.

274 OWN INVESTMENTS

income-yield from each stock held should be
considered from the point of view explained in
Chapter V. of this book.

Whilst this investigation is in progress, there
is another exceedingly important point of view
from which existing investments should be
considered, namely, the power of the Investor to
realise a portion of his investments at any time
without loss. There are some Investors who
say they will never require to convert any part
of their invested capital into cash, nevertheless
this is an eventuality which might happen at
any unforeseen moment. When it does happen,
and there are no stocks held which can be sold
without a loss at the critical moment, a heavy
Capital-loss is possible.

Every properly constructed Investment-List,
which is based upon the principles of Geo-
graphical Distribution of Capital, gives its
owner an opportunity of realising at any time
at least one quarter of his Capital without
loss. On Geographically Distributed lists of
investments which have had time to mature,
this realisation can, as a rule, be effected at a
profit. It is not intended to enlarge upon this
point here, but the reader is referred to a
publication entitled “ Investments Practically
Considered,” a collection of articles on
investment-questions, written by the present

eet for
5 use.

--- Page 144 ---

Test SHEET.

VALUES AT AVERAG!
TA Forrewmc’s a gs DURING VALUE OF STOCKS REALISABLE AT A PROFIT, OR WITHOUT
ARS. Loss IN THE FOLLOWING YEARS: IN £’s.

Geographical

Division of | held in each QuantiTius AND NAMES OF Cost Price
each Stock, | Geogr. Div. Srocks HELD. of Stock,
43

4%
At present. At present

--- Page 145 ---

OWN INVESTMENTS 275

Author. There, under the heading Tests for
every Investor’s Real Position, he will find the
foregoing contention fully proved by statistical
facts.

It is a convenient plan to group all the salient
facts under investigation in the form of a table,
as thereby their relative proportion to each
other becomes strikingly apparent.

For the purpose of summarising an Investor’s

actual position, the annexed form of Test Sheet A Test Sheot for

@ form for his own use, or he can use the form
contained in this book. In case of need the
publishers will supply a full-sized Test Sheet on
application being made to them,

The quantities and names of the stocks held
should be entered on the Test Sheet in their
_ geographical order, together with their cost and
Present value ; and the total value held in each
Geographical Division should be shown in the
second left-hand column. The values of the
stocks held as they stood, say, ten years ago,
five years ago, two years ago, and last year,
should be ascertained from a statistical hand-
book, and entered opposite each stock on the
left-hand side of the Presenj Value of Stocks held
tn each Division column, When the cost price
of a stock is not ascertainable, the average
price ruling in the first year of the period

. Investor's use,
18 suggested. The reader can either preparesuch

--- Page 146 ---

How to read
Investor’s
position froin
completed
Test Sheet.

276 OWN INVESTMENTS

covered by the investigation should be taken as
a substitute for it. Then, by comparing the
Cost Price column with the amounts entered in
the Value at Average Prices column, it will be

ascertained how many stocks were saleable each -

year at or above cost price. All the stocks which
were so saleable should be entered in the Stocks
Realisable column. The Dividends or Interests
which were paid on the stocks held during the
identical years which have been selected for the
realisable values should next be ascertained,
either from the Investor’s own Account Book
or from a statistical handbook, and they should
be entered opposite the stocks in the Annual
Income column. All columns of figures should
now be cast up, and the table is complete.
The Investor has now ascertained how the
total value of his investments has altered in
each of the five separate years; this is seen
from the totals of the Values Columns, and gives
him an infallible clue to the distribution of his

investment-risks. A properly distributed list -

of investments does not vary more than 8 per
cent. in its total realisable value year by year
[see “‘ Investment Practically Considered 7], and
every list which habitually shows variations of
over 5 per cent. in its total realisable value, in
any two consecutive years, is badly distributed

as to investment-risks. Especially is this so

OWN INVESTMENTS 277

_ when several successive years show either a

steady and prolonged increase or decrease in

_ the total realisable value.

Absolute steadiness of the total realisable sign of a
value, or a jumpiness from increase to decline Fercistributed
and back to increase again, is the unfailing sign “*
of a properly distributed investment-list.

The Investor will further have ascertained
from the totals of the Stocks Realisable columns
what proportion of the Capital was realisable
without loss in each year under review. As
has already been stated, a properly Geographi-
cally Distributed List of Investments is always
realisable to the extent of at least one quarter Capital-loss
of its total value without loss. If the listrectmaten
which the owner is investigating does not °”"**
display this important feature, there is grave
danger of Capital-loss in the case of forced
realisation.

The totals of the Annual Income columns
disclose the steadiness of income. All badly
constructed investment-lists show considerable
variation in this respect. Especially is a gradual
and steady decline in income a: danger-signial
which no Investor should treat lightly.

fivery point of the existing investment-
position has now been dealt with. The Investor 4 useful
has two clear examples before him: (1) The @vestment-

. ; : comparison
model investment-list, which fulfils every one *orded-

--- Page 147 ---

What Stocks
ought to be sold.

278 OWN INVESTMENTS

of his requirements and is likely to show a
steady realisable value, which will allow of
the realisation of a portion of the capital
without loss, and give a steady annual income;
(2) the existing investment-list with all the
weak points, if such there be, exposed.

If no great difference in any vital details
exists between these two models, it has been as-
certained beyond doubt that the existing list is
well constructed. If there are great differences
between the two, then a glance at the existing
list itself will show where and to what extent
this combination of investments is faulty, and
the reader would be extremely ill-advised if he
did not forthwith set about remedying these
defects.

Assuming the investment-list to be unsoundly
constructed, a careful selection of all the
stocks to be sold should be made, and the
total realisable value of these ascertained.

All stocks which are superfluous in any one
Geographical Division or which do not fit
in with their owner’s investment-objects [see
Chapter II.] should be placed on this list.
The Capital realisable by the sale of these
stocks should then be apportioned over those
Geographical Divisions which the stocks to be
retained do not cover. .

A broker should now be asked to recommend

OWN INVESTMENTS 279

investments which answer to the Investor’s How to
exchange

- requirements in every detail, and which are undesirable for

i : . . «+ desirable Stool
situated in the vacant Geographical Divisions.“ "°°"

He should furnish the Investor with such details
concerning every separate investment recom-
mended by him as will enable the Investor to
form his own opinion as to its suitability when
judged in the light of the explanations given in
this book.

The Investor should investigate each stock
which is recommended to him, and if he approve
of it he should sell a sufficient quantity of the
most undesirable of his holdings to enable him
to purchase the new stock.

This procedure he should continue gradually
until every undesirable stock held has been
exchanged for a suitable security. As soon as
this task has been successfully accomplished, the
Investor’s actual holdings should in every way
coincide with the model list which he himself
drew up at the start of his investigation.

It will be noticed that no actual cash is No actual Cast

: ‘ . needed for
required for effecting a reconstruction of an reconstructing

existing list, and that every Investor who has pu
independent control of his own investments
can at any time proceed to reconstruct his
investment-position.

The expense of effecting a reconstruction

will depend upon the means employed for

--- Page 148 ---

280 OWN INVESTMENTS

carrying it into effect. Perhaps the broker
will charge a special fee for giving additional
attention to the case and supplying statistical
details, but in no instance should the recon-
struction cost more than I per cent. upon the
total value of the stocks exchanged. This 1
per cent. is an extremely trifling matter when
compared with the results obtained. In addi-
tion, the entire expense should invariably come
out of the proceeds of the stocks sold, so that
the Investor has no actual cash of any kind
to find for the reconstruction.
Expense of. By glancing at the variations in the total
a negligible realisable value year by year, the Investor
anantity. will perceive that the reconstruction expense
is almost negligible when it is compared with
the wild annual fluctuations of a badly con-
structed investment-list. The cost of a re-
construction is rapidly made up out of the
advantages gained by the Investor in capital
and income.
Why unsuitable A pessimistic reader who has not quite parted
market. with his former conviction that all stocks are
similar in character to each other, and that an
investment which has been found undesirable
by one Investor must necessarily also be con-
sidered undesirable by all other Investors, may
now ask the seemingly pertinent question :
“ How is it that ready buyers can be found

OWN INVESTMENTS © 281

for all the undesirable stocks which have to be
sold through a reconstruction ? ” ;

The answer to this question is that a stock
which is unsuitable for one investment-object
may yet be suitable for another, and that, in
fact, there is no investment which is quite
unsuitable to every investment-object, unless it
be worthless or such a rank speculation that it
does not deserve the name of either security or
investment.

A very interesting example of the general Interesting
adaptability of investments is contained in a adaptability of
little book by Sir John Rolleston, published *"“""""""*
at 2, Waterloo Place, London, 8.W. In that
book a number of charts are given, each chart
covering the investment-area of a different
country; another set of charts is then given
which contains the same stocks as the former
charts, but the investments of different countries
are included with them, so that a Geographical

Distribution of Capital is effected.

The results obtained from these charts prove
that whilst a combination of the investments
of any one of these countries makes up ex-
ceedingly undesirable investment-schemes, these
identical investments make very desirable in-
vestment-lists when one stock out of each
country has been taken as the material out
of which to form an investment-combination.

--- Page 149 ---

An ideal
Investment-
Scheme.

Periodical
supervision of
Investment-
List.

282 OWN INVESTMENTS

In fact, if the Investors of nine separate
nations, each of them holding stocks of his
own country to the same value, were to put
their combined investments into a pool, they
would obtain an ideal investment-scheme, which
they could divide at any time among them-
selves in such wise that all would hold ideal
investment-schemes. But if each continued to
hold the stocks of his own country every one
of them would have a bad investment-scheme.

A more striking proof of the fact that the
same investment may be bad for one Investor
but highly desirable for another, can hardly be
imagined.

After the Investor has adjusted his invest-
ments and secured a desirable investment-plan,
he should, by means of proper book-keeping,
keep in close touch with his stock through-

out his investment-career, and thereby make ©

sure that his investment-plan is properly main-
tained.

THE ENT

INDEX

Account Book, A proper, 93
Accounts foreshadow future disasters, 220
ARBITRAGE Deratinas, 235, 236

rare in pure investment stocks, 237

ARTICLES oF Association show rights of shareholders, 148
ASSETS—

and their valuation, 203
“quick,” Meaning and advantage of, 204, 217
should be detailed, 205

which are intangible should be written off, 210
AUDITORS AND THEIR Founcrions, 200

BaLaNnce SHEET—
analysis, Advantage of, 221
Necessity for examining, 110
remedy against obscurity, 205
Use of, etc., 78, 202, 203, 206, 209, 215
Bank rate, 101
Burarer Stocks versus Reaisterep Stocks, 232
BoONDHOLDER aND SHARFHOLDER—
Difference between, 81, 84, 118, 161
Duties of, 81
How shareholders assist bondholders, 84
Bonps—
classes, value, etc., 82, 113, 114, 118, 131, 139, 133, 143
Government, Proof of ownership of, 126
subject to annual drawings, 114, 132
Boork-KEEriIne unnecessary for investors, 94
Boursz, Paris, Power of, 225
Britisz Srocxs, Results of exclusive investment in, 107
BROKER AND J OBBER, Distinction between, 229

Cariratr—

as distinguished from income, 79

compared with possessions and money, 59, 61

defined, 20, 58, 60, 63, 64, 73, 153

Ensuring safety and increase of, 20

equivalent to personal effort, 4

Geographical Distribution of, 30, 42, 45, 49, 50, 68, 70, 92,
107, 108, 258, 270, 274

increase, Calculation showing, at compound interest, 44

invested in permanent works, 137

must be supervised, 8

Profits should be taken to build up. 88

tealisation, 274, 277

reinvestment, 91

Responsibility of owning, 4

283

--- Page 150 ---

284 INDEX

Capitan (continued)—

safety, 106, 107, 220

Two methods of adding to, 51

Use of, 65, 66, 76

Working, 159, 194, 216
CaprraL Issues, 163, 16&, 167
CaPiraLists—

afraid of unknown risks, 100

Small, 54
CAPITAL-SAFETY, 96, 107, 140, 181
CoMPANIES AND THEIR SHAREHOLDERS, 202, 216
Company, Risks of investment in new, 196
Comraxy PRoMOTERS AND THEIR Mernops, 155, 186, 188
Competition and its dangers, 137
Consots—

as investments, 55

How to regulate the price of, 124

Security of, 119

the bankers’ cash reserve, 125
CoNVERSION-RIGHTS, 144
Corporation Srooxrs, 126, 127, 128, 129, 130
Cost Price or UnsurraBLe Houpines a negligible factor, 267
Customers, Many small better than few large, 219

Derarinas, ARBITRAGE, 235, 236, 237
DEBENTURE AND SHAREHOLDERS, Position of, 219
DEBENTURES—
Position of, in America, 143
Safety and value of, 113, 133, 135, 136, 140, 141, 142, 143
Types of, 131, 134
DEPRECIATION OF BrivisH Ramway Srocxs, 12
DirEcrors—
and managers, Success of company dependent on, 189
and their autocratic attitude, 9
and shareholders, 78, 156, 162, 199
should possess business knowledge, 190
DISTRIBUTION, GEOGRAPHICAL, 30, 42, 45, 49, 50, 68, 70, 92, 107,
108, 258, 270, 274
DistRiBpurion or Risxs, 258
DIvipENDS—
and their payment, 201, 217
on shares dependent on profits, 145
versus interest, 80
Drawn Bonps, Some countries do not notify, 133

Earnines from personal exertion, 39
ENTERPRISES—
in the making, 43
Unpopular, 43
ELXAMPLE—
illustrating drawback of popular stock, 86
in monetary outlay, 62
of interest-variation, 99
EXPENDITURE of professional men, 40

INDEX 235

“First Issue or Stock judged by eomparison, 176
OUNDERS’ SHares absorb large profits, 151
Free Marxer—. ep

dangerous to stocks, 240, 241

often created by speculators, 240

stocks generally unsuitable for permanent investment, 241

GampBuxs defined, 163

Legitimate speculations not, 253, 263
GaMBLING with Government stocks as counters, 122

versus legitimate speculation, 252
GzoGRaPHican DIvIsIons AND SUB-DIvIsIons, 73
Goopwiti—

a mercurial property, 111

can be estimated, 212, 213

generally overvalued, 213
GovERNMENT—

and corporation stocks, 71, 129

and investors, 121, 126

and legalised robbery, 121

as a business concern, 123, 125

loans and their redemption, 119

loans, French and German, 119, 120

loans secured on revenue, 82, 120

stocks and their drawbacks, 122, 126

stocks as gambling counters, 122

Incomz—

and its investment, 39

as distinguished from capital-appreciation, 79

from shares dependent on business success, 79

from three sources, 75, 94

has ita root in capital, 63

important to some investors, 42

irregularities, 90, 91

payments, 88, 95

regularity, 89, 92

risks, 89, 106

versus capital safety, 22, 96
Income Bonps generally a bad security, 143
Inpusrries and their different influences, 69
InsuRance—

against investment-risks, 97

Life, 53
InTEREST—

security, 136, 138, 141

variation, 98, 99, 100, 101, 102

versus dividends, 80

World’s average rate coustant, 109
InvVENTIONS a bad basis for investment, 185
InvEstinc—

defined, &

for increase in capital-value, 2%
Investing anv GamBLina, Difference between, 45
INVESTMENT-AIM, 37, 38

--- Page 151 ---

286 INDEX

INvEsTMENT—
aims, 28, 24, 26, 265
and reconstruction, 279
axiom, 25
comparisons, 277
distribution, 277 .
in free-market stocks generally unsuitable, 243
lists and their arrangement, 267, 271, 272
loss, 10, 13
nest-egg, 53
opportunities, 180
possibilities, 44, 175, 281
results, 67
risks, 48, 66, 175, 196, 254, 256, 257
safety, 33
similes, 24, 249, 255
study, 7, 8, 15, 18, 19, 45 .f
supervision, 46, 55, 57, 269, 273, 282
values, 15, 16, 17, 31, 67, 166, 169, 176, 180
versus speculation, 260
InvEstMENTS—
and averaging, 50
and their anomalies, 103
and their marketability, 177, 237
and their readjustment, 57
as commodities, 264
in land companies, 46
in leased-line shares, 151
under Government control, 226
INvVESTOR—
depends on sound utatistical facts, 247
versus speculator, 246
InvEstors—
and the Government, 121
dislike taking trouble, 169
may become experts, 56
often receive insufficient advice, 264
of various types, 5, 6, 16, 28, 41, 52, 170
Investor’s-—
aims and difficulties, 21, 28, 30, 57, 77
division of capital, 270
test sheet, 275, 276
Issuzs, New, 196

JOBBER—
and broker, 229
his uses and shortcomings, 238, 239

Laws which are futile, 14
Lzasep-Line SHaREs as investments, 161
Lraisuarors and their mistakes, 14
Lissirities of a company, 207
LiQuiDATION—.
and shareholders’ rights, 147, 159
due to apathy of shareholders, 160

INDEX 287

List oy Sxanwnorpers, 183
Loans—
distinguished from partnership, 116
of a Company, 130
of a Corporation, 127, 130
of a Government, 119, 120
specie, Currency risks of, 128
Losszs—
due to improper distribution of risks, 258
must be faced, 58

‘Maxine «4 Marrer,” in new issues, 177
Marxer—
does not depend upon official quotation, 239, 240
Money—
and its profitable ownership, 5
and ways of lending, 82
as capital, 64
compared with commodities, 101
compared with possessions and capital, 59, 61
is accumulated energy, %
is a measure of work, 2
Money, Borrowrp~—
Danger of paying dividends with, 217
Dangers of speculating with, 261
Morraace Bonps, 131

New ENtERPRISES—

and the difficulty of gauging them, 188

their survival and development, 184, £85, 187
New Issurs—

and their subscription, 170, 171

and underwriting, 171, 174

Annual amount of, 163

in relation to the investor, 165, 167

with a guarantee, 182

Orrictan List or Stock Quoratrions unreliable, 231
Onpinary SHane always a speculation, 77
Orpivary Suares are sometimes split, 150
OVER-OAPITALISATION dangers, 12

Partnersuip distinguished from loans, 116
PERISHABLE Goops valued at sale price, 204
Popunarion and its effect on investments, 138
Possrssions—

classified, 62, 63

compared with capital and money, 59, 61
PREFERENCE SHaREs and their disadvantages, 148
Premioum—

on new bonds, 173

versus discount, 47
“ PREmMIuM Dopas,” 178, 179

--- Page 152 ---

288 INDEX

Premium Riss, lil, 114
Prion Fiocruation and its causes, 70
Prick Leve. or Srocxs dependent on public demand, 238
PRICE-MOVEMENT— ;
and its dissimilarity, 71
indicated by Government stock, 71
Prorir anp Loss Account, 214
Prorits, 78, 88, 145, 191, 192
Prorgrry considered in various aspects, 64
Prosprecrus-—
fascination for small capitalist, 166
framing, 163, 164
often misleading, 164
Reading a Company-, 180, 181, 184, 188
Proxies, 157

QuotTaTIon on Stock Exchange, 174, 239

RECONSTRUCTION expense, 280
REconsrrRucrions— ;
often result of reckless finance, 160, 161
REDEMPTION-—
an important factor in bond valuation, 113
of Government loans, 119
REGISTERED Srocks versus BEARER STOCKS, 23
RENT-CHARGES and their safety, 144
Reserve Fonp, 36, 90, 92, 208, 209
REVENUE as security for Government loans, 120
Rumours—
as price influences, 123
or tips futile, 80

SxcuRITIES—
always saleable if good, 87, 242
Relation of Government to local, 102
which are safe, 31
which are specifically mortgaged, 83
Sgcurrry may be general or special, 97
Srertiine Days, 230
SusREHOLDER—
and his duties, 81
and his rights, 147, 148
compared with bondholder, 81, 84, 118, 161
SHAREHOLDERS—
and their indifference, 10, 158, 202
and their relation to debenture holders, 219
and their relation to directors, 78, 155, 162, 199, 200, 20)
and their relation to vendors, 190
and their remedy for obscure balance sheet, 205
and their rights governed by company’s Articles, 198
‘ and their voting power, 156
are sleeping partners, 176
must confirm interim dividends, 201
the victims of unimparted knowledge, 207

INDEX 285

SHarr Issvus, 35, 139, 152

SHares—
and bonds, 118
and their break-up value, 110, 146
and their uncertain income, 77
Classification of, 146, 148, 150, 151, 193, 195
compared with bonds, difference between 117
following prior charges, 153 ,
Ordinary, Cases where safe to buy, 35
practically not different from stocks, 116
sometimes safer than Debentures, 153

ona snominations and participation in profits, 191, 193,

which are given away, 113
which are partly paid, 112, 1
SPECre Loans, 128° P , » 158
PECULATING WITH BORR
SER CUTATING ¥ OWED Money, 261
causes fluctuations in stocks, 246
defined, 19, 51, 77, 128, 129, 253, 254, 268
fascinating but dangerous, 262
may be conscious or unconscij
versus investment, 260 meerous, 257, 259
versus reckless gambling, 252, 263
SPECULATOR—
as compared with investor, 246
Spx depends on {Sensational news, 247, 248
CULATORS often
Paces create free market, 240
dealing, 233
market, 234, 235
quotations, 231
quoted “ex div.,”? 230
sales which are forced, 248
ransactions concernin: ivate i
ero valnes 182, 196, 244, 266, 269, Or 728, 265, 260
TOCK 4ND Morreaas V.
Stock Excuaner— emuns compared, 17
and the investor, 228
origin, 223, 224, 295
Tules and customs, 226, 2
settling days, 230° » 227, 229, 233
Stood Pantion fascinating but dangerous, 262
P Artificial, 260, 261
TOCKBROKER’S QUALIFICATIONS, ]
Srock BROKING DEFINED, 223 ” 108, 222

Stockcs—

and shares compared, 116

and their possibilities, 26

and their purchase or sale, 226

and their sale by public auction 242
and their values, 85, 86, 87 ,
fluctuate owing to speculation, 71, 246

19

--- Page 153 ---

290 INDEX

Srooxs (continued)—
have their price-level dependent on public demand, 238
in combination, 27, 34, 37, 68, 69
influenced by national and other conditions, 71, 103, 104,
105
may be registered or bearer, 232
need to be matched, 266
of a local nature, 233
of varying grade, 93
of varying vitality, 47
which are officially quoted, 244
which are undesirable, 32, 34, 279
which earn no dividend, 46
which ought to be sold, 278
Succxss dependent on suitable tactics, 56

TsnpDrrR, New issues subscribed by, 171

Test SHEET for investor’s use, 275, 276

TrapING Tests, 218

Trust CERTIFICATES carry no voting power, 152
Trust-DEEDs and their use, 133

LuRNOVER should be compared with previous years, 215

UnDERWRITERS—

bait, 178

responsibility for fictitious quotations, 173
UNDERWRITING a profitable business, 172

VALUES—
may be realisable or intrinsic, 243, 244, 245
on a fall, 48
VENDORS AND SHAREHOLDERS, 190
VENTURESOMENESS and its uses, 250, 251
VotTine PowErr—
is not carried by trust certificates, 152
of shares, 154, 157
should be regulated by value invested, 193

“Wass Sass,” 177
“ WrattH—
which is annihilated, 11, 13
within every one’s reach, 3
WorkK1nG CaprraL, 159

Yrntp—

considered, 32, 87, 105, 109
influences capital-safety, 339

Printed and bound by Hazell, Watson & Viney, Ld., London and Aylesbury,

Che
Financial Review of Reviews.

MONTHLY, 174 pp.

ONE SHILLING NETT.

Published at 2, WATERLOO PLACE, LONDON, S.W.

Recent Contributors have included:

His Grace the Duke of Argyll, K.G., K.T.,
G.C.M.G.

The Right Hon. Lord Welby, G.C.B.
The Right Hon. Lord Lamington,
G.C.M.G.

The Right Hon. Sir George Reid, K.C.,
GC.M.G.

The Right Hon. The Earl of Dunraven.
The Right Hon. Viscount Midleton.
The Right Hon. The Earl of Kenmare.
Field Marshal The Ear! Roberts, K.G.
The Right Hon. Lord Desborough.
The Ven. Archdeacon Sinclair, D.D.
The Lord Elcho.

Admiral the Hon. Sir Edmund Fremantle,
G.C.B., C.M.G.

The Right Hon. The Viscount Hill.
The Right Hon. the Viscount Helmsley,

Sir Roper Lethbridge, K.C.I.E.

Sir R. Hamilton Lang.

The Right Hon. Thomas Lough, M.P.
Professor Robert Wallace, F.R.S.E.
Sir William Bull, M.P.

Sir R. H. Inglis Palgrave, F.R.S.

Col. The Right Hon. Mark Lockwood,
M.P., C.V.O.

The Right Hon. F. E. Smith, K.C., M.P.
The Right Hon. The Lord Inchcape.
Sir John Randles.

Sir J. Henniker Heaton, Bt.

Alan Burgoyne, M.P.

Norman Angell.

Sir Gilbert Parker, M.P.

Colonel Sir Arthur Boscawen, M.P.

The Hon. Michael H. Hicks-Beach, M.P.

The Right Hon. The Lord Aberconway.

The Hon. W. Pember Reeves.

The Right Hon. Sir T. P. Whittaker, M.P.

Professor Henry Dyer, C.E., M.A.

Felix Cassel, K.C., M.P.

Sir J. Athelstane Baines, C.S.I,

Mrs. Louise Creighton.

Sir Robert Edgcumbe.

Sir John Rolleston, M.P.

The Right Hon. Lord Norton,

George Jamieson, C.M.G.

J. Ramsay Macdonald, M.P.

Sir Edward Sassoon, Bt., M.P.

Professor J. Shield Nicholson, M.Ac.,
D.Se.

Admiral Sir Charles Campbell, K.C.M.G.

Harold Cox.

Sir John Barker, Bt.

Sir Edward Fithian.

Mons. Yves Guyot.

J. A. Hobson, M.A.

J. G. Swift Macne¥l, K.C., M.P.

Sir Westby Brook Perceval, K.C.M.G.

Sir Walter Mieville, K.C.M.G,

Sir Charles W. Macara, Bt.

Sir John Benn.

The Contents of the Review

Written for the private investor and not for the speculator, this journal provides
a complete compendium of investment facts. In addition to its special articles,
it contains each month a tabular record which embraces the life history of over
5,000 recognised securities, including a Digest of the Balance Sheets of all

important companies.

DAILY TELEGRAPH.—‘'For investors and all who would keep their eyes
on the money markets of the world this Review is invaluable.’’

Yearly subscriptions are received at the reduced rate of 10/- for the 12 monthly
parts, post free, -A copy of the current issue will be sent on approval to any

inquirer who is a likely subsoriber.

--- Page 154 ---

Royal 8vo. 528 pp. Price Four Shillings Nett.
THE

Investors’ Four-Shilling
Year Book

PUBLISHED IN NOVEMBER.EACH YEAR.

Contains the History, Salient Particulars, Balance-

Sheet Details, Price Movements, etc., respecting

the Principal Investments quoted on the Stock
Exchanges of the United Kingdom.

Morning Post.
‘A wonderful compilation.”

Evening Standard.
**A valuable ally of the investor."

Spectator.

**An amazing amount of information."

Financier,
“‘A useful and unique book."

Daily Mail.
‘One of the most useful financial reference books ever compiled.”

Financial News.

‘‘A striking testimonial to the skill and enterprise of the Financial
Review of Reviews.

Financial Times.
‘* Comprehensive reference book of information as to the world’s leading
investments,"’

Supplementary to and Published by the

FINANCIAL REVIEW OF REVIEWS,

2, WATERLOO PLACE, LONDON, S.W.

CLOTH, 2/6 Nett, HALF LEATHER, 4/- Nett.
; THE
Investors’ Account Book.

This book is so arranged that it may be kept
up by anyone, whether he possesses any know-
ledge of accountancy or not. It always indicates
at a glance any weaknesses in an Investor’s
holdings. It is arranged to show :—

All Stocks held
Dividends due each month

Cash received and paid out

Geographical Distribution of
Investment

Income tax payable
Total Annual Results

nily Bye i The Financial Hews

** Highly valued in the ** Practically keeps an investor's
financial world.” accounts for him.” ,

PUBLISHED BY

THE FINANCIAL REVIEW OF REVIEWS,

2, WATERLOO PLACE, Lonpon, S.W.

--- Page 155 ---

POPULAR FINANCIAL BOOKLETS

PUBLISHED BY

THE FINANCIAL REVIEW OF REVIEWS,
2, WATERLOO PLACE, LONDON, S.W.

Published at 1d. each, post free 14d., or six booklets, price 6d.
ARGYLE, His Grace the Duke of, P.C., K.T., G.C.M.G., G.C.V.0.

**Canada as a Field for Investment."* Surveys investment prospects in
Canada.

AVEBURY, Right Hon. Lord. ‘The Case for Free Trade.”
Sets forth the defence of Free Traders.

CASSEL, Felix, K.C., M.P. ‘‘The Scandal of Moneylending
‘Banks,’ and a Proposed Remedy.” Gives reasons for supporting the
new Bill introduced in the House of Commons.

COX, Harold. ‘‘The Economics of Strikes.” Discusses the economic
aspect of recent labour troubles.
CURREY, Comm. BE, Hamilton, R.N. ‘* The Investor and the

Navy.”” Shows the need of a big Navy asa business proposition,

DICEY, Edward. ‘The Outlook for Egypt.” Reviews the rise of

Egypt and its investment future.

FOSTER, A. R., and P, TOVEY. ‘The Inside of a Balance |

Sheet.” Shows how a Balance Sheet may deceive the investor.

HEATON, Sir J. Henniker, Bart. ‘The World’s Cables and

the Cable Rings.” Outlines a scheme for penny-a-word telegrams through
out Europe.

, HELMSLEY, Viscount, M.P. “The Payment of Members,”

Deals with the Disadvantages of Paying Members of Parliament,

INVESTMENT CRITIC, The. ** Geographical Distribution:
Some Practical Results,”’ Shows how the Geographical Distribution of
Capital works in practice.

KIMBER, Sir Henry, Bart., M.P. « Investment Interests and
Licensing Legislation.”’ Shows how legislation May press unfairly on the
investor.

“‘The Future of Indian Railway Finance.” Suggests various
readjustments in Indian Railway finance.

LAMINGTON, The Right Hon. the Lord, G.C.M.G., G.C.LE.
‘Investments in India.”? A valuable article on the financial future of
India,

iv.

POPULAR FINANCIAL BOOKLETS.

a

LAW, the fate Sir E. F. G., K.C.M.G. ‘* Scientific Investment.”

The experience of an eminent financier, one of the financial advisers to the
Viceroy of India.

LETHBRIDGE, Sir Roper, K.C.LE. ‘*The Trend of Indian
Investment and Finance,”’ Shows how administrative changes in Indta
will affect investment.

MIDLETON, The Right Hon. Viscount. ‘The New Science of

Investment.’* Supplies a remedy for the losses incurred on “ Silt-edged "
investment.

MIEVILLE, Sir Walter F., K.C.M.G. Egypt as a Field for

the Bona Fide Investor.” Reviews the growth and present position of
Egypt.

PALGRAVE, Sir R. H. Inglis. ‘Banks and Insurance Com.

panies.”” A Reply to Dr. Beattie Crozier’s chapter on Banks in ** First
Principles of Investment."

ROLLESTON, Sir John, M.P, ‘Investments in Real Property.”
Describes the advantages of Mortgage Investments,
‘The Taxation of Land Values.” Proves that land should receive the
Protection of the Government and not be further taxed.

SCHOOLING, John Holt, F.S.s. **World-Trade and the Geo-
graphical Distribution of Capital.” an impartial investigation of the
principles of Geographical Distribution.

SMITH, J. W., F.C.LS. ‘*How to Read a Balance Sheet.”

Explains the method on which a Balance Sheet should be analysed.

SMITH, The Right Hon. F. E., K.C.. M.P., and ERNEST BE,
WILLIAMS, Barrister-at-Law. ‘“'The Custodian Trustee,’ Describes
the functions pertaining to this office and its effect in safeguarding trust funds,

STEVENS, W. J., F.S.S.  “ British Railway Extravagance.”

A practical investigation of the capital expenditure of a typical railway
system.

TAYLOR, Benjamin. **Prospects of Shipping Investments,”

Considers the outlook for shipping companies’ investments.
TOVEY, Philip. ‘‘What is a True Reserve Fund ?” Discusses
in a practical way the artificial and real character of reserve funds.
WELBY, The Right Hon. Lord, G.C.B. **Our ¢ Drifting’ Policy
in Local Finance,” Warns the Government against the over-borrowing by
local bodies.
eee
CROZIER, Dr. J. Beattie. ‘“‘The First Principles of Invest-
ment.’’ Demy 8vo, cloth, 168 pp. 3/6 net.

HOBSON, J. A., M.A. “An Economic Interpretation of Invest~-
ment.”” Demy 8vo, 154 pp. 3/6 net.