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INVESTMENT

PRACTICALLY
CONSIDERED

By the Same Author.

INVESTMENT AN EXACT SCIENCE. | By
Price 2/6. ;
THE INVESTMENT OF TRUST FUNDS. ; HENRY LOWENFELD
ice 2/6. i fay

ALL ABOUT INVESTMENTS, Price 5/-

THE EYAR INVESTOR’S ACCOUNT
BOOK. Price 4/-

PUBLISHED AT
2, WATERLOO Prace, Lonpon, S.W.

PUBLISHED BY
THE FINANCIAL REVIEW OF REVIEWS
2, WATERLOO PLACE, LONDON, S.W
Copyright] [All rights reserves

CREEP ES

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nee 73

Se aan EINE Suimineamanaameeeac cere

. .

BO Sh 26.1912

Introduction

INVESTMENT is a matter requiring deep con-
sideration, whereas only too often the inves-
tor allows himself to be guided by mere
impulse in the disposal of his capital. The
following series of articles from the pen of
Mr. Henry Lowenfeld have already appeared
in the Financial Review of Reviews ; they are
now reprinted in book form in the hope that,
collected, they may assist the investor to
grasp the fact that the science of investment
comprises a series of acts of selection, all of
which require to be carefully weighed if the
combination of securities, which results, is to
take the shape of a perfect list of invest-
ments.

First of all there is the selection of the
type of security best suited to the individual
investor’s requirements; then there is the
selection of suitable localities for investment,

After it has been decided in what class of
Vv

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vi INTRODUCTION

security and in what countries the capital
to be disposed of should be employed, it still
remains to discriminate wisely between the
respective merits of kindred securities.
Above all things it is essential that the
various stocks, of which an Investment
List is composed, should weld one with
another. They must not only harmonize in
their respective widths of fluctuation, but
also in their respective yields of income.
On no account must an attempt be made
to blend stocks, which habitually fluctuate
widely, with stocks of marked stability : and
investments yielding high rates of income

must not be combined with securities which —

afford a comparatively low return.
, Perfect harmony can only be secured by the
judicious selection of a combination of stocks,
similar in income-yield and identical in width
of fluctuation ; but every one of them con-
trolled by a separate set of market influences.
It is the aim of the articles reprinted in
“this book to show how investment harmony
is to be achieved. The reader will find that
the Statistical Record which is published at
the end of each number of the Financial

cde tne eee eat tet

= ise ne rene ermine oA

INTRODUCTION vii

Review of Reviews will supply him with all
the necessary data as to income-yield, width
of fluctuation, trend of price-movement, and
balance-sheet analysis of over 5,000 securities,
So that the investor will be enabled to make
therefrom an intelligent selection of invest-
ments, suitable to his own requirements and
suitable also to blend with one another in an
harmonious scheme of investment.

If he will only follow the directions, which
the originator of the Geographical Distribu-
tion of Capital so clearly lays down in this
symposium of financial essays, the investor
will learn how to house his capital securely
and how to put himself in possession of an
assured income.

THE PUBLISHERS.

2, WatTERLOO Pron,
Lonpon, 8.W.

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Contents

PAGE
INVESTMENT CRAZES . . . . : 1
Tzsts roR Every Invustor’s ReaL Posrrion . 22
How to SEe.ect INVESTMENTS? . . . . 53
How Investment Sarety 1s ATTAINED . . 87
Tue Worup’s Stock MARKETS . . . lil
InvESTMENT KNOWLEDGE . . . . 132
Consots AND NaTIONAL CREDIT . . . 166
Our Unsust Taxation anp Its RemEpy . 17
Waar Incomm sHoutp Investments Yreup? . 237
How tHE British Pusiic INVESTS . . . 260
Money Scares AND THEIR ORIGIN . . . 281
PRoFESSIONAL MEN AS INVESTORS . : . 3809
Tae Money MARKET ARTICLE AND THE PRIVATE

INVESTOR . . . . . . 3832
Tue Investor’s Mind. . . . . 358
Tae Investor’s Derence AGAINST LaBourR’s

ATTACKS UPON CAPITAL . : . . 385
SHAREHOLDERS AND DIRECTORS. . . . 405

Investment Crazes

Or all financial transactions there is none of
more general interest to the investing public
than the manner in which a new market or a
new group of securities suddenly springs into
popularity, and there is no subject into which
it is more difficult for the average investor to
obtain an accurate insight. His knowledge
is usually limited to the fact that he learns
one morning from the financial column of his
daily paper that, when the Stock Exchange
closed, a certain new issue was quoted the
previous day at a substantial premium; and
from that time onwards, for days and weeks,
and, indeed, in the case of a particularly well-
organised “‘ boom,” perhaps even for months
the advertisement columns of the Press will
be crowded with the prospectuses of kindred
ventures, whilst the reigning market sensation
will be the premiums at which this new group
of stocks is being actively dealt in.

1
B

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2 INVESTMENT PRACTICALLY CONSIDERED

Without pausing to consider precisely how
all these activities and all these premiums
have thus miraculously sprung into existence,
the public not unnaturally becomes fascinated
by the prevailing financial topic of the hour,
namely, the buoyancy of the new market and
the sums of money which are being made by
those who are fortunate enough to be inter-
ested therein.

But if the investing public would only stop
to investigate the origin of this seemingly
inexplicable outburst of activity, they would
doubtless be surprised to find that they them-
selves were individually capable of producing
an exactly parallel phenomenon by their own
firesides, with no more complicated a set of
apparatus than a kitten, a cork, and a piece
of string. For just as a kitten is unable to
restrain itself from eagerly jumping in pursuit
of a cork which is steadily drawn away from
it, so the average investor finds himself im-
pelled to jump into a market which is steadily
rising. It matters not to the kitten that past
experience has taught it that the cork is pos-
sessed of no real vitality, any more than it
matters to the investor that bitter experience

SFR RS TRANS MUN ETHRm rre:  rtr—eeea TREAT eR nye

INVESTMENT CRAZES a)

has taught him that these spurts of artificial
activity in a new market are just as devoid
of real life as is the inanimate cork which
fascinates the kitten. In both cases the attrac-
tive force is motion—motion which to the
unreasoning observer bears a certain resem-
blance to life.

Now the real explanation of this sudden
simultaneous production of a number of brand
new ventures of kindred character lies in the
fact that the various Houses of Issue, which
are responsible for the flotation of new joint-
stock companies, all have a multitude of
schemes in all parts of the world, pigeon-

holed and waiting for the capricious Public

to display a marked interest in any one of

_ them. When the investor has a fancy for

tramways, it would be useless for the company-
promoter to tempt him with a brewery and
vice-versa. Therefore when one tramway
scheme has been seized upon by the public
with avidity, forthwith a succession of tram-
way issues are unearthed from the obscurity
of the pigeon-holes, in which they have been

-Yeposing, and are given forth to the world.
Amongst this mass of flotations there are

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4 INVESTMENT PRACTICALLY CONSIDERED

naturally schemes good, bad, and indifferent,
companies of proved dividend-earning capa-
city, and crude, immature concerns of doubt-
ful prospects.. The whole situation, more-
over, is still further obscured by each House
of Issue lending a certain amount of market
support to its own offspring ; in the language
of Throgmorton Street every man is busily
thwacking his own donkey, and amidst the
consequent dust and uproar which ensues,
the general public can be little surprised if it
fails to display the very keen amount of
discrimination which is requisite in such a
case.

But the engineered advance in quotations
having accomplished its purpose, and the
investor having been induced to ally his for-
tune for better or for worse with that of the
new market, there forthwith ensues what the
average financial journalist, who is a man of
set phrases, so dearly loves to term a “‘ healthy
reaction.” And naturally enough the reced-
ing tide leaves the genuine investor stranded
high and dry with his new purchase or pur-
chases. Then follows a dreary period of
‘suspense, accompanied by a further shrink-

- INVESTMENT CRAZES 5

age in values, until the unpleasant conviction
begins to steal over the erstwhile over-eager
buyer that there is no immediate probability
of the glowing prospectus promises being
realised. .

At this point, too, the speculator, who is
carrying large masses of the new stuff on loan,
finds that his banker is beginning to display a
certain amount of uneasiness, and it is made
abundantly clear to him that his loans will be
closed down upon him, unless, of course, he
should happen to be of sufficient wealth to
entitle him to practically unlimited credit.
Thus one weak speculator is compelled to
liquidate his holding, with such disastrous
effect upon the market that other weak
speculators are in turn forced to liquidate
theirs ; so that there ensues, to quote another
picturesque Throgmorton Street idiom,
‘“‘such a getting downstairs’’ as altogether
eclipses in rapidity even the suddenness of
the original rise.

During the progress of the slump the doubt-
ful ventures die a natural death, and only the
sound ones survive to participate in another
** boom,” perhaps, when the investment craze

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6 INVESTMENT PRACTICALLY CONSIDERED

once more takes the market in hand again,
after it has been purged by a lengthy period
of liquidation. This new boom follows pre-
cisely in the footsteps of the first, and again
leaves the market to a lengthy period of repen-
tance. .

Amongst recent investment crazes have
been : —

Sout American INVESTMENTS.
ENTERPRISES IN Eqyprt.
Motors AND Moror-Buszs.
ELEoTRIC TRACTION VENTURES,

For the purpose of the present argument
I will group the two first and the two last
together, as, though united by the common
bond of all being fashionable, the two former
widely differ in their main essentials from the
two latter. —

The first group bases its claims to recog-
nition upon new developments in specific
countries, whilst the second owes its popu-
larity to the development of new industries
which are universal to the whole globe. Now,
obviously, an enterprise dependent upon the
development of tracts of country affords far

0 en: Ae MOMS pene ERI fn ete mene ment eee

INVESTMENT CRAZES © 7

greater stability than an enterprise secured
upon the prosperity of a particular industry.
Because new inventions and individual indus-
tries are always liable to be superseded by
some fresh discovery or social movement, as
the electric tramcar has practically killed the
horse-drawn tram, as the motor has cut into
the bicycle trade, and as the Temperance
Movement has checked the prosperity of the
Brewing Industry. On the other hand, no
new craze, invention, or social development
can injure the industrial progress of a par-
ticular part of the globe.

_ When a new country has once made a start
upwards, though its prosperity may be checked
by a. period of lean years, yet its progress
cannot be altogether arrested. Hence an
investment based upon the development of
a country hasa much more solid foundation
than an investment based upon a specific
trade or an individual industry.

The recent financial developments of the
South American Railway stocks are typical
of the present investment craze for South
American securities of all kinds. For the
purpose of illustration I will take the Buenos

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8 INVESTMENT PRACTICALLY CONSIDERED ~

Ayres and Rosario Railway, one of the greatest
and most important of the South American
Railway group. This company was incor-
porated in 1873. It would serve no useful
purpose to trace its early history, so I will
commence with the year 1886, when its
Ordinary stock rose from 114 to about 160
on the prospect that its dividends would
increase from 6 to 8 per cent. This expecta-
tion was fully realised ; the dividend rose to
9 per cent. and the price of the stock touched
1853, its highest record in the year 1889.
At that price the stock yielded slightly under
5 per cent., and the then craze had it that the
stock was bound to rise considerably higher.

However, the Baring crisis, which took
place in the following year, summarily checked
Argentina’s borrowing power and led to a
period of financial conservatism, during which
it became evident that much of the country’s
past prosperity had depended upon the con-
stant influx of fresh European capital. Dur-
ing this time the dividends of the Buenos
Ayres and Rosario Railway ceased entirely,
and the price of the Ordinary stock dropped
from. 185} in 1889 to 45—or just one quarter

om,

ares

ORM LNT LTTE TT Ee

INVESTMENT CRAZES 9

of its former figure—in 1893. Dividend pay-
ments were resumed in 1894, and, after linger-
ing between 14 and 4 per cent., they gradually
rose again to 6 per cent. for 1904, the price of
the stock improving to 117.

Clearly, then, a stock with such a past history
as this is entirely unsuited to a steady-going
investor. It should be the aim of the investor
to consider nothing but the safety of his capital
and the income-yield which it affords him.
Whenever he finds that he can obtain greater
safety and a better income by changing from
one security to another, he ought certainly
so to change with the view of improving his
Income and building up his Capital Account.

An investment craze, no matter how strong,
only lasts for a time, and, after a large rise in
prices above the normal level, a reaction is
sure to follow. This has been emphatically
demonstrated by the dwindle of prices in the
British Railway Market of recent years, and
we are quite certain to witness a similar re-

action in South American securities. To

the speculator an investment craze does offer

-undoubted opportunities of which he may

avail himself so far as he deems it to be pru-

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10 INVESTMENT PRACTICALLY CONSIDERED

dent ; but for the investor the investment craze
is apt to prove a dangerous trap, which it is
easier to walk into than to walk out of. It
should be the object of the investor to improve
his capital position and his income when-
ever he can do so by realising an unduly
inflated stock ; this he can do in the present
' instance, and a cursory survey of an invest-
ment list will reveal many opportunities offer-
‘ing to the prudent holder of South Americans
if he will only take advantage of the present
craze to turn his paper profits into actual
cash.

The case of the present ‘‘ boom ” in Egyptian
securities differs from that in South Americans
chiefly as to the knowledge we possess of
Egypt as a field of investment. Egypt has
only recently come to the front; therefore,
as to the probability of Egyptian investments
possessing any ultimate stability we have
little to guide us. History does, however,
serve to show that the original pioneers are
but rarely those who reap the ultimate profit.
When developing a new territory many mis-
takes are inevitable, so that it naturally
follows that, for a time, Egyptian invest-

INVESTMENT CRAZES 11

ments were all strongly tinged with the taint

of speculation. The speculative element, of
course, entered least into that class of invest-
ments which appertains to the nature of
mortgages. A sound well-secured mortgage
debenture, yielding a substantial rate of
interest to compensate for the risk incurred,
should prove the least dangerous type of
Egyptian investments. But more speculative
stocks and ordinary capital issues should be
eschewed by all who aim at solid investment.

_ Having now treated of investment crazes

in new countries, and having explained how

they should be regarded by investors, let us

next consider booms in the development of

individual trades, like motors and motor-

buses and electric traction. Here I should
like to veto at once every investment in’
motors and. motor-buses, no matter whether
Debentures, Preference or Ordinary shares,
We are in this case dealing with an entirely

untried industry. There is not the slightest

doubt that the motor has come to stay, but

whether it is the motor as at present manu-

factured, or not, is a question of grave doubt.

I should like to advise every investor to closely

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12 INVESTMENT PRACTICALLY CONSIDERED

watch the development of motors and motor-
buses. They pass him daily in the street,
so that he can obtain a cheap, instructive,
and practical lesson as to the way an investor
should look upon this and every other boom
which concerns itself with any fashions and
new inventions.

He will see a bus or a motor which will please
him vastly ; let him take careful note of the
particular make which strikes his fancy, and
he will most likely find that in the short space
of two or three years that very same motor
which he looked upon as almost perfection
has already dropped out into the ranks of the
obsolete. Every time that he witnesses such
a development, let him remember that in all
probability some patent right, which was
originally acquired for tens of thousands of
pounds, has become valueless, or that some
firm or company which did not understand
how to adapt itself to altered circumstances
has been brought to the verge of bankruptcy.

There is but little to be gained by entering
the ranks of the pioneer investors in a new
industry, whilst there is everything to be lost
by so doing.

ta sae ennangeagtetinne ip ep meree,

INVESTMENT CRAZES 13

Perhaps one of the most successful patents
in connection with motors was the Dunlop
pneumatic tyre. Yet the Hight per Cent.
Cumulative Ordinary shares of this company
are now purchasable at a discount of about
twenty per cent. The patentee has no
doubt made a fortune out of his invention
but the shareholders also have quite evident]
lost one. Yet the Dunlop tyre was ‘quite
remarkable success, A glance at the Birming-
ham Stock and Share List, giving the quota-
tions of all the cycle companies—a craze of
a few years ago—clearly illustrates what is
likely to happen to motor investments of the
present day.

Here, both investors and speculators are
equally likely to lose, so that the finding of
capital for motors and motor-bus concerns
ought to be left to the trade and to those
investors who are practical engineers and are
following the entire movement with the
closest. attention.

The last craze which I propose to discuss
here is that of Electric Traction. This ig by
no means a new industry, but one that has

already established itself so strongly as to

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14 INVESTMENT PRACTICALLY CONSIDERED

have become a veritable danger to some of
isting railway systems.
eoctri traction was first introduced about
eighteen years ago, and has, during that time,
so thoroughly established itself that it can
be safely assumed that new inventions or
developments are not likely materially to
affect this industry. As a matter of fact we
are de@ling here with a thoroughly tried and
successful form of enterprise. The pioneers
of the Electric Traction movement have lost
money, no doubt, but the present investor
is in a position to profit by these losses. For
these reasons this craze has now reached a
point when it may be said to have justified
present current prices, if not the boom prices of
earlier days. Electric trams have opened up
new districts which were formerly inaccessible.
They are also very popular for pleasure traffic
on account of the speed of which they a
capable, and of the ease and comfort wit
ich they run.

wt is «significant fact that few of the
recently established electric railways and mn
ways but have already entered the list o
dividend-payers, whilst some of them. are

INVESTMENT CRAZES 15

most signal successes, and it is particularly
noticeable that in hot countries they do
extremely well,

But, here again, the investor should be
cautious in hig selection, and he should not
purchase any stock of an Electric Railway
which does not return to him a fair amount
of yield in comparison with the risks which he
runs. .

During the present craze many investors
seem to have lost sight of this important
point, and there are even now a great many
instances in which the prices, at which Electric
Tramway and Electric Railway stocks are
selling, cannot well be justified by their pros-
pects.

Let us take, for example, the £5 fully-paid
Ordinary shares of the Anglo-Argentine Tram-
way, which used to sell at about par three
years ago, and are now selling at £8 15s. a
share. It is true that the dividends on these
shares have risen from 6 to8 per cent., yet
on an 8 per cent. basis they only yield at the
present price about 4% per cent. This is an
instance which clearly shows how far a
temporary craze for any particular class of

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16 INVESTMENT PRACTICALLY CONSIDERED

investment tends to upset the investor’s

judgment.

It is quite true that the Anglo-Argentine —

Tramways Co. own a very fine system ; it is
also true that with very careful management
the dividends might yet be increased.
However, in my opinion, no investor should
hold a Tramway Ordinary share which does
not return him a minimum rate of over 5 per
cent. on the selling price of his stock.

It is only by ascertaining whether the
stock under consideration is really the safest,
cheapest, and most remunerative that its
desirability to the investor can be proved.

Now, how can the present selling price
of Anglo-Argentine Trams be justified when
this investment is compared with other invest-
ments of a similar class ; taking, for example,
the First Mortgage Gold Bonds of well
established American electric railways.

Many first class Electric Railway Deben-
tures yield 5 per cent., and it,.of course,
naturally follows that the yield on Ordinary
stocks of this class of enterprise ought to be
at least 5} to 53 percent. How, therefore,

can the present price of Anglo-Argentine

INVESTMENT CRAZES IT

Tramway Ordinary shares, yielding 4} per
cent., be in any way justified—or, why should
the Four-and-a-Half per Cent. Debenture of
the British Columbia Electric Railway and
many other Debentures of this class be selling
at 105? On Second Mortgage Debentures a
still larger yield is procurable. I know of
several instances where as much as 6 per cent.
is obtainable with comparative safety on this
class of stock.

It is these comparisons which’ fix the price
at which stocks ought to sell, but during the
time of crazes, investors, for some unaccount-
able reason, seem to forget to make these
comparisons, and only find out, after they have
made their purchases, and when the excite-
ment of the craze is over, that they ought
to have done much better for themselves.

Investors should keep constantly in their
minds the fact that investing crazes do not
come about spontaneously, but that, usually,
they areengineered by some groupof interested

_ parties. As it is the business of newspapers to

record the latest news, and to discuss those

sections of the market which are attracting

the greatest amount of public attention, it
0

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18 INVESTMENT PRACTICALLY CONSIDERED

follows that when an investment craze once
is set going it is like a snowball, which gradu-
ally, by the very fact of motion, finally attains
to enormous dimensions.

There are times when every investment
broker throughout the length and breadth of
the land has the same class of stock in his mind,
and naturally, therefore, reflects his state of
mind upon that of his client.

For these reasons anomalies like the above
cited examples come about, much to the
detriment of those investors who simply
purchase such stocks as have been brought
principally to their notice through an invest-
ment craze. They fail to consider at the time
of purchase whether they might do much
better in another, but similar, security.

Another point of the gravest moment is
overlooked during periods of financial excite-
ment, viz., whether the particular security
selected happens to fit into the investment
scheme of its purchaser. I have, in Invest-
ment An Exact Science,1 drawn attention to a
fact which did not seem to have been well

1 Investment an Exact Science, Demy 8vo, 2s. 6d.,
2, Waterloo Place, S.W.

INVESTMENT CRAZES 19

understood previously by investors, that a
badly assorted list of intrinsically sound and
perfectly safe investments may give most
unsatisfactory results, and that it is only by
working on a proper system of investment
averages that the Capital Stability and
Income Safety can be attained. As my
book is already in the hands of the public,
I will not enlarge upon this point beyond

simply mentioning that one of the greatest

levils of investment crazes is, that investors
lon such occasions are apt to lose sight
entirely of the indispensable necessity of a
proper distribution of investments if Capital
Safety is to be maintained.

On the whole, my long and very varied
experience amongst investors has proved to
me that a calm and judicial selection of invest-
ments is the only way in which investment suc-
cess isto beachieved. All crazes or temporary
excitements warp the judgment of investors—
they are, therefore, pernicious in their general
effect. If there were any particular advan-
tage to be gained by following a craze, I should
certainly counsel investors to watch, study
and profit by these erratic temporary move-

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20 INVESTMENT PRACTICALLY CONSIDERED

ments, but as, on the contrary, the not well-
advertised and neglected stocks invariably
offer better investment opportunities than
those which are in everybody’s mouth, the
fashionable stocks of the moment should
always be purchased with caution.

Crazes should be left entirely to those who
are desirous of losing money. The solid
investor should rather confine himself to
stocks which, although not particularly pro-
minent at the moment, offer a solid invest-
ment opportunity.

There has been countless money lost
through crazes in the past. The list of
Brewery and Distillery stocks presents the
appearance of a great battlefield piled high
with corpses and strewn with the shattered
remains of numberless victims crippled for
life. The Brewery craze was a craze indeed,
and stocks like Allsopps, which at one time
sold at 150, are now procurable at about
one-fifth of that figure. If anyone should
ask who profited by this craze, the only
possible answer would be—the Brewers, who
sold their properties at high prices, and the
Promoters who brought out the concerns.

INVESTMENT CRAZES 21

Precious little profit found its way into the
pockets of investors, and such small profits
as were made by the fortunate few did not
represent a tithe of the investment capital
which was swallowed up in the subsequent
collapse.

Just as with the Brewery craze, so with
almost every one of the innumerable financial
crazes which have taken place during the last
quarter of a century.

It is true that even during a craze some-
times a really sound investment can be
picked up cheaply. But cases of this sort

- are only exceptional, and investors will, as

a rule, do infinitely better by studying a
table of prices, yields, and past records of
stocks, than by allowing themselves to be
swayed by a passing market delirium.

--- Page 15 ---

Tests for Every Investor’s Real
Position

As there are but few investors who are capable
of readily enumerating the factors which con-
stitute the soundness of an investment posi-
tion when considered as a whole, the purpose
of the present article is to set forth these
factors in detail. Not only so, but also to
explain how each individual investor can
test the conjoint value and solidity of the
stocks which he holds.

Investors employ their Capital with the
intention either of deriving an income there-
from, or else of augmenting the capital sum
of which they are possessed. The larger the
Capital which is employed, the greater is
the expectation of Income or the larger is the
prospect of Capital enhancement. Conse-
quently, it is the reasonable desire of the
investor to keep his Capital fully employed

and. to reduce his idle, and therefore unpro-
22

¥

TESTS FOR REAL POSITION 23

ductive, cash to the minimum. But as none
of us knows what the morrow may bring
forth, and as all of us are liable to be called
upon suddenly to furnish an unexpected sum
of money, there is no investor who may not
be confronted by the necessity of realising
some portion of his invested capital. For
this reason one of the chief factors of a sound
investment position is the ability to convert
into cash at any time without loss some por-
tion at least of the stocks held. It is easy
to ascertain whether ready realisation with-
out loss is a constant characteristic of any
given investment position by comparing the
original prices paid for the stocks held with
the prices which have ruled during the. last
few years. By this means it can be rapidly
seen what proportion of the invested capital
could have been turned into cash either
without loss or at a profit on the original pur-
chase. : :

‘If an investment position is to be held to
answer this test satisfactorily it is requisite
that a quarter or a third of the stocks should
have shown themselves capable of realisation
without loss in each year during which the

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_ 94 INVESTMENT PRACTICALLY CONSIDERED

Investment List has existed. Whenever, how-
ever, the fact is revealed that any less quan-
tity than one quarter of the stocks held were
saleable without loss, then the investor must
accept this as conclusive proof that his in-
vestment position is calculated to involve
him in loss.

Nothing is more productive of disaster
than attempting to explain away an estab-
lished fact. It is highly dangerous for an
investor to attribute to exceptional circum-
stances the failure of his own Investment
List to pass the realisation test in any par-
ticular year. A sound investment position
displays its soundness under the most adverse
circumstances. It is folly to attempt to con-
ceal the exposed weakness of an Investment
List behind such transparent screens as the
after-effects of the South African war, the
financial crisis in the United States, or any
other upheaval of Stock Exchange values.
Rather than bandage his eyes with such

plausible excuses, the investor would do.

better to look the fact squarely in the face
that an investment position which has once
broken down under the realisation test_is’an

TESTS FOR REAL POSITION 25

investment position which is unworthy to
have any further confidence placed in it.
As it is by no means difficult to construct an
Investment List which will always enable
its owner to realise one-fourth of his capital
without loss, why should not all investors
avail themselves of this sound investment
method ?

It is possible that some few investors may
be found to assert that the matter of realisa-

tion without loss does not concern them

personally. They may perhaps believe that
they will never have occasion to disturb
their invested capital. It is only fair to
admit, this view of investment is supported |
by eminent financial authority; for Pro-
fessor S. J. Chapman, in his able article on
“* Applied Geographical Distribution,” which
appeared in the Financial Review of Reviews
for November, 1908, stated: ‘ Ifa person is
investing with a view to secure income, and
does not want the trouble of changing his
investments, the only risks that he need con- -
sider are those which affect the income from
investments.” It would almost appear, how-
ever, as if the learned writer, in penning

--- Page 17 ---

26 INVESTMENT PRACTICALLY CONSIDERED

this sentence, had overlooked the fact that
the most independent of investors are at
times constrained to break through their
habitual immobility and to raise money in an
emergency. It may be that some dear rela-
tive is suddenly placed in a position of dire
need. or that a fire occurs, which is not fully
covered by insurance, or a thousand-and-one
unanticipated demands may force an in-
vestor to realise a portion of his invest-
ments in spite of himself and contrary to his
preconceived investment programme. An in-
vestor who merely concerned himself with
the regularity of his interest payments could
not find a more ideal security than Consols.
Yet what isthe position of a holder of Gos-
chens if forced into a reluctant realisation at
the present current quotation ? On the sale
of this gilt-edged stock he would stand to
lose from 5 to 25 per cent. of his invested
capital. Can it be prudent for an investor
to expose himself to so crippling a disaster,
when with a proper system of investment
the risk of such a catastrophe can be alto-
gether obviated ?

The second test of a sound investment

_
bo

TESTS FOR REAL POSITION 27

position is whether the total realisable value
of all the investments held has varied con-
siderably from year to year. The question
of a variation in the total realisable value of
an Investment List is of secondary impor-
tance from a practical point of view, because
only under the rarest circumstances is an
investor suddenly compelled to realise the
whole of his stocks. But, as a test of the
soundness of an investment position, the
fluctuations displayed in the total realisable
value of the stocks held affords a most trust-
worthy guide. Now, the object of an in-
vestor holding several stocks, rather than en-
trusting the whole of his capital to a single
security, is to distribute the risk of the in-
vestment. It is the idea of an investor, who
holds various stocks, to arrive at a position
where the misfortunes which may overtake
some of his stocks may be counterbalanced
by the increased prosperity of other stocks.
Such an investor places his original capital
on one side of the scale, and his aim is that the
total realisable value of his various stocks,
when placed on the other side of the scale,
shall always exhibit equilibrium with the

--- Page 18 ---

98 INVESTMENT PRACTICALLY CONSIDERED

sum he laid out in their purchase 3 or, better
still, he hopes that the total realisable value
of his investments shall outweigh their total
cost price. But if he fails to establish a
an equilibrium by distributing his cap
amongst several stocks he has not nan
his object. He might, indeed, have save
himself the trouble of selecting a variety of
stock, and he may have obtained no worse
a result by investing his whole capital in one
ck. - .
eo that we see that the total annual value
at any single year’s average prices is the ‘one
in the investor’s scale, which indicates wit.
what measure of success he has distributed
his investment risks. It need not and cannot
be expected that an absolute equilibrium
will be maintained. Some variation is bound
to occur in the total value of the best assorted
Investment List. But whenever it is found
that the total capital value has diminished by
as much as one-tenth or more, then it is proof
positive that there is something seriously
amiss with one or more of the items which go
to make up the investor’s combined holding.
This test is therefore valuable, and it is easy

TESTS FOR REAL POSITION 29

of application. It is only requisite to obtain
the average prices of ten years ago, of five
years ago, and those of each of the last three
years immediately preceding the date of the
investigation. Then, having multiplied the
quantity of each stock by these several prices
and put down the results obtained in separate
columns for the convenience of addition, it
is easy to compare the. respective totals of
the five years with one another, and also to
detect which individual stocks have been
responsible for the discrepancy which has
occurred. Any reader who has not a table
of previous quotations conveniently at hand
should submit his Investment List to some-
one who habitually carries out such statistical
investigations, and he will experiénce no
difficulty in getting such a table of compari-
son drawn up for him.

But when an investor has in this fashion
applied to his Investment List the only true
test as to the proper distribution of the risks
to which his investment position is subject,
he must accept the result as constituting
either the commendation or the condemna-
tion of his investment scheme. He must not

--- Page 19 ---

30 INVESTMENT PRACTICALLY CONSIDERED

quibble about exceptional times having pro-
duced exceptional fluctuation; because no
properly distributed Investment List varies
very greatly in value year after year. In-
vestments can be so selected that their com-
bined value remains fairly stable; so soon,
therefore, as pronounced instability of value
begins to be apparent the investor must bestir
himself to uproot the cause of the mischief.
The third test of a sound investment
position is regularity of income. Now, in-
come can be rendered absolutely stationary
by exclusively holding stocks which produce
a fixed income, or else it can be endowed.
with stability by so selecting stocks which
vary in income that a decrease in the
dividends paid on some stocks may be com-
pensated by increased dividends from others.
How imperfect an investor’s system of book-
keeping may be, but few neglect to take
some note of the amount of annual income
which they receive. Those, however, who
take no record even of this important item,
can supply the deficiency from various statis-
tical publications, or they can appeal to some
investment authority to furnish them with

TESTS FOR REAL POSITION 31

the Tequired information. The sum-total of
dividends received should vary but itt
from year to year, and, should this not rove
to be the case, then the investor is in 0

session of incontestable evidence that ‘th
quality of the stocks which he holds hag ;
been harmoniously adjusted. It matters not
whether his Income tends to display a ju -

ness or whether it tapers off in a decline
for both these symptoms indicate a want of
counterpoise in the investment position. ,

The chief tests, then, of a sound investment
position are as follows :—

(1) Ability to realise some considerable
portion of the invested Capital at
any time without loss.

(2) The maintenance of the total realis-
able value of all the securities held
at a fairly permanent level.

(3) Regularity of Income, which is an

ndication that the various stocks
held have been properly selected.

Further, it has been briefly explained how

_ every investor can apply these three tests to

his own investment position. Lastly, it has

--- Page 20 ---

32 INVESTMENT PRACTICALLY CONSIDERED

been emphatically insisted upon _ Pant
investor, who finds that his own ho ne
fail to pass these three tests satisfactorily,
a e ° .
stands in a position of considerable aan
ment danger, and that it is highly a ind
‘souise this danger benim
to attempt to disguise
such a plea as the unusually nervous on
iti &c. But lest it may
dition of markets, ; he
id 4 tate of perfection as
said that such a § m 28
i is unattainable in reality,
been outlined above 1s : ate
i ill be given that a p
ractical proof will giv ,
investment position is within reach of every
°- ° .
wk certain amount of suspicion must alway
attach to any expert who has x. nae
inst future disaste
how safeguards agains Me ve
nce to pastevents. in
work by a reference steven
case there is a natural disposition to won
whether certain exceptional events are no
being unfairly pressed into the service in
order to prove that a mer —
occurrence establishes a general ru ° °
general is this feeling that the jibe that figur ‘
can be made to prove anything has eine
o a conversational commonplace. i

ely accidental

int

being the general mental attitude towards

TESTS FOR REAL POSITION 33

the statistician, the present writer, in order to
avoid the slightest hint of suspicion, has
_ Selected as his illustration a List of Invest-
ments which appeared in print so long ago as
October, 1904, as typical of an ideal invest-
ment position. This Investment List was
published in 1904 in a small pamphlet, en-
titled How to Protect Capital, a handbook
which enjoyed considerable popularity and
passed through several editions. It is, there-
fore, just possible that the reader may have a
copy in his possession. In any case a copy
can be inspected either at the British Museum
or at the office of the publishers of this book.
The table of stocks to which reference is here
made faces page 40 of the pamphlet, and it is
headed “International Investment Scheme
Yielding 43 per cent.” The pamphlet itself
is rendered additionally interesting by the
fact that it was the first publication in which

_ the Geographical Distribution of Capital was

discussed from a practical standpoint.

Chart I., which faces this page, presents
in black print on its right-hand side an
exact reproduction of the table of securi-
ties as it was published in 1904, and the

D

--- Page 21 ---

34 INVESTMENT PRACTICALLY CONSIDERED

additional figures in red ink show the annual
average prices of the same securities brought
up to the present date. In 1904 the science
of the Geographical Distribution of Capital
was not sufficiently advanced for the idea to
have been perfected of illustrating its effects
by displaying lines of price movement in
chart form. This method of ocular demon-
stration has now been added on the left-hand
side of Chart I. In this connection it must
be explained that since 1904 a large number
of financial experts have been incessantly at
work perfecting the practical application of
the Geographical Distribution of Capital to
the every day needs of investors. The result
of these systematic researches has been to
reveal some flaws in the selection of the
stocks displayed in Chart I. For example, it
is now recognised that in devoting double the
quantity of Capital to investment in British
stocks—namely, £992 to Great Western Rail-
way Ordinary stock and £940 to Bass Mort-
gage Debenture—too large a proportion of
the total capital sum was staked upon the
continued trading prosperity of one country.
Next, the important financial division of

906
feo noo _ “Te =
nett

ED IN RED, BRINGING THIS SCHEME UP TO DATE.

CHART 1.

VALUE AT AVERAGE PRICE FOR YEAR IN £ STERLING

: 1 18) 189. 1899 900 | 901 | 1902 | 1005 | Oe 5 [ re06 | 2907 |
5 896 97 8 1 9 90 OG

£ é € £ £ £ £ £ £ =
1039 | 1036/ 1024/1007 922 Bae 844 | S10 | 750
foe re - °
Geek el Geen

2

‘6; 1016/1001! 998] 978 964

: | a nn wef _ “a .
| | ” on mo ~ a

[seo ose zo fossa fase fy oat

% (n of thie Table as published In 1904;
the date of Publication,

: the additions in red Indicate the price movement subsequent to
‘dint i
4. 0 32 % Rentes nett, instead of 5 94—now mot subject to 20 9% Italian tax.

duced without permission.

--- Page 22 ---

CHART I.

REPRINT OF AN INTERNATIONAL (INVESTMENT SGHEME YIELDING 43

CHART SHOWING MOVEMENT OF VALUE,

[i [ioe [iow [ies [wos |
| ar A SRR
eS He
t—+-+4

G1) arent Western Railway

£600 nom. valus

Fes [ror [om |

193 | 1894 | 1895

1896

1039

2) Bars, Ratcliffe 43

Mge. Debs. ..

£600 nom. value

(8) New Brunswick 5%

Ist Mge. Debs.

£1000 nom, value

of
70

Swedish Cent, Raitway
4% Debs, .. one

£1000 nom. value

Italian 5% Rentes ...

£1000 nom. value

@) Bengal Presidency 5%
Tst Mge. Debs.

£15000 nom. value

@ Natal 44%

£1000 nom. value

@) Denver & Rio Grande
Railway 5% Bds. ..

$5000 nom value

(Q) Argentine 5% 1886-7

£1000 nom value

£
992 | 955
940 | 946

a lo
om
role ao :

+ | 1120 [1087
“a “

Direct U.S. Cable Ordy.

100 shares nom. value

NOTE.—The dets In the zig-zag tines indicate to price at which each Stock was saleable in each year at that year's average price,

Ff | o07 e202 |

841

859

916

1190] 1217

% WHICH WAS PUBLISHED IN 1904, WITH PRICES SINCE 1904 PRINTED IN REO, BRINGING THIS SCHEME UP TO DATE.

REALISABLE VALUE AT AVERAGE PRICE FOR YEAR IN £ STERLING

ws [|

(2

1007] 922 | 840

CHART I.

IHEOME.

vr [oe [os [oe [ome [oe]
3 £

835 | 824

wo
9

1070

1070 | 1082 aide

1219

978 | 964

944 | 942

£ £ £
844 | 810
929 | 896

35,
O68
60

71
72

rar

1210 | 1182

916

ooo fons ooze ote one oi

NOTE.—The prices printed In black are an exact reproduction of thie Table as published In 1904; the additions In rod Indicate the price movement subsequent to

the date of publication. |
* In December. 1906, converted into 33 9 Rentes nett, instead of 5 94—now sof subject to 20 9% Italian tax,

The above chart is the copyright of the Publishers of the Financtat, Review or Reviews, and may not be reproduced without permission.

ec

meee Eb
Soecad
PF

1185| 1185 | 1180 |1050

1170] 1180
fm 1002| 960

992

1020

1085 {1082

me i 105511040] 50

1040] 50

1000

e

[To face p. 34.

--- Page 23 ---

TESTS FOR REAL POSITION 35

Central America was altogether omitted from
this early Investment List. Again, Natal
4> per cent. is treated as an African security ;
but, owing to the fact that this stock is entirely
~ held in England, the investment demand
' which controls its fluctuations depends en-
tirely upon the state of British trade. Conse-
quently, Natal 44 per cent. moves in perfect
sympathy with the London market, and it is
an African security in name alone. Further,
the selection made in 1904 would now be
condemned as faulty owing to the securities
failing to harmonise with one another in
quality and.in their width of fluctuation.
To-day it is more clearly appreciated that
the Great Western Railway Ordinary and
Direct United States Cable Ordinary cannot
be correctly blended with Government Loans
and with Railway and Industrial Debenture

. stocks. Yet in spite of these imperfections

the general principle of the Geographical
Dittribution of Capital is so sound that the
Investment List, although it was capable of
improvement in some details, adhered suffi-
» ciently closely to the broad principles of
scientific investment to successfully with-

--- Page 24 ---

36 INVESTMENT PRACTICALLY CONSIDERED

stand the test of time and the exceptional
events which have marked the period which
it covers. For, when surveying the stability
exhibited by each year’s total of realisable
value at the foot of the table, it is not unprofit-
able to remember that the period under re-
view witnessed the Spanish-American War,
the South African War, the Russo-Japanese
War, the French expedition to Morocco, the
accession to political power of the Socialistic
Labour Party in England, the Money Panic in
the United States, a series of small banking
and commercial failures in Germany, all of
which events were punctuated by a succes-
sion of world-stirring and panic-provoking
speeches by the German Emperor. Briefly,
the chart covers a period of untoward events,
throughout which it displays remarkable
stability and finally emerges scatheless from
a series of peculiarly trying ordeals.

This being the unbroken success which this

investment position achieved, it will now be —

of interest to examine how far it was capable
of satisfying the three investment tests formu-
lated earlier in this chapter.

TESTS FOR REAL POSITION ' 387

Test I,

ABILITY TO REALISE somrE CONSIDERABLE
Portion or THE INVESTED CaPITaL At
ANY Timi WITHOUT Loss,

The list depicted on Chart I. can be tested
on this point first of all by assuming that the
stocks were purchased in 1890, and com-
paring the values then ruling with the average

values of subsequent years. Next, by assum.
ing that the purchase was made in any sub-
sequent year, and again comparing the values
displayed in that year with the average
values of the following years, °
As such a comparison would entail the
making of 164 separate calculations, the cal-
culations have been worked out for the reader
and the results thus obtained have been
embodied in Chart II., which teaches several
valuable lessons. In this chart the lines separa-
ting different years are drawn vertically and
the lines displaying the profits are made to
run horizontally. As each stock might have
been purchased in any of the eighteen years
depicted, there is a separate line tracing the
result of each of these eighteen possible

--- Page 25 ---

38 INVESTMENT PRACTICALLY CONSIDERED

purchases. These lines of purchase start at
the bottom of the chart, and each one of
them is intercepted annually by a ring; in
the centre of these rings are numbers which
specify how many of the ten stocks were
saleable without loss during that particular
year. The position of each ring indicates
the amount of profit which could have been
realised if the number of stocks enclosed in
the ring had been sold. Thus, for example,
the purchase line for 1897 has its ring for 1902
in the position of £450 profit, and the figure
enclosed in the ring is 4, which indicates
that the purchaser of these ten stocks for
£10,153 in 1897 would have been able to
realise roughly 4-l0ths of his capital in 1902
at £450 profit.

It will be seen that there is not a single
year during which a sufficient quantity of
the capital was not realisable at a profit, no
matter in which year the stocks had been
bought. As might have been expected, owing
to the fact that a Geographically Distributed
Investment List requires a few years before
it comes to maturity, the purchases made in
1906 and 1907 display the least favourable

--- Page 26 ---

SHART Il. CHART SHEWING THE NUMBER OF STOCKS IN THE INTERNATIONAL INVESTMENT SCHEME, YIELOING 42%, WHICH WERE SALEABLE AT A PROFIT YEAR BY YEAR CHART II.

Pyofit £1550

» £1400

a
a
vill
6
©)

LN
@
i
A
©|

(XC) .
el
Haag
S
ease
Lp
“al
S

Ee
HY?

[pe
— a

ae .,

50)
Ke
cs)
ve
4
|
rm
GO.
i:
ei
i

mM

A,
ATP
a ©)
PKL IAS
PW

i

‘dl

(3

YO“ | Ss
i A
ee OD ee

Ss

OS C7 a An aS aa
OT eet ZT
10)

Roo
a ey A ee ee

“@ be He oo ota oto

y a
/
pe S) Omg Ero 2) |
OmiO OT @ ©: OFT OT © | O | Ooo
; : :
- “Ts ry : r : 7 : sx — 3 aS > 3 9 3 $ ts 8
2 w 3 a3 eae a2 * S2 Sze 2 B82 Bz || Bix Bz 82 gi! Sz & S 4] Bz, ee NOTE.—Exospt on the
s gz &2 @e ge SéEx 8 gos Bs Ss 8 £! s Rs Ga Se 3 bd = =
2 gag ss 23 eae eo ¥3 ra es rs eos rox Fo ea — 34 “3 3 z 3 purchases in 1900
% 2.2 "3 3 3. 3% 3 w2l 2? a? e 2 il ot x 22 22} git. 2 = = il 2: | gz and 1906 Profits
we Bg o Z 2 2 Stx ge 22, gz 33 (| gt 25 a es 35: aq 34 2% 34 ave rentisabte In
ee “82 3 | ay git |Zix |i! HE a} £i Zill |2i% |g: a: ZF gé SEn (BE: BE svory year.
g2e Oz Se 3 fs Ss S 2 | 3 2 ‘$ 26 X fe . fer Ze 5 2 | a og
g52 573 fe Be ce. 52 x 52 et gz éi| efit efx a é: ef; es Pay | es es
BOs oz as as a5 es aux as a3 a 3 3 a a J

NOTE.—1 wi iat the av r'e position would have been ff he h Pl f cr Tl re je , v5 os! ‘ hh je if whieh waa realisabte In each year,
OTE.—Each, Individual zig-zag (Ine shews what the Investor’ FL jt ti ad bought during any one of the 18 years here depicted. Tha Agures In the circles oO givo the number of stocks anteable iit a profit in each year; the position of the circle indicates the amount of prefit whi y
a sf ;

The above chart is the copyright of the Publishers of the Financtau Revirw or Reviews, and may not be reproduced without permission.
: [To face p. 38.

--- Page 27 ---

TESTS FOR REAL POSITION . 89

; results. A cursory survey of Chart IT. suffices
to prove the truth of this : for, with the ex-
ception of purchases made in 1894, 1895, and
1896, the early tendency of all the profit lines
is to slope upwards, but slightly from the
horizontal during the first few years, and
only in subsequent years were large profits
realisable. This was strikingly the case in
1891, for the purchase made in that year
showed but an insignificant profit during
the first three years, yet in 1906, the fifteenth
year after that purchase, there was a profit of
£1,429 to be taken. This tendency of a pro-
perly-balanced Investment List to gather way
slowly is the rule, and the rapid accumulation
of early profits displayed by the purchases
made in 1894, 1895, and 1896, was excep-
tional, and it was due to the fact that, as has
been already explained, thig early Investment
Scheme was too heavily represented in the
British Geographical Division, containing as
it did Bass Debentures, Great Western Rail-
way Ordinary Stock, and Natal Government
Loan, the movements of all of which securi-

ties are controlled by the London market,

. Bo that, in spite of its admitted imperfections,

--- Page 28 ---

49 INVESTMENT PRACTICALLY CONSIDERED

this Investment List is shown by Chart II. to
completely satisfy the first test of a sound
investment position by enabling its owner
to realise a substantial portion of his in-
vested Capital at any time without loss.
Additionally, the chart establishes the fact
that a Geographically Distributed Investment
List does not settle down into good going
order until the combination has had time to

mature.

Trst II.

THe MAINTENANCE OF THE ToTaAL REALISABLE
VALUE OF ALL THE SECURITIES HELD
AT A FAIRLY PERMANENT LEVEL.

Tt has already been explained that this

| test is made by valuing all the stocks held at
the annual average prices and comparing
the amount of the capital originally invested
with the total value thus obtained. By
reference to Chart I. it is to be seen that the
bottom line of figures gives these respective
annual totals, from which it is clear that the
original purchase price compared most un-

TESTS FOR REAL POSITION 41

favourably with the subsequent result in the

' case of a purchase having been made in 1899

for £10,564 and realised in 1904 for £10,042—
the result showing a loss of £522. To have
lost such a sum would have been a serious
matter ; but as a compulsory sale of the whole
of an investor’s holding is a rare occurrence,
and it has been assumed that he was com-
pelled to realise under the worst possible con-
ditions, there is no doubt that in actual fact
he would have been able to obtain a better
result. But it has already been made clear
that the comparison of total annual values
is rather a test by which the investor assures
himself that he has achieved a proper dis-
tribution of ‘the risks of investment; it
cannot be regarded as a record of transac-
tions which it is conceivable could ever have
taken place. Viewed from this standpoint,
a depreciation not exceeding 10 per cent, is
satisfactory enough, so that the List of In-
vestments depicted on the Chart must be con-

sidered to have fully satisfied the second
test.

--- Page 29 ---

42 INVESTMENT PRACTICALLY CONSIDERED

Test ITI,

REGULARITY OF INCOME, WHICH Is AN INDT-

CATION THAT THE VARIOUS StTocKS HELD
HAVE BEEN PROPERLY SELECTED.

As the investments displayed on Chart I.
are all stocks producing fixed incomes with
the exception of Great Western Railway
Ordinary stock and Direct United States
Cable Company’s Ordinary shares, the varia-
tions of dividends exhibited by those two
companies are the only points to consider.
The dividends on these two stocks have
varied, but the total annual dividends have
remained. unaffected, owing to the fact that
these two stocks taken together only repre-
sent two-tenths of the total Capital invested,
and therefore their influence on the total
annual income was very limited. As was
explained above, these two stocks of varying
dividend do not harmonise with stocks pro-
ducing fixed incomes; and therefore, accord-
ing to the latest developments of scientific
investment, they would not have been blended
together. So that, although the Investment

TESTS FOR REAL POSITION . 43

List under consideration successfully passes
Test ITIL, yet it does not represent perfection

in the matter of grouping stocks together

harmoniously.

When summarising the results achieved by
the Investment List we have examined, it
must be conceded that the statement put
forward at the opening of this article has
been fully justified, namely :—That it is com-
paratively easy to so construct an Invest-
ment List that it will satisfactorily pass the
three fundamental tests of a sound invest-
ment scheme. Having established this point,
it follows that an investor has only himself to
blame if he allows his own investment position
to remain a source of future anxiety to him.
It is scarcely necessary again to refer to the
fact that the combination of investments by
means of which this article has been illustrated
was put together and appeared in print four
years ago.

The object of writing this article is not to
advance an interesting theory or to call atten-
tion to some striking charts; its aim igs to

prove of practical use to investors. There are

several contributory causes which. are re-

--- Page 30 ---

44 INVESTMENT PRACTICALLY CONSIDERED

sponsible for the existence of tens of thou-
sands of people in Great Britain who are
the proprietors of badly-balanced Invest-
ment Lists. Chief amongst these causes is
the fact that until a few years ago the Science
of Investment was entirely undeveloped.
There were a few detached investment theories
in the air, but it has only been quite recently
that the question has been studied with any
practical result. Such progress has, however,
now been made that it is possible to foretell
with reasonable accuracy what future results
& properly-constituted Investment List will
produce. Another cause which is answer-
able for a great deal of the apathy displayed
by investors is the point that so many people
in this country have inherited investments,
and they feel a vague sentimental reluctance
to disturb the capital which has thus passed
into their possession. They should, how-
ever, regard themselves as stewards of the
nation’s accumulated wealth, and they should
remember that in this age of lightning progress
the sound investment of to-day is the neg-
lected and obsolete industry of to-morrow.
Moreover, the fact must be faced that whereas

TESTS FOR REAL POSITION 45

our forefathers lived a life of simplicity,
which bordered occasionally upon parsimony,
life at the present day tends each year to
make greater demands upon the individual’s
income; with the result that incomes which
were regarded as substantial some forty
years ago are now considered to sentence
their owners to lives of genteel poverty.
Then again, before democratic legislation had
begun seriously to attack accumulated wealth,
both invested capital and the income which
it earns required far less vigilant supervision
than they do to-day.

For confirmation of this fact it is not neces-
sary to look further than the Investment
contained in Chart I: for, barely a dozen
years ago, securities like Great Western Rail-
way Ordinary stock and Bass 43 per cent.
Debentures were justly considered to repre-
sent the acme of all that was desirable in
the shape of a safe investment. In 1896 the
realisable value of these two stocks, taken
together, represented in the chart the capital
sum of £2,055; their present value the chart
now shows to be only £1,589, so that they

have depreciated by £466. In other words,

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46 INVESTMENT PRACTICALLY CONSIDERED

nearly a quarter of their value has disappeared.
Such a loss is serious, but as the chart shows,
a properly balanced Investment List can
sustain as heavy a blow as this without its
total realisable value being thereby impaired.
But it must be remembered that a badly
assorted Investment List, in which high-class
British stocks predominated, would have
suffered irretrievable damage, because asimi-
larly staggering depreciation would have ‘at-
tacked all the other British securities which
the list contained, and would have perma-
nently diminished the owner’s capital re-
sources. In short, times have altered; in-
vestment values are altering, materially and
permanently ; it therefore behoves the hither-
to careless investor seriously to reconsider
his investment position by the light of the
three investment tests, which now are placed
before him.

There are other causes which are instru-
mental in encouraging investors to hold badly-
assorted Investment Lists. It is quite a
recent discovery that investment safety de-
pends upon all the stocks in the same Invest-
ment List being considered conjointly as

TESTS FOR REAL POSITION 47

mutually supporting one another, — Formerly
it was the invariable practice when investing
fresh capital to do so without systematically
considering the class and character of the
stocks which the investor already held, so
that temporarily popular stocks of all sortg
and descriptions were heaped together, new
issues were applied for and taken up on the
strength of glowing prospectus promises, and

in this thoughtless fashion a curious medley

of investments was accumulated which never
gave their owner the slightest chance of

arriving at investment success. Tested sep-

arately, each stock might have been quite
sound, yet the total result of the ill-assorted
mixture was most unsatisfactory. After all,
it is only the total result which counts in
investment as well ag in most other mat-
ters. .

In many cases family solicitors, bankers,
and brokers are consulted in reference to
investments, and it ig quite proper that these
reliable sources of information should be
consulted. But if such a consultation is to
be of any value to an investor nowadays, itis
essential that he first satisfies himself that

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48 INVESTMENT PRACTICALLY CONSIDERED

the authority whom he consults is not of the
ultra-Conservative type which refuses to en-
tertain modern ideas. At the present moment
there are many bankers and solicitors who
refuse to avail themselves of telephones or
typewriters, or to expedite their office work
by employing shorthand writers, and many
others to use electric light. Indeed, if rumour
is correct, the news that all these things have
been invented has not yet penetrated into
the Bank of England. Respect for ancient
customs is all very well, and doubtless, in
some measure, this feeling is the backbone
of British stability. But there is a limit to
everything, and who would have a bad tooth

taken out without gas or chloroform simply |

because these are comparatively modern
inventions, or who would travel in an old-
fashioned horse-drawn tramcar because his
father did so before him ? |

Investors should certainly consult a careful
business-man if they do not trust their own

judgment; but they should make sure that.

the authority so consulted is abreast of the
times, and does not advise them in accord-
ance with the leech and cupping glass methods

TESTS FOR REAL POSITION 49

ofa previous century. The value of an article
of this kind is to inform investors how they
can test the advice which they receive so that
they may know beforehand what to expect
in future.

There are two other very potent causes
which prevent many investors from putting
themselves into a sound investment position
—these are false pride and indifference. There
is a generally prevalent feeling that to dis-
close an unsatisfactory investment position
is somewhat like taking the family skeleton
out of its cupboard. The point is overlooked
that if a really competent man is consulted,
he is no more surprised at any investment
eccentricity than a watchmaker is startled
at having a damaged watch handed to him
to repair. To both these men such events
are daily, if not hourly, occurrences, and the
mere abstract question of whether an owner
was wise to attempt to stimulate a jaded
watch by prodding its works with a pin never
presents itself to them. Their occupation
would be gone if all men were experts in
watches or investments, so that they are the
last men in the world to sneer at the efforts

E

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50 INVESTMENT PRACTICALLY CONSIDERED

of inexperience. Besides this, financial ignor-
ance need never be long lived, for after a few
really sound lessons in the science of invest-
ment the most ignorant becomes an expert
investor, if only the main principles are
lucidly explained to him.

The careless investor is a perpetual menace
to his own best interests. Neglect of ordinary
financial precaution is certain to be followed
by a day of reckoning, when the hitherto
light-hearted trifler may have to forego many
of the pleasures which he formerly enjoyed.
For there is one absolutely indisputable fact
which recent investigation into the science
of investment hasconclusively proved, namely,
that a badly-assorted List of Investments
can never right itself. The only remedy is a
drastic reconstruction, and the longer that
reconstruction is delayed the worse the ulti-
mate disaster is likely tobe. . Itisno tempor-
ary cause which is making Lists of Invest-
ments which formerly produced good results
now produce bad results. Life’s conditions
have altered, social questions wear a different

aspect, and international trade is assuming
fresh developments. As time goes on the

TESTS FOR REAL POSITION 51

chasm which separates the present age from
the past will tend to go wider, so that delay in
setting an investor’s house in order will only
tend to increase the cost of the inevitable
operation.

The methods advocated in this article, if

- properly applied, will enable every investor

to clearly grasp the weak points of his own
investment position. The three tests to which
reference has been made are easily carried
out, and the results obtained thereby are
infallibly true. No investor can afford to
remain in a position where it is impossible to
sell a substantial portion of his investments
without incurring loss. To hold a combina-
tion of investments which varies greatly in its
total realisable value is to court disaster,
whilst to forego a safe and stable income is
needlessly to adopt an uncomfortable con-
dition of life. It has been proved that there
is no necessity to tolerate any of these finan-
cial discomforts. There is no Investment

List so badly constructed that it cannot

gradually be brought into scientific shape.

Therefore, whenever an existing investmeng

scheme fails to satisfy the three tests described

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52 INVESTMENT PRACTICALLY CONSIDERED

above, the task of building up a sound
investment position should be taken in hand
at once and order should be evolved from

chaos.

How to Select Investments

THE varieties of stocks are greater than the
varieties of investors. There is, therefore,
no small risk that the individual investor,
embarrassed by the wealth of choice which

_ lies before him, may ultimately select securi-

ties which are in many respects unsuited to

‘ his investment aims. It may seem strange

to any one whose investigations into invest-
ment questions have not gone very far that
it should be said that any varieties of in-
vestors exist, or that the investment aims
of all of them are not simply confined to
striving for the maximum of income obtain-
able with the minimum of risk,

But in connection with the aims of in-
vestors and aimless investment it is, indeed,*
@ curious fact that many people habitually
invest money over a period of years without

- ever attempting even to formulate in their

own minds a definite investment programme,

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54 INVESTMENT PRACTICALLY CONSIDERED

If the great majority of investors, whose
investment experience stretches over no
longer a period than ten years, were to
arrange their lists of stocks in the order of
the dates in which their different securities
were respectively acquired, they would find
that not only had they started on their
careers as investors without having decided
upon any settled plan of investment, but
they would also notice as they scanned the
names of their securities, when arranged in
chronological order, that even in the com-
paratively short space of ten years they
had on several occasions unconsciously re-
modelled and revised the vague predilections
that they had previously entertained for
various types of Stock Exchange securities.
For the original basis of most Investment
‘Lists will be found to be a prepossession on
the part of the owner for some particular
form of security. This mental bias in favour
of one particular type of stock may have
been the result of advice from a parent or
guardian, or it may be traceable to some
half-remembered financial article, the con-
tents of which the reader had so completely

HOW TO SELECT INVESTMENTS 55

absorbed in the past that its teachings had
re-appeared to him in the guise of his own
original thought. On the subject of invest-
ment the mind is singularly impressionable,
and a fact or theory, when once impressed
on the investor’s mind, frequently lingers
there long -after its originating cause has
been clean forgotten.

Prejudices against some kinds of securities
and prepossessions in favour of others may
in truth be said to form the working outfit
with which the average investor pieces to-

- gether an Investment List over a period of

years, The most curious feature of the mis-
cellaneous collection of securities which results
from this lack of a coherent investment plan
is usually to be found in the fact that, as
the investor turns in cold neglect from some
hitherto highly prized financial idol and
proceeds to prostrate himself before another
new object of financial adoration, he is seldom
sufficiently whole-hearted in his worship of
his newly found perfection to rid himself

of the accumulation of past securities which

he amassed when he was under the influence

‘of a widely different train of financial thought,

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56. INVESTMENT PRACTICALLY CONSIDERED

Another great objection to Investment
Lists which are thus aimlessly strung together
is that, although the capital-sum involved
may be said to a certain extent to be dis-
tributed, yet it is distributed without method ;
and for this reason the distribution of capital
must altogether fail to achieve its purpose.
For the object aimed at in distributing
capital amongst a number of different stocks
is that the fluctuations of one stock may be
counterbalanced by the fluctuations of an-
other. This object can, however, only be
attained when the stocks purchased are iden-
tical both in quality and in quantity. For
unless the securities held are similar in
quality, that is to say unless they are subject
to fluctuations of corresponding width, and un-
less they each represent an identical amount
of capital, it is obvious that the movements

of one cannot counterbalance the movements
of another.
It is, then, easily to be seen that the selection
of stocks of the right type is in itself a matter
of importance, and in order that the stocks,
when selected, shall accomplish the personal
investment aims of the individual investor,

- HOW TO SELECT INVESTMENTS 57

it is of primary importance that the investor
shall first of all definitely decide what are
the objects which he wishes his Investment
List to accomplish.

Broadly described, investors may be said
to consist of three classes: the first of which
comprises those who wish to be as free as
possible from all the anxieties. of investment,
and who are prepared to content themselves
with asmall but safe and stable income ; the
second class of investors may be said to
embrace those who at some personal trouble
are anxious to improve their investment
position ; whilst the third class of investors
are merely desirous of obtaining the maxi-
mum of interest which their capital can earn
with safety, and they are prepared to abandon
the idea of adding to their capital resources

‘ ‘in the future.

It will, of course, be self-evident that in

each of these three main sub-divisions there

will be investors who are tinged with the

[inclinations of the other two sub-divisions,

It will be observed, moreover, that I have
classed together in the second sub-division

both those investors who desire an increage

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ee ————————__—_——

58 INVESTMENT. PRACTICALLY CONSIDERED

of income and those investors who are anxious
to improve the realisable value of their
capital. Both these types of investors I
have placed in the category of those who are
anxious to improve their investment position.

My reason for doing this has been that

my lengthy study of investment questions
has convinced me that the only sound method.

of attaining an improved income from a given ~

capital sum is steadily to build up the realis-
able value of the principal invested, and it
will then be found that the interest accruing
therefrom will tend naturally and automatic-
ally to inrease. This is the only sound
method of attaining an improved income.
Therefore, a8 an improved income is only to
be arrived at by sedulous care and cultivation
of capital, the fact needs no demonstration
that the improvement of income and the
improvement of capital are practically one
and the same thing. For one entails the
‘other and both are arrived at by the self-
game process.

‘Before I quit the question of investment
aims, I may just mention that the fortunately

rare type of investor, who is anxious to ob-

HOW TO SELECT INVESTMENTS 59

tain the maximum of income combined with —
a substantial increase in his capital’s value,
is striving after the impossible. What usually
befalls investors of this sort is that in attempt-
ing too much they accomplish nothing.
As a.tule, they simply fall between two
stools, and obtain neither satisfactory income,
nor does their capital display any power of
expansion when revalued over a fair invest- -
ment:period. I may also take the opportunity
of alluding to the position of trustees whose
investments are limited to Trustee Stocks

authorised by Act of Parliament. Such

investors are limited in their selection to a
comparatively small group of stocks which
comprises a number of securities practically
sdentical in character. The point which the

- movements of Trustee Stocks during the last

decade should impress upon the general body
of investors, is that it is impossible to guard.
against capital-loss by merely formulating
certain fixed principles which ought, speaking
in the pure theory of investment as under-

“stood by the legal advisers of the Crown, to

determine absolutely the safety of an invest-
ment,

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60 INVESTMENT PRACTICALLY CONSIDERED

It was the benevolent intention of the
Trustee Acts to divert Trust Funds into
such channels as precluded the possibility
of any future depreciation of the capital in-
vested; in spite of this, however, Trustee
Stocks have fallen in value more severely
than other securities of which the intrinsic
merits are undoubtedly inferior. This fact
proves that any effort to name a stock or a
group of stocks which at all times and under
all conditions is to be regarded as a desirable
purchase is to court disaster. No such
automatic selection of investments ever could
be made as would stand good for all time and
at all times. The nearest approach which.
can be made to an investment which requires
the minimum of attention on the part of the
holder owing to the regularity of its dividend
payments and the stability of its capital,
is to be found only amongst commercial
debentures of well-matured companies en-
gaged in non-speculative business. We shall
discuss this type of investment later on. In
the meantime it is instructive to note that
the one class of investment, which on the
score of its immunity from violent fluctuation

HOW TO SELECT INVESTMENTS 61

is the most suited to the requirements of
trustees, should happen to be excluded
from that list of investments which Acts of —
Parliament have sanctified to the use of
trustees.
_ Having, then, definitely made up his mind
as to what are his own investment require-
ments, the investor should next pass in
Teview the various classes of existing securities,
and he should select from them such stocks
as are most likely to fulfil the objects he is
aiming at. In order to facilitate the work of
selection I will now discuss in brief detail the
various types of security which lie before an
investor.

The first broad distinction which sharply
divides investments into two main classes is
to be found in the fact that the act of purchase

~ of some stocks puts their holder in the position
of a money-lender, who has advanced money

to a state or a public company; whilst the

- purchase of other stocks constitutes him a part-

ner in the concern whose shares he has pur-
chased. For example, any one who purchases
a portion of a Loan or of a Debenture, or a
Bond Issue, thereby assumes the position

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62 INVESTMENT PRACTICALLY CONSIDERED

of a lender of money to the State, Municipality,
or Public Company, which has isued stock
of the above description. On the other
hand, the purchaser of a share of every sort
and description thereby becomes a partner
in the concern in which he interests himself.
These being the two main positions which an
investor can take up, let me proceed to analyse
the results likely to be obtained from each
of them.

In the first place, any one who lends money,
that is to say, who takes up a Government or
another Loan or Debenture can only partici-
‘pate in a very indirect way in the prosperity
of his borrower. Therefore, the main point
with which he has to concern himself, is the
security upon which his money is lent: for it is
this security alone upon which he has to fall
back in case the borrower should make
default in his obligations. In the case of a
State, Provincial or Municipal Loan it is
difficult to ascertain what sort of solidity
there is. But, even if this were not the case,
it would not very materially assist the investor
in his selection; because loans of this kind
are more influenced in their value by political

HOW TO SELECT INVESTMENTS 63

and other public events than by the security

|. afforded by the borrower.

There recently appeared in the columns of
the Daily Telegraph a ‘long and interesting
correspondence on the question of the price
of Consols. Here we have a Loan whose

a security is absolute and undoubted, and yet

it is selling at a very considerable discount. It
will be seen, then, that a purchaser of Consols,
who a few years’ ago paid over par for his

7 ; stock, would have found no restraining warn-
, ing in the security which lay behind his selec-

tion. In spite, however, of the solid nature

: of his security, he would have still sustained
| & very serious. depreciation of his invested
i capital. What is true of Consols is equally

true of every class of Public Loan which

y Stands in the full daylight of public attention,
q so that it follows that no prudent investor
q who was anxious as to the stability of his
' Capital’s realisable value would invest in
| public securities which are largely swayed

in their market movements by events which
cannot be foreseen and lie altogether outside
the intrinsic value of the security itself.

_ Next, we come to Debentures. issued by

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64 INVESTMENT PRACTICALLY CONSIDERED

Public Companies. Here the position is

different. The security behind the Debenture
issue is readily ascertainable from the balance-
sheet, and the question of the safety of both
capital and income is more or less a determin-

able item. Besides this it will be found that _

there are a great many Debentures in public
companies which only feel the influence of
political events to a very smallextent. Here,
therefore, we have a group of stocks which
is peculiarly suitable for investment in all cases
where great stability of realisable value is the
desideratum. The marked stability of many
Debenture issues may, however, provoke the

inquiry—What about British Railway Deben- . |

ture Stocks, which have depreciated so very
seriously of recent years? This raises the
question of a stock’s marketability and all
that is entailed thereby. The first necessity
in the case of a readily niarketable stock is

that there should be a regular supply of float- — |

ing stockin the hands of dealers and others;

on the other hand, in order to arrive at great
stability of realisable value it is essential : |

that the whole of the stock, whose merits are
being analysed, should be firmly held by

‘HOW TO SELECT INVESTMENTS 65

actual investors, and that there should be
practically ho floating supply. of stock. Be-
cause the average investor is only too prone to
overlook the fact that it is the comparatively
small quantity of floating stock in freely nego-
tiable investments which causes the wide
fluctuations to which they are subject. For
instance, a dealer, who finds himself at the
conclusion of a day’s business with ten thou-
sand pounds worth of unsaleable stock on
his hands in a security which is considered to
be freely negotiable, would in the ordinary

course of business be persistent in his struggles

to sell the stock and “ to get his book even.”

‘Consequently, after nursing it overnight, he

would offer his holding at the next day’s
opening of the market, and he would so per-
sistently worry the market with his £10,000
stock that, in nervous times, he would fre-
quently produce a fall of a couple of points
or so before he achieved his end and completed
the sale ‘of the parcel of: stock which he had
acquired in the ordinary turnover of business
but had no desire to retain,

Some idea of the risk attaching to “ negoti-

able” stocks may be gathered from such-like

F

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66 INVESTMENT PRACTICALLY CONSIDERED

incidents. Translated into actual figures it
would mean, say, in the case of London and
North-Western Ordinary, that £84,000 floating
stock pressed for the sale wu uld produce a de-
preciation of 2 per cent. on a capital issue
of some £42,000,000. In other words, when
the market in North-Western “dries up,”
as it has done on several recent occasions, the
sale of £10,000 is capable of wiping £840,000
off the realisable value of the whole Ordinary
issue. For that is what the damage done by
a 2 per cent. fall amounts to in the case of
an issue of £42,000,000.

Another disadvantage under which stocks
lie which are accounted “ readily negotiable,”’
is the existence of a large number of profes-
sional and semi-professional Stock Exchange
operators who habitually study the probabili-
ties of price-movements in securities of this
type. Their object is to “scalp profits” off
a moving market ; itis a sine qué non for such
operations that there shall be facilities for
buying and selling large quantities of such
stocks as they select. For this reason stocks
which are well held, and consequently are
not so freely to be dealt in, are protected from

HOW TO SELECT INVESTMENTS 67

the attentions of “scalpers,” whilst fashionable
stocks, owing to their greater market-freedom,

readily lend themselves as playthings to

these gentry. The natural result of these
anticipatory operations is that the quotation
of marketable securities oscillate with a vio-
lence which is much akin to the fluctuations in
Government stocks, Although at the self-
same time quite as important, but less readily
dealt in, securities follow the general trend
of markets to only a very small extent. In
illustration of this let us consider the price-
movements of three well-known and readily
negotiable stocks, namely :—

(1) London, Brighton and South Coast
Railway Ordinary sold at 197 in
1896, and fell as low as 121 in
1903.

(2) North British Railway Preference
Stock sold at 156 in 1896, and
declined to 117 in 1906.

(3) North-Eastern Railway 3 per cent.
Debentures changed hands at 1184
in 1898, and were selling at 92 in
1904,

Let us now compare these wide fluctuations

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68 INVESTMENT PRACTICALLY CONSIDERED

with the comparatively infinitesimal move-
ments of less well-known stocks, whose very
lack of universal popularity enables them to
escape the attentions of the speculator. For
the purpose of comparison I will first select the
singularly striking example of the Kimberley
Waterworks 6 per cent. Debentures. The
price record of this stock during 1896 was—
Highest, 108; Lowest, 994. Between 1896
and the present date there has occurred the
South African War, which entailed a lengthy
siege of the town of Kimberley. Although
one would, therefore, have imagined that
the Kimberley Waterworks Debentures in
particular, and all South African stocks in
general, would have been adversely affected
by this long-drawn-out event, yet it is re-
markable that, during the whole period from
1896 until to-day, the lowest recorded price
of this Debenture has been 97, and that this

moderate fall was quite temporary, the stock _

rallying promptly to par and over, and stand-

ing at 108 again at the present time. Here is ©

the most impressive object-lesson of a stock,
which has suffered from the depreciation in-
evitable in time of war, which is dealt in in

HOW TO SELECT INVESTMENTS 69

London, and has passed through a period
when stocks in the British Market have depre-
ciated enormously in price, and yet this stock
has held its own through this trying period.
This, it will be observed, is the price-record
of a stock which is by no means a free market
at any time, and in times of great depression
it can only be dealt in by means of careful
negotiation.

_ Another stock which would be contemp-
tuously referred to as an “ out-of-the-way
investment ” in Throgmorton Street, is the 5
per cent. Debenture of the Land and Mortgage

Company of Egypt. In 1896 this stock’s

Highest Recorded Price was 1034, and its
Lowest was 100. During the ten years which
have elapsed since, the Lowest Record has
been 99, and the Highest 104. In other

| words, this stock’s extreme width of fluctuation

has been 44 per cent. during ten years, which
have embraced a period of acute depression.
We may assert, then, that for all practical
purposes these two trading debentures, the
Kimberley Waterworks 6 per cent. and the

_ Land and Mortgage Company of Egypt 5 per

cent. have exhibited no fluctuation,

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70 INVESTMENT PRACTICALLY CONSIDERED

In the case of Preference and Ordinary
Shares it would, of course, be more difficult
to find such conspicuous examples of stability
of realisable value. Because in Stock Ex-
change issues of such type the question of
dividend-earning power becomes an active
factor in determining value ; yet, if we take
a case like the North British and Mercantile
Insurance Company, we find the price-record
of 1906 to be :—Highest 423, Lowest 36};
whilst the extreme difference in the ten years
which followed was 45 Highest and 35 Lowest.
We see, then, that there was but a trifling
difference between one year’s width of fluctu-
ation and ten years’ width of fluctuation in this
stock, whilst the present price is practically
the same as the highest recorded in 1896.
Yet from Throgmorton Street’s point of
view the North British and Mercantile In-
surance Company’s shares could only be de-
scribed as an “ out-of-the-way security.” So
that it really comes to this, that Stocks which
do not appreciably alter in value are only to
befound amongst “out-of-the-way securities,”
and the exceedingly liquid and frequently
dealt in Stocks do not afford that stability of

HOW TO SELECT INVESTMENTS 71

value which is such a.source of strength to
the investor.

As opposed to this argument as to the un-
desirability of holding stocks which are too
susceptible to every passing influence, it may
possibly be urged that the objection to “ out-
of-the-way securities” is that it might very
well happen that a stock of this description
might not be realisable at the moment when
realisation was requisite. Such might be the
case when questionable investments were con-

‘cerned, or in some isolated instance; but

in all my five and twenty years of financial
experience I have never known a case in which
areally good investment could not be disposed
of on very fair terms within a week.

In fact, it is beyond dispute that the capital
invested in what are termed “ out-of-the-way
securities’ is fully as large as the capital
invested in so-called marketable securities,
for officially quoted stocks are commonly as-
serted to be marketable in spite of the fact that
these so-called marketable stocks are fre-
quently more difficult to deal in than securities
which enjoy no sort of official quotation. If
any reader entertains a doubt as to the ratio

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72 INVESTMENT PRACTICALLY CONSIDERED

which unquoted stocks bear to quoted stocks,
let him turn to page VI. of the Preface to
Skinner’s Stock Hxchange Year Book, where
he will find it stated that in April, 1906,
the number of companies actually existing
amounted to 40,995, and the total of their
paid-up capital was £2,003,392,001. Allow-
ing that these 40,995 companies have issued
only the low average of two types of stock
apiece, we arrive at 81,990 as the number
of stocks in existence; whilst the number
of officially quoted Stocks, weknow, does not
amount to more than a few thousands.

To sum up, therefore, our investigations
into the nature of stocks of the first category,
which comprise Loans and Debenture Bonds,
we find that our conclusions are that the
unmarketable stocks in this category are
suitable for safe and sound investment,
where any one is desirous that the realisable
value of his capital shall remain stationary ;
whilst the marketable stocks in this category
are suitable investments for those who have
no objection to seeing wide fluctuations in
the realisable values of their capitals respec-
tively invested,

HOW: TO SELECT INVESTMENTS 73

Before quitting the subject of Loans and
Debentures I should like to refer to the
subject of depreciated stocks of these types,
viz., those which are selling at a considerable
discount. These can hardly be said to be-
long to the category of Loans and Debentures
as it is clear from their quotations that sub-
stantial doubt exists as to the security which
stands behind them.

Such depreciated Debentures should rather.
be regarded as Preference Shares; for, although
they were originally issued as Debentures
the possibility of their again being quoted
at their par value depends entirely upon
the amount of future success which their
company may achieve. The security upon
which they were originally secured having
depreciated, they tend to fluctuate with the
temporary successes and reverses of their
company, precisely as do the share-issues
of other concerns.

The second main class of investments which
we have to consider are those which constitute
their holder a partner in the company in which
he takes an interest. Such invéstments are
companies’ shares, and these naturally group

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74 INVESTMENT PRACTICALLY CONSIDERED

themselves into those which are entitled to
a fixed rate of interest, and are termed Pre-
ference or Guaranteed Shares, and those which
vary in their income and are usually spoken of
as Ordinary Shares. There has been a great
deal more money lost than made on Prefer-
ence and Guaranteed Shares, because the
position of the holder of them is such that he
cannot demand the return of his subscribed
capital when his interest payments fall into
arrears as the holder of a Debenture can do.
This is his fate in an unsuccessful company ;
whilst he participates to but a small and an
indirect extent in a highly successful concern,
for the reason that, no matter what prosperity
may surround his company, his income is
still limited to the fixed rate of interest agreed
upon at the outset.

It will readily be seen that under no circum-
stances is it wise to pay a large premium for
Preference Shares. On the other hand great
care should be exercised in their selection, and
the investor should satisfy himself that the
company’s earnings so far exceed the sum
necessary to provide the interest on the Pre-

ference Shares that there is no probability

HOW TO SELECT INVESTMENTS 75

of the Preference dividend-distribution ever
being imperilled. Preference Shares, thus
amply secured, are very near akin to Perpetual
Debentures, and may be regarded as safe in-
come-producers. The mere fact that a Pre-
ference Share stands at a heavy discount,
although it usually points to the income not
being quite safe, is by no means an absolute
indication that suchisthecase. For instance,

the 43 per cent.{Cumulative Second Preference

Shares of Ohlsson’s Cape Brewery, which were
issued at £5 each, are to-day quoted about
4. Yet, in spite of this heavy depreciation, the
income on these shares is amply secured by
the fact that the brewery has paid regular
dividends on £300,000 Ordinary Stock, which
rank behind the Second Preference Shares,
and that the distribution on the Ordinary,
which was at the rate of 12 per cent. in 1894-5,
has been steadily progressive until it reached
the almost unprecedented dividends of 52 per
cent. for 1902-3, and 40 per cent for 1903-4
and 1904-5. The purchase of depreciated
Preference Shares should commend itself
to those investors who are not averse from
risking a possible variation in their incomes

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76 INVESTMENT PRACTICALLY CONSIDERED

in their effort to secure stocks on which
there is a strong probability of an ultimate
enhancement in realisable value.

The second type of shares comprises Ordi-
nary and Deferred Shares. Now, there are
many companies whose business is so devoid
of fluctuation that their distributions to their
Ordinary shareholders hardly ever vary.
For example, the India Rubber and Gutta
Percha Company has paid 10 per cent. on
its Ordinary Shares for more than a decade,
and. Boots Cash Chemists paid 10 per cent.
on its Ordinary for five years up to 1898, and
for the seven subsequent years its. Ordinary
Dividend has been at the uniform rate of
12 per cent. So that both in Capital Value
and in Income earned it is possible to find

Ordinary Shares which show little deviation. —

Whether, however, either a Preference or an
Ordinary Share is really sound is only to be
ascertained by a close study of the company’s

balance-sheet, and, even then, the result ar- _

rived at is not always to be relied upon. Let
us take, for example, the unfortunate case
of the British Electric Traction Company.
Here was a company which almost from its

HOW TO SELECT INVESTMENTS V7

inception had paid steady dividends of 6 per
cent. and upwards on its Ordinary Shares
until 1905. Up to that date the balance-
sheet showed that the Preference Shares could
only be regarded as safe from every point of
view. Then suddenly, in 1905, the attitude
of municipalities in the matter of tramway
concessions completely altered. Remunera-
tive contracts were no longer obtainable by
the British Electric. Traction Company, with
the result that the payment of the Ordinary
dividend ceased, and even the Preference
dividend is by no means so safe as it might
be. I quote this case simply as an example
showing that the nature of an undertaking
should be carefully considered when buying

Preference and Ordinary Shares. Indeed,

the rule which a cautious investor should make

-is not to interest himself in any type of

share unless he is satisfied that the under-
taking is uninfluenced by the whims of fashion

and ‘that its business is not of a character
_ which might suddenly expose it to the attack
~ of a powerful competitor.

To sum up, prudent investors, who are

- anxious to avoid any startling fluctuations in

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78 INVESTMENT PRACTICALLY CONSIDERED

the realisable value of their invested capital,

should confine their investments to such
securities as are as far removed as possible
from the wild whirl of market influence. More
speculatively inclined investors should in-
vest their money in depreciated Debentures,
which can be bought at a discount, and in
Preference Shares which stand in the same
friendless position. But to the speculator
should be left Ordinary Shares and those
stocks which command wide market atten-
tion.

The next important point in the selection
of investments is that all the stocks which
an investor holds should be of a uniform
character, that is to say, that their average
widths of fluctuation should be as nearly as
possible identical. Stock Exchange history
conclusively proves that no matter how sound
and solid an individual investment may be,
no absolute reliance can be placed on its
future price-movements. This being the case,
the only way in which capital safety is to be
achieved is by the adoption of a proper system
of averages—thatis to say, by such a system
as will ensure that the depreciation of one

HOW TO SELECT INVESTMENTS 79

group of stock shall be counterbalanced by
the appreciation of another group..
In this conjunction it will be patent to

anyone that, if the system of the movement

of one stock being counterbalanced by the
movement of another is to work smoothly, it
is primarily essential that the range of fall
and the range of rise must be identical
throughout the whole of the individual stocks
which are comprised in an Investment List.
On the other hand, whenever the combined
movement of the stocks comprising an Invest-
ment List exhibits a large excess either of
profits or losses, it is a clear indication that
the List is improperly balanced, and an im-
properly balanced Investment List can only
be regarded as an unstable speculation, in-
stead of a stable investment scheme such as it

-Should be the prudent investor’s aim to com-

pile.
It will, of course, be easily seen that not only

_ is it requisite that the individual stocks com-

prised in an Investment List should be of
identical width of movement, but also that the
amounts of capital respectively invested in
them should be identical. Otherwise the

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80 INVESTMENT PRACTICALLY CONSIDERED

investor would again find that the downward
movement of a stock representing, say, £1,000
would be inadequately counterbalanced by
an upward movement in another stock re-

presenting £500. The steady-going Investor
will naturally endeavour, so far as possible,
to lift his Investment List clear of the menace
of violent fluctuations. Yet it must be re-
membered that, however sound an investment
may be, and however small may be the
attention which it receives from the bulls and
bears in the speculative arena, it is inevitably:
subject to the one great price-controlling
influence, namely, the course of trade in the
country in which it happens to be chiefly
dealt in. The influence of trade upon Stock
Exchange fluctuations I have dealt with ex-
haustively in a book I published some time
ago entitled Investment an Exact Science ;
wherein I advocate a system which I have
called Geographical Distribution, whereby the
effect of the various trade influences of the
world are minimised by equally dividing the
capital sum to be invested over the various
portions of the earth’s surface. It would be
beyond the limits of this article to explain

HOW TO SELECT INVESTMENTS ~ a1

this interesting subject at greater length here ;
I must therefore refer the reader to the

volume which treats of it fully.

Only too frequently shrewd investors say
to themselves: ‘‘I will invest some part of
my capital in absolutely sound stocks, such
as Consols and other trustee stocks, and I will

_ supplement the small income obtainable

from these high-class securities by investing
the balance of my capital in more speculative
stocks, such as the Preference and Ordinary
shares of industrial companies.” Such a
system as this may be described as “‘ mixing,”
but by no stretch of imagination can it
be termed averaging. A study of price-
movements will convince even a superficial
observer that there can be no methodical
counterpoise in an investment list which
is compiled on so deplorable a basis ag
this.

The above explanation of the forces which

are the mainsprings of fluctuation will, I trust,

have shown the various types of investors in

which quarters they should search for stocks

which will suit their own investment require-

ments. The trustee investor is, of course, com-
G

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82 INVESTMENT PRACTICALLY CONSIDERED

pelled to confine himself to stocks sanctioned
by the Trustee Acts; whilst the extremely
cautious investor, who feels the responsibility
of his position perhaps fully as keenly as the
trustee, should turn his attention to such
first-class Debentures and loans as afford no
scope for the operation of speculative and
semi-speculative manipulators ; again, the in-
vestor who is prepared to accept some small
risk of adverse fluctuations in the course of his
investment operations, which are based on the
steady building-up of his capital account,
should devote his attention to Preference
shares, selecting for his purchase such stocks
as are temporarily neglected and afford in
consequence a high rate of interest; lastly,
the investor who is of a speculative turn of
mind will find that his most hopeful oppor-
tunities are to be found amongst depreciated
Debentures and Preference shares standing
at a discount, and he might mix with these
some fair Ordinary stocks which seem likely
to improve in value.

It must always be understood that in selec-
ting an investment the balance-sheets and
the highest and lowest records of price-move-

HOW TO SELECT INVESTMENTS 83

ment in previous years should be considered.

Those investors, who make the safety of their
invested capital their chief object, should only
select those stocks which have a narrow width
of fluctuation; whilst, on the other hand,
investors who seek to build up their capital
accounts by purchasing stocks of fairly wide

I}. fluctuation should buy such preference stocks

as display a tendency to inove freely.

The published balance-sheets of the various
companies should form the basis on which
the values of all stocks are calculated, and
investors should satisfy themselves on the

following points before they consider any

security to be worth purchasing :—
(1) How much Capital is there behind
_@ particular stock whereby capital
safety is secured ?

(2) How much annual income is there
earned beyond the interest on the
stock, the purchase of which is
contemplated ?

(3) How does the Stock contemplated
compare with other stocks in the
same category, and what is the Com-
pany’s financial position generally ?

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84 INVESTMENT PRACTICALLY CONSIDERED

It will be found that the answers to these
three questions are to be found in the
Statistical Record, and in the Digests of
Companies’ Reports, which are published each
month at the end of the Financial. Review
of Reviews.

With the aid of the information there con-
tained the investor, blessed with no great skill
as an accountant, can satisfy himself of the
eligibility of any investment he selects. If,
for instance, he learns that there is double the
amount of capital behind his stock as there
is ranking in front of it or on the same terms
with it, and that the Company’s earnings
exceed, say, threefold the amount of revenue
requisite to pay the annual interest on his
selection, and further that the Company’s
liquid assets exceed current liabilities by a sub-
stantial sum, he will have no difficulty in decid-

ing that he is dealing with a safe investment,

although he may not have received the train-
ing of a professional accountant. The Finan-
cial Review of Reviews aims at so focussing
its readers’ attention upon the main essen-
tials of investment-safety that they may,
with the least trouble to themselves, ar

HOW. TO SELECT INVESTMENTS 85

rive at a right judgment on all financial
questions. .

Having once arranged his investment scheme
in accordance with the above suggestions,
the investor must bear in mind that later on,
when he is either investing further capital or
realising a part of his holding, he is altering
one detail of the many details which go to
make up.the unity of a perfect Investment
List. He must on such occasions, therefore,
reconsider the symmetry of his reconstructed
investment scheme, and satisfy himself that
in its new form his Investment List will be
capable of fulfilling his investment require-
ments.

The whole of the above system of invest-

ment is based not only upon a lifelong ex-

perience of Stock Exchange matters, but also

upon the actual results which I have observed

to have regularly followed upon various
schemes of investment. The practical lesson

- which I would seek to impress upon my readers

is that they should forthwith examine their
own Investment Lists with a view to ascertain-
ing how far they have followed the principles
which I advocate, Should they find that

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86 INVESTMENT PRACTICALLY CONSIDERED

they have hitherto acted upon no definite
investment tactics, or that their methods are
seriously at variance with the scheme I
have laid down, I should urge upon them
straightway to set their affairs in order. It
is too much the fashion amongst investors
to bemoan their losses as the result of ill-luck,
and to shirk the duty of ‘informing them-
selves at regular intervals as to what is their
exact investment position. In investment,
as in everything else, the only man who can
command success is he who is capable of
taking infinite pains.

How Investment Safety is
Attained

THE investment of capital in stocks and shares
when based upon sound and solid principles is
capable of producing not only the satisfaction

which arises from pecuniary gain, but also

the far more important sense of security and
the complete freedom from worry which can

_ only be achieved by the capitalist whose mind
_is thoroughly at ease.

For many years I was puzzled by the

_problem of how to arrive at a really sound
system of investment. My difficulty arose
“from the fact that Stock Exchange securities
seemed to be such highly electrical eel-like

creatures, gifted with such erratic and incal-

.culable movements, that it appeared impos-

sible ever to be able to rely upon them pro-

ducing any desired result. But now that I
have succeeded in classifying the main influ-

ences which govern the movements of stocks,
87

--- Page 52 ---

88 INVESTMENT PRACTICALLY CONSIDERED

my former difficulty has been surmounted,
and I have been enabled to formulate a simple
system of investment, capable of withstanding
the severest strains, and yet so easy of com-
prehension that it can be explained in the
space of a few pages.

I will first make it clear why it is that
investors almost invariably fail to obtain the
safety they are in search of when they invest
their capital, and then I will lay before them
the simple plan by means of which any
desired investment result can be arrived at.

The great majority of people fall into the
natural error of supposing the acquisition of
a number of stocks, which are of undoubted
soundness and solidity, is all that is necessary
to ensure the safety of a given capital sum.
This erroneous belief is held not only by the
general investing public, but it also ensnares
a great number of bankers and brokers. Now
as these bankers and brokers act as skilled
technical advisers to the general public, it
can be a matter for small wonder that this
wrong-headed method of investment enjoys
an undeservedly wide popularity.

The second mistake which is too generally

INVESTMENT SAFETY 89

'. made is that the personal requirements of the
individual investor receive too scanty a con-

sideration when the selection of stocks is
made. A stock may possess undoubted invest-
ment merit without its being a suitable
security for every type of investor to hold.
The third, and certainly the most potent,
cause of failure in the search for investment

safety is the dangerous habit of considering

each stock separately instead of regarding
the whole number of stocks held as constitut-
ing one harmonious investment scheme. For
harmony throughout the whole investment

is the key to investment success.

- At one time I was as blind to these points

as some of my readers may be to-day, and it

was only after many years of attentive re-

‘search that the principal causes of investment
' disaster became clear to me. During my

researches I candidly admit that I found
myself forced to discard many cherished

. illusions and to abandon many pet theories

before I gradually arrived at a right under-

standing of the investment question. Judg-

ing by the hindrance I suffered from my own
preconceived notions, I can conceive it

--- Page 53 ---

90 INVESTMENT PRACTICALLY CONSIDERED

more than likely that I shall unintentionally
arouse a certain amount of antagonism here
and there in my reader’s mind in the course
of my argument. But the system of invest-
ment which I herein advocate is by no means
widely known, and instead of meeting the
novelty of my ideas in a spirit of hostility,
as amounting to a practical vote of censure
on his own system of investment, I would
remind the investor that where he has hitherto
failed to find investment safety many skilled
professional financiers have failed before him.

The three causes of investment disaster
enumerated above may be regarded as the
three primary difficulties which beset the
investor. In addition to these there are a
number of other minor stumbling-blocks which
militate against investment success. These
include the unintentional purchase of specu-
lative securities through a want of a proper
understanding of the real nature of the invest-
ments selected, the purchase of stocks at a
price too high to be compatible with safety,
the retention of stocks which have risen to so
high a level that they have ceased any longer
to be a remunerative holding, and the specu-

INVESTMENT SAFETY 91

lative retention of inflated stocks beyond the
point where the chance of a further price
enhancement has ceased to be reasonable,
and such like minor errors of investment
judgment. These points, however, will
explain themselves when once a right
understanding of investment is arrived at;

. therefore I need do no more here than to
- indicate their existence. ‘

Whilst following my argument, I should like
every one of my readers to bear in mind the
particulars of his own investment career,
and I should like him to tick off, as it were, my
ideas against his own practical experiences.
Whenever he finds that my teachings are in
direct opposition to his own experience, let
him make a note of the fact, and communicate

forthwith with the Editor of the Review, who

will, I am sure, be only too pleased to insert
any sound counter opinion in his publication.
By this means it may very well be that a great
and further light may yet be thrown upon a
topic of such world-wide interest as the attain-
ment of investment safety, and no opportunity
should be lost of assisting to put a stop to the
enormous losses which are annually made by

--- Page 54 ---

92 INVESTMENT PRACTICALLY CONSIDERED

investors—losses which in many cases entail
actual privation upon the individual investor.

There is an old nursery adage which deals
with the folly of putting all one’s eggs into
one basket, and herein lies the fundamental
principle of all safe investment. I am not
here referring to the case of a practical man
personally supervising a particular enter-
prise, and devoting his entire energies there-
to. Such a man need have no hesitation in
putting his eggs into one basket—always
provided that he himself is the only person
who is permitted to touch the handle of that
basket, and also provided that his personal
strength is equal to the load which he under-

takes. I am now rather discussing the invest-

ment question from the standpoint of that
great army of investors who invest their
money outside the circle of their daily pur-
suits, or those who invest but, for practical
purposes, have no daily pursuit whatever. I
am addressing myself, in fact, to the great
multitude of investors who hand over the
management of their capital to others, as
every one does do who buys a Stock Exchange
security without being either a director or a

INVESTMENT SAFETY 93

manager of the concern in which he thus
interests himself. This is the average type
of investor, and an investor of this type
requires a number of varied receptacles for
his capital.

The man who has invested the whole of his
capital in one single security is so rare as to
be practically non-existent. Most investors
hold a considerable number of stocks, some
as many as 30 or 50, yet in many such
cases the eggs are all actually in the same
basket, whilst their owner is serenely
unconscious of this unfortunate fact. It is
the realisation of what constitutes a separate
basket—that is to say, what constitutes a
separate investment risk which is the first
step towards successful investment.

The mere fact that an investor holds, say,

>. twelve stocks is not sufficient to effect a
distribution of investment risks: for it may

well happen, and it very frequently does hap-

= _pen, that the fluctuations of all these stocks

are controlled by the same motive force.

f Let us take, for example, say, three British

Corporation Stocks, three British Railway
Stocks, the stocks of three British Gas and

--- Page 55 ---

94 INVESTMENT PRACTICALLY CONSIDERED

Water Companies, and the shares of three
miscellaneous British commercial concerns—
a fairly mixed assortment of securities which
not only on the face of it appears to be a
capital distribution covering a wide area, but
also is a fairly typical specimen of the at-
tempted distribution of investment risks such
as exists in tens of thousands of cases. But
so far from such a distribution being produc-
tive of any beneficial results, it will be found
that over a period of twenty-five years the
same result will be obtained by holding one
or two of these stocks only as was obtained
from the whole combined investment.

Such an investigation is easily made from
practical experience by all those whose Invest-
ment Lists tally with, or are somewhat similar
to, the above description, while those whose
Lists of Investments held differ materially from
the specimen outlined above, or who have no
past investment experience to guide them,
can make experiments for themselves with
the aid of the price-records of British Stocks
contained in the Investor’s Shilling Year Book.

Some people have a natural antipathy to

figures, and will therefore neglect to carry this

INVESTMENT SAFETY 95

suggestion into practice. But those who
take the trouble to inform themselves on this
point will arrive at the inevitable and most
important conclusion that all British Stocks
are under the control of the same identical

j influence. Further, they will then have the
j fact forcibly borne in upon them that the

splitting up of a capital sum amongst a

. number of stocks all fluctuating in sympathy

with one common influence is not conducive
to a distribution of investment risks. Having
once arrived at that conclusion the cautious
investor will immediately appreciate the neces-
sity of so subdividing his capital that the

various sections of it may each be influenced

by a different motive power.
The next point will be to ascertain what that

motive power really was which caused all his
: : “British investments to move in the same direc-
: 4 tion, and this he will do in the easiest way
_» by ascertaining how the investments situated
exclusively in any one other country move.

If he does this he will ascertain the fact that
the price movements of the principal stocks

| of every country areidentical with one another 3
but that the individual price movements of

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96 INVESTMENT PRACTICALLY CONSIDERED

each country differ from the price movements
of every other country.

Then, guided by the fact that all British
Stocks are subject to one and the same
controlling influences, and that the same rule
applies to the stocks of other countries, the
intelligent observer will readily understand
that a true compensating balance of invest-

ment risk is easily attainable by means of the _

Geographical Distribution of Capital—that
is to say, by not investing the whole of a
capital sum under the controlling influence
of one country, but by so dividing it that its
component parts are each under the influence
of a different geographical division of the
world’s surface. On this subject I have
written a book which is published under the
name of Investment an Exact Science. The
title of the book may sound somewhat for-
midable, but its contents are easily digestible,
and as it is impossible to go into the subject

of the Geographical Distribution of Capital

at greater length within the limits of this
article, I must refer my readers to this volume
for the more detailed explanation of this inter-

esting discovery.

INVESTMENT SAFETY 97

When once the investor has really succeeded
in dividing his eggs amongst different
baskets by means of Geographical Distri-
bution, the most serious of his investment
difficulties will be at an end. The total value
of his invested capital will cease to fluctuate ;
some few of the stocks which he holds will
always show him a profit over their cost
price ; his income will commence automati-
cally to increase ; in fact the chief elements of
investment success will be his forthwith.

The next point is the class of stocks which
any given investor ought to hold, and this is
fully as important a consideration as the
proper distribution of investment risks. Many
investors, with the view of rendering some
portion of their capital, as they think, perfectly

_ safe, invest it in Trustee Stocks, whilst
“another portion they put into securities of

medium class, and with the remainder of their

7 : capital they dabble in dubious ventures
ag screturning a high rate of interest. By this
@ means they counter-balance the low yield of

interest obtainable from Trustee Stocks, and

_ 80 they arrive at a fair average return on their
' money.

--- Page 57 ---

98 INVESTMENT PRACTICALLY CONSIDERED

The unwisdom of such a proceeding has

been completely laid bare by the course of --

markets during the past few years, during
which Trustee Stocks have fallen over 20 per
cent. in value, and have thus entirely defeated
the object with which they were originally

purchased—viz., to endow the portion of the —

capital sum which they represented with the
much-coveted stability of realisable value.
The most casual observer must have
noticed that the width of fluctuation differs
in every class of security. For whilst some
classes of security only fluctuate a few points
in value any one year, there are others which
fluctuate to an extent which is five or even
ten times as great. In most instances the
width of fluctuation depends upon the nature
of the stock. For example, good trading com-
panies’ Debentures vary but little in value
from year’s end to year’s end; whilst in
some Home Railway Ordinary Stocks the
annual fluctuation amounts to twenty or
thirty points. Width of fluctuation depends
much upon the quality of an investment
and hence upon its yield. So that any one
who holds Trustee Stocks, medium-class

INVESTMENT SAFETY 99

investments, and speculative securities by
his" own act involves himself in three
groups which are all at variance with one
another in the matter of width of fluctuation.
But the primary object which led to their selec-
tion was the hope of minimising the risks of
investment. This was to be accomplished
by the rise in one stock compensating for
the fall in another; clearly, however, the
desired compensation could not be achieved
if one stock held is to rise three points whilst
another falls twenty points. It will be seen,
then, that holding various classes of stocks
must in the long run imperil capital.

The last point of cardinal importance is
that most investors consider each one of their
stocks separately, instead of regarding their
whole Investment List as a carefully drawn

“scheme. Although the necessity of dividing

their investment risks is instinctively obvious
to all investors, they fail to appreciate the

fact that the first object of the division of

risks is to arrive at a balance of risks. They
know well that a pound put on one side of a
scale can only be balanced by exactly the
same weight being put on the other side of it,

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100 INVESTMENT PRACTICALLY CONSIDERED

and yet they habitually subdivide their capital
so unevenly that they are content to hold
£3,000 worth of one security, £500 worth of
another, £1,800 worth of a third, and so forth,
and still they appear to expect that such
an uneven distribution of risks will endue
their capital with an evenness of realisable
value.

I feel quite certain that a great many of my

readers, and especially such of them as have.

achieved most unsatisfactory investment re-
sults in the past, are holding at the present
moment Lists of Investments in which many
stocks are subject to the same investment
influences, and are of diversified qualities
and are held in quantities which do not cor-
respond one with another. Such heterogene-
ous collections of stocks can only produce
investment catastrophe: this has been their
result in the past and such must continue to
be their result in the future.

The only way in which satisfactory invest-

ment results can be obtained is by observing

the three main principles :—
That every stock held must constitute a
really separate investment risk.

INVESTMENT SAFETY 101

That the quality of all the stocks held
must closely correspond.

That the amount of capital invested in
each stock must be as nearly as
possible identical.

These three points, once understood and
observed, will, in my opinion, almost ensure
permanent investment success, and will
certainly outweigh any small mistakes as
to the details of selection and price paid for
individual stocks. At the outset of my
argument I drew attention to these minor
details, which are sometimes the cause of
want of investment success, and as after all
they are also of some considerable importance,
I counsel those of my readers who are really
interested in this question to inform them-
selves of them, and for this purpose I suggest
reading a small book. published under the
title of How to Manage Capital. This
volume is quite as easily understandable as
this article, and will give the investor all the
information which he needs on these minor
details. When he has mastered these ele-
ments of sound investment, and has supple-
mented this knowledge by the strict obser-

--- Page 59 ---

102 INVESTMENT PRACTICALLY CONSIDERED

vance of the three main principles cited .

above, he will find that his future career
as an investor will be regulated by rules
which cannot fail to secure success.

I am fully convinced that there are ex-
tremely few people in the United Kingdom

who realise what enormous sums are lost by

investors in the aggregate by disregarding
the main principles of sound investment.
Some years ago I made a calculation that the
amount which was lost would pay off the
entire British National Debt in a period of
four years. Some people dismiss this serious
matter with an airy remark to the effect that
the losses so incurred no doubt serve some
useful purpose as some one, doubtless, profits
by them. Such ideas, however, only exist
in the minds of those who have not studied
the—I will admit—somewhat abstruse science
of Political Economy.

Taking one easy example out of thousands
which present themselves, let. us discuss the
fate of the thousands of pounds which have
been lost by those investors who subscribed
the capital for the London Coliseum. Enor-

mous sums have been spent in erecting this

INVESTMENT SAFETY 103

edifice. The contractors may or may not
have derived a solid profit from their con-
tracts; the workmen might have been em-

_ ployed on another profitable undertaking,
_and if the total profits made out of that build-

ing were put on one side, and the losses of the
investors on the other, a large deficit which
has not benefited any one at all would be

? found to be the actual -result.

In this way the money so sunk has dis-
appeared without affording any adequate
advantage to any one. Had those who sub-
scribed the capital studied the investment
question, and had they read How to M anage

Capital, they would have realised the risks of

such an undertaking beforehand, so that most

likely the Coliseum would never have been
built, and the national loss thus made would

have been avoided.

It is by being able to foresee what the
future is likely to produce that the investor
can guard against his losses. He knows that

“ym 0 country can continue being prosperous for
mm 3 long and uninterrupted number of years.
This fact proves to him that risking his money
on the prosperity of any one country is

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104 INVESTMENT PRACTICALLY CONSIDERED

unsafe. He further knows that if his capital
is divided up over a number of countries the
division must be even in order that a true
compensating balance may be effected ; and,
lastly, a short study of price movements of
individual stocks has convinced him that
only stocks which are similar in kind are
similar in price movements. By observing
these very simple axioms he will not only avoid.
personal loss to himself, but he will also assist
in reducing the serious national loss which is
incurred through imprudent investment.

If an account of all the Investment Lists
existing in Great Britain were taken, and
they were sorted as to desirability in accordance
with the above explained principles, it would
be found that comparatively a very small
number of them properly protected their

owners against capital loss, and it is with the
~ view of reducing the number of unsatisfactory
Investment Lists that I have written my book
and am now writing this article.

My book has enjoyed a certain amount of
popularity, and has already passed through
various editions, yet I have found that in a
good many cases the readers of this book,

INVESTMENT SAFETY . 105

whilst agreeing with me as to general prin-
ciples, have delayed putting their houses

in order, so to speak, so far as their invest-
‘ments were concerned. This neglect has

been due to a multitude of reasons. One
of the chief reasons of their vacillation has
been that they did not consider the time to
be favourable for a proper re-arrangement
of their own particular Investment Lists. In
this respect they were wrong, because experi-
ence has shown me that the time is never in-
opportune for the reconstruction of an Invest-

- ment List ; and my experience is by no means

small, as I have personally considered and
practically dealt with many hundreds of
Investment Lists.

It is true that sometimes, in re-arranging
a, list, some of the stocks held. have to be sold
at under cost price, and thereby a temporary
capital loss is sustained. Investors reason
that so long as they retain a stock which is
likely to regain the price originally paid for
it they cannot be wrong. Further, they
assert if they sell any of their holding at a
depreciation their loss becomes certain and.
irrevocable. Such a point of view is deplor-

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106 INVESTMENT PRACTICALLY CON. SIDERED

able, because the re-arrangement of an Invest-
ment List is simply the substitution of desir-
able stocks for undesirable ones, If a man
sells a stock under its cost price, all he must
endeavour to do is to buy a stock in exchange
which is possessed of a greater expectation
of recovery than the security he parts with.

Another reason for reluctance in revising
an Investment List is that the investor says,
“I know all about the stocks which I hold at
present, and I know comparatively nothing
of the new stocks which I am going to buy.”
This is not a sound argument because there
was a time when he knew nothing of the stocks
which he now holds, and because all he now

knows about them he has learned, and because

it is quite as easy for him to learn all about a
fresh stock from its past statistical history
as from the actual experience of having held
it. There are aconsiderable number of hand-
books published. which give the statistical
facts in reference to almost every security of
importance, and from these just as large an
amount of knowledge is to be gleaned in refer-
ence to unknown stocksasthe knowledge which
the investor possesses as to his own securities,

| INVESTMENT SAFETY 107

The third point which weighs in an in-
vestor’s mind against the reconstruction of
an Investment List is that of expense; but

here again he will find that the total cost of

setting his affairs in order does not come to
two months’ interest on his investments.
Furthermore, he will find that a wise re-_
arrangement will, in nine cases out of ten,
recoup the amount of expense in an exceed-
ingly short space of time.

I would not counsel any investor to re-
arrange his Investment List unless he can
achieve a very material gain thereby, and the
desirability of this gain may be calculated as
follows :— |

1st—Additional capital safety. |

2nd—Additional annual income.

3rd—An additional chance to regain
past capital losses.

Unless the first point can be unquestion-
ably secured by the proposed re-arrangement

: scheme, an investor should not think of

altering his present holdings.

The second point is in many cases also one
of great importance, and here I should like
to make a remark in reference to the geo-

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108 INVESTMENT PRACTICALLY CONSIDERED

graphical distribution of capital, which will
explain at once another advantage of thi SSys-
tem which I have not as yet touched upon.
‘In every country money has a certain
value, but that value differs in each country.
In England and in France capital is more
plentiful than in any other part of the globe,
and therefore is in the least urgent demand.
Consequently 33 per cent. is about the average
yield obtainable in these countries from
investments of the highest class ; whereas in
Germany the same type of securities return
4 per cent. But in America, the British
Colonies, Africa, and Asia much higher rates
are obtainable. In fact, the same class of
Debenture which would yield in England
only 4 per cent. will be found to yield quite
5} to 5} per cent. in Africa. For this reason,
when an investment is made on the geographic-

al principle, and the money is evenly divided _

among various countries, if the same class of
stock be chosen in each instance, then an aver-
age rate of income is obtained, which is con-
siderably higher than the rate ruling in
England at the present time ; in fact, the same
selection of stocks which would produce in

INVESTMENT SAFETY 109

England, say, 44 per cent. will produce, when
geographically distributed, 43 per cent.
A half per cent. may not seem to be much
on the face of it, but on a capital of, say,
£20,000 it amounts to a good deal, as
there is a considerable difference between
an income of £850 and £950 per annum.

- And whenever such a difference is ob-

tainable whilst capital risks are also reduced,
it certainly becomes a question of consider-
able importance.

I have in this article given my views on
this all-important subject with much brevity ;
but they are entitled to consideration from
the fact that they are not based on mere
theory, but on a life-long practice. I do
not suggest that my views are perfect, and I
am willing to believe that some further im-

: | .- provements of my system may yet be effected

before the really ideal investment method
is discovered. For this reason I should be

4 ; : very pleased to receive any intelligent criti-
, cism of the investment programme which I

lay down and to receive any statistical state-
ment of investment results which appears to
traverse the expediency of the system which

--- Page 63 ---

110 INVESTMENT PRACTICALLY CONSIDERED ,

I advocate. Exhaustive discussion is the
basis of true knowledge, and I am anxious
to encourage the most searching inquiry into
every aspect of the Investment Question.

The World’s Stock Markets

_ Every important commercial centre has a

Stock Exchange of its own, and the dealings
in every one of these Stock Exchanges are
naturally confined to those securities which
are held by the public of the neighbourhood
in which each Stock Exchange is situated.
Some stocks are held in many quarters of
the globe. Dealings in them, therefore, take
place on a large number of Stock Exchanges.

_ Other or so-called “local” stocks are not go

widely distributed, and, therefore, not so
universally dealt in. It is really not the

“@ .. size of a stock which determines its number

of regular markets, but simply the manner
in which it is distributed among the popula-
tion of the world. Thus, there are some large
and important stocks representing millions
of capital which have only one principal
market, like British Consols, the only real

market for these being London; whilst com-
111

--- Page 64 ---

112 INVESTMENT PRACTICALLY CONSIDERED

paratively much smaller issues, like the loans
of the Turkish Empire, are dealt in on nearly
every Stock Exchange in Europe.

British Consols can, of course, be dealt in
on every British or Foreign Stock Exchange,
as they are known throughout the world ;
but nearly all these transactions come directly
or indirectly by letter or telegram to London
and are finally transacted on the London
Stock Exchange, where almost any quantity

of the stock can readily be bought or sold. —

In fact, only London can be relied upon to

absorb or supply any substantial amount of.

the stock, and London is consequently the
sole market.

In securities which have various large
centres where they are dealt in, like the
Turkish securities, this is not so; they are
held largely by the public which make the
London, Paris, Berlin, Brussels, Amsterdam,
Vienna, and other less important Stock Ex-
changes their places of dealing, and conse-
quently any one of these centres is always
ready to supply or absorb Turkish stocks.

In fact, while every important transac-
tion in Consols sends its reflex to London,

THE WORLD’S STOCK MARKETS = 113

Turks are dealt in locally, and these dealings
only affect indirectly the other places where
they are quoted. For this reason London
alone determines and controls the price of
Consols, whilst the price of Turks is deter-
mined by international arbitrage dealings.
Arbitrage transactions are the sales and
purchases of stocks which are effected by letter,
telegram. and telephone between the Stock
Exchanges of different countries. In these
international dealings the level of the respec-
tive quotations at any two centres is deter-
mined by the current rate of exchange be-
tween them. The rate of exchange becomes
the arbiter of value—hence the term arbitrage.
For instance: Paris quotes Turks in frances,
and it is, therefore, necessary to work out the
French franc-quotation by the rate of exchange

~into its equivalent in English money before

an arbitrage dealer can determine whether
it is possible to buy or sell Turks more advan-

; j _tageously through his agent on the London

market than he can buy and sell them on
his own Bourse. It is the constant rush on
the part of arbitrageurs to buy stocks in the

market where quotations are low, and to sell
I

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114 INVESTMENT PRACTICALLY CONSIDERED

them in'the market where quotations are high,
which keeps internationally-dealt-in stocks at
an uniform price at the various centres.

In these international securities, of course,
the most powerful centre determines the
quotation. Thus, if the Paris public is more
interested in Turks than Berlin, Paris is able
to absorb or supply larger quantities of stock,
and it is then the Paris market which controls
the price and fixes the level of value to which
Berlin is compelled to conform. If, in the
course of time, the interest in Turks in Paris
gradually diminishes, and the people of Ber-
lin or any other centre should become the
_ largest holders of Turks, then the position
would be reversed, and the Berlin or some
other Stock Exchange would commence to
dominate the market in Turks.

In this way the principal markets for
internationally held stocks are constantly
changing, and the dominating centre of a

stock does not depend upon its nationality, -

but upon the place where it is principally
dealt in.

Thus, the principal market for the loans
of the United States of America was at one

THE WORLD’S STOCK MARKETS 115

time in London, but has now been transferred
to New York. In the same way the Grand
Trunk Railway is mainly a Canadian
enterprise, but no Canadian or American
Stock Exchange can at present control the
price of its stocks, as London dominates the
market ; whilst in the case of the shares in
the Rio Tinto Copper Mine, which is situated
in Spain, there is no independent market

_ either on the Madrid or Barcelona Bourses.

The shares are held in France and England,
and the London or the Paris quotation alter-
nately dominates the market, though the
control is generally in the hands of Paris.

To the holder of stocks it is, for the above
reasons, not only important to know where
an enterprise is situated and where its stocks
were originally issued, but also which finan-

~ cial centre happens to determine their quota~

tions.
Not only do wars, political troubles, trade

stagnation or prosperity influence the pros-

perity of the enterprises and the prices of |
stock which are held in a country, but such
events as these also affect the stocks in which
that individual country is the dominant

--- Page 66 ---

116 INVESTMENT PRACTICALLY CONSIDERED —

market. This is a point which should be most
carefully considered by all those who desire

to obtain a real international distribution of

risks.

Many investors object to hold stocks which
they do not see daily quoted in the particular
newspaper they regularly read, and this fact
alone prevents them from obtaining a proper
capital distribution. No newspaper is able
to quote all the really important stocks of the
world, as this item of intelligence alone
would suffice to fill the most voluminous
newspaper. The largest number of stocks
which are at present quoted in any newspaper
or periodical of any country are contained
in the Financial Review of Reviews. But al-
though this Review gives the last four years’
prices, dividends and yields at present prices
of upwards of 5,000 individual securities, yet
this number of stocks is only a tithe of all
the investments of the world.

Every paper has to confine itself to a few
stocks only, and these again are selected
according to the individual ideas of the editor,
who is usually not influenced by the relative
importance of various stocks, but by the

THE WORLD’S STOCK MARKETS 117

amount of public attention any given security
happens to command for the time being.
Thus, frequently, prices of unimportant specu-
lative securities are recorded by all papers to
the exclusion of the quotations of really safe,
solid, important investments. Frequent news-
paper references to any one stock are tanta~-
mount to a large number of trade advertise-
ments of a commercial article. Publicity does,
doubtless, create a demand for much-adver-
tised articles, but in the same way as it does
not follow that any particular soap is the
best because its name is on every hoarding,
so the Allsopp Brewery issues have not proved
the best investment of their kind because
during a number of years they have been
constantly quoted and commented upon in
every British financial paper and in every

' City article.

When the choice of an investment is being
considered, it is better to select a compara-
tively unknown security, because in such a
stock the probability of securing a real bargain
is far greater than amongst stocks that are in
everybody’s mouth. And just as consumers
should always give a wide berth to all largely

--- Page 67 ---

118 INVESTMENT PRACTICALLY CONSIDERED

advertised articles which have not already
positively proved themselves. to be the best
of their kind, so investors should shun every
stock which is much written and talked about
at the moment, unless the past records of
that stock prove it to be safe, sound and
cheap at the ruling quotation.

The argument frequently advanced that
investors should only interest themselves
in stocks. which command a free and ready
market proves to be quite fallacious on close
investigation. The difference between a stock
in which there is a free market and one in
which the dealings are not frequent really
consists in the difference between the buying
and selling prices.

It is true that some stocks can be bought
and sold at a difference of 5s. in every £100,
whilst in other stocks this difference amounts
to £2 for the same quantity. But. stocks of
both types are subject to market fluctua-
tions, and an increasing or decreasing demand
for a particular stock will rapidly alter the

1 The writer has dealt exhaustively with this subject

in the Popular Financial Booklet No. 17 (The Money
Market Article and the Private Investor).

THE WORLD’S STOCK MARKETS 119

facility with which it can be dealt in; so that
the free market of to-day becomes the labori-

- ous negotiation of to-morrow.

Investors do not buy with the intention
to sell again soon after; they buy to hold
for years. Suppose an investor, intending
in 1905 to invest in a speculative South
American Railway stock which paid a high
rate of interest, had selected the then so-very-
much-talked-about Buenos Ayres and Pacific
Railway Ordinary Stock rather than the
very little known 5 per cent. Second Prefer-
ence Stock of the Cordoba Central Railway,
and that he had made this choice because
the former stock had a very free market,
whilst in Cordoba Second Preference there

was very little dealing and a difference of £2
per £100 between the quoted buying and
selling prices. The income yields from both

transactions in 1905 were about the same,
while the dividends paid on both stocks
remained unchanged. But if the inves-
tor had allowed himself to fall a victim to
the free-market delusion and had bought
Buenos Ayres Pacific Ordinary at 143 (quoted
then at 1423-143), whilst he might have had

--- Page 68 ---

120 INVESTMENT PRACTICALLY CONSIDERED

to pay 90 for Cordoba Second Preference
(quoted 88-90), what would his position have
been in March, 1907? Why, he would then
have found that the Buenos Ayres and
Pacific Stock had in the meantime not only
dropped in value, but had also lost its free
market, and he would have to accept 119
for it, or in other words, he would have lost £24
on every £100 of stock which he held. But
Cordoba Central Second Preference, which
had also receded in the meantime, and still
remained a wide-priced stock, were yet sale-
able at 86 (quotation 86-88), representing a
loss of £4 only on every £100 of stock held.
It is true that in the purchase of the Buenos
Ayres and Pacific Stock only 10s. more than
the lowest price quoted at the time was paid,
while the market turn in the Cordoba case
amounted to £2, yet not all this disadvantage
in dealing was repeated at the time of sale.
Thus nominally about £2 was saved on the
Buenos Ayres and Pacific transaction. But
into what utter insignificance these forty
shillings sink when it is considered that the
cheaply completed. transaction produced an

ultimate loss of £24 against a loss of £4 only

THE WORLD’S STOCK MARKETS 121

on the same quantity of the less negotiable
security.

We wish it to be quite understood that in
the above example Cordoba Central Second
Preference and Buenos Ayres and Pacific
Ordinary have only been used to prove the
argument and not because we consider that
they will retain their respective positions,
both as to price or marketability. It is
always dangerous to give in a financial review
an example of this kind, as a review of this
sort is frequently referred to and re-read for
some time after publication, and both stocks
used in the example might then have ceased
to exist. For this reason I hope that my
readers will understand that the future of
the stocks quoted in the example is an un-
foreseeable quantity, and that the argument
only is of value.

The speculator who intends to realise again
promptly must, of course, consider the tem-
porarily existing marketability of a stock.
The investor should, as a matter of fact,
turn his attention to stocks which are un-
fashionable and rather difficult to deal in.
Every good investment is always saleable at a

--- Page 69 ---

poi tr enangnenne erent pn me

122 INVESTMENT PRACTICALLY CONSIDERED

price, and the margin of difference between
purchase and sale prices is a matter of small
moment in comparison with the ultimate
destination of a market movement. It is,
therefore, only present and future prospects
and the suitability of a stock to a specific
Investment Scheme, which ought to weigh

with an investor, and not the margin of ©

difference between its sale and purchase
prices.

Again, it is really immaterial to the investor
who holds a good stock which particular Ex-
change determines the price of that security.
Whether it is quoted in England or elsewhere,
or what may be the small actual expenses of
purchase or sale, are minor considerations so
long as it pays him to hold the stock at the
nett cost price, including all charges.

Every investor who once grasps this im-
portant fact will experience no difficulty in
distributing his investment risks in such a
manner that no conceivable combination of
circumstances can seriously reduce the realis-
able value of his invested capital.

To the investor who realises the truth
contained in the foregoing paragraph, the

THE WORLD’S STOCK MARKETS 123

world, so to speak, is open, and he can buy
- - the safest and most remunerative securities in

existence, and thereby free himself from the
confined limits of any one financial centre.
An International firm of stock dealers is in a
position to supply him with the best selection
out of all markets, together with the neces-
sary material for forming a capable opinion
of the stocks he is inclined to purchase.
Such a firm will also inform him as necessity
arises how all his stocks are valued on those
Stock Exchanges on which they are principally
dealt in.

If the question of what people think of
stocks and what they consider safe is
analysed, we come again to a point of geo-
graphy pure and simple. A Swede will con-
sider Swedish the safest National Loans, and
an American will entertain a preference for
those of the United States. The Scotchman
will prefer the British Linen Bank to the

| London and Westminster, the Londoner

vice versd. Jf an Englishman were told to
buy Austrian North Railway Debentures he
would hesitate, while an Austrian might con-
sider London and North-Western Deben-

--- Page 70 ---

124 INVESTMENT PRACTICALLY CONSIDERED

tures to be highly speculative. As a matter
of fact, both these debentures are equally
safe, as can be proved by statistics; there-
fore, why should an investor allow local
feeling to interfere with his obtaining invest-
ment safety ?

’ When the various Stock Exchanges of the
world are reviewed, and when we consider
that each Stock Exchange deals in quite a
number of stocks which have only a very
limited, if any, market in other countries, yet
which stand high in the estimation of local
investors, we see more clearly how wide may
become the area of an investor’s choice, and
how, in this way, it becomes possible to
find stocks which are able to realise any
reasonable investment aim, whatever its
. nature.

To give the reader some idea how the stock
markets are scattered over the surface of the

earth we append the following list of principal —

Stock Exchanges obtaining in each of the

nine main Geographical Divisions; a refer- _

ence to a map of the world will indicate how
widely they are distributed,

THE WORLD’S STOCK MARKETS 128

I. Bririso Drviston.

Principal Stock Exchanges :—
London, Manchester, Glasgow,
Liverpool, Birmingham, Edin-
burgh, Dublin, Cardiff, Leeds,
Bradford.

II. Bririsn CoLoniszs.
Principal Stock Exchanges :—

Inpia: Calcutta, Madras, Bombay,
Rangoon.

CaNnaDA: Montreal, Toronto.

AustTrauia: Adelaide, Melbourne,’
Sydney.

TASMANIA: Hobart.

NEw ZEALAND : Wellington, Christ-
church, Dunedin.

Straits SETTLEMENTS: Singapore.

Ill. Evuropz, Norra.

Principal Stock Exchanges :—
BrELerumM: Brussels, Antwerp.
DENMARK : Copenhagen.
GERMANY: Berlin, Hamburg, Frank-

fort, Bremen, Breslau, Munich.
HoLtanp: Amsterdam, Rotterdam.

--- Page 71 ---

126 INVESTMENT PRACTICALLY CONSIDERED

Norway : Christiania.

Russra: St. Petersburg, Warsaw,
Moscow, Odessa.

SwepeEn : Stockholm.

SwitzERLAND: Geneva, Basle,
Berne.

IV. Europe, Sours.

Principal Stock Exchanges :—
Austria: Vienna, Prague, Trieste.
BuueaRis : Sofia.

France: Paris, Marseilles, Bor-
deaux, Lyons, Lille.

Gresce: Athens.

Iraty: Milan, Genoa, Turin, Rome.

Huneary: Buda-Pesth.

PortuGgaL: Lisbon.

Roumanisa: Bucharest.

Spain: Madrid, Barcelona, Bilbas.

Servia: Belgrade.

TurKEY : Constantinople.

V. Asta.
Principal Stock Exchanges :—

JAPAN: Tokio, Yokohama, Osa Ka. | 4
Cuina: Shanghai, Hong-Kong, Kobe.

THE WORLD’S STOCK MARKETS = 127

VI. - AFRICA.

Principal Stock Exchanges :—
Carr Cotony: Cape Town.
Eeayet: Cairo, Alexandria.
Natau: Durban.
TRANSVAAL: Johannesburg.

Vir. America, Norrs.
Principal Stock Exchanges :—
New York, Chicago, Boston, Phila-
delphia, San Francisco, New
Orleans, Baltimore.

VIII. America, CENTRAL.
Principal Stock Exchanges :—
Mexico City.
Havana.

IX. America; Sours.

Principal Stock Exchanges :—
ARGENTINE: Buenos Ayres.
Braziz: Rio de Janeiro.
Cuiti: Santiago.

Preru: Lima.
Urvavay: Monte Video.

We have in the above list, named some
90 different Stock Exchanges, among which

--- Page 72 ---

128 INVESTMENT PRACTICALLY CONSIDERED

it should not be a difficult matter to find just
the stock necessary to fit in with any kind
of investment scheme.

Whether the securities held by an investor
are marketable in London or any other part
of the world makes nowadays but little differ-
ence. There are many stock-dealing firms

in Great Britain who are in daily contact |

with every Stock Exchange centre, and by
means of telegrams and cable transfers stocks
can now be quite readily bought or sold, wher-

ever their chief market may be. Quotations—

for all stocks, no matter where they are dealt
in, are daily obtainable with the same amount

of facility, provided that the proper firms

are applied to.

Those investors, however, who prefer Lon-
don as their market for investment transac-
tions will not find it absolutely necessary to
go considerably outside that Stock Exchange.
The London market deals in a great variety
of securities, a number of which are mainly
controlled in other parts of the world and
a very fair distribution of capital can be

achieved by confining oneself to that market .

alone.

THE WORLD’S STOCK MARKETS 199

In former times this was not quite the case,
but during recent years the position in this

a _ Tespect has improved to the advantage of

the individual investor, though perhaps to
the detriment of London’s financial supre-
macy.

During the third quarter of the last century,
which witnessed the dawn of present day in-
dustrial developments, Europe was in a state
of great political unrest, and all Continental

3 bourses were still in the infancy of their sub-
= sequent financialimportance. For this reason,

Great Britain—or perhaps it would be better
to say London—was then the only existing
international harbour of refuge for all financial
transactions of magnitude. Not only did

every important issue of stock find its way

to London, but, in addition, a great deal of
foreign capital was entrusted to London for
investment. All foreign magnates and poten-
tates had their nest-eggs in the safe custody
of British Banks.

This gave to London the undisputed supre-
macy of the finances of the world, and this

| position continued. until the end of the
#@ Franco-German War. This war resulted in

x

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130 INVESTMENT PRACTICALLY CONSIDERED

the payment of a large indemnity by France

to Germany, and the subsequent consolidation

of all German interests, which struck the first
blow to London’s financial supremacy. _
Then—and particularly during the last
decades of the past century—trade, commerce
and industry all over the world developed
that historically unprecedented expansion
which so enormously multiplied the wealth
of the world, and gradually withdrew from
London its former financial power. Investors
of all nationalities used their newly acquired
wealth in the purchase of the stocks of their

own countries, thereby shifting the dominating _ y

markets in them to their own Bourses, and
in this way the London Stock Exchange has
lost control over many stocks in which its
influence was at one time supreme.

A very striking example of this happened

recently in the case of Argentine securities. . s
These were formerly wholly in the hands ©

of English investors, and British trade de-
pression spelt inevitable reduction in Argen-
tine values. Now itis different; and whilst

during 1904 financial stagnation prevailed — 3

in England, Argentine stocks were on the

THE WORLD’S STOCK MARKETS 131

boom, and every ship which left English
shores for South American harbours conveyed.
parcels of Argentine stocks to a new domicile ;
and this has continued to the present day.

This loss of financial control is a sad fact for
the British nation as a whole, but it is ad-
vantageous to every individual British inves-
tor, as the number of stocks well known to
him and to his London Stockbroker which
are free from British trade influences is gradu-
ally increasing. In this way, as time passes,
it daily becomes easier to obtain a fine distribu-
tion of capital risks by means of an interna-
tionally distributed list of stocks, without
going beyond the securities which are known
on the British Stock Exchanges.

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i

Investment Knowledge

PRECISELY as the knowledge of language ~

possessed by every individual depends upon
the number of words which he has in familiar
use, so the individual’s investment vocabulary
depends upon the number of stocks with the
value, position, and history of which he is
perfectly familiar. When judged by this stan-
dard it must be admitted that the average
investor is possessed of but a scanty store of
investment information; for the number of
stocks with whose capital, constitution, and
past market fluctuations he is thoroughly
familiar is exceedingly small. But although
on the one hand a limited vocabulary is a
matter of small inconvenience to its possessor
for the simple reason that his ideas are corre-
spondingly few and, therefore, capable of ex-
pression in the few words with which he is

acquainted, on the other hand an investment .

vocabulary of limited range is a serious dis-
182

INVESTMENT KNOWLEDGE 133

advantage. For this reason being intimately
acquainted with the history of but few
securities an investor has a natural tendency
to circumscribe his area of investment within

. dangerously narrow limits.

Neither is it difficult to understand why the
individual range of investment knowledge is
small. For, as a rule, investors obtain such
information as they possess either from their
stockbrokers or from the particular daily
paper which they are in the habit of reading
regularly. Now the number of visits which a
steady-going investor pays to his stockbroker
is, and should be, few; whilst the number
of stocks which a newspaper can habitually
discuss is also necessarily limited.

There are, of course, published in this country
a number of excellent daily and weekly finan-
cial journals which give the names, quotations
and particulars of a vast number of invest-
ments, together with analytical articles which

deal with individual securities or groups of

securities. Butin this country financial journ-
alism has never obtained the firm foothold
which it deserves ; so much so that the com-
bined circulation of all the English financial

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134 INVESTMENT PRACTICALLY CONSIDERED

papers is smaller than that of any of the well-

known London “ Dailies.”? In other countries |
this is not so, and the circulation which some |

continental financial papers achieve is remark-
able. Thus, for example, the Berliner Bérsen-
Courier is one of the leading German papers

and has a circulation which equals that of the |

best daily papers in Germany, whilst in France
even the smaller financial papers have a list
of permanent subscribers which would fill the
distribution managers of our most important
periodicals with envy.

The simple fact is that the continental in-
vestor has a greater appetite for financial in-
formation than hash is English confrére.
The practical result of this is that a cursory
examination of a complete list of prices issued
by any British Stock Exchange will reveal
a most extraordinary number of price-anoma-
lies, whereas, if a similar list from any Con-
tinental Bourse is examined, it will be found
that nearly all the stocks quoted therein
have grouped themselves into certain levels
of value and that few if any discrepancies
can be said to exist.

In a previous article in the Review we have

INVESTMENT KNOWLEDGE 135

already alluded to the noteworthy absence
of any common basis of value amongst

| English securities, and we will now endeavour

to explain the reason of such a phenomenon.

It must first of all be granted that the English
nation is essentially commercial. Therefore,
it would be ridiculous to assume that they
are wittingly content to pay 20s. for one article
when another of similar quality and kind is to

be procured for 17s., and, further, that they

would accept an income of, say, £10 a year

_ did they only know that the same capital sum

could be invested with identical safety to yield
an annual income of £11. The reason for the
existing anomalies in English Stock Market

_ values is that the British Public is too much

occupied with the pressure of its every-day

business to devote sufficient attention to in-

vestment questions. The commercial instinct
of the nation is so busied over the making of
trading profits that the ultimate investment
of such profits, when they have been made, is
regarded as a matter of quite secondary im-
portance.

So that Englishmen of keen commercial in-
stincts are content to assume that the market-

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186 INVESTMENT PRACTICALLY CONSIDERED

basis of quotations is subject. to some sort

of systematic adjustment, and they are.

strongly convinced that if one stock hap-
pens to be cheaper than another, or if it re-
turns a larger income to its holders than an-
other, the less esteemed stock must on the
face of it suffer from some sort of inferiority.
Such a conclusion is, however, frequently a
mistaken one, and these price-variations are
the natural result of the small amount of
investment information which is at the dis-
posal of the average investor.

Let us, therefore, turn aside for a moment
to examine the nature of the Money Articles
in the daily Press, which form the foundation
of the investment knowledge of the nation.
Now, these Money Articles, from their relia-

bility, from their honesty, and from the’

amount of painstaking research which is
employed in their compilation, are productions
of which both the Press and the public may be
very justly proud. The only fault which
can possibly be found with them is that they
are written so much over the heads of their
readers. The very enterprise of English
journalism, which supplies such an epitome

INVESTMENT KNOWLEDGE 137

of the world’s news as is to be found in the
daily Press of no other nation, necessitates
the curtailment of the Money Article within
strict limits. Now any writer who is com-
pelled, no matter what may be the incidents
of a particular day, to confine himself to a
certain set space is bound at times to so greatly
curtail his subject as to render it difficult of
comprehension. More especially is this the case

_ when dealing with so highly technical a matter

as financial movements and their causes,
and it comes to pass, therefore, that though |
excellent in quality and teeming with inform-
ation to the financially expert, the money
article is of small use to the general reader.

Such articles invariably commence with a
brief description of the day’s events in the
Money Market itselfi—that is to say, the
transactions of discount brokers and the
fluctuations in the value of money when lent
for certain fixed periods. But to the general

_ public the movements of bullion and the rates

of exchange with various banking centres
abroad convey no information—indeed, these
details are Greek to many of the greybeards

‘of the Stock Exchange. Briefly the number

--- Page 77 ---

138 INVESTMENT PRACTICALLY CONSIDERED

of people who are possessed of a comprehen-
sive knowledge of trade balances and the
exchange of money which they involve is
extremely small. Altogether, the opening
paragraphs of the conventional Money Article
are calculated rather to bewilder than to
enlighten the ordinary investor.

Following the money movements come the
actual changes which have taken place in
Stock Exchange quotations. Thus one reads
that—

Cape Three-and-a-Half per Cents. fell 4, Great
Northern Deferred showed a slight tendency to harden,
Peruvian Corporation Preference rose }. Allsopp’s

Trust Certificates were weak, at a concession of 1} from
the previous day’s closing quotation.

At times, of course, an investor does happen
upon the name of a stock which he knows, or
in which he is directly interested, but other-
wise this part of the Money Article conveys to
him little more practical information than
was to be gleaned from the discount para-
graphs which preceded it.

Usually some dividend reports follow upon
the record of market movements, but it can
only be at rare intervals that the investor

INVESTMENT KNOWLEDGE 139

will come across the half-yearly or yearly

statement of a stock with which he is familiar ;
because, it must be remembered, there are

~gome 30,000 joint stock companies in exist-

ence, and the limited space of the Money
Article only permits of the publication of the
figures relative to about 1,000 of these in the
course of a year.

Next come the weekly traffic statements of
various English, colonial and foreign railways ;

‘but, here again, lack of space compels the
_City Editor to compress his information so

closely as to afford practical guidance only
to those systematic statisticians who have
tabulated, for their own information, the
traffic particulars of the preceding portion
of the current year, and who have also the
traffic figures of previous years before them
for the purpose of comparison. So that
although it may be pleasing news to an actual
holder of Great Western Railway stock when
he reads that his railway’s traffic receipts
have increased by £1,500 for the tenth week of
the current half-year, yet we greatly doubt

“@ whether the average investor is in a position

to appreciate the effect of this announcement

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140 INVESTMENT PRACTICALLY CONSIDERED

upon his future dividend prospects or upon
the realisable value of his stock. .

The typical Money Article then concludes

with a set of tabular matter, giving the price-
variations of the previous day in the case of a
limited number of stocks, together with the
“marks”? of actual ‘business done,” as
reproduced from the Stock Exchange Official
List.

In itself the Money Article is altogether
excellent, but it is compiled on the unfortunate
assumption that the average investor is
possessed of both the leisure and of the in-

clination to engage in statistical investigations _

on his own behalf. But as the majority of

investors are active business men with no —

time for such researches, and the minority
of investors consists of ladies and professional
men with no aptitude for such arithmetical
exercises, it follows that the conventional
daily Money Article fails to enlighten its
readers save by implication and guesswork.
For even the most conventional of Money
Articles has its regular readers, who dutifully
plod through its contents, partly from a
dogged determination to have their money’s

INVESTMENT KNOWLEDGE 141

worth and partly because few investors
have.the courage to confess that their mental

4 _ digestion is not sufficiently active to assimilate

the exceedingly strong meat which the average
City Editor sets before them.

The perusal of the Money Article becomes
largely a matter of habit. Having a certain
amount of money invested in stocks and
seeing his neighbours poring over the Money
Article the average investor not unnaturally

follows ‘suit. He scarcely cares to admit
_to himself that the subject, as therein

treated, is entirely foreign to him, and for
the sake of appearances he seeks to mask
the shallowness of his own knowledge by the
use of the technical phrases and expressions
in which the Money Article abounds. We
particularly remember at one time carrying
on a long and a most intricate correspondence
with an investor on the subject of his invest-
ment list. In order to prove to us the value of
a certain debenture stock he went into the
most elaborate calculations, based upon traffic
receipts, Board of Trade Returns, and such-
like arrays of statistics. Never having had
the advantage of personally meeting our cor-

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142 INVESTMENT PRACTICALLY CONSIDERED

respondent we almost came to the conclusion
that we were dealing with a financial expert,
until one day a small postscript attached to
one of ‘his letters let the cat out of the bag.
The postscript ran as follows :—“ Would you

mind explaining in your next what debentures |

really are?”

Here was a painstaking reader of money
articles whose native shrewdness had enabled
him, in spite of his ignorance of the elements
of finance, to string together a plausible but
fallacious argument which had led him to
form a wholly erroneous estimate of his stock’s
intrinsic merit.

Neither is this want of technical financial
knowledge a matter concerning which the

average investor need feel any false shame. . 4 :

We have no hesitation in admitting that we
approach the Commercial Market Reports in
wondering ignorance. Occasionally, for our own
personal instruction, we have attempted to
decipher the Special Intelligence from the
Meat Market, the Corn Market, or the Metal
Market, and we have puzzled our brains in
unsuccessfully endeavouring, for example, to
find an intelligible meaning to the following :—

INVESTMENT KNOWLEDGE 143

English Beef. . . . 3/4 —3/8
Scotch Sides. . . . 38/10—4/-
Do. Shorts . . . . 4/- —4/5

We were aware that the retail price of beef
varies between 8d. and Is. 4d. per lb., but why

Scotch sides should be cheaper than shorts,
_ and why English beef, which we, in our

ignorance, had always deemed to be the best,
should be quoted nearly 1s. cheaper than
Scotch shorts completely passed our under-
standing. Further, the precise quantities of

‘meat represented by the above quotations

still remain an unsolved mystery.
And again, of the Seed Market we have

read: “ Wintry weather has naturally im-

parted more life to blue peas and haricot

beans.”’

Can it be, we have asked ourselves, that the
population consumes more peas and beans in

wintry weather ? For this would seem to be

the only feasible explanation of the above ;
for neither of these two crops would have
yet been sown, and therefore the frost could -
not have affected the future supply.

_ Andofthe Metal Market, the special report
concerning Iron states that: “ Much business

--- Page 80 ---

144 INVESTMENT PRACTICALLY CONSIDERED

has been done in Cleveland, closing 49s. 11d

cash, 50s. 34d. one month. Standard Foundry © :

49s. 6d. cash.” .

To an ironmaster such information is doubt-
less perfectly clear, but to us it affords no guide
to the cost of a hundredweight of iron.

No doubt it is with feelings of similar be-
wilderment that the average investor culls
from the Money Article such uncut gems
as “‘ Daira Sanieh Ordinary declined to 17%.”

Having thus reviewed the limited avenues
of information which are open to the aver-
age investor, we have often endeavoured to

compute, at some approximate figure, the

amount of loss which individual investors
incur through their lack of a right under-
standing of investment questions. For it
must not be forgotten that money is after all
absolutely essential to the material comfort
and well-being of civilised man, and that,
further, every walk of life, or, rather, that
success in every walk of life results in the
accumulation of capital. Be he poet, painter,
sculptor, actor, doctor, or university professor
the satisfaction of eacl man’s ambition is
tinged with money-making. For; however

INVESTMENT KNOWLEDGE 145

‘far from the vulgar greed of gain a man’s
_ ideals may seem to travel, yet worldly success
of every sort brings with it the responsibility
of money, and upon the intelligent investment
gf of that money depends the worldly comfort
@& of the family and dependants of the most
a exalted of visionaries.

But intelligent investment implies an
B® intimate knowledge of the investment market;
for without knowledge no man can hope to
deal successfully in any market. The snares
‘for the unwary are as great amongst Stock
4 _ Exchange securities as they are in any other
market in the world, and the man who handles
his hardly earned accumulations without
Inowledge exposes his capital to unnecessary
danger. The unskilled investor may per-
chance possess a financial adviser upon
whom he relies to guide him through the
 quicksands of investment, but such blind
- reliance is at best unsatisfactory, and how is
the inexperienced investor to discriminate
between good and bad advice when the subject
matter of the advice is entirely beyond his
comprehension ?

At the outset of this article we mentioned
L

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146 INVESTMENT PRACTICALLY CONSIDERED

the danger to which a limited investment
vocabulary exposes its owner. This danger
is the greater because it is usually quite un-
suspected by the investor whose familiarity
with investment stocks is but small. Con-
scious that his financial information requires
to be supplemented by additional knowledge,
it is not unnatural that a painstaking investor
should apply himself to the task of perusing
the Money Article regularly and carefully.
Herein would seem to lie the path of know-
ledge, and it would be with incredulous
astonishment that a financial inquirer would
receive the statement that nothing so greatly
tends to warp the judgment as does a syste-

matic daily course of the Money Article. A - 4

moment’s reflection would, however, suffice to

convince him of this important truth. As - q
its very name implies, a “newspaper” g
exists for the purpose of purveying “ news,”  @

and the stocks which provide the most con-
stant succession of startling and unexpected
developments are obviously the stocks whose
careers furnish the best journalistic material.

But these sensational qualities are the very j

characteristics which, above all, an investor

INVESTMENT KNOWLEDGE | 147

should seek to avoid when selecting securities.
Stocks which display the smallest amount
of fluctuation are those which pay the most
regular dividends, and whose capital value
displays the greatest stability : these are the
securities which an investor should diligently
search for, and these are, of course, the stocks
which hardly ever are mentioned in the
Money Article. This is only reasonable and
natural, for the Money Article would become
precious dullreading did it attemptto chronicle
the humdrum existence of the most suitable
investment stocks.

In this connection what is true of stocks is
equally true of humanity. Your season-
ticket-holding, church-going, rate-paying and
altogether exemplary suburban resident is, as
a rule, a steady money maker. Yet, undeni-
ably, he would provide a novelist in search of
a hero with very little material to work upon.
Consequently the reckless Adonis who wildly
whirls across a hemisphere in a motor-car,
accompanied by a mysterious lady in goggles,
is allowed to elbow the unromantic suburban
money maker off the bookstalls in the same
unceremonious fashion as the steady-going

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148 INVESTMENT PRACTICALLY CONSIDERED

investment stock is elbowed out of the Money
Article by the speculative gambling counter
whose fluctuations are material for endless
comment.

Occasionally it happens that some thor-—

oughly old-fashioned security which habitually
does not move at all suddenly commences
to make wild upward and downward
movements. Thus—for example—for many
years Hudson’s Bay shares (the Hudson’s Bay
Company was established in 1670) were never
mentioned by a single newspaper. In those
days the stock was non-speculative, and re-
turned a fair rate of interest. Recent develop-
ments in Canada have raised the price of
this stock from about £22 a share—at which
figure it commonly stood—to £92 a share.
No sooner had this rise commenced than the
newspapers began to give reports regarding the
stock daily. Now, let us ask ourselves: Is
it prudent for any investor to interest himself
in a stock at over four times the price at
which it stood a few years ago ? It is possible
—but not probable—that the present rise
will be maintained. But, in any case, .a

question of this sort seems to us rather to lie

_ INVESTMENT KNOWLEDGE 149

within the province of a speculator than within
that of aninvestor. Yet our knowledge of the
Stock Markets confirms us in the belief that

five times as many real old-fashioned inves-

tors have entered their names on the share
register of the Hudson’s Bay Company during
the last two years at the present enormous
price than did so during the preceding ten
years at the lower price.

It is in this way that the investor with &

~‘jimited investment vocabulary sets a snare

for himself, and the pathetic part of it is
that this man does not realise for one
moment that he has degenerated into a
mere speculator when he purchases a popu-
lar fancy like Hudson Bays, and he ulti-
mately bemoans what he is pleased to
term his ill-luck if he subsequently loses his
money.

Every one knows that eager competition
to buy has a tendency to raise prices, and
that where there are a few sellers and many
buyers opportunities of picking up a real
bargain do not occur. Almost all the daily
papers in England give—with some local
exceptions, of course—quotations of the self-

--- Page 83 ---

150 INVESTMENT PRACTICALLY CONSIDERED

game stocks. The whole of the British in-—

vesting public has its eyes concentrated,
therefore, upon this limited number of se-
curities. How, then, can any one hope to
pick up anything in the nature of a bargain in
the midst of this enormous competition ?
Indeed, it naturally follows that the over-
eager purchaser will find himself possessed
of a very bad bargain, because, in nine cases
out of ten, the much-quoted securities are
the dearest and most unremunerative of their
class. For these reasons it is quite evident
that the regular reading of money articles and
periodical conferences with a stockbroker will
not prove the high road to permanent invest-
ment success.

Having now fully discussed the drawbacks
of a limited investment vocabulary, let us
analyse how this state of affairs is to be
remedied. To begin with, we should like
to dispel the only too-prevalent notion that
understanding stocks is a difficult matter, and
to eradicate the superstition that a lifelong

experience is necessary to acquire this know-
ledge. We have, throughout our entire ex- .

perience, always worked upon the principle

INVESTMENT KNOWLEDGE 151

that a client who does not understand stocks
is an additional trouble both to himself and
to ourselves. We have found that the best
efforts on our part to improve such a man’s
investment position have been constantly
baulked by his erroneously preconceived no-
tions, and that, altogether, little good could
be done in the case of a person who is
ignorant of the first principles of finance.
Therefore, to every new client we show
the main elements of successful invest-
ment.

In this way, during the twenty-five years
of our experience, we have spread a good deal
of investment knowledge among investors,
and we have invariably found, with a little
goodwill on the part of the client, that quite
a short space of time suffices to make him
acquainted with the fundamental principles
of sound investment. Our experience has
also taught us that ladies with no business
experience of any kind usually grasp the sub-
ject in an amazingly short time, and eventu-
ally become quite expert investors after a
comparatively small amount of study.

The great trouble with the majority of

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152 INVESTMENT PRACTICALLY CONSIDERED

investors is that they will insist on attempt-
ing to spell before they have learned the
alphabet. The alphabet of investment is
just as simple as the alphabet of a language ;
but simple as it is, it requires to be learnt,
and to be learnt thoroughly. By the alpha-
bet of investment we mean a proper under-
standing of what a company really is, of what
‘difference exists between the rights and privi-
leges attached to the various classes of stocks,
and of how a speculative stock is to be distin-
guished from a non-speculative security ; also
by what means it can be ascertained whether
a particular stock at a given price is cheap
or dear. When an investor has assimilated
these preliminary points, the next step is to
convince him that building up a sound invest-
ment scheme is very much like building a
house, and that too much roof and too limited
bedroom accommodation is as much at fault

in the one as in the other. The investor who —

simply piles up a list of stocks regardless
of whether they fit in with each other in
respect both of quality and quantity is just
as poor an architect as the man who, desiring
to build a house, accumulates without calcu-

INVESTMENT KNOWLEDGE 153

lation a quantity of bricks, stones, mortar,

and timber, and then commences his edifice
by building walls of various thicknesses
without a plan and without a foundation.

This is a subject on which even experienced
stockbrokers are curiously ignorant. They,
like many investors, look upon investment
results largely as a matter of luck. They
consider if every individual stock held is safe
and, intrinsically sound that the total result of
the investment list must of necessity be
satisfactory. How very wrong they are in
this respect recent years have proved, for
even on the soundest Trustee List of invest-
ments 20 per cent. of capital loss has been
recorded during the past few years.

The harmonious distribution of capital in

‘an investment scheme is, therefore, quite as

important as the preliminary investigation of
the individual securities. This branch of invest-
ment knowledge is to be easily acquired from
a small volume, a few hours reading of which
will explain the right construction of an
Investment List to the most unskilful of
financial inquirers.

When, the investor has once grasped, first,

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154 INVESTMENT PRACTICALLY CONSIDERED

the method of selecting individual securities,
and, secondly, the systematic blending of
them into a properly balanced investment
scheme, the subsequent attention which his
investments will require will take the shape
of an interesting study, possessing a peculiar
fascination of its own for the intelligent in-
vestor. |

The Financial Review of Reviews contains
over one hundred pages of tabular matter,
which will prove very interesting and profit-
able to all those who have once grasped
the main outlines of the subject of invest-
ment. We should advise our readers, after
having perused this article, to give a
cursory glance at these tables, and they
will find, particularly in the commercial
and industrial section, a number of points
which are bound to prove interesting. They

will notice that there is a column next to the -

price quotation which gives the yields obtain-
able from the various stocks at their present
prices, and that almost every page shows a vast
difference between the yields obtainable from
securities which are identical in type. Thus

some Debenture stocks will yield under 4 per —

INVESTMENT KNOWLEDGE 155

cent., whilst others yield over 5 per cent., and,
similarly, the yield from Preference and
Ordinary stocks will show similar but even
greater variations.

All investors who have taken the trouble to
learn the right method of comparing one
stock with another will be able to discern for
themselves which stock is the cheaper, and
which stock is the dearer. They will then
refer in their mind to the results which they
personally are obtaining from their own
investments, and they will, in this way, be
in a position to ascertain whether their own
holdings are the cheapest, safest, and most
remunerative of their kind.

No one can do better than the best, and the
certainty that one’s capital{is invested to the
best advantage ought to give not only a feel-
ing of satisfaction, but also a feeling of pride.

The tables contained in the Review should
prove a ready means of increasing the reader’s
investment vocabulary, and the greater num-
ber of names of individual securities which
the investor adds in this way to his vocabulary
the more certain he is to enter the ranks of
the really successful investors.

--- Page 86 ---

Consols and National Credit

Tr British investor has had rather a rough
time of it during the last decade. It is now
ten years ago since all British securities rose
to what in reality were fabulous and unten-
able prices. Yet the rise in quotations which
took place between 1894 and 1897 was so
steady and so gradual, and the reasons which
were put forward in explanation of the move-
ment were so plausible, that many people
accepted the price-level which was reached

during that period as natural. So strongly |

were the majority of Englishmen impressed
with the conviction that the pinnacle-prices
of 1897 were reasonable that even now they

are to be found expressing surprise and indig- .- q

nation at the very natural reaction which has
succeeded to that bygone period of inflation.
Yet, whilst the boom of 1897 was at its height,
no analytical student of finance believed for

one moment that such a price-level could

156

CONSOLS AND NATIONAL CREDIT 167

possibly be maintained. Some idea of the
recklessness of this gigantic rise may be
gathered from the fact that stocks like Lan-
cashire and Yorkshire Railway Ordinary had
risen from 102 to 156, Metropolitan District
5 per cent. Preference from 78 to 120,
London and South-Western Railway De-
ferred Ordinary from 60 to 98, Manchester
Corporation 4 per cent. from 129 to 152,
Bass’s Brewery 5 per cent. Preference from
124 to 156, and Vickers, Son and Maxim 5
per cent. Preferred from 103 to 134. Natur-
ally enough this enormous rise in prices had
reduced the yield from all classes of British
securities to a level which was too unremunera-
tive to be permanent.

In the natural course of events a reaction
set in, and the rebound unfortunately has
so far outstripped the rise that to-day
some of the best and most cherished
British investments are selling at figures
which are materially lower than the low
records of many decades ago. In fact, the
present position of first-class Home invest-
ments is regarded by the majority of English-.

men as nothing short of a national disaster. -

--- Page 87 ---

158 INVESTMENT PRACTICALLY CONSIDERED

If, however, the controlling influences _

both of the rise and the subsequent reaction
are investigated, it will be seen that the
position which British investments occupied
was, up to a few years ago, an exceptional
one. First of all, it must be remembered
that the important stocks of nearly every
other country in the world except Great

Britain enjoy considerable investment popu- —

larity amongst investors who belong to other
nations. British stocks, with the exception
of a very few, are exclusively held by British

investors, so that the reduction in capital —

value of British securities falls almost entirely
upon the British people. But this is only
part of the trouble, for whilst a great many
foreign investors have habitually split up
their investments among various nations,
there is a very large—one may almost say
predominating—number of British investors

who up to a few years ago entirely eschewed —

foreign investment in every shape or form.

It is upon these people that the burden of

the loss has fallen, and these are the people
who feel the present position most keenly.

During the past few years this state of affairs

CONSOLS AND NATIONAL CREDIT 159

has changed considerably, and the British
investor is now beginning gradually to appre-
ciate the truth that an international distribu-
tion of investments is the only way in which
capital safety is to be attained. The gradual
spread of this belief has to a certain extent
aggravated the fall in British securities, and
has tended somewhat further to weaken the
market for English investments, thus helping
to bring about the present state of affairs,
which is typified by the unwelcome fact
that Consols are selling at 85. Not so very
many years ago Consols were selling at 113.
The difference between the two fluctuations
amounts to 28 points—truly a large reduction
in the selling value of so fine and so safe a
security.

Some thoughtless people are inclined to
compare prices alone, forgetting all about
the question of yield. Consols used to pay
2% per cent.. in 1896, when the first record
highest prices were reached. They now pay
23 per cent. only. The reduction in yield
is tantamount to a reduction of £9 5s. in
capital value. Therefore, although it seems
that Consols have fallen 28 points, yet, if

--- Page 88 ---

160 INVESTMENT PRACTICALLY CONSIDERED ,
CONSOLS AND NATIONAL CREDIT 161

true values are compared with each other, |
they have really only fallen 19} points. There
is a vague idea prevalent that the price of
Consols indicates the standard of the credit
of the British nation. This, I venture to
submit, is an absolutely erroneous way of
approaching this subject. It is, of course,
quite impossible to appraise the real safety of
any Government Stock, as a Government
Stock is, after all, only a promise to pay
without any special collateral security for
principal and interest being offered. It is

in which the credit of a nation is held
1s to compare the rate of yield afforded
by its Loans with the yield obtainable
from the Loans of other Powers. I have
accordingly prepared a table showing the
yield of the Government Stocks of Great
Britain, the United States, France, Prussia,

Austria, Italy and Russi i
siria, sia at their present
ruling quotations :— —

Lowxst Pricks or Narronat SECURITIES In 1907 AND
Comparative Yrexps.

true that in the case of Powers of the third “Issuing Nation, Yield 9
class sometimes special hypothecations are es

made to the nation’s bondholders, but the Great Britain hee d.

mere fact of such hypothecations being re- raed States 3 9

quisite indicates a want of national credit. Pruesig 346

When the respective amounts of credit Italy . io 8

/ . . *

which various nations enjoy are considered, Austria 49 0

Russia 5 3 1h

there are only a very few Powers which can be
mentioned in comparison with Great Britain,
viz., perhaps, France, Germany, and the
United States. As a merchant’s credit is
measured by the discount which he has to
pay when melting his paper into money,
‘similarly the only way to measure the esteem

* Italian tax of 20% deducted.

It will be seen that in this list Great Britain
takes the lead with a yield of £2 198, per cent.
the United States are a good second with the
low yield of £3 2s. In France so much as
£3 4s. 6d. per cent. is paid, whilst Russia,

M

--- Page 89 ---

162 INVESTMENT PRACTICALLY CONSIDERED

which, owing to unfortunate wars and political

complications, has so sadly impaired its |

national credit of late, foots the list with
£5 3s. 1ld. per cent. How fickle national
credit really is can clearly be seen by the
present yield of Russian Stocks. Only a
short time ago such a yield would have been
considered impossible, and yet here it is a
live fact.

The Government Loans included in the
above table, pay various different rates of
interest. For this reason it is impossible,
without reducing the interest paidto a com-
mon denominator, to see clearly how the
respective prices of the several stocks compare

in reality with each other, from the point —

of view of income-yield.

To meet this difficulty I have imagined that, |
prior to 1870, all the Governments mentioned ~

in the table following had adopted an
uniform rate of 3 per cent. as payable on all
their loans, without thereby affecting the yield
they afforded in any way or at any time. In
this way I have reduced the average market
prices ruling during the years included in the

table to a uniform standard. The resulting

. CONSOLS AND NATIONAL CREDIT 163

figures can now be fairly compared one with
another, as they are based on the actual
standard of yield which did prevail. By
this means the figures arrived at disclose the
only true comparison which can be made
between the respective price-levels at which
these various loans were actually dealt in.

TABLE SHOWING THE REAL COMPARATIVE VALUE, FROM

THE POINT OF VIEW OF YIELD, OF THE STOCKS
INCLUDED THEREIN. (The average price ruling

im each year included in the table has b
een tak
the standard of value for that year) :— ne

Russian
Railway

4
Bords.

nm | Prussian
34%
ntes, Consols,

United
States.
%
Bonds.

Italian
5%

Rentes.

* :
Last line represents present price on 3% basis.

t Italian tax increased from 13°20% to 20%.

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164 INVESTMENT PRACTICALLY CONSIDERED

This table clearly shows the relative posi-
tions of the financial credit of the countries
included therein: and it will be seen there-
from that throughout nearly the whole of the
period English credit led the way. During
the years 1901 and 1902 the credit of the
United States stood slightly higher, but this
was principally owing to the legislative enact-
ments relative to Bank Reserves and Govern-
ment Bonds which exist in the United States.
The position, however, was soon reversed,
and English credit again resumed the lead.
A careful study of the figures contained in
this table I recommend to all who are in-
terested in the question of International
credit. The table clearly establishes the fact
that English credit still occupies the premier
position.

We see then that 102 is ona three-per-cent.
basis the equivalent of the present current

price of Consols, namely, 85. Now let us con- |

sult past financial history in order to discover
how often Consols, when they actually were a
3 per cent. Stock, ever did stand at 102, and
if 102 is such a very low valuation. The
very first time that Consols ever went over

CONSOLS AND NATIONAL CREDIT 165

par after their conversion to a 3 per cent.
Stock in 1844 was in 1852, but that price was
not long maintained. The Stock soon fell

again to 854 during the Crimean War in

1854, then gradually recovered until it be-

-came very steady in the ’seventies, and it was

not until 1880 that the price of over par was
again recorded. The price then fell to 94%
in 1885, and as a matter of fact there are
only three years in the whole history of Consols
in which at one time or another they were not
purchasable below par.

The above facts will perhaps seem startling
to some of my readers, yet they remain facts
all the same, although there does seem to be
an impression amongst investors that speak-
ing generally 3 per cent. Consols used habi-
tually to be quoted over par.

As I have already stated, 3 per cent. Consols

would now have been selling at 102, if only

there had been no conversion on to a 2h per
cent. basis. The question then forces itself to
the front whether or no the late Lord Goschen’s
conversion scheme was a well-conceived idea.

‘If the history of Government Stocks generally

is taken as an argument, this scheme certainly

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166 INVESTMENT PRACTICALLY CONSIDERED

was well conceived, because all countries
of the world were gradually reducing the
rate of interest they were paying on Govern-
ment Loans, and why should not England
do so too? especially as since 1844, or
for a period of over half a century, no re-
duction in interest had taken place. If con-
ditions had remained the same, and if the
world’s trade had not so vastly altered during
the last decade, Lord Goschen’s conversion
scheme would have certainly been justified.
The world’s trade has increased enormous-
ly, but of that increase the United States
and Germany have taken the lion’s share ;

and although Great Britain’s trade con-—
tinues to grow, the growth is comparatively —
small. Moreover, the esteem in which foreign ~

securities are held by English investors
has materially grown. These changes Lord
Goschen could not foresee. But it can

hardly be laid to his charge that as Chan-

cellor of the Exchequer he failed to provide
for the unforeseeable.
I enlarge upon the subject of the financial

development of the world’s trade, during the .

last decade, at some length in the introductory

CONSOLS AND NATIONAL CREDIT 167

_ chapter of “* The Investment of Trust Funds ”

—~a fact which I mention because it is impos-—
sible in the limits of this article to deal in any
way adequately with ithere. I may, however,
mention one salient fact: that whilst for-
merly British Government Loans formed 50
per cent. of the loans of the whole of the world,

_ they now only amount to 10 per cent. of the

world’s Government Loans, which, taken
together, amount to SEVEN THOUSAND MILLIONS

4. stertive. Half a century can only be con-

sidered a very short time in the life of a nation,
but in the history of finance the last half-
century has proved to be an epoch-making
period. It is only about fifty years ago

_ that the Limited Liability Act was passed and

the Limited Liability System began gradually
to creep into popularity all the world over.
The amount of money represented by all the
limited liability companies of the world would,
if the figure could be ascertained, amount to
some FIFTY THOUSAND MILLIONS STERLING.

Some years ago British stocks were the only

stocks which were regarded as really safe.
Now, owing to the general enlightenment on

financial questions, the former bogie of foreign

--- Page 92 ---

168 INVESTMENT PRACTICALLY CONSIDERED

investment risks has almost entirely disap-
peared. Stocks, in fact, are now regarded

by investors very much as Bankers’ Drafts ©

are regarded in the Discount Market, and

whether the bank is situated at Pernambuco,

Kamschatka, Vladivostock, London or Paris,
the discount rate at which it can place its bills
remains practically the same, provided the
bank is of first-rate standing. Nowadays
investors do not ask where astock is situated,

they simply ask whether the stock is safe, — q
sound and non-speculative. Thisalteredat-  ;

titude on the investment question has brought
British stocks into direct competition with

stocks situated in every quarter of the globe, ,
and the competition has been enhanced by |
the fact that it is beginning gradually to be.
realised that only a Geographical Distribution -

of Capital can produce real capital safety.

Now, let me explain how this competition -
works outin practice. In the last issue of the .
Financial Review of Reviews there was an article.

explaining the solidity of the position of the

4 per cent. Bonds of the Land Mortgage Bank’

of Hungary. This article proved to me—and

it seems to have had the same effect upon the ;

CONSOLS AND NATIONAL CREDIT 169

British Press and British Public—that it is

- indisputable that these Bonds are as safe, both

as to capital and income, as any security in
the world can possibly be. What then has been
the effect of this discussion of the merits of a

, gilt-edged stock of high yield upon the English

Investor ? The holder of, say, London and

/ ; ‘North-Western Debenture Stocks, or any first-

class British security, has said to himself,
“Why should I continue to hold British
stocks when I can get as good a security,
which will yield me from } per cent. to 1 per
cent. more than my present stock does ?”’
And in thus reasoning the investor has taken
a perfectly logical line. Because, however

patriotic a man may be, it clearly is no duty

of his to devote his private fortune to prop-
ping up the price of Home Investments.
Indeed, exhaustive particulars of first-class
foreign investments are at present being most
eagerly considered by all those British inves-
tors who are desirous of improving their
capital-safety and income. They are now
daily discussed in the Press and compared
with the results obtainable from British

securities. Such a standard of comparison

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x1 emg MNT youpiecte mee ety

rent acaemermer ma:

170 INVESTMENT PRACTICALLY CONSIDERED

having once become prevalent, is likely to con-

tinue, with the result that the artificial sup-_

port which Home Investments have hitherto
enjoyed, owing to the circumscribed horizon
of the British investor, is rapidly being with-
drawn. And no means legislative or other-
wise, suggest themselves by which the former
state of affairs could be re-established. For,
so far, almost every combination which has
been engineered to uphold or depress the
price of any great commercial commodity arti-
ficially has failed; and, as artificial support
has failed to permanently enhance the price
of commodities, so is a temporary demand
equally doomed to failure inthe maintenance
of afalse price of stocks. Foraclear example
of this we have not far to seek.
Contemporaneously with the date of the

last Conversion of Consols the Government —

broker paid an almost daily visit to the Consol
Market, where he openly bid for stock on
behalf of the Government, with the con-
sequence that Consols rose to 113. This arti-
ficial price lasted for some three years. As
no special enactment appears to have been
contemporary with this unusually large de-

CONSOLS AND NATIONAL CREDIT 171

_ mand for Consols on the part of the various

Government departments, and as the published
figures of the Post Office Savings Bank, etc.,
do not disclose any abnormal rise in the amount
of public deposits which would have justified
such a demand, I can only come to the con-
clusion,- more especially as no official ex-
planation has ever been given of these mysteri-
ous purchases, that the Government of the
day, in their anxiety to make their Conver-
sion scheme a success, strained every effort to
support the Consol Market artificially. But
when this unusual demand for Consols grad-
ually tapered off the price of Consols once
more slipped back to the basis of par for a
3 per cent. issue. |

It may be urged on patriotic grounds
that British capital should be kept in this
country and utilised for the purpose of raising
the price of Home Securities, rather than that
the foreigner should be allowed the use of it.
This, however, is impossible, as the trend of
time cannot be stopped, and a certain train
of thought having once been started cannot be
hindered in its progress by Act of Parliament
or otherwise. Further thought on this sub-

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172 INVESTMENT PRACTICALLY CONSIDERED

ject will indeed incline the intelligent investor

to take the view that the foreign employment

of British capital is a positive national benefit.

England as a nation depends for its food
supplies almost solely upon the foreigner. This
food supply has to be paid for: it is at
present being paid for to a great extent by the
export of manufactured articles. But let it
not be forgotten that, whilst England in
regard to international trade held somewhat
the same position as Consols in respect of

investments fifty years ago, this position ~

is being gradually altered, and all the nations
are gradually increasing their commercial
activity. To give a homely example: let

us imagine all the nations to be brothers, —
England, as it first gained the bulk of the

world’s trade, being the eldest of them.
Whilst the younger brothers were grow-
ing up, the eldest brother was increasing
in age, and although the eldest brother had
matters all his own way whilst the other
were minors, they have now grown to ma-
turity and are steadily becoming keener
competitors. Not for one ‘moment do
I wish to suggest that England is losing

CONSOLS AND NATIONAL CREDIT 173

ground: far from it, English exports are daily
increasing. But what I do wish to make
clear is that the exports of other countries
are increasing also, and, as Mr. Schooling
very ably proves in an article which I had
the advantage of reading prior to writing this
argument, England’s share of the world’s

_ exports used to be 18 per cent. seventeen

years ago, and has now fallen to considerably
under 13 per cent. Here, again, we are face
to face with a progress which no power in this
world can stop. This progress makes it in-
evitable that English traders must make up
their minds to meet keener and keener compe-
tition as the world grows older. The British
nation will always be under the necessity of
paying for its food supplies. It now does
this with the proceeds of the manufactured
articles which it exports—will it be able to
continue to maintain this position for cen-
turies to come? This is a matter of grave
doubt. |

Under these circumstances would it not
be wise to lay up provison for a rainy day, and
is it not well advised so to arrange our invest-
ments as to enable us to pay for our food

--- Page 95 ---

174 INVESTMENT PRACTICALLY CONSIDERED

supply with the interest on the capital we have

lent to foreigners ? This is really what every -

British investor is helping to do who uses his
money in purchasing foreign investments.
Surely, after all, this is not so basely un-
patriotic. The time has gone by when
British securities can be compared solely
with each other, and the new era compels
attention to the investments of other na-
tions. Whilst the predominating sway of
British securities remained almost unchal-
lenged, the prices ruling prior to the present
fall might perhaps have been to a certain
extent justified, now they certainly are not.

I have for the last ten years persistently

advised the sale of Consols and the sale of — ;

all first-class British securities, as I foresaw
to a certain extent what was likely to hap-
pen. It is useless to look back upon the
price-records which ruled during the three
years of mania—if I may call them so—dur-
ing which Consols stood at 113. The con-
ditions on which the quotations of that date
were based have disappeared for ever, and a
new basis of value now controls quotations.
Yet it is idle to lament needlessly over the

CONSOLS AND NATIONAL CREDIT 175

fact that. Consols stand at 85, and it is
foolish to attempt to argue from this fact

that British National credit is on the wane.

As I have shown in the introductory part
of this article, British credit holds its old
supremacy as it has done ever since people
first began to invest their money in loans and
Joint Stock enterprises. I feel convinced that
this present state of affairs will continue for
some time to come, but perhaps not long
enough for the real old-fashioned British
investor to realise the competition which he
now has to face. Whether the value of money
will increase or decrease in the future no man
can possibly foretell. It is really on the value
of money that the international standard of the
value of investments depends, and the fact is
now generally dawning upon investors, that itis
only by basing capital safety upon the world’s
trade, and by not depending upon the trade
of any individual country, that such perfect
capital safety can be achieved as is at all
times and under all circumstances to be re-
lied upon.

The lesson to be learnt from recent finan-
cial developments is that the standard of

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176 INVESTMENT PRACTICALLY CONSIDERED

measurement of British national loans is no
longer other British stocks of lower grade,
but rather the national loans of other powers.
At the present day, when Consols at 85 are
judged by this standard, it will be found
that this stock is standing above rather than
below its true comparative value.

In short the actual position seems to be
this :—It isidle to look for a recovery in Con-
sols inasmuch as that Stock already stands
at a level which, had the Stock not been con-
verted to a 2} per cent. security, would be
the equivalent of 102 on a 3 per cent. basis.
Such a price is decidedly high, and therefore
it is clear that it is a confusion of terms to
debate whether or not asecurity standing at
a decidedly high level can be expected “ to
recover.” Consols, then, cannot recover
because their current price is exceedingly
adequate, and because even now, when the
superficial observer regards the stock as
exceptionally depreciated, its current price
shows that English national credit is well
maintaining its supreme position.

Our Unjust Taxation and its
Remedy

AN OPEN LETTER TO THE CHANCELLOR OF

THE EXCHEQUER.

Sir,—

The growth of the rate of National Expen-
diture is continuous year by year. Without
taking into account the temporary increase
caused by the South African War, the ex-

_penses of the nation are steadily expanding.

Owing to the colossal shipbuilding pro-
grammes. of foreign Powers our present navy
estimates can scarcely be reduced: indeed,
during the next ten years, if we are to keep
pace with the projected naval armaments
of the rest of the world, it is inevitable that
our future naval expenditure shall be upon
a scale considerably larger than hitherto.
Under these circumstances the calculation
is justifiable that Budgets of approximately

120 millions are likely to remain permanent.
177 N

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178 INVESTMENT PRACTICALLY CONSIDERED

It would, therefore, seem timely to examine
whether the present system of taxation is
adequate to provide the apparently indispen-
sable amount of National Income or whether
the enormous increase in the amount requisite
does not call for an entire re-modelling of the
present system of taxation.

Simultaneously with the increased expen-
diture a Democratic wave is rising, and
financial provision will have to be made for a
number of measures, such as Provision for
the Unemployed, Old Age Pensions, the
Housing of the Working Classes, and other
schemes involving large expenditure. Every-
thing, in short, points to the fact that a
general broadening of the basis of taxation
is inevitable. For these reasons it is re-
quisite, first of all, to review the present
system of taxation, and to analyse how far
the rich and the well-to-do contribute to the
National Exchequer in comparison with the
poorer and humbler classes of the population.
Secondly, it will be desirable to show how,
by the adoption of a more scientific system
of taxation, all classes of the population
might be so brought into line, that each class

UNJUST TAXATION AND ITS REMEDY 179

would bear its fair share of the national bur-
den, whilst an adequate sum would be raised
to furnish means for the nation’s growing
requirements.

It is not proposed to criticise here the
national expenditure in any way whatsoever,
but to confine this argument solely to the
gross income of the country, for the raising of
which the executive government is responsible.
For this purpose the National Revenue has
been grouped into three main divisions. All
figures are stated roundly, so as to dispense
with unnecessary detail; and in order that
the broad facts may not be obscured by
immaterial complications. The three main
divisions, after taking off the already abolished
Coal Tax, are as follows :—

Tue Present Nationa Income.

I. Items paid almost eaclusively by the

well-to-do—

Income Tax, Estate Duty, Game,
Dog, Carriage and Armorial Licences,

and the tax on male servants. £52, 250,000
II. Items paid by all classes of the popu-
latton—

Customs and Excise Duties . - 67,000,000

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180 INVESTMENT PRACTICALLY CONSIDERED

III. Items which are partly beyond the
control of Government and partly of
minor importance—

Post and Telegraph Service, Crown
Lands, Suez Canal Shares, Stamps,
Land Tax, Inhabited House Duty,

and all other items not included in
Groups I. and II. . : . 35,250,000

Total Revenue collected . £154,500,000
Less amount paid to Local Authorities 11,000,000

Leaving the available Imperial .
Revenue. . . . . £143,500,000

Item ITI., £35,250,000, I do not propose to
discuss hereafter. It may therefore be oppor-
tune here to state in detail that it is made up
as follows :—

Post and Telegraph Service. . £21,425,000 _ -

Crown Lands, Receipts from Suez

Canal Shares and other Loans - 1,618,000
Stamps, Land Tax and House Duty

and Miscellaneous . . . 12,207,000

£35,250,000

The Government can but slightly influence
the receipts derived from the Post and Tele-

UNJUST TAXATION AND ITS REMEDY 181

graph service and the Stamp Duty. These
are paid directly or indirectly by all parts ‘of
the population in proportion to,the personal
benefits they derive from their use. The
Land Tax and House Duty do not appear
capable of expansion, as land values are falling
and houses are already overburdened by
Municipal Taxation. These, therefore, call
for no attention at the hands of a reformer.

There are now left for consideration the
other two main items, namely :—

I. Amount paid exclusively by the

well-to-do . . £52,250,000
II. Amount paid by all classes 67,000,000
£119,250,000

Next let us determine in what proportions
this total of £119,250,000 ought to be con-
tributed by the different classes of the popu-
lation, and then let us ascertain how in fact
this sum is raised at present. Unfortunately
the statistics furnished by the Government
are most inadequate, and to a certain extent
it is only possible at times to rely upon con-
jecture. The following three main figures,
however, are adopted by most political

--- Page 99 ---

182 INVESTMENT PRACTICALLY CONSIDERED

economists as correct: they are the result of
the most careful research and calculation, so
that they may be taken as being so approxi-
mately accurate that the existence of any
small discrepancy between fact and estimate
would not alter the broad result arrived at :-—

The population of the United Kingdom is
taken to be 44,000,000, and it is estimated
that of these 5,000,000 are the rich, the well-
to-do, and the moderately well off—in brief,
all those who are income-tax payers, upon
whom estate duty is levied, and who take out
dog, carriage, and other establishment licences.
It is not asserted that all persons included
amongst the 5,000,000 rich are living in com-
fortable circumstances. It is admitted that
a curate with an income of say, £200, and a
wife and children to support would be classed
as rich ; this, however, is the weak point of
a system of direct taxation. Allowing for
5,000,000 as well-to-do, there remain 39,000,000
of the population who pay no income-tax.
They are the work-people in trade and com-
merce whose incomes do not exceed £160 per
annum, the labourers, the poor and needy.
Here, again, it is not implied that many per-

UNJUST TAXATION AND ITS REMEDY 183

sons in this latter category are not infinitely
better off than many included amongst the
well-to-do. These are the facts as to the
population and income classification of the
United Kingdom.

The income earned by the individuals,
comprising the nation, is computed by most

- political economists to stand now at 2,000

millions per annum, and very careful investi-

. gation shows that this income is divided as

follows :—

. 5,000,000 Rich and well-to-do enjoy

the income of - £1,100,000,000
39,000,000 Workpeople and poor earn

the income of . . 900,000,000
44,000,000 £2,000,000,000

The fact that a nation’s most valuable asset
is its population, without which its natural
resources are valueless, should, in strict equity,
entitle the man with a family dependent upon.
him to some remission of taxation. But, as
all systems of taxation must of necessity be
~ based upon income regardless of the indivi-
dual’s domestic responsibilities, let us see

‘how £119,250,000, here reviewed as the sum

--- Page 100 ---

184 INVESTMENT PRACTICALLY CONSIDERED

now raised by taxation, should be collected.
Calculated on the basis of income,

The 5,000,000 Rich who receive 1,100

mnillions should pay £65,587,500

The 39,000,000 Poor who receive 900
millions should pay 53,662,500
44,000,000 2,000 £129,250,000

The division of taxation on the basis of
income regardless of domestic responsibilities
is admittedly unfair, and it would be more
reasonable if the rich contributed at least 70
millions and the poor 494 millions of the sum
annually raised by taxation. But let us con-
tent ourselves with the division of taxation-
liability calculated strictly in accordance with
income as set forth above, and let us see how
far this mathematically correct division is
carried out in practice. But we find that in
practice the division of taxation on the basis
of income, which in itself would unduly
favour the rich, is still further warped in
favour of the well-to-do by the system of
taxation which actually prevails. The rich

pay -—

UNJUST TAXATION AND ITS REMEDY 185

Income Tax, Estate Duty,

. and Licences : . £52,250,000
One-eighth of Customs
and Excise . . . 8,375,000
£60,625,000
The poor pay :—
_ Seven-eighths of Customs
and Excise . : . - 58,625,000
£119,250,000

Whereas, if the above calculation as to the

‘respective incomes of the two classes is

assumed to be correct, their respective con-

tributions to the National Revenue should be
as follows :—

Five millions of Well-to-do Persons
should pay on £1,100,000,000 in-

come . - _.  £65,587,500
Whilst they actually do pay only 60,625,000

‘The Rich, therefore, escape paying
their minimum share of taxation
to the extent of . . : . £4,962,500

Thirty-nine millions of the poorer classes
should pay on £900,000,000 income £53,662,500
Whilst they actually do pay . 68,625,000

The Poor, therefore, appear to be over-
taxed to the extent of . . . £4,962,500
a"

_ These calculations so clearly show that a

--- Page 101 ---

186 INVESTMENT PRACTICALLY CONSIDERED

. heavier burden of taxation should be laid on

the shoulders of the well-to-do, and that at

the same time the load of the poorer classes
should be reduced in like proportion, that it is
obviously essential to examine whether these
figures are based upon any miscalculation,
To begin with, it would seem certain that
there are 5 millions of well-to-do and 39
millions of the poorer classes, for nearly all
economists are agreed on this point: they
also agree that the distribution of income is
as nearly as possible 2 to the poorer classes
and 44 to the well-to-do. These figures have
been subjected to so frequent and to so close
a scrutiny that it seems unlikely that any
miscalculation can underlie them. Therefore
the only point, upon which a miscalculation
might have crept in, is as to whether the
amount collected, under the present system
of raising Imperial Revenue, is fairly divided
between the two main divisions of the popula-
othe Revenue derived from the Postal and
Telegraph Services, the Crown Lands, and
the national holding of Suez Canal shares
can scarcely be considered as taxation,

UNJUST TAXATION AND ITS REMEDY 187

therefore these may be left out of the calcula-
tion. But the Revenue from Stamps, Land
Tax, Inhabited House Duty, and miscella-
neous items has been assumed to be borne in
equitable proportion by all classes of the
population so that these matters require no
further consideration. It may possibly be
argued that this assumption is rather in
favour of the poorer classes: this may to
some extent be the case, but the unevenness of

: _ the proportion can be in no degree important,

and cannot be considered to redress the
ine iality of nearly five millions set forth in
the preceding calculations.

The next point for inquiry is whether it is
fair that the Custom and Excise Duties should
be divided in the porportion of one-eighth
amongst the well-to-do and seven-eights
amongst the poorer classes. These two items

ij of Revenue are made up of duties on beer,

spirite, sugar, tea, coffee, tobacco, wine, raisins
and other kinds of dried fruit, and of the
charge for licences to deal in these dutiable
articles. In fact, taxation is levied exclu-
sively on the main articles of consumption,
which are used by rich and poor alike, and

--- Page 102 ---

188 INVESTMENT PRACTICALLY CONSIDERED |

these are assessed for taxation—with a few ox 4
ceptions which will be considered later on—

upon the quantity and not the value of the
article consumed. ‘This is where an injustice

is done to the poor man: because, however .

rich 2 man may be, he does not take more
sugar in his tea, than does the poorest labourer,
and quantitatively he does not consume more

tobacco than a healthy navvy ; whilst his 4

consumption of alcoholic beverages has lately
decreased rather than increased in quantity.

So that, to arrive at a correct estimate of how | @

this tax is divided between rich and. poor,
it, would be fair to accept a purely numerical
division between the rich and poor portions
of the population: that would be to divide

their respective contributions in the propor- qa
tion @ to #2, their numbers being respectively a
5 millions to 39 millions, as explained above. :

But by way of allowing for a more liberal ©

consumption of dutiable articles by the rich,

their share has been calculated at 3% as against
'% the share of the poorer classes, whereas 3

when calculated on the basis of their numbers,

the rich would only be credited with paying 4
1 of this tax. Allowance has thus been made 3

UNJUST TAXATION AND ITS REMEDY 189

for a possible less economical consumption
on the part of the well-to-do by crediting
them with the payment of 4 of it, and these
estimates of consumption, therefore, appear

_ to represent as accurately as possible the

actual facts.

Objection might be raised to these estimates
of the amounts of duty respectively paid by
the rich and the poor on the ground that the
articles consumed by the rich pay a heavier
Import Duty than do those consumed by the
poor. Tosome small extent this is true in the
case of cigars, cigarettes and manufactured
cocoa, but, when the actual figures of this
difference in Duty are examined, it will be seen
how insignificant it is. Thus the duty on
cigars is 6s. per lb., on cigarettes 4s. 10d. per
Ib., and on raw tobacco only 3s. per lb. But
whilst the total amount of tobacco of all kinds,
imported during the year ending December 31,
1907, amounted to 98 million pounds in
wgight, and the Import Duty on this quantity
amounted to over 15 million pounds ster-
ling ; yet it is a noteworthy fact, upon which
I shall comment in greater detail later on,

that of this 98 millions of pounds weight

--- Page 103 ---

190 INVESTMENT PRACTICALLY CONSIDERED

of tobacco only 2 millions of pounds weight
consisted of cigars, cigarettes, and snuff, and
that the Duty on this whole quantity of manu-
factured goods only produced. slightly over

half-a-million sterling, or about one-thirtieth —

of the entire amount of Duty levied. The
Duty raised on Manufactured Cocoa is con-
siderably under £100,000, a sum almost too
insignificant to inquire into. So that it will
be seen that the contention that the rich con-
tribute comparatively per. head of the popu-
lation a very much larger proportion to
Revenue in the shape of Customs and Excise,
is absolutely baseless. Wine has been left
out of the calculation for the simple reason
that the Duty on Wine is relatively far
lighter than is the Duty on Beer. It may
be stated roughly that on a quart bottle of
champagne costing, say, 10s. 6d., a duty of

7d. is levied, whilst this same duty of 74d. is.

charged upon only the value of 2s. 2d. in even
beer of the lowest quality. Furthermore,
whilst Beer produces thirteen millions sterling
of Revenue, and Spirits twenty-two millions,
the Revenue derived from Wine amounts only

~ to one and a quarter millions sterling. Here -

UNJUST TAXATION AND ITS REMEDY 191

again the rich man’s contribution to the
National Revenue is comparatively paltry—
a fact to which I shall also recur, later on,
as worthy the consideration of a reformer of
taxation.

We have now closely investigated the
present methods of raising Imperial Revenue,
and we have arrived at the following main
conclusions :—

I. The well-to-do classes contribute
under 61 millions sterling, whilst they
should contribute at least 654 millions.
The poorer classes contribute over 58}
millions sterling, whereasthey should con-
tributea maximum of 533 millions of the
total amount of Revenue here analysed.

II. The remaining 35} millions col-
lected are to a very large extent beyond
the reach of legislation, are not capable of
expansion, and are fairly divided amongst
the various classes of the community.

These two conclusions make it patent that
the present methods do not worksatisfactorily.
Next let us endeavour to formulate a prac-

tical scheme for raising Imperial Revenue,

_ whereby the existing inequalities of taxation

--- Page 104 ---

192 INVESTMENT PRACTICALLY CONSIDERED

could be remedied, and adequate provision

made to meet the nation’s growing ex- .

penditure.

At the outset it is obvious that no additional —

burden ought to be laid upon the 39 millions
of people who are the poorest part of the
population. Already their lot is by no means
enviable, and a heavy duty is now levied
upon their small and only luxuries, namely
beer and tobacco, tea, sugar, and currant cake. »
Any tax placed upon staple articles of con-
sumption falls upon the poor to the extent of
seven-eights of the total Revenue so raised.
Therefore, it is clear, that justice demands
that no additional Revenue shall be raised in
this direction.

The situation makes it requisite that the

well-to-do should be taxed to a greater extent

than they are at present. To this they will
cheerfully agree, so soon as they realise that,
at present, they are not contributing their
fair quota to the National Revenue. It is

true that the rich form the great majority |

of the govering class, but England’s governing
class can justly claim that they have never
attempted to evade bearing their full share of

UNJUST TAXATION AND ITS REMEDY 193

National Expenditure. Indeed, to their credit

_ be it said, therich at present voluntarily contri-

bute over ten millions sterling per annum
to public charities, besides numberless private
benefactions of which no record is made, and
of which no estimate is possible. It is only
essential that the form in which additional

_ taxation is raised should be fair and equitable,

and that above all things, it should not entail
an additional burden upon those whom, for
want of a better classification, I must describe
as the poor-rich. But to enable the well-to-do
to contribute more liberally to the National

. Revenue, and at the same time, in a manner

unoppressive to them, is a problem the solu-
tion of which does not seem possible so long as

_ the present basis of taxation remains in force.

It has already been shown that it is idle to
attempt to make an inroad upon the rich
man’s purse by imposing duties or taxes on
staple articles of consumption, because goods
of this class are consumed in such compara-
tively small quantities by the rich, owing to
the fact that, numerically, they are so small
@ minority. If any proof of this fact were
required, the present incidence of the Tobacco

o

--- Page 105 ---

194 INVESTMENT PRACTICALLY CONSIDERED

tax furnishes the requisite evidence. An
attempt to tax the luxuries of the rich has been
made in the imposition of a double duty on
imported cigars. But this effort has com-
pletely failed to accomplish its purpose. For
although the declared value of imported
manufactured tobacco (cigars, cigarettes, etc.)
is one-quarter of the total value of the entire
quantity of tobacco entered for home con-
sumption yet this choice portion of our
importation only produces about one-thirtieth
of the revenue derived from tobacco. A fine
Havana cigar pays only one-eighth of its
cost in duty, whilst the working man pays
23d. in duty on his ounce of tobacco which
costs him 3d. Yet if an ad valorem duty
of say 80 per cent. were imposed on imported
manufactured tobacco, this levy would only
raise the present sum collectedin tobacco duty
by about one twenty-fifth. For this reason
it is not amongst staple articles of consump-
tion that the means of increasing the Imperial
revenue must be sought.
A tax is at present in force upon Carriages,
Motor Cars, Male Servants, Armorial Bear-
ings, Gun, Dog, and Game Licenses. The

| additional proof that the n

UNJUST TAXATION AND ITS REMEDY 195

object of this tax was no doubt to make the
best-filled purses contribute to the Exchequer
and for the purpose of the present argument
all these payments have been allocated, as
exclusively paid by the rich, although Dog
Licenses, which produce nearly £650,000 per
annum, are also paid for by poor men. Yet
all these licenses, taken together, only produce
12 millions per annum, thereby affording
to-do aren . umbers of the well-
paratively insignificant, and

that any effort to tax them individually ;
bound to result in failure. y*
Under the existing system of taxation the
principal method of taxing the well-to-do is
of course, by means of the
the Estate Duties,
duce 504 millions
Tt is the fashion a

Income Tax and
and these taxes alone pro-
of Revenue per annum.
mongst democrati iti-
Clans and would-be reformen, with no eran
tical] knowledge of matters financial, to assume
that these two forms of taxation must be the
panacea to be applied whenever the National
Revenue appears to be a little run down

But the belief that Income Tax and the Estate

Duties can be screwed up indefinitely, without

--- Page 106 ---

196 INVESTMENT PRACTICALLY CONSIDERED

mortally injuring the whole community, is
professed by no Statesman who has attained
the position of Chancellor of the Exchequer.

For both Capital and the Income resulting —

from it are easily removable commodities.
By means of Acts of Parliament it is impossible
permanently to retain them in the country,
and if unduly onerous taxation is laid upon
them, they are certain to betake themselves
to more congenial climes. In this connection
it is important to remember that England
already affords a less remunerative field for
the employment of Capital than any other
country with the solitary exception of France.
When the Income Tax was raised from 8d.
in 1900 to 1s. 3d. in 1908, quite a number of
cases of investors shifting their permanent
addresses to countries where no Income Tax

is levied, came under my personal notice, and |

by this means they have escaped the British

tax-collector altogether. Again, when: the ~ a
Estates Duties were raised to their present .

level, recourse was had to a number of devices,
to avoid the impost either partially or entirely.
These facts are well-known to the better in-
formed officials of the Inland Revenue, and

UNJUST TAXATION AND ITS REMEDY 197

they prove conclusively the great danger of
further straining this already overworked
device for raising Revenue. |
There are quite a number of limited liability
companies, whose business is situated abroad,
and whose capital is largely held abroad, but
whose central offices are situated in England,
which for this sole reason pay British Income
Tax, on their entire earnings. Such concerns
would gradually dispense with their London

_ offices and would slightly modify their present

constitution, with the result that their profits
could no longer be made to contribute to the
National Revenue. These are but a few
reasons, out of many, which go to show, how
dangerous it would be to increase the Income

-'Tax and Estate Duties ; but, in point of fact,

no one who really deserves the name of states-
man could seriously contemplate any measure
calculated to drive capital and the income
which capital earns, out of the country. For
it must be clear to an intelligent observer, that,
if the pressure of taxation is increased in these
directions that capital will take flight in order
to avoid the Estate Duties, and income will
accompany it in order to escape Income Tax.

--- Page 107 ---

198 INVESTMENT PRACTICALLY CONSIDERED

‘To a far-seeing statesman, it must be evident
that the people who investtheircapital abroad,
but who continue to live in this country, are
doing an excellent work in so far as the divi-
dends they are entitled to draw from foreign
countries go to provide in part the funds which
it is so necessary to send abroad to pay for the
nation’s food supply. On the other hand,
the people who take both their capital and
income out of the country, are to that extent
reducing the wealth and the spending power
of the nation. It is these latter, who should

be offered every inducement to desist from
a policy of migration which cannot but tend
to diminish the spending power of the United

Kingdom. .

There is another point to be considered in
connection with the Income Tax and Estate

Duties, that, although they are reasonable

means of raising Imperial Revenue, and in

theory and in practice they are paid by
the wealthy, yet, when these two imposts rise
beyond a certain level, the first reacts very
harshly upon the small tradesman and the
great army of clerkdom, whilst the second
tends to increase further the grave evil of

UNJUST TAXATION AND ITS REMEDY 199

unemployment from which the country is
already suffering. It is almost superfluous to
point out how difficult must be the task for a
father who has a large family to support on,
say, £200, to pay his Income Tax. The results
of high Estate Duties are not so clearly under-
stood, but they press even more harshly on the
poor. For the reason that when pushed be-
yond a certain point they tend to deprive the
labouring man, not of an undue proportion
of his earnings, but of the very entirety of his
‘Wages. The heir to an entailed property, con-
fronted by the payment of a heavy succession
duty, may well find himself compelled to dis-
miss, at least, the majority of the out-door ser-
vants on an estate, and to deny his tenants
the improvements which, otherwise, he would
have been glad to have assisted them in carry-
ing out. It is in this way that heavy Estate
Duties are conducive to unemployment.
We have now seen the futility of attempting
to reach the rich man by taxing staple articles
of consumption, and we have examined the

danger of further straining the special exist-

ing taxes. It is obvious, therefore, that some
new basis of taxation will have to be adopted

--- Page 108 ---

200 INVESTMENT PRACTICALLY CONSIDERED

if the burden of the cost of maintaining the
Empire is to be evenly distributed between
rich and poor, and the present amount of
the Budget is to be maintained or enlarged.
But, in addition to the all-important question
of broadening the fiscal basis of the Empire,
there are three other almost equally momen-

tous questions of national policy which call .

for an immediate solution, namely, the
Unemployed Problem, Old Age Pensions, and
the question of the relations between the
mother country and her colonies and depen-
dencies. As the propositions, which I shall
now proceed to put forward, seem satisfac-
torily to dispose of every one of these vexed
questions, it will be expedient briefly to
digress from the subject of taxation and to
examine these questions in detail.

It is roughly estimated that there are at
present 250,000 people in the country who are
wellableto work, butfor whom noemployment
offers. This state of affairs leads to increased
emigration and it is not the undesirable but the
most desirable of the working classes who are
the first to emigrate. Every good workman
who emigrates, impoverishes the nation, be-

_UNJUST TAXATION AND ITS REMEDY 201

cause national wealth is made up of the surplus
of the value of work performed, over and above
the cost of maintaining the workman. The
cost is invariably smaller than the value of
the work produced by a capable workman,
so that emigration should be regarded as the
draining away of a nation’s heart’s blood,
and every true patriot should endeavour to
find productive work in this country, in order
that every capable workman may be en-
couraged toremain athome. This productive
work is readily to be found in England at the
present time, for the following argument will
prove that if all the work necessary to provide
for the needs of the nation were done within

_ the country itself, there would not only be

work for all, but there would be an absolute
shortage of labour in place of the existing
dearth of employment, .

At present nearly £250,000,000 worth of
food is imported annually. This food could
not, of course, all be grown in the British Isles,
but a certain amount of it could and formerly
was. For, whilst the value of imported food
has risen at an average rate of over £7,000,000
sterling per annum, the number of persons

--- Page 109 ---

202 INVESTMENT PRACTICALLY CONSIDERED

employed in producing food, in the United
Kingdom, has fallen at an average rate of con-
siderably over 5,000 persons per annum dur-
ing the same period. Consequently the number
of persons now working outside the United
Kingdom in the production of food for her
considerably exceeds 1,500,000 persons, and
a number of these are actually taking away
the work which British-born subjects might
perform within the British Isles.

An investigation of the figures relating to
imported manufactured goods, other than
food, reveals the existence of asimilar state of
things in that branch ofindustry. The total
value of manufactured articles imported is
£154,000,000 sterling per annum. A very
careful analysis of the list which comprises
these articles gives the following figures :—

Value of raw material out of which
imported manufactured articles
are made . .

Value of labour employed in produc-
ing these imported manufactures 80,000,000

£74,000,000

Total value of imported manufac-

tured articles .£154,000,000

i
“4
H
|
{
j

. UNJUST TAXATION AND ITS REMEDY 203

This calculation shows, that on the import
of foreign manufactured goods, the country
pays £80,000,000 for foreign labour. Now,
if 5s. per day is taken to be the average wage
of the working man, and if he works 300 days
in the year, £80,000,000 will pay the annual
wages of 1,066,666 men. We by this means
artive at the following conclusion :—

Persons employed in producing
£250,000,000 worth of imported food,

say . . . 1,500,000
Persons employed in manufacturing

£154,000,000 worth of imported goods,

say . . . . 1,066,666
Total number of workers employed by

the United Kingdom outside of the

country . . . . . . 2,566,666 _

The number of unemployed in the country
is, as has been already stated, estimated to

_ be 250,000 men. It seems probable that this

is an under-estimate, but if we assume it

‘to be correct there would be a shortage of

2,316,666 workmen if the British people
themselves did all the work necessary to
support the nation. This state of affairs

--- Page 110 ---

204 INVESTMENT PRACTICALLY CONSIDERED

can only be remedied by forcing foreign
food and manufactures out of the country,
and the only known means by which this can
be done is by a Protective Tariff. Itcomes to
this, then, that a Protective Tariff would not
only solve the unemployed question, but, as
I shall be able to show later on, it would also
provide the means of dividing the burden of

taxation more equally between the well-to-do .

and the poor, and of so broadening the basis
of Imperial Taxation as to enable it to meet
all possible future contingencies.

There are some members of the present
Cabinet who do not believe that a Protective
Tariff could either solve the unemployed
question, or foster British industries. For-
tunately there is an indisputable set of figures
at hand which completely confutes this dis-
belief. At the present time we have a protected
industry in the country in the manufacture
of tobacco. The manufacture of tobacco is
protected because the manufactured article
pays twice as much duty as the raw article.
The figures of this trade are as follows :—

UNJUST TAXATION AND ITS REMEDY 205

Tora Toracco Importep (Part Re-exported).
1891. 1907.
Unmanufactured . Ibs. 59,996,176 99,063,830

Manufactured » 9,497,408 3,393,235
Total . » 63,493,584 102,457,065
Consumption per head a
of the population . Ibs. 1°40 Ibs. 2.
Census Returns, Census Returns.
1891. 1901.
Persons employed in Tobacco
Trade. . . . 29,970 44,366
Estimate for 1907 . - 52,000

In theabovestatement the figures of the 1901
census had to be taken as the means of arriv-
ing at an estimate of the number of persons
employed in the industry in 1907, as there
were no nearer official figures available.
But in the face of the fact that the quantity
of raw tobacco imported in 1901 was only
84,620,000 Ib. as against 99,063,000 Ib. in
1907, it is a moderate estimate to assume the
44,366 persons employed in 1901 had increased
to 52,000 in 1907.

The above figures establish two facts beyond
the possibility of dispute, namely, that in a
thoroughly protected trade an increase in
consumption does not increase the import of

--- Page 111 ---

206 INVESTMENT PRACTICALLY CONSIDERED

manufactured goods, but rather the import
of raw material ; and, further, that an increase
of the importation of raw material naturally
produces additional work in the country.

The depression which reigned over our home
agriculture between 1891 and 1906, is vividly
portrayed by the comparative figures of
the entirely unprotected article, wheat :—

1891. 1906.

Tons. Tons.
Grown in Great Britain . 2,028,579 1,661,956
Imported into Great

Britain . . . 3,315,648 4,648,360

Total consumption . 5,344,227 6,310,316

Here again the increased consumption is
considerable, but whilst the home production
has markedly decreased, the quantity impor-
ted has increased by 40 per cent. That the
growth of 1,661,956 tons of wheat has afforded
employment for fewer people than does the

growth of 2,028,579 tons is again self-evident. .

In fact, the respective figures of tobacco manu-
facture and of the home wheat crop afford
an excellent insight into the comparative
merits of Free Trade and Protection, so far as
they affect national employment. In the

UNJUST TAXATION AND ITS REMEDY 207

figures of tobacco manufacture, which is
protected, we see a very large decrease of
foreign manufactured imports, and a corre-
spondingly large increase in the amount of
British Labour which these industries em-
ploy: whilst in wheat, which suffers from
the foreign competition inseparable from
Free Trade, there is a sharp falling off in the
demand for British Labour.

With figures like these before him, who can
still doubt that Protection inevitably brings
with. it an increased demand for Labour.

‘Under these circumstances it seems only

reasonable to believe that Protection would,
at least, solve the problem of unemployment
in the United Kingdom, although, so far as I
understand, the following apparently for-
midable array of arguments hinders the
adoption of a Protective Tariff :-—
I. The possibility of an increased Cost
of Living.
Il. The Uncertainty of Tariffs up-
setting Traders’ Calculations.
Il. Manufacturers, more especially
those who export, suffering through the
increased cost of Raw Materials and

--- Page 112 ---

208 INVESTMENT PRACTICALLY CONSIDERED

through retaliation on the part of other
nations. .

IV. The Belief in the impossibility
of devising any system of Protection
affording equitable protection to all In-
dustries.

V. The Dread that haggling over Tariffs
would interfere with the ordinary work
of Parliament and the risk that these
bargainings might demoralise our legis-
lators.

VI. The assertion that Capitalists
alone would benefit by the imposition of a
Tariff.

Now let us inquire whether it would not be
possible to outline some form of Protection
which would meetevery one of these objections.
This is purely a business subject which must
be discussed from the standpoint of an intel-
ligent business man, to the exclusion of all
theoretical arguments and economic theories.
To begin with, there is no need to labour the
point that it is necessary to raise the sum
requisite to meet the increased Budget re-
quirements in one form oranother. The form
is immaterial, provided only that all classes

UNJUST TAXATION AND ITS REMEDY 209

of the population contribute their fair share
to the Exchequer.. Earlier in this letter it
has been pointed out how Government, pro-
vided that sufficient statistics are collected,
can adjust the burden of taxation to a nicety
among all classes of the population, by actu-
ally ascertaining who pays the indirect taxes.
It has been shown that the poorer classes
are now taxed through their beer, spirits
tobacco, sugar, tea,etc. We know that they
pay seven-eighths of these taxes, and we agree
that the proportion of Imperial Revenue
raised in this way from them is excessive.
If, therefore, it should be found in practice
that a general system of Protection would
put a further burden upon the poor, why should
not some of the existing taxes upon the
necessaries and the cheaper luxuries be re-
mitted, and by this means a fair adjustment
of taxation be arrived at, somewhat on the
lines suggested by Mr. Joseph Chamberlain
in various speeches made in 1903 and succeed-
ing years ?

That some of the present imposts will
sooner or later have to be materially reduced,
must already be patent to most statesmen.

. P

--- Page 113 ---

210 INVESTMENT PRACTICALLY CONSIDERED

For example, although the tax on tea was
reasonable when that article was principally
imported from foreign countries, it has. now
become a grave injustice, since 279,000,000
pounds weight are now grown in British
India and Ceylon, out of a total of 316,000,000
pounds weight which this country imports.
So that foreign countries to-day only supply
us with 8 per cent. of the total consump-
tion. This being so, is it not astate of affairs
which cries aloud for alteration, that although
92 per cent. of an article is produced by the
poorest population living under the British
flag, and although more than half of the article
thus produced is consumed by the most needy
classes in the United Kingdom, nevertheless
the English Government should levy a tax of
nearly six million pounds sterling per annum
upon this article ? It should be needless to re-
mind our statesmen that European enlight-
enment is rapidly spreading in Asia, and that
India must inevitably resent this treatment
one day. Rather let us appeal to the English
love of justice, and let us remember that
India is the only country in the world which
in her trading imports and exports on balance

UNJUST TAXATION AND ITS REMEDY 11

buys more from Great Britain than she sells
to her in return. Surely this fact alone should
suffice to prevent the Mother Country putting
up a tariff barrier against her own Dependenc y>
the great majority of whose population is
constantly scourged by only too frequently
recurring famine—above all, a Mother Country
which at present professes strenuously to
advocate Free Trade. . So that, if it should be
found that Protection did throw an additional
load upon the working classes, it is byremitting
taxation upon articles of general consumption,
like tea, that a sound and statesmanlike
way would be found of lightening the poor
man’s burden, and at the same time of doing
tardy justice to our great Asiatic Depen-
dency.

I have already explained the impolicy of
increasing either the Income Tax or the Estate
Duty in order to levy a larger amount of
revenue from the well-to-do, and I have shown
how futile it is to attempt to reach them by
taxing staple articles of consumption, for the
reason that the wealthy only pay one-eighth of
the total of such taxation. Under these cir-
cumstances it naturally follows, that the only

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212 INVESTMENT PRACTICALLY CONSIDERED

possible means of making the well-to-do in-
crease their contributions to the national

Exchequer, is by imposing a general Tariff —

upon all goods of foreign manufacture im-.
ported into this country. But we have al-
ready agreed that no scheme of Tariff Reform
would be worthy of consideration unless it
were so consistent in operation that all trades
could make their calculations of working
expenses years ahead ; that it must in no way
increase the cost of raw material used in the
manufacture of articles which we export ;
that it must so equally hold the scale between
the various nations with whom we trade, that
no individual nation could justly or reasonably
retaliate ; that all our home-industries must
enjoy a precisely similar degree of Protection:
and that the working man must stand to de-
rive the maximum of direct benefit from the
Tariff, whilst Capital’s share must be subser-
vient. The basis of such a scientific Tariff

scheme must be that it shall be devised with

the object of so stimulating home production,
and home manufacture, that, so far as possible,
the work which the nation requires shall be
executed at home by its own resident popula-

UNJUST TAXATION AND ITS REMEDY 213

tion. In fact, the practicable maximum of
foreign labour executed abroad should be ex-
cluded. With this main object in view, it
would be useless to frame a Tariff on the basis
of taxing goods as such, because a tax of
this description would involve the taxation
of the raw material of which these goods were
composed. In brief, the only scientific way
of increasing the National Revenue would be
to levy taxation upon the amount of foreign
labour which is comprised in an imported
article. Tio do this it would be necessary to
separate the raw material from the labour in
the cost of an imported article, then to tax
the item of labour, and allow the item of raw
material to come in free.

In order properly to appreciate the result
of this method of raising Revenue, it is
essential to understand that the chief dis-
tinction between the goods used by the rich
and the goods used. by the poor is the quality
and quantity of the Labour employed in
their production. There is, of course, also
some difference in the quality of the material
used, but this difference sinks into insignifi-
cance in comparison with the quality and

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214 INVESTMENT PRACTICALLY CONSIDERED

quantity of the Labour. For instance, a
poor man spends 10s. on a pair of boots,
whilst a rich man’s boots cost him £2 28.
The difference in quality between the two
kinds of leather does not exceed 48., yet the

one pair costs fully four times as much as

the other; the difference consists in the
higher quality of labour upon which the rich
man insists, and upon the higher scale of
profit which he is content to pay to his boot-
maker. As it is with boots, so it is with al-
most every article used by the rich. In
short, it is only the well-to-do who import
articles the production of which involves a
quantity of high-grade labour. So that it
naturally follows that the simplest way in
which the rich man can be made to contribute
more liberally to the Exchequer, is by taxing
him upon the value of. the foreign labour
which he chooses to employ.

This would involve a Tariff upon all im-
ported manufactured articles. At the same
time, such a method of taxation would prove
no burden to those whom I have described
above as the poor-rich, for this class can al-
ways adjust their expenditure to their in-

UNJUST TAXATION AND ITS. REMEDY 215

come, and need not indulge their fancy for
foreign goods.

Now, at present there are two forms of
Tariff in force throughout the world: the
one levies taxation upon quantity or weight,
the other upon value. Neither of these
forms is suitable to the requirements of Great
Britain. But she, as the pioneer country,
which first admitted Democracy to the en-
joyment of real political power, might very
fittingly be the first nation to frame a scheme
of Tariffs, based upon the purely democratic
principles of the greatest happiness for the
greatest number, and of regularity of well-
paid employment for the working classes.
Such a tariff would be based solely upon the
taxation of the quantity and quality of
foreign labour which is imported into this
country.

The great recommendation to such a
Tariff, would be the extreme simplicity and
the great rapidity, with which it could be
carried into almost immediate practice.
It would only be necessary that the Custom
House authorities should furnish a very full
detailed list of all imported manufactured

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216 INVESTMENT PRACTICALLY CONSIDERED

articles. Then, the exact nature of our
imports of foreign manufacture having been
established by means of this list, it would be
by no means a formidable task for a com-
mittee, representative of the various Chambers
of Commerce throughout the Kingdom, to
decide how the value of each article divided
itself into (1) cost of raw material; (2)
labour and profit. On the decision of the
Associated Chambers of Commerce, a body
which already enjoys a corporate existence,
and, consequently, obviates the necessity
of hastily improvising an advisory committee,
a Custom House list could be drawn up
settling, once for all, the proportion of value
of labour and raw material in each imported
article. Such a list would furnish the exact
value of the amount of foreign labour im-
ported, and upon this list the scheme of
Tariffs would be based. This practical sug-
gestion would obviate the difficulty of Parlia-
ment involving itself in the morasses of a
lengthy Tariff list, containing many articles,
with which the majority of our legislators can
only be vaguely familiar. The function of
Parliament, thanks to the preliminary work

UNJUST TAXATION AND ITS REMEDY 217

of the Associated Chambers of Commerce,
would thus be simplified down to deciding
merely upon the exact percentage of Duty
to which foreign labour should be subjected.
Thus, for example, if the value of Foreign
Labour, imported in the shape of manufac-
tured goods, is ascertained to be £80,000,000
per annum—and investigation will show that
this is a fairly accurate estimate—and if it is
intended to raise say £30,000,000 additional
revenue, then a tax of say 50 per cent. should
be levied upon the value of imported labour.
It will be observed that this rate of taxation
makes an allowance for the shrinkage of
the demand for foreign goods under the new
Tariff. But the nation would view a dwind-
ling importation of foreign manufactures
with delight, as every sovereign less which
was spent on manufactured imports would
mean ten shillings more spent on British
wages, thus benefiting the British working
man, and indirectly the whole of the rest of
the nation besides.

Such a shrinkage of imports of manufac-
tured goods would invariably be accompanied
by an increase in the imports of raw material.

--- Page 117 ---

218 INVESTMENT PRACTICALLY CONSIDERED

In fact, the nation would do the same as a
prudent and economical labourer’s wife does.
Instead of buying expensive bread, she buys
wheat, grinds it up in a hand mill and bakes
the bread herself, thus saving the miller’s
and baker’s profit. If that miller and baker
lived in the same country as the consumer,
then it would not be disadvantageous, from a
national point of view, to buy the ready made
bread, but whenever the manufacturers live
abroad, then the nation is impoverished by
paying for labour and profit to foreigners,
and by the ensuing drain of value out of
the country, perhaps never to return. This
is exactly what happens to all nations who
encourage the import of manufactured goods.
Nations should encourage the import of raw
material to the utmost, and especially of
such raw material as is permanent and not
eaten or burnt. Those nations which import
the maximum of raw material, and the
minimum of manufactured goods become,
as a natural consequence, the richest. in
the long run. England’s enormous and ever-
growing imports of raw cotton, wool, iron,
copper and other metals, have created her

_ UNJUST TAXATION AND ITS REMEDY 219

wealth and not the imports by other nations’

manufactured. articles.

If the Tariff basis proposed here were
adopted, experience would soon show what
the amount of permanent decrease in the
importation of foreign manufactures was
likely to be. Further, as time went on, it
would, by tabulating the nature of the articles
upon which Tariff duty was paid, be possible
to decide beyond question, which class of
the population was paying the new tax. If
it were found that the burden of the rich
was becoming unduly heavy, then the dis-
crepancy could be adjusted by a reduction
of the Income Tax. The amount of Tariff
Duty paid by the working-classes would be
comparatively small, as the imported foreign
manufactures, which they use, include pro-
portionately a very small amount of foreign
labour. But here, again, the precise amount
could easily be ascertained, and, as Mr.
Chamberlain has already proposed, a com-
pensating allowance could be made by a
reduction in the taxes on beer, spirits, tobacco,
sugar, tea, etc., all of which are consumed by
the working classes and the poorer popula-
tion to the extent of seven-eighths.

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220 INVESTMENT PRACTICALLY CONSIDERED

- To a Tariff of this description a perfect
system of Custom House drawbacks would
be indispensable, in order that the country’s
export trade might not be injured, because
there are certain manufactured articles which
constitute the raw material of some of our
exported manufactures. In all such cases
the Tariff Duty originally paid on importa-
tion would have to be remitted to the manu-
facturer on the re-exportation of the goods.
Otherwise our manufacturers would not enjoy
their present ability to compete in the world’s
markets, a trading advantage which legisla-
ture could not afford to imperil.

If the history of taxation, as now existing in
any country, be studied, it will be found
that taxes and tariffs have been instituted,
and then abolished, and then instituted again,
in a haphazard way as necessity dictated.
In no country has the Chancellor of the
Exchequer had the good fortune to begin
with a clean slate, and thus be able to con-

sider the question of taxation as a whole. |

Before framing a reformed scheme of taxa-
tion, the statesman responsible for it should
first ascertain with exactitude how much each

UNJUST TAXATION AND ITS REMEDY 221

portion of the community should, and does
contribute towards the expenses of the State,
and to decide by what judicious adjustment
of the Budget such purely business questions
as the lack of employment, unfair competi-
tion, provision for old age and sickness, and
the housing of the working classes are to be
met. This opportunity of reconsidering the
very basis of taxation now occurs in Great
Britain.

If the question of the practical working of
the Tariff system here advocated were to
be submitted to the present Custom House
and Board of Trade officials, they, no doubt,
would find it bristling with difficulty ; but I
frankly confess that I can see none. Indeed,
I should only be too pleased to explain to
the permanent officials the practical means
of surmounting any obstacle which may
baffle them. |

The advantages of the suggested system
of taxation are undeniable, and it does not
appear that any political party or faction will
be able to raise any well-founded objection
to it. If it should entail any increased cost
of living—and I deny that there is any likeli-

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222 INVESTMENT PRACTICALLY CONSIDERED

hood of this—the cardinal fact must not be
overlooked, that the increased expenditure,
if any, would entirely remain in the country,
and. it would almost wholly take the shape of
additional wages paid to British working
men. There would be a permanent stability
in the amount of Tariff chargeable, because
every manufacturer knows precisely how
much labour is requisite to turn out the
type of goods which he produces, and the
actual percentage of Duty, charged upon
the importation of Foreign Labour, would
only alter fractionally from year to year.
Besides, the probability of any forthcoming
alteration would be obvious months in ad-
vance. Our exporters would be in quite as
favourable, if not in a better, position than
they now occupy, because they would pay
for their raw material, were it entirely raw
or partly manufactured, the world’s market
price plus only the unavoidable freight.
Such a Tariff could scarcely provoke retalia-
tion by Foreign Powers, and in reality England
has little cause to feel apprehensive on this
subject, because, after all, she is one of the
largest buyers in the world, and therefore

_. UNJUST TAXATION AND ITS REMEDY 293

' & Power to conciliate. Moreover, Foreign

Tariff Walls have already been raised against
her to about their maximum. ‘Then, again
as the amount of Tariff levied on each article
would automatically adjust itself, all trades
would be protected in an identical degree ;
and, as it would be impossible for Parliament
specially to favour any particular trade, all
jobbery, lobbying, and political corruption
would be made, not only impossible, but
utterly unavailing. Finally, the Protective
Tax would be levied mainly in the interests
of the working man, and only quite second-
arily in the interests of capital, although,
a8 every practical business man is well aware
the interests of capital and labour are, after
all, so inseparably bound together, that any
fresh departure in our commercial policy,
which benefits one, must inevitably react
favourably upon the other. By making
British labour a valued commodity, by means
of a Protective Tariff, the British working
man would find there was a rea] dignity at-
taching to labour, such as has been scarcely
observable whilst our English working classes
have been elbowed out of their own home-

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224 INVESTMENT PRACTICALLY CONSIDERED

market and deprived of employment by the
unrestrained dumping of foreign manufac-
tured goods.

Thus far in this argument manufactured
goods only have been considered, but as the
Taxation Question would be quite incom-

plete if I failed to deal with the question
of Food Supplies from abroad, this subject
now comes up for discussion. At the outset
it is only right to admit that it is useless for
Tariff Reformers and others to pretend
that a tax on food is likely to benefit the
working man directly. Beyond question it
will benefit the agricultural labourer, and
prevent his migrating to our industrial
centres, there to swell the ranks of the unem-
ployed. But the agricultural labourer, and
those who are dependent upon him, only
make up about one-ninth of our total popu-

lation. Therefore it would be scarcely fair to

tax the other eight-ninths of the community
for the benefit of a single industry. If the
interests of the agricultural classes were the
only arguments in favour of the taxation of
food, such a proposal ought to be met with a

stern negative.

| UNJUST TAXATION AND ITS REMEDY 2925

But the food supply of the nation must be
considered from a wider standpoint. First
of all, the native soil is the country’s natural
food-producer. This native soil forms a con-
siderable part of the fixed assets of the nation.
No sound business man would willingly per-
mit one of his principal assets to be made
valueless, neither should a nation be guilty
of such an act of folly. Besides, the soil of
the country may be said to represent the
reserve fund of the working classes. Because

_ not all members of the community are adapted.

to manufacturing pursuits, whereas almost
all able-bodied. men are capable of tilling
the soil, provided only that the soil is able
to afford them remunerative employment.
So that it really constitutes a working class
grievance, that the highly productive soil of
the country should be allowed to go out of
cultivation owing to foreign competition.

~ I will merely allude to the fact that the
fighting line at Waterloo was largely made
up of drafts from the militia, a force raised
solely amongst agriculturists, and that the
crews which fought under Nelson at Trafalgar
were recruited by the press-gang, chiefly

Q

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226 INVESTMENT PRACTICALLY CONSIDERED

from the agricultural districts of Kent and
the West of England, to show how much the
country owes in the past to its sturdy agricul-
tural backbone, and I will pass on to consider
the question of food in relation to modern
warfare. It is the duty of every nation
to prepare for war. Last year Great Britain
spent £59,199,000 on her Army and Navy.
In 1905 a Report of a Royal Commission,
presided over by His Royal Highness the
Prince of Wales, was published, showing that
at times the country’s wheat supply falls below
eight weeks’ requirements. It demonstrated
clearly how absolutely dependent the country
is on foreign food supplies. The Report
contains a number of tables explaining how
the home-produced food is gradually dimin-
ishing: that, for example, the quantity of
wheat grown in this country had decreased
by 33 per cent. in one dozen years, yet
this Report fails to refer in any marked
degree to the clear remedy for making
the country safe, by increasing the home
production of food. Nearly 60 millions ster-
ling are spent annually on preparing for
war, and the chief necessity of war—an

UNJUST TAXATION AND ITS REMEDY 227

ample food supply—is almost .lost sight of.

Let the superior officers of our fighting
forces make it their business to insist upon
this vital point being constantly held up before
the eyes of the nation, whom it is their duty
to protect. For what would be the advan-
tage of protecting the country from invasion
if its inhabitants were doomed to die of
starvation during the siege? The agrarian
policy of Germany is disapproved of, and
jeered at, by the Socialists, but the stern

- Ministerial reply invariably is: “We must

have bread and meat in case of war ” ; and this
is the true explanation of Germany’s taxation
on food. As arule itis unsafe to argue regard-
ing the economic policy of one nation from the
economic experience of another, because the
underlying conditions, such as climate, soil,
sea, and river transport, etc., are wholly
different ‘in every country. But war is a
great leveller, and food is an universal neces-
sity : so that, in the matter of food supply in
case of war, England might very advantage-
ously take a leaf out of Germany’sbook. For
it is certain that in time of war every addi-

‘tional bushel of grain grown on English soil,

--- Page 122 ---

228 INVESTMENT PRACTICALLY CONSIDERED

and every ox in English pastures, will be
worth an additional soldier and sailor.

Last, but not least, there is the question
of the Colonies. And in order to understand
the future of the Colonial Question aright,
it is necessary to glance at past history. It
was by being the workshop, the banker,
and. the carrier of the world, that England
accumulated her wealth in the past. Fifty
years ago, all countries which only had raw
produce to offer in the markets of the world
were the paupers, whilst those nations who
had manufactured articles for sale were the
kings. Slowly and gradually, but with dead
certainty, the tables are turning. Already
England has ceased to be the exclusive work-
shop of the world, her banking position is
being assailed by foreign competition, and
every foreign nation is rapidly increasing its
mercantile marine. The former producer of
raw material is not only now manufacturing

almost enough for himself, but, in many in-

stances, he is now offering his surplus manu-
factured:goods in the world’s markets. Manu-
facture can be carried on in almost any clime,
but raw material is only to be found in certain

UNJUST TAXATION AND ITS REMEDY 229

limited areas. Raw material and certain
food products cannot be grown everywhere.
Consequently, in time, the producer of raw
material and food will be the king, and the
manufacturers will be dependent upon his
royal favour.

Where will England be then, if she abides
by her present policy of doing everything
for her manufactures, and neglects the truly
Imperial policy of securing her entire future

_ by ‘means of a close business alliance with

her Colonies? The British Empire to-day
is of a magnitude which the world has never
before seen, and Great Britain can only per-
manently maintain her present exalted posi-
tion, by encouraging her Colonies to supply
her permanently with all she can ever reqiure,
Assisted by men and money, the British
Colonies and Dependencies are capable of
producing five times as much raw material
and food of all descriptions as Great Britain
can ever want, and the hundreds of millions
sterling paid by her for these supplies of food
and raw material would be capable of stimu-

lating an Export of English Manufactures

to the Colonies, equal to England’s present

--- Page 123 ---

930 INVESTMENT PRACTICALLY CONSIDERED

export trade with the entire world. There
can, in short, be no question that with a
wise and far-seeing statesman at the helm, a
man capable of initiating a truly Imperial
‘ Policy, Great Britain, her Colonies, and her
Dependencies would be knitted up into one
unit, which would not only be self-supporting,
but entirely independent of the whole of the
rest of the world. It is no argument to point
to the present figures of colonial imports
and exports, because we have never given
our Colonies sufficient encouragement. It
is, however, very much to the point to re-
member that, not so very many years ago,
the United States made no export of grain
to Europe whatever, and that many at
present uncultivated square miles in our
Colonies are just as climatically capable of
growing grain as the famous wheat-belt of
the United States. Statesmanship should
not dwell upon either the past or the present—
its eye should be upon the future, and the
future possibilities of our Colonies are bound-
less. Yet how can our Colonies and Depend-
encies develop in the interests of the mother-
country, so long as they are so scantily sup-

UNJUST TAXATION AND ITS REMEDY 231

plied with capital? Is it not pitiful to see
quoted in the Official List of the London
Stock Exchange such a scanty array of
Colonial Industrial Companies? We have
squandered our capital in colonial mining
gambles, but have we made any serious at-
tempt to promote the welfare of colonial agri-
culture 2? Why are we permitting the United
States gradually to acquire a controlling
interest in the Canadian Pacific Railway ?
Why do we allow the Americans to push their
way to the front in Canadian financial matters?
Why is India starving for capital, and why
has that country of enormous undeveloped
wealth permanently a higher rate of dis-
count than any other Eastern nation, and
this after generations of English occupation ?
In fact, why does British statesmanship
habitually neglect colonial enterprise ?

The present relations between England
and her Colonies can only be described as
visiting terms of a cordial nature. For the
sake both of England and the Colonies, it is
requisite to bind the two together by means
of permanent, and mutually satisfactory, in-
timate business relations. It will not be

--- Page 124 ---

932 INVESTMENT PRACTICALLY CONSIDERED

enough for England to provide the Colonies

_ with the most advantageous market in the

world for their food-produce. If she is
wise, she will also assist them with men,
tools, and money, to develop their great
natural resources. England can only secure
her food markets for the Colonies by placing
a tax upon all the kinds of food stufis which
the Colonies can produce, and by making this
tax entirely inoperative against the Colonies
themselves. Mr. Chamberlain once said that
the Custom House made a federated Germany
possible, and sealed the bonds of Imperial
Unity. Why should not the same result be
attained by a Customs Union between the
Mother Country and her Colonies ?

It has already been explained that a tax
on food would fall upon the working classes of
Great Britain to the extent of seven-eighths. It
would be necessary, therefore, to make a sim-
ultaneous reduction in the duties now levied
upon staple articles of working class con-

sumption, such as beer, spirits, tobacco, _

sugar, tea, etc., or else, in common fair-
ness, the entire proceeds of the taxes upon
food must be solely devoted to the improve-

UNJUST TAXATION AND ITS REMEDY 233

ment of the conditions of life of the work-
ing population. A food tax can never
be popular, and certainly only in case of
dire national need should a tax of this des-
cription ever be used as an expedient for

increasing Imperial Revenue. For these

reasons intelligent statesmanship would apply
itself to the task of making it clear to the
British Nation that this tax is solely made
in the interests of the national welfare, and
as a means of more closely uniting the Colonies
with the mother-country. A politician, am-
bitious of proving himself a capable leader of
national thought, should strive to impress
upon the British working man, that it is not
intended that the food tax shall be used as
a means of grinding additional funds out of
the poor; but that, as the tax is a politi-
cal necessity, the money, which it is instru-
mental in raising, shall be solely devoted
to ameliorating the lot of the working
man. .

The questions of Old Age Pensions and of
the Housing of the Working Classes are large-
ly to the front at the present moment. Why
should not the funds necessary for both

--- Page 125 ---

234 INVESTMENT PRACTICALLY CONSIDERED

these reforms be produced by means of a
food tax? The annual value of foreign
food imported stands at present at about
£250,000,000 ; so that a tax of only 15 per
cent. on this value would produce an annual
income of about £30,000,000, after allow-
ing for an increase of £50,000,000 in the
value and quantity of home-grown food,
thus providing the funds required for these
boons to the working-classes, Why should
not the working man provide for his old age
by paying a trifle more for his bread and
meat? The difference in cost he would never
feel—the present constantly recurring vari-
ations in the price of food conclusively prove
this—yet by this means he would insure
himself against the present dearth of employ-
ment, he would insure the country against
starvation in time of war by fostering home
agriculture, and he would also insure the
supremacy of the British Empire by means
of a close business alliance with the Colonies.
The love of the Colonies is so ingrained’ in
the British people that they would cheer-
fully submit to any sacrifice in order per-
manently to attach them to the mother-

oe tg toon
Pe ce Ala natant tan a

UNJUST TAXATION AND ITS REMEDY 235

country. But under the scheme of Tariffs
outlined in this letter, the working man would
not be asked to make any sacrifice, but merely
to lay by a prudent provision for his own
old age. |

It is true that the well-to-do portion of
the population would pay one-eighth of
the entire expense of Old Age Pensions, but,
again, they are likely to save in the Poor
Rate. If, however, they did not, they would
have the satisfaction of knowing that they
were doing their share in eliminating poverty
and privation from the British Isles, and that
they were at the same time assisting in the
federation of the British Empire. .

The only class of people who, perhaps, might
unduly benefit by the imposition of a food
tax, would be the farmers and farm labour-
ers. But Free.Trade has already played
such sad havoc with their Capital and Income
during the last thirty years, and they have
been so long-suffering, almost during the

‘entire lifetime of the present generation, that

no one can justly begrudge them this wind-
fall, more especially when it is remembered
that their welfare is so closely bound up with

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236 INVESTMENT PRACTICALLY CONSIDERED

that of their native soil, which must always
be the nation’s most cherished possession.
IT am, Sir, your obedient servant,
Henry LOWENFELD.

‘What Income Should Investments

Yield ?

THE actual income derived from capital in-
vested in stocks and shares is, with many in-
vestors, purely accidental. Some of them, the

desire of whose hearts is to receive a large

income, contrive to make the minimum, and
others, whilst making the question of income
quite subservient to that of capital safety, yet
make a large income. There are very few in-
vestors who realise that the extent of their
income can, within reasonable limits, be so
adjusted as to meet their actual requirements,
and that there are simple rules by the applica-
tion of which certain income results can be con«
fidently counted on.

Many investors believe that a high rate of
income is synonymous with insecurity of
capital. This axiom, so fondly adhered to by

some capitalists, is only true when applied to
237

--- Page 127 ---

238 INVESTMENT PRACTICALLY CONSIDERED

loan money. In the case of Stock Ex-
change investments it is misapplied, as I shall
be able to prove in the course of the present
article. But even if it were true that a high.
yield cannot be obtained without imperilling
the safety of the capital, it does not necessarily

follow that a low yield must mean capital |

security. This, however, is unfortunately the
inference frequently drawn, and it is the
prevalence of this erroneous idea which is the
primary reason why so many investors are
receiving an inadequate income.

There are a considerable number of invest-
ment lists now in existence which, on account
of the faith of their owners in out-of-date
axioms, are producing for them a rate of in-
come totally inadequate in proportion to the
amount of capital and the degree of security
obtained. The existing conditions of the

money and investment markets offer particu-

larly suitable opportunities for adjusting such
anomalies, so that a discussion of this most
important subject should now prove to be
not only of interest but of considerable profit.

The laws by which the investment markets
are governed are not understood by all in-

' WHAT SHOULD INVESTMENTS YIELD ? 239 |

vestors, and. many of them argue that the
quality of a stock can, to a certain extent, be
gauged by its income yield. By the same
course of reasoning they arrive at the conclu-
sion that the mere fact that an investment
shows a large income-producing capacity at
its market price is sufficient to mark it unsafe
at once, and they hold the belief—equally
without foundation—that a stock from which
the minimum yield is being received must
necessarily be good, or people would not pay

80 high a price for it. The following examples

will show that the yield has but little relation
to the quality and safety of stocks.

We will take for our illustration two classes
of investments, which, to all intents and pur-
poses, are on common ground as regards capital
safety, viz.: the Ordinary shares in first-class
British banks and insurance companies. Ifany-
thing, the bank shares are the safer of the two,
and yet a glance at thetables inthe Finacial Re-

view of Reviews will prove that first-class insur-

ance companies’ shares yield an average return
of 20 per cent. less in income than bank shares
of the same standing do. The following are a

few exceptional examples of present yields :—

--- Page 128 ---

240 INVESTMENT PRACTICALLY CONSIDERED

Div. for last 4 yrs. INSURANON COMPANIES. Yield. BANKS. Yield,
60% Bonus 37/6, 02 ClericalSMed. & Gen.. London & Westmin-
ife . - « 2% ster Bank . . . 43 %
108% _ Life Association of London Joint Stock
Scotland. . . 33,% Bank . . . . 4¢ %
20% > Sun Life Assurance 23;% Union Bank of Scot-
land . 1. ww 446%
45% _ Commercial Union Lloyds Bank . . 43%
Assurance . . 34%

It might be said that the insurance com-

panies have comparatively larger reserves,
that in some cases the bonuses compensate
for low yields, or that their assets have been
under-valued, and thus the capital safety of
their shares has been increased. This argu-
ment, however, does not apply, as it will be
remembered that a single catastrophe, such

as the San Francisco fire, was the means of

reducing the value of certain insurance shares
to an alarming extent. Thus, the Royal
Hachange Assurance Company’s shares fell
from 310 to 175, Caledonian from 30 to 14,
Scottish Union from 4 to 2%. Banks are not
subject to any such sudden risks ; yet insur-
ance shares return a smaller average yield than
bank shares do. This drastic example proves
that a low rate of income does not indicate
capital safety. Now let us take another
example,

There is a vast difference between the yield

' WHAT SHOULD INVESTMENTS YIELD? 241

to be derived from railway debentures and
that obtainable from the debentures of trading
companies. In order to analyse the facts we
give the following representative groups of
stocks from both classes :-—

« RalLway DEBENTURES. Yield. TRADING DEBENTURES. Yield.
reat Central Rail. Debs. 34% Brit. Insulated & :

- 6 . Holsby Debs. 45,9
pondon, Chat. & Dover Debs... 3k% Bovril Debentures. . . tee
ie ne astern Rly. Debs... 835% Lipton Debentures. . . . 44%
igh’ Railway Debentures 38% United Alkali Debentures. . 435%

I have purposely chosen for my argument
Railway Debentures which are not Trustee
Stocks in order that the comparison may be
quite fair. On Trustee Railway Debentures
the yield, of course, is still smaller. These
few examples prove that the rate of income
received from Home Railway Debentures is
very much lower than that to be obtained
from Trading Debentures, and yet a glance at
the steady fall during recent years in the prices
of the Railway Debentures seems to show that,
from a capital point of view, the Trading
Debentures are safer. During the last decade
Great Central Debentures have decreased 26
points in value, London, Chatham and Dover
Debentures 30 points, South Eastern Debentures
40 points, and Highland Railway Debeniures
about 27 points, whilst the Trading Deben-
, 4

--- Page 129 ---

242 INVESTMENT PRACTICALLY CONSIDERED

tures, having fluctuated very narrowly, are
now only slightly below the prices at which
they stood in 1896. I have no desire to encum-
ber this article with many tables, and would
prefer my readers to look at the price records of
a number of Railway and Trading Debentures
given in the Statistical Record of the Review.
The result of the comparison will show
them how very stable the prices of Trading
Debentures are, as contrasted with Trustee
Stocks or non-Trustee Railway Debentures.
Capital stability is but another term for capital
safety. A stock, like South Hastern Railway
Debentures, which is capable of falling 40
points in value in a few years, cannot be called
safe. Of the two classes given the Trading
Debentures, having shown such a small mar-
gin of fluctuation, are undoubtedly the safer.
I have now cited the two extreme examples,
viz., Ordinary Shares and Debentures, and
have shown that, if securities of a similar kind
are compared with each other, the yield fails

to indicate the degree of capital safety. Now.

let me prove that a larger rate of income is not
followed by any lack of capital security.
The Six per Cent. First Mortgage Debentures

WHAT SHOULD INVESTMENTS YIELD? 243

of the Costa Rica Railway have paid regular
dividends almost since the inception of this
line, and during the last ten years their
realisable value has not varied more than 8
points. The shares of the New Zealand Ship-
ping Company, having moved but little from
a steady price level, have yielded over 6 per
cent. Between 1896 and 1906 the Debentures
of the Land Company of Egypt have only
varied 5 points in value, and yet yield nearly

_ Spercent. Kimberley Waterworks Six per Cent.

Debentures have fluctuated in value only
to the extent of 10 points during the last ten
years, although these ten years have seen a
fateful war break out and work its way to a
long-protracted end ; throughout the whole
period these debentures yielded from 5} per
cent. to 53 per cent. Henry Clay and Bock
Preference Shares have since 1896 not varied
to much extent in value, and have yielded
in income over 64 per cent. The safety of
all the investments now cited as examples
is fair, and the balance sheets issued by

the respective companies are satisfactory.

They should be taken as fair average sample
cases, proving the erroneousness of the idea

--- Page 130 ---

244 INVESTMENT PRACTICALLY CONSIDERED

that capital insecurity must go hand-in-hand
with a high yield.

When a writer attempts to illustrate his
argument by laying before the reader particu-
lars of specific cases, there is very often a sus-
picion in the mind of the reader that the cases
quoted cannot be taken as a fair average.
I always, therefore, much prefer my readers
to look out examples for themselves, and
thus verify my facts to their own satisfaction.
This has now been made a fairly easy matter,
as the Investor’s Shilling Year Book publishes
records of almost any stock about which
the investor is likely to require informa-
tion. A reference to this book will not only
strengthen my case in the mind of the reader,
but will also give him a practical lesson in the
selection of investments. .

Having proved that the yield derived from |

investments has but a remote relation to their
capital safety, let me explain the reason why
some investors hold low yielding stocks, to

their own disadvantage. On the face of it, it

seems absurd that an investor should be con-
tent with an income of, say, £35 per annum
from a capital sum of £1,000 invested in Com-

WHAT SHOULD INVESTMENTS YIELD? 245

mercial Union Insurance shares, whilst he
might be deriving £45 from the same sum by
exchanging this investment into London and
Westminster Bank shares; and yet such
anomalies are the order of the day. The Com-
mercial Union Assurance shares are £50 shares,
£5 paid, with a liability attached to them to
the extent of 90 per cent. of uncalled capital.
The London and Westminster Bank shares are
£100 shares, £20 paid, with a liability of 80 per
cent. only. Banking is a safer business than
insurance and not liable to sudden calamities.
The Commercial Union shares have risen from
40 in 1896 to 77 at the present time. They
have, therefore, reached a dangerously high
price level. The London and Westminster
Bank shares are now at about the same price
at which they stood ten years ago; in this
investment there is, therefore, little likelihood
of capital depreciation. The pros and cons of
both investments might be summed up as
follows :—

Wrst- {Safe business . . . .
MINSTER < Small chance of deprecia- ties. . 1. we UNION

ASSURANOH
SHARES,

Bark
SHARES.

tion . 2. 2. ww.
Smaller uncalled ability.

Dangerously high in price

Loxnon & (ier high yield
Large uncalled liability .

Small yield . . . . Cox-
Liable to sudden calami- MERCIAL

If these facts were put before a holder of

--- Page 131 ---

246 INVESTMENT PRACTICALLY CONSIDERED

Commercial Union shares, he perhaps would
aver that the figures, so far as he is concerned,
are incorrect, as he bought his shares at 40, at
which price they yield him, not 3} per cent.,
but 7 per cent. He would tell us that, as they
now stand at 80, it is highly improbable that
they will drop below 40 again, and that, there-
fore, there is no chance of his capital deprecia-
ting; in fact, that the whole argument does
not apply to him. Such a reasoner forgets
that it is not the price he gave for his invest-
ments that constitutes his capital and yield,
but the present value AND YIELD of his holdings.
He does not take into consideration the prob-
able fact that he has other stocks in his list
of investments which have fallen in value and
have decreased their dividends, and that,
following his reasoning, the value of these,
also, should be calculated on the basis of cost.
Tf he were to work his income account on
these lines and endeavour to arrive at an aver-
age yield, he would obtain curious results, and,
in fact, would find that current market yields
are much higher than the yields he claims to
be receiving. Letus assume that he bought,
say, North London Railway Ordinary at 200

WHAT SHOULD INVESTMENTS YIELD? 247

when a dividend of 74 per cent. was paid on
that stock, and the yield, at that price, was
at the rate of 32 per cent. Now this stock
is paying a dividend of 43 per cent., and thus
yields 23 per cent. on the cost price of 200.
Every investor is forced to join the flow of

financial events from the moment in which he
has become an investor. Itis useless for him to
imagine himself on an island on which every-
thing stagnates, while the stream of financial
events is flowing past. He must base his
calculations on what is, and not on what has
been, and for this reason the cost of an invest-
ment is no foundation on which to work out re-

turns. The present value invariably should be
the basis of all reckonings. One of the chief
reasons for such a large number of anomalies in
yields is that so many investors calculate their
yields on cost.

There is one other reason why investors

‘retain securities which have ceased to be

remunerative, and why they show such a
disinclination to make any decisive move.
It is that they believe they know all about
the stocks they hold, and nothing about those
to be bought. They have lost sight of the

--- Page 132 ---

248 INVESTMENT PRACTICALLY CONSIDERED

consideration that the present holding was
once a stranger to them, and that they have
now far better facilities than they ever had
for learning all about a new investment. A
certain lethargy holds them to the old unre-
numerative stocks. If “to be idle is the

ultimate aim of the busy,” the thoughtful

man will find it reasonable to believe that to
be busy will eventually be the sad condition
of the idle. It is this financial lethargy, to-
gether with a certain amount of prejudice and
a totally mistaken way of calculating yields,
which prevents investors from making the
income which they ought to make.

Every investor who really wants to use his

capital to the best advantage must take facts.
as they are, and not as they have been or as he’

would like to have them. He must learn to
profit by the opportunities which offer them-
selves for the improvement of his position, and
thus make up for the losses which the most
provident and careful investor is bound to
make from time to time. He must regard
his stocks exactly as income producing
machines, and, in the same way’ as any
machinery is discarded when the pattern is

WHAT SHOULD INVESTMENTS YIELD? 9249

becoming obsolete, he must discard the stocks
which have ceased to “ work ” properly, and
adopt a sounder and more profitable method .
of employing his capital. Each investment

must be placed in its proper category, regard-

less of the sentimental notions and inherited

beliefs which he may have been accustomed

to apply to them. Money is a merchandise

like any other commodity, and the most

profitable markets for it alter from time to

time. It is by always taking one’s money to

the best markets that satisfactory results are

obtained.

In 1897 the following were the best rates
obtainable :—

From trustee investments in stocks . 34%
From other gilt-edged stocks » BBY
From Miscellaneous Debs. and Prof. °

Shares . . . . . - 420/
From medium investmenta . . 420/
From speculative stocks . . - 54%

Since 1897 the value of money has gradually
increased until it has now reached what is com-
paratively a very high figure, and the follow-

ing rates are now obtainable :—

--- Page 133 ---

250 INVESTMENT PRACTICALLY CONSIDERED

Increase
in yield
since 1897.
From trustee investments in

stocks . . . - BBY+ $%
From other gilt-edged stocks 4}% + &%
From Miscellaneous Debs.

and Pref. shares 5 Y%+ 3%
From medium investments 5E% + BG
From speculative stocks 64% +14%

This table shows clearly that to-day every
£1,000 invested in stocks can be made to pro-
duce from £5 to £12 10s. per annum above the
average sum which was obtainable from it
ten years ago. The progressive investor will
profit by this increase, but he who desires to
stand on his little island and refuses to move
with the stream of events, will suffer the loss
consequent upon letting the present excep-
tional opportunity escape.

The rates which I have quoted above are
not theoretical ; they are absolutely practical,
and by means of a Geographical Distribution
of Capital they can be obtained attended with
the highest degree of capital security. For
this reason from £45 to £65 should be derived
from each £1,000 represented in the value
of investments held at the present moment.
These rates of income should be quite stable,

fate ts ter Coney

WHAT SHOULD INVESTMENTS YIELD ? 261

and not liable to any appreciable degree of

fluctuation, and any present Investment List

which does not produce them is obviously
badly constructed. To re-organise such a list
without delay should be the investor’s object.

The argument which I have here advanced
should prove to the investor the two facts :
That the actual yield derived from an invest-
ment is no index to the capital safety afforded
by such investment, and that the yield ob-
tainable from investments varies consider-
ably from decade to decade.

The average yield obtainable from any
particular group of investments indicates the
esteem in which the investing public holds the
stocks comprised in such group. But such
esteem is, in a great many instances, based
more on prejudice than on inherent merit,
and therefore those investors who have
trained themselves to form original opinions
Should not be misled by it. For example,

Coal and Iron investments have, for many

years past, produced a larger yield than
other similarly staple industries ;. Shipping
and Cable stocks are in somewhat the same
position, and the extreme example is to be

--- Page 134 ---

252 INVESTMENT PRACTICALLY CONSIDERED

found in the case of Theatrical Enterprise,
which, although the yield from investments
in such companies reaches practically the
maximum and the degree of capital safety is
very fair, is yet looked upon by investors
as being highly speculative.

My long and varied experience in financial
matters has taught me that a low average
yield derived from any group of investments
is not accounted for by the fact that that
particular class of investment is safe, but the
reason rather is that nearly all the companies
floated in that line of business are successful.
It has proved to me, too, that wherever the
average yield is high the indication is that

among the companies in which these invest- _

ments are made many are absolute failures.
In further explanation I may point out that
water company shares are considered safe
(and therefore yield the minimum) because so
few water companies go into liquidation.
Theatrical enterprises yield a large return
on an average, because a large number of
them prove failures.

The general trend of a particular trade is
thus taken as a sure indication of individual

WHAT SHOULD INVESTMENTS YIELD? 253

merit, or demerit. Are we, then, to consider

all bookmakers rogues because some of them
fail to pay winners their bets? For the
above reason it appears to the thoughtless
investor that the better plan is to confine
himself to those investments which have been
approved of as safe by vor populi, whilst the
thoughtful man will rise above prejudice
and judge each particular investment on its
own merits, and, as a reward for his independ-
ence, will obtain the maximum of income
coupled with the minimum of capital risk.

The final question which arises out of my
argument, and on which the reader might
like to have some information, is the follow-
ing: Every investor naturally desires to
derive the greatest benefit he can from his
money. I have shown by the two tables
given that there is a large permanent differ-
ence in the average yield to be derived from
certain classes of investments. Thus whilst
gilt-edged stocks produced in 1897 33 per
cent. (now the yield is 4} per cent.), specu-
lative stocks atthe same period returned an
average of 5} per cent. (now 64 per cent.)
on the capital sum. The statement that

--- Page 135 ---

254 INVESTMENT PRACTICALLY CONSIDERED

most of my readers would probably make
here is that with the 44 per cent. safety is
obtained as regards both capital and income,
and that the increased yield of from 2 per
cent. to 24 per cent. is obtained as a pre-
mium for a certain amount of additional
risk sustained. This, however, is again one
of those popular fallacies which are so difficult
to disprove to the satisfaction of those plac-
ing their faith in them. In my opinion, a
really carefully constructed list of invest-
ments, producing an income of 5} per cent.
per annum on the capital sum represented
is not one iota less safe than a scheme which

embraces only gilt-edged securities and pro-

duces 44 per cent. to the investor.

To construct an investment list calculated
to return 4} per cent. is, of course, a much
easier matter than the construction of a
scheme to produce 5} per cent., as each
separate item in the former scheme would
be selected from groups of stocks which for
generations past have produced good results.
It would, therefore, be hardly possible to
make a mistake in a list of this description.
In a scheme planned and evolved on the basis

WHAT SHOULD INVESTMENTS YIELD? 285

of a 54 per cent. return, however, the. con-
stituent parts might be recruited from groups
of investments which are considered unsafe
as groups, and each individual item would
have to be so chosen as to offer practically
the same degree of capital safety as stocks
constituting the 4} per cent. scheme. Further-
more, after completion the 4} per cent. scheme
requires the minimum amount of supervision
(every item composing it being a safe item),
whilst the 53 per cent. scheme would have to
be tended and cared with much more thorough-
ness.

It is, therefore, not by risking one’s capital
that one makes sure of additional income.
It is the extra trouble entailed by properly
looking after the 54 per cent. scheme that
ensures for the investor the higher yield.
This is as it should be, and is a perfectly
natural law of compensation. The lethargic
investor obtains the minimum, and to him of
an active tendency and an inclination to learn
is granted the maximum, in both instances
the capital safety being very much alike. I
know of a good many most experienced
investors who even consider a 4} per cent.

--- Page 136 ---

256 INVESTMENT PRACTICALLY CONSIDERED

investment scheme more risky than a 5} per
cent. scheme. This, of course, is tending
towards the extreme, but there is a good deal
of foundation for their argument, as the
following table will show.

For the purpose of this argument I am using
two stocks which have already been referred
to in the course of the present article, viz. :
the South Hastern Railway Debentures, and the

Costa Rica Railway (this time the Prior Lien)

Debentures. The South Eastern Railway
Debentures are looked up to as something
very sound and choice in the shape of
an investment, simply because they come
under Home Railway Debentures, and, be-
longing as they do to a very fine group, are
considered safe, and yield on an average
between 34 per cent. and 38 per cent. On
the other hand the Costa Rica Railway is
considered highly speculative, partly because
it is a foreign railway and partly for the
illogical reason that it suffers for the shady
reputation the Costa Rica Government loans
have made for themselves. Therefore this
investment yields 5 per cent. Now, what
are the facts on an investigation of the position

WHAT SHOULD INVESTMENTS YIELD? 287

of both these stocks? The South Eastern
Ratlway distributes annually about £1,250,000

_in the shape of dividends on all its classes of

stock, About £350,000 of this sum goes to
the debenture-holders and £900,000 to the
shareholders. The South Eastern Railway
Debentures are therefore secured, so far as
income is concerned, to the extent of about
24 times. The Costa Rica Railway, on the
same basis of calculation, distributes about
£105,000 annually. Of this sum, however,
only about £12,500 goes to the debenture-
holders, and £92,500 to the classes which stand
behind them. Therefore, Costa Rica Railway
Debentures, from the point of view of income,
are secured over sevenfold, and hence are
the better secured of the two stocks. If, how-
ever, the reader prefers to take the average
capital value as a criterion, he will find the
following figures in keeping with the results
arrived at from the income comparison :—

AVERAGE PRICES.

1897. 1898. 1899. 1900. 1901. 1902. 1903. 1904. 1905. 1906.
Costa Rica

Rly. Prior

Mt. Deb. 104§ 103} 108 1038 1028 1002 108 1023
3. 5
- Rly. 6%

Debs. [ 1803] 183$ 1763 168} 158 157 161 140% 1487} [ 1469]

‘3S

--- Page 137 ---

258 INVESTMENT PRACTICALLY CONSIDERED

It will be observed from this table that this
year’s average price of the Costa Rica Railway
Debentures is only 22? points below that of
1897, and that in those ten years there has
been a fluctuation to the extent of 432 points
in the South Eastern Debentures. Almost
any stock mentioned in this article, which
is subjected to a similar analysis, will show a
like result. In other words, it will prove to
the reader that the high yielding stock,
properly chosen, is by no means weaker in
capital safety because of its high yield than
the low yielding stock.

Briefly, then, the following sums up the
principal points in my argument :—

1. Any investor who at. present obtains a
smaller average yield than the average yields
mentioned in this article is simply wasting
income.

2, The intelligent investor who is willing
to take some trouble, and expend a certain
amount of care on the construction and
maintenance of his Investment List, is entitled
to receive almost double the amount of income
that his less alert and active brother investor
will make.

WHAT SHOULD INVESTMENTS YIELD? 259

3. The yield received from an investment

cannot rightly be regarded as an indication

of the safety afforded by that investment.

One of the greatest follies that can possibly
be committed by an investor is to gather into a
list a miscellaneous collection of stocks, some
yielding a large income, and some giving the
lowest possible return, with the idea of arriv-
ing at an average income. In all such cases
capital stability is entirely sacrificed without
any compensation being obtained. I laid
it down as a rule in Investment an Exact
Science that “ safety of capital 1s obtained by
its even division over a number of sound stocks
identical in fluctuation, and every stock held
must be subject to an entirely different market
influence.”

The mixed list mentioned above cannot
possibly conform with this rule, as the fluctu-
ation of the investments would not be consis-
tent. A scheme of this description, then,
would be unsound, even in its fundamental
principles, and this is the reason why I have
not thought it necessary to touch upon this
point throughout the course of this article.

--- Page 138 ---

How the British Public Invests

Taxkine it all in all, “John Bull,” is by no
means a bad investor. Like everything else
in connection with this gentleman, his invest-

ment list is very bulky. Indeed, it is infinitely .

more bulky than that of “ Brother Jonathan ”
and ‘‘ Madame La France,” although they are
both considerable investors, yet they have
neither of them laid by anything like so con-
siderable a list of stocks as “ John Bull,”

Being of a very enterprising turn of mind —

“John Bull,” at the very outset of his in-
vestment career, turned his attention to all
parts of the globe, and, in this way, he secured
a truly international list of investments
There is hardly any considerable spot on the
face of the whole globe which has not at-
tracted his capital. Consequently he has
not only participated in his own prosperity, but
has practically made all other nations work for

him. Asa result, a world-wide distribution of
260

HOW THE BRITISH PUBLIC INVESTS 261

investments has been achieved, and although
he has experienced some nasty knocks at
times, on balance he has done rather well.
There is a very curious fact in connection
with British investment which is hardly suf-
ficiently realised by the public at large. Al-
though the Britisher is very businesslike in
most things, in the matter of investment a
somewhat haphazard want of method prevails
with him. Of the 250,000 individual people
who hold stocks in this country there is but
a very small proportion who give to their in-
vestments that attention which they really
deserve. A large number of people who live
entirely upon the income produced for them
by their investments have, in a great many
instances, not worked for their invested capi-
tal. The money which their stocks represent
has been handed down to them by their fathers
or grandfathers, and they, therefore, do not
consider it any part of their duty to look after
the welfare of their stocks, and, as a matter of
fact, they leave these stocks to pretty well
take care of themselves. There is another
large proportion of the investing public who
regard the funds represented by their stocks

--- Page 139 ---

262 INVESTMENT PRACTICALLY CONSIDERED

and shares as of quite secondary consideration.
These are engaged either in some trade or
profession in which they are making money
fast. Whenever these people find their bank
balances assuming unduly large propor-
tions, they send a part of them to some stock-
broker to be safely invested. No sooner has
that act been accomplished than, to all in-
tents and purposes, they do not trouble any
further than is necessary about the progress
_ of their invested fund. A large amount of in-
vested capital is placed in the care of trus-
tees, and in this way really great fortunes in-
vested in stocks are left practically untended
and take care of themselves, 'The small in-

vestor as a rule does not consider it worth his

while to trouble much about his stocks. The
few five-pound notes produced per annum by
his investments are so small in proportion to
his earnings that he looks upon the whole
matter of investment as a kind of side-show,
and he would consider it an extraordinary idea
if some one suggested that it would be wiser on
his part to take a little trouble over the
matter.

As a matter of fact the whole method of in-

HOW THE BRITISH PUBLIC INVESTS 263

vestment in Great Britain and the attitude

adopted by the British public towards they

investments are rather wasteful. This is
of course, a general characteristic ot al
thing in connection with British life. ie
Office scandals, municipal oxtravagen®® i
conversion of civic funds into huge so -
are not due to the lack of a high °° e -
national honour. They are noun : eich
wasteful joint whic
\ Mother ” provides for her family mio
due thought as to whether another orm ot
cookery would be more enol
‘the family exchequer, like the British n wy
working in the sweat of his brow for nen :
wage, and then buying a steak at : ° ae
a pound and. burning it up on an ex ra oem
fire in order to prepare it for his re .:
We know of many cases where un
amounting, in the aggregate, to six ‘ee
left by their owners Practica y ae ° oe
ves. If it is pionte t
on aver that by a little care and ame
he might vastly improve his a ve ‘
i he answer frequently ,
shat he ‘ fully aware that something ought

--- Page 140 ---

264 INVESTMENT PRACTICALLY CONSIDERED

to be done, and that it has been his intention
all along to do that something some day.
It is not that the ordinary investor does not
feel that he is by no means doing justice to
himself and his capital, he is much too shrewd
forthat! Itis simply his want of appreciation
of the importance of the subject which pre-
vents him from taking the necessary steps.

Great Britain was at one time an uncul-
tivated island, and although this island pos-
Besses a vast number of natural advantages,
yet its present wealth could never have been
produced from the soil itself. It was by
trading with the whole world. that England
became rich, and if the vast fortunes which are
prevalent at present in England are traced to
their origin it will be seen that the nucleus hag
invariably been made in trade or commerce
of one kind or another.

For these reasons the Englishman is not
only naturally wealthy, but he is a business
man by heredity, and the centuries of money-
getting which have passed over the country
have made him perfect. It naturally fol-
lows, therefore, that the instinct of the British
investor is good. If put to the point, if forced

HOW THE BRITISH PUBLIC INVESTS 265

to give the subject due consideration, he in-

variably does well with his money. The great
point, therefore, is to show him the avenue
which leads to improved capital and in-
come, and also to impress him with the fact
that in this instance the game is really
worth the candle.

As soon as this is done, and done to a suf-
ficiently large extent, the London Official
Stock Exchange List will cease to be the true
‘¢Tom Tiddler’s ground ” which it is at pre-
sent.

However, we do not wish to be misunder-
stood by our readers. We do not want them
to think that, in our opinion, money is to be
picked up by studying the ‘‘ Official List ” of
Stock Exchange prices in a haphazard man-
ner, or by any kind of speculation, as nothing
is further from our thoughts.

Our long and very varied practice and ex-
perience have proved that all speculations, |
sooner or later, result in disaster. This is
the reason why we should advise every investor

to adopt the same view in his own interest,
unless some really remarkable and extraor-
dinary opportunity presents itself. No large

--- Page 141 ---

266 INVESTMENT PRACTICALLY CONSIDERED

fortunes are, in our opinion, to be made rapidly
by the study of investment, but capital safety
can be improved upon and incomes consider-
ably increased by this study. If due atten-
tion is constantly and persistently paid to
these two factors the aggregate result taken

for a number of years will lead to fortune,

“* Take care of the pence and the pounds will
take care of themselves ”; avoid capital
losses, and add slightly to your income, so that
you are able gradually to build up a Reserve
Fund, and every investment list, however
humble at the commencement, will steadily

increase, and will assume unthought of

proportions. It is not the sudden accumu- _

lation of wealth which is lasting! It is the
Saving nature of an investment account
which gradually rises that ultimately pro-
duces great results.

Now the question will be asked, What is the
nature of this “‘ Tom Tiddler’s ground,” and
how are the coins to be picked up init? The
answer is much simpler than many people may
suppose, viz., do not be simply satisfied with
what you are doing, but compare your own

results with those achieved by your neighbour,

HOW THE BRITISH PUBLIC INVESTS 267

and only rest contented if you find that your
results are equally as good as his.

The Financial Review of Reviews gives in
each of its issues the highest and lowest prices
of nearly 5,000 of the principal securities, also
the dividend obtained on these and the yield
obtainable at their present price. If this
exhaustive list, which really represents the
bulk of all British investment is compared with
a list of another country, say France or Ger-
many, a startling fact is immediately dis-
covered. The total French or German list
exhibits an extraordinary amount of similar-
ity, that is to say, there is a certain standard

of yield and safety which invariably governs
the price of the investment. All safe deben-
' tures or debenture stocks give within a second
decimal fraction the same yield, and all
shares of a non-speculative kind do the same,
so that there is very little to choose between
two equally safe investments. This result
is brought about by the fact that the French-
man is thrifty and the German is poor; the
one egged on by his thrift and the other by
his poverty, they both study the whole field
of investment very closely before. putting

--- Page 142 ---

268 INVESTMENT PRACTICALLY CONSIDERED |

their money out. Both these nations are
studious, and the German particularly good. at
arithmetic. Hence the minutest advantage
offered by one class of investment over another
is immediately detected and an army of
investors, like a set of vultures, pounces down
upon it and thus raises the prices of that stock
to its normal level.

In England nothing of the sort takes
place. The Englishman, when he goes out
investing, does not look upon it, as we have
already said, as a serious business, and there-

fore he is quite ready to accept whatever stock _

happens to be most handy. This is the reason
why some of the most extraordinary anomalies
are produced.

Let us turn, quite at random, to one of the
pages of tables contained in the Review.
On page 45 we find the Three-and-Three-
Quarter per Cent. Debentures of the City
of London Real Property Company, also the
Three-and-Three-Quarter per Cent. Deben-
tures of J. and P. Coats. Both these Deben-
tures return the same rate of interest, and if
they are selling at different prices there ought
to be a difference in their safety. As a matter

HOW THE BRITISH PUBLIC INVESTS 269

of fact, the City of London Debentures are
selling at 96, with four months’ interest ac-
crued; their real price is, therefore, about
95, whilst the Coats’ Debentures, which are
just ex-div., are selling at 109. Here, there-
fore, is a difference in price of 14 per cent.,
which is equal to about one-seventh of their
total nominal value. Now, how is this price-
difference justified ? By turning up the
Investor's Shilling Year Book we find that the
City of London Real Property Company was

established in 1864, that it has a reserve fund

of £343,000, that its Ordinary shares are quoted

at about 250 per cent. premium if calculated

upon the money paid thereon, that large and

steady dividends are paid on its Ordinary

capital. In fact, here we have one of those
rich, old-fashioned concerns which practically
melts in its own fat, and its Debenture stock
is as safe as anything possibly can be. Having
established this fact we think it is superfluous
to turn to the safety of Coats’ Debentures.
The Real Property Debentures are butter on
‘bacon—surely, whatever the qualifications
of the others may be, they cannot be better
than that. We have therefore established the

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270 INVESTMENT PRACTICALLY CONSIDERED

fact that on a single page of the tables, taken

quite at random, there are two stocks which

for all intents and purposes, are absolutely of
equal value, and yet the one can be bought
£14 cheaper than the other. This is where
the “Tom Tiddler’s ground ” comes in.

Naturally the comparative merits and
cheapness of the two stocks cited are points
which will only interest the relatively small
cirele of investors who hold debentures of a
similar type. But to those who are thus
directly interested, and whose capital thus in-
vested returns them a yield of under £3 15s
per cent., the above analysis should provide
both food for thought and a stimulus to take
active steps to improve their own individual
investment positions.

Now the Statistical Tables of the Review
will be found to teem with debentures which
can. be judged by the self-same standard of
desirability as is displayed by the City of
London Real Property Debenture. For ex-
ample, pages 14, 15, 16, 17, and 18 of the
Tables contain debentures, preference stocks
and guaranteed shares, and yet on these pages
not a single instance will be found of astock of

HOW THE BRITISH PUBLIC INVESTS 271

similar intrinsic value which returns the same

substantial yield to a present purchaser as

does the City of London Real Property Deben-

‘ture. In the aggregate these pages repre-

sent fully £250,000,000, of invested capital,

‘and our Tables show that on an average these

two hundred and fifty millions are earning 10s.
per cent. per annum less income than is ob-
tainable from the purchase of City of London
Real Property Debentures. The practical
value of this information is now obvious: as,
by means of it, the investor is afforded an
opportunity of increasing his income by 15
per cent. at a single stroke, whilst at the same
time he attains this desirable end without in
any way diminishing the safety of his invested
capital.

We want it, of course, to be clearly under-
stood that we do not particularly advocate
the purchase of City of London Real Property
Debentures. Asa matter of fact we do not, as
a further search will show yet better invest-
ments. But we have simply used this stock
in order to illustrate broadly the anomalies of
the London Stock and Share List, and how,
by a little trouble and attention, every indi-

--- Page 144 ---

272 INVESTMENT PRACTICALLY CONSIDERED

vidual investor can improve his own position.
Prior to the publication of the Financial
Review of Reviews, there was no periodical in
Great Britain which gave the same informa-
tion as the tables of this journal give month
by month. It was with a view of drawing
public attention to the market anomalies which
exist on the London Stock Exchange that
these tables have been published, and the main
object of the present article is not only to illus-
trate their use, but also to explain how the pre-
sent contradictory prices have come into exis-
tence.

We have previously stated that the British
investor as a rule does not give that attention
to his investments which the subject deserves.
When he loses money on his investments the
chief cause of the loss is usually to be traced
to his want of experience in considering the
nature of the investment which he selects. It
ishis lack of comparative analysis whichrenders
the average investor so easy a prey to the
company-promoter. Curiously enough it is
in so important a matter as the investment
of capital that the British public fails to dis-
piay that strong conservative instinct.which is

HOW THE BRITISH PUBLIC INVESTS 273

| the chief national characteristic. Strange to
gay the very man who would almost regard

a change of bootmakers as a step towards
revolution is the most prone to fall a victim to
the insidious wiles of a well-concocted prospec:
tus—the man who venerates the old-fashioned
bootmaker as a god, turns lightly aside from
the contemplation of an old-established secur-
ity to offer incense to some idol with feet of clay
in the shape of a brand new company, the
name of whose chairman or the wholly fanciful
estimate of whose profits may have happened
to attract him. This folly the British investor
continues to repeat throughout his life, regard-

Jess of the fact that only about 18 per cent.

of the new companies floated ever survive to
celebrate their tenth birthday.

What makes this neglect of the well-estab-
lished. company and this wild worship of new
ventures the more inexplicable is the fact that
‘even if it were safe to accept prospectus pro-
mises at their face value, and implicitly to be-
lieve in the forecasts of the future as set forth
by the over sanguine promoter, it would. still
be found that the actual achievements of exist-

ing well-tried companies eclipse most effectu-
.

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274 INVESTMENT PRACTICALLY CONSIDERED

ally the pi i
y neta promises of the imaginative
. Ii, for example, a new Five per Cent.
rewery Preference Stock were to be offered at
pe whens before applying for an allotment, the
Siving particulars of this class of stock
should first be consulted. On the face of it
a Five per Cent, Brewery Preference at an
would seem to be a very fair investment but
when it is found that Alton Brewery Five :
Cont. Preference can be bought at 20 per c nt.
discount, Arnold Perrett Six per Cent. Pre.
ference at 5 per cent. discount, Arrol (Ar hic
bald) Five-and-a-Half per Cent. Brewe
Preference at 37 per cent. discount, Ashb i
Brewery Five per Cent. Preference at 5 ser
cent. discount, all of these paying re alar
dividends, the gloss which seemed to shine on
re Prospectus proposal forthwith entirely
ses its lustre. The brewery shares instanced
above are selected at random, without refer-
ence to their present desirability. and ar
merely mentioned to illustrate the method in
which our Statistical Tables should beutilised,
, Of course there area good many pitfalls to
e guarded against when comparing one invest-

HOW THE BRITISH PUBLIC INVESTS 275

i ment with another, and in order to be able to

carry out this work satisfactorily a know-
ledge of the different classes of stocks and.
how they compare with each other, in regard
to safety both of capital and income, must
be acquired. Attention must also be paid
to the varying character of the investment

- opportunities which present themselves in

the case of stocks selling at a premium
and. of stocks selling at a discount, and to the
risks attendant upon holding partly-paid
shares, which expose the investor to the pos-
sibility of further capital-calls in the future.
All these cardinal points of investment are
fully discussed in How to Manage Capital, a
small handbook published from the same
office ‘as the Review. This book is designed
to inform anyone, however ignorant of
financial matters he may be, as to the
main features of the investment question.

All readers of the Review who grasp the
importance of subjecting their own invest-
ment holdings to strict analytical comparison
by means of our Tables, and who realise that
money is to be made without the slightest
taint of speculation by exchanging a compara-

--- Page 146 ---

276 INVESTMENT PRACTICALLY CONSIDERED

tively sterile investment for another of more
abounding yield, will be well advised to obtain
a copy of How to Manage Capital before pro-
ceeding to put our Tables to practical use.

In this matter the investor will find that
his investigation will also be greatly facilitated
by using the form for the index of one’s own
holdings contained in every issue of the

Review. Such an index, once prepared, serves
as a true guide to what the investor has actu-
ally accomplished, and also to what he might
accomplish.

In the tables all stocks are grouped accord-
ing to their kind. So that, by comparing the
revenue received on one’s own holding with
the revenue yielded by similar stocks contained.
‘ on the same page, the investor, without any
trouble at all, sees at a glance whether his
stock is really the most advantageous to hold.

But it isnot by considering each individual

stock separately that the safety of an invest-

ment list is ascertained! Capital safety is
only obtainable by a true system of averages,
and that system of averages can only be
arrived at by a good international distribu-
tion of investments.

HOW THE BRITISH PUBLIC INVESTS 277

We have stated at the outset of this article
that one of the chief reasons why “ John Bull”
is successful with his investments is, and has
always been, the truly international charac-
ter of his investment list and the wide area
over which his investments are distributed.

The advantages to be obtained by distri-
puting a capital sum to be invested over a
world-wide area are fully set forth in “ In-
vestment an Exact Science.” Within the
limits of this article it is impossible to do more
than outline the system of the Geographical
Distribution of Capital. Suffice it to say that
in no two countries of the world are the same
investment influences at work. Different
climates beget constant variations in agri-
cultural prosperity, for instance. When the
Argentine wheat crop is a failure it is.compen-
sated for by an abundant harvest in Russia
or elsewhere. Similarly when the English
iron-trade is brisk, it is probable that there is
a simultaneous depression in the iron interests
of the United States or of Germany. But over

and above these cycles of local prosperity
and depression there stands out the fact that
owing to the world’s ever-increasing population

--- Page 147 ---

278 INVESTMENT PRACTICALLY CONSIDERED

the trade of the world, viewed as a whole, is
constantly expanding. It follows, therefore,
that an investor who makes the whole world
his investment field, instead of confining his in-
vestment area to one country, must benefit by
_ the perpetual growth of the world’s trade,
The result of this investment discovery has
been to render it a matter of primary impor-
tance that an investor’s capital should be
systematically distributed over a world-wide
area.

To many of our readers our whole method
of approaching investment questions will be
a revelation of a new system, and the idea of
instituting an analytical comparison between
kindred investments will possibly strike them
as a novelty. Consequently they may desire
some initial aid when turning our Statistical
Tables to practical use. It is with the view of
meeting such a contingency that an Inquiry
Coupon is bound up in the Review. Our
subscribers purchase with their Review the
right of making inquiries respecting their in-
vestments. This right, if freely availed of,
will put our readers in a position to obtain the
maximum practical advantage from the statis-

HOW THE BRITISH PUBLIC INVESTS 279

tical information which we publish. Should
an investor feel in any way doubtful of the
wisdom with which his own Investment List
has been selected, he should submit a list of
his holdings to us, together with our Inquiry
Coupon, and we will, in return, send. him a
short and concise report upon his entire
position, indicating in which directions an 1m-
provement is possible.

By amending the Limited Liability Acts
the Government have endeavoured by law to
guard Investors against pitfalls. This is, of
course, a very laudable attempt, but, in our
opinion, not quite the right direction in which
the desired object is tobe accomplished. For
grandmotherly legislation of all kinds has
never achieved any practical success In this
country. The British investor merely requires
to be put in possession of sufficient technical
knowledge to enable him to form an indepen-
dent opinion of his own, and, with this as
sistance, his own strong commonsense will
prove to be his best investment protection.

“ John Bull,’ as a whole, has done very
well on his investments, but only if the whole
of British investments are grouped  to-

--- Page 148 ---

280 INVESTMENT PRACTICALLY CONSIDERED

gether. The benefits of these results are un-

evenly distributed among the large crowd
which constitute the army of English investors.
Thus there are some who manage to make very
large incomes out of their invested capital,
whilst there are others who have but poor re-
sults toshow. It is with the object of increas-
ing the proportion of successful investors that
our financial investigations have been con-

ducted and our financial handbooks have been
published.

Money Scares and Their Origin

Ir the subject of the present money we
were not such an extremely serious ma
to all classes of society almost the world ae
the majority of the innumerable af aa
which are just now filling the nowspapt
would afford rather amusing ean °
the man in the street it would appear
these articles as if we were face to face Mi
gome calamity which could neither have een
foreseen nor guarded against. As, bow °
the present crisis appears to me ° ; re
merely been the inevitable result 0 on "
universally accepted. principles of an ; e»
perhaps it may be timely to examine in ; ne
actual cause of the scare through whic

assing.
is in the vourse of my argument I shat
be compelled to make use of an omy -
rather disconcerting figures, T should . e *°
make it clear at the outset that 1 am by

1 Written December, 1907.

281

--- Page 149 ---

282 INVESTMENT PRACTICALLY CONSIDERED

means an alarmist. On the contrary, I am
convinced that the present crisis has so thor-
oughly exposed the shortcomings of the
Monetary System adopted by the principal
commercial countries that humanity cannot
but benefit by the exchange of views which
must now almost inevitably take place be-
tween responsible Statesmen and leaders of
Finance.

The point which I shall first seek to establish
is that the origin of all financial scares is the
logical sequence of the world’s methods of
banking. In order to prove this point, I
will explain the origin of panics to my readers

who, I take it, all have banking accounts,
by an illustration of how a feeling of uneasiness
amongst those who have banking accounts

rapidly develops into a national panic. Now

in all countries in which banking exists in

its highest state of development, the current -

account with a bank takes the place of the
cumbrous pocket-book bulging with notes
and gold. The idea of a banking account
is that the customer’s money lying in the
bank, is there for safekeeping, and at its
owner’s disposal whenever he chooses to

MONEY SCARES AND THEIR ORIGIN 283

withdraw it. So long as such withdrawals
take place in the normal way, the bank’s
customer draws a cheque and hands it over
to the customer of another bank to whom he
is indebted. 'The recipient of the cheque in
his turn pays in to his own bank the cheque
which he has received, and by this means an
exchange of an amount of money from one
man’s credit to that of another takes place be-
tween two banks without any actual cash being
used in the transaction. But in abnormal
times financial trouble immediately arises when
a large number of panic-stricken men with
banking accounts suddenly make up their
minds to withdraw their balances, for in a
financial emergency actual cash enters into
such. withdrawal transactions, because the
bank’s customers withdraw their balances
in cash and hoard their money in their own
safes. Indeed, under the banking system of
Great Britain, it would be immaterial whether
they withdrew their bank balances in gold or
in Bank of England notes, as every Bank of
England note represents a certain amount of
gold being kept against its issue by the Bank.
The reason why trouble must immediately

--- Page 150 ---

284 INVESTMENT PRACTICALLY CONSIDERED

ensue upon any large withdrawal of cash from
our banks is obvious when it is appreciated that
whereas £900,000,000 are deposited with the
banks of the United Kingdom, yet the total
amount of cash in existence in the Kingdom
is only estimated at £125,000,080.
Therefore rather less than 3s.of each pound
sterling, which is owned by banking de-
positors, has any actual existence. Further
the £125,000,000 of cash in the United King:
dom includes the loose cash which all of us
carry about in our pockets. Asit would beim-
possible to collect such loose cash by any
means, I am fairly within the mark in stating
that only about one-tenth of all the deposits
in English bankscould possibly be forthcoming
if all the depositors simultaneously called for
their cash. And this one-tenth could only be |
raised by denuding the Bank of England and
every other bank in the Kingdom of every
shilling in cash which they hold.
As throwing a further curious sidelight upon
a situation which is sufficiently curious in
itself, it is noteworthy that the cash in hand
and the cash at short notice, as set forth in the
balance-sheets of the United Kingdom on

ah whale he
Ree: :

- MONEY SCARES AND THEIR ORIGIN 285

June 30 last, amounted to £250,000,000.
But, as already stated, the total cash in
existence in the United Kingdom is only
$125,000,000. So that if every bank were to
try to lay its hands upon its own cash in pre-
cisely the same way as its depositors do in times
of panic, then there would only be sufficient
cash in the country to allow of a payment to
the bankers of 10s. in the pound all round.
This extraordinary state of affairs is accounted.
for in the following manner: A country bank
keeps an account with a London clearing bank,
and theclearing bank in its turn has an account
with the Bank of England. Now, supposing
this country bank has, say, £40,000 cash in its
balance-sheet, then this verysame £40,000 also
figures in the balance-sheets of the London
clearing bank and the Bank of England—in
fact, it does service three times over.

These are the figures of the available cash
in the United. Kingdom. I will not weary
my readers by giving similar sets of figures
for other civilised countries, but I will con-
tent myself with stating that the result
would practically be the same in nearly all
other countries. In brief, by far the larger

--- Page 151 ---

286 INVESTMENT PRACTICALLY CONSIDERED _ MONEY SCARES AND THEIR ORIGIN 287

portion of the cash, which people imagine

PIABHARBHSrONOANAAA TS
they have in their banks, the world Over, does ei | % S. nt & 6 S & o i at & 8 % S = = zi S
not actually exist at all. In order to substan- 8 : aa 8 3 S “ S S z é 8 = z eect s 5 S.
tiate this statement, I append a table giving AS a8 es % = aa . 7. - : 7 5 3 ° 3 a
the proportions of cash in hand as against | a * am = BAM a
deposits, held on behalf of the public, of rs : CRSEFESAARSLRRS
eighteen representative banks of eighteen ~ = ae a SB Se owe is & ai 06 x Ss
countries. In this table I confine myself to 4 8 6 S 6 ~ jz 6 5 Ze % 8 © a S. * S < at
two principal columns: one is the cash in ~ ode dad ee ead 2%
hand at call—in fact, at the command of the E i. al aaah ® ua
banks at short notice—the other is the cash 3 a 3 2
due to customers by the banks on current gq @ fs Re m - ° ge <4
accounts, deposits, etc. I have already . b 8 3.8 = & of 3 2 Bes ve 2 g
stated that, in the case of England, the banks 4 5 . a2 8 s 3 8 8 Es a KE . 5 3 Be
themselves could only obtain 10s. in the a 3 cer foe ae Ba 8 : as as
pound of the sums due to them if they simul- g 2 Eeour A 35 3 gaa Ae °
taneously attempted to call up the cash to BeSgegeeseads gs88 S E: |
which they were entitled, and I should like my HAS ORAM MIE mal AO to - =
readers to bear this point in mind when com- es 2S S S S 3 S S S S = S S BSS
paring the cash nominally in hand with the 3 3 a Sof dnShtddddddesa
amounts actually due to customers by the es ashSsksagssessk : 3
various foreign banks depicted in the table. a BAZASABASAAASAA SE A
As an instance of the very high esteem in 4 . ro a
which the finest Continental banks are held, 4 Z a 4 be dg 4 me ; 2
the Credit Lyonnais owes 1,796,000,000 francs 4 a | 8 z e BS egeegss 5 a a 3 8,
to its customers and has under 138,000,000 . a AOHARS SAM oHaAnabead

--- Page 152 ---

288 INVESTMENT PRACTICALLY CONSIDERED

francs ready to meet this possible demand.
The Oecsterreichische Credit-Anstadt with
13,000,000 kronen in hand owes 448,000,000
kronen to its customers, and yet finds this
seemingly slender amount sufficient for
its needs, so deeply rooted is public con-
fidence in the stability of this institution. Or
again, the Central Bank of Norway and the
Danish Landmans Bank enjoy such reputa-
tions that they find themselves able to con-
duct their business satisfactorily with their
cash in hand representing only about 3 per
cent. of the sum for which they are liable
to the public.

Having thus clearly established the fact
that all over the world there is a very large
discrepancy between the amount of cash in
existence and the amount of cash which the
inhabitants of the world severally own, let
us now examine how this extraordinary state
of affairs comes about. When approaching
this subject, every reader must draw a sharp
line of distinction between cash on the one
side and property of all kinds, including
Government loans, stocks, bonds, lands, and
houses on the other side—in fact, everything

MONEY SCARES AND THEIR ORIGIN 289

which is of value to mankind. Such property
truly represents money’s worth, but, before it

‘ is possible to employ that value as a medium

of purchase, it is first necessary to sell the
property or, in other words, to convert it
into cash which at any time will buy anything
which is purchasable. The distinction be-
tween cash and property is, that the first is
an universally recognised medium of exchange,
whilst the second is not.

The customers of a bank pay cash into their
drawing accounts simply and solely because
they have not made up their minds into what
class of property they will ultimately convert
it: they leave their cash with their bank in
order that it may lie there at their ready
disposal. Now the banks are all anxious
to create revenue for themselves by the
employment of the cash so entrusted to them.
But it is only when cash is lent on loan that
it is capable of producing revenue. Conse-
quently, the banks lend out their customers’
cash at interest as fast as they receive it,
with the result that the cash paid into a bank
promptly leaves the bank and passes into the

hands of a borrower. Again, the borrower
U

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290 INVESTMENT PRACTICALLY CONSIDERED

only applies to the bank for a loan; in order
that he may employ it to his own advantage,
and directly he so employs it, the borrower
thereby converts the cash which he has
borrowed into property which he acquires.
It will, therefore, be seen that in the ordinary
way of business it is the function of banks to
receive cash from their customers and to
convert the cash so received into property.
This is the reason why the cash of which the
public is possessed largely ceases to exist in
cash form, it being converted into property
by the everyday transactions of bankers.
Naturally the bankers, as is shown by the
Table already given, do not turn the whole
of the cash entrusted to them into property.
They are careful to retain sufficient cash
resources to equip themselves with till-money
and to provide for the ordinary emergencies
of business. With the result that so long as
ordinary conditions prevail, and so long as
the cash withdrawn from one bank by one
person is promptly paid into a second bank
by another person, the monetary world
revolves steadily enough on its own axis.
But so soon as there is the slightest clog in

MONEY SCARES AND THEIR ORIGIN 291
these delicately balanced wheels, the whole
machinery is thrown out of gear, and this is
precisely what has happened in the United
States at the present time; for in that
country a deep-seated distrust of the banks
is causing people to withdraw their cash and
to store it in private hoards.

This withdrawing of cash from circulation
is most crippling to the banker: for, although
he practically never lends money except
against ample security, the cash which he
has lent is locked up in property. So that
whilst he may be quite incapable of meeting
the simultaneous demands of his depositors,
yet the banker always has solid security in
his hands; and, if he were only given time,
any banker conducting a prudently managed
banking business would have no difficulty
in paying 20s. in the pound. Unfortunately,
however, promptitude of payment is the

‘very essence of the contract between the

bank and its depositors, and it is the slightest
suspicion that payment may be delayed
which causes a panic. The nervous impatience
of the agitated depositor will brook of no
delay, and this is the menace which con-

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ac eck ete eetndntenemen a Tet hae

292 INVESTMENT PRACTICALLY CONSIDERED

stantly overhangs the banker, who does no
more than employ the funds entrusted to
him with the most scrupulous observance of
the strictest canons of finance. Unfortun-
ately, the traditions of the banking world
have rather tended to foster this wild unreason-

ing demand for money on the part of deposi- —

tors. For instead of adopting a policy of
candour with their depositors and accustom-
ing them in times of serenity to grow familiar
with the fact that the normal condition of a

bank is to employ its money up to the hilt,

bankers have, in a spirit of over-cleverness,
attempted to throw dust in the eyes of their
depositors by indulging in the process known
as window-dressing on the eve of each recurr-
ing half-yearly balance-sheet. This. process
consists in the banks calling in as much cash
as possible in order to present an appearance
of artificial strength in their published ac-
counts. If instead of pursuing this vicious
system, bankers were boldly to enlighten the
public and to allow them to see the true cash
basis upon which the pyramid of credit is
built up, it is at least probable that bank
depositors would in no long time become

MONEY SCARES AND THEIR ORIGIN 298

educated to steady their nerves and keep

their heads cool in times of financial crisis.
It would certainly be to the advantage of
the banking community if every depositor
thoroughly understood the actual position,
and if he were to realise that, given only
reasonable time, all soundly constituted banks
can meet their engagements without faltering.

The above argument establishes the fact
that so long as money and money’s worth .
are taken to be one and the same thing no .
trouble can arise. But property is money’s
worth, and it is in times of crisis that property
cannot be converted into money. The root
of all banking trouble lies in the fact that the
cash resources of the world would only suffice
to convert a very minute proportion of the
property in the world’into money. .

Leading European commercial nations have
adopted what is known as the gold basis for
their monetary system, that is to say, gold
is supposed by them to be the only kind of
property which can be converted into money
without any intermediate process of sale—by
simply minting it into sovereigns, marks,
francs, or dollars. As there is not enough gold

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294 INVESTMENT PRACTICALLY CONSIDERED

to furnish a sufficiency of currency, Govern-
ment Bonds have to a certain extent been
substituted for gold as the basis for an issue of
paper-money. Thus, the Bank of England, for
example, is empowered to issue notes not only
against gold, but also against Government
Bonds. Some people seem to be of the opinion
that gold alone is capable of forming the
foundation of a Monetary System. They seem
to forget that for generations past this duty
has been successfully fulfilled to some extent
by Government Stocks. Gold, of course, is
not money, as it is only the mint which con-
verts gold into money. But Government
Stocks are certainly not money but property,
and yet this property has served very suc-
cessfully as a basis for currency, so that it is in
this direction, doubtless, that the solution
of the whole monetary problem lies. It
would seem as if Statesmen and Financiers
would have to agree upon some process
whereby some special description of property
could be converted into money, without the
necessity of its being first sold. We can
convert money into property at any time,
and if we could reconvert property into

MONEY SCARES AND THEIR ORIGIN 295

money in sufficient quantity, when the neces-
sity arose, the whole monetary and bank-
ing problem would be solved. The United
States are taking a step in this direction by
their contemplated issue of Panama Bonds.
Let us hope that this issue will prove efficaci-
ous, and that it will indicate the direction in
which a more elastic system of currency is to
be found. For it is by this time patent to
every one that the quantity of gold in exist-
ence is insufficient to meet the demand for
currency which the present trade and com-
merce of the world entail. Further, there
is no possibility that the stock of gold can
increase sufficiently to satisfy this demand.
Therefore some substitute must be found to
supply the place of the gold which is not
forthcoming. To some of my readers silver
and bimetallism will here intrude themselves ;
they will say, why not simply add the stock
of silver to the stock of gold, as used to be
the case, and thus increase the quantity of
the whole. These means would, however,
prove quite inefficient ; no, it will be neces-
sary to demonetize gold, just like silver has
been demonetized, and to start on an abso-

--- Page 156 ---

a

296 INVESTMENT PRACTICALLY CONSIDERED

lutely new basis. I have worked out such a
basis—but this is not the subject of the
present article.
To the man in the street the whole bank-
ing position must seem ludicrous. He hears
that one bank alone in the United States
has failed for £40,000,000, and that many
other institutions of similar size are hard
pushed for money. He knows that the
London Bankers’ Clearing House turns over
in the course of one year over £12,000,000,000,
and on Stock Exchange Account Days alone
more than £2,070,000,000 ; whilst the provin-
cial Clearing Houses swell this total to the
extent of £203,000,000 at Liverpool and
£263,000,000 at Manchester, with propor-
tionate amounts at other large industrial
centres. Against this huge marshalling of
millions he suddenly hears that, as a great
concession, the Bank of France has arranged
to allow three millions of gold to go to America
and a further two milliogg is being shipped
from England to the accompaniment of much
head-shaking and knee-trembling on the part
of our financial authorities, and with the
Bank rate rocketting up to a point which

MONEY SCARES AND THEIR ORIGIN 297

is calculated to strangle legitimate trading
activity. In the midst of all this fuss and
flurry it must appear to the disinterested
spectator that these few paltry millions | of
gold sent out to allay a trouble involving
thousands of millions of property is very
like placing a fly in the path to arrest the
charge of a stampeding elephant.
What reduces the position to a further
point of absurdity is that statistical tables,
showing the entire gold movement of the
world, prove that this merely consists of
shuttlecock shipments backwards and for-
wards, and that the permanent stock of gold
in any one country, although it fluctuates,
never fluctuates to any appreciable degree.
It is true that some countries are steadily in-
creasing their stock of gold, but the back-
ward and forward movement of gold, whose
function is supposed in some way to balance
the trade of the world, is absurdly out of
proportion to the volume of business done,
for, according to Mr. Holt Schooling, the
world’s exports alone amount to over
£2,000,000,000 per annum, and, as a matter
of fact, the backward and forward gold move-

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298 INVESTMENT PRACTICALLY ‘CONSIDERED |

ment between nations has but little to do

with the real settlement of balances between

Debtor and Creditor Nations, |

Only those who are directly affected and
those who have gone deeply into the sub-
ject realise the amount of havoc which the
present unsatisfactory monetary system of
the world plays with trade and commerce.

All commercial and manufacturing transac-
tions are based upon careful calculations
as to cost, and it is only when all the factors
which enter into these calculations are stable
and alter but slowly by small degrees that
satisfactory results are to be obtained. ‘Now
credit plays a leading part in every branch
of commerce. Such credit has to be paid
for in the shape of interest on borrowed
money, and the amount of interest charged
depends upon the Bank Ratz, which is the
official rate at which the leading bank of the
country—with us, the Bank of England—is
ready to lend.

This Bank Rate is used for the purpose
of stopping the exp@t of gold from the
country, and whenever there is a money
scare in any important commercial centre the

MONEY SCARES AND THEIR ORIGIN 299

Bank Ratz ruling there promptly moves up.
By this means the price of credit is advanced
and all trading calculations are forthwith up-
set. Although the average stock of gold in
the Bank of England is only about £30,000,000
the actual amount of money lent for the pur-
pose of trade in the United Kingdom exceeds

- £1,000,000,000. The question of whether 30

millions remains intact or not governs the in-
terest charged on over 1,000 millions. Surely
this is not as it should be. Again, the normal
rate of the Bank of France is 3 per cent., and
during the last twenty-five years it has never
been below 2 per cent. nor above 44 per cent.
In Belgium the rate is even steadier, for it has
averaged between 23 per cent. and 3} per cent.,
any movement over that figure being for a few
days only. In England, on the other hand,
there is no such thing as a normal rate, and
traders have the greatest difficulty in keeping
touch with its fickle movements. The reason
for the comparative stability of the Bank
Rate in other countries as compared with
England is that England is the only country
in which the export of gold is not hindered
by legislation, so that this is the only coun-

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SHORE ne reGeaa nm Seg gyier. 2s saysie ome

eee ee ea terancoecerceectatineee eet

300 INVESTMENT PRACTICALLY CONSIDERED

try in which there is a free market in old
Further, of recent years England has mado n
effort to increase her stock of gold which
from £22,000,000 in 1887 has to-day onl i
creased to £29,000,000, whilst France who hela
£45,000,000 in 1887, now holds £108 000,000
But great fluctuations in the ‘cost of

credit, although thay affect the trader seri-

ously, inflict the greatest injury on the
working-man, because a very large amount ;
credit is required for all permanent works
and consequently, so soon as- the rate of
discount becomes abnormally high, money i
unobtainable for such purposes. The re con
of this is that in times of dear money. although
bankers will still lend to those : who .
likely to repay at short notice, they refuse
to grant accommodation to borrowers who
intend to lock it up in permanent works So
that in such times permanent works ar
brought to a standstill, and all classes of
workpeople engaged upon Gen are thrown
out of employment. The saddest of all
news which we have recently received from
America has been that 100,000 men h
thus been suddenly deprived of work

MONEY SCARES AND THEIR ORIGIN 301

Only under conditions which insure the
stability of the cost of credit can either
labour, trade, or commerce prosper. These
conditions depend upon a properly elastic
monetary system. A system by means of
which a sufficient amount of cash to meet all
emergencies can be created at will, when and
as it is required; and not a system, such as

_ we have at present, under which there is not a

sufficient amount of cash to go round, and all
nations, consequently, have to work against one
another to enable each nation to hold its own.
The whole of the national property of
Great Britain is estimated to have a value
of over 12,000 millions sterling, the annual
national income is estimated at about 2,000
millions, and the whole stock of gold in the
entire country is 125 millions. In other
words there is about 2d. in the £ of property
represented by gold, and the whole of. this
amount of gold is insufficient to pay one
month’s income to the nation. Truly these
figures are utterly out of proportion to one
another; but, in my opinion, it is not the
stock of gold which should be increased. On
the contrary, I want bankers and statesmen

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$02 INVESTMENT PRACTICALLY CONSIDERED
to grasp the fact that some new system is
required by means of which a large stock
of gold could be dispensed with, and yet a
very solid monetary system be established
which, independently of the stock of gold
would prevent the English bank-note falling
to a discount in the world’s money market, and
I maintain that such a system is quite possible.

Hitherto the obstacle to any great chan 10
in the monetary system has been that tie
bankers of the nation have been called in to
advise on the proposed reforms. Such a
proceeding appears to me to be analogous
with calling in your enemy to advise on

your plan of campaign. For statesmen appear -.

to entitely forget that it is the banker who
has brought about the present unsatisfactory
state of affairs and that it is entirely contrar
to the interests of the banking community
that the existing conditions should be changed,
If the entire nation had kept their own
possession the cash which now figures in
bankers’ balance-sheets as “ Customers’ Money
on Drawing Account,” we should now have at
least £300,000,000 of cash in the country,
and in that case no money scare and no con

MONEY SCARES AND THEIR ORIGIN 303

siderable fluctuation in the Bank RATE
would be possible. It was the bankers’

~ gunning which invented the cheque system

by which the banker keeps his customers’

- banking account free of charge in considera-

tion of the money therein being placed at
the bank’s disposal. As soon as the customer
pays in money, the bank immediately lends
it; with the result that the same sum of

- money appears many times over in various

accounts and that about 90 millions of actual
cash in the hands of all banks, including

- the Bank of England, stand for 900 millions,

which these banks owe their customers.

If there were £300,000,000 of cash in the
country, interest would be lost on £175,000,000,
which at 3 per cent. per annum would amount
to about 5 millions per annum. The annual
income of the nation is 2,000 millions sterling

~ and the National Budget has been raised

about 40 millions in ten years, so that this 5
millions of loss in interest—although a large
sum in itself—would make no appreciable
difference to the nation’s annual income.
Besides, in reality, this loss would fall en-
tirely upon one class, namely, the bankers,

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304 INVESTMENT PRACTICALLY CONSIDERED

and what do they afford the nation in return
for the millions entrusted to them? N. othing,
except the gratuitous keeping of banking
accounts. In fact, the entire banking com-
munity, although of very great importance,
is insignificantly small when compared with
the trading community and the general
welfare of the nation. The amount of loss
which the United States has sustained by the
recent panic has exceeded many-fold the
entire capital of all the American Banks.
Lastly, let us consider the manner in which
money scares affect the private capitalist
who has money invested in stocks. On
the speculator or the speculative investor
their influence is disastrous, and in many
cases they cause the loss of large fortunes
in a short space of time. The reason of
this is that only those securities which
fluctuate considerably appeal to the specu-
lator who wants to make money gut of the
rise in stocks, and naturally enough these
are the very securities which experience the
largest set-back in times of money trouble.
Such stocks are not held by strong investors,
who have bought them as dividend-earning

MONEY SCARES AND THEIR ORIGIN 305

securities, but they are rather in the hands

of persons who propose to re-sell them at a
profit. Speculative purchases of this sort
are usually financed by bankers and brokers,
and so soon as credit becomes restricted
blocks of stocks, thus financed on loan, are
pressed for sale upon markets incapable of
absorbing them. Thus, for example, Chicago
and Milwaukee Railroad Ord. have fallen
244 points during the last two months, as
they were held by speculators who were com-
pelled to close their accounts, whilst the
Gold Bonds of this railroad remained un-
altered in value, the bonds being in the hands -
of solid investors who were under no obliga-
tion to realise. In the same way Northern
Pacific Ordinary shares fell 29 points and
Union Pacific 24 points, whilst the respective
bonds of these railroads remained steady.
This experience endorses the wisdom of the
advice I constantly impress upon investors,
namely, never to hold stocks which have a
very free market, but confine themselves to
Securities in which purchases and sales are
matters of negotiation. This latter class of

stock is invariably strongly held, and no
x

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306 INVESTMENT PRACTICALLY CONSIDERED

speculators are interested in it. Therefore,
passing spasms of the Money Market have
no effect upon it, and for this reason violent
fluctuations are unknown.

There is a class of perfectly sound gilt-
edged investments which do suffer very
seriously in money scares, and these are the
new debentures and bonds issued in con-
nection with companies whose work of con-
struction still remains unfinished. Bonds of
this sort are held by underwriters or are sold
by the contractors as money is needed to
continue the work in hand. Such forced
sales naturally depress selling prices out of
all recognition of intrinsic merit. But let us
ask ourselves whether such a set-back in
price entails any hardship upon an actual
holder of stock. I venture to assert that
it does not, always provided, of course, that
the security held is really sound; in fact,
under such circumstances, the fall in price

is rather an advantage, as it affords holders |

an opportunity of making a further purcMise
on advantageous terms. And here I come
to the point where the general disaster of a
money scare becomes an opportunity to a
fortunate few.

MONEY SCARES AND THEIR ORIGIN 307

For during a money scare anyone who can
command cash and who knows how to use
it intelligently is king. There is no neces-
sity for him to have the actual money in
his bank, provided that he has stocks which
he can sell, and thus raise cash. This is the
explanation of the fact that during the very
time when business has been almost at a
standstill on the Stock Exchange the business
of which I am a director has been brisker than
ever. We are in communication with thou-
sands of investors who hold millions of pounds’
worth of stocks, the intrinsic merits of which
are well known to us. Amongst these securi-
ties are many which do not pay a sufficient
rate of interest, and are not so perfectly
secured from a capital point of view as some
of the stocks which are now to be picked
up at bargain prices. Moreover, many
bankers and brokers are aware of the advan-
tageous position which my company occupies,
and whenever there is a block of first-class
securities on offer the. refusal is usually
submitted to us. We, after a thorough in-

vestigation, and having satisfied ourselves

of the soundness of the stock so offered,

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308 INVESTMENT PRACTICALLY CONSIDERED

submit it in turn to our customers in exchange
for some of their holdings of lower quality.
We find that our customers are by no means
slow to avail themselves of so excellent an
opportunity of improving the character of
their Investment Lists. The suggested ex-
change is effected, and thus a transaction
equally satisfactory to all parties is com-
pleted. Our customers are pleased because
they have obtained greater capital safety and
a better income-yield without finding them-
selves under the necessity of providing any
additional cash; the original holders of
the depreciated stock are pleased because
they have been enabled to obtain the money
they required; and my company is pleased
with the profit which it makes on the trans-
action.

Thus, in some businesses money scares
are distinctly advantageous, as in the case
of mine. Hence my comments upon banking
methods are directed practically against my
own personal interest, and are made solely
with the view of contributing my share to-
wards removing a block in the way of the
world’s progress.

.

Professional Men as Investors

Tue readers of the Financial Review of Reviews
are very largely recruited from the ranks of
professional men. Amongst them, of course,
there are many who have not only large pro-
fessional incomes, but also private fortunes
of considerable magnitude; but, taken as a
whole, the professional class cannot be called
wealthy. In the first place, the years of pre-
liminary study, with their attendant expenses,
have usually made a considerable inroad into
the capital accumulations of the young pro-
fessional man’s parent, consequently his per-
sonal fortune is small if it be not altogether
non-existent; secondly, the first years of
professional life are proverbially barren. So
that, in his early manhood, the average pro-
fessional man, owing to his lack of private
means, combined with the scantiness of his

_ professional income, is possessed of noincentive

to study the question of investment, Yet,
9

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310 INVESTMENT PRACTICALLY CONSIDERED

in order to provide for those who some day will
find themselves deprived of his income-earning
power, the professional man feels it peculiarly
incumbent upon him to make every possible
provision for a rainy day.

Finding themselves placed in the above
position, with little or no investment know-
ledge and enjoying an income which is en-
tirely dependent upon their individual health
and strength, it has been natural enough that a
large number of professional men who are sub-
scribers to the Review should have used their
inquiry coupons to ascertain what, in the opin-
ion of the Review, a professional man should
do with his money. Therefore the Editor
asked. me to deal with this important subject
in detail in an article. I will, therefore, leave
out of consideration here wealthy professional
men and apply myself solely to the financial
necessities of the less well-endowed majority.

In the professions a man is fortunate in-
deed if, after having attained to the position
of a fully-qualified man, the expenses of
living, studying, and the final examination fees
have not swallowed up his entire capital. No
matter which profession may be selected, be it

PROFESSIONAL MEN AS INVESTORS 311

that of clergyman, doctor, lawyer, architect,
or any other calling requiring special technical
knowledge, the initial struggles in all of them
are practically identical. It is open to a pro-
fessional man to commence his career in two
ways—either by setting up for himself and
patiently waiting until capricious fortune may
elect to send him work and a consequent op-
portunity of professionally distinguishing him-
self, or by joining himself in partnership with
others who have already achieved some pro-

- fessional foothold. In the case of a man who

starts upon a single-handed career the initial
struggle is harder and fiercer, but the spoils
of victory, when victory is finally won, are |
larger, owing to the fact that there is no other
claimant to a share of the booty. Whereas in
the case of the man who joins an already going
concern, although his period of waiting for
public recognition may thus be expeditiously
bridged over, his income at the outset is gen-
erally an exceedingly modest one. But,
whichever line of procedure he may adopt, it is
practically certain that some considerable

_ time must elapse before the young professional

man will be able to detect any symptoms of ex-

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312 INVESTMENT PRACTICALLY CONSIDERED

pansion on the credit side of his Banker’s Pass
Book beyond the necessities of his daily wants.
It is only when income begins markedly to
outstrip daily necessities that the time arrives
when the question of finding a “ home” for
surplus earnings becomes at all a burning one.

At first sight the idea of providing capital
with a ‘“‘ home ” may seem somewhat peculiar,
but I have used the expression advisedly, as,
in my opinion, the resemblance between the
homes of living creatures and the homes of
capital is very complete. Both types of home
vary very widely in comfort and security, and
having been under the necessity of working
hard for his capital, the professional man is
inclined to regard it with a certain amount

of affection, and is anxious above all things.

that it should be particularly well housed. I
do not wish to suggest that there is any special
tendency on the part of the professional man
to indulge in a miserly contemplation of his
small hoardings; but I am convinced that
one of the consequences of the high educational
standard which prevails amongst professional
men is that it makes them intelligently alert
to the endless vista of misery which might

PROFESSIONAL MEN’ AS INVESTORS 313

follow upon any neglect properly to house the
first nucleus of capital. At some time or other

- all of us have to experience a rainy day, and

we are all aware of the misery which the want
of an umbrella entails upon us. Figuratively
speaking, the umbrella represents the invested
reserve fund, and, like the umbrella, the re-
serve fund should always be immediately get-
atable and in a perfect state of preservation
when its services are suddenly called upon.

It will be seen, then, that it is essential that
the first beginnings of capital should not only

be safely invested, but also be so invested that

such a portion of it as might be suddenly re-
quired should be promptly available. But be-
fore proceeding to indicate the best means of
achieving these objects I had, perhaps, better
preface my explanation by a few preliminary
observations on the subject of investment
generally. - ;
With reference to investment, the public
appear to entertain one or two extremes of
opinion: they either regard it as an extraor-
dinarily difficult problem which baffles any
attempt at understanding it—and this type of
capitalist generally falls into the error of leav-

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314 INVESTMENT PRACTICALLY],CONSIDERED

ing his money on deposit at his bankers at an
altogether inadequate rate of interest—or else
they consider investment to be the simplest
matter in the world, which consists merely of
purchasing somesecurity, indicated by a banker
of broker as a safe stock. I need hardly say
that both these extremes of opinion are incor-
rect and the only question is whether excessive
timidity or excessive complacency ultimately
proves the more expensive to those who in-
dulgeinthem. Now my experience has proved
to me that investment is a business, and that
like every other business it requires to be
learnt. I am also satisfied that it is as es-
sential that every money-making member
of society should learn to invest as that he
should learn to behave at table. For without
such knowledge a man becomes a nuisance
to himself and a trial to all who have any-
thing to do with him. Precisely as natute as-
sists us to accumulate fat in our bodies, so that
we may possess a reserve of strength to draw
upon in case of illness, when the usual organs
are incapable of providing the indispensable
means of sustaining life, similarly do accumu-
lated funds perform the same function for us

nts Cima Rihanna ain Di MED AR ite ne dg tans AAS Eatin tia Nate ae ona im ea

PROFESSIONAL MEN AS INVESTORS 315

financially. But with this wide difference,
that whereas the essential fat is provided by
nature, the equally essential reserve fund has
to be first created by our own individual exer-
tions and subsequently systematically hus-
banded by our own individual care. The
reserve outside our bodies is quite as impor-
tant as the reserve within our bodies, and as
the former is not self-creating it follows that
the necessary attention must be given to its
gradual formation. Neither is the gradual
creation of a financial reserve and its sedulous
protection when created by any means the
difficult matter which many people appear to
imagine it to be.

The publishers of the Financial Review
of Reviews also issue some small Investment
Hand-books, the most important of which on
the subject of safeguarding capital are How to
Manage Capital and Investment an Exact
Science. The former of these books, whilst
dealing with the whole of the Investment ques-
tion, addresses itself more particularly to a dis-
cussion of the method of selecting individual
securities. In Investment an Hxact Science
the main question discussed is the harmony

--- Page 166 ---

316 INVESTMENT PRACTICALLY CONSIDERED

which must exist between the various types
of securities comprised in a properly adjusted
Investment Scheme. The latter of these two
books I wrote myself, and my chief object in
doing so was to explain in the most simple and
direct fashion possible to the investor pos-
sessed. of little commercial knowledge the var-
ious influences which control Stock Exchange
values. Although boththese publications were
written for the information of the unskilled
investor, it should not be imagined that they
are in any way rudimentary books: indeed,
the man of average intelligence, who studies
them carefully, will rise from the perusal
of these works fully competent to traverse
the too prevalent investment heresy that the
investor who contents himself with purchasing
stocks, which are in themselves intrinsically
sound, has achieved all that there is to be done
in the important matter of endowing invested
capital with permanent stability of realisable
value. -

In addition to these two treatises of Invest-
ment methods the same publishers are respon-
sible for the Investor's Shilling Year Book, a
book of reference containing valuable statis-

Anes

PROFESSIONAL MEN AS INVESTORS 317

tical information as to all the chief invest-
ment stocks, and also for The Eyar Investor’ s
Account Book, a handy form for investment
book-keeping which will be found specially
useful to those large and small capitalists
who have drawn up their schemes of invest-
ment in accordance with the teachings of
Invesiment an Exact Science. The intention
of this set of books is to cultivate the inves-
tor’s own self-reliance in the matter of invest-
ment. The reader is told not only what he
should do, but also it is minutely explained
to him why he should doit. Heis encouraged
to form an opinion of his own as to the eligibi-
lity of every security he purchases, and he
is warned against the speculative elements
which are likely to undermine the safety of his
Capital.

For many reasons blind reliance on a banker
or a broker for investment advice is unsatisfac-
tory. Precisely as a doctor has difficulty in
diagnosing his patient’s symptoms, unless he is
made fully acquainted with his past history
and present habits ; and precisely as a lawyer
is unable to express a reliable opinion unless
the whole of the circumstances affecting a

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318 INVESTMENT PRACTICALLY CONSIDERED

case are candidly revealed to him, so financial
advice in order to be applicable to the needs
of an investor must be based upon an intimate
knowledge of that investor’s past accumula-
tions and future prospects. Clearly, then, there
can be no more competent financial adviser
than the investor himself : for he is possessed of
an inside knowledge of his own circumstances
such as is possessed by no other living indi-
vidual. A banker or a broker may recom-
mend a stock sound enough in itself but
altogether unsuited to the particular case
under consideration. For this reason “ Every
man his own Financial Adviser” is & say-
ing embodying far more wisdom than many
people might suspect. .

The next point the investor must fully grasp
is that Stock Exchange securities possess both
life and growth, and that like every other liv-
ing thing which grows they require constant
supervision. This is the elementary truth con-
cerning every security from .Consols down-
wards, and yet it is in strong contrast to the
attitude of the average investor towards his
own possessions. He buys what he considers
to be a good security, and forthwith locks up

4

4

q
4
4

PROFESSIONAL MEN AS INVESTORS sro

the stock certificate ; subsequently he draws:
any dividends which may accrue, and tnen
considers that he has faithfully discharged
his duty to himself as a capitalist. It would
be with open-eyed surprise that an investor
would hear that in reality a stock certificate
—or at least the security which it represents
—is fully as much alive as any plant. That
there are prosperous seasons in which a stock
branches forth into luxuriant growth, and,
again, that there are inclement seasons when
rough weather strips the plant of boughs
which have been the result of years of slow
development, is an aspect of the investment
question which the average investor is only
too prone to neglect. A glance at the 164
pages of tabular matter at the end of the
Review, giving the extreme quotations, divi-
dends, and yields of 5,000 stocks over a period.
of four years, will suffice to show how indi-
vidual securities shrivel up in value during
the frosts of adversity and: blossom forth
into fresh records of high values in the sun-
shine of prosperity. These tables include every
known type of investment, from the safest to
the most speculative, and it will be found

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i
4
t

320 INVESTMENT PRACTICALLY CONSIDERED

that all of them, without exception, are con-
stantly altering in value and in the actual yield
which this value produces to their owners,
and, consequently also, in desirability. With
his perception quickened by a reference to
these tables the investor will have no difficulty
in appreciating the folly of locking up in
forgetfulness an investment which if it is to
thrive requires fully as much attention as any
plant.

Thopel have now established in the inves-
tor’s mind the two fundamental principles
which are absolutely indispensable to pro-
Stable investment of capital sums of all kinds,
whether large or small, and these are :—

1. A knowledge of the main investment —

principles.
9. A conviction that every investment
is alive and demands - periodical

supervision.

Having settled these essential but general

points I will now return to the more particular
consideration of the case of the professional
man at the time when he first begins to find
himself possessed of a surplus cash sum ait

PROFESSIONAL MEN AS INVESTORS 321

his bankers. Now, the leading banks of this
country may fairly be assumed to be perfectly
safe so far as their depositors are concerned,
and. cash deposited with them may be regarded
as always readily available. But in return
for the responsibility which the banker as-
sumes, in relation to his depositor, he allows’
him the very smallest known rate of interest
on his deposit. The banker, in fact, exerts
his own investment knowledge in the employ-
ment of his depositor’s capital, and naturally
énough he makes the depositor pay for his
expert invostment experience. Therefore it is
important that the professional man should
understand that when he ceases to thus employ
his banker as his medium of investment he
is undertaking to assume in future the respon-
sibility and the supervising care’ which the
banker has hitherto exercised ort his behalf.
Let the investor, thereforé, before he
mind that the game is worth the candle; that
is to say, that the sum to which he proposes to
devote his personal attention is sufficiently
large to make the sacrifice of some’ portion of
his time worth his while. Here, doubtless,
¥

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Tea asm Pe

322 INVESTMENT PRACTICALLY CONSIDERED

some of my readers would like me to suggest
a minimum specific amount as representing
my own idea on this point. So much, how-
ever, depends upon the amount of spare time
that the investor possesses that a hard and
fast minimum cannot be laid down. Suffice
it to say that the sooner a professional man
accustoms his mind to deal with commercial
questions the better, and that, in some cases,
£100 capital would be sufficient to induce a
man to assume theresponsibility ofinvestment ;
yet, in others, £1,000 would scarcely repay a
man of many engagements for the demands
upon his time in which the personal care of
his capital would involve him. In his early
days as a capitalist the professional man may
possibly find that the Post Office Savings

Bank will allow him a more liberal rate of

interest than his own banker, but on no ac-
count should capital be entrusted to the safe-
keeping of any person or institution of less
financial stability than the two classes of
banks which I have named.

Sooner or later the time will arrive when

the professional man will have a sufficient’

amount of money accumulated in his bank

PROFESSIONAL MEN AS INVESTORS 323

to make it worth his while to seek an invest-
ment for it. At that moment, and prior to
deciding on the purchase of any security, he
should make a survey of his entire position in
order to make a rough estimate as to how
much money he is likely to have to spare
annually for the purpose of investment.

In Investment an Exact Science I have ex-
plained why all investments should be made
on a previously constructed Investment
Scheme, and such a scheme as is there in-
dicated he ought now to make for himself,
taking his present position and future pros-
pects into consideration ; he should, in short,
choose his first investments in such a manner
that they can be added to year by year as
further sums become available. In con-
structing the scheme he should, so far as
possible, follow his own personal inclinations
and desires, that is to say, if he is satisfied
to allow his capital to grow slowly he should
choose only stocks of the greatest stability :
if, on the other hand, his natural tendency
should happen to be impatient, and he is
desirous of exerting his capital strength, so
to speak, to the utmost, let him choose more

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324 INVESTMENT PRACTICALLY CONSIDERED

speculative ventures. But in arriving at a
decision on this point he must never lose
sight of the fact that capital safety is the first
consideration, and, further, that all investment
schemes, in order to produce satisfactory
results, must consist of stocks of a kindred
kind. He will find all these points fully ex-
plained in the books already mentioned.
Let me impress upon him the necessity of
implicitly following the instructions therein
given. Capital which is earning between four
and four-and-a-half per cent. is doing its
ordinary work. Capital which is producing a
larger return is working “‘ overtime,” so to
speak, and therefore requires infinitely more
care and attention than that which is working
at more normal pressure. Let the investor
also remember that quite unforeseen events

may occur to him personally which may make

freé cash a sudden necessity, therefore let a

part of his capital be placed in such securities
as can be realised at all times without any

trouble or delay. .
If the professional man will follow the lines

which I have laid’ down above he will obtain _

the following advantages :—

PROFESSIONAL MEN AS INVESTORS 325

1. He will understand clearly in his own
mind “how” his own capital is
invested. |

2. He will protect himself against capital
losses.

3. He will always be able to realise and
to turn a part of his capital into cash
in case of an emergency.

4. He will, most important of all, ac-
complish these objects without any
taint of speculation.

Let me here say a few words on the subject
of speculation. If any one deliberately, and
with his eyes open, enters into a speculative
venture, then he knows what he is doing, and
he has no right to be surprised if the results
achieved are disastrous. But to speculate
without being aware of it is nothing short of a
calamity, and to be quite frank this is the
snare into which professional men are some-
what apt to blunder. They usually com-
mence their investment operations without
clearly understanding that anyone who in-
vests his capital exclusively in the stocks of
any one country—no matter which may be the
country selected, nor what may be the quality

--- Page 171 ---

|

326 INVESTMENT PRACTICALLY CONSIDERED

of the securities chosen—is simply staking his
investment position on the trading prosperity
of that particular country. Now, a nation’s
trading prosperity is a very fluctuating com-
modity, and any investor who is improvident
enough to stake his capital upon such an
uncertainty is, in fact, gambling ; and, more-
over, he is. gambling so blindly and uncon-
sciously that he naturally neglects to take any

precaution. And to raise another point, he —

does not know that out of every ten new
companies which are promoted, only one sees
its twentieth birthday, and at least half of
them result in entire loss to their shareholders.
He does not understand that buying shares at
a high premium is tantamount to buying the
good-will of a company at an enormous in-
flation ; in fact, he has not taken the trouble
to learn the rudiments of sound investment,

which he could have done by reading some |

sound. literature on this subject. Although
he never intended to speculate he suddenly
finds himself face to face with a disastrous

capital depreciation, and ultimately perhaps

he is involved in a very heavy loss.
I have analysed the existing lists of invest-

PROFESSIONAL MEN AS INVESTORS 327

ments of many hundreds of professional men,
and I have found that only in the very rarest
instances have proper precautions been taken
for really safeguarding capital. I feel quite
certain that most of the professional men
who read this article will find that they have
not followed the simple rules here laid down
for investing their surplus funds, that their
investment lists are not constructed on a
systematic plan, and that the results which

they have obtained in the past on their invest-

ments have been by no means satisfactory.

The tests which should be applied to invest-

ment lists in order to find out whether the

_ capital is properly laid out are as follows :—

In the first place the total capital value of
all stocks held should not vary materially year
by year..

Secondly, the investor throughout his career
should always find himself in possession of at
least one stock which is realisable without loss.
- Thirdly, the total amount of income derived
from the aggregate investment should be
stable, or if it alters it should be working up-
wards on a rising scale.

These three objects can only be attained

--- Page 172 ---

828 INVESTMENT PRACTICALLY CONSIDERED

by a proper distribution of capital risks, and.
such a distribution can only be arrived at
through a knowledge of the influences which
affect the realisable value of invested capi-
tal.

When an investment list does not exhibit the
three main characteristics of sound investment
mentioned above, namely (i) stability of capital
value, (ii) one or more stocks standing above
cost-price, (iii) a steady income with an in-
creasing tendency, then it may be taken as
proof positive that it is faulty in its construc-
tion. To amend an existing faulty investment
list is a much simpler process than many inves-
tors imagine, and it is imperative that some
steps should be taken at the earliest possible
moment to remove the impediment to success.
At all events an expert opinion on the scheme,
as it stands, should be obtained speedily, as
knowing the cause of the trouble is already
half-way to removing it. If there was no
means of achieving an investor’s aims with
certainty, there would be some excuse for in-
curring severe investment losses, but as such

a system does exist, and as the simple rules laid

down herein explain how success can be ob-

PROFESSIONAL MEN AS INVESTORS 329

tained, there really is no excuse for exposing
invested capital to possible loss.

To a gambler, or one with a bump of specu-
lation strongly developed, this whole argu-
ment is not likely to appeal, but to every in-
vestor who does not desire to speculate it
should appeal, and if he will simply leave
his money in his bank on deposit until the
sum is sufficiently large to make it worth
his while to learn the simple art of invest-
ment, and he will then construct a properly
balanced investment scheme and follow it
implicitly, he will find that instead of his
capital accumulations constituting a source
of worry and of loss, they will prove a pleasant
problem capable of a scientific solution.

If, on the other hand, the investor has
already started and found from results that
his existing scheme is faulty, he should forth-
with set himself the task of acquiring the
requisite amount of knowledge and then
proceed to reconstruct his investment scheme
on sound lines. If this plan were universally
followed we should hear no more of losses on
capital made by professional men of limited
means. Most professional men have to work

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330 INVESTMENT PRACTICALLY CONSIDERED

very hard indeed for their money, and they
have frequently to deprive themselves of
many little luxuries in order to be able to
lay up a nest-egg for the future. Consider-
ing the difficulty with which professional
men accumulate capital, it is surprising to
see the recklessness of results with which
they invest it.

I have now explained that the fault is
their own, that although they may have
expended no matter what amount of personal
exertion to acquire capital, they do not
hesitate to expose it to every kind of imagin-
able danger, and this almost criminal care-
lessness simply arises from the want of easily-
acquired knowledge and a little foresight.
I have, of course, approached the subject
from my own point of view, and I should
be very glad to hear the other side of the
subject (if there is such a side) from any
investor who has, without following the lines
laid down in this article, achieved invest-
ment success, and I feel quite sure that no-
thing will please the Editor of the Financial

Review of Reviews better thanto receiveinform- .

ation as to the construction of an investment

PROFESSIONAL MEN AS INVESTORS 331

scheme compiled on principles differing entire-
ly from my own and yet producing satisfactory
result, The Editor would welcome any discus-
sion which tends to enlighten the readers of the
Review on the important subject of profitable
investment, for, as I understand it, the
object of the Financial Review of Reviews is
to spread amongst its readers investment
knowledge and investment experiences culled
from every reliable source of information.
In the course of this article I have been
compelled to refer somewhat freely to the
teachings of a book of my own entitled In-
vesiment an Exact Science. I have done so
with a reluctance which will readily be under-

. Stood, but, without such references, it would

have been impossible to compress so large a
subject as scientific investment within the
short compass of a Review article,

--- Page 174 ---

The Money Market Article and the

Private Investor

THE values of all commodities are in a con-
stant state of change, and a correct record
of all these changes is one of the most im-
portant points in every trade. For this
reason all newspapers devote a certain amount
of their space to the record of the changing
conditions of various markets, and among
these the article which deals with Money and
Stocks holds the first position. This is
only natural when it is considered that
whilst, say, the Iron Market, the Fish Market,
the Copper Market, or the Timber Market is
directly interesting only to one particular
class of traders, the Money Market is inter-
esting to all of them, as it governs to a very
large extent the prices of all commodities.
This is the reason why the Money Market,

both in position and in the amount of space
2a ;

THE MONEY MARKET ARTICLE 333
allotted to it, takes precedence of all other
itéms of commercial intelligence.

The private Investor may or may not be
interestéd also in the price of commodities,

_but as soon as he has money invested in

stocks the general trend of the Money Market
influences the value of his stocks, and is
therefore interesting to him. On the surface
it would appear that the average Investor
has indeed a very large interest in reading the
Money Article of his daily newspaper, as he
will there find recorded the upward and
downward tendencies of a considérable
number of Stock Exchange securities, some
of which it is probable are included in his
own Investment List. In thus following
the movements of the Money Market his
object naturally is to know the condition of his
own stocks, and probably he also hopes to
profit by the knowledge thus gained. Let
me analyse, then, how far the average private
Investor is capable of profiting by the study
of a daily record’ of the movements of the
Money Market.

The British Stock Market comprisés somé
35,000 securities of various types; of this

--- Page 175 ---

334 INVESTMENT PRACTICALLY CONSIDERED

number about 2,000 or 3,000 may be cata-
logued as really important stocks. The im-
portant securities are, of course, those chosen
by the City Editor as forming the basis of
his daily writings. Now the average Invest-
ment List embraces about 15 stocks.
Although there are all sorts and conditions
of private Investment Lists, the capital
value of which varies almost infinitely—
the man of great wealth investing millions
whilst the proper disposal of £100 or less
engages the attention of numerous small
capitalists. The small Investor is, perhaps,
interested in two or three stocks while the
multi-millionaire will find it prudent policy
to confine his attention. to not more than,
say, 100 investments; so that an Invest-
ment List composed of 15 stocks may, as I
have said, be taken to represent the holding
of the average Investor. It will be seen, then,
that the average Investor is interested in
35000 Of the investments known on British
Stock Markets; so that his interest in the
important stocks to which the City Editor
confines his attention is infinitesimal, When
the matter is thus expressed it is clear that

THE MONEY MARKET ARTICLE 335

the average Investor’s personal interest in
the Money Article, as far as his own holding
is concerned, must be very minute. _

If the only result of reading the Money
Article by the individual Investor should be
that he thereby is enabled to follow the
movements of his own Stocks, the result so
obtained, as we shall show hereafter, would in-
deed be paltry, but although many readers
of the Money Market Article believe that
they should make this their chief object,
quite the contrary is the case.

It is not the movements of individual
Stocks which should be looked for in the
Money Article, butitis rather the general move-
ments in the value of money which form the
important information to be gained therefrom.

We have shown above how very few Stocks
in which he has a particular interest, each
individual Investor is likely to find recorded
in his Money Article. The Stocks which he
does find recorded, however, are representa-
tive samples of large groups, and it is by
knowing how the representative Stocks of a
group have moved that the altered value of
stocks not quoted is to be ascertained. Thus,

--- Page 176 ---

in

336 INVESTMENT PRACTICALLY CONSIDERED —

for example, when the Money Article reader
sees that the Japanese Government Securi-
ties quoted in London have risen, say, 5 points
in value, he can infer justly that Japanese

local investments like Nagasaki Docks, Kobe
Waterworks, and such like, are likely to

have appreciated te a similar extent. Again,
when he sees that the general rate of dis-
count in Brazil has considerably receded

he can take it as a natural consequence that:
his local Brazilian’ investments which are not
quoted, have gone up in value. It is, as we’ |

shall be able to show, these changes which
should’ be watched in reading the’ Money
Article. In fact, the Money Article is a
general indication of the rates of interest
stocks should produce, and it is not intended!
for merely watching the fluctuations of
individual investments.

City Editors, whether they are attached!
to Conservative, Liberal, Progressive, or even!
Revolutionary journals, are still nearly’ all
conservative in their methods. A stock once
placed on their list for daily discussion stands
every chance of being included’ in: that: list
for'a considerable: period’ of time ; ds such: a

THE MONEY MARKET ARTICLE 337

list is only subject to very gradual alteration.
So that an Investor who habitually reads the
same paper may, if he. invests his available
capital in stocks which are regularly men-
tioned by his favourite City Editor, have the
satisfaction of reading something about his
own property daily—at least for some time.
Sooner or later, however, one or other of his
investments will certainly be deleted from
his City Editor’s list. Therefore, in order
to retain only such stocks as are mentioned
in his newspaper, the investor would find
himself compelled from time to time to
make considerable changes in his Investment
List. 'Those who wish to indulge in an inter-
esting and profitable study should scan the
financial columns of their to-day’s paper,
and then compare them with the contents of
the same columns, say, two, five, and ten
years ago. Such an investigation would re-

-yeal the fact that, although City Editors are

conservative in their habits, yet the daily

list of the stocks which they discuss varies

considerably with the lapse of time. As it is

exceedingly: doubtful whether any Investor,

in whatever degree of reverence he might hap-
2

--- Page 177 ---

338 INVESTMENT PRACTICALLY CONSIDERED

pen to hold his City Editor, would go so far
as to change his list of stocks with the view
of having the pleasure of seeing them dis-
cussed in his daily paper, the conclusion is
inevitable that the number of private In-
vestors who find many of their holdings thus
reported upon is very limited.

Having shown, then, that in many cases
Investors do not really follow the movements
of their own stocks in their perusal of the
Money Article, I now desire to examine how
far the daily reading of the progress of these
stocks, or of stocks remotely connected with
them, can be turned to the profit of the In-
vestor. With this object in view let me take
two cases—one where a stock held has risen
appreciably and another where some security
quoted daily has receded in value to a con-
siderable extent.

Taking the former case first, there are two
chief reasons to account for the upward price-
movement of a security. Hither the price
goes up on the improved intrinsic merits of
the stock or because some individual or group
of individuals believe, or announce that they
profess to believe, that its future prospects

THE MONEY MARKET ARTICLE 339

are particularly bright. Whichever of these
reasons may be responsible for the upward
movement, the reasons in themselves are
simple and devoid of complication and do

not admit of a daily continuous discussion.

Hence the amount of butter which the City
Editor has to distribute over his very large
slice of bread is decidedly small—a rise of the
kind indicated above sometimes taking years
to accomplish. He is forced, therefore, either
to repeat himself constantly or to revert to
market gossip and street rumours. If he
chooses the latter course his readers who
make a point of reading the bewildering
imaginary reasons so given for a rise in their
stocks, naturally work themselves into an
unsettled and unreasoning frame of mind.
Their judgment becomes clouded and they
read of so many causes why their property
must fulfil the various sanguine anticipa-
tions as to its future that. the conviction
gradually forces itself upon them that it
would be unwise to sell their stock and
to secure their profit, no matter how large

might be the profit they would realise by so
doing.

--- Page 178 ---

340 INVESTMENT PRACTICALLY CONSIDERED

A notable example of a movement of this
sort has occurred quite recently in the case
of Hudson’s Bay shares. Here was a stock
which was selling at only £33 per share about
three years ago, and in December last touched

123. The tables of quotations show the rise —

to have been quite gradual; in 1903 the
average price being 394, in 1904 453, in 1905

691. During the three years which have

witnessed such an extraordinary change in
the value of these shares, there has probably
hardly been a single Money Article which has
not mentioned the Hudson’s Bay Company,
with the result that this continuous rise and
the daily discussion of it during its progress
have effaced the past history of the concern
from the memories of those who acquired shares
at low quotations. They now overlook the
fact that as three years ago the company’s
shares were selling ata total market valuation
of £3,300,000, and have now reached a valua-
tion of about £12,000,000, it is quite possible

that the shares are considerably overvalued.

These being the facts of the Hudson’s Bay
Company’s history, the action of an investor
in retaining the stock without most seriously

THE MONEY MARKET ARTICLE 341

investigating the real present position of this
company shows him to be wanting in fore-
sight. One of the most difficult things in the
world is to induce an investor to turn his
paper profit into a cash profit, i.e., to realise
his stock at its enhanced temporary market
price. This difficulty is rather increased than
diminished by its holder being constantly
confronted by the prominent position which
his stock has evidently assumed in the eyes
of such financial experts as the great run of
City Editors undoubtedly are.

Again, for example, it was quite obvious to
the careful investigator that London and
North-Western Railway Ordinary Stock was
not worth 2093 when that price was reached
in 1897. The present price of the stock is
about 153. Yet how many Investors were
there who took practical advantage of the
inflated quotation ten years ago and realised
their paper profits ? As a matter of fact such
prudent holders of North-Westerns were ex-
ceedingly few, and I happen to know that
those who did thus benefit by the rise in
price were, for the most part, not amongst the
assiduous students of the daily Money Article.

--- Page 179 ---

342 INVESTMENT PRACTICALLY CONSIDERED

The constant microscopic study of price fluc-
tuations rather cripples than develops an
Investor’s power of taking profits; there-
fore, in the case of the rise in prices the regular
reading of a Money Article is detrimental
rather than useful.

Now conversely I should like to show how
the constant study of price-movements works
out in the case of a fall. Every one feels a
natural disinclination to sell for 19s. 6d. any-
thing for which £1 was obtainable a short
time ago, and he experiences an even greater
reluctance to accept 18s. 6d. for the same

article later on.’ I should like my readers to >

consider the following case: Supposing they
own something which cost them £1 and that
without warning they see it only worth 15s.
The suddenness of the alteration startles
them. Is it not sudden calamity, in any

shape, that impels a man to pull his wits to-

gether, to set his teeth, and to face the situa-
tion squarely? On the other hand, had
the investor merely witnessed a gradual
dwindle in the price extending over a number
of years, and ultimately culminating in a
similar fall, he would have found that the

THE MONEY MARKET ARTICLE 343

very persistency of the decline had softened
the fall to such an extent that he had never
properly appreciated how disastrous it had
been. He consequently continued and will
continue to hold his unsatisfactory invest-
ment regardless of the amount of dissipated
capital which it represents. A gradual decline
of this description reminds me of the story
of a man who had a dog fancier for a neigh-
bour. He found himself disturbed evening
after evening by the piteous howling of a
dog next door, and believing that the animal
was being ill-treated, he spoke to the owner
on the subject of the noise. The dog fancier,
whilst expressing every sympathy for the
dog, explained that he was desirous of cutting
off the animal’s tail to make it look fashion-
able, but as he could not reconcile his con-
science to the cruelty of cutting the tail off all
at once, he had adopted the expedient of
cutting off a small piece each evening, so
as to accomplish his purpose the more
humanely and gradually. Investors will
find by experience that it is better sud-
denly to be made aware that their capital
is diminishing than to perceive that it is

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344 INVESTMENT PRACTICALLY CONSIDERED

slowly wasting away by small fractions at a
time. My arguments will, I hope, prove
that whether one of his stocks has risen con-
siderably or whether it has seriously declined,
the constant reader of the Money Article
will find himself a sadder but not so wise a man
as the non-reader.

I will now take a stock, in the shape of the
Egyptian Unified Debt, to illustrate what
happens when there are constant fluctua-
tions without any ultirnate result. This stock
during the last few years has occupied a
prominent place in the generality of Money
Articles. It has fluctuated to some consider-
able extent, and yet to-day the price is much
about the same as it was some five or six
years ago. The fluctuations have, in fact,

been non-resultant, and the Investor has been —

kept on tenter-hooks meantime by his atten-
tion having been daily called to the fact that
his stock has gone up so much or down so
much, and now at the end of five years he
finds himself in exactly the same position as
he started from. It is clear, therefore, that
neither in the case of a rise nor in the case of
a fall, nor in the case of a placid pendulum

THE MONEY MARKET ARTICLE 345

movement, does the daily reader of newspaper
finance profit by his reading.

But because many of its readers wholly
misunderstand the purpose of the Money
Article the average investor must by no
means jump to the conclusion that Money
Articles generally are useless institutions.
I shall be able to show presently that this
inference is erroneous; but before doing so
IT would touch upon one other danger which
besets the “constant reader” who is also a
prospective purchaser of stocks. His reading
makes him familiar with a certain number of
investments which form the topic of constant
allusions in print. Such stocks being thus
made the centres of discussion become familiar
to him, and he is therefore prone to infer that it
is amongst securities of such general interest
that he will find the best material out of
which to construct his own Investment List.
The fallacy of this belief is, however, obvious.
For an intending purchaser should always
go to the cheapest market, and by the law of
supply and demand it would be foolish for
him to think of making his purchases in a
market which is over-crowded with buyers.

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346 INVESTMENT PRACTICALLY CONSIDERED

As nearly all the Money Market Articles in
the British newspapers record the movements

of practically the same stocks, these stocks.
are the most advertised. With the eyes of so_

many Investors upon them, it is surely impro-

bable that a real bargain can be obtained

in these much-discussed stocks. On the other
hand, of the 33,000 “‘ unimportant ” stocks,

some are merely quoted locally, some are.

recorded in journals like the Financial Review
of Reviews, and a number of others are never
discussed at all, the result being that some
of the finest securities are never brought to
the notice of the average Investor. Every.

company’s list of shareholders records changes —

of proprietorship from time to time. ‘'There
are deaths, which necessitate a sale of the
shares by the executors ; other holders desire

to realise, in order to put their capital to some
other use, and thus the shares and debentures

of these neglected properties come into the
market. They are known to but few Inves-
tors, which fact ensures but few buyers.
Amongst these few are to be found the In-

vestors who are determined to secure a E
bargain by purchasing a sound security at a |

THE MONEY MARKET ARTICLE 347

comparatively low figure. Here I am going

to anticipate the argument that it is not

..- good to own a property which cannot be
- immediately realised at any time. This argu-

ment, however, does not apply. Those who

buy a stock with the definite object of shortly

selling it again—in other words, Speculators

‘—must, of course, consider the immediate

marketability of a stock before any other
qualifications, but an Investor who purchases
with the view of holding his investment for
years need have no qualms on the question

- of its being readily saleable or not. In an
.. emergency a good stock will always find a
‘ready purchaser, and I have never known of

a single case where a really sound security
has gone begging. Therefore, to pre-suppose
the case of a good investment ever being un- |
saleable is a mistake, as such cases do not
occur. In any well-arranged Investment, List
there should be no difficulty about selling one
or two of the stocks held at any time. In
any case the immediate marketability of a
stock is a volatile qualification, and cannot
be said to be a permanent characteristic of any
stock. To-day a stock might be very readily

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348 INVESTMENT PRACTICALLY CONSIDERED

saleable, and a year or two hence it is possible
that the Investor would experience some diffi-
culty in disposing of precisely the same stock.
One of the most forcible examples of this
kind is to be found in the case of the London,
Brighton and South Coast Railway Company
Preferred Ordinary. I have in my mind a
time when any quantity of this stock up to,
say, £30,000, could be sold at a moment’s
notice; and this without affecting the price-
current of the stock. I had £10,000 of this
stock on sale last summer for six weeks, and
then could not realise a proper market price
for it. Mexican Railway Second Preference is
another extreme example of the fickleness of
a stock’s saleable quality. I remember trying
to sell a quantity of this stock some years
ago. The transaction fell through, as I could
neither realise a fair price for it, nor was it
possible to borrow money on it. To-day,
any reasonable quantity of this stock can
be disposed of on practically the same easy
conditions as those which governed transac-
tions in London, Brighton and South Coast Ral-
way Preferred Ordinary Stock some years ago.
What, then, doth it profit a man if he read

THE MONEY MARKET ARTICLE 349

the Money Market Article and gain nothing ?
All reading should produce some good. In
the Highlands they have a proverb to the
effect that the man who has grown wise
has learnt from fools. No matter what may
be the subject matter of the book or news-
paper, the reader should be able to gather
a certain amount of knowledge or information
from it. It is thus that an Investor should
read his Money Market Article: he should
put his own case before himself as follows :—
“T have a certain amount of money invested
therefore a section, however small, of the
Money Market Article belongs to me. My
money, being merchandise, must be taken to
the best market if I wish to obtain the most
satisfactory results. I have employed my

_ capital as seemed most profitable to me at

the moment, but I am in no way fettered as
regards my investments, and, if a better
method of employment for my merchandise
were to present itself, I would alter my modus
operand: without the least hesitation.”
Having convinced himself that this is the
right position to take up, the Investor should
look upon the Money Market Article as a

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350 INVESTMENT PRACTICALLY CONSIDERED

barometer from which to judge the existing
conditions of markets generally. He will
there learn not only how the value of money
generally is moving, but also how the value
of each particular group of investments is
trending. From a study of the conditions of,
say, Foreign Bonds, he will notice that
Argentine 4 per cent. Bonds, which, in 1900,
could be obtained at about 60, have crept up
to about 93 at the present time, and he will
thus know that the Argentine Republic is not
now so suitable a place for laying out his

capital as it was a few years ago, when he >

could get over 53 per cent. on money loaned
to that Government. The 4} per cent. obtain-
able now is not sufficient to counterbalance

the disadvantages attendant on having one’s —

capital invested in a quarter of the globe
where the time is divided between the antici-
pation of political excitements and the actual
experience of them. Russian 4 fer cent.
is an example of the opposite type. Those
who used to obtain a yield of 4 per cent. on
that stock can now procure it at a price at
which it yields 5} per cent. In former years
the Investor may have eschewed the Preferred

THE MONEY MARKET ARTICLE 351

Ordinary Stock of the Home Railways as
not being very remunerative, as they only
returned a yield of 34 per cent. ; now, how-
ever, 4 per cent. can be obtained on these
stocks, which seems a much better rate on
such old-established investments.

Supposing, then, that the Investor, from a
study of the Money Article, has been able to
watch the trend of the different markets of
the world, he should now be in a position, if
he applies his knowledge rightly, to so adjust
and re-adjust his investments from time to
time as to always remain in the best market.
It willbe seen that he would not be able to
compile a good list of investments from the
very limited selection he finds in the news-
papers, but he ought to take his cue from
his reading, and make his selection as oppor-
tunities offer. For instance, having come
to the conclusion that Home Railway Stocks
are cheap, he should not make random pur-
chases in that particular investment depart-
ment, but he should study a complete list
of British Railway securities and their yields,
and then make his selection carefully in
accordance with the past histories of the

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352 INVESTMENT PRACTICALLY CONSIDERED

respective stocks. City and South London 5
per cent. Preference Stock yields, at the present
price, about 43 per cent. ; Dublin, Wicklow
and Wesxford 4 per cent. Debentures about the
same, and Isle of Wight 4 per cent. Consolidated
Preferred Ordinary 544 per cent. True, the
City and South London Railway may be
subject to some competition, as are all pioneer
enterprises, and the Dublin, Wicklow and
Wexford Railway (now the Dublin and South-
Eastern), though not subject to competition,
is said to request its passengers not to alight
in order to gather flowers during the journey.

But these facts do not alter the central truth |

that the stocks are fairly cheap, considering
the high esteem in which the Home Railway
group is held. Such stocks as the above do
not come under the notice of the ordinary
newspaper reader, and yet, from a capital
point of view, they will be found just as
good as, if not better than, stocks which find
daily mention in the Money Article.

T'o confine one’s selection to the few stocks —

contained in the Money Article is like dealing
in a small shop which you may have entered
merely for the sake of verifying your own

THE MONEY MARKET ARTICLE 353

opinion that you will not find what you want
there. It is possible, however, that some-
thing in the small shop may remind you of a .
similar but better-class article that you do
require, and thus, when you arrive at a large
store, you will know exactly what to buy. In
the same way, the intelligent Investor, after
first deciding, from knowledge acquired by
reading the Money Market Article, what securi-
ties will most nearly answer his requirements,
and then consulting an extensive list such as
the tables given in the Financial Review of
Reviews, will obtain the finest opportunities of
making those comparisons which are the one
great essential to successful investment. It
would be curious if, after having thus closely
studied respective merits, he were to fail to
make a proper selection.

It is with stocks as with every other com-
modity in the warld. If some of them are
held in high estimation by a great number
of Investors, there will be more buyers than
sellers, and the consequence will be a high

range of prices which altogether precludes

the possibility of their being attractive and

remunerative investments.

AA

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354 INVESTMENT PRACTICALLY CONSIDERED

A good bicycle would be just as good were
it a Humber, a Swift, or a Rover. The
practical prospective buyer, who knew it
to be first-class, would make up his mind that
a Rudge-Whitworth by any other name would
run as well, and buy according to his opinion

of the innate merit of the machine. It is -

really much easier to know whether a stock
is of first-class quality than it is to know
whether a bicycle is sufficiently perfect for
use. For the latter, a certain amount of
technical knowledge is required, while in the
case of the former, the simple rules laid down

in How to Manage Capital are sufficient for »

any one of ordinary intelligence.

Although the realisable value of stocks
is said to change, it is equally correct to say
that it is the value of the money which pur-
chases them that varies. ‘The value of money
is measured by the amount people are pre-
pared to pay for its use, i.e., by the income
yielded by it. At the present moment money
in England is worth from £4 to £5 for every
£100. In Japan it is worth from £54 to
£64. In Russia from £5 to £6 per £100 is its
value. Formerly money was worth from

_ THE MONEY MARKET ARTICLE 355

£3} to £4 in England, and from £4 to £5 in
Russia. In this way the value of money con-

_ stantly changes, according to the supply and

demand of the moment, and it is by watching
the trend of values by means of the excellent
information contained in the Money Article,
and applying the knowledge for one’s own
benefit, that one makes sure of receiving the
largest income compatible with safety.
Every Investor should insist first upon
keeping his capital sum intact. When
once the value of money has risen, and
in consequence when the realisable value
of his securities has declined, the Investor
will find it difficult to improve his posi-
tion, as he will then be dealing with a
diminished capital sum. N. owadays, the
guarding against a possible loss of capital is
much more easy of accomplishment than was
the case formerly, as, by applying the system
of Geographical Distribution of Capital, the
Investor will, in the first place, make a point
of properly distributing his risks, and then,
by means of reading the Money Article, he
can ascertain in which quarter of the globe
the most satisfactory yield is obtainable for

--- Page 186 ---

356 INVESTMENT PRACTICALLY CONSIDERED —

the time being. Then, as advantageous op-
portunities offer themselves, he will know how
to make the most successful moves with his
capital on the geographical chess-board. It
is this type of Investor who succeeds in
obtaining the largest return with the minimum
amount of risk.

There is a last and final point which I have
not touched upon, which treats of the ques-

tion of speculation. It is natural to suppose
that the person who is ignorant of the fluctua-
tions of a stock will never be attracted to it
from a speculative point of view. The In-
vestor, however, who watches the persistent
rise of one of his stocks, and sees it eventually
fall again, is vexed with himself that he did
not profit by the opportunity. In this way,
the reading of the Money Market Article be-
comes an incentive to stock speculation, and
experience has proved that these half-and-
half speculators invariably lose by their
ventures. The man who takes up specula-
tion from a professional point of view might
be able to make it pay, but not so the Investor
who has acquired a taste for it from read-
ing the Money Article. This is another

THE MONEY MARKET ARTICLE 357

direction in which such reading may, to
many people, prove extremely dangerous.

I hope to have proved by the above argu-
ment that if anyone reads the Money Market
Article simply for the sake of watching the
progress of his own investments, or with a
view of seeking desirable new investments
therein, he is taking a rather superficial view
of the value of the Money Market Article
and is more likely to lose than to profit by
his reading, whilst the investor who studies
the Money Market Article simply as a baro-
meter of the value of money in various parts
of the world and as indicating what sort of
interest yield he is entitled to expect from
any particular group of securities, will find
it of the greatest value to himself.

To the student of the Money Market Article
who looks upon it in the above light, its ser-
vices are absolutely invaluable, and it is for
this reason that editors of newspapers are pre-
pared to pay very large fees to those who
write the Money Market Article for them, and
it is justly considered one of the most impor-
tant sections in the entire production of their

journal.

--- Page 187 ---

The Investor’s Mind

THERE never was a time in the history of the
globe when trade competition was keener
than it is to-day. In the same ratio as the
population of the world increases, the battle
for existence becomes fiercer until, to the on-
looker, it appears almost impossible to dis-
cover any branch of business-activity offer-
ing an opening for a successful departure from
the beaten track, which already bears the
footprints of the countless thousands of way-
farers who have travelled by it. Every trade
and profession seems to be over-supplied
with men of energy, resource, and ideas;
and yet, in the midst of this multitude of
workers, anxious to be doing something use-
ful to their fellow men, there is, in my humble
opinion, a most important section of the
British public which is by no means adequately
catered for—namely, the investor.

There exigts, of course, an enormous army

THE INVESTOR’S MIND 359

of Bankers, Brokers, Stock Jobbers, Company
Promoters, and others whose ‘calling in life
consists almost exclusively of supplying the
investor with what they think he really
wants. But it is my conviction that but
few of these people have gauged the in-
vestor’s requirements with sufficient accuracy
to discover his real mind. Let us then first
of all examine what are the wants of the vast
majority of investors, and then let us con-
sider to what extent these wants are supplied.

To probe the inner minds and the actual
intentions of so large and miscellaneous a
throng as is comprised in the British investing
public is obviously a task quite beyond any
single individual. But in the same way as all
enormous masses may be satisfactorily tested
by fair average samples indiscriminately
drawn from the bulk, so I may claim to

have a wide and general knowledge drawn

from personal experience, because for up-
wards of five and twenty years I have been
engaged in the investigation of the merits
of stocks and shares, and I have availed
myself of my opportunities of studying the
investor closely. Very early I discovered

--- Page 188 ---

360 INVESTMENT PRACTICALLY CONSIDERED

that, although the investor knew his own
mind intimately, he had great difficulty in
making his intentions clear to others. The

investor was possessed of all the necessary .

decision, but his decision was inarticulate ;
he was too prone to assume that the particular
type of investment securities which he per-
sonally desired was the one type invariably
selected for all investment purposes.

The investor had ideas of his own, but his
trouble was to give coherent expression to
what was in his mind. To meet this difficulty
I commenced a system of examining my

customers verbally as to their requirements. -

But I soon discovered that it was a more
effective plan, in order to render the investor
perfectly explicit as to his wants, to supply
him with a question paper to fill up at his
leisure. The question paper which I drew

up contained a number of alternative invest-.

ment propositions, and it was pointed out to
its recipients that the ultimate selection of
securities suitable to their requirements would
depend upon their written replies.. It will

be seen, therefore, that the replies which I

received were the deliberately thought-out

THE INVESTOR’S MIND 361

intentions of men who were on the point of
dealing with capital sums of great importance
to themselves. Under such conditions I may
fairly claim that the replies given actually
represented the investors’ real minds on the
subject.

Some thousands of such replies were exam-
ined by me, including investors from every
class of society, rariging from thrifty workers
who had saved up sums approaching £100 to
noblemen and commercial magnates, whose
investments ran into six figures. The view
I have thus been permitted to take of the
investor’s mind has therefore been a wide
one, and it has led me to make the following
observations.

The questions asked naturally varied in
each individual case ; but, briefly summarised,
they first of all directed themselves to the
Safety of Capital, then to the matter of
Income, and, lastly, whether a probable
increase in Capital Value was considered essen-
tial. Also, if such increase in Capital Value
were desired, whether the investor was pre-
pared to incur additional risk. I further
inquired if the investor had a preference for

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362 INVESTMENT PRACTICALLY CONSIDERED

any particular class of investment, or for any
particular country, or whether he had an objec-
tion to any class of stock or to any country.
When I first drew up these question-forms,
my business friends derisively assured me
that every one would answer that he wanted
absolute Safety of Capital, a very large
Income, and at the same time the oppor-
tunity of increasing the Value of his Capital
- without running any risk ; they further asser-
ted that almost every investor craved for a
small gamble, and they tried to prove this

assertion by the indisputable fact that more:

than 90 per cent. of all the business which
takes place on British Stock Exchanges are
speculative transactions.

Actual results, however, entirely falsified
these predictions, for the great majority of
investors replied that the question of Capital
Safety was all important to them: they

declared themselves satisfied with a most —

moderate rate of Income, provided that their
Capital was safe, and hardly any of them
desired to incur the slightest risk, however
tempting the chances might be of an improve-
ment either in capital value or in income,

' THE INVESTOR’S MIND — 363

This result conclusively proved how sound
were the fundamental ideas and intentions
of British investors, and how undeserved
were the investment losses which they incur
with such deplorable frequency. Almost
without exception they expressed no particu-
lar wish as to the class of enterprise or as to
the country in which they were willing to
invest. Whenever special views were given
I noticed that they were connected in some
way with the calling of the individual in-

- vestor, or that they were based upon religious

convictions or personal prejudices quite un-
‘connected with the actual question of invest-
ment. For example, more than half my
clerical customers objected to investments
connected with the manufacture or sale of
‘alcoholic beverages ; others declined to lend
financial support to businesses which were
carried on on Sundays ; whilst quite a number
of investors, whose opinions had been moulded
by travel, objected to particular countries
because they disliked their form of govern-
ment or the national character of their in-
habitants. Some investors had a prejudice
against all places of amusement, and in one

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364 INVESTMENT PRACTICALLY CONSIDERED

instance drapery businesses were excluded
as calculated to encourage an extravagant
outlay on feminine finery. The manufacture
of guns and military equipment was naturally
enough regarded with aversion in some
quarters, and one old country squire considered
shipping companies a national danger, as they
facilitated theimportation of foreign wheat and
were, by this means, ruining English agricul-
ture. Such was the nature of the reasons
expressed for excluding certain classes of in-
vestment and certain countries; but, in

the great majority of cases, a perfectly free

hand was given as to selection, and the
requirements as to income were of the most
modest description. a

It is true that there were some few excep-
tions to the general reasonableness of the
investors’ demand, but in most instances
these were traceable to sheer necessity rather
than to actual greed. There were some in-
vestors so situated that they were bound to
insist upon a high yield of interest in order
merely to subsist; but the actual gamblers
who craved for capital safety, an income-
yield of over 6 per cent., and a chance of an

THE INVESTOR’S MIND 365

enhancement in the realisable value of their
capital, were the smallest sprinkling out of

-an ocean of investors. It is scarcely neces-

sary to add that those capitalists who re-
garded the act of investment as a short cut to
fortune, invariably lost most of their capital
in a comparatively short space of time.

As a matter of fact, the British investor,
when closely examined, proved himself to be
a most modest, moderate, and easily satisfied
individual, for whose financial requirements it
should be easy to cater efficiently. More than
sixty per cent. of all the investors who have
come under my notice were so very much in
earnest in their endeavour to obtain capital-
safety, that the most moderate rate of inter-
est seemed ample to them and, actuated by
the belief that a stock yielding more than
41 per cent. must be unsafe, they refused to
hold securities of high yield.

Having by means of the Question Form
thus settled the investor’s requirements, the
next step was to send him a list of stocks from
which he should take his choice: this afforded
an opportunity of testing the financial know-
ledge of the British investing public, and here

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366 INVESTMENT PRACTICALLY CONSIDERED

a wonderful want of discrimination was laid

bare. For some reason or another it appeared .

that the majority of English investors were

quite incapable of distinguishing between a —

sound solid investment and a speculative
venture. This poverty of judgment was by
no means confined to people who lacked a
business training ; for in many cases shrewd,
hardheaded business men who had made their
money in trade, lawyers in large practices,
and others seemingly qualified to form an
opinion on business matters, were worse judges
of what was cheap or dear, or of what was
safe or speculative in investments than mem-
bers of the Upper Ten Thousand who had had
no business experience whatever to guide them.
I remember a case of a solicitor who had
held £15,000 London Chatham and Dover
Ordinary Stock for upwards of twenty years,
and who consequently had never received a
shilling in the shape of interest on his capital
throughout the period, and yet refused to sell
his stock at the excellent price of 27, although
I urged him to do so. It was in vain that I
proved to him by past records that in no
possible set of circumstances could this stock

THE INVESTOR’S MIND 367

_ ever come within the prospect of a dividend ;

he was a persistent holder of an unremunera-
tive stock, who was wasting his investment
strength over a hopeless security, and he
declined to budge from his unsatisfactory
position. The present price of the stock
is now 11, and I have no doubt that he still
continues to hold it, and to waste his substance
and his care on the endless effort to incubate
addled eggs. Again, in 1897, I had a discus-
sion with one of the ablest men in this country
as to the comparative desirability of British
Railway Debentures and of American Rail-
road Bonds of the first class; on that occa-
sion the most formidable array of figures
entirely failed to convince my opponent that
both types of stock were equally well secured,
but that. British Railway Debentures were
greatly overvalued and American Railroad
Bonds were very considerably undervalued
at the then pervailing level of quotations.
Similarly I have a vivid recollection of a
manager of one of the largest London banks
assuring me not many years ago that neither
of us would live to see Goschens again quoted
below par; indeed, I could fill pages with

--- Page 192 ---

368 INVESTMENT PRACTICALLY CONSIDERED

kindred specimens of the want of discrimina-
tion displayed by otherwise first-class busi-
ness men. Descending from men of special
business capacity to the average investor, it
is surprising to find how many people there
are who fail to understand the broad difference
between Debentures, Preference Stocks, and
Ordinary Capital: whilst the problem of
calculating the actual income-yield obtain-
able from a stock quoted either over or under
par would floor so large a proportion of stock-
holders as would appear incredible if ex-
pressed in figures in cold print. Or, again,

an investor who is really capable of analysing —

a balance-sheet is quite the exception, and
the feat of appraising the difference in value
and in relative capital-safety of two stocks
is beyond the power of most men. Yet
these are a few pieces of fundamental financial
knowledge quite indispensable to the proper

management of capital invested in joint-stock _

enterprise.

To me this lack of elementary knowledge
seems doubly regrettable; firstly, because
the necessary information is so easily to be
acquired, and, secondly, because the want of

THE INVESTOR’S MIND 369

it constitutes all the difference between a
successful and an unsuccessful investor. As
I shall show later on, this incapacity on the
part of the general investing public exercises
a deep and a disastrous influence upon
British national finance. Yet the British are
beyond doubt, to my mind the most business-
like nation in Europe, so how is it that they
carelessly neglect so important an item as
their Stock Exchange investments? The
only answer to this most puzzling question
would seem to be that every investor has en-
deavoured to discriminate between what is
safe and what is speculative in investments,
but has finally abandoned the problem in—
despair. It may be that he has analysed a
few stocks and formed an opinion as to their
respective merits : some he found undesirable
and dear, and these he mentally marked down
as likely to fall in value; others he decided
were exceedingly good and cheap, and these

he was convinced must ultimately rise in

price. ‘But on following the subsequent
careers of the subjects of his investigations
he not improbably found that the good

stocks receded in value, and that the un-
BB

--- Page 193 ---

ani epee ota

370 INVESTMENT PRACTICALLY CONSIDERED

sound stocks improved in price. Finding
that theory was so entirely set at naught by
actual practice, the belief gradually gained
ground that a study of finance was useless,
and the present indifference to financial in-
vestigation has naturally followed.
Singularly enough, in England there are
very few stocks which are really stable in
value ; whereas in France, Germany, Holland,
Sweden, Norway, and even in the United
States, there are many such investments.
Fluctuations there are of some kind in all
stocks, owing to the constantly fluctuating
value of money. But whilst some first-class

English stocks fluctuate to the extent of 25—

to 40 points during a single decade, stocks
of similar class in other countries only fluctu-
ate from 5 to 10 points. In proof of this
fact I append the following table :—

Great Britain :— 1898-1907.
Lowest Highest
Average. prices. Dif.

* Bristol Corporation 34% Debentures . - 992 .. 127%... 28%
Manchester Corpotation 4% Stock . . - 1174 .. 1486 .. 28-50%
Great Western Railway 44% Debentures - £183 .. 150 .. 81-50%
London, Brighton, & S. Coast 44% Debentures 1274... 165} .. 38%

Average difference in fluctuation of British Stocks = 31-50%.

Germany :— 1897-1906.

Lowest. Highest. Diff.
Berlin 34% Municipal Loan . . . - 9455 ., 10120 ., 665%
Preuss Bodencredit Bank 4% Mortgage Bonds. 9782 ., 10275 .. 493%

Deutsche Hypotheken Bk. 4% Mortgage Bonds 9725... 10110 ., 385%

Deutsche Hypotheken Bk. 5% Mortgage Bonds 11090... 11680 ., 490%

AVERAGE DIFFERENCE IN FLUCTUATION =5-08%.

THE INVESTOR’S MIND 371
France :—
1896-1905. :
Lowest. Highest. Diff.
Paris Municipal 4% Loan 1865 . . - 54369 .. 5768 .. 68%
Credit Foncier de France 3% Obligations. + 48717 ., 4703 1, 67%
Chemin des Fer du Nord 3% Obligations. - 45978 .. 48568 ., §189/
Compgne. des Chemins de Fer de L’Est. 5%
Obligations . . cre + 65027 .. 68458 ., 508%
AVERAGE DIFFHRENOE IN FLUCTUATION =5-57%,
Austria :—
1896-1905.
Lowest. Highest. Diff,
Vienna Municipal 5% 1867 Loan. . + 10240 .. 10530 ., 200%
Lemberg Czernowitz Jassy Railway 4% Prior
Lien Bonds . . . . . - 8675 ., 9410 1, 735%
Austro-Hungarian States Railway 4% 1883
Prior Lien Bonds . . . . - 11550 .. 122 1. gy
Austrian Hypothekenbank 4% 1886 Mortgage
Bonds . . . . : . 9610 .. 10020 ., 410%
AVERAGE DIFFERENCE IN FLUOTUATION =5-21%,
Holland :—
Oo, 1897-1906.
Lowest. Highest. Diff.
Amsterdam 34% Municipal Loan 1861. - 96 .. 100% .. 3-62%
Rotterdam Hypothbk. 4% Mortgage Bonds . 1002 .. 101g =... 112%
Amsterdam Hypothbk. 4% Mortgage Bonds . 95} .. 101 ++ 575%
Arnhem Hypothbk. 4% Mortgage Bonds » 96 .. 1002 .. 450%

AVERAGE DIFFERENCE IN FLUCTUATION =3-75%.
Norway and Sweden :—
. . Lowest. Highest.* Diff.
City of Bergen 4% Loan 1901 . . - 9935 .. 1O1Z .. 119%

Christiania 4% Municipal Loan. . - 100 .. 102 .. 200%
Norwegian Hypothekenbank 4% Mortgage

Bonds, 1896-1905. . . . » 95 .. 101$ .. 650%
City of Stockholm 4% Bonds, 1900. . + 100 .. 104 -. 350%

AVERAGE DIFFERENCE IN FLUCTUATION =3-30%,.
* Last six years’ price only.
United States :—
1897-1906.

Lowest. Highest. Diff.
Louisville and Nashville 6% General Mortgage

Bonds : . - . . . + 1175 .. 1224 .. 500%
‘Illinois Central Railroad Co. 4% Gold Bonds,

1888 . . . . . - 104k .. 109 .. 475%
Minneapolis St. Paul 4% First Mortgage . + O7F .. 1044 .. 675%
Buffalo, Rochester and Pittsburg Railway Con- :

sold. 6% Bonds . . + 1234 .. 1285; .. 481%

AVERAGE DIFFERENCE IN FLUCTUATION =5-31 %
Total 24 Stoeks, embracing six countries, mean average fluctuation during a period
of ten years=4-70%,

Perhaps the most surprising fact contained
in the above statement will be that there
are in the United States securities which are

--- Page 194 ---

372 INVESTMENT PRACTICALLY CONSIDERED

practically stable in value, as solid Railway
stocks of that country move faster than do
similar British stocks.

The wide fluctuations of British stocks.

exercise a most pernicious influence upon in-
dividual investors, and upon British National

Finance. Because, if an investor sees the
Irredeemable 3} per cent. stock of a city like —
Bristol fall from 139 in 1896 to 100 in 1903, | -

or nearly one-third of its value, what en-
couragement is held out to him to endeavour
to appraise the worth of any investment stock?
For here is a stock practically removed from
the influence of International Politics, and
issued. by a prosperous and growing city, and
yet, if such a stock proves a pitfall for the
investor’s capital, wherein shall he find
Capital-Safety ?

Why is it, moreover, that it is impossible
to find a parallel case to that of Bristol
Corporation stock in any of the other invest-
ment countries which are included in the

above table? The municipal issues of their

cities move to some small extent, but how
is it that they fluctuate in nothing like a

similar degree to the municipal stocks of |

THE INVESTOR’S MIND 373

this country ? The answer is simple. The
investors of all these countries have a much
better understanding of the real value of
stocks than the English investor has. They
devote care to their investments whilst the
English investor does not. They are more
thrifty than the Englishman, and their thrift
impels them to realise any of their investments
which rise in price to such an extent: as to

_ render it unprofitable to hold them any longer

owing to the diminished income-yield which
they return at the higher level of value.
Last, but not least, when a continental in-
vestor is deficient in financial knowledge he
is put right by his banker or broker, whilst the
British investor receives no such co-operation
from his financial agents.

It would be absolutely impossible that any
34 per cent. stock, which carried no other
privilege with it beyond its interest-earning

- power, should rise in either Germany, France

or Holland to 139, as Bristol Corporation
stock rose in this country in the year 1896.
The utmost limit to which such a stock could
have risen in any of these countries during
the last twenty years would have been about

--- Page 195 ---

314 INVESTMENT PRACTICALLY CONSIDERED THE INVESTOR’S MIND 375

118, at which price it would yield just under
3 per cent. This limit would have been fixed
by the fact that at over 118 every holder :
would have been eager to sell and to invest
his money in a more profitable manner and
a more profitable method of investment has
always existed in each of these countries and
in Great Britain as well.
In Great Britain there does not seem to-
be any such limit. In this country stocks
are bought without regard to the income-—
yield they afford on the capital-sum repre-
sented by their purchase-price, and but very.
few holders seize the opportunity to sell
when stocks have risen to a point when it is
unprofitable to hold them longer. That such
is the case is easily to be seen by the present.
price of Guinness Brewery Ordinary stock,
which stands at 560, at which price it yields
about 3% per cent. The average price of
this stock since the South African War has
been 550, and it now stands above that aver-
age in spite of the fact that Console, Home
Railway Debentures, and Corporation stocks
have all fallen in price very materially.
Amply secured Brewery Debentures can |

be bought to yield 4} per cent., yet
7 Guinness Ordinary stock only yields 32 per
cent. at its current price. Although the
tealisable value of this stock is £14,000,000
and some thousands of investors are holding
it, yet the great. majority of them fail to ap-
preciate the sheer absurdity of their position
and there are no bankers or brokers to explain
to them the folly of this extreme valuation.
Similarly, it can only be a complete indiffer-
ence to the income-yield on the realisable value
of their capital which restrains the holders
from selling such stocks as Hertfordshire
County Council 24 per cent. stock, quoted 79-
81 and yielding 3,'; per cent. (Financial Review
of Reviews, tables, p. 3) ; Corporation of Lon-
don, quoted 96-103 and yielding 244 per cent.
(tables, p. 1); Harrod’s Stores 5 per cent.
Cum. Pref. shares, quoted 6- ~63 and yielding
3; per cent. (tables, p. 48); J. Lyons and
Company 4 per cent. Ist Debentures, quoted
104-107 and yielding 3} per cent. (tables, p
52); J. and P. Coats 32 per cent. Debentures
‘ quoted 104-107 and yielding 34 per cent.,
' and the same firm’s 20 per cent. non-cum,
: Pref. Ord., quoted 470-490 and yielding

--- Page 196 ---

376 INVESTMENT PRACTICALLY CONSIDERED

45 per cent. (tables, p. 45), because it re-
quires no great amount of research amongst
the stocks quoted in the Review tables to
reveal securities of precisely the same class
returning considerably higher yields of income.
Or, again, it is impossible to attribute to
anything but deplorable carelessness the
apathy with which holders regard extraneous
events vitally affecting the values of their
stocks. For instance, on the projected ab-
sorption of the Port Talbot Railway and
Docks by the Great Western Railway the
£10 Ordinary shares of the former concern
have risen to the high price of 104-114 (tables,
p- 13), at which price they afford the paltry
yield of only 155; per cent. Clearly, then, at
this price the market has already discounted
the completion of this purchase on the most
favourable terms likely to be conceded to
the Port Talbot shareholders; in other
words, should the present sanguine forecasts
be finally modified by the event, the price of
Port Talbot Ordinary threatens to recede
considerably, whilst if the projected deal goes
through, as anticipated, the current quotation
of Port Talbot Ordinary affords little or no

THE INVESTOR’S MIND 377

Scope for a further rise. So that a holder
of this stock now stands the risk of a substan-
tial fall, with no compensating prospect of a,
rise. Clearly, this being the position, share-
holders ought not to hesitate to sell—yet no
sales take place. To give yet another in-
stance of a stock whose position has been
materially altered by a recent event, let us
consider the position of Somerset, County
3 per cent. redeemable 1923-33, quoted at
88-90 and yielding 3,5, per cent, (tables, p. 4),
Now Somerset has just issued (see “ The
Month’s New Issues ” in Nov., 1907, number)
debentures of £100 at par, bearing interest
at £3 10s. per cent, - Obviously, then, Somer-”
set’s 3 per cent. issue cannot fail ultimately to
fall into line with the price of this new 34 per
cent. issue, or, in other words, its price must
recede to 85. More especially is this the case
because the redemption of the 3 per cent. stock
can be varied by purchases of stock in the
open market, so that it is improbable that
the redemption at par of the 3 per cent. stock
will ever become operative. The price of the
3 per cent. stock has, therefore, practically
no redemption price to Support it. Clearly,

--- Page 197 ---

378 INVESTMENT PRACTICALLY CONSIDERED

here again holders of the old 3 per cent. stock
should not hesitate to sell at current quota-
tions—yet no sellers are forthcoming. _
Precisely as there is a limit to which Fixed-
Income stocks can rise outside Great Britain,
so there is a limit below which such securities
cannot fall. For so soon as a stock begins to
‘sell below its comparative value an army of
investors, bankers and brokers is on the watch
to purchase it, with the result that the price
very soon recovers. Such, however, is not

the case in England, for here it seems to be’

‘very dimly understood that very frequently a
stock is depressed from causes which have

nothing to do with its safety or desirability. -

I had a very convincing example of this sort
a short time ago, when I was endeavouring to
sell £10,000 Midland Railway Debentures. No
Stock Exchange jobber would take this parcel
of stock at the officially quoted price until
ultimately a jobber offered me one point be-
low the lowest nominal quotation, and in order
that I should be able to justify this appar-
ently bad price to my customer, the officially
quoted price was lowered one point. Now
there are £40,649,280 of Midland Railway

ee

if

THE INVESTOR’s MIND | 379

Debentures issued, so that @ difference of one
point on thig amount of stock wag equal to

. £406,492, and it was to this extent that the

national wealth of Great Britain was re-
duced by the gale of £10,000 stock. Not
only so, but I verily believe that many in-
vestors who saw their stock had fallen rather
felt that they would like to Sell their holdings
also, Further, I very gravely doubt whether
any of the thousands of holders of Midland
Railway Debenture Stock paused to think
what their stock was really worth and
whether it wag good to buy at the lower
price. Similarly it frequently happens that
a stock is quoted at a certain price, but
if even a small quantity, say, £1,000 ig
wanted, the price has to be raised gradually
many points until an actual seller puts in an
appearance,

These indiscriminate upward and downward
movements of the official quotations of the
finest stocks in the world can only have a
most deadly effect on investors, and they are
simply due to the Seneral want of investment
knowledge on the part of English investors
coupled with the apathy of their bankers and

--- Page 198 ---

380 INVESTMENT PRACTICALLY CONSIDERED

brokers, who fail to enlighten the public as
to the opportunities which market fluctuations
afford them. This is one of the chief reasons
why I am driven to the conclusion that the
wants of the British investing public are
insufficiently catered for. Yet where ‘is the
British investor to obtain investment know-
ledge? It is a subject which is not taught

in schools, and his financial advisers refuse -_

to take the responsibility of giving advice, and
even decline to explain their reasons for
any scanty suggestion they may ever make. .
Educated in such an atmosphere the invest-
ing public never grasp the elementary prin-

ciples upon which investment should be based. —

With the result that all confidence in his own
judgment is shaken out of the British

investor and he stands, hesitating and 4

irresolute, unable to trust himself to appraise
the relative values of sound fixed dividend-

paying stocks. So that on the one hand. 4

great bargains in stocks go vainly begging,
whilst on the other hand, securities are forced
up to unremunerative price-levels without
the investor being able to recognise and take
advantage of these follies of extreme depres-

THE INVESTOR’S MIND 381

sion and of undue inflation. British market
‘prices are actuated by a policy of drift

. and the realisable values of some of the finest

securities in the
eee then world become a matter of
There is another grave disadvantage which
arises out of the want of investment knowledge
from which England suffers, and that is the
enormous influence which ‘passing fashion
exercises on the value of investments. Let
me quote two striking examples of the
whim of fashion dominating market-values
Some years ago the public fancy was centred
on Brewery investments, with the result that
the prices of Brewery Mortgage bonds and:
shares were carried up to unwarrantable levels
—although the investing public altogether
failed to understand that this was so. Then
the Legislature began to interfere with licenses
and with their renewals, and a feelin
of nervousness seized upon all holders of
Brewery stocks, and prices gradually fell
until to-day the opposite market extreme
has been arrived at, and many fine brewery
investments are selling much below their real
values when compared with other industrial

--- Page 199 ---

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382 INVESTMENT PRACTICALLY CONSIDERED 3

THE INVESTOR’S MIND 383

fidelity in the case of drapery and cater-
ing, shares. It is this lack of proper dis-
‘rmination on the part of the investing
public which gives rise to these dispro-
portionate upward and downward move-
ments and is the primary cause of losses
amounting to hundreds of millions ster-
ling which are sustained b
public.

Lastly, let us consider the question of new
issues of public companies.

the same reasons that the in
fails to appreciate the solid

issues. ‘Thus enormous sums of mone
have been lost through a once-fashionabl
investment becoming altogether unfashion
able. But have investors learnt anythin
from this disaster ? No—so little have the
learnt that we have to-day a similar inves
ment movement taking place amongst us.
For tube railways, motor omnibuses and:
other improved facilities of communicatio :
have brought vast crowds from the suburbs:
and the outlying districts in the metro-

y the investing

For precisely
vesting public
merit of an un-
p fash it also fails to give ade-
quate encouragement to the solid bong fide
peompany promoter. So that it matters
not how cheap and sound an offer of new
stock may be, there is never any certainty
pis to whether it will tempt the palate of
tho fickle public—and prospectuses of many
Hirst-class issues do undoubtedly fall ab-
polutely flat—whilst the less conscientious

Promoter—who is eloquently lavish in his

Prospectus promises—stands a far better
chance of arresting public attention. Con-

pequently, Some of the most palpably un-

politan area for the purpose of shopping to th
West-end of London. This movement has:
given an enormous stimulus to all West-.

ffashionable stock
end shops which cater for the middle classes, ,
and has given a temporary prosperity to the
trade of tea-shops and large drapers, with the
result that shares in drapery and light refres
ment establishments have climbed to such
giddy heights that they now yield less th
first-class brewery debentures secured up
property of unimpeachable value. This:
fashion, like all other fashions which fly
in the face of common sense, will suddenlyz@
pass away and we shall then. have. the,

brewery experience repeated with painful 7

Mammen

--- Page 200 ---

384 INVESTMENT PRACTICALLY CONSIDERED

sound ventures are eagerly over-applied
for by the undiscriminating investor.

To sum up my argument, the British:

investor’s mind inclines naturally to solid
securities. But unfortunately his want of
sound financial knowledge prevents him fol-
lowing his own mental bent. It is want of
judgment rather than any reckless desire to
gather riches quickly which causes by far the
greater part of the investment losses which
occur. I am convinced, then, that a future full
of golden promise lies before those investors
who will take the trouble to study and profit

by the experience of the past, and in no small . P|
measure they will stand to benefit by the 4

want of discrimination displayed by their
less well-informed fellow investors. Let

the fundamental principles of investment

and he will be astonished to find how

simple and logical these principles are, and
then, with a proper investment equipment,
he will find that he cannot fail to achieve
solid investment success.

Defence Against
Labour’s Attack upon Capital

The  Investor’s

ONLY those investors, who make a constant

Study of our national commercial position

are able to appreciate the unending struggle
which is going on between Capital and Labour
in this country, and the far-reaching effects
which this strife is producing on the values
of all classes of British investments. To

- begin with, taking the total value of Home

Railways alone, say, ten years ago, and com-
paring it with the present value of these same

the investor take a little trouble to master i stocks, we are confronted with a capital

| shrinkage of about two hundred and fifty

millions sterling. During the years 1904

‘| and 1905 it seemed as if the tide had turned
‘q for the better, but increasing competition
q and the recent demand for about seven million
| pounds additional annual wages on the part
| of the Railway employees, have entirely
‘V swept away any benefit which British in-

385 oo

--- Page 201 ---

386 INVESTMENT PRACTICALLY CONSIDER THE INVESTOR’S DEFENCE 387

vestors derived from that brief period
investment-revival, with the result that :
of thousands of Capitalists, who had invested,
their money in all good faith in this most so |
form of investment, contenting themselves
with the very minimum of income, now id
that their caution has availed them nothing,;
and that their losses in respect of deprecia
Capital and diminished Income have beco
exceedingly serious. The most pathetic part,
of this sad state of affairs is that the actus
sufferers are in most cases non-combatants
who suddenly find themselves in the line of
fire without having in any way provoked the
fight, and without having the most elementary,
notion of how to take cover from the hail:
storm of missiles which are falling amongst

tin spite of his willingness to accept a moder-
Pate return of interest in the hope of thereby
f securing” himself against the risk of losing a
I part of his money. As a matter of fact the
F majority of those who have lost thejr money
Fover solid British stocks imagined that their
pcapital was most securely invested in stocks
fof stable character, far removed from all
suggestion of speculation. It is in the in-
terests of these people that the present article
fis written. |

f At all times finance has been considered
}4n intricate subject, and but few people are
7 Fable to gauge financial causes and effects.
iT do not propose here to enter into any
lengthy discussion of these subjects, which
have already been dealt with exhaustively
in the financial handbooks which I have
mitten. I will merely content myself with

observing that there is a bright side to the

darkest of clouds, and that all those who

have suffered financially in the past and are

willing to benefit by the sad lessons they have

eceived can do so in the following simple

md effective manner, I¢ is said that a

pound of practice is worth more than a ton

- the gambler who recklessly stakes his money,
carried away by the hope of landing so ng
enormous coup. But every one must feel:
sympathy for the solid old-fashioned investa
guiltless of the least taint of gambling, w.
suddenly finds that an unexpected catastrophe
has swept away a large slice of his capital

--- Page 202 ---

388 INVESTMENT PRACTICALLY CONSIDER

of theory. As my plan is based solely upod
practice there should be a good deal of solit
value in it. a

It is given to no man, no matter how e ‘
perienced he may be, correctly to foretell th
future of an individual security with « .
degree of certainty. It, therefore, naturally
follows that to invest in one class of stock on .
must always be a hazardous enterprise, a P
that a number of stocks, which are tote i
different in their _price-movements, along
can effect a compensating balance by mea if
of which the total realisable value of af
securities held can be steadied. Or, in otha
words, it is only when an investor has sug
ceeded in so dividing his capital that no sing
event can seriously affect more than one on
two of the total number of stocks whicks
he holds, that he can be said to have p a
tected himself against any serious capital
depreciation. Now let us ask ourselves, haq
is this best to be done? One of the mog
deplorable features in connection with in
vestment in stocks and shares is that gt a
work is so largely resorted to when stocky
are selected. Moreover, the individual idi@

--- Page 203 ---

PRICE-MOVEMENT. OF THE STOCK EXCHANGE VALUES GIVEN BY THE BANKERS’ MAGAZINE.

For the past ten years (1897-1906) the Bankers’ Magazine has published the aggregate values of 887 representative securiti oe : gs. These groups of

securities are here arranged, as far as this was possible, on the principle of Geographical Distribution of Capital, ih ea vided into group section representing

e British stocks, the bottom section the stocks of other countries. The value at the end of each year ha : ini ig-za rice-
movement lines of each group. S been taken for ascertaining the 218-248 P

Nominal

fin thousands). 1897. 1go8. [1809 | 1800. [907 [1902. | 1903, 1904, 1905, | 1906.
ple RINE EE
soot | @oowmen (et PONT TT TET Eee reeee |
ssara noroation, «=otsate INEM TT EP
: © cre 2S Ne ee ee ee
mone | Orne TOSSES pee
— k
am) @miw ene ||| | PSS re
a ES EBs rtisty
a ee ee i ee ee eee
£ Pot fa PRICE MOVEMENT OF STOCKS (OTHER THAN BRITISH) OF THE ot | eo (1)
. NOMINAL VALUE OF £466,404,000.
119,916 @) aritisH COLONIES. O44 4 SS oor
ross |@conore Sse. 468002 =>—857 == ©
| —~= Os ee A Ds a eS —| 4 tT LS
ts709 | @anenioy norms | [| TT ON Pt hee ep etin
e504 | @amentoa, south, (Qa nach ernafaanr> Perea PT feet SPT pe | Ot mb hay
na |Ommammne peat TS ee
ee ee ON ae ee ee ee ee ee eee

CLASS OF STOCKS.

Sea —e————————————————eS—eE————————

PRICE MOVEMENT OF BRITISH STOCKS OF NOMINAL VALUE OF £1,356,843,000.

The above chart is the copyright of the Publishers of the FiINanctat, Revirw oF Reviews, and may not be reproduced without permission.

{To face p. 388.

--- Page 204 ---

THE INVESTOR’S DEFENCE 389

Syncrasies of the guesser are permitted to
sway him in his efforts at guesswork. Now
the element of guesswork is so detrimental
to investment success that steps must be
taken to eliminate it. This is accomplished
by means of a few fundamental principles,
‘which I have formulated and may briefly
outline in the following system. an
_ For the purpose of illustrating my plan I
- have taken certain figures, published by the
_ Bankers’ Magazine, and I have depicted the
variations of these figures in the form of
a chart. With the aid of this chart it is
easy to see what. are the pervading and pre-
dominating influences which govern the prices
and values of all Stock Exchange securities,
As I have already explained, capital-safety
can only.be obtained by spreading the amount

of capital to be invested over a number of

stocks which are dissimilar in their price-

-. movements. For this reason a knowledge

of the influences which affect price-move-
ments is the first essential to investment
success, These influences I have described
in full detail in Investment an Exact
Science, and lack of Space precludes my

--- Page 205 ---

'VESTMENT PRACTICALLY CONSIDERED: THE INVESTOR'S DEFENCE vo
390 IN

attempting to discuss them within the vent
i icle. | 8
. Retumning again to the figures re
in the Bankers’ Magazine I should, Pen aE :
first of all explain that it is the custom of tha
periodical to group together large ee
certain kindred stocks, and, month Py mon -
to give the variations in capital-value . ote
these groups. These variations I a ad
played in chart form, showing how ne i
value of each group rose or fell throug ne ie
period under review, that is say, me ®
ten years from 1897 to 1906. ae art ; e
investor—and these form the majori a i‘ ‘
audience I desire to address—does - ; a
rule, understand charts, neither “oe ae
to be troubled with lengthy =P ana: ae
Accordingly, I will make the tas! onsy j
him by asking him to follow the ne as
chart from the left to the right ; he ;
be tracing the fluctuations in va “ ~
individual group in the order in w. nh ~
occurred—an upward tendency * e
denoting a rise in value, one for esa
fall in value. ;
the “roup of British Government sec

ies, which is the top zig-zag line of the chart,
we see one steady downward movement ;
whilst, on the other hand, if we take the lowest
line of the chart, Tepresenting the movement
3 of American securities, we see a, gradual rise |
Fup to 1901, followed by a fall up to 1903,
Lwhich was again succeeded by an upward
‘Movement extending to the end of the period
depicted in the chart. This explanation will,
aI hope, suffice to render the meanings of the
tig-zag lines of price movement clear to the
reader, and it is from these lines that the |
Practical lesson of this article
learnt,

I may mention that I have taken the
figures of the Bankers’ Magazine in preference
g'0. any figures selected by myself for the
following Teasons :—First of all, investors
Bvho are not practical statisticians them-
elves are habitually shy of statistics and are -
inclined to Suspect that exceptional cases
ay have been selected to prove general
Pinciples. Another point which lends ad- |
ditional strength to the testimony of the a
igures from the Bankers’ Magazine is that
ey do not represent the fluctuations of any

is to be

--- Page 206 ---

392 INVESTMENT PRACTICALLY CONSIDERED |
THE INVESTOR’S DEFENCE 393

one individual stock which might have been.
affected by special causes, but they include
entire groups of stock; so that the price- ‘
movements depicted by these figures must
be taken not only as representative, but as
absolutely conclusive as to the general market
tendency. I have divided my chart into
two sections. The upper one represents _
British investments, the lower one embraces’
investments outside of Great Britain, viz., :
those of the British Colonies, Europe, America’
North, America South, and General Inter-
national investments.

The Bankers’ Magazine has so arranged
its groups of investments that it is easy to
separate all those groups which represent,
purely British stocks from those which re-.
present stocks which are chiefly held outside
of Great Britain and consequently are not |
subject to the influence of British trade..
This system I have followed in my charts:
The reason for this separation was simplicity:
of comparison, for my object was to show
that whilst the principal investments of any:
one country move harmoniously together
in value, the stocks of various countries move

| each in different directions. The year which
illustrates this diversity of price-movement
; the most clearly is 1899. At the commence-
ment of that year the lines of price-mov
: ment of all the British stocks started it
: almost an identical angle, and at the oon.
| clusion of the year they all terminated in the
; same uniform fashion, whilst in the case of
_ the securities situated outside Great Britain
. the angles of entry and of departure are
; different in every instance. It is needless
- to mention that all the stocks on the chart
| are in investors’ hands, and that the rise ‘and
: fall of the zig-zag lines displayed on my chart
j depict actual capital gains and capital losse
; made by individual investors, Let us then
examine the difference between the position
j of an investor who confined himself solel
to British securities and the position of an.
| other investor who held an assortment of

| British and Foreign securities during the
pyear 1899. In the first case, in which the
Stocks held were entirely British, there wag
m@* general all-round depreciation. In the
second case, however, of the International
List, some stocks moved up and other stocks

--- Page 207 ---

2, Waterloo Place, S.W.)

SWITZERLAND.

Price Tiv00 [a Ouring

ce

OMI CEMONCHICHKES

tA

CAI Tmo
raya

OF Stocks.—(1) La Genevoise Assurance Company ; (2)
mplon ; (3) Banque du Commerce ; (4) Central Swiss Deben-

4894 ; (5) Ville de Geneve ; (6) 3% Rentes; (7) Industrie Elec-
le Genéve Debentures.

UNITED STATES OF AMERICA.

Price Movament rate] aoa VALUE

Tae

fi tH HH
ETE ez

280

1908

clan
VAD
4S

A 260

70

ere

Lt Le UA
A a z

(Us fl 4 Le | 4 160
i et Ltt NTT Tso
3 ie 100
(3)

9,

0.

At
Stocks.—(1) The Pullman LLL ; (2) Delaware and
ny ; (3) American Express Company ; ; (4) Wells, Fargo

Le (5) Home Fire Assurance Company ; (6) Consolidation
; (7).New York, Chicago and St, “Louis Railroad Com-

40

DM, CANADA, JAPAN, UNITED STATES OF

AMERICA, AND ARGENTINA.

BELGIUM.

sales maeertent Ean g ALUE!
896 [[stoce

0,

@

ro
i

We SS
PAT
a

Y {+ _\_
a eS
{|

sea
a
q
fs
8
)

NAMES OF STOCKS. —(1) Banque d’Anvers :

(2) Athus; (3) Société
Immobiliére de Belgique ; (4) Société @’ Eclairage du Bassin Houiller
de Mons; (5) Produits Chimiques de Droogenbosch : 5 (6) Prayon ; (7)

Glaces de Charleroi.

ARGENTINE REPUBLIC.

ance Tyo00f Fatt 607

0 SATSHAAANA

+H Ht fh TH ee poe
HLL oA tH
UL LEA

As a
LY

Class of- Stock,

© patway,

@. WATERWORKS
———_

——

@® GOVERNMENT ,

4

@ FINANCIAL TRUST
Pt H4+494

yj «a
| |

@® TRAMWAY
rereteritreette

RAILWAY

OO We

-NaMES or Stocks.—(1) Buenos Ayres Western Railway Ord. ; (2

Buenos Ayres 5% Water Works Loan (3) 44% Sterling Loan idss ; >
(4) River Plate Trust ,.Loan?& "Agency Company : 3 (5) Anglo-Argentine
Trams ;3(6)}Argentine North- Kastern Railway Ord.

[All Rights Reserved.

--- Page 208 ---

THE REPRESENTATIVE STOCKS OF GREAT BRITAIN, FRANCE, GERMANY, SWITZERLAND, BELGI

Class of Stock

© STEEL

@ ELECTRICITY

@ pocxks

@ TRAMS
paren

©) RAILWAY
seeeetteites

© MUNICIPAL

evecenestonecee

@GAS & WATER
le eee shee ee

(These charts are taken from “Investment an Exact Science,’

FRANCE.

Price Movement During

NAMES oF Srocks.—(1) Acieries de France ; (2) Thomson Houston
(procédés) ; (3) Docks du Havre ; (4) Lyon Omnibus & Tramway Com-
pany ; (5) Lyon 5% ; (6) Ville de Besancon ; (7) Gaz et Eaux ; (8) Soc.

Lyonn. de Teinture Apprét ct Gaufrage.

Class of Stock.

@ BANK

eett+

@) ELECTRICITY

@ BANK

@ FINANCIAL

NAMES oF STocks.—(1) Canadian Bank of Commerce ; (2) The! On-
tario Bank; (3) Toronto Electric Light Company ; (4) The Standard
Bank of Canada; (5) Toronto Mortgage Company ; (6) The Traders’
Bank of Canada; (7) Grand Trunk Ist Pref. ; (8) Real Estate Loan

Company.

CANADA.

VALUE)
OF
STOCK:

Price Movement During

[Tae] 1696] 1607] Tet] 1690] t000| Teor | 202 | 705] 704]

prices are
not in the
author's
possession,

1906

1906

| @]

ry ter

ol

VALUE
oF
STOCK:

2

GERMANY.

Price Movement During

PCY

@® RAILWAY

eee reese

NAMES OF STocks.—(1) Frankfort Mortgage Bank Shares ; (2) General
Gas Company of Magdeburg : (3) Liibeck-Btichen-Hamburg Railway ;
(4) Deutsche Bank ; (5) Gelsenkircher Mine ; (5) Schaafhausen Bank-
erein 5 (7) Westphalia Wireworks ; (8) Passage Building Society of

‘in.

Class of Stock.

A
3
Ed

@ RAILWAY

©)

v
@ BANK

@) BANK

ome

@ COLLIERY

@ RAILWAY

wy OT)

KX

® SHIPPING
@ RAILWAY || ser TS aD

NAMES OF StTocKs.—(1) Sanyd Railway ; (2) Bank of_Japan ;,;(3)
Yokohama Specie Bank ; (4) Hokkaido Colliery ; (5) Japan. Railway ;
(6) Japan Steamship Company ; (7) Kwansai Railway. Z

and may not be reproduced without permission of the Publish

tomes

--- Page 209 ---

304 INVESTMENT PRACTICALLY CONSIDERED

moved down, and, therefore, capital losses
were off-set by capital gains.

It requires no explanation to show that
if it is possible for all the stocks held by an
individual investor to move in concert eithe
upwards or downwards, then the investor’
is no better off than he would be if he had:
staked his entire capital upon one singl
venture ; in fact, he has derived no sort
of protection from distributing his capital
amongst a number of stocks.’ The two:
divisions of my chart show the difference
between a good and a bad distribution o
capital. The upper part is a bad distribu
tion, as it fails to effect its purpose, owing:
to all the stocks moving together ; the lower
part is a-good distribution, as all stocks
move independently and in different direc-

tions. In fact, this chart illustrates, in an

obvious form, the best method of safeguard
ing capital; for it shows that to hold only
British securities is practically to stake one’s

investment future upon the future trading

prosperity of the United Kingdom—a line
of action which is simply speculating upon

a single event, the event being the course

TYPICAL PRICE MOVEMENT

I.—GREAT BRITAIN (General Investments),

Price Movement Ouring

ALU
| Class of Stock.
ac | 896 | 1696 | 1897 | 1896] 1899] 1900] 1901 [7802 | 1903 | 1906 | 1905 [1906

LL

ete em ee

i

a

NaMES OF Stocks. omit Liverpool Overhead Railwa. 9,
y 4% Deb.; (2
i & P. Coats 6 % Cum. Pref. : (3) Bass, Ratcliff & Gretton 5 % dul
ref. ; (4) Brentford Gas ‘Consslidated Stock: (5) Guardian Assurance
Company ; (6) London & North Western Railway Company Consoli-
dated Stock ; (7) Grand Junction Canal Original Shares : ; (8) Parr’s

‘ Bank Shares.

11—GREAT BRITAIN (Trustee Stocks).

Geographical Price Movement ra
Position. STOCK TTT | 3897 | [ 1898] 1899 | 1800] 7805 |

@ ENGLAND

LAKE EE it

@ ota
@ ENGLAND Sunt LTE
NU
Oro. hii HT a
© ar. BRITAIN +4 1 LPN
mcm PNW AI
@ NATAL na PN
\~t-t-t-t-]~4
Onew. ZEALAND eeeae Beet ;
+ - —
@caNava OTE.—This Chart is copied from “ The Investmant of Trust Funds
te by the the same author. |
ao

NAMES OF STOCKS.—(1) London & North-Western Railway 4 Pre-
ference ; (2) Southern Mahratta 4 % Debenture ; (3) Bitieehae Cor.

poration 33%; (4) India 31%; British L % 3
4% 5 (1) New Zealand 34; : (8) Canada Sop uoans 3%;

Copyright. |

(6) Natal

--- Page 210 ---

THE INVESTOR’S DEFENCE 395

English trade, whilst spreading capital
wer different countries entails a variety
tf _price-movements, and this variety of
hovement affords the compensation by means
f which capital is preserved intact.

- But it must not be imagined, because the
nes of price-movement of the British stocks
all display such a uniformity of fluctuation
renders any Investment List consisting
ntirely of British stocks highly risky to
old, that England is a peculiarly dangerous
mnvestment-centre. This is not my mean-
ing. For what is true of British stocks is
1@ also of the stocks of all other countries
the world. In every country the stocks
hich are held mainly in that country fluc-
ate with a similar identity of movement
that displayed by the British stocks,
Re eaders who desire to follow this subject
farther will find in Scientific Investment in
aily Practice by Sir John Rolleston a num-
r of charts representing the fluctuations
English, French, German, Swiss, Belgian,
nadian, Japanese, American, Argentine and
other stocks,

From these it will be seen that there is

--- Page 211 ---

--- Page 212 ---

--- Page 213 ---

400 INVESTMENT PRACTICALLY CONSIDERED . THE INVESTOR’S DEFENCE 401

investor to have a “pet” country in which | fact a scientific whist-player, playing at his

he invests the bulk of his capital. Naturally . | best because he is playing for small stakes.
enough England is the “pet” investment 3] Under the system of Geographical Distribu-
country of the great majority of English in- “Ji tion of Capital the sum of money at stake at
vestors. But whichever may be the “ pet io @ any one centre is never sufficiently large to
country of the ordinary investor, he finds gm upset the nerve of the player, or to divert his
himself compelled to follow the political and -
financial events of that country with keen’
interest, and its welfare is a constant -
source of anxiety to him. On the other.
hand, the investor whose capital is. evenly’
distributed over the earth’s surface in accor- :
dance with the tenets of Geographical Dis--.
tribution, can have no “ pet” country, and.
has no preponderating interest in any quarter -
of the globe. Consequently he gradually:
comes to look upon political and financial ;
events in a purely detached manner. Poli
tics may interest him, but they no longer.
touch his pocket. A financial crisis at. any.
of the world’s stock exchange centres: No |
longer alarms him ; his local interest. amounts:.
to a mere fraction of his total capital. He -
preserves his equanimity, and he considers:
whether he may not be confronted by a pro«
mising buying opportunity. He becomes in.

attention from the strict science of the game.
| Consequently he finds himself, to his great
material advantage, no longer reluctant to
' realise his profit upon such a one of his in-
vestments as shows a substantial increase in
value, and he feels himself less nervous of re-
- investing the proceeds of such a sale in some:
_ quarter of the globe where depression tem-
porarily reigns supreme.

It has been proved that travel enlarges the
mind. I have found that International In-
-vestment not only enlarges the horizon of the
investor, but also tends to free him from the
“narrow prejudices which are the chief stum-
_blingblocks to a successful investment career.
In the April (1907) number of the Financial

Review of Reviews Mr. Holt Schooling wrote
= a very interesting article on the subject of

_ the World’s Trade and the Geographical
Distribution of Capital. In the course of that

DD

--- Page 214 ---

402 INVESTMENT PRACTICALLY CONSIDERED | THE INVESTOR'S DEFENCE 403

whereas the truth is the whole world is
experiencing an unusual demand for money.
This demand has arisen from the general
extension of trade and the large rise in the
price of raw materials, which have increased
the quantity of cash requisite to carry on
the world’s trade. This unwonted demand
for liquid cash has increased the rate of
mcome obtainable from first-class securities.
Indeed, as a matter of fact, although a
further large fall has recently taken place
in the value of British securities, yet these
still rank among the smallest dividend-payers
in the world. For this reason anyone who
sells his British securities at the present
moment and carefully constructs an inter-
national list of investments will not only im-
mediately increase his capital safety, but he
will also increase his income at the same time.
Whether, in this process, he sells some stocks
at prices which are below their original cost
r not will make but little difference to him in
he long run.

To sum up, it is quite clear that the pre-
‘sent outlook for British investments is by
no means reassuring ; for Labour’s demands

article Mr. Schooling conclusively proved tha:
whilst the trade of any one country is subjec
to considerable fluctuation the trade of th
world, as a whole, is constantly on the increase
As it is the country’s course of trade which a
directly affects the price-movements of the |
stocks of any one country, so it is the course “
of the world’s trade which controls the price-
movement of an Investment List which is :
endowed with a world-wide distribution of’
capital.

Yet there are a certain number of investors
who, although they are quite convinced that
capital safety is only obtainable by means of
a Geographical Distribution of investments,
are slow to adopt the system, for the simplé
reason that the stocks which they hold show
them such a large capital depreciation, at the
present moment, that they prefer to wait
until their holding recovers in price before
they commence the task of re-arranging
their lists. This reasoning is natural; but,
at the same time, it is based on a fallacy.
The fallacy lies in the fact that the individual -
investor wrongly imagines that his own stocks
are suffering from exceptional depression,

--- Page 215 ---

404 INVESTMENT PRACTICALLY CONSIDERED |

are likely to cause infinite trouble in the 4
future, and their total effect on capital-values E
is an ungaugeable quantity. For this reason

investors should consider their position with: J —

out delay ; and, if the argument which I have
put forward urging the Geographical Distri- 3
bution of Capital as the investors’ best future 4
defence becomes of practical service to them, |

Shareholders and Directors

‘THE ideal conception of a Joint Stock com-

the object of this article will have been fully

attained.

‘pany is that a number of investors should
combine their capital for the purpose of carry-
jing out an enterprise upon a far larger scale
gihan would be possible for any of them to
attempt as individuals. Further, the Joint
Stock principle assumes. that the conduct of
the business, which is thus jointly undertaken,
shall be controlled by such individual share-
gz holders as possess special trade knowledge
‘and. experience, or who have a large personal
interest in the company’s welfare. The
reduction of working costs, which is to be
arrived at by means of a large output, accom-
panied by highly technical skilled manage-
ment on the part of the directors, are the
two chief attractions which Joint Stock
companies lay before the investing public.

Under the Joint Stock principle, moreover,
405

--- Page 216 ---

406 INVESTMENT PRACTICALLY CONSIDERED

the investor, although he surrenders the |
employment of his capital to the discretion 4
of his directors, retains a very effective check 4
upon their proceedings owing to the fact that J
it is usually provided by the company’s |

Articles of Association that at the end of each 4
financial year one or more of the directors q
shall retire by rotation, and be under the 4
necessity of submitting themselves to the 4
whole body of shareholders for re-election. 4
The shareholder, therefore, although he sur- q
renders the control of his capital to his
directors, is still in a position to exercise a.
very effective control over the directors, whom 4
he has deputed to control his capital. Again, a
the Articles of Association under which Joint
Stock companies are formed stipulate, in the. 4
very great maj ority of cases, that the directors: i
shall publish either half-yearly or yearly .

balance sheets setting forth their company’s

financial position prior to the general meet-:
ing of shareholders; so that the directors,
who compulsorily retire by rotation, are, in “q

effect, compelled to render an account of

their stewardship to their shareholders before °§

submitting themselves for re-election at the

¢

SHAREHOLDERS AND DIRECTORS 407

meeting. It is true that some few companies
do not publish their balance sheets. But
these ‘‘ silent ’’ companies, as they are termed

-in the city, are so few in number, and they are

so obviously to be avoided by the reasonably

_ prudent investor, that they are scarcely

worth mentioning.
The Joint Stock principle provides, in

theory, for a very efficient control by the

majority of shareholders ; but in practice the
weak spot of Joint Stock enterprise will be
found to lie in the fact that the majority of
shareholders wholly abdicate the authority
which the law and their company’s Articles

- of Association have placed in their hands.

The average investor is altogether too supine,
and it is to his own indolence rather than to

. any deficiency in our company law to which
‘the want of success of an unnecessary number

of Joint Stock companies is due. It is, in
short, the function of shareholders to exercise
-. an intelligent supervision over their directors,

and when a Board of Directors falls into finan-

- cial error it is generally due to the lack of that

very supervision which the shareholders them-

selves should supply. Indeed, one of the

--- Page 217 ---

408 INVESTMENT PRACTICALLY CONSIDERED 4

most extraordinary phenomena with which
advisory experts on investments are con-
fronted is the extraordinary, and at times
even culpable, negligence of investors. Al-

though financial history does contain at least .

one instance in which negligence has proved
to be of advantage to an investor or his heirs,

yet this case was so exceptional that it may 4

be entirely disregarded. It is, for instance,
a well authenticated fact that a mislaid cer-
tificate of an undivided share in the New
River Company, which was found in a Jaco-
bean tea-caddy, did lay the foundation of the
family fortunes of a popular present-day
politician, This is perhaps the only well
attested instance of investment-negligence
which has resulted in a princely profit. Apart,
however, from an isolated case of this sort, it
is an indisputable fact that it is through negli-
gence and want of common prudence that the

majority of investors find themselves involved
in serious losses of capital. So universal, 4
indeed, is investment-negligence that pro- 4
fessional financiers may, broadly, be divided.

into two classes, namely, those who appreciate
that their own permanent success depends

SHAREHOLDERS AND DIRECTORS 409

upon the investment successes with which
their names are connected, and those who
deliberately convert the culpable negligence
of the investing public into their own per-
sonal profit.

Grandmotherly legislation has never been
popular in England ; but the development of
Joint Stock enterprise in this country has
been attended by spasmodic legislative efforts

q . to protect the investor from the consequences
a of his own imprudence. At regularly recur-

ting intervals, Parliament makes some sort
of an attempt to save the investor from him-
self and from his own folly. But as invest-
ment discretion cannot be provided for the
public by any process of inoculation, and
as, even if an investment vaccine were dis-

wa covered to-morrow, the probability is strong

that the majority of investors would forth-
with declare themselves to be convinced

-anti-vaccinationists, legislative enactments

have hitherto proved powerless. How futile .
is the effort to protect investors against in-

@ vestment irregularities by means of legislative

enactments is to be seen in the practical

q working of the Companies Act of 1900,

--- Page 218 ---

410 INVESTMENT PRACTICALLY CONSIDERED

This amendment of the law relating to |
Joint Stock companies had for one of its q
chief objects an increased stringency as to S|
the information which was bound to be 4
furnished by a prospectus. The amount @
payable for goodwill, the contents of the 4 .
memorandum of association, the amount of a
promotion money paid, and the date and 4g
parties to every material contract were, 4
amongst other details, to be specifically set 4
forth. The object of stipulating for the a
publication of this information was the en- 4
lightenment of the would-beinvestor. It was 4
intended that the important inside facts rela- 3
tive to a flotation should be readily accessible 4
to the general public, and that the prospectus .

should furnish the requisite information.

Furthermore, directors and managers of com- 4
panies were enjoined to file certain particulars . 4
at Somerset House, which would enable share- :
holders to obtain an insight into the actual .
progress which their companies were making.

If itis asked whether this enactment for the
fuller publication of details at the time of the q
creation of a new company has been pro- a

ductive of real good, it must be frankly con- 4 aught immediately to have aroused their

SHAREHOLDERS AND DIRECTORS 411

fessed that the Act has altogether failed to
| accomplish its purpose. Indeed, in practic
this Act, which aimed at affording more
definite information to the investing public,
has resulted in even a greater suppression of
material facts than was customary prior to its
passing. Because, alarmed at the financial
secrets which he would thus have been com-
pelled to disclose, the wily promoter forthwith
‘bestirred himself to circumvent the provisions
of the new Act. So definitely, however, was
the Statute worded that it was only possible
to evade the stipulated publicity by the pro-
@ moter contracting himself out of the Act al-
| together. Accordingly the supple-minded pro-
moter accommodated himself to his new leg-
islative surroundings, and he cut the Gordian

abstaining from issuing anything whatever
in the shape of a prospectus. Now if the
generality of investors had approached the
question of investment with that alertness of
mind with which they address themselves to
other business matters, it is obvious that

the appearance of a prospectusless company

Imot of the too-inquisitive prospectus by-

--- Page 219 ---

412 INVESTMENT PRACTICALLY CONSIDERED

suspicions.
promoter was anxious to withhold certain
information which the legislature had decided

that he ought to be compelled to furnish, |

should have been sufficient to warn the intelli-

gent investor that he was being invited to - @

tread on dangerous ground. It was indeed
only because the investor had weakly con-
sented to be an accessory to the evasion ‘of
the law concerning prospectuses that the pro-
spectusless company did not stand straightway
condemned. If the investing public had not
with foolish good-nature encouraged the pro-
moter in evading an Act passed for the public
protection, prospectusless companies would
never have appeared in such undesirable pro-
fusion. Had the public only displayed a
firm disposition to cold shoulder any flotation

which did not present the necessary creden- - 4
tials in the shape of a properly explicit pro-  @

spectus, the prospectusless company .-could
never have enjoyed any vogue.
ever, from the public treating prospectusless

ventures with disdain, their popularity has — 4
been so enormous that both in numbers and 4

in amount of capital they altogether eclipse

The very fact that the company-

So far, how- — 4

SHAREHOLDERS AND DIRECTORS 413

the concerns which duly file prospectuses and
are introduced to the investor in accordance
with the Act of 1900. 'The following com-

parative figures as to the flotations made

during the years 1901, 1902, 1903, 1904, 1905,
1906, and 1907, are taken from the Report of
the Board of Trade :—

eee

Percent-

Panton. spectus. | spectus. without
Pro-

spectus.

Per cent.
January to June, 1901 .| 91 65 41
July to December, 1901 . 55 36 39
January to June, 1902 . 66 63 48
July to December, 1902 . 54 61 53
January to June, 1903 . 38 59 60
July to December, 1903 . 27 43 61
' January to June, 1904 . 19 42 68
July to December, 1904 . 28 20 41
January to June, 1905 . 25 33 56
‘July to December, 1905 . 37 25 40
January to June, 1906 . 50 22 30
~ July to December, 1906 . 67 24 26
January to June, 1907 . 43 35 44
July to December, 1907 . 33 21 38

_ The whole truth concerning the relations
which exist between shareholders and direc-

--- Page 220 ---

414 INVESTMENT PRACTICALLY CONSIDERED

tors lies in the fact that the public carelessly | | _and that he is burdened with the defects of

choose to assume that the standpoint of
directors and shareholders is in every case
identical. The inert shareholder elects to
justify his own indifference as to his financial
welfare by the soothing reflection that he and
his directors are in precisely the same boat,
and that therefore, with every confidence, he
can leave the management of the said boat to
his directors. So that the shareholder pays

insufficient attention to the point that it is -

inevitable that directors cannot reasonably be
expected to see eye to eye with their share-
holders.
tors thus generally, it must be understood
that the typical English director of Joint
Stock companies is a man of high commercial
probity, of good social standing, and of an
intelligence well above the average. He is

of the class of man which furnishes our magis- 4q
tracy, and which is appointed to public and 4
In brief, the typical

private trusteeships.
director is an excellent specimen of the

that the director is, after all, only human,

4 a little too dictatorial in his manner.

“@ business.

SHAREHOLDERS AND DIRECTORS 415

his many excellent qualities.

Now the very social and commercial position
which the average director occupies renders
him perhaps a little too self-confident and
He is
accustomed to lay down the law on the

@ magisterial bench and in his own business,

and he conducts himself as a benevolent

4 ‘despot in his family circle, with the natural
@ result that he is exceedingly loth to admit
@ that he could ever have made a mistake, or

4 that he could have been guilty of an error in
In discussing the attitude of direc-

judgment. As a rule the average director’s
business acumen and his close attention to

@ detail have enabled him to build up an
@ adequate private fortune.
4 ‘won success does not. logically justify his
‘@ refusal to admit the possibility of mismanage-
ment in a Joint Stock concern, to which pro-

But his own hard-

bably he devotes no more of his time than a

q few hoursweekly. It is theexception when the
‘@idirector devotes himself as whole-heartedly
Englishman of the upper and middle classes; J to the welfare of a Joint Stock enterprise as

at the same time it should not be overlooked q

a struggling tradesman does to his private
The result is that mistakes are

--- Page 221 ---

416 INVESTMENT PRACTICALLY CONSIDERED 4

made and then the amour propre of the Board 4
of Directors prevents them making public .
acknowledgment to their shareholders that. 7q
works’ extensions have been needlessly under- 4
taken, or that money has been wasted in the 3
invasion of new but unremunerative markets. |
In this way perfect candour ceases to exist. q
between directors and shareholders. So that 4
a situation is created in which the directors q partial unsuccess. It is the humiliation of
have knowledge of unremunerative develop- q
ments undertaken whilst the general body of 4
shareholders are entirely unaware that all is | would entail which leads directors to couch
not going perfectly smoothly with their com- 4
pany. It may be, and it usually is, the case 4
that the board are convinced that the new 4
policy will ultimately result in the prosperity q
which they originally anticipated ; but in the 4
meantime shareholders are kept in the dark, q
and the directors, when the date of the balance |
sheet comes round, gloss over the situation by. 4
neglecting to write down the value of lease- / :
holds, or by failing to set aside an adequate -
sum. to cover the depreciation of plant. In §
some way or another the directors cease to 4
observe the strict canons of sound finance, and 4

by this means they are enabled to present to q any other opinion than that shareholders do

SHAREHOLDERS AND DIRECTORS 417

their shareholders a more prosperous state-
ment of affairs than the actual position alto-
gether warrants. There is no cold-blooded
determination to embark upon a policy of
deception ; merely a situation arises in which
men whose past commercial career has been

uniformly successful display a not unnatural

reluctance to make a public confession of

a public confession of misfortune which a
statement at a company’s general meeting

their yearly or half-yearly reports in unduly
sanguine phraseology.

It is also only fair to directors generally to
admit that the average shareholder dearly

loves a sanguine chairman. It would be

impossible without descending to personalities
to instance the magnetic influence which a

Sanguine chairman exercises over the spirits of

disheartened shareholders, who, perhaps, have
patiently listened to him during many years
of disappointment and of dividends delayed.
But no man who habitually attends the
meetings of Joint Stock companies can form

EE

--- Page 222 ---

418 INVESTMENT PRACTICALLY CONSIDERED

encourage by rapturous applause the Board:
of Directors which belittles present difficulties
and enlarges in a boldly prophetic vein upon
the brilliance of future prospects. It is no
over-statement of fact to assert that the too-
sanguine chairman is created by the unhesita-
ting loyalty which the too-sanguine share-
holder displays to his Board.

The history of Joint Stock finance in this
country may in short be summed up in the
fact that the English shareholder possesses
the very type of director which he deserves.
Now the main characteristics of the share-
holder are a strong historic sense and an
ingrained respect for constituted author-

ity. The mental attainments and the past — 4

achievements of his Board appeal to his
historic sense, and his respect for consti-
tuted authority leads him to resent as a
personal matter any attempt to criticise the

policy of the Board either at a meeting or in | q

the columns of the Press. Beyond and
above which, there exists a strong sporting
feeling that no man who is playing to the best
of his ability should be interfered with during
the progress of the game. This attitude,

SHAREHOLDERS AND DIRECTORS 419

though admirable enough in its way, results
in deplorable negligence on the shareholders’

a part. Indeed, so long as directors manage
‘g@. to pay good dividends, shareholders do not

trouble to ascertain whether these dividends
have been actually earned or from what fund
they may be drawn; neither do they pause
to reflect whether this distribution of the
concern’s cash resources in the shape of
dividends is in the best interests of share-
holders ; further, they are singularly indif-
ferent as to whether the Balance Sheet and
the Directors’ Report exhibit the company’s
position with sufficient clearness. In short,
shareholders are content to leave everything
to their directors, and it is only when the
directors find themselves compelled to an-
nounce that the steed has been stolen that
the generality of shareholders manifest any
interest in the fastenings of the stable-door.
Prosperous companies, with shareholders
numbered by hundreds, find it difficult to

@ forma quorum at General meetings; whilst

so soon as there is a cessation of dividends

| shareholders attend in large numbers. Were

the shareholder more alert to his own interests

--- Page 223 ---

420 INVESTMENT PRACTICALLY CONSIDERED

the principle of attendance at meetings would
be precisely reversed. Fortune is ever fickle,
and it is only by close attention to business
in times of prosperity that prosperity can be
induced to become permanent. Whereas it is
idle to imagine that querulous speeches at
public meetings can restore prosperity when
prosperity has been choked by long neglect.

Shareholders would do well to appreciate

the fact that Great Britain is a country where — 4
brains are well paid for, although, as a rule, |

directors’ fees are inadequate. They seldom
are sufficiently large to compensate a really

brainy man for devoting himself entirely to 4

the service of a company which has appointed
him one of its captains. So that it has come
about that the Directory of Directors shows
that the highly capable men habitually hold
so large a number of directorships that they
are unable to attend in any great detail to
the various concerns which they control.
Any one who has any inside experience of
company-management is aware that, as arule,
one or two directors eclipse the rest of the
Board in intelligence and application. So
that, in many cases, concerns which nomin-

SHAREHOLDERS. AND DIRECTORS 421

ally are managed by half a dozen or more
directors are in reality in the hands of one
man—a position which has much to recom-

_ mend it, provided always that the one man

is capable and honest, and that it is worth his
while to devote himself entirely to the con-
cern’s best interests. Indeed, a North-Country
company which had floundered for years |
in a dividend-less condition was restored to
prosperity by a strong-minded director appeal-

q _ ing for the election of a capable committee of

directors to manage its affairs. As he went on
to explain, in his opinion, a capable com-
mittee was a committee of one, and he himself
was that one man. The perfect self-confi-
dence, which this suggestion conveyed, was
completely justified by results, and the
capable committee consisting of one director
restored the company to the dividend-paying
list. But directors who are prepared thus
whole-heartedly to devote themselves to their
shareholders’ interests are the exception ;

q _ for this reason shareholders in protection of

their own capital must, of necessity, exert
themselves to follow the vicissitudes of their
company’s fortunes.

--- Page 224 ---

422 INVESTMENT PRACTICALLY CONSIDERED

In the case of the great majority of com-
panies shareholders are put in possession of
information which would be instrumental in
saving them a great deal of money if they
would only utilise the opportunities which
they enjoy. It is quite an exceptional case
where the Articles of Association do not
provide that shareholders shall be regularly
supplied with a balarice sheet and a properly
drawn-up statement of profit and loss. Until

the amendment of the Companies Acts of — |

1907, there was no penalty enforceable if a
company neglected either to hold an annual
meeting or to publish a balance sheet; but
the Law now insists that every company
shall hold an annual meeting, and _ shall
supply the Registrar of Joint Stock Companies
with an audited balance sheet, which is to
contain :— .
(a) A summary of the Capital.
(6) A summary of the Liabilities.
(c) A summary of the Assets.
(d) Particulars as to general nature of
Liabilities.
(e) Particulars as to general nature of
Assets, |

SHAREHOLDERS AND DIRECTORS 493

_ It is, however, the exception when a com-
pany only furnishes its shareholders with the
bare legal limit of information. So important
is it that a company should make a full
disclosure of its position, that it is a salutary
rule for an investor to make not to entrust
any portion of his capital to a Board of
Directors which does not supply him with
ample balance sheet details. If only investors
would avail themselves of the balance sheet
information, which is supplied to them, they
would at least receive timely warning that
their company’s assets were disappearing and
that its liquidation, or its reconstruction
on a reduced basis of capital, was becom-
ing inevitable. For instance, after the
Board of the Sweetmeat Automatic Com-
pany had been reconstituted in 1904 the
new chairman informed his shareholders
that “the average nett profit per machine
had been steadily and continuously shrink-
ing since 1899. This circumstance was
masked by the constantly growing capital
expenditure which kept adding to the number
of machines without, however, any propor-
tionate increase in profits. Dividends were

--- Page 225 ---

424 INVESTMENT PRACTICALLY CONSIDERED

paid in advance of profits instead of profits
being earned in advance of dividends.” Now
it was well within the power of any share-
holder by the aid of a simple arithmetical
calculation to have ascertained for himself
from the company’s balance sheet figures
that capital expenditure was increasing rapidly
without there being any corresponding in-
crease in profits. To arrive at this fact
required no access to special “ inside”
information. Long before the company had
involved itself in a maze of unsound finance
the investor who submitted its published
accounts to analytical scrutiny must have
received timely warning that it had em-
barked upon a course of unremunerative
capital-expenditure, the outcome of which
could only be financial disaster.

Or, taking the British Westinghouse Electric
and Manufacturing Company, which found
itself compelled to write off as a total
loss £1,375,000 from its Capital Account in
January, 1907; here again was a case in which
the balance sheet figures ought to have raised
a, timely alarm in the mind of a shareholder
who was only moderately observant. For in

SHAREHOLDERS AND DIRECTORS 425

“November, 1904, when this company arrived

at the end of its first year of manufacturing,
credit was taken in the balance sheet for
Patents and Goodwill, £794,867, and for Works
at Trafford Park, Manchester, £1,069,009,
whilst the depreciation allowed for on these
two items, totalling £1,863,976, merely
amounted to the obviously inadequate sum
of £10,500. So that the shareholder who
had subjected the balance sheet figures of
1904 to no very exhaustive analysis would
have had no less than fully two years’ warn-
ing of the catastrophe which took place in
1907.

At times the shareholder who takes the
trouble to investigate balance sheet figures
receives even more ample warning of im-
pending trouble than two years. For instance,
there was no less an interval than ten years
between the times when Spiers and Pond,
Limited, first began to deviate in their
balance sheet figures from strictly orthodox
finance and when the company finally was |
driven to purge its accounts by a drastic
scheme of reconstruction. In illustration of
this I will first exhibit in tabular form the

--- Page 226 ---

426 INVESTMENT PRACTICALLY CONSIDERED

variations in the capital account of this —

company :—

£
Year ending March 31, 1897, Share and Loan Capital was 1,306,000
Py 1898 :

” ” ” 1,306,000
2 ” 1899 ” » 1,308,641
” ” 1900 ” ” 1,908,281 |
” ”» 1901 * »” 1,908,281
>» ” 1902 ” ” 1,908,281
% ” 1903 ” » 2,206,000
% ” 1904 ” 2,206,000
- ” 1905 » % 2,206,000
» » 1906 » » 2,206,000
” ” 1907 » ” 2,206,000

It will be noticed that throughout this
period the tendency of capital account was
to expand ; yet, at frequently recurring in-
tervals, it was stated in the Directors’ Reports
to their shareholders that the company’s
assets were being steadily diminished. For
instance, in 1902 the directors made mention
of the fact that the Gaiety Restaurant and
the Yorkshire Grey, a valuable property
standing at the junction of two tramway
systems, had been sold for £100,000 3; in 1903
the contract for the supply of refreshments at
Waverley Station, Edinburgh, had expired
and had been diverted from Spiers and Pond,
also the refreshment contracts with the
Metropolitan District Railway, the Zoological
Society’s Gardens, and the Manchester South |

SHAREHOLDERS AND DIRECTORS 427

Junction and Altrincham Railway had been
renewed, but all at considerably increased
rents. In other words the revenue-producing

_ powers of these depdts had been materially

diminished by their enhanced rentals, there-
fore their value as assets had been similarly
diminished ; so that in sound finance it was
obligatory upon Spiers and Pond to write
down their Capital Account correspondingly.
This, however, was not done, as the above
table clearly shows. In the Directors’ Re-
port issued in 1905 it was stated that the —
lease of Winchester House Restaurant in the
City of London and the London, Chatham
and Dover Railway refreshment contract had
expired and had not been renewed. Mention
was made in 1906 that the Dover Harbour
refreshment bars contract and the lease of
Freemasons’ Tavern had expired and had not
been renewed, and in 1907 it was admitted
that the refreshment contract with the
Cheshire Lines had expired and had not been
renewed. Then the crash came, and in June,
1907, shareholders were asked to consent to
£480,000 being written off Capital Account,
and. also to write off the amount standing at

--- Page 227 ---

428 INVESTMENT PRACTICALLY CONSIDERED

the credit of the various Reserve Funds

amounting to a further £123,023.

The point I wish to establish by these
examples is that the shareholder is already
placed in command of most valuable infor-
mation which, as a rule, he entirely disregards
or at least he fails to apply it advantageously
to his own holdings. On broad principles I
admit the injustice of directors, with the aid
of proxy-power entrusted to them by their
fellow-shareholders, smothering discussion at
general meetings ; but, on the other hand,
I by no means withhold my sympathy from
directors who are harassed and wearied by
the irrelevancies of inquisitive shareholders
who have not even taken the trouble to inform

themselves as to the figures which are placed —

beforethem. It was with the view of remedy-
ing the obvious disadvantages under which
shareholders labour in the interpretation of
balance sheets and reports, and to enable
them to arrive at a definite opinion as to the
wisdom or unwisdom of a particular dividend
distribution that the Financial Review of
Reviews instituted its system of publishing

digests of companies’ accounts, of reprinting

SHAREHOLDERS AND DIRECTORS 429

topics interesting to investors culled from the
world’s Press, of opening its pages to cor-
respondence, and of including in each number

' which it issues an Information Coupon for

the use of investors who desire a gratuitous
expert opinion on any particular point.
Unfortunately, however, although many avail
themselves of the facilities which are thus
placed at their disposal, there is still a large
body of subscribers to this periodical who do’
not appear to be aware of the privileges which
they habitually neglect. It is with the view
of enlarging the circle of those readers who
derive their full twenty shillings in the £ from
their Review subscription that I have been
prompted to write the present article.

It was one of the presidents of the Institute
of Accountants who once said that balance
sheets are unfortunately more frequently
used to conceal facts than to throw light upon
them. So true is this that a volume could be
filled with instances in which the manipula-
tion of balance sheet figures has completely
blinded shareholders to the true state of
affairs. On the principle that it takes a thief
to catch a thief, it frequently requires a skilled

--- Page 228 ---

430 INVESTMENT PRACTICALLY CONSIDERED

accountant to extract the true meaning from
a statement of accounts, which another
accountant has compiled. Shareholders may
therefore be pardoned for failing to appreciate
the real meaning of a balance sheet when it
is put together by an accountant who does
not intend to be more communicative than
he can help. Bearing this fact in mind the
Financial Review of Reviews has instituted
a system of supplying special information
on balance sheets prior to a Shareholders’
Meeting. This has been done in order to
prevent shareholders passing and adopting
vague and unsatisfactory balance sheets,
The result of this fresh departure has so far
been extremely gratifying. For owing to
the pertinent questions which shareholders
have by these means been enabled to put
to their directors, in several instances balance
sheets, which once were unsatisfactory in
form, are now being published in proper
shape. The shareholder, whose inquiries are
foolish and irrelevant, annoys his directors
without benefiting either himself or his pro-
perty ; whilst intelligent criticism is always
productive of good results. There are, of

SHAREHOLDERS AND DIRECTORS 431

course, some classes of investments which

require little watching: these consist prin-

cipally of fixed-income stocks, which “are
so well secured, both from the point of capital
and of income, that it is scarcely possible
that they should be adversely affected by

_mismanagement or other malpractices. Such

stocks as these naturally constitute the ideal
of investment, but how few investors there
are who in reality confine themselves to this
class of holding.

Considering the difficulty there is in
amassing capital it-is astonishing how little
trouble investors are prepared to take to safe-
guard it when it has been acquired. If only
the readers of this article would carry its
principles into practice and would determine
no longer to pursue a policy of drift in regard
to their investments, then they would forth-
with set about seriously investigating their
own financial position. In any case of
difficulty, or whenever they found that
they had neglected to file the bygone
Reports and Balance Sheets relative to
their holdings, a consultation with the Pub-
lishers of this Review would soon supply

--- Page 229 ---

432 INVESTMENT PRACTICALLY CONSIDERED

the deficiency. By closely following the
information which the Review affords, investors
will rapidly acquire practice in estimating
the strength of their own investment posi-
tions and they will also equip themselves for
the task of intelligently criticising their own
directors, and of extracting from them such
information as a Company’s balance sheet

and report can reasonably be expected to
furnish.

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etc., respecting 5,000 principal investments,
quoted in the United Kingdom.

IN HIS PREFACE TO THIS BOOK
SIR HENRY . BURDETT, &K.C.B., says :—

“ By means of the Year Book the investor may compare
the financial position of other similar companies with the
financial position of those companies in which he has in-
vested capital. Such comparisons should enable him to
obtain safer, cheaper, and more remunerative stocks.”

Press Opinions,

«A wonderful compilation.”—-Morning Post.

«A valuable ally of the investor.”—Evening Standard.

‘©One of the most useful financial reference books ever
compiled.”—Daily Mail.

“A stirring testimonial to the skill and enterprise of the
‘ Financial Review of Reviews.’’’—Financial News.

“« Comprehensive reference book of information as to the
world’s leading investments.” —Financial Times.

“ An amazing amount of information.”’—Spectator.
“* A useful and unique book.” —Financier.

“Likely ;to become very popular.”—Westminster
Gazette.

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