A man blessed with a moderate property sufficient for the welfare of his family, in case of his decease, provided the principal should suffer no shrinkage, gave his wife this advice he had made her his executrix under his will, and it would devolve upon her to manage his property if she outlived him-"buy no security not sanctioned by law as a legal investment for Massachusetts savings banks." Of course, this anticipated no less conservative laws regulating the investment of the funds of such institutions than at the time the advice was given, but, perhaps, on the whole, no better reading of the future could have been undertaken, and no better advice given in so few words. In general, the laws regulating the investments of savings banks, as now in force, in such other States as New York and Connecticut, and, to a large extent, Maine, Vermont, and New Hampshire, may be used as guides in the selecting of securities. Now, many will say: "But I can't live on such small interest returns as this kind of securities affords." Quite right, but neither can they afford to lose any of their capital. High interest rates beget loss of principal. This should be a motto and hung as conspicuously in the household of those of limited means, as other mottoes once so common in the New England home. To get with safety better than 6% to 7% interest return one must either be a shrewd, wellposted person in financial matters, or rely upon the advice of some one who is. Misplaced confidence has been ruinous to the small fortunes of thousands. Undoubtedly there are numerous bonds of Southern and Western municipalities as well as bonds of public service corporations, which present a minimum of risk, paying from 5% to 6%, but buy such only of bankers of long experience and good established reputations, and who are known carefully to follow rules and customs which years of practice have fixed as proper. It is partially from an attempt to explain such rules, so that one may select with intelligence, that the contents of this book are offered to the reader. Again: let the careful thinker consider if there are not certain investments based upon the needs of this nation of great resources which must, in the very nature of things, be sound. Who was it that once said "a man will see a fly on a barn door and miss the door"? Look at a map of the United States; do not get too near it; one, by so doing, sometimes sees the name of a small village, but does not see county or State names, which are in large letters. Consider this map from a broad and general standpoint; grasp, in your mind's eye, the enormous traffic of this country; the big arteries of transportation. It would seem that the bonds and many stocks of these large railroad lines should be reason ably safe, for these big systems carry commerce from ocean to ocean-if ill-advised state, governmental and political interference can be curbed-bringing the products of the West to the Eastern marts, and, also, in vast quantities for shipment to the European markets. They, likewise, transport the manufactures of the East to the West as well as to the steamship lines, in some instances controlled by these same railways, which pass them on to the Asiatic countries. Such immense traffic as this must furnish the basis for sound investment if anything can. Unquestionably, there are almost countless small investments, here and there, which are safe and very profitable in interest return, but it is the belief on the part of so many that they have found just such a security which leads them astray. Better follow well-established rules and not be tempted by the wayside. No one may gainsay that there are not many gold and copper mines which are good, very good, but how often does the outsider get a chance to buy such a security at a legitimate price? When found to be beyond reasonable risk they are high in price. Certainly, many pay more than 31% or 4%, but it takes an expert to pick out the good ones among the multitude of mining issues for the benefit of the kind of investor referred to here. It is customary for reputable banking houses, handling mining securities, to first have the properties examined by competent engineers and other well-known experts. When this. has been done, they have gone as far as possible for the protection of the purchaser, for no one can see into the ground beyond the property already developed. There is the ever prevalent element of risk in investments of this class. If the temptation to buy mining investments of any kind is allowed to influence one, bear one very important point in mind, viz., that a mine is ever consuming itself, so, likewise, are such properties as oil wells, quarries, etc., — and at some future time, the product must cease altogether, or the mine reach a depth too great for economical production. The shares of a mine, therefore, should not be valued entirely by dividends. A sufficient allowance should always be made for the exhausting of the mine's resources. In case of a bonded debt upon a mining property, the investor should be sure that there is a sufficient sinking fund set aside for the payment of this indebtedness, and this sinking fund should be ample to allow for the reduction in the mine's value, for the reasons given above. In relation to mining, it is probably true that "more money has been put into the ground than has been taken out of it." Do not be argued into buying a mining security based on the location of the mine being near another similar property of established value. Let not the fact that a security can be bought at a discount less than its face value alone entice you to a purchase. That in itself is no argument to buy. It should warn one even to a more careful scrutiny of the property back of the investment. It is a well-known fact that the suicidal policy of buying only at a discount wrecked one savings bank. Do not judge the value of shares by one dividend or by an increase in the dividend rate. The value of shares based on dividend rates can only be ascertained by a period long enough to test the corporation's dividend paying ability through good times and bad. A corporation which has been, for a term of years, paying 7% per annum upon its shares, quoted on the market at 100, enjoys extraordinary good business which, for the time, warrants the increase of the semi-annual dividend rate from 31% to 4%, equal to 8% yearly. Speculators seize the opportunity to force the price of the stock to 114, at which price the increased dividend rate still equals only 7% return upon the investment. There is no certainty that 8% can be maintained, nevertheless up has gone the stock, and investors buy it more greedily at 114, yielding 7%, than they did at 100, yielding 7%. It will take fourteen years of the dividend increase to return the market value increase of the stock. Perhaps that is hardly a fair way of putting it, but it may cause people to hesitate before acting according to the belief that one swallow makes a summer. Stocks are forced up or down in the market upon the least excuse, and those close to the scene of action make money at the expense of those who allow themselves to be influenced by surface appearances, and who do not probe to the bottom for real conditions. When an industrial business, which has been conducted as a partnership, is changed to an incorporated company, and the public is invited to buy its securities, the intending investor should ask himself: "Why, if the business was such a good one, did the old firm wish to let the public into its profits?" All kinds of plausible answers can be given to such questions, and, in many cases, the incorporation is justified. As a rule, however, such methods of financing industrial concerns are best justified where many firms or corporations, or both together, in the same line of business, are united under one management to reduce competition and expense. It is the capitalization of a single firm which is more to be guarded against. Even in the consolidation of several "industrials," it is essential to consider if the business is dependent for its success upon the continued management of some, or the greater part, of the original owners. If so, it is necessary if such a management is retained, that its ownership in the stock of the new company is sufficient to continue its interest to make the company a success, or some plan adopted to insure as good or better management of the whole as the integral parts had formerly. In this connection, the reader will do well to turn to the subject "Industrial Securities." The question often arises as to the advisability of investing money for a long or a short time. The best method to pursue depends very largely upon the financial condition existing at the time of the investment. During the early part of 1907 corporations found difficulty in selling new issues of bonds at normal prices. Consequently, they issued high rate notes running from one to three years, with the expectation that when they fell due the condition of the market would be such as to permit the refunding of these notes by the issue of long time low rate bonds in their stead. Other bonds of the same corporations were selling upon the market at extremely low figures. Yet what did the public do? Instead of buying the bonds, they bought the notes in preference, thereby enabling the corporations to profit out of the expected advance in the bonds to be issued later, rather than themselves seizing the opportunity with similar bonds then on the market. From the above it is very easy to deduce this rule: Buy short time securities when prices are high and the net return consequently small, and buy long time securities when prices are low and the net return high. This is all based upon everything else being equal; that is, the safety of the security being supposed to be satisfactory. Why do so many people buy a stock in some little known company with so little investigation? Such a person would not buy a small partnership interest in a business of long established reputation in his own neighborhood-one which he had every reason to believe prosperous- without the most minute investigation. But how does it differ from the other? The stock represents, to all practical purposes, his partnership in the incorporated company. Is there some hypnotic influence in the names "stocks" and "bonds"? Or is it the distance that lends enchantment? The "prophet is not without honour save in his own country," and so, perhaps, the investor believes not in his local industries, and, perforce, must seek afar for an outlet for his money, buying on the faith of some newspaper advertisement. By all this it is not meant that the seeker for an interest-bearing security should not make distant investments. Far from it, but either he should deal with a firm of untarnished and long-established reputation for fair dealings, or place his money near home in properties concerning which he has some certain knowledge. Choosing neither of these methods, then let him investigate with as great care as would the deacon in a horse trade. There are enough good investments regarding which full information may be had without wasting time over those of uncertain value, and facts regarding which are withheld from the searchlight of publicity. says At times a man but more frequently a woman that there is a very small sum of money to live upon, and that it is extremely necessary to get as high a rate of interest as possible, consistent with safety. The conscientious banker often advises putting the money in some good savings bank, or buying what are known as high grade investment stocks or bonds returning from 5% to 5% interest. The customer will immediately say that he cannot possibly live on such a rate of interest, that he must have 7% or 8%. In spite of all arguing and urging upon the part of the banker he will insist upon this interest rate. The former, against his better judgment, and contrary to his strong advice, will select, to the best of his knowledge and belief, a security that will return this desired rate of income with as little risk as possible, knowing, all the time, that no matter how earnestly he tries there is quite an element of risk. Finally, the investment is made; all goes serenely for months, perhaps years. The banker may do as well as he can to "keep track" of this investment, and often succeeds in persuading his customer to dispose of it in time to forestall a loss, and, possibly, in season to secure a profit. Frequently, in spite of his best endeavours, a loss will occur, and then his troubles begin. He will wish a dozen times that he had refused absolutely, in the beginning, to invest the money; at the time he may have requested the man not to invest it through him. The customer may have replied: "Please advise me; to whom else can I go for advice?" The latter is apt to remember very little of this. The banker is to blame from the other's point of view; he ought to have known that something was going to happen to this security, and sold it. He should have been more than human in his ability to foresee a loss; he has neglected his duty. There have been numerous cases where so little did the investor remember the conversation which took place at the time of making the investment, that he has heaped upon the banker. the unjust accusation of having urged the purchase of the security. In case of loss, let the investor assume his or her proportion of the responsibility and give proper credit to the banker in event of extraordinary profits. Remember, always, that your investment banker is not infallible; for it is not possible for any human being to carry continually in his mind facts in relation to the multiplicity of securities handled by him. It is not to be expected that he constantly can be fully acquainted with every detail and ready, upon call, to decide upon the merits of any question |