‘Safe’ Earning Power of Dollar Is Fixed Within Certain Limits
A. W. BLUEAugust11927
‘Safe’ Earning Power of Dollar Is Fixed Within Certain Limits
BUSINESS & INVESTMENTS
A. W. BLUE
Hundreds of thousands of dollars are lost annually in Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to entrap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste—
• BEFORE YOU INVEST—CONSULT YOUR BANKER.”
THE primary consideration in the investment of money is safety, To obtain safety it is necessary to pay for it, just as one must pay for anything that is worth having. Contrary to standard practices in the purchase of a commodity or any desirable service, the acquisition of safety in an investment does not involve any cash outlay. The investor pays for safety by the acceptance of a lower interest return on his investment than he would in a security where the safety of his principal was not so assured. The safe earning power of the dollar is fixed within definite limits by inexorable economic laws, and the current earning power ranges from four and one half to six and one half per cent. The moment the investor purchases securities returning a higher yield, he steps from the ‘safety zone’. He sacrifices some measure of safety, and is automatically transformed from the investment to a speculative class.
The art of investment is one of the most important of our human institutions. Considered from a broad viewpoint, it has made possible and facilitated the development of our present day civilization, and contributed to the upbuilding of the great superstructure, which means so much to the human race—the modern industrial machine, transportation devices, home comforts, and the luxuries which are so indispensable today. Without the saving of money, and that is a fundamental form of investment, and the wise and conservative employment of these accumulations of funds, human endeavor would stagnate, and progress be blighted. But investment contributes more than this. From the personal standpoint, it can with certainty show the majority of men and women in gainful occupations the way to a substantial measure of financial independence, thus contributing to the sum total of comfort and happiness.
And this serves to stress again how vitally important it is that every person of adult intelligence should gain a firsthand knowledge of the common sense of sound investing. Such knowledge is not difficult to acquire, and it will guard the inexperienced and the credulous against loss.
The word ‘invest’ means literally ‘to clothe’, and the literal meaning of ‘to clothe’ is ‘to protect.’ An investment is placing money in such medium where it will be protected against risk and loss, where it will return a regular, definite income, and where the investor may recover the principal invested.
An investment medium is not necessarily a stock or bond. It may be real estate, mortgages, a business undertaking, Real estate is not primarily an investment. There is no assurance that property will appreciate in value, or remain stationary. There are many cases on record whereby despicable frauds have been perpetrated in the name of real estate. Then, again, a piece of
real estate may have sound value, and bright prospects for appreciation, but is at present dormant, returning no revenue, and may continue so indefinitely. It is in no sense an investment, although it may be an attractive speculation. Favorably located real estate, however, has often proven a lucrative source of revenue for the owner, and has thus assumed investment characteristics.
Highest Form of Investment
rT"'HE highest form of investment obA tainable is found in government bonds. In securities of this type the element of risk is eliminated entirely, and the investor naturally pays for the one hundred per cent of safety he secures. Dominion of Canada bonds may be purchased today at prices to yield from four and one half to four and three-quarters per cent, a return that does not appeal to the average investor, more especially when contrasted with the 6 per cent and 7 per cent yields returned by standard corporation issues. But, for the small investor, government bonds are a highly desirable form of investment. In addition to safety and a fixed return, they offer the factor of ready marketability. Government bonds are almost as negotiable as cash, and can be bought or sold through any branch bank agency. As collateral they can be borrowed on almost to the full extent of their market value. They should form the first investment, for it is sound practice to build a solid foundation of government bonds. Once securely established, the investor may then enter the corporation field, where the yields are higher, and the element of safety not so sharply defined. Government bonds are protected by the assets of the country at large, its natural resources, timber, mineral and agricultural wealth, and specifically the government’s obligation to its bondholders is met out of moneys raised through taxation.
Associated with government bonds at the top of the investment list are issues of the provinces, municipalities and lesser subdivisions, all secured by the taxing power of the central government of the issuing division.
Securities of Canadian corporations have come to the fore as desirable investment media. Great care in selection must be exercised in this department. Business at best has certain elements of speculation or hazard associated with it. This uncertainty is reduced to the minimum in the case of old established companies which have enjoyed a satisfactory record of earnings over a period of years, and whose securities may be said to be thoroughly seasoned, and thus entitled to investment rating.
Investments and Speculations
GENERALLY speaking, the bonds of a corporation may be classed as investments, and the stocks as speeula-
tions. Very often, however, the preferred shares of well-regulated companies have been elevated to the dignity of investments, and a comparatively slender list of common stocks have reached this standard also. Securities of companies which can point to a long and honorable experience, which have shown earnings well beyond interest and dividend requirements over a succession of years, which have built up sound reserves, and which are reporting a steady and constant expansion of operations, may be classed as investments, and it is only the security that measures up to these exacting standards that should be considered by the small investor.
Rarely can the securities of new enterprises legitimately claim investment ranking. The element of risk is obvious in issues of this type. It need only be recalled that mo.e than eighty per cent of new concerns either fail or encounter such severe losses as to seriously impair the value of their securities. Less than ten per cent of such failures are caused by the dishonesty of these responsible for the undertaking. The hazards of business are great in this highly competitive age, and only those who are prepared to wait indefinitely for a return on their investment, or who will not be seriously handicapped. by loss in the event of disaster overtaking the concern in question, should consider the securities of a new undertaking. This is not investing. It is hazarding money in the hope of large profits eventually. The small investor cannot in justice to himself and his dependents assume such risks.
SPECULATION is the placing of ^ money or other valuable considerations in an honest enterprise that the speculator believes, from his own experience or from reliable information, will succeed. He realizes that he is assuming a business risk, but he is willing to take the risk in the hope of large profits eventually. The true speculator is not a gambler. He is not plunging in the dark. He has a certain knowledge of the situation at issue. He believes that his enterprise will succeed, and he is 1 contributing through his capital advance to its success. He has taken precautions which tend to minimize the risk, without of course, eliminating it entirely.
The placing of money in a venture concerning which the individual knows nothing, and is likewise ignorant concerning the honesty and capabilities of the management is not speculating. It is blind gambling, which usually means throwing good money away, to the eventual and lasting regret of the plunger. There is no excuse for speculation of this absurd character. Taking a chance in the dark is the last thing an investor should do or need do. There has been built up in this country a great, dependable business, investment banking, the function of which is to minimize chance and risk in investment. Sound advice is available for the asking.
Many an investor, in extenuation of some misguided investment folly, such as the purchase of a worthless mining stock, or participation in an oil venture in Oklahoma which peters out, pleads that the small wage earner and investor can never hope to attain financial independence through the ordinary conservative investment channels. Money left to accumulate at five and six per cent increases very slowly, he argues, whereas one successful strike in the speculative markets may mean virtual independence forthwith. Such arguments are based on an erroneous conception of the accumulative power of money when invested at the despised rates. At six per cent interest compounded half-yearly, money doubles itself in about twelve years, and in fifteen years when the rate is five per cent. If small savings are added regularly to the investment fund, the increase is amazingly rapid. Semi-annual interest has
built up more fortunes than the automobile industry, or steel or oil. Sound investment securities pave the road to financial independence. The illusory shadows of speculation may lead to loss and ruin.
Opportunities in Canada
FEW countries in the world offer so many opportunities for the safe and profitable investment of money as does Canada, and in few countries, too, does the per capita wealth rank so high. But Canada is a young country, and a new field, especially when so richly endowed with natural gifts as is this Dominion, is always the scene of exploitation and development for the future. This is emphasized in the tremendous expansion of the pulp and paper industry, of lumbering, of agriculture and of mining. This latter branch of industry lends itself peculiarly to wholesale exploitation, and the investor must observe meticulous care if he would safeguard himself against the encroachment of the fraudulent promoter.
Canada, in her leading basic as well as secondary industries, has passed the pioneer stage of her existence, and sound corporations have been built up, whose securities are worthy of the investor’s consideration. The investment opportunities are manifold. Each year sees many new industries spring into being. The total of sound operating Canadian concerns has reached impressive proportions. As' the number increases it obviously becomes more difficult for the individual to determine the reliability of individual securities. He has not the time to give to a thorough study of the investment situation. And yet he must be doubly cautious, lest out of the multitude an unworthy member creep into his security list. He should consult those whose business it is to keep thoroughly abreast of the investment situation.
THE investment banker applies certain standard tests to all corporation securities that come under his observation. The formula is comparatively simple, and may be easily applied by the average investor. In the first place, the banker takes into consideration the character of the industry represented by the security. Is the industry basic or fundamental, and of a permanent character? Is the product a necessity rather than a luxury? Will it be affected by changing public fashions and desires? It may be that what is at one time regarded as a luxury may in due course become a necessity. The automobile is a case in point.
The item of management is one of the most important factors contributing to the safety of an industrial security. The investor should determine for himself the character of the management of the business in which he is contemplating investment. Incompetent management is a highly important contributing cause to business failure. What is the past record of the management? Honesty, reputation, ability, judgment, etc., are points on which the investor should satisfy himself. The management should have a large interest in the junior issues of the company—preferably control. They will thus have a greater incentive in striving for the success of the enterprise. The earnings record of the concern should be satisfactory. The company should show earnings over a period of years sufficient to cover fixed charges and dividend requirements by a substantial margin. A company that can demonstrate this record for a period of ten years should satisfy the most exacting requirements.
Is the line of business engaged in liable to attract competition? If so, how is the company equipped to offset such adverse development?
How does the company stand in rela-
i tion to fuel or power and raw materials?
Are all requirements of this character I readily accessible? Can the company be assured of an abundant and uninterrupted supply of raw materials, and are these liable to extreme price fluctuations, thus contributing to the uncertainties of business? Other points, such as plant and equipment, credits, inventories, number of customers and provision for depreciation are technical features which the private investor may find difficulty in analyzing. He should study the balance sheet with great care, as does the investment banker, to assure himself that the securities offered are well guarded by assets, working capital and earning power. Careful attention to these matters and study of investments will amply repay the investor.
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