NINETY-eight men out of every hundred are financially incompetent, recently declared a wellknown authority on insurance, Dr. S. S. Huebner, of the University of Pennsylvania. Most men, he thinks, are failures.
Man has two great economic disabilities, Dr. Huebner added. One is his inability to continue his life, and the other his inability to continue his substance.
Only one out of every ten men at sixtyfive have enough money to ensure them an income of even $50 a month.
Only one out of three men, healthy at thirty, dies before he reaches sixty. The burden of support of the survivors usually falls on the children. And, of course, the statement that each generation should be able to take care of itself will scarcely arouse argument.
Hundreds of thousands of dollars are lost annually in Canada through careless investment. Fraudulent and worthless securities are being conslantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste — “BEFORE YOU INVEST—INVESTIGATE”
It is a gloomy picture that Dr. Huebner draws, but one that is nevertheless true. Records reveal an appalling percentage of people who cannot begin to support themselves in later life, when their earning capacity has been exhausted, and are forced to depend upon children, relatives, friends, or to subsist upon cold charity. They have lost in the race of life, either through ill luck, misfortune, the inability to save and provide for a rainy day, or because of a hundred other reasons, both controllable and uncontrollable. The incontrovertible fact remains, however, that much of the present day improvidence, poverty and misery could be dissipated if the individual wage earner would give even a modicum of thought and application to the task of saving and investing his savings on a clearly defined plan.
Much has been said and written by way of advice to the small investor. The recent stock market collapse has led to a certain revision of opinion as to what suggestions can be logically made to the investor of limited means. The small investor.was hard hit in the latest tumble of stock values, and the fact has been pressed home that there is no easy way, no royal road to wealth. As the individual himself is the chief benefactor or sufferer from the investment habits he forms, or fails to form, he must seek his own salvation, as one financial writer expresses it, through prayer and works, with the exercise' of will, courage, caution, the" labor of study and the pain of thinking. He must be self-reliant. He must study and learn to appraise investment securities. He must lay down a plan for his own guidance. He should seek investment advice, but should be sufficiently informed on such matters to pass his own judgment upon the recommendations.
The problem of the small investor is essentially difficult. He wants to make a little money go a long way, earn a lot, lift him out of the constant state of financial depression in which he finds himself. As a result he is inclined to take unwarranted chances, and is also preyed upon by that form of human parasite who is constantly peddling off worthless securities with the promise of fabulous returns. The ignorance and the cupidity of the ordinary individual render him peculiarly gullible and an easy prey. Or if he plays the stock market, he does so on slender margin, hoping to make a killing, and when reverses come he is wiped out or seriously reduced financially.
The First Thousand Dollars
ARE you one of those who foresaw ^ *• the stock market panic of October, 1929, and sold out your speculative stocks in advance and pocketed the proceeds? Danger signals were plainly visible to those who could see. Or were you one of the multitudes who were caught? A little intensive study should have awakened a realization of the dangerous condition of the market, but how many were qualified to make this study, or to formulate any intelligent conclusions as a result of this study? And for lack of this self-preparation, thousands were embroiled in financial chaos! Again we emphasize the necessity of the labor of study, and the pain of thinking. Investment is no haphazard pastime. The consequences are too vital, too serious.
The first one thousand dollars is said to be the hardest to save or accumulate. While the first thousand will not buy much in the way of income, it will buy a freedom from financial anxiety. It is a buffer capable of absorbing many shocks of economic fortune. In view of its tremendous economic value to the individual, the necessity for playing safe with the first thousand becomes apparent. This money left in the bank or used in the purchase of government bonds can be regarded as entirely safe. Not until the investor has acquired an additional two or three thousand, can he legitimately consider a security of a slightly higher yield, a credit security, which is a primary obligation of the issuing company, or perhaps some of the sounder preferred stocks. The investor who at the outset follows strictly conservative practices is securing a valuable training and adding to his limited store of financial information at the minimum of risk. As his knowledge and savings increase and his horizon grows, he can perhaps even give consideration to the sounder common stocks. The doctrine of buying a participation in profits has been preached from the four quarters in recent years, and while its exponents are less outspoken today than six months ago, the principle is sound if acted on with discretion and moderation.
Under such circumstances, what do discretion and moderation imply? In the first place, a thorough study of the common stock in question, the past record of the company, its earnings and future prospects, the nature of the industry, whether engaged in the manufacture of an essential product with a broad and permanent market, or in the production of a luxury or semi-luxury, popular and readily marketable today, but tomorrow liable to be forgotten and worthless; the character of the management, the financial structure of the company, taking into consideration the various classes of securities outstanding, and the relationship of total capital issued to the annual earnings of the company. From the market standpoint, a study of present and future conditions, the main points to weigh being whether or not the market is high or low, likely to decline or advance in accordance with prospective business conditions; and lastly, conservative practice on the part of the investor in buying outright, or on a highly conservative margin. All this, of course, entails a good deal of application which the investor may not have the time or the will to give. But it is essential to ultimate success. And as self-interest is a strong motivating influence, it should be a predominant force in investment as in other human activities.
Is it possible to prevent a recurrence of the market disaster of last autumn? Perhaps not. Market collapses have recurred periodically throughout financial history. There seems reasonable prospect that they will continue so long as human instincts and passions are such as they are today. Perhaps the spread of information and education on investment wiK serve as a partial corrective at least, but the premise is entirely theoretical, for no power has yet been discovered for controlling human emotions, and at certain stages of a market’s career, emotions rather than reason will rule, and then trouble ensues.
The Lesson of Aar Investments
A/fANY plans have been promulgated for directing the savings of small investors into sound channels. During the war the patriotism of the financially small, as well as the financially big man, was catered to by the government, and as a result he bought an immense amount of bonds. In addition to buying sound bonds he acquired a vast amount of useful experience, which has quickened his investment sense, and has turned Canadians into a nation of investors within a comparatively few years. Of course, many original investors in government bonds have transferred their allegiance to other types of securities in the ensuing years, but the first principles implanted have exercised a healthful and permanent influence.
The installment plan of buying has also been applied to the securities market. Bonds have been created in small denominations—baby bonds, as they are called, of $50, $100 and $200—principally for the benefit óf the small investor. The argument for buying first and saving after, instead of the accepted process of saving first and buying after, was that prices were going up, and through buying now the purchaser would secure a profit while saving. And the further point was made that compulsory saving thus instituted was excellent discipline for the investor novice.
The principle of customer ownership has made headway in this country. The practice has been adopted by certain of our large utilities of selling stock on favorable terms to those who use their services—customers. Another version of customer ownership is employee ownership whereby employees of a concern may be privileged to buy stock in their company, usually at liberal price concessions. Both plans were devised to promote loyalty to the concern, by creating greater goodwill and interest on the part of the customer or employee, on the theory that when a worker is a part owner of the company for which he toils, and receives something more from the product that his labor creates than the mere wages he collects every Saturday night, he will take a more lively interest in its welfare. This constructive interest should offset normal labor tendencies, unrest, unhealthy turnover. And customers who are stock owners are likely to regard with a friendly eye any fair proposition with respect to rate changes.
It is, of course, unfortunate that this loyalty and increased energy on the part of the shareholders are largely contingent upon advanced security values. They do not relish the correlative sharing in the losses. And in industry, periods of declining earnings do materialize.
It is just as essential that the small investor formulate sound principles of investment as it is that he should know his job. Both are equally important in building toward a state of financial independence. Furthermore, the investor who has formulated his principles should insist on adherence to them against any advice or pressure whatever. He should in the first instance be sure he is right, and then proceed without deviation, for a man who follows no definite financial course is like a ship without a rudder—he goes round in circles and never gets anywhere.
How to attain financial independence is a problem that is in the mind of every normal individual. It is as reasonable an ambition as it is to desire physical health. The weight of responsibility rests on the individual investor himself. An outsider may offer suggestions, but it is up to the investor to formulate his own plans and policies and stick to them. The preliminary stages of income building represent the most critical time, for that is the habit-forming period, and financial habits, like all other habits, are hard to change once they become firmly rooted. The following suggestions for the construction of an investment foundation, as recently presented by ,an authority, struck me as particularly sound and practical.
The first step in a safe and sane financial programme is insurance. For most purposes ordinary life policies are the most suitable, and should be taken in amounts which will provide an income after death to take care of the minimum requirements of dependents. In case the insured survives his beneficiaries, the insurance policy can be turned into an old age pension for financing retirement. Life insurance should be supplemented by noncancellable health and accident insurance, and by adequate fire and theft insurance against property. After insurance the next requirement is to build up a cash reserve of at least $1,000 in the savings bank. After that, automobile thrift should be contracted. When these fundamental steps have been taken, the investor is in a position to acquire high-grade bonds and guaranteed first mortgages. The next advance can be toward diversified preferred stocks, which offer a somewhat higher return. The last step should be the outright purchase of the best grade of diversified common stocks.
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