Security Is First Essential to Sound Investment Policy
A. W. BLUEJune151930
BUSINESS & INVESTMENTS
Security Is First Essential to Sound Investment Policy
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 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”
JUNE is traditionally the month of roses—and of brides. As in Junes of other years this current month will witness the founding of many new Canadian homes, hundreds, perhaps thousands, of homes presided over by glowing spirits, who look to the future to bring a realization of their dream of happiness and wealth. Theirs is the ambition that has been universal down the ages; theirs the hopes and aspirations that have actuated countless generations. How will the new band of gallant adventurers fare on life’s high seas? Will they realize their ambitions or will theirs be the less romantic story of trial, tribulation, hopes destroyed, or hopes irrevocably pushed back beyond the ken of realization? Of course, these young people intend to work, to save, to rear a competence of financial independence. The carefree days of youth are gone, when money was merely something to be exchanged for fleeting pleasure. Now, alert and serious minded, they have something to work and strive for.
It would be interesting if one could only secure a glimpse of the years yet to be, to see how fate has toyed with hopes and ambitions. And while the power of penetrating into the future is denied us, yet we can secure a comprehensive and fairly clear-cut picture through the medium of cold statistics, which tell us that very few, a pitiful handful at best, will ever realize their dream of wealth; a few more, but still a small percentage of the total, will attain á state of financial independence, and the great majority will approach old age financially dependent upon relatives or friends or upon charity.
Are we justified in assuming that this summing up applies to the future as well as to the past? Perfectly, for human nature does not change, and new generations will continue to make the mistakes of the past and fail to pr’ofit by precedent.
Security is the First Essential
JT HAS been wisely said that money does not necessarily bring happiness, but that there is little happiness without money. The statement requires some modification, as the money factor assumes a vastly different status with different people. And what are these common mistakes that the human race continues to make from generation to generation? The commonest, and the most far reaching in its consequences, is the failure of the average individual to form a plan for the saving and investing of money. He overlooks one of the most important and vital considerations in domestic economy. To work and save is only half the battle. The funds that are saved must be put to work to return profits to
their owner, but they must work in such a way that the principal sum represented is absolutely safe, and the income return positively assured. Many persons fail to grasp the importance of safely investing money; they feel at liberty to take chances with it in hope of large return.
One of the first steps that the young householder should take in order to ensure a successful financial experience as far as such matters can be humanly controlled, is to form a definite plan. A bank account is the primary essential, the bigger the better. This he can build up by saving something each week from his salary cheque or pay envelope. This can be arranged through the inauguration of a budgeting system in the home and the practise of pet economies. After the surplus has been created he should make the acquaintance of some reputable investment banking house, and it must be emphasized that this is one of the most important steps he will take in his whole investment career. For an independent and thoroughly reliable bond house will study his position and requirements, and make recommendations only that are' suited to the investor’s personal and peculiar wants.
Everyone comes in contact some time or other with the individual who has some bonanza to sell, which will return handsome profits to those let in on the ground floor. It seems hardly necessary to counsel against a venture of this kind, but unfortunately the gentry who “high pressure” these extremely speculative and often worthless securities have a persuasiveness about them that wears down or breaks through the resistance of the investor novice. Remember, salesmen of this type are not concerned with your welfare. They want your money.
The investor should bear in mind two or three simple investment truths. The element of safety of securities varies in direct ratio to the promised return. A high yield security is speculative. The ideal investment is one which assures the safety of both the earnings and the principal, and it is only when a security returns a “safe” yield that one can be assured of its stability. For in investment one must pay for safety by accepting a lower interest return, and today the “safe” interest ranges from \y2 to 5y2 or 6 per cent. In the second place, no one can afford to speculate unless he can afford to lose money, for the very essence of specûlation is risk—the acceptance of a risk in the hope of an abnormal return. And the young householder, generally speaking, is in no financial position to assume the hazards inherent in speculation, no matter how conservatively conducted.
It may be here pointed out that more fortunes have been built up by interest,
iompounded regularly, paid on safe conservative securities, than all the superheld offerings of the high-pressure salesnen thrown in together. “The magic ff compound interest” is a subject worthy )f careful study and investigation.
We have said that the young householder cannot afford to speculate. On the other hand, he cannot afford not to invest. He must learn through experience the art of making his earnings stretch beyond his immediate requirements, of building up a surplus fund, and to make this surplus fund work for him at profitable employment, which will return somewhere in the neighborhood of five cents a year for every dollar so employed.
Bonds represent the most attractive investment medium for the young investor, considered from the standpoint of safety of capital and interest. Most experienced financial men will say that bonds are preferable to stocks as initial investments. This can be best appreciated through a consideration of the inherent differences between stocks and bonds.
A holder of stock in a company is in reality a partner, and shares in all the fortunes of the business whether good or bad. He expects that the business will prosper, and that he will benefit accordingly, but he cannot secure positive assurance to this effect. The purchase of stock incorporates the privilege of participating in the losses as well as the gains.
The bond on the other hand is a promissory note issued by a corporation, to be repaid at a certain definite time, with interest to be paid at fixed rate at regular intervals. The bond is usually backed by assets which can be realized upon in case of emergency. The bond interest must be paid regardless of current business conditions or earnings; otherwise the bondholder may become the nominal owner of the company, and placed in a position where he can effectively press for a settlement of the company’s obligation to him.
A stockholder does not enjoy such a privilege, and if dividends are passed because of adverse business conditions he has no recourse but to wait and hope for the return of better times.
Bonds are of many types, and they may be roughly grouped as follows, in order of their desirability from a safety standpoint. Dominion of Canada obligations; provincial, county, city or municipal bonds; foreign government bonds made payable on this continent in gold in Canada or the United States (it is advisable to secure recommendations in this group from investment houses of unquestioned standing); first mortgage railroad or utility bonds, preferably listed or which enjoy an active market; first mortgage industrial bonds of old established, successful manufacturing companies listed on some recognized exchange; second mortgage bonds of leading utility and manufacturing companies; real estate bonds where the mortgage is first lien, and where the loan does not exceed sixty per cent of a conservative appraisal of the property’s value; and finally, certain debenture bonds which are largely dependent for their safety upon the standing of the institution issuing them because they are not backed by physical property.
PREFERRED stocks rank next to bonds in point of safety, but in this group the investor must be prepared to exercise discretion, picking only the preferred stocks of companies with long and favorable earnings and dividend records. Most preferred stocks are cumulative; that is, if the dividend is passed in any one year it is not necessarily lost forever, for if the company’s business revives, the so-called arrears of dividend must be paid before the regular disbursements are resumed. Not all preferred
are cumulative, and if non-cumulative, the dividend if passed, is lost forever so far as the lapsed period or periods is concerned. It has been the custom in preferred stock financing during the past two or three years to impart additional virtues to preferred stocks so as to render them more saleable. We have participating preferreds, which share dividends with the common after a certain rate has been reached on the junior issue; and convertible preferreds, which may be converted into common stock at the option of the holder. The common stock had a peculiar popularity during the. late market boom, and the value of common stocks often soared to extravagant heights. The investor who held convertible preferred stock often found it profitable to exchange his preferred for common. Page Hersey preferred was a case in point. This stock was convertible into common on the basis of two shares of common for one of preferred. When earnings of the company grew to proportions which warranted a market price of over $100 per share for the common, the preferred soared to $200 a share, although the dividend continued at $7 per share. But one share of the preferred was worth two of the common, and the common was worth $100 a share. Subsequently, the great bulk of the preferred was exchanged for common, and the original purchasers of the preferred made a highly profitable investment.
When the young investor enters the realm of common stocks, which he should not do until he has established a solid background of sound bonds, and has attained a ripe experience and knowledge of investment matters, he should ask himself or some recognized authority the following questions concerning a company whose stock he is considering as a purchase. Has the company a better future than past? Does the company publish regularly complete financial statements? Has it a large proved earning capacity? Have substantial dividends been paid regularly on the common stock, and is the common stock readily marketable? Is the business of such a nature _ that it is likely to incur damaging competition, or does it manufacture a luxury product, for which an uncertain and erratic market exists?
A satisfactory answer to each and all of these questions will enable the investor to form a fairly accurate appraisal of the desirability of the stock from a speculative or investment standpoint.
Don’t Put All Eggs in One Basket
D OGER BABSON, the well-known American statistician, who made a reputation for himself predicting the market crash of last autumn, two months in advance, suggests the following five investment fundamentals in his book Business Fundamentals.
1. When purchasing select a broad list. Don’t put all your eggs in one basket. And neither should you use baskets that you know have holes in them, just for the sake of having more than one. Select securities which you know to be good but don’t depend upon any one. Always keep your funds invested in at least twenty companies, and eight or ten different industries.
2. Buy stocks during panics. This will mean that you are buying them when other people are not buying. You will buy during the dark days when your friends think that business is going to the bow-wows. Remember that when you buy something for nothing, it is usually worth what it costs. When you do what everybody else is doing, you generally lose money. Hence, buy stocks during times of panic or depression. The rest of the time be content to study fundamental conditions, statistics and charts, preparing for the opportunities which will some day be yours.
3. Pay outright for everything you buy. Don’t buy on margin. You may have to
borrow money for your regular business but don’t borrow any money for the purchase of securities.
V. When the period of prosperity comes, sell and liquidate your holdings. Get your money into cash and keep your cash in liquid form. Many know when to buy, but fail to know when to sell. It sometimes takes more courage to sell during a period of prosperity than to buy during a period of depression.
5 When making permanent investment i for security and yield, bonds are most desirable. Don’t take fliers. Avoid gambling. Shun tips of all kinds. Borrow the process of the iceman who cuts and stores ice in winter when it is a nuisance, knowing that before the year is over people will be crying for it. Hence, when business is good and speculation rampant, and everybody is making money in the stock market, keep out of the market.
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