Primerofscientif00davi 2

332.
61
0286 (*3j
A PRIMER
OF
SCIENTIFIC
INVESTMENT
By
EMIL DAVIES
Author of
“The Money and the Stock and Share Markets'*
THIRD EDITION
Published by
H. E. MORGAN, S3 FETTER LANE
LONDON, EtC.
Price 6? net«
(Copyright)
Return this book on or before the
Latest Date stamped below.
University of Illinois Library
DEC 1? BilS
LI 61—H41
A T\IMER
OF SCIENTIFIC
investment
By
fitbert EMIL DAVIES
Author of
u The Money and the Stock and Share Markets ”
COTTRIGHT
Published by
H. S. MORGAN, 53 FETTER LA^S
LONDON, E.C,
THIRD EDITION
a-
FOREWORD.
TT T is a well-known fact that, while the public occasionally

I gains, and frequently loses, over its investments, the few
big financial houses of the world, conveniently covered by
the designation of la haute finance, consistently make large
profits.
The explanation of this indisputable fact is not to be

found in the possession of large resources, for, as many private
investors know to their cost, it is as easy to lose large sums
as smaller amounts. The success of the great financial
houses is built up on the same basic principle as that of those
German industrial concerns which employ the best trained
chemists and expert brains that money can procure to improve
and perfect their processes of manufacture ; in other words,
by the application of science to industry.
Each of the financial houses of the world has its “ general

staff ” of experts—its intelligence department—constantly
engaged in watching and studying the economic development
of every country, the advance or retrogression of every trade
and industry, the trend of prices in the different markets of
the world, and the progress of the principal undertakings in
every branch of industry. The private investor, acting on
his own initiative or on a chance “ tip,” can no more hope to
pit his knowledge and judgment against that of the trained
experts of the great financial houses, with their mass of
systematised information and statistics ever up to date, than
a small artisan or trader can hope to be successful against one
of the giant industrial concerns to which reference has already
been made.
The individual investor can, however, at least profit by

learning something of the scientific methods adopted by
these formidable competitors, and with this end in view the
present treatise has been written.
3
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A Primer of
Scientific Investment
CHAPTER I.
INVESTMENT versus speculation.
I KNOW scores of well-to-do men,” said a well-known

financier in conversation recently, “ who are not specu¬
lators in the ordinary sense, but who place their money
in stocks which they hear, from one quarter or another, are
* good for a rise,’ and who would be thousands of pounds
better off in the long run if they were to place their money in
safe fixed interest-bearing securities, yielding between 4 and
5 per cent.”
The idea underlying the foregoing remark is perfectly

correct, and applies with equal force to avowed speculators,
who, if they knew the real forces arrayed against them, would
be appalled.
There is no science of speculation, except such as is com¬

prehended in the word “ don’t ” ; but in the more profitable,
if less exciting, field of investment, it is possible to work upon
scientific lines, which it is the purpose of this booklet to
indicate.
5 B
A PRIMER OF SCIENTIFIC INVESTMENT
INVESTMENT A SCIENCE.
The investment of capital is a science, but, like economics,
to which it is closely related, it is less definite than most
sciences, because it is affected by so many ever-varying
influences. None the less, it is possible to determine upon
certain basic principles which, if followed out intelligently,
secure the maximum yield with the maximum degree of
security, and to this extent one is justified in speaking of a
science of investment.
THE AIMS OF INVESTMENT.

It at once becomes necessary to determine the aims or
object of investment. It may fairly be assumed that the
aims of every investor are :
1. To secure as high a rate of interest as possible without

any interruption in the payments of same.
2. To keep the capital intact—that is to say, to be able

at any time to get back the whole of the original capital.
3. To increase, if possible, the amount of capital invested,

by growth in the value of the securities held.
To formulate these desiderata is not a matter of difficulty ;

to give full effect to them is less easy, for on examination it
will be found that one aim militates against the accomplish¬
ment of the other. It is easy to secure absolute safety of
income (albeit at a low rate of interest) by placing all one’s
capital in Consols; but it is only too notorious that this safety
of income is not equalled by safety of the invested capital,
as the individual who put £1,000 into this security ten years
ago, when Consols were at par, could now only obtain about
£820 for it. Strictly speaking, such an individual has not
been receiving 2\ per cent, on his capital, for of the £250
received as interest during the ten years, £180 has been
swallowed up by the depreciation in the value of his Consols,
so that the true yield to him has been less than f per cent.,
and if he has spent the £180 under the impression that it was
income, he? has, simply been diminishing his capital. We see
6
here, therefore, that the obtainment of regular income on

capital (aim No. i) is of little value unless accompanied by
stability of value of the capital itself (aim No. 2). Stability
in the value of capital over a lengthy period may be arrived
at by placing one’s capital on deposit account with first-class
banks, but only by the sacrifice of aim No. 1—viz., a good
rate of interest. As to the third aim—viz., an increase in
the value of the capital invested—this usually involves the
purchase of securities at the present moment inferior, but the
prospects of which appear promising, and as this necessarily
implies greater risks, both aims Nos. 1 and 2 have to be
sacrificed to some extent.
Probably not one investor in a thousand has ever taken

the trouble thus to dissect and analyse his motives in laying
out his money, all feeling in a general sort of way that they
wish to make the best possible use of their capital. None the
less, a clear understanding of the three different objectives
aimed at, and of their conflicting nature, is essential to a com¬
prehension of the principles of investment.
IS THE ACHIEVEMENT OF ALL THREE AIMS

POSSIBLE?
Owing to the apparently conflicting nature of these aims,

the question may well arise in the mind of every thoughtful
investor, is the achievement of all three possible ?
There is no certain method of getting rich quickly, although

there is a sure method of getting poor—i.e., speculation.
But however much the aforesaid three aims conflict one with
the other, it is possible to arrive at the greatest common
measure of all three, and the whole science of investment
lies in so distributing one’s capital as to achieve the maximum
degree of success in all three aims with the minimum risk of
loss, and in changing from one investment to another as,
by the force of ever-changing circumstances, a security
already held ceases to fulfil all the requirements, or another
security i6 found to fit the case more nearly.
7
If this is done properly, regularly, and in a scientific manner

a safe and relatively high yield, combined with stability of
capital, with incidental profits arising from occasional read¬
justments, may be obtained.
We will now proceed to indicate how this may be done.
8
CHAPTER II.
ESSENTIALS OF SUCCESSFUL INVESTMENT.
Averaging the Risks.
I T is not sufficiently recognised by the ordinary investor

that risks should be spread. The adage that one should
not put all one’s eggs in one basket is more honoured in
the breach than the observance as regards capital outlay.
Merely to distribute it amongst a number of securities in the
same country by no means meets the case, even if they are
of diverse or contrasting character.
There are two main influences governing each separate

investment: first, the locus—the general conditions obtaining
in the country in which the security is located ; and, second,
the merits or demerits of the particular investment, apart
from such general considerations.
The first influence is more easily determined than the

second. It is evident that both the value of money and
trade conditions vary in different parts of the world ; what
would seem an exorbitant rate of interest in England or
France may appear quite reasonable in a new country like
Brazil or Mexico, where wealth is more rapidly created.
For example, in Buenos Aires local capitalists are able to
place their money out on first-class mortgages to yield 7 and
8 per cent., so that Argentine securities generally give a
9
higher yield than the same class of securities in Europe.

But the individual who placed all or the greater part of his
money in the Argentine would be acting very foolishly, for
in the event of that country passing through a period of bad
trade or political disturbance he might suffer considerable
loss. The same remark holds good of any single country,
even the United Kingdom being no exception to this rule,
so that it can at once be seen that to obtain a perfect equilibrium
in the value of capital, such capital must be spread in equal
parts over different areas of the world's surface and in stocks
of equal grade or quality. A poor harvest or period of trade
depression in the United States and Canada would for the
time being bring about a fall in the market value of American
and Canadian securities ; it is out of the question, however,
that every country in the world should at the same time be
in similar case. On the contrary, what is the misfortune
of one is often to the benefit of another, and it is quite likely
that—as has already happened more than once—while
North American crops were poor, Argentina had a bumper
harvest and sold at good prices on account of the shortage
elsewhere. Thus, what the wise investor may lose through
unforeseen circumstances in one direction must, humanly
speaking, and almost by virtue of such circumstances, be
made up by the gain in another direction ; and an appreciation
in, say, his Argentine or Brazilian securities would balance
any depreciation in his North American investments. But,
as has already been indicated—and the point needs em¬
phasising—to effect this it is necessary that as much of the
investor’s capital should be placed in one part of the world as
in another. This involves the demarcation of the earth’s
surface into investment divisions, and before describing this
method, let us summarise the benefits accruing to the investor
from this scientific repartition of his capital.
i. The value of the total capital invested remains more

stable, for under no conceivable circumstances could the
safety of investments in all parts of the world be simultane¬
ously threatened.
io
2. A higher rate of interest is earned without lessening the

security, because the total received represents the mean
between all the rates obtaining throughout the world, which
in many countries are appreciably higher than those obtainable
in Europe.
3. With a well-distributed list of investments there will

always be some showing a good profit. By exchanging these
for similar grade securities as described on page 26, a reserve
fund supplementary to the original capital may be built up.
There is another manner of building up, more or less

unconsciously, a reserve account which may well be adopted
by the possessors of large sums of capital, and this is by having
surplus income placed to a separate bank account.
We will assume the case of a man having £20,000 invested,

who in the ordinary way would be satisfied with, and whose
requirements would be met by, an average yield of 4 per cent.,
but who, by means of a scientific averaging of risks as here
indicated, is successful in obtaining 4J per cent, without any
increase of capital risk. By instructing his bank to place
all interest in excess of 4 per cent, received during the year
on the total sum invested, to a No. 2 deposit account, he will
automatically at the end of ten years have built up a reserve
of £1,000 exclusive of interest.
Investment Divisions.
The areas constituting separate investment divisions should

correspond as nearly as is practicable with the different
climatic, trade, and political influences, and should comprise
a number of different countries offering variety of choice;
for there will always be one, among a number, offering at a
given moment more favourable opportunities for investment
than the others. Man has already divided the earth’s surface
into certain broad divisions, following natural features, and
we cannot do better than follow this division into continents,
except that as North and South America present such different
characteristics—political, natural, and climatic, it is advisable
to keep them distinct.
11
For investment purposes, therefore, the world may be

divided into seven divisions—viz. :
United Kingdom.
Europe.
Asia, including the East Indies, Philippines, etc.
Africa.
North America, including Canada, Mexico, and West Indies.
South America.
Australasia, including New Zealand and the Pacific islands.
Any sum of capital evenly divided over these investment

areas will conform to the first general principle of the science
of investment—viz., the averaging of risks, and will escape
violent fluctuations arising from natural, industrial, or
political causes.
Equality of Grade also Necessary.
Compliance with this general principle does not, however,

of itself suffice to insure complete success, because if the
securities in one investment division are badly chosen, or are
inferior in quality to those in other divisions, the scheme
will to that extent be dislocated ; so that it becomes needful
to insure equality of grade. With this achieved, an invest¬
ment scheme is perfect, and as the sum total of the world’s
prosperity is steadily increasing concurrently with the increase
in population (or even more quickly, on account of the growth
of invention), this means that in aiming solely at perfect
equilibrium or stability of capital one is insensibly aiming
at increased value of capital, for the normal trend will be
upwrard. As will be shown later, by constantly watching
over the different stocks held, taking good profits where
they are obtainable and an equally good but cheaper stock
in the same division is available, it is quite possible to increase
the total value of one’s capital. This requires more atten¬
tion than either of the other two aims, and, after all, it is
worth a little trouble.
12
CHAPTER III.
THE CLASSIFICATION OF INVESTMENTS.
Debentures, Preference and Ordinary Shares.
B EFORE we can grade investments it is desirable that

we should attempt some classification of investment
securities.
The classification and grading of negotiable securities may
be done in various ways, but it is important at the outset
to have quite clearly in one’s mind the distinction between
securities rendering one a creditor and securities rendering
one a partner. In the former category are included all
Government and municipal loans and all classes of deben¬
tures. Holders of this description of security are in the
position of lenders ; they are entitled to their interest whether
profits are earned or not, and, in the event of default, they
have in the majority of cases redress; furthermore, with
few exceptions, their capital is repayable at some period or
another.
Holders of shares or ordinary stock are in the position of

partners ; the interest they receive is contingent upon the
profits, and in the event of failure they may only share in
the division of the assets after the debenture holders and
other creditors have been satisfied in full.
13 c
By way of compensation, their dividends are not limited

to a fixed rate, but vary according to the profits. Holders
of preferred stock or shares are in the same position of partners,
except that their dividends are usually limited to a fixed
rate, in compensation for which they come before the ordinary
shareholders, both as regards dividends and repayment of
capital invested, in the event of a winding-up ; but their
dividends are still dependent upon profits being earned, and
in any case, the claims of the debenture holders and ordinary
creditors have to be met in full before anything can be repaid
to the holders of preference shares.
It is obvious, therefore, that both ordinary and preference

shares are of a more or less speculative character—the ordinary
shares more so than the preference—and that from the
investment point of view debentures are infinitely to be
preferred to them.
Plain as this fact is, there are thousands of people holding

ordinary shares the annual return on which is no more, and
often less, than on debentures. The only justification for
this would be the likelihood of such an increase in the value
of the shares as to atone for the vastly enhanced risk: this
is, however, seldom the case.
It might be argued that ordinary shares in a sound under¬

taking having no prior charges in front of them are less
speculative than the preference shares of another concern
which has issued debentures. This is true of some cases, but
the fact remains that the holder is still in the position of a
partner, instead of a protected lender, and subject to the
fluctuations in earnings which affect the value of every
partnership.
Classes of Negotiable Securities.
The negotiable securities quoted on the Stock Exchanges

of the world may be conveniently divided into the following
classes, according to the nature of the borrower or under¬
taking :
14
1. Government Loans.
2. Corporation—i.e., Municipal—Stocks.
3. Railway Debentures and Stocks, British.
4. ,, „ ,, Colonial.
5. „ „ ,, Indian.
6. „ „ ,, American.
7. ,, „ ,, Foreign.
8. Waterworks.
9. Gas Companies.
10. Electric Light Companies.
11. Electric Light and Power Companies.
12. Tramway Companies.
13. Telephone and Telegraph Companies.
14. Banking Companies.
15. Land Companies.
16. Shipping Companies.
17. Industrial and Trading Companies.
Government, State and Corporation Loans.
In Classes 1 and 2 we have certificates of indebtedness,

the payment of interest on which, and the repayment of the
capital of which (except in those few cases such as Consols,
French Rentes, etc., which are either perpetual or only
redeemable at the option of the borrower) are uncondition¬
ally guaranteed by the State, province or town, as the case
may be.
In some instances certain assets and revenues are specially

hypothecated as security for such loans, but as one has really
to do with a moral obligation on the part of a Government
or a city, it is evident that in appraising the degree of security
offered by loans of this nature, the history and character of
both Governments and people must be taken into account,
so that there is room for a wide divergence in quality among
the various loans in these three classes. On the other hand,
15
it is to be said in favour of this class of security that taxes and

rates (which form the security for the payment of interest)
have to be paid, and it is on this account that loans of this
description are almost invariably quoted at higher prices than
others, and consequently give a lower return to the investor.
Even here an anomaly has to be noted. Government

loans are usually priced more highly than town loans in the
same country, but a good town loan is probably a better
security than a Government loan, because in the event of
default thetfe is the centred Government to put pressure on
the municipal authorities, whereas in the event of the State
itself defaulting, there is no higher authority to which one may
appeal. Moreover, Governments may change, but the old-
established town goes on.
Loans Guaranteed by Governments.
There are many loans in existence which are specifically

secured upon a certain undertaking, such as a railway, but
are also guaranteed by a Government. If such guarantee
relates to both interest and repayment of capital, the loan
may be regarded as of the same quality as a Government
loan ; if anything, it is better.
Railway Debentures.
In the case of Classes 3 to 7 we have the debentures and

the preferred and ordinary stocks of railway companies in
different parts of the world. As there are ranking behind
the debentures large amounts of preferred and ordinary
stocks, it is easy to form an idea of the degree of security
afforded on the basis of past results by showing what dividends
have been paid on stocks ranking behind the debentures, and
what proportion the total bears to the amount required
annually for the payment of interest on the debentures.
Other factors, however, such as the progress of trade in the
particular country, the extent of actual and potential com¬
petition, all have an influence on the value of the securities of
16
railway companies, and only by a careful investigation of all

the circumstances can the relative value of the different
railway debentures and stocks be determined.
Public Utility Companies.
In Classes 8 to 13 we have to deal with what may be called

Public Utilities. Now, while these are in a sense industrial
companies, they really rank higher, provided their concessions
(or franchises) are perpetual or for a number of years—in other
words, that they enjoy a monopoly. As the services they
provide are largely of an indispensable nature their revenues
are necessarily more secure than those of any undertaking
liable to competition, and as, generally speaking, the demand
for these services increases concurrently with the increase in
population, the securities of companies of this description are
well worthy of attention.
Great care must, however, be taken to see that the con¬

cessions are sound, and that, in the not uncommon event of
the municipality having the right to buy out the company at
a given date, the conditions of purchase as set forth in the
concession are such as would leave the company with sufficient
to pay the debenture holders in full. Here, also, it will be seen
that careful investigation of numerous factors is necessary
before the relative value of the securities of companies of this
nature can be arrived at.
Banking Companies.
The assets of a bank, which consist usually of advances to

customers and negotiable securities, are not suitable security
for debentures; consequently, except in the case of land-
mortgage banks, with which we deal under the heading of
“ Land Companies/’ bank debentures are almost unknown.
For some reason or other, preference shares are seldom, if
ever, issued by banking companies, and as the business of a
well-established bank is of a lucrative and safe character, the
17
ordinary shares of companies of this description, having

neither debentures nor preference shares ranking in front of
them, are usually less risky than ordinary shares of other
commercial undertakings. Those banks firmly established in
“ new ” countries such as Argentina, Canada, Brazil, Mexico,
etc., the prosperity of which necessarily grows at a much more
rapid rate than that of older and more highly developed
countries, are attractive, as they have every likelihood of
sharing in such increased prosperity. The general factor of
importance here lies in selecting that country which, at the
moment, offers the greatest prospects of increased commercial
prosperity. This decided, one must select the particular
banking institution working in that country whose shares at
that juncture happen to be the cheapest, after allowing for
the amount and regularity of dividends.
Many bank shares are only partly-paid, and others carry a

special liability in connection with note issues and deposits.
Such shares are to be avoided unless the yield on the price is
sufficient to constitute ample compensation for this serious
disadvantage.
Land Companies.
Land being one of the first essentials of life on this planet,

and the supply being limited, the debentures—and, for high
yields, the preference shares—of good land-owning companies
are an excellent form of investment. But the value of land is
dependent upon certain conditions, and in measuring the
value of any securities of this nature care must be taken that
the property consists of well-developed land, or land which
will have an assured value when developed, and that the
amount of indebtedness does not bear more than a safe
proportion to the lowest selling value of the property. If the
surplus revenue from the land for the last few years has not
been well in excess of the amount required to meet the interest
on the debentures, the latter, however good the undertaking
may appear to be, are not a safe investment.
18
The bonds or debentures of banks or companies doing a

land-mortgage business are usually well secured, for such
companies lend only up to a certain percentage—often 50
per cent.—of the assessed value of the property mortgaged.
Moreover, as these loans are repayable by instalments, the
first of which falls due shortly after the granting of the loan,
the margin of safety is at once increased. The value
of such bonds varies according to the special circumstances of
each company : i.e., the proportion the bond issues bear to the
capital; the amount of capital and reserve funds; all require
careful investigation. There is no doubt, however, that it is
among securities of this description that some of the highest
yields, compatible with well-nigh absolute safety, are to be
obtained.
Shipping Companies.
Shipping companies usually issue debentures, but we are

not enamoured of this class of security. Theoretically, the
shipping industry enjoys the advantage of mobility—that is
to say, if business is bad in one part of the world the vessels
may be diverted to another part where conditions are more
favourable ; but in practice, and in face of the internecine
competition which prevails in this industry, this advantage
does not count for much, and the shipping trade is of too
fluctuating a character to render the debentures suitable for
the majority of investors. The ordinary shares of shipping
companies are altogether speculative.
Industrial and Trading Companies.
In our opinion, the majority of industrial and trading com¬

panies are not undertakings on the security of which deben¬
tures should properly be issued. In view of the enormous
number of debentures of this description which are quoted on
the stock exchanges this statement will appear somewhat far-
reaching, but that we cannot help. From the standpoint of
a trading company earning profits in excess of 7 or 8 per
cent., it is, of course, good business to raise capital at from 4 to
*9
6 per cent., but from the point of view of the investor it is a

question whether a commercial trading concern gives com¬
mensurate security. The success of an ordinary commercial
business depends upon so many unstable factors—fashion,
the business ability of a single individual, the life of a patent—
and is ever exposed to the danger of competition. We will
not go so far as to say that commercial debentures should
under no circumstances be held, particularly in cases where a
high return on the capital is looked for, but extreme caution
should be exercised in their selection, and only those should
be passed which are amply secured by the special hypothe¬
cation of immovable assets of a realisable nature. Even new
buildings may prove not to be worth their cost price if they
have to be realised, for a huge structure like a hotel or a big
department store which fails may be suitable for no other
purpose, and on that account realise only a trifle in a forced
sale.
Where debentures or shares in trading concerns are held,

the annual balance sheets should be subjected to a most
stringent analysis immediately after their appearance, for
from the growth of certain items and shrinkage in others,
as well as other indications familiar to the expert, the first
signs of decay or unsatisfactory management may often be
detected.
20
CHAPTER IV.
THE GRADING OF INVESTMENTS.
T HUS far we have dealt with the classification of the

various forms of stock exchange securities, and enough
has been written to show that some generalisation
as to the superiority of one class of loan or undertaking over
another is possible. But it is evident that a scientific system
of investment cannot be built up upon mere considerations
of a general character; for while, as a rule, a railway debenture
is safer than the debentures of a commercial concern, the
debentures of the best commercial company in a given country
are probably better in quality than those of the least successful
railway company situated in the same region.
If, however, each investment is examined upon its merits,

taking careful account (i) of the considerations of a general
character already referred to, and (2) of the special position
and circumstances of the particular loan or undertaking in
view, it becomes possible to put such investment in its proper
place as regards comparative value with other securities, or,
in other words, to grade it.
We would divide Stock Exchange securities into five

grades, as follows :
21
Grade I. (Excellent).
Securities which may be considered either as absolutely

safe as regards payment of interest and (where redeemable)
repayment of capital when due, such as the loans of the
British Government and Municipalities, and of first-class
foreign and Colonial Governments and Municipalities, or in
which the possibility of default is exceedingly remote. In
this grade would be included the bonds of the best land-
mortgage banks, the debentures of railway and other “ public
utility ” companies of the very first order, and the first
mortgage debentures of a very limited number of manu¬
facturing or commercial companies, which are so well estab¬
lished and so well covered by assets and annual profit-earning
capacity as to place them in the first rank.
In this grade there is often room for some appreciation in

the capital value of securities.
Grade II. (Good).
Securities where the interest and repayment of capital

appear to be well secured, but subject to some slight risk,
such as the loans of South American or Mexican provinces
and municipalities, the debentures of public utility companies
of second rank or in countries of the second grade, shares
in banking companies established some years and paying
egular dividends, the debentures of well-established industrial
or commercial companies offering an ample margin of security,
and the preference shares of some first-class commercial
and industrial companies.
Securities of this grade have a good chance of appreciating
in capital value, but require more careful surveillance than
those of the first grade.
Grade III. (Moderately Speculative).
Securities, the capital and interest of which appear to be

“ fairly safe ” ; as, for example, the debentures of trading
22
companies which are sufficiently covered by assets and annual

profits, but without any appreciable margin of safety. In
this category, too, would be placed Government loans of
low rank, and the preference and ordinary shares of many
commercial companies paying regular dividends.
Securities of this grade naturally show greater chances of
appreciation and depreciation than those of the first three
grades, the limits of fluctuation being wider.
Grade IV. (Speculative).
Speculative stocks or shares, such as the ordinary shares

of companies whose profits and dividends fluctuate con¬
siderably from year to year, the majority of tried mining
enterprises, and the preference or ordinary shares of new
undertakings whose prospects appear promising.
These securities may be termed “ speculative/' and are not

suitable for investment purposes.
Grade V. (Hazardous).
New companies, the profits of which are wholly problema¬

tical, untried mining enterprises, and speculative schemes of
all descriptions.
23
CHAPTER V.
HOW TO CONSTRUCT AN INVESTMENT
SCHEME.
O NCE the grade of the different securities is established

it becomes possible to devise a scientific scheme of
investment, dividing one’s capital, however large or
small it may be, into seven equal parts, each part being
spread over one of the investment areas indicated on page 12,
in securities of the same grade.
Which Grade ?
Naturally Grade I. affords the greatest possible degree
of security, but with a correspondingly low rate of interest.
By separating his capital over the seven investment areas,
however, the investor undoubtedly obtains a higher rate
of interest than if it were all placed in British stocks of
the same grade. If, for example, the investor buys £1,000
of 2J per cent. Consols at 82, at which price they yield
3 per cent., and £1,000 of Prussian 3 per cent. State Loan
at the same price, at which it yields 3! per cent., he obtains
an average yield of 3^ per cent., as compared with the
3 per cent, he would get if the whole of the £2,000 were
placed in Consols. As regards security he is a positive
gainer, the Prussian national debt being, as a matter of
fact, more than covered by the value of reproductive assets
belonging to the State.
24
At the present juncture Grade I. securities properly dis¬

tributed in the manner indicated would produce a yield of
between 3J per cent, and 4! per cent., and, as will be shown
later on, give an investor, working on scientific lines, oppor¬
tunities for increasing his capital without in any way lessening
its safety.
Grade II. securities are suitable for those individuals who

are willing to incur a very slight risk for the sake of a relatively
high yield, with good chances of capital increase, but such
investors must be prepared continually to watch over their
holdings, and to effect frequent changes as circumstances
arise, rendering the sale of one security and purchase of
another desirable. At the present time a yield of about
5 per cent, may be obtained on securities of this grade.
Grade III. securities should only be held by those investors

who attach considerable importance to an increase in the
value of their capital, and who are prepared to face the
greater risk involved. To minimise the risk it is advisable,
with securities of this grade, to spread the risk over as large
a number as possible of different stocks or undertakings ;
consequently it is easier to work on this grade of security
with a large capital than with a small one. An average rate
of 6 per cent, can be obtained in this grade.
Grade IV. securities can only be recommended to indivi¬

duals who fully appreciate the risk they are running, or
where a certain sum is deliberately set aside for the purpose
of laying it out in securities of this description, the possi¬
bilities of gain and loss on which are naturally greater than
with the grades already mentioned.
It is unnecessary to speak further of securities coming

under Grade V.
Where the investor hesitates between two grades he may,

if his capital is sufficiently large (the smallest sum which
25
should be placed in any one security is £ioo), decide upon

spreading his money over two grades, but it should be divided
equally over each investment area, otherwise the first rule
of scientific investment is at once transgressed.
We will assume now that the capital at the investor’s

disposal has been divided in the manner indicated. The
task is by no means finished, for, as a result of the thousand
and one influences, natural, economic, and political, to which
each security is subject, what is to-day the best and most
remunerative investment of its grade and class may, in a
month’s time, have changed its rank. It may, for example,
have risen somewhat in price, while, during the same period,
another security of equal grade may, owing to some
adventitious circumstance—such as, for instance, the pressing
for sale of a large parcel of stock belonging to a deceased
holder—have fallen temporarily in price, with the result
that an exchange from the first to the second security is
advantageous, the amount of income being left unchanged,
but the profit constituting a valuable reserve. Circum¬
stances may arise of an unfavourable nature in connection
with one of the investments, rendering an immediate sale
advisable. It will be seen, therefore, that it is not sufficient
merely to grade one’s own investments, but necessary to
watch all other investments of similar grade, so as to be
able to avail one’s self of any favourable opportunities
occurring. For obvious reasons the necessity for this action
cannot be escaped by the holder of even the finest gilt-edged
securities. This is certainly a formidable task imposed upon
the investor, and how he can achieve it is set forth in a sub¬
sequent chapter.
Foreign Markets.
London undoubtedly has one of the world’s most im¬

portant stock exchanges, and the five or six thousand securi¬
ties quoted in the official list offer considerable scope for
26
selection. But London is by no means the only important

stock exchange in existence, and it is obvious that, the wider
the field of selection, the more likely is one to find good
securities. Furthermore, in framing an international scheme
of investment it must necessarily happen frequently that a
foreign security can be obtained more cheaply on its home
market than a similar grade of investment, belonging to the
same country, which has been introduced on another market.
The extent to which this occurs would surprise the majority
of investors if only they were in a position to make the
necessary comparisons. On the other hand, the average
investor naturally prefers to deal on a stock exchange with
the customs of which he is more or less familiar and where
he can readily follow the course of quotations.
A good list of investments must, however, include a certain

number of securities which are quoted on foreign stock
exchanges, this being an additional influence in assuring
stability of the total sum invested, for the tone of the market
—and, consequently, quotations—may be good in Paris or
Berlin at a time when, on account of local conditions, they
are bad in London. These market conditions, which may
vary in the different stock exchanges of the world, con¬
stitute a secondary influence on prices, the primary influences
being, of course, those which affect the intrinsic value of
the security—viz., the general condition of affairs in the
country or region in which is situated the authority or under¬
taking whose loan or shares are held, and the actual position
of the authority or undertaking itself. This secondary
influence brings about opportunities of more favourable
investments in one financial centre than another, and affords
increased facilities for advantageous exchanges by selling in
a good market, and at once reinvesting the proceeds in
securities of similar grade, though temporarily depressed, in
another market. The inclusion of some foreign quoted
stocks in every scheme of investment is highly desirable,
and the larger the total capital invested the larger should
be the proportion of such stocks.
27
Only Quoted Securities Should be Held.
Only such loans, debentures, or shares as are regularly

quoted on some stock exchange or another should be held.
Without this the investor loses all possibility of ascertaining
at any time the market value of his holding, and consequently
the amount of his capital; for, once invested, the amount
of that capital is, of course, no more and no less than the
sum obtained by the sale of the securities. The price
originally paid no longer enters into the question.
Unquoted Securities.
Owing to the enormous profits attaching to them there is a

much larger business done in unquoted stocks than the
average investor dreams, and before purchasing any security
recommended to him the investor should satisfy himself
that it is quoted on a stock exchange, or, in the case of a
new issue, that the prospectus contains the specific assur¬
ance that a quotation will be applied for. If not, his position,
should he wish to sell, will probably be an unenviable one.
The only means he has of ascertaining the realisable value of
such securities, or of checking the prices furnished to him by
interested parties, such as the vendors, is to inform the latter
that he wishes to dispose of his holding, and to ask point-
blank the price they can offer for it. This, however, he will
not do if he wishes to preserve his peace of mind.
28
CHAPTER VI.
DISABILITIES OF THE INDIVIDUAL INVESTOR.
Summary.
I F we summarise the essentials of successful investment

as here set forth, we find that it is necessary—
i. To average the risk by spreading one’s capital in

equal parts, and in securities of the same grade, over the
whole of the earth’s surface, adopting for this purpose certain
well-defined investment areas.
2. To keep a sharp watch over the general trend of things—

the value of money, the crop outlook, the course of trade,
political conditions, etc., in the different countries comprising
each investment area.
3. To follow carefully the development of each under¬

taking in which one has money invested, and with this end in
view, to scrutinise searchingly the annual reports and balance
sheets, and any other particulars available. The lower the
grade of security held, the more imperative the need for this
regular supervision and investigation.
4. To watch the quotation of all securities of similar grade

and class in the same investment area, including new issues
29
offered for public subscription, and to change from one

security into another of equal quality as soon as the discrepancy
of price and general conditions warrant such a course.
Now, it is quite obvious that no single investor is possessed

of either the time or ability to comply with all the require¬
ments indicated as being essential to successful investment.
In the first place, he must keep himself au courant with all

that goes on throughout the world having any bearing upon
investment conditions in general and his own investments
in particular. It is not sufficient to read one—or even three,
financial dailies. A perusal of the Statist, the Economist and
the Investor's Review, all containing sound and reliable infor¬
mation, would require to be reinforced by a study of the
articles and prices in such foreign publications as the Moniteur
des Inter Sts Materiels of Brussels, the Cdte DefossSs or L’Infor¬
mation of Paris, the Berliner Bdrsen-Zeitung, La Finance
Egyptienne of Alexandria, the Commercial and Financial
Chronicle of New York, the Monetary Times of Toronto,
Capital of Calcutta, and a score of others that could be
named. In an obscure financial journal published in Mexico,
Buenos Aires, or some foreign or Colonial centre, there may
be an item of news relating to a tramway or lighting concession,
or to a particular company, which may mean hundreds of
pounds to the investor. The few financial houses referred to
in the introduction to this little book will be made aware of
this item of news ; but not so the individual investor, who has
to wait weeks and sometimes months before he sees the
inward explanation of certain price movements that have
hitherto been inexplicable to him.
Then, assuming that the individual investor has sufficient

financial knowledge and judgment to allocate the principal
securities to their respective grades, he must for this purpose
have access to the financial reference books of the world ; in
addition to the excellent British works of reference such as
the Stock Exchange Official Intelligence and the Stock Exchange
30
Year-Book, he will find the numerous French Annuaires,

the splendid Belgian Receuil Financier, the German Saling’s
BOrsenpapiere, the Austrian Compass—to name only a few—
absolutely indispensable ; and if he is to ascertain which
are the cheapest and most profitable securities of a given
grade or class at any particular moment, he must have
facilities for studying the lists of quotations of the principal
stock exchanges of the world.
The Need for Expert Aid.
It is quite apparent that no single individual can hope to

possess either the capacity or the facilities for any such
scientific system of investment, and that if the carrying out
of any such system is to be rendered possible, some organisa¬
tion built up on the lines of those intelligence departments
mentioned in the preface must be available for the use of
private investors; in other words, expert and professional
assistance is necessary.
And, after all, how can there be any doubt on this point ?
When a man builds a house, he employs the services of an
architect—that is, a building expert; if he raises, or invests
in, a mortgage, he employs a solicitor. There are consulting
engineers, architects, physicians—why not consulting financial
experts ? In all these matters a man recognises the fact that
he is an amateur and requires professional aid ; and if pro¬
fessional assistance is necessary in the laying out of a house,
surely it is still more necessary in the laying out of one’s
fortune, be it large or small.
The fact that an investor avails himself of the service of

professional financial advisers does not imply that he should
surrender control of his fortune. He can consult his expert
advisers, weigh up their recommendations, insist upon full
reasons being given, and all the evidence adduced in support
of such recommendations. Then, after having been placed
in possession of the facts which have caused his advisers
(with the superior facilities and all the machinery at their
3i
disposal) to advise a certain action, if he does not agree with

such advice, he is under no necessity to follow it.
In the following and concluding chapter of this little work,

we show how both the large and small investor may have at
his disposal all the machinery of a perfectly-equipped
financial house, right down to the minutest detail, including
the services of a highly organised intelligence department,
and the impartial advice of leading investment experts,
without any additional cost to himself, the manner in which
the company, offering these facilities, recoups itself being
clearly and unequivocally indicated.
32
CHAPTER VII.
THE BRITISH, FOREIGN & COLONIAL CORPORATION,
LIMITED.
T HE British, Foreign and Colonial Corporation,* Limited,

has been constituted to carry out for its customers, on
the scientific basis outlined in this book, all the work
connected with their investments.
By means of its unrivalled statistical and intelligence

department it is able to advise its clients as to the most
lucrative manner in which they can lay out their surplus
capital, and systematically to supervise their investments,
advising from time to time when circumstances render a
change from one security to another profitable. The
Corporation is also prepared to look after every detail of
investment, including the purchase and sale of securities in
the best market, the cashing of coupons, the presentation
of bonds and debentures when due for repayment, etc., etc.
In short, all that the intelligence department of a great

financial house, as described in the preface, can do for its
firm, the British, Foreign and Colonial Corporation does for
its clientele, placing at their full disposal all the machinery
of a modern financial establishment.
* 88 Bishopsgate Street Within, London, E,C.
33
The different ways in which the Corporation can be of

service to the investor will best be illustrated by some actual
examples ; but, before doing so, it is necessary to give a
description of the methods and system by which such an
organisation is arrived at.
The Index of Investments.
In the first place, the list of every important stock exchange

in the world is carefully gone through, and the name of
every security of apparent worth extracted. The size of the
residuum—i.e.} stock exchange securities which to the eye
of the expert are immediately rejected as unsuitable for
investment, would surprise and appal the average investor.
Each security selected at this preliminary stage is traced
back in the reference books and subjected to a critical in¬
vestigation. If it survives this ordeal it is classified and
graded according to the system already described in
Chapters III. and IV. Those securities which are not invest¬
ment stocks at all are at once eliminated. The remaining
securities are now sorted out according to their respective
areas, and are entered in separate indexes (one for each
investment area) in which are shown the essential particulars
of each stock, such as the nature of the security, the amount
of debentures ranking in front, the amount of preference and
ordinary shares ranking behind, the date of redemption, the
dividend dates, etc., so that each volume contains a bird’s-eye
view of all the good investments in a determined area, divided
up into their various grades of safety. Now the latest
quotation of each security is written in, and the net yield
which, at that price, it gives to the investor, is worked out.
These particulars are constantly revised as quotations

change, and the index is continually undergoing alteration;
for if the analysis of a company’s balance sheet shows that
it has fallen from the standard which determined its inclusion
into its grade, or if any other circumstances are known which
render it a less desirable investment, it is taken out of
the list. In the same way, every new public issue, in every
34
financial centre, is carefully examined, and if found suitable

is classified, graded and added to the index.
What we have thus far described, however, is merely the

preliminary or “ working ” index. After the quotations
have been revised in accordance with latest prices, the
most attractive stocks in each grade are selected, undergo a
further careful investigation, any points requiring elucida¬
tion (and this is of frequent occurrence) being cleared up
either by reference to the houses responsible for the issue,
or by inquiry of the Corporation's agents in the different
financial centres, and are then entered in the final index,
which shows at a moment the pick of the world's investment
securities quoted on the different stock exchanges. A
detailed description or analysis of each loan or security
included in this final list is made and filed for easy
reference.
Purposes Served by Investment Index.
The purposes served by the index are manifold, for not

only does it enable one to select the most remunerative
investment in any class, grade or country, but it also serves
as a standard of value against which may be measured the
value of any existing investment or any new issue.
New Issues.
For instance, a 4 per cent, loan of the city of Budapest

is offered in London to the investing public at 95 J—i.e.,
£95 10s. for the £100 bond. A customer inquires how this
loan compares in price with loans of similar grade, and if
it is to be recommended.
Analysis of the prospectus, together with further parti¬

culars culled from Austro-Hungarian reference books, show
that the security is excellent, and although the political
situation in Hungary is not wholly satisfactory, the safety
35
of the loan of this city of over 800,000 inhabitants, with a

rapidly increasing population, itself holding property con¬
siderably in excess of its total indebtedness, cannot be ques¬
tioned. It therefore falls into Grade I., and at the issue
price yields £4 4s. per cent. On turning up the index to
ascertain how this loan compares in price with other European
securities of similar rank, we find that, at that moment,
other 4 per cent, loans of the city of Budapest are quoted
in Budapest itself at 92, yielding £4 6s. nd. per cent., and
that the Roumanian 4 per cent. Gold Loan, which is redeem¬
able at par by semi-annual drawings between now and 1940,
and therefore offers the chance of a handsome bonus at any
moment, is quoted in Berlin at 90J, yielding £4 8s. 6d. per
cent. ; that the Bucharest 4! per cent. Loan is quoted, also
in Berlin, at 98, yielding £4 ns. 6d. per cent., not counting
the profit on redemption ; whilst the Roumanian 5 per cent.
Loan is quoted in Amsterdam at 98J, yielding £5 2s. 3d.
per cent.
All these loans are of the same grade ; therefore, while

the new City of Budapest 4 per cent. Issue is an excellent
loan, it is not as cheap as others of the same quality, and
the customer had better place his money in one of those
named.
Investment of a Capital Sum.
Or, again, a client may write that he wishes to lay out the
sum of, say, £5,000, to the best advantage. On being ques¬
tioned as to the precise nature of his requirements it is found
that he will be content with an average of about 4J per
cent, interest, provided he can sleep soundly on his invest¬
ments and be sure of no loss of capital. This capital is
divided into seven sums of about £700 each, and by
means of the index two first-grade investments are
selected in each investment area in such manner that the
yield averages fully 4! per cent. From the moment of
purchase a careful watch is kept over each security held by
the client, who is from time to time advised of any change
36
in his investments that circumstances make desirable. Such

a list as this, scientifically framed from the outset, gives
the minimum of trouble, and as the yield expected is a reason¬
able one, it requires less readjustment as time goes on than
in cases where 5 per cent, interest or more is expected.
A Good Investment.
Another client may not be wholly converted to the idea of

scientific investment of capital, or may be loth to part with
those of his existing investments, the sale of which is necessary
to the adoption of the principle ; but he has a sum of money
available and wishes to lay it out to advantage. On his
requirements being made clear, he is given the choice of those
investments which the index shows to be the safest and
most profitable of their kind at the moment.
Re-forming Investments.
Another typical case is that of a client having some £10,000

invested in various securities. He is slightly sceptical both
as to the advantages offered by any scientific scheme of
investment and as to the bona /ides of the institution anxious
to advise him. As a keen man of business, however, his
mind is always open to new ideas, and he is curious to see to
what extent other people, claiming to be experts, can improve
his list of investments. He accordingly sends in a list of his
stock and share-holdings, which proves to be one of the usual
heterogeneous masses of all sorts of securities, ranging from
Grade I. down to virtual rubbish. While some of the securi¬
ties held are undeniably good, his interests are confined far
too much to one or two countries, and he holds several stocks
of quite inferior rank (ordinary or preference shares) which
yield less return on the invested capital than he can obtain
by purchasing debentures of better concerns secured by a first
mortgage. By means of the index it is not a difficult
matter to suggest a certain number of exchanges (all quoted
securities) which will improve both the average yield and the
security.
37
The improvement is so obvious that the client, and his

banker, to whom he shows the list, are convinced as to its
superiority, and the scheme is carried through.
Limitations.
It is unnecessary to multiply these instances. Of course,

impossibilities cannot be achieved. The widow who is left
£1,000, and requires at least 7J per cent., which must be
absolutely safe, as this sum is all she possesses in the world,
cannot be satisfied by the means at the disposal of the Cor¬
poration. She will be advised to content herself with from
4f per cent, to 5 per cent., with the likelihood of a gradual
increase of capital, that being the highest yield at present
obtainable consistent with the degree of safety vital to one
so circumstanced.
If a client asks for an investment scheme giving an average
yield of over 6 per cent., combined with absolute safety, he is
informed that what he desires is impossible. What the
Corporation can do, with all the facilities at its disposal, is to
draw up a list of investments giving the desired income, which
are certainly safer in the aggregate than any list of invest¬
ments the client or an ordinary broker, with their more limited
resources and knowledge, could hope to obtain, and it is in a
position to give such a scheme the unceasing surveillance that
is absolutely necessary if it is to be successful and result in an
increase of capital.
Inquiries.
Isolated inquiries as to the position or prospects of individual

stocks or undertakings are answered with the same care as
those of a wider nature, the same resources naturally being
available for work of this description.
Statistical Department and Library.
In the Statistical department of the British, Foreign and

Colonial Corporation are filed the lists of all the principal
38
Stock Exchanges of the world. By means of one of the most

highly specialised libraries in existence, containing financial
works of reference in all languages, as well as the principal
Home, Colonial and Foreign financial journals, combined
with the services of a network of agents and correspondents
in every financial centre, the Corporation is able to give the
latest information and special advice, based on expert know¬
ledge, regarding every security no matter where quoted.
The reports and accounts of all undertakings in which

clients are interested are subjected to minute analysis,
daily fluctuations in the prices of the leading securities in all
the markets of the world are carefully watched, and customers
are immediately advised when any favourable opportunity
for a change in investment arises.
Clients are invited to make the fullest possible use of the

Library and of the services of the Statistical Department, and
are also invited to call and examine the system, described in
this chapter, in full operation.
Methods of Business.
The investor who wishes to avail himself to the full of the

advantages offered by the British, Foreign and Colonial
Corporation will send in a statement of his present investments
(forms for the purpose will be furnished on application) for
criticism. A detailed opinion on the composition of the
investments and any recommendations of a general character
arising therefrom will then be submitted to him. The
employees of the Corporation are pledged to secrecy in the
same way as all bank employees.
Terms.
The investor will now be asked whether, if he agrees in prin¬

ciple with the recommendations, he wishes the Corporation
to advise him fully and in detail as to the changes he should
39
effect in his investments in order to bring about the desired

degree of income and safety. It is made clear to him that if
he entrusts the sale and purchase of securities, resulting from
the recommendations, to the Corporation, no charge what¬
soever is made for the work performed, but if he gives the
business elsewhere (and some investors not unnaturally prefer
to give all their business to the brokers or others with whom
they have always dealt), a fee agreed upon is charged.
The Corporation buys and sells stocks at net prices in no

case exceeding the official stock exchange quotations. By
virtue of its better financial knowledge, its extensive con¬
nections and the size of its dealings the Corporation, which has
agents and representatives all over the world, is able to buy and
sell to very much better advantage than individual investors.
Stock exchange securities are surprisingly like other mer¬
chandise : there are wholesale and retail prices, lines avail¬
able or wanted in certain quarters, and special terms for
large traders, if one knows where to go. The Corporation
can frequently obtain better terms for its clients than they
would by selling or buying through the ordinary channels, and
in no case does the customer have to pay more or receive less
than the stock exchange quotation of the day.
Furthermore, the Corporation undertakes the under¬

writing of Government and municipal loans, and debentures
of the quality and value of which it is satisfied.
The British, Foreign and Colonial Corporation Limited*

does not recommend or undertake speculative business, and
any orders of such a nature will be respectfully declined.
*88 Bishopsgate Street Within, London, E.C.

W. H. SMITH & SON,
s S Fetter Lone, London,«.C.

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332.

University of Illinois Library

TT T is a well-known fact that, while the public occasionally

The explanation of this indisputable fact is not to be

Each of the financial houses of the world has its “ general

The individual investor can, however, at least profit by

I KNOW scores of well-to-do men,” said a well-known

The idea underlying the foregoing remark is perfectly

There is no science of speculation, except such as is com¬

THE AIMS OF INVESTMENT.

1. To secure as high a rate of interest as possible without

2. To keep the capital intact—that is to say, to be able

3. To increase, if possible, the amount of capital invested,

To formulate these desiderata is not a matter of difficulty ;

here, therefore, that the obtainment of regular income on

Probably not one investor in a thousand has ever taken

IS THE ACHIEVEMENT OF ALL THREE AIMS

Owing to the apparently conflicting nature of these aims,

There is no certain method of getting rich quickly, although

If this is done properly, regularly, and in a scientific manner

We will now proceed to indicate how this may be done.

Averaging the Risks.

I T is not sufficiently recognised by the ordinary investor

There are two main influences governing each separate

The first influence is more easily determined than the

higher yield than the same class of securities in Europe.

i. The value of the total capital invested remains more

2. A higher rate of interest is earned without lessening the

3. With a well-distributed list of investments there will

There is another manner of building up, more or less

We will assume the case of a man having £20,000 invested,

The areas constituting separate investment divisions should

For investment purposes, therefore, the world may be

Any sum of capital evenly divided over these investment

Equality of Grade also Necessary.

Compliance with this general principle does not, however,

THE CLASSIFICATION OF INVESTMENTS.

Debentures, Preference and Ordinary Shares.

B EFORE we can grade investments it is desirable that

Holders of shares or ordinary stock are in the position of

By way of compensation, their dividends are not limited

It is obvious, therefore, that both ordinary and preference

Plain as this fact is, there are thousands of people holding

It might be argued that ordinary shares in a sound under¬

Classes of Negotiable Securities.

The negotiable securities quoted on the Stock Exchanges

Government, State and Corporation Loans.

In Classes 1 and 2 we have certificates of indebtedness,

In some instances certain assets and revenues are specially

it is to be said in favour of this class of security that taxes and

Even here an anomaly has to be noted. Government

Loans Guaranteed by Governments.

There are many loans in existence which are specifically

In the case of Classes 3 to 7 we have the debentures and

railway companies, and only by a careful investigation of all

Public Utility Companies.

In Classes 8 to 13 we have to deal with what may be called

Great care must, however, be taken to see that the con¬

The assets of a bank, which consist usually of advances to