Railway Securities as an Investment

THE railway was invented by George Stephenson in 1814, but it was not until 1825 that investment in the shares of such enterprises came to public notice. The opening in 1825 of the Stockton and Darlington Railway, the first completed enterprise of the kind in history, first drew to that investment field the attention of the British public. The “boom,” as we should call it nowadays, in stocks of that and other projected enterprises, was short-lived, partly because the railway was an experiment, but chiefly because English capital had not yet recovered sufficiently from the long and exhausting strain of the Napoleonic wars to provide a sufficient surplus for new ventures on an extensive scale. During the subsequent decade, however, railway extension continued at a modest rate of progress, but with much pertinacity, the requisite capital being raised, as is usual in periods of reaction, from among a few wealthy men who had made a thorough study of the undertakings, and were content to devote to them their private fortunes or the accruing surplus of their own trade enterprises, and await results with patience. As a consequence, the authorizing and surveying of new railway routes progressed, while the large profits of lines already in operation, and the steady advance in quoted values of projected enterprises, more and more drew the attention of investors and speculators to the possibilities of the field.

Between 1835 and 1837, three familiar elements in a “railway boom ” came simultaneously upon the scene. The thrifty public, after a decade of apprehension, economy, and accumulation, found its savings once more overflowing the field of local investment. The railway projects, meantime, found their way into Parliament, where the advantages of rival schemes, discussed by the advocates of each, obtained wide audience. Simultaneously there came into public view the first of the long line of “ railway promoters,”— George Hudson, a York linendraper, whose daring, imagination, and persuasiveness gave to the schemes the fillip which is always essential in removing the outside public’s instinct of mistrust. For other reasons, chiefly, than the railway mania, the “ boom ” of the thirties broke down in the panic of 1837; but by this time the industrial opportunities of the railway were so manifest that capital was obtained to pursue construction, even under the heavy handicap of financial depression.

The ensuing years witnessed the linking of London with the provinces; half a dozen years later, the time was ripe for investment on an extensive scale in railways, completed or uncompleted. Mr. Grinling, in his History of the Great Northern Railway, has thus described the resultant rush of outside capital into English railway securities: —

“During this autumn of 1843, the money market in London was in a remarkably easy state. The amount of bullion in the Bank, which two years before had been as low as four and a half millions, had trebled itself in amount. The rate of discount was 2½ per cent, and Consols were above par. Money was very abundant, and the investments in foreign securities, in which it had until recently found full employment, had suddenly become extremely unpopular owing to ‘repudiations ’ on the part of several South American States. Hitherto the London brokers had left railway shares severely alone, and the lines so far constructed in England had been promoted; not by financiers, but by solid commercial men, — bankers, manufacturers, and merchants, — who were interested in them, not as investments primarily, but as likely to improve trade in general, and their own business in particular. But, now that other fields of investment were proving unfruitful, the attention of ‘the City’ began to turn to railway promotion; it was discovered to be a branch of speculative finance from which 10 percent dividends might be hopefully expected, — for were not the London and Birmingham, Grand Junction and York, and North Midland paying this, and the Stockton and Darlington 15 per cent ? — and so, all at once, as it seemed, a condition of most intense apathy in regard to railway projection gave way to one of keen interest, rapidly passing through enthusiasm to a new and overpowering mania.”

This description gives an idea of the economic reason for the rise of railway securities as investments. In brief, the accumulation of private capital had been so great, in the period of unusually prolonged peace and unprecedented industrial activity following the Napoleonic period, that it overflowed the ordinary channels of investment, and did so at the time when the very industrial expansion, from which arose the surplus investment fund, urgently called for the new transportation facilities which now could not be provided save through extensive use of private capital. From that time up to the period of wild promotion and speculation in the early seventies, the movement progressed continuously; hastened or impeded by the vicissitudes of financial prosperity or adversity, but on the whole continuous, as appears from the table in the next column, drawn up in 1883 by a French statistician, and reprinted, with expression of confidence in its exactness, in Poor’s Manual of Railways for the ensuing year. Since the year 1880, railway mileage has doubled in the United States, and a similar increase has occurred elsewhere in the world. The increase in volume of securities of this sort may be judged from the fact that, in this country alone, railway stocks and bonds outstanding, which in 1880 slightly exceeded $5,000,000,000, have risen subsequently to the remarkable total of $14,000,000,000.


Europe. Asia. Africa. America. Australia. World.
1840 2,117 none none 2,840 none 4,957
1850 14,458 none none 9,015 none 23,473
1860 32,147 840 296 33,332 347 66,962
1870 64,253 5,085 950 58,470 1,035 129,793
1880 104,733 9,856 2,878 107,162 4,858 229,487

What is to be said of the relative advantage or disadvantage of these securities for the investment of private funds, compared with other investment fields ? Judged solely by the criterion of safety, the best investment of capital is in an enterprise with which the investor is familiar, and of whose prospects he can keep himself constantly and accurately informed. Real property or real estate mortgages will fall within this category when the capitalist is personally conversant with the field; so of investment in merchants’ paper by a merchant, or in his own business by the head of any commercial undertaking. Such investments do not touch the present discussion; because the investor who considers railway securities is probably looking for something which can be instantly turned into cash, as the above-named investments usually cannot; and he is, moreover, either desirous of putting some of his eggs in another than the familiar basket, or else is no better acquainted with the merits of real property and merchants’ paper than with any other field of investment. Railway securities, in so far as they have been introduced on stock exchanges, have the advantage of a ready market; this they enjoy, however, in common with government securities, and the mass of industrial stocks and bonds.

As to government securities, it is to be observed that if they are issued by a government in unquestionable credit, their price is apt to be so high as to reduce the net income yield to a very low figure; whereas, if they are placed by an unstable government, or by a state confronted with war, revolution, or financial disaster, the buyer may secure a seeming bargain, but with a risk of total loss. This risk is not so slight as may be supposed; repudiation of all or part of a public debt has not, even in very recent history, been confined to states subjected, like the Central and South American republics, to alternating military dictatorships and anarchy. Within a dozen years, governments as respectable as those of Portugal and Greece have defaulted on their coupons; somewhat farther back, numerous American states and municipalities, with more or less excuse, have done the same; and the recommendation to do so for the national debt was actually incorporated, only forty years ago, in the message of a president of the United States. Public securities of Japan and Russia have lately, it is true, sold in the market on a 5 or 6 per cent basis; but they did so only because, in the one case, the Continental bankers publicly expressed the belief that Japan would break down financially under the strain of war, and in the other, because the impaired credit of Russia, in the throes of revolution, prevented her ministers from making terms with the bankers which should enable her even to meet her recurrent revenue deficit.

Industrial securities, on the other hand, incur the objection that at the present stage of their development they are, and probably will for a good many years remain, an experiment. Rules and methods employed by a manufacturer with a single mill, catering to a particular line of trade, and borrowing, largely on the credit of his personal record and experience, from banks of his own neighborhood, are necessarily and very radically altered when a dozen or a hundred of such establishments are combined into one great corporation under a central management. Expedients well established in the case of the independent manufacturer are no longer adequate; the new corporations learned in 1903 that they could not even borrow working capital on the plan pursued by their constituent companies before the amalgamation. Furthermore, these companies have not yet reached the stage of tried experience which will make their financial machinery as simple and as easily understood as that of a well-managed railway.

Yet it is not wholly this consideration which places these securities at a disadvantage, compared with railway investments. Even to-day, the problems confronting the railway business are as complex and bewildering as in most other industries. The influence of good or bad times on profits of railways is no more obvious and direct than their influence on steel or sugar or copper manufacture. The question of transportation rates governs the outcome in net railway profits, and rates are regulated, not only by competition, but by restrictions of public law. Railways, furthermore, are compelled, more generally than any other industry, to embark in new undertakings which are experimental, which must, for a time, at least, be not only unproductive, but a positive drain on the company’s general finances, and which may never turn out remunerative. New branches and extensions, planned with the idea of “opening up” districts whose resultant new population will provide future profits, are an inevitable incident of railway development. No doubt somewhat similar experiments play their part in the career of a manufacturing company; but with this difference, that if the venture turns out badly, the manufacturer is at liberty instantly to abandon the disappointing field. The railway, on the contrary, must continue the experiment and make the best of it.

But, from the investor’s point of view, the very important offset to all this was the early adoption, by the railways, of the practice of making full and frequent reports of earnings to their shareholders. Of the great industrial companies whose shares are most active on stock exchanges and most largely dealt in by investors, only a portion submit even annual reports. A company whose shares are as widely distributed as the $155,000,000 Amalgamated Copper never states its earnings, and has never submitted a report, save one whose inadequacy made it a mark of contempt for every accountant. Of industrial corporations which publish annual reports, only a handful have anything to say more frequently to their investors. A very few publish meagre quarterly statements; one gives out, every three months, its report of monthly net earnings for the period.

It follows that shareholders in such companies must, during all such intervals, and permanently in the case of such corporations as the Amalgamated Copper, be left in the dark as to their companies’ finances, save for the utterly unreliable “market rumors,” the interested personal assurances of officers, and the conjectures based on their own untrained observation. Railways, on the other hand, began very early in their career to publish frequent income reports and balancesheets. The annual report, usually very thorough, is a matter of course. The state authorities require as a rule complete quarterly reports of earnings, expenses, and net income, and of assets and liabilities. This information the companies themselves, with very few exceptions, supplement with a monthly statement of gross and net income, fixed charges, and surplus. The greater number go still farther, and publish weekly reports of gross receipts. Such information is of the highest practical value, and has played a very large part in the winning of the investor’s favor for such enterprises. There are several reasons for this completeness of information from the railways. I have already mentioned that the state railway commissions have exacted some of it. The greater part, however, is a result of intelligent judgment of the investment problem by the railway managers themselves. They learned very early that the company which withheld such information, when its competitors were providing it, fell instantly and rightly under suspicion of investors. A practice first adopted by virtue of necessity became at length a habit. In times when the interest of outside capitalists was hard to attract, railways vied with one another in the completeness of information published as evidence of good faith. Once thus established, the practice could not be abandoned. Such is one simple chapter in the rise of railway investments.

The reader will not fail to notice that the argument thus vindicated for frequent publicity of railway accounts applies absolutely to industrial companies which withhold such statements. The familiar plea that manufacturing companies cannot afford to disclose “trade secrets” to competitors, and that frequent income statements would involve such disclosure, is either hollow in itself, or else ought equally to militate against publicity by the railways. The simple truth is that an earnings report does necessarily, in any and every case, give some clue to an aggressive competitor as to what is going on. But while this may properly be invoked as an argument for secrecy in the case of a small enterprise, owned by the men who manage it, the company which has offered its shares to the larger general public owes to that public a duty which supersedes all such considerations. No industry can be conceived in which a competitor could obtain, through such statements, a more positive hint of his rival’s plans and policies than in the railway; yet no one suggests abandonment of “railway publicity.” A vast amount of humbug has been inflicted on the public in the discussions of this matter, and the numerous absurd anomalies of the Federal government’s Bureau of Corporations are the logical result.

Because the railways make full and frequent reports of their earnings and financial condition, it does not follow that the investor has only to glance at these statements and be assured as to the safety of his investment. To get these figures is something, but it is necessary also to know how to interpret them. Reliance on balance-sheets is a notorious pitfall to the inexperienced reader; even income statements may be utterly misleading. There was a time, for instance, — in the later eighties, when a craze for rapid expansion of branch lines had seized the railways, — that numerous important companies, in their weekly and monthly reports, used to include without comment receipts from “company freight; ” that is to say, money paid out of proceeds of bond sales by the company itself to itself, for carrying building material over its older lines to points where new construction was in progress. The result, naturally, was a fine show of increased earnings, which vanished in air when assets and liabilities came to be balanced up at the end of the fiscal year. This objectionable practice has been abandoned. Another, that of burying in separate and obscure accounts all inconvenient liabilities, has been harder to destroy. One very important railway company, fifteen years ago, bought or leased a series of small connecting lines, which thereupon failed to meet running expenses. The parent company had to make good the resultant deficits, for which it took the notes of the smaller lines. The losses it tucked away quietly into what it called a “suspense account;” the notes it reported as current assets. By this ingenious jugglery, the statements were made to show that the company was growing richer with each successive loss through an unprofitable investment. There is little cause for wonder that when this railway, supposed to be sound and solvent, went in an hour of financial crisis to a banking house to raise an emergency loan, it was promptly shown the door and left to plunge into public bankruptcy.

In studying a railway report, the income account and the balance-sheet are the principal and, to the average reader, the only guides. The income account — whether monthly, quarterly, semi-annual, or annual — gives gross earnings, operating expenses, net earnings, other income, fixed charges, dividends (if any), and surplus. Sometimes a report of this nature, taken by itself, will tell the real story of the company’s condition; more often it will not, because railways have their fat seasons and their lean seasons. A railway whose business is largely made up of carrying grain will show up best in October, November, and December, when the harvesting is over and the wheat or corn or oats move freely to market. Such a road may show, in its report for the quarter ending September 30, that its dividend was not earned; yet may earn so great a surplus over dividends in the ensuing quarter that the preceding deficit will be far more than made good. So, also, many roads incur so large expenses from heavy snowfall, in the dead of winter, as to eat up the great bulk of gross earnings; yet other seasons will compensate. As a rule, the best way to make such allowances is to compare the statement with the same period’s results in the two preceding years. In the absence of abnormal incidents, such as a great blizzard, this comparison shows the tendency of the business. It does not necessarily show permanent tendencies; a short crop of wheat or corn, in a given year, leaves less grain for every road in the district to carry, and, furthermore, leaves less money in the hands of farm communities to use in buying manufactured goods which the railway expects to carry to them. Yet the next year may bring a “bumper” harvest.

Careful attention should be paid, not only to increase or decrease in operating expenses, but to the change, if any, in the ratio of such expenses to gross earnings. If such ratio grows larger, year by year, in corresponding months, and if that increase is not explainable either by abnormal weather conditions, steady advance in cost of labor or materials, or appropriation of increased sums from earnings for improvements, then the enterprise is losing ground. Fixed charges, which are mostly interest on the funded or floating debt, must be compared with special care. Money borrowed through sale of bonds is presumably used for productive purposes. It may, however, be employed for uses which will not immediately add to earnings, as with a new terminal station substituted for an old one; it may be used for buying control of other railway properties, or, finally, it may be devoted to settling old losses or paying unearned dividends. The first question to ask, therefore, is whether net earnings are increasing along with interest charges, or not. If the borrowed money was profitably invested, net earnings ought to increase more rapidly than charges, — always excepting cases where investment was made for the longer future, as in new terminals or connecting lines which the main company hopes to make profitable later on. The facts in either of the two last-mentioned cases should be matters of public knowledge. Knowing the facts, the questions left are: first, whether the investment was judicious in itself; second, whether the company could afford to make it and await results. A poor company cannot safely buy branch lines and build expensive terminals, and the margin of surplus (if any) left after the resultant fixed charges goes far toward settling the question whether it was able to do so or not. If the company is using proceeds of loans to pay unearned dividends, it is an investment to avoid.

The income statement will tell part of the truth in these regards; the balancesheet will tell more. Balance-sheets are a source of perpetual bewilderment to the average investor, largely because of the difficulty of discovering what makes up such large items on the assets side as “cost of road” and “cost of equipment.” If the liabilities items of “funded debt” or “floating debt” show large increase from year to year, the analysis of “cost of road and equipment,” in the annual report, should be carefully examined. What is learned from that analysis should be tested by reference to the income account. It is at least a matter for suspicious inquiry if funded and floating debt increases steadily, without any increase in net earnings. The fact that “cost of road and equipment” had reached larger figures, along with the increased debt, would mean little, unless earning power (after due allowance for general conditions) had increased along with it. If, on the other hand, the balance-sheets show “cost of road and equipment” to have increased without any addition, or without an equivalent addition, to funded or floating debt, the presumption is that earnings have been put back into the property before shareholders’ dividends were considered; and the property ought thereby to have been made more valuable.

These are tests which investors, not experienced or trained in examination of accounts, may apply with some expectation of enlightening themselves as to the status of a railway property. They are not final tests. Inquiry into the real condition of such properties, especially where legitimate misgiving as to the nature of that condition exists, necessitates the professional knowledge and experience of expert accountants. Stock Exchange commission houses, recognizing this fact, are adopting much more generally the practice of keeping in their own employ a qualified expert of the sort. Where any question of real doubt arises, the banker himself prefers not to trust his own unaided judgment. What I have endeavored to give here is simply a notion of the manner in which reports of these companies should be read, and of the general conclusions which may be drawn from them.

Glancing over the list of securities which may be purchased for investment, on the Stock Exchange or elsewhere, the investor is apt to be first impressed by the apparently numerous classes into which such securities divide themselves. In reality, however, the variety is not so great, especially among railway securities, as might be supposed, the divergent classification of bonds in particular being due rather to special provisions as to the mortgage lien behind them than to a radical difference in kind. Common stock of a railway needs no explanation; it simply represents a share in ownership of the property. Preferred stock is so named because it must receive a certain stipulated dividend before the common stock gets anything. This privilege is commonly offset by a further proviso, either that the preferred stock, having received its own dividend at the stipulated rate, shall get no more, even if a higher rate is paid to the common stock, or else that, after the common stock has received as large a dividend as the preferred, further dividend distributions shall be made in equal ratio to the two classes of stocks. In general, the advantage of a preferred stock is that it may be paying dividends while the common stock is getting nothing; its disadvantage, that the common stock usually has unlimited possibilities of increased dividends, while the preferred stock’s right to share in subsequent larger profits is strictly limited. The dividends on a preferred stock were for many years made contingent simply on yearly earnings, — that is to say, while in a given year the preferred stock was entitled to its 6 or 7 per cent before the common stock got anything, it had to take its own risk on the question whether enough would be earned to pay the dividend on the preferred. So many investors in preferred stocks, two or three decades ago, found their expectations disappointed, that the fashion grew, among stock-issuing corporations, of making dividends on the preferred stock “cumulative.” If, for instance, a preferred stock has the prior right to a 7 per cent dividend, and if the company has earned only enough to pay 5 per cent, for the year in question, then the omitted 2 per cent will remain a contingent claim for the benefit of the preferred shareholders. The next year, the same company may have earned enough to pay 7 per cent on the preferred stock and something on the common, but nothing can be paid on the common stock until the 2 per cent back dividend had been made good. This plan of cumulative dividends was obviously adopted for the sake of giving a market to the preferred stock of new companies. It is not, however, approved by the best authorities, and has not worked well in practice. Generally it has been found that when a company ran behind in the dividends stipulated for its preferred shareholders, the deficiency was due to original overcapitalization or to miscalculation of the future. Under such circumstances, failure to earn the full preferred dividend was likely to be permanent; the result, in a number of cases, was that back dividends on preferred shares accumulated at so portentous a rate as to drive the company’s managers in the end to radical reorganization of the company’s entire finances. The United States Leather Company’s 8 per cent “cumulative” preferred stock, for example, paid something regularly in dividends; but it could not pay 8 per cent, and after ten years, more than 40 per cent in “overdue dividends” had accumulated. The company’s finances had to be readjusted, under a new name, with new stock issued to pay for these back dividends. Voting power has much to do with fixing the value of an active stock. Sometimes the right to vote for directors is restricted to the common stock; rarely, as with the Rock Island Railway Company, the preferred stock alone enjoys the privilege. More often both kinds of stock enjoy equal voting rights.

A first mortgage bond is what its name indicates, — a lien prior to all others, with foreclosure rights. Such a mortgage is not, however, necessarily secured on an entire railway system; the Union Pacific’s first mortgage 4 per cent bonds, for instance, cover only 2091 miles of the company’s lines, whereas the whole system comprises 5602 miles. Since the value of such a bond depends on the property it can claim in the event of foreclosure, this question of security behind a bond should be carefully examined. Second, third, and fourth mortgage bonds are terms which explain themselves; they take this order of precedence in claim on assets, in the event of foreclosure. Divisional bonds are secured only on the property of a given division of a railway. Consolidated mortgage bonds are usually a security grouping a number of subordinate liens, and coming after a first mortgage. Income bonds receive interest only when earned; they hardly differ in value from a preferred stock, and are pretty nearly obsolete. Debenture bonds are practically the same. Terminal bonds are secured on the railway station property of a company; land grant bonds on the land given to the company by the states which incorporated it. Collateral trust bonds are secured only by other stocks or bonds, bought with the proceeds of the collateral bond, and deposited in the hands of trustees. A “short-term note ” is an obligation usually entered on because bonds either cannot be sold at the moment to advantage, or cannot be sold at all. They are secured, as a rule, by pledge of stocks or bonds owned by the railway, and are seldom offered on the open market. In the past, issue of such notes was a plain sign of danger; it was the forerunner of the panic of 1873, and it marked the approaching downfall of more than one company in 1893. Yet in 1903, when the wellsprings of domestic credit seemed suddenly to dry up, some of the soundest railways in the country borrowed on such notes rather than sell long-term bonds at a sacrifice. They placed the notes mostly in Europe; when the financial storm, which was local to Wall Street, passed away, the companies redeemed their notes in bonds. In buying any bond, the date of maturity is a matter of importance. A good bond with fifty years to run is usually more valuable than a similar bond with only ten. This is particularly the case when the price is above par, because at maturity the railway can redeem the bond at par or the fixed redemption price, and the premium paid is lost.

In general, securities of railways in old and long-settled sections of the country are the best investments, because they are less subject to the vicissitudes of bad times. In the panic of 1893, for instance, nearly all of the great transcontinental railways — the Union Pacific, Northern Pacific, and Atchison, Topeka, and Santa Fé, which traversed new and largely unsettled districts — went into bankruptcy. Yet the Erie Railway, one of the oldest Eastern companies, and the Philadelphia and Reading, a pioneer in the Pennsylvania coal-fields, met the same fate. The question, East as well as West, is largely one of conservative or excessive capitalization, especially in bonds, on which interest must be paid if the company’s solvency is to be preserved. The intrinsically most valuable railway property in the country may be so loaded with debt, and may so far have dissipated its resources in excessive dividends, that its credit is at the mercy of a disastrous year in trade; whereas a railway in a purely experimental section of the country may be absolutely sound, because of prudent financial management. It is Wall Street bankers and speculators, who have at times insisted on excessive dividends to keep up prices, or have “unloaded” connecting railways on a larger company at extravagant prices, taking pay in bonds, who are responsible for the worst bankruptcies of our railway history. Railways like the Delaware, Lackawanna, and Western, the Chicago, Milwaukee, and St. Paul, the Illinois Central, the Chicago and Northwestern, the Pennsylvania, the Delaware and Hudson, and the New York, New Haven, and Hartford, which have handled their finances carefully, occupy the highest grade of credit. To-day the Union Pacific and Northern Pacific railways stand among the strongest, — partly because excessive capitalization was cut down in reorganizing after their bankruptcy in 1893; partly because the country traversed by them has developed new and vast resources; partly because of the more skillful management under which they now have fallen. Other companies, like the Erie, and in a less degree the New York Central, are to-day handicapped by inadequate provision of capital to keep step with the demands of presentday traffic, and there is a long list of roads which are still experiments. With these, the Stock Exchange price goes far toward telling the story. When a stock pays 4 per cent or more in dividends, and sells nowadays below par, something is the matter; investors show by their lack of bids that they are suspicious. Yet it may easily be that, while dividends are precarious, interest on the higher-grade bonds is abundantly secured.

Supposing this part of the inquiry into investment possibilities to have been satisfactory, there remains one further consideration. The security tentatively selected for investment sells to-day at a given price on the Stock Exchange. Is that price such as to invite immediate purchase, or will the buyer be wiser in awaiting more favorable terms? There are investors, not always of the inexperienced class, who base their inquiry wholly on the question what a given security is worth to them, at ruling prices, and ignore further consideration of the condition of the markets. Such an investor may have convinced himself that a given railway stock is safe, that it will continue, and probably increase, its existing dividend, and that if he can receive, say 4 per cent per annum from his investment in the meantime, he will be doing as well as he can do elsewhere. The stock, let us say, pays 6 per cent per annum, and sells on the Stock Exchange at $150 per $100 share. If the investor holds exclusively to his adopted principle, he will pay that price, regardless of the question whether the stock market outlook seems to promise a lower price on some subsequent occasion.

It would possibly be better, both for the investor’s peace of mind, and for the general wisdom of his investment, if he were to follow more frequently such a plan. It is not, however, the policy of the average investor. In nine cases out of ten, an element of speculation enters into his deliberations. Stock brokers will bear witness that even the small capitalist, ostensibly seeking for a safe and permanent investment, is likely first of all to inquire for stocks which are likely to “go up.” There is surely no harm in this, so long as it simply means that the inquirer is looking for a stock which sells at inviting prices. But there are other means of determining this question, and unfortunately the state of mind which induces purchase of a stock because it is “going to rise ” is also likely to encourage sales because it is “going to fall,” and thus to keep the investor constantly shifting from one security to another,regardless of real values. This game of speculation is one in which the Stock Exchange rarely fails to beat the outsider. A very great part of the machinery of Wall Street is constructed with the purpose of persuading the “outside public,” when experienced operators are trying to sell their own speculative holdings, that stocks are about to advance, and vice versa. The ingenuity with which these “rumors” are contrived and circulated, their frequent plausibility, and the enthusiastic excitement with which they are repeated in brokers’ offices, and in the financial columns of most newspapers, create heavy odds against cool and accurate judgment by the outside investor. If he surrenders himself to the charm of “following the market,” the chances are that the market will have its own way with him. The public that always buys at the top and always sells at the bottom is the objective point of half the professional speculation on the Stock Exchange.

There is, nevertheless, a class of investors who do take close and intelligent account of the condition of a market, and whose fixed plan is to watch for advantageous moments in which to buy or sell. It is impossible to lay down rules for a policy in which success depends so largely on possession of a sort of financial instinct. Neither would it be useful or wise to suggest what times should be chosen for such purposes by people engaged in speculating on a “margin” with borrowed money. With such adventurers, the accident of an hour may offset the soundest reasoning adopted with a view to basic conditions. The bona-fide investor, however, will do well to keep his eye always on the rate for money in the Wall Street market; because, while the rise or fall in rates makes no difference to his own capacity to invest, it may make all the difference in the world to the mass of speculators on borrowed money. If, for instance, stocks are advancing rapidly, and the rate for money is simultaneously rising to high figures, it is a disadvantageous market in which to buy. The action of the money rate bears witness to the fact that reserves of loanable capital have been strained to bring stocks to the high prevailing figures, — which usually means that before long some of the speculators must let go their hold through inability to command further resources, — which brings about readjustment of prices. This conclusion is so obvious that it would hardly need to be repeated, but for the fact that those are the very occasions when conviction that prices are going to a far higher level usually seizes on Wall Street. It is much to the interest of professional speculators to create such an impression. If they allowed the contrary view to prevail, whom would they find to pay high prices for the stocks which they themselves are forced to sell ?

On the other hand, when stocks have declined heavily, and when money rates, after the decline, stand at forbidding figures, it may usually be assumed that the market is advantageous for the purchaser. On the face of things, it is clear that the high rate bid for money means that speculators who are “carrying” stocks with borrowed money are in distress and apprehension, and that other speculators cannot afford to borrow for new purchases. The result is an abnormally low range of prices, which gives to the man with money of his own an opportunity.

One notable incident of the recent insurance investigation was the unearthing of a letter from the Equitable Life’s president, written in the worst days of the “rich men’s panic” of 1903. This letter set forth that the market, where stocks had broken disastrously, and where money ruled at prohibitive rates, was full of inviting opportunities for a great investment company. His company, the president went on, would be buying “a good many of such things,” but for the unlucky fact that “we are so strapped for money by engagements already made.” This left it plain enough how the matter stood with investors whose bank account was clear.