Efficiency in Investing
The Financial Counselor
EVERYONE who has sufficient capital to invest in securities should follow a definite policy in his investing. A miscellaneous accumulation of ‘safe’ investments does not qualify as a policy, because safely, by itself, is not a definite policy it is an indication of common sense only, and its presence merely distinguishes an investor from a speculator, or a gambler.
It is not possible to have an investment policy without having a clearly defined purpose. There may be as many different policies as there are types of investors, and to cover their range would require considerable space, but certainly there can be stated one steadfast purpose which should be the aim of every individual investor. That purpose is the preservation and the increase of his capital.
Consideration of the outcome of an investment of capital in securities should be divided into two entirely separate parts, one having to do with the income it produces, and the other having to do with the future status of the capital sum itself.
Income so naturally associates itself with investment securities that it may betaken for granted, in order to make way for consideration of the capital itself; yet, in spite of this fact, income doubtless receives the bulk of consideration from most investors, with the exception of the factor of safety for principal.
The pity of this lies in the limit it places upon efficiency in investing, because no investor who neglects to provide in some measure for the growth of his capital, apart from its income and apart from his ability to increase it through sav - ings, can be said to handle his money to his best advantage.
Every investment of capital in securities is susceptible of three results: first, it may be wholly or partly lost, which is disastrous; second, it may be safely preserved, which is fortunate; third, it may be increased, which is highly desirable. Perhaps one reason why many investors neglect the third possibility is their fear of the first. In their zeal to avoid losses, they concentrate upon safety, apparently forgetting that safety and appreciation are elements which may readily be combined in a single investment. Perhaps another reason lies in the fact that finance is a complex subject, about w hich the average investor, especially the small one, feels so ill informed that be is prone to play oversafe, thinking (erroneously) that investing for appreciation is a dangerous form of speculation. Quite on the contrary, certain types of securities which have had remarkable records of increase in value and return are classified among the most conservative material available. Still another reason may be the fact that safety, liberal income, and potential appreciation are rarely combined in a single security at the time the investor might consider buying it. Safety and potential appreciation are almost invariably accompanied by a low immediate income, but one which bids fair to be increased as time passes. The investor, like everyone else, cannot have his cake and eat it. Compensation applies, as a rule, in securities as in everything else.
It is probably a fact that the investor who buys his securities under an undefined policy receives little or no encouragement toward following a definite schedule from the majority of security salesmen. A moment’s reflection will show that this is not entirely the salesman’s fault. Ihe method of security distribution to-day produces rather standardized salesmen, who are expected to sell what their house provides, and who cannot earn money either for themselves or for their house unless they do sell it. Now, without questioning in the least the investment quality of this material, it remains as an outstanding flaw in the set-up of the business that the form taken by the securities offered is usually patterned more to the advantage of the issuing corporation than to that of the investor who is expected to buy it. Banking houses are unavoidably in the position of having to satisfy first of all the source of their material, and hence the source of their profit.
For one illustration, investors are bombarded with offerings of long-term, lowrate bonds when money is cheap, and with short-term, high-rate bonds or high-rate, callable preferred stocks when money is high, whereas the investor’s needs would be better satisfied by the reversal of these combinations. It is obvious that such reversal cannot and will not occur, but it does not logically follow that the investor must accept the situation blindly. At all times there exists a vast supply of previously distributed securities, suitable for nearly every conceivable need of the investor, which is neglected by banking houses for the simple and understandable reason that it does not produce for them a reasonable profit. The real profit comes from new issues.
The argument is not here advanced to ignore new issues, but rather to recognize their characteristics clearly and to supplement their purchase by a judicious selection of other material in furtherance of a purpose to invest efficiently by increasing capital.
The individual investor is under no legal restrictions in his buying, and he should formulate his own policy by independent thinking. Once he undertakes to do this, and makes it known among the salesmen who call upon him, he will find that these same salesmen are valuable allies. Perhaps the salesman w hose activities are limited to bonds, for example, and who always commanded the bulk of the investor’s business, will be given a lesser amount under a new efficient policy than under the old casual policy. This may be a cause for regret by the investor because he likes the salesman in question, yet it is a fair assumption that this very salesman, if his conception of his value as an advisor be not clouded by his desire for profit, will cheerfully recognize the merits of the case, and under the spur of competition become more valuable wit hin his field than before. Put a salesman on his toes, and he reaches his peak of efficiency.
It is trite to state that bonds, by and large, will not produce an increase in capital. They are not intended to do so. In rising markets they should increase in value, and can be exchanged here and there at limited profits. It is a fallacy that their redemption at a premium produces a real profit, because the mere fact of redemption usually indicates a lower rate of return upon the succeeding bond as an offsetting disadvantage.
In any event, the average bond has a lifetime which is spread over several market cycles, and at maturity it is worth only its face value. Bonds should be the indispensable backlog of most investment portfolios, but it is to the common stock that the investor must look for his real appreciation. There is no good reason to disassociate investment quality from common stocks; and, while it may be true that many investors have fared infinitely better in their bond ventures than has been the case with their stocks, it is probably due to the exercise of substantially less prudence in stock buying than in bond buying. This article being suggestive rather than conclusive, no effort will be made here to lay down any extensive foundation for guidance in buying common stocks, but in lieu thereof the broad recommendation is made of certain types which are capable of sustained appreciation in value,
The stocks of well-managed banks and insurance companies are among those conservative investments which have had magnificent records of appreciation in value and growth in income. Banking and insurance are fundamental underlying businesses, capable of a growth which is measured in terms of the growth of the country itself. Common stocks of indispensable public utilities, enjoying virtual monopoly of operation in growing territories, seem certain to endure and to progress. Common stocks of genuine, internationally operating investment trusts are peculiarly susceptible of tremendous increase in value, in proportion as their operation is based upon sound banking and economic principles. Material such as this, judiciously selected, combined with standard investment bonds in the investor’s portfolio, will have a distinct tendency to increase his capital, and thus render his investing more efficient.
ARTHUR W. JOYCE