Timing One's Investments

THERE are many small buyers of bonds and investment stocks who have learned to make careful and independent inquiry into the status and prospects of the companies whose securities they are about to purchase. It would be strange indeed if this were not the case considering the recent growth in the number of small investors and the increasing quantity of investment information that may be had nowadays for the asking. In addition to the voluminous data one may obtain on particular securities from t he statistical department of any investment house or direct from the head office of the issuing company, there are to be found in many of the public libraries throughout the country standard manuals of investmenl which set forth succinctly the pertinent facts, statistical and otherwise, about the past and present of all well-known companies.

In learning to use these and similar sources of information as a basis for estimating the status of a particular security, the small investor has made notable progress. But too often his investigational work has stopped at that point. Too often he has neglected to explore the more general field having to do with the trade situation, the position of business within the trade cycle, and the monetary factors which shape the course of security prices. This field is just as important as any other. It is a technical field, to be sure, but not so technical as to be beyond the understanding of any intelligent investor who wants to buy sound securities at the right time— when they are cheap, not when they are dear.

IT is a commonplace to all investors that security prices move up and down in wide swings over a period of years, and that from time to time real bargains are to be had by those who are adept in judging investment values. Yet comparatively few realize that most of these broad movements in security prices can be anticipated — in fact, are anticipated by movements in interest rates, it is unnecessary for the small investor to go behind this fundamental principle; to understand or even to inquire as to the reasons for the upward and downward swings in interest rates. It is sufficient to note that such swings occur again and again over a period of years— they are an integral part of the capitalistic system.

The causal effect of changes in interest rates on the level of security prices may be seen at a glance in the course of any trade cycle. Starting, for example, in a period of business depression, when interest rates are usually low, one finds a distinct tendency on the part of bond prices to rise. It is logical that this should be so for the reason that there is always a strong demand for fixedincome obligations which yield a return of more than the current rate of interest. The demand comes from all classes of investors from individual investors who are tempted to borrow money and buy bonds in order to scalp a profit on the transaction, and from banks or other institutional investors seeking to give profitable employment to funds that would otherwise he idle. Invariably there is a concerted demand for bonds during periods of low interest rates, and invariably bond prices rise.

Meanwhile the ability of business enterprises and other borrowers to obtain funds at low interest rates sets into operation the forces which cause business to expand and consumer purchasing power to increase. To take a stock illustration: the construction industry is always one of the first to show signs of revival after a period of business depression. This is because new building can be easily financed when interest rates are low — people are ready to buy firstmortgage real-estate bonds. As the volume of new building grows, more and more workers are employed in the industry and more money is paid out for labor and materials.

The new spending power which lie’s in increased pay rolls and in the disbursements to manufacturers of building materials is soon felt by manufacturers in other lines. There is a better demand for clothing, motor cars, radios, and the like. Accordingly, expansion takes place in these lines also, and more spending power is distributed to the workers employed in manufacturing these products. As the new stimulus reaches out from one industry to another in an ever-widening circle, the prospects become distinctly favorable for increased business earnings all along the line. The stage is then set for a general rise in the prices that must be paid for investment as well as speculative common stocks.

There is thus a remarkable sequence between interest rates, bond prices, and stock prices when security prices are rising. And the sequence is no less remarkable when the trend of prices is downward, it will be found, for example, in any period of intense business activity, that there is a shortage of credit and that interest rates are high. Bond prices, being very sensitive to money-market conditions, lall as interest rates rise, and, after an interval of time, stock prices also fall.

Here again the subtleties of the interest factor are in control, .Just as low interest rales make for higher bond prices, greater consumer buying power, business expansion, and, finally, rising slock prices, so a period of high interest rates reduces bond prices, slows up new conslnteiion, restricts consumer buying, and renders the business prospect less favorable. I’nder such conditions stock prices inevitably fall. Incidentally ihe decline in stock prices and in business activity releases new credil supplies and ushers in a period of cheaper money. When interest rates have got down to rock bottom once more, everything is in readiness for the beginning of smother cycle in trade and security prices.

TIIE significance of all this to the investor is that he must walch ihe course of bond prices if he would buy his securities at the right time or if he would buy the right kind of securities. He need not bother much about interest rales. Over a period of time, bond prices — which promptly reflect changes in credit conditions — point ihe way, moving up or down from one to several months in advance of stock prices. When the course of bond prices is definitely upward, — as in the latter half of 10-21 and again from the beginning of 1924 to the end of 1927, — it is a good time to buy sound investment stocks. On the other hand, when the trend of bond prices is downward, — as in the latter part of 1922, the last three quarters of 1928, and the first three quarters of 1929,— it should he clear at once that it is no time to buy common stocks. Rather it is a time to buy notes or bonds of short maturity which will he stable in value and can he converted into long-term bonds or good common storks at the next turn of the cycle.

The trend of bond prices is not, of course, the only thing to be wale bed in liming one’s investments, but it is the most important single factor to be taken into consideration. A review of all previous cycles shows that it is a dependable barometer of ihe longer swings. It tells one when to buy bonds, when and when not to buy common stocks for long-term investment. Had the late buyers ol common stocks paid proper attention to the course of bond prices front March 1928 to October 1929, they could have avoided extremely heavy losses.

THE small investor who is intent on building up his principal and income account would do well to familiarize himself with ihe use of bond-price indices; not only as a means ol buying his future income at the lowest possible price, but also as a device for settling question ol common stocks versus bonds as long-term investments. Questions of this kind cannot be settled by means of balancesheel and income statements alone. Without ihe supplemental aid of a bond-price index, no amount of statistical information even about the foremost companies can afford asufficienl basis for sound investment judgment.