The Conservation of Investments

THE old saying, ‘Any fool can make money, but it takes a wise man to save it,’might well be emended to read, ‘Anyone can invest money in good stocks and bonds, but it takes a wise person to safeguard his principal and income.'

Mere observation suggests that one who has made an investment out of his own savings will ordinarily show better judgment in selecting and protecting his holdings than will the investor who obtained his capital fund fortuitously. Yet the number of investors who lose all or substantial portions of their invested savings is legion. Too often the fault lies in improper selection in the first place; but even where the initial work of selection is reasonably well done, heavy losses may be subsequently incurred owing to the failure of the investor to keep a constant watch on the changing status of his holdings.

One of the first essentials in any programme of investment conservation is the realization that no investment is absolutely safe. There is no bond or share of stock in existence having such permanent qualities that it can be locked up and forgotten. The investor who does not subject his entire investment list, to a searching half-yearly or quarterly review is not properly safeguarding his own interest.

There are at least two ways in which the problem of reviewing one’s investments may be approached. The experienced investor who has learned how to read financial statements knows how to scrutinize carefully the annual balance sheet and income statement of the company whose securities he has purchased, together with the quarterly, semi-annual, or annual statements of earnings. In the case of nearly all of the nationally known companies, such statements are readily available. They are published currently in the metropolitan press, in the weekly financial reviews, and in various monthly trade journals. As a rule one may obtain all of these data direct from the head office of the company in question or from the statistical department of any investment house. Valuable year-to-year data reflecting the financial progress of the company over a period of time may be assembled in concise form with the aid of any standard investment manual.

In this connection it should be observed that the problem of safeguarding one’s investments is greatly simplified if one has taken the precaution, when investing money, to select the securities of those companies which follow a liberal policy in giving out information to their shareholders. This is by no means to imply that liberality in the granting of information is an unfailing sign of financial strength. On the contrary, there are many weak companies having vigorous publicity departments. There are also many strong companies which are deterred by the seasonal character of their operations from publishing more than one financial statement a year. The fact remains, however, that corporate information is a vital matter to the security holder who wishes to keep abreast of the developments affecting his investments. Other things being equal, he is justified in showing preference for those Securities which he can know the most about.

Contrary to popular notions on the subject, the critical reading of a balance sheet or an income statement is not beyond the powers of the novice, once his interest is aroused. An interested security holder soon learns where to look for the essentials in a financial statement. As a shareholder, he learns to note the size of the net earnings per share available for dividends; he calculates the probability of the company’s earnings falling off 50 per cent over a twoor three-year period; he ascertains from the published records whether such falling off has ever been encountered in the past, and, if so, how his investment fared. Finally, he undertakes to form a sound judgment, independently of the financial data, as to how essential the business services of his company are, how well it is managed, how good its prospects are.

As a bondholder one can easily note by how much the earnings available for interest (and other fixed charges) exceed the actual interest charges. In practically all cases, earnings available for the payment of interest should be at least twice the interest charges. In companies whose earnings are subject to wide fluctuations, earnings before interest should be five to ten times interest requirements. An ample margin of safety in the earnings statement is the investor’s first line of defense in any conservation plan, whether he is appraising bonds or investment stocks.

A second way of approaching the conservation problem is to rely upon the advice of a good investment house. An investor who does not feel competent to review his own holdings should submit his list periodically to acknowledged experts. Even when he is reasonably satisfied with the results of his own appraisal he may with advantage seek the counsel of a banker who specializes in investment matters. The investment banker can quickly ascertain whether one’s list measures up to one’s investment needs. He can make constructive suggestions as to ways of securing better diversification and greater safety.

Some investors having extra-cautious tendencies, but not versed in the intricacies of financial technique, follow the interesting and commendable practice of periodically submitting their investment holdings to the scrutiny of two or more specialists in whose judgment they have confidence. When the experts are in agreement, it is a reassuring sign; when they disagree, it is a signal that things need watching and that further counsel is advisable.

No matter how confident the security buyer may be in his own conservation ability, it should be a settled part of his safeguarding policy to select a competent trust company, or trust department of a bank, where for a small yearly fee he can deposit his securities under a custodianship or fiscal agency agreement. Under an arrangement of this kind, the clipping of coupons, the making of income-tax returns, and a host of other details will all be attended to by the trust company. In addition, the security owner will have established a connection with a financial institution where he can always get investment counsel for the asking.

The fact cannot be too often emphasized that investment protection is no less important than investment selection. It is far easier to lose the savings of a lifetime through failure to use proper protective safeguards than it is to acquire the savings. The responsibility of conserving one’s invested capital is not a matter to be dealt with lightly. In a world of change the safety of principal and the continuity of income can be assured only where the investor has developed a balanced judgment in the selection of his investment counsel and is himself eternally vigilant.