The common sense of money and investments

Front matter

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Contents

PART I. WHY INVEST?—A COMMON SENSE PROBLEM CHAPTER PAGE INTRODUCTION... Cet Pee ee IN wah 84 By Duiurende Chanbertan

1, A Common Sense VIEW oF MONEY . . 1 Introductory: The human significance of finance. 2. WuHeEN To ENJoy THE Fruits oF Your LABoR . 6

Choice between spending and saving; Why invest? Dangers of excessive thrift.

Part II. Dont’s For Investors—and A Few Affirmations

CHAPTER PAGH fe

AL,

TEsTs OF A SAFE INVESTMENT. . . A9 Footrules by which the worth a a ‘seeuriny may be measured.

Wuy not Ger Ricu Quick? . | 66 The lesson of the lotteries and gaming tables.

Investinc. WitHouT Rep Tape . . . . . 7 Conveniences of preferred stock.

INVESTMENT PRoGRAMS FoR RicH AND Poor. . 77 Specific recommendations for the workingman, the business man, the lawyer, the doctor, the minister, and other classes.

WHEN TO SwiTcH FROM Stocks To Bonps . . 118 How business cycles affect the investor.

How To Setect aN Honest BROKER. . . . 123 Separating the wheat from the chaff.

How to Detect a SECURITY CHARLATAN . . 127 Characteristics of blue sky promoters.

Bucket SHops—anp How To Keep Out or THEM 141 Exposure of the lures of the great pretenders who lurk in the shadow of Wall Street.

Hicn FINANCE—AND THE Pusiic Goop. . . 159 Services of investment brokers and_ stock exchanges; how Wall Street does its day’s work, [x]

Contents CHAPTER PAGE 16. Has THE Day or Opportunities Passep? . . 165 A study of new frontiers and the disappearance of free land.

17. A Formuta ror Errective THrirr. . . . 170 Avoidable and accidental factors which frustrate those who would be prudent.

Part III. Financial Knowledge As A Tool

18. SECRETS OF THE FinanctaL Pace. . 182 Facts and fancy; how to keep in boneh Wah developments affecting securities.

19. Some FALLACIES OF THE INVESTMENT COLUMN . 201 The need of speculation; price and yield sometimes a delusive guide to safety.

20. Tue Story BEHIND THE FIGURES IN A FINANCIAL REPORT. . 207 What to look for ir in a balance sheet and an income account.

21. SoorTHsAayERs IN WALL STREET . . 20 A critical survey of the art and science e of financial forecasting; why tips are misleading.

22. Harr TrutHs ABout WALL STREET AFFrairs . 244 Delusions and misconceptions about finance which blur the vision of the layman.

23. Bic Business FLirts witH VIRTUE”. . . . 209 Significance of the Better Business Movement.

[xi]

Contents CHAPTER PAGE 24. LEssonS FROM THE Lives or FieLp MarsHALs OF) ANDUSTRY 20. Wye 2S) eae Mistakes of success oeaeniee not all rich men are heroes; nor are they all villains.

25. THE CusToMER Buys THE PLANT. . . . 268 Consumer ownership of public ition as an alternative to municipal ownership.

26. BANKS FOR THE IMPECUNIOUS.. . . it ee Loan sharks versus cooperative lendera

27. “OnE Dotiar Down anpb of 286 Advantage and hazards of the tape developing use of the instalment plan.

28. AvorpINc BANKRUPTCY IN THE PANTRY. . 285 Budgeting: The problem of intelligent and systematic spending.

29. Picxinc Your EMPLOYER AND YouRJoB. . . 290 The problem of earning; science of vocational guidance.

30. How to Turn O_p AcE FROM A DEFEAT INTO A TRIUMPH . . MP Financing eee ole stepping aside for younger men; permanent dollar a year men.

31. On THE ALLEGED Root or ALLEvin. . . . 304 Money: Its uses and functions.

¢ 32. Booxs as STEPPING STONEs TO Business Success 314 A bibliography of informative volumes.

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Contents

Appendix

LOsshn Vamemre ere! at) TW nai he Ree AY lare WU ate SOU) DOUNDMY TELDELORMULA (600 Liles. LR gen eee eee 2G IDONDPINTEREST (TABLE. 06050...) A alae ee oe TaBLE SHOWING RETURN oN Divipenp—Payinec Stocks 328

INDEX » 329

[xiii]

INTRODUCTION by LAWRENCE CHAMBERLAIN

Chairman, Education Committee, Investment Bankers Association of America

“Of the making of books there is no end”: this is getting to be true even of books on matters connected with American investment. The ebullition of the World War has upheaved a new set of investment problems in this country, as well as elsewhere, that require solution. Not the least among them is the problem of helping the Liberty bond buyer to maintain his hold on this, to him, newly realized kind of wealth, and to assist him, as he progresses in prosperity, to broaden his grip on securities by introducing him to forms of intangible wealth other than Liberty bonds.

There are, perhaps, few not engaged in the business of distributing securities who realize the fact that prior to the War the great majority of American citizens had no personal acquaintance with bonds and

[xv]

Introduction stocks and no ownership in them; that subsequent to the War the converse is equally true. A tremendous step forward is made in economic and _ financial education when Tom, Dick, and Harry, by the physical possession of pieces of paper, realize the conveniences and other values peculiar to intangible wealth. The most direct contact with “intangibles” that most of these people have is through the financial columns of the daily press. The most direct personal contact, therefore, possible to them is with the financial editor, particularly of the metropolitan dailies. These men, rather than the investment bankers, have sensitive fingers on the pulses of the small investors. They more than any others, through the medium of countless letters addressed to them by their readers, understand the experiences, the misfortunes, and the aspirations of those who are seeking to prosper through the ownership of small sums invested in securities.

It is, therefore, very appropriate that one of these financial editors, Mr. Merryle Stanley Rukeyser, of the New York Evening Journal, should be the first to set down in book form the problems of the inexperienced small investor in intangibles, and the solution of these problems. In doing this Mr. Rukeyser is not only rendering a highly important service to a very large part of the community which hitherto has

[xvi]

Introduction been without a recognized and generally known source of help and guidance, but he is also making a notable contribution of literature on the subject of how the inexperienced investor may best be safeguarded against predatory concerns selling worthless or fraudulent securities. He joins the increasing number of those who are making it plain that in the long run investment education is the only safeguard against the sale of fraudulent securities, and that so called Blue Sky legislation, as distinguished from the sincere enforcement of penal laws, already spread freely on the statute books, is merely political pap, and an encumbrance to the efficient and economical raising of investment capital through the distribution of securities.

These are the more important reasons why I welcome this contribution of homespun truths to the growing literature of investment.

[xvii]

CHAPTER I A COMMON SENSE VIEW OF MONEY Introductory: The Human Significance of Finance

The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions in their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion of. . .. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labor, must naturally have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry—Apbam SMITH.

Tuts book is intended as an introduction to the whole subject of finance, as it affects the everyday problems of the ordinary man or woman. It has been conceived as a means of bridging the gap between a textbook on economics and a bond circular; a link between an abstract thesis and the importunings of a stock salesman.

It makes no pretense at contributing new theories to be tested at the round tables of specialists. It is rather an effort to tell the layman the essentials of those financial problems which he must inevitably face in his own struggle to maintain a roof over his head, to get clothing to cover his nakedness, and food for his physical nourishment. In attempting to strip the mystery from investment and speculation, from a common-sense standpoint, it goes a step further, and indicates how present labor may in part be conserved for future uses.

The author, who received in the course of three years more than 30,000 inquiries about practical financial questions from newspaper and magazine readers, was frequently called upon to suggest useful books. He has done so freely, having compiled a list of works which seem admirable for sundry needs. However, he has frequently felt and often been told that there was a need for a single volume which would sum up the common sense essence of the entire subject, briefly and within two covers.

This volume has been conceived from the human standpoint. It deals with man’s material requirements primarily. Stocks, and bonds, and banks, instead of being the subject of discussion, are looked upon merely as instruments which serve specific human needs. Virtually every man or woman is concerned

A Common Sense View of Money with money making or spending, or saving, and this book aims to deal suggestively with universal needs.

It is written under no delusion that man is an economic creature. The economic activities of a human being constitute only one aspect of life. The intention of the author is not to stress unduly the human significance of money getting and using. The book is written rather in the belief that the artist, the housewife, the physician, and the minister will be freer to attain their spiritual objectives, if the bread and butter side of life is clearly understood and definitely planned. Money making and saving is infinitely more enslaving when manipulated hy an ignorant bungler than by one who understands the science of finance in its practical aspects and reacts almost automatically to a program of consistent work, intelligent spending, and systematic saving.

Before the war, corporation finance was of interest to the Four Hundred. Now it is the concern of the Four Million. Prior to 1914, for example, in all the states and territories of the United States there were approximately 400,000 bondholders—a _negligible group from the criterion of numbers. In 1917, having joined the European fray and needing larger loans than had ever been arranged since man became a two-legged animal, the United States Treasury went to every home in quest of funds. Millionaires alone could not supply the financial sinews of war. The floating of Liberty bonds concerned not merely Wall Street, but Main Street and all the back alleys, too, in every city and hamlet. Government bonds went to 20,000,000 buyers, and the masses for the first time participated in the strange adventure of coupon-clipping and learned of the weird magic of compound interest.

Having acquired a first hand knowledge of securities, the average man has never since stepped out of the money market. Soon after the government had sold the highest-grade issues to patriotic millions, _ schemers, charlatans, and fakers began a heinous career of exchanging Liberty bonds for securities that \ promised infinitely more but yielded little or nothing. , Secretary of the Treasury Mellon recently lent his | authority to the oft-repeated estimate that $1,000,- ' 000,000 a year is frittered away by the American public in worthless or questionable securities. To the individual, such deception frequently entails genuine tragedy—a laudable ambition, such as education of one’s children, unrealized. ‘To the community, it represents the loss that comes from false and unproductive activities and from misdirected capital. Without a background of elementary financial knowledge, the small investor is like a child wander-

A Common Sense View of Money ing through a tangled forest, trusting blindly to luck.

In attempting to reveal in the simple language of the ordinary man and woman the seeming mysteries and obscurities of money and investment, the author hopes not to convert high minded folk to an excessive interest in materialism, but wishes to suggest a workable technique that will be helpful to the pursuer of beauty, the dreamer of dreams, as well as to the man of affairs. Baser men, to whom acquisition of goods and their symbols, is the sum total of life, already know the tricks of the market-place. And since humanity’s friends cannot escape the obligation to supply the elementary requirements and comforts for their families, it is hoped that the hints in this volume will help them better to gauge the meaning and opportunities of modern business.

Business and finance can be treated from various points of view—their social utility, their effect on modern art and philosophy, on politics, on the welfare of the individual. This book is concerned with the specific operations by which the individual can employ the legitimate devices of present-day economic machinery best to attain the prerequisites of physical well-being. To use the analogy of the automobile, the book does not raise the question whether the motor car is the best conceivable means of locomotion; it tells the reader how to run the car.

Chapter II

Choice between spending and saving; Why invest? Dangers of excessive thrift.

It is not a wise economy which tends to lower the vitality of any member of the family in order that provision may be made for the future—Mary Witcox Brown.

There is not anything in this world more talked of, and less understood, than the business of a happy life. It is every man’s wish and design. We live, however, in a blind and eager pursuit of it; and the more haste we make in a wrong way, the farther we are from our journey’s end.— SENECA.

No salaried man ever grew rich from salary alone. Only by saving and wisely investing can he become independent of his salary. Money will work. It does the business of the world. It is a question whether you will set it to work for you or blow it in to work for the other fellow.—THomas E. SAUNDERS.

But if any provide not for his own, and especially for those of his own house, he hath denied the faith, and is worse than an infidel—TimorTHy.

“EAT, drink and be merry,” says the epicure, “for _ to-morrow you die.” Such is the philosophy of thriftlessness—the dogma of improvidence. Freed from the overstimulus of artificial merriment, the individual remembers that to-morrow he lives, or at least his obligations live after him.

A deliberate scheme of dissipating one’s energies and one’s resources currently leads inevitably to financial ruin. Thrift is a scheme by which a small portion of the fruits of one’s current labor are diverted for future happiness or well-being. Intelligent saving gives the future a lien on an individual’s current productivity. It is a device for tying to-morrow to to-day.

Investment, entailing the placing of thrift funds in channels that will assure reasonable return on moneys employed, entails a quest for deferred happiness. It involves self-denial. It means negativing impulses to use one’s purchasing power at present in order that it may be employed at some later day.

Investment presupposes faith—a belief that society will continue present economic arrangements so that benefits currently foregone may be enjoyed in the future. Investment involves confidence in those corporations or governments to whom thrift funds are entrusted for profitable use. Investment in contracts in the form of mortgages or bonds by which borrowers agree to pay back a specified sum at a given date signifies an assumption that the money standards in which such agreements are expressed are stable. |

Parenthetically, it may be said that no perfect money standards have yet been evolved. Unfortunately financial yardsticks themselves fluctuate and in sundry subtle ways thwart the impulses of all except the most canny investors. As Professor Irving Fisher indicates in a symposium of the views of experts called, “How to Invest when Prices are Rising”:

“The investor is one who makes a present sacrifice in order to gain a future return. If prices rise between the present sacrifice and the future return, the fact is bound to influence the results. If the promised return is a definite sum of money, the rise of prices means that the purchasing power of this money will be curtailed. In a general way, during the recent decade and a half of upward prices, it is the bondholder who has lost and the stockholder who has gained.”

Since this observation was made by the Yale professor, economic forces have turned in the reverse direction. When commodity prices declined, the purchasing power of money rose and bondholders fared relatively far better than stockholders.

Where currencies leap madly toward worthless

[3] | ness, as in the case of the German mark and the Russian rouble, contracts—such as life insurance, bonds and mortgages—expressed in terms of those currencies shrink in real value almost to the vanishing point. John Maynard Keynes, the English economist and critic, treats the effect of change in the value of money in investments in his book on “‘Monetary Reform.”

“The effect of the War and of the monetary policy which has accompanied and followed it,” he says, “has been to take away a large part of the real value of the possessions of the upper classes. The loss has been so rapid and so intermixed in the time of its occurrence with other worse losses that its full measure is not separately apparent. But it has effected, nevertheless, a far reaching change in the relative position of different classes. Throughout the Continent the pre-war savings of the middle class, so far as they were invested in bonds, mortgages, or bank deposits, have been largely or entirely wiped out. Nor can it be doubted that this experience must modify social psychology towards the practice of saving and investment. What was deemed most secure has proved least so. He who neither spent nor speculated, who made proper provision for his family, who sang hymns to security and observed most straitly the morals of the edified and the respectable injunctions of the worldly wise—he, indeed, who gave fewest pledges to fortune has yet suffered her heaviest visitations.

“What moral for our present purpose should we draw from this? Chiefly, I think, that it is not safe or fair to combine the social organization developed during the nineteenth century (and still retained) with a laisser-faire policy towards the value of money. It is not true that our former arrangements have worked well. If we are to continue to draw the voluntary saving of the community into investment, we must make it a prime object of deliberate state policy that the standard of value in terms of which they are expressed, should be kept stable; adjusting in other ways (calculated to touch all forms of wealth equally and not concentrated on the relatively helpless investors) the redistribution of national wealth, if, in course of time, the laws of inheritance and the rate of accumulation have drained too great a proportion of the income of the active classes into the spending control of the inactive. .. .

“The individualistic capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer presumes a stable measuring rod of value and cannot be efhcient—perhaps cannot survive—without one.”

Consider the seemingly provident German who twenty years ago took out an endowment policy worth the equivalent of $10,000. To-day, for all his self-denial he receives a small fraction of a cent. This appears to warrant a cynical attitude toward all the beckonings of thrift. Such a reaction is natural, yet not wise. Because peasant homes, built with great tenderness and love throughout Northern France, were battered down to mere pulp by Teuton guns, it does not follow that we in America should shrink from the impulse to construct new and better homes. Similarly, the effacement of the mark and the rouble investment—and the watering of investments in francs and lire and other depreciated currencies—should not drive Americans to the conclusion that no constructive financial program is likely to bring to the individual the benefits that he is searching for. As a matter of fact, the dollar, though it is an imperfect standard of value, has stood up better during the abnormal years of war and reconstruction than any other unit of currency in the world.

A more stable currency than any that has yet been evolved, the ideal formulated by Fisher, Keynes, and other economists, would make the réle of the investor infinitely more simple and certain. It would assure him that a dollar invested to-day would have the same purchasing power in the future.

Under present conditions, to avoid all losses from fluctuating conditions, the investor must be agile indeed, knowing when to shift from stocks to bonds and when to transfer his savings from long term to short term securities.’ Perfectionists are doomed to disappointment whenever the human element, which is subject to error, enters. In the sphere of investments, for example, there is no absolute safety; safety is relative and the discriminating and welladvised can find in these approximations to theoretical ideals thc means of attaining their legitimate objectives.”

Why invest?

First, because by investing or entrusting funds in a productive enterprise or government, an individual increases his total income by adding the return on his securities to current earnings based on his own mental or physical labor.

Moreover, by putting his surplus earnings to work, the individual is facilitating an increase in national productivity and is thus enlarging the social income, on which society draws to finance its commonplace requirements and its noblest aspirations. The socially desirable man is not the easy spender, but the individual who doles out his funds with intelligent discrimination, saving some and converting his thrift

1 See Chap. XI on “When to Switch from Stocks to Bonds.” 2See Chap. III on “The Legitimate Objectives of Thrift.”

funds into capital in the form of productive machinery represented by corporate securities.

Investment connects the individual to the throbbing economic activity of the nation. It gives him the thrill of: participation in digging of tunnels through great mountains, the spanning of rivers, the fertilization of arid fields, and the manufacture of a variety of new and useful products which assure a rising standard of living for the great masses of his fellow men.

Under the present capitalistic organization of society, the accumulation of capital is the task and the duty of the individual. Unless such steady accumulation goes on, the great development of factories and plants and the erection of huge buildings and offices must cease. In a socialistic society, presumably the state would arbitrarily and automatically endeavor to set aside a portion of the current social income for conversion into a capital fund. Individual thrift now accomplishes that result.

For social purposes, it is conceivable that individuals might save too large a portion of their income and spend relatively too little.

J. A. Hobson, the British economist, in his new book on “The Economics of Unemployment” says, “Now if you hold, as seems to be the case, that a depression is due to, or testifies to, the existence of an excess of producing power and a corresponding deficiency of consuming power, we can only mean that somehow or other there has been oversaving or underspending on the part of industrial society in the sense that more non-consumable, i.e., capital, goods have been created than have been capable of being properly utilized for the supply of future consumption. This is not a theory or an explanation, but rather a description of the actual facts. At a time of depression large bodies of capital stand idle, together with the labor and business ability that could operate them. They simply represent a surplus or excess of former savings which cannot get used without delay and waste for the productive end for which they were designed.

“, . . This thesis may be presented in the following manner:

“Just as waste of productive power admittedly occurs by misapplication of capital, skill, and labor, as between one trade and another, or one area of investment and another (too much applied here, too little there) so income as a whole may be wastefully applied as between purchase of commodities and purchase of new capital goods.”

There are, of course, natural correctives which tend to prevent over-investment by the social group and also under-investment. These adjustments are never perfect, but if they should ever fail to operate with some measure of success, an economic society would wither and decay. For example, when a disproportionately large amount is being saved, the effect is a fall in the return on capital which in turn tends to discourage investment. On the other hand, when an unduly small amount is being accumulated, the rate of return on capital funds steadily rises and thus makes saving or investment more attractive and tends to induce marginal individuals who would not have saved for a four per cent return to accumulate funds under the lure of a seven per cent return, for example.

Apart from the social aspects of this question, the individual faces dangers of excessive thrift. For example, a father who denies his children an ample education and perhaps even sufficiently nourishing food and an attractive home life so that he can enjoy the strange thrill of watching his pile of gold grow faster than his income really warrants is pursuing an unwise course. The man who denies himself good books, visits to the theater or the opera, travel and a vacation once a year, if his means permit, so that he can accumulate capital faster than his income justifies, is not really thrifty in a higher sense of the word. Money is purchasing power and the true use of money is neglected by the miserly individual whose. passion in life is hoarding funds.

But for every miser there are tens of thousands of spendthrifts—individuals who in their senseless whirl of self-gratification dissipate their economic energies, setting up no reserves against the inevitable wearing out of their physical machines, against the day of sickness or premature death.

No universal rules as to the precise amount that an individual should save can be formulated. Rents, for example, are a larger item in the city than in the country. The man with a wife and five children needs a different formula than the bachelor. The principles by which an individual can formulate his own program, however, are discussed in Chapter 28, (Avoiding Bankruptcy in the Pantry.)

Good advice for the average man ya be: Save regularly and for definite purposes.®

Spend wisely and in accordance with a well considered plan. Make the accumulation of a thrift fund an important incident in your life but one subordinate to the larger problem of living well and usefully.

8 See Chap. III on “The Legitimate Objectives of Thrift.”

CHAPTER Il LEGITIMATE OBJECTIVES OF THRIFT

Human Goals for the individual who saves.

The greatest secret of success in life is to be ready when your opportunity comes.—DIsRAELI.

The spirit of thrift does not involve stinginess, which is an abuse of thrift, nor does it require that each item of savings should be a financial investment. The money that is spent in the education of oneself or of one’s family, in travel, in music, in art, or in helpfulness to others, if it brings real returns in personal development or in a better understanding of the world we live in, is in accordance with the spirit of thrift—Davip STarR JORDAN.

It is no job of the economist to make out a respectable case for stinginess.

The miser is by no means the ideal of intelligent thrift.

A well ordered economic life entails a wise balance between saving and spending. No single formula can fit the requirements of every case. Extravagance is a relative term. The records of the divorce courts eloquently illustrate this principle. The plea is frequently being made that a divorced woman is unable to live according to the standards to which she is accustomed on $25,000, $50,000, or even $100,000 a year, as the case may be. And yet on another street, a family of seven may be getting a full measure of happiness and comfort on an income of $3,000 a year.

To some a used Ford car would seem a wasteful luxury. To others, two automobiles for every member of the family seem an utter necessity.

In a strict sense, every expenditure beyond those needed to keep the biological processes of metabolism going entails the buying of luxuries. But, in a nation with a relatively high average standard of living, the plain citizen has come to expect more out of life than a minimum of essential food, a roof to protect him from inclemencies of the weather, and clothing to cover his nakedness.

Economic progress, as a matter of fact, is measured by the multiplications of wants. The luxuries of to-day become the necessities of to-morrow. An index of the material welfare of a democratic society is the capacity of the masses to command goods. The limits to consumption bear a close relation to the productive ability of an economic unit.

The sure road to the ideal economic life then lies not in exaggerated self-denial and penury.

Legitimate Objectives of Thrift

For the individual, saving merely means storing up, instead of exhausting, purchasing power. It entails deferring the satisfactions which come from spending. It involves transferring present claims on society for goods and services into future drafts. It signifies holding a blank check for subsequent use.

Elementary desires and passions conspire to advise, “Spend Now.” Likewise every merchant and manufacturer, with every show window and advertisement, contribute to the forces urging the individual to spend his money. The frailties in this direction of the head of the family are frequently intensified by the pleas of other members of the household.