How to invest your savings

Contents

Chapter

I. Saving by System n

II. The A. B. C. of Investment 17

Preface

This little book is based on the articles which appeared in the Saturday Evening Post of Philadelphia, entitled, "Your Savings. " The wide interest they aroused among investors and prospective investors all over the country, encouraged the author to present them in this more permanent form. Their sole purpose is to enable the man or woman with savings to become acquainted with the facts essential to safe and intelligent investment. The book is offered as a slight contribution to the growing educational literature which has for its largest purpose the safeguarding of the people's money and also to show how the pitfalls dug by unscrupulous "get-rich-quick" promoters may be avoided.

I. F. M.

Chapter I Saving By System

Benjamin Franklin once said: "Money makes money and the money that money makes, makes more money." This is the simple key to all wealth. Therefore, to get money and make it increase and multiply for you is the almost universal desire. Most people do not stop to realize that to make money, you must make what money you have work for you. The wealth hoarded by a miser is inert power. It is like owning a piece of real estate. The property will not actually earn anything for the owner unless he plants something in it, or builds something on it. Then it becomes productive. So with money.

Investment simply means putting money out to work so that it will earn more money. Speculation is often mistaken for investment. There is a big and sometimes costly difference. Speculation is buying something, or part of something, in which

ii the element of chance figures. It may be profitable or it may not. Take a share of stock or a city lot. If it is bought for speculation the buyer expects the principal to increase in value. Investment, on the other hand, consists of buying something to secure a steady and assured income. It may be a bond or it may be a mortgage.

All investment begins with the savings bank, which is the first bulwark of the people's money. The first step toward accumulating money is to save a little, and the best way to save a little is to put a small amount in a savings bank. It is astonishing to see to what extent a small sum of money will grow. The smallest amount is worth saving. Do not hesitate to begin with the pennies. They do not know how to take care of themselves and the dollars do.

"But how can I save?'' is the question that people who work for small salaries are asking everywhere. There is a way and it lies through system.

Simply apply the same intelligent effort to your money that you expend on your time, energy, or •the material with which you work. Practically everybody who works or earns money in some way can put aside five cents a day. This seems to be a very insignificant sum. It is a single car fare or the price of a glass, of soda water. Yet let us see what it can do.

Five cents put aside every day will amount to

$182.50 in ten years. Placed in a savings bank that pays four per cent, interest it will earn $40.06. Thus the total sum represented at the end of ten years by the simple saving of five cents a day is $222.56.

Take ten cents a day and by the same process of saving and. investing, it will amount to $445.56 in ten years; while twenty-five cents a day will become the sum of $1,113.75. If you put a dollar in a savings bank even' week for twenty years it will mean $1,612 at the end of that time.

The only way to save successfully is to keep constantly at it. It is a good thing to remember that you can start a savings bank account with one dollar and that no amount is too small to be deposited. It is not a good plan to keep your savings around the house. There is always the danger of fire and burglars. Besides, if they are kept in a stocking or in a tin bank they will not be earning any more money for you.

You can very easily get the saving habit. When you get your pay envelope, or your allowance or your income, ask yourself the question : "How7 much of this can I save?" If you ask it often enough you will find that it will become a sort of instinct not difficult to heed. Start some little system that is regulated by your business or your habits. For example, put aside a quarter every time you are late at your work. If you live in the country assess yourself fifty cents every time you miss your regular train. If you are a man who smokes and for economy take to a pipe, save the price of the cigars that you would have bought. If you smoked three five-cent cigars a day you would be saving fifteen cents. This sum, put into a savings bank regularly would amount to $668.18 in ten years. If you smoked three ten-cent cigars, and thus saved thirty cents a day you would have $1,336.59 to your credit at the end of ten years. This is enough to buy a small cottage.

The results of systematic saving are many and far-reaching. The ambitious boy may secure an education in this way. Suppose that the boy starts to work when he is ten years old, and that he can put away forty dollars the first summer, working up to October first, when he should put the money into a savings bank. Each succeeding year on October first he should put away fifty dollars. If he started this account on October first of any given year, his savings, at four per cent., compound interest, would represent the sum of $511.53 on October first, eight years later, the principal being $440 and the interest $71.53. This is enough to pay for the first year in one of the average colleges. With scholarships and work during vacations, he can easily make his way the remaining three years.

Thrifty parents may, by saving, not only provide an education for their children, but start their sons in business or equip their daughters when they marry. Assuming that they are able to buy a thousand-dollar bond when the first child is horn, the interest on this bond, put regularly into a savings

bank, will provide a neat stun when the child liecomes of age.

Take a thousand-dollar bond paying five per cent. The interest each year would be fifty dollars. Granting- that the interest is payable January and July, there could be deposited the sum of twenty-five dollars every six months. At four per cent, this interest alone would amount to $1,299.47 by the time the child, for whom the bond is bought, is eighteen years old. In other words, there would have been deposited $900 in interest, and the interest on these various deposits would be $399.47. This would more than pay for half of the college education, and the principal of the bond (for the bond could easily be sold) would pay for the rest.

If, on the other hand, the parent desires that the boy should go into business when he leaves the high school, the bond can be sold, and, with the interest that has piled up in a savings bank, give the young man a start in some commercial enterprise.

A merchant in a large Southern city hit upon a good plan to provide a fund for his children when they should reach the age of twenty-one wars. When each child was born he deposited a dollar in the savings bank in its name. The next year he deposited two dollars. He kept this up each year for each child, depositing the number of dollars that the birthday represented in years. When each child became of age there was $306.16 to its credit in the savings bank. The putting aside of this money was scarcely felt by the parent. It came in s'mall amounts and at intervals. It had a good effect on the children, especially on the boys, who realized that they had a bank account, and it made them see the value and importance of saving money.

Thus, the importance of saving, as the first start on the road to fortune, is obvious. It is not what you earn, but what you save, that makes you rich. If there are no savings banks in the town or community in which you live, you can easily arrange to do your banking by mail. In New York City, for example, the big savings banks receive deposits from all over the United States. One of them, the Bowery Savings Bank, the largest, has depositors all over the world, including many men in the United States army and navy. Banking by mail has become a fixed part of modern business.

Chapter II

THE A. B. C. OF INVESTMENT

The first problem of the average investor is to know when to withdraw his money from the savings bank and invest it where it will yield a larger, and at the same time a safe, return. You can begin with Sioo, but it is best to wait until you have $500. Then you can look over the investment field for a choice of opportunities.

In the main there are four kinds of conservative investments :

Bonds.

Certain Stocks.

Real Estate.

Real Estate Mortgages.

Bonds are the corner stone of conservative investment. A bond is a receipt for money borrowed by a government, state, city or corporation. This receipt, which is in the form of a promise to pay, is engraved from a steel plate on heavy paper. The government, state, city or corporation issuing it pays interest on it until it falls due. Then it pays the principal or issues a new bond to take the place of the old one which has expired.

2— Savings I J

There are many kinds of bonds. The principal ones which interest the average investor are these :

Government bonds, which are issued by national governments.

Municipal bonds, which are issued by states, cities, villages, counties and school districts.

Railroad bonds, which are issued by railroads.

Public service corporation bonds, which are issued by corporations that serve cities : as, for example, gas or electric light companies or street railways.

Industrial bonds, which are issued by companies engaged in any kind of business.

These bonds are always issued for a specific purpose and to do a certain work. In the case of a government it may be to build ships or dig a canal ; in the case of a state, the funds may be wanted for good roads or a new university building; a city or village may issue bonds for paving streets or other improvements ; a county may desire to build roads or erect a new jail or courthouse; railroads are continually needing money to improve their roadbeds, build bridges or extend their systems, and industrial companies may want to build new power-houses or factories. It will be seen that the bonds are issued with the intention of doing something with the proceeds thus obtained.

There is usually but one kind of government and state bond, and the security is the good name of the government or state issuing it. No one will question Uncle Sam, for example, or doubt the integrity of the State of Massachusetts. These bonds are merely promises to pay. The remaining three kinds — railroad, public service corporation and industrial bonds — are usually mortgages on something, and comprise the different classes which are usually so confusing to people who have had nothing to do with them. They are as follows :

Since the bond is a. mortgage on property, the highest class bond (and consequently the most valuable), is a first mortgage bond. It is just what the name says, anjd is a first claim on the property, whether it be/a railroad, gas plant, street-car line factory. ''If you own one of these bonds and the corporation issuing it fails to pay the interest after a given period, usually six months, you have the right, with the other owners of the same kind of bond in this corporation, to take steps looking to the protection of your interests. This may result in the property being sold at auction and your taking your share out of the proceeds. The security depends on whether the property is bonded for more than it is worth.

A second mortgage bond gives the owner second claim on the property. This kind of bond is, of course, not ><> valuable as a first mortgage

A general mortgage bond is a mortgage on all the property of the corporation issuing the bond. In the case of a street railway company it would cover the cars, tracks, buildings and plant generally. With a steam railroad it would be on tracks, roundhouses, office buildings and real estate. The value of this bond depends on how many first and second mortgages were already on the property, because these mortgages would have a prior claim over the owners of general mortgage bonds. A general mortgage bond, however, may also be a first mortgage on the property.

A consolidated mortgage bond is a mortgage on a group of properties, as, for example, when the gas and electric lighting companies in a city are consolidated into one company, or two small railroads combine and form one system. The consolidated mortgage, therefore, is an obligation of the company thus formed. The first mortgage bonds of any of these single companies, issued before they were consolidated, have prior claim over the consolidated mortgage.

A collateral trust bond is secured by the deposit, with some trustee, of stocks and bonds owned by the corporation issuing the trust bonds. If it came to a point where the collateral trust bondholders wanted to get their money back, in the event of the corporation's failure to pay interest, they might foreclose and sell the stocks and bonds offered as security.

Refunding bonds are issued to take up bonds that have run out. It frequently happens that when

HOW TO LWEST YOUR SAVINGS

bonds mature the railroad or corporation that issued them faces the problem of reborrowing the money, unless, as in some cases, the railroad or corporahas been setting aside a fund, which is called a sinking fund, to pay off the bonds. Many bonds have a clause, called a "sinking fund" clause, which compels the corporation to do this. What is generally done, however, when bonds come due is to issue a refunding bond, which is sold and the proceeds used to pay off the old debt, or these new bonds are exchanged for the old ones.

A debenture bond is simply a promise to pay the holder a certain sum of money, and, like a government bond, has as security only the good name, or, in the case of a corporation, the record and earning power, of the borrow :r. This is not so desirable as a bond with more concrete security.

The average bond is for one thousand dollars. Some are for five hundred dollars and a few for one hundred dollars. Bonds run generally from ten to one hundred years. Some are for longer periods. The longer a bond runs the more desirable it usually is for the investor who is able and willing to keep his money so invested, because it keeps on paying interest regularly and the owner - not have to bother about a new investment.

Bonds pay interest ranging from two per cent. ( the rate now on government bonds) to seven per cent. The average now is from four to five per cent. This means that a five per cent, one-thousand-dollar bond pays the owner fifty dollars every year, and a six per cent, one-thousand-dollar bond pays sixty dollars a year. Interest is usually paid twice a year. The amount of interest due at a given period is represented by coupons that are attached to the bond. If the bond runs for fifty years there are one hundred coupons. You have only to cut these off one by one as they come due semi-annually, send or take them to the office of the company or its bankers and receive the interest in cash. You can even deposit most coupons in your own bank as cash ; for the bank, in turn, will collect the money. If the bond be registered, no coupons are attached, but the corporation which issues it mails checks to all of the bondholders, whose names it has on its books. Many bonds are "gold" bonds, which means that the principal and interest are paid in gold.

The value of a bond depends on four things : what security is offered, the rate of interest it bears, the length of time it runs, and how easily it may be sold if the owner wants to sell on short notice. The price is quoted in per cent, of its face value (the amount of the bond). If a thousand-dollar bond is quoted at ninety-two, it costs nine hundred and twenty dollars. This is under par. If, on the other hand, it is quoted at one hundred and ten, it is above par, "at a premium," as the term goes, and costs you eleven hundred dollars. These quotations are fixed by the general value of the bonds and the demand for them. The greater the demand, the better the price. Many very safe investment bonds never appear in newspaper reports of Stock Exchange transactions, for the reason that few municipal bonds, for example, are listed on the exchanges.

Why pay eleven hundred dollars for a thousand-dollar bond? Here is the explanation. If a railroad company issued some bonds twenty years ago when its credit was not of the best, it naturally had to pay a high interest, say seven per cent., for the money it borrowed. If these bonds remained outstanding, provided they had not been refunded at a lower rate, they would still pay seven per cent. This bond, therefore, would be worth more than one that paid five per cent. Hence the premium. But if this same company had prospered it could borrow new money now at a lower rate of interest and issue bonds, say, at five per cent., which probably would not bring so large a premium, if any. For the conservative investor these new bonds at five per cent., but running a longer time, would be the better investment. Why ? Because when you pay a high premium on a bond, this high buying price reduces the actual return of interest and thereby cuts down the actual return, in the end, on the investment.

It used to be the fashion to buy government bonds because the country was less prosperous and investment opportunities were not so many as now. Of course, few bonds are so secure, but they pay only two per cent., and no investor would think of buying them when many other safe investments are to be had that yield more. Government bonds are bought by national banks mainly, which are required by law to own them in order to put out currency (bills).

In buying bonds it is necessary for the buyer to know, in the case of a street railway company, how long it has been doing business, the character and record of its officers, what its earnings have been both in prosperous years and in lean, what its franchises are, what the chances for municipal ownership are, the competition it has, its indebtedness — in essence, all the facts about its condition. Particularly, he should see to it that the maturity of the bond does not extend beyond the life of the franchises. So with all others.

Practically all bonds contain part or all of the phraseology of the following, which is a First Mortgage Twenty Year Five Per Cent. Gold Bond :

For value received, the Blank Consolidated Street Railroad Company, a corporation organized and existing under the laws of the State of Ohio, and operating street railroads in the City of Columbus, promises to pay to the Central Trust Company of New York, Trustee, or to the bearer or registered owner One Thousand dollars in gold coin of the United States of America, of the present standard, on the first day of July, 1909, and to pay interest thereon at the rate of rive per cent, per annum from the rirst day of July, 1889. on the first days of January and July in each year, on the presentation and surrender of the coupon hereto annexed as they severally become due until said principal sum shall be paid, both principal and interest of this bond being payable at the agency of said railroad company in the City of New York. This bond is subject to redemption on or after July I. 1894, at no per cent, of the par value thereof, with accrued interest out of a sinking fund of $22,500 a year beginning with that date as provided in the mortgage herein described. This bond is one of a series of eight hundred bonds of like tenor, date, and amount, numbered consecutively from one to eight hundred, both inclusive, and amounting, in the aggregate, to Eight Hundred Thousand Dollars, which are all equally secured by a mortgage of said railroad company in the nature of a conveyance in trust, dated July 1, 1889, and duly recorded, conveying all the property and franchises of said railroad company to said trust company in trust, for the benefit of the holders of said bonds, to all the provisions of which mortgage this bond is subject. In case of default for six months, after due demand, in payment of any interest on any of said bonds, the principal of all thereof may be declared due as provided in said mortgage. The principal of this bond may be registered on the books of the said company at its said agency, and registration thereof noted hereon, after which no transfer thereof shall be valid except on said books until after registered transfer to bearer, when the principal of the bond will again become transferable by delivery. The coupons annexed to this bond will always be transferable by delivery. This bond shall not be valid unless authenticated by the certificate of the trustee of said mortgage.

Chapter III How To Invest Your Money

Formerly the investor sought the investment; now the investment seeks the man. To this extent has modern investment been organized. It has become a science, like farming.

Xo matter if you live in a small town in Kansas, or in a clearing in Oregon, or on a plantation down South, you are able to-day to share in the opportunity for safe and well organized investment. Just as the rural free delivery has brought the daily newspaper, with the fresh news of the world and its markets, to the very door of the farmer, so has organization of modern investment brought its advantages to the homes of the people.

Since Xew York is the financial heart of the country it is natural that this work should have begun and been developed there. You will find "bond and investment" houses, often with branches in many of the other large cities, that make a business of seeking, developing and selling safe investments to people who have small or large amounts of money to invest. They are like department stores. Instead of carrying household goods or clothing, they carry bonds and other securities. The method by which these bonds are secured and sold forms a large part of the machinery of investment organization.

If any kind of firm wants to do business, it must first have something to sell. Therefore, if the investment houses sell bonds, the first question is, how do they get them? Let us take a typical case that will illustrate the general method.

Suppose a street railway company in a large Western city wants to borrow five hundred thousand dollars to improve its system. Under ordinary circumstances an individual who wants to borrow would give a mortgage on something. Therefore, the street railway company does the same thing. It issues bonds, which are simply small mortgages. But the company does not undertake to sell the bonds. It gets in touch with one of the large bond and investment houses in the East. A street railway company is a public service corporation, and if it traverses a populous and prosperous community, its bonds are usually very desirable securities. Hence the bond house is interested.

Now, the bond house with which this street-car company gets in touch does what any other carefulj conservative business concern would do. In this particular case it would send /(engineers to test the physical condition of the road — that is, find out in what shape the tracks, cars, power-houses were. But this would be just the beginning. The bond house would have its own lawyers investigate the titles to the land owned by the company, the rightof-way and the franchises, for all of these enter largely into the prosperity of the property. Franchises especially require to be carefully looked after, for it is important they should extend beyond the life of the bond. In short, every bit of security that the company or property has is tested.

The same line of careful inquiry would be observed in any other kind of property. If it happened to be a coal mine, the bond house would -end geologists to make investigation and analyses ; if it were an industrial corporation there would be a test of the plant and its earning and producing capacity; if it were a railroad, experts would be

fit up and down the line. So, for every exigency 'the investment house would first make careful, exhaustive investigation.

When it is assured, after its investigation, that the property is good and the security ample, the house will underwrite, as the term goes, the bond issue. This means that it will buy the bonds and then undertake to sell them, in turn, to investors and other buyers. Sometimes one house "underwrites" a whole bond issue ; sometimes several bond houses form a buying syndicate in which each is a participating member.

Every large investment house has its own method of selling, but all have the same object — to reach the buyer. In this respect the comparison with the ordinary commercial house continues, for nearly all the bond houses have salesmen who literally go out on the road. They sell wholesale and retail, but they deal, to use a commercial phrase, "direct with the consumer." They may sell twenty bonds or one bond to a customer. They go to banks and they go to homes. Thus they bring investment to the doors of the people.

It is very easy to get in touch with the big investment houses. Most of them advertise. A single inquiry, sent on a postal card, will cause them to be interested in your investment.

No investment is too small to be beneath the notice of these houses. A. butcher up New York State with five hundred dollars to invest gets the same service as a city bank president with one hundred thousand dollars. If a sick man in Philadelphia with a thousand dollars writes to one of these houses that he is seeking investment, a salesman will be sent to see him. -Advice is always obtainable. Much investment is now done by mail, i

The organization of investment has not only served to put facilities for investment within easy reach of the people, but it is giving them an intelligent idea of what they are buying" and what their income will be. You don't go at it blindly. Some of the bond houses are hanks as well, where the small investor can deposit his money until he has enough for an investment.

The investor must have confidence in the integrity of the house with which he does business, for this integrity, after all, is the best guarantee of the investment. An example of how worthy of this trust some of the great houses are was shown not long ago in Xew York.

A house brought out an issue of street railway bonds. On account of a strike and temporary financial difficulties, the railway company defaulted interest — that is, failed to pay interest wThen it came due. The bond house which sold the bonds immediately notified every buyer of them that it would buy the bonds back at the price paid, or exchange them for other bonds.

Every big investment house issues comprehensive booklets and other kinds of literature describing the bonds it sells and also explaining the security behind them. You can have your name placed on their list of people to receive such announcements regularly. In this way you can keep in touch with the market.

It is best for the average investor with savings to make his first investment in a bond. Many of the railroads and corporations issue $500 bonds, which will pay from four to five per cent, interest. The city of New York has ten-dollar bonds, the most recent issue paying interest at four and one half per cent.

If you live in a small town and buy a bond or some stock from a house located elsewhere it is a good plan to have the security sent to the local banker. Then he can tell you if it is the bond or stock you ordered. j

Many people with savings have an idea that they must wait until they get $500 before they can buy a bond. They are mistaken. Along with the organization of the modern business of investment there has come a plan of selling bonds on what might be called the instalment plan. It is just like going down to a department store in your town and buying a suite of furniture "on time." You pay a certain amount down and the rest in instalments. Meanwhile, you own the furniture. So with bonds, but with this exception — the banker or investment dealer lends you the money to buy the bond — that is, lends you the difference between the amount you pay down and the total cost. For this money that he lends he charges the current rate of interest. All the while, you own the bond or bonds and you are entitled to the interest that comes due on the security. In most cases this interest is ample to pay the interest on the money you borrow from the investment house.