Money and investments; a reference book for the use of those desiring information in the handling of money or the investment therof

Front matter

MON&Y AND INVESTMENTS

MONTGOMERY ROLLINS

UNIVERSITY

Foreword

IN EXPLANATION

THERE is not any book which is of especial value in aiding one to an understanding of the many intricate expressions and terms of the financial world. Most attempts in this line have either been by some " insider " who had an " axe to grind " and, therefore, desirous of selling his own wares, or, if not that, then some book or pamphlet which treats of investments and money matters from the standpoint of supposing the reader to already have a fair knowledge of finance, which has resulted in the use of terms and expressions not comprehensible to many. I am not aware of the existence of any reference book treating of matters relating to money, and the handling and investment thereof, in an elementary way; in a fashion to which those entirely untrained in its management may turn and find facts needful to their understanding plainly set forth. Such simple information as to the correct way to draw a check, indorse the same, open a bank account, and a thousand and one details of every-day life, are things often not clear to many.

It has long been my belief that there is need of some publication in which a mere beginner in the handling of money may seek for assistance in unravelling the mysteries of the expressions of Wall and State Streets, and giving in a concise form such instruction as above suggested. I wonder if the financial writer of the average newspaper realizes what a tremendous amount of financial slang1 he uses, and how he

1 Examples of financial slang :

" The market is in a much overbought condition; things have been sky-rocketing until there begins to be an evidence of pressure upon the long side. Fancy stocks have advanced, deals have been in evidence, off which Wall Street has been scalping points. Stock pyramiding is noticeable everywhere; in fact, they have been jack-screwing the market." < " The shorts will probably now begin to get in their work, for the wise ones are beginning to act a little bearish. The old lady of Threadneedle Street must be considered."

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has come to depend upon such words as " gunning," " pyramiding," " scalping," etc., to convey his meaning. No less a newspaper than one of the leading New York dailies recently published a long detailed statement of the earnings of the " Clover Leaf " Road, without anywhere giving the real title of the company. Do the banking houses which issue circulars offering bonds and other investments, or the stock exchange houses which publish market letters, ever think what a hopeless mass of matter this all is to the uninitiated? Necessarily all this information has to be put in a condensed form, and must be issued on the supposition that such common expressions as " selling short," " bull market," " legal for savings banks of New York State," " net debt," etc., are understood by the readers, and it may be said that the last ten years has been an era of education to the investing public, and that most of the matter sent out is understood by the large majority. The monthly circular of the bond selling houses, especially, have been mailed so broadcast of late that a great deal of information must have been absorbed, even by the most obtuse. But there is still much to be desired. Women, in particular, who are unexpectedly called upon to handle money, are generally puzzled to understand the meaning of the words and phrases in common use by all financiers. Many a man makes the mistake of telling his wife little or nothing of his financial affairs during his lifetime, or in any way preparing her for the care of his property, be it ever so little, in case of his death. A woman so left with a modest fortune may have to start at the very A B C of investing, and needs knowledge sorely.

It will be my aim to explain in language as little technical as possible the many most commonly used terms and expressions in relation to investment matters. In order to avoid, to a great extent, the use of one financial term in the explanation of another, it will be necessary to treat each subject at some, I fear perhaps too great, length. To the financier I am aware it will appear unnecessarily detailed and elementary and some of the definitions almost ludicrously simple, but I can perceive no injury likely to result from erring in that direction. There are many things which the beginner should

" Sugar rose from the bottom of the cup and had a very sweet look."

" The mills where tips are manufactured were accordingly put on two shifts, and pools went to work with zeal."

" Stocks went both ways to-day. There was some selling short, apparently, some going long, some supporting of the cliqued stocks. The cliqued stocks were strongest. London came firm, and New York started the same way ; then came reaction and recovery.

"Great laundry establishments are now running night and day, and unscrupulous manipulators of good, bad and indifferent corporations are working overtime."

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know: the ordinary rules to safeguard one's investing which the experienced man applies almost unconsciously in making his investments. To the latter it hardly occurs that there are thousands who do not even know the desirability of a sinking fund, or that it is generally considered better to have a bond payable in gold than in lawful money, etc. I have known a banker to spend more than an hour in explaining the meaning of " accrued interest " to a woman, and a school teacher at that. Such instances are by no means rare.

A book which will help to educate the investors will be not only, I hope, of value to them, but also to the bankers, who are necessarily busy men, by having made it possible to do business with a greater dispatch with such as may have received some benefit from its use.

Many investment bankers doubt the wisdom of doing business at all with the average woman from the fact that so much time is consumed in explanation of details, and often from the lack of knowledge which many women have of the most common business rules, and which, either from courtesy or charitableness, the banker often allows her to break, to his own pecuniary loss. There must be necessarily more women who can find need for the book than men, yet it is hoped that there will be among the latter many who will find here and there in its contents something previously not clear to them.

The necessity, perhaps, for a little financial knowledge on the part of women is not so urgent as formerly. In early days, the strenuous domestic cares left them little time, if any, to the care or thought of money, and it is not to be wondered at that the husband made no attempt to educate his wife in such a direction. In the present day of greater wealth and numerous servants to lighten the domestic burdens of the housekeeper, it has become quite customary for the woman of the house to have a bank account, and check against it for personal and household expenses. Consequently, to a limited extent, many women of late years have been gathering experience, but, step by step, with this slight growth of knowledge, have arisen more and more complicated questions of finance, making it, year by year, harder to grasp even a fair knowledge of the handling of money, with the many intricate stock and bond issues now upon the market. Although this book will endeavour to cover, in a brief way, such simple subjects as the making of a draft, drawing a check, etc., yet it is intended to cover financial and investment matters in general, and to set forth in a clear light their many ramifications.

No attempt to lay down fixed rules to lead the investor to certain success finds its way into these pages; rather, it is the desire to make clear certain dangers which the investor should viii MONEY AND INVESTMENTS

avoid, and establish principles which should prove helpful in reaching a fair idea as to the value of securities.

The writer has made an earnest effort to make clear some of the many intricacies which surround the complicated nomenclature of bond issues. It is not surprising that he received a letter, not long ago, from a young man, unknown to him, about to connect himself with a Southern bond house, asking if there were not some book to which he could turn to put him on horseback and start him out of the wilderness, as it were, in regard to the complexity of names attached to issues of securities.

The writer cannot undertake to give every possible combination of names. For instance, there is a "general mortgage bond," " sinking fund bond," a " first mortgage bond," and so on, all of which will be separately described in the text, but to undertake to give a fair definition for such possible combinations as "first, general mortgage, sinking fund bond," would lead to an increase in the number of subjects too great to contemplate.

Again, it would not be safe to elucidate all the laws and legal technicalities which may surround an issue. It is supposed that every reputable bond house shall have taken the legality of the issue into consideration before offering it for sale; and in this connection the reader is asked to turn to the subject headed " Attorney's Opinion." Reference to issues in general can only be made, and the value of securities referred to from the same standpoint, for there must be many common stocks which, in the nature of things, frequently sell higher than the preferred of the same company; or the first mortgage bonds of one company may not sell at as high a price as the third mortgage bonds of another. All these facts must be taken into consideration, and the province of the writer is only to undertake a reasonable interpretation and definition of each security issued within the understanding of the least experienced.

It is not the intent here to treat of mercantile affairs, but upon financial matters and investments as dealt in by banks; money and the handling of it, etc. The meaning of words and phrases as defined herein is as understood in the world of finance.

It is not advisable to follow accurately the nouns, verbs, or adjectives, as the same are given in a dictionary or an encyclopedia, but select, without regard to their grammatical position, words used commonly in financial matters. In some cases definitions will diverge widely from those of an encyclopedia and will usually not give all the possible uses of a word, but only such meanings as relate to the handling of money and securities.

FOREWORD ix

The effort has been made to arrange all subjects alphabetically under the headings by which they are most commonly known. If the reader is unable to find information upon the subject sought, let him endeavour to think of some other term, word, or arrangement of words, which might refer to the same subject, with the hope of locating it in some other part of the book.

It will be useless to attempt to cover every conceivable financial term used in this country and Great Britain, or in the English-speaking world in general, nor can it be possible to give all the intricacies of the law and the rights of the lender, debtor, indorser, etc., but merely to cover those most usually come in contact with in daily financial transactions or in reading newspapers. And, as regards the rights of the lender, etc., to give the most common principles to guide him. This is not intended for an advanced book on finance, for there are separate books which cover nearly every general subject. It is more for daily reference and a guide to those greatest in need of information.

There will naturally occur to some, now and then, points not covered. To such I would say that the Encyclopedia Britannica leaves much to be desired, and that the aim here is to produce a simple " handbook " of most commonly used expressions and most needed rules to aid the beginner in the handling of money and investments. To enumerate in detail all the many rules that the banker himself has to exercise, first and last, in his own larger experience of buying and selling, would be but to breed confusion.

The names chosen by different corporations for new security issues are sometimes strange and conflicting, and very often misleading; again, entirely improper, and it is not surprising that a young man entering the banking business seeks relief from the confusion. It is human nature, a fact well appreciated in the financial world, that there is a good deal in a name, leading to the giving to many security issues titles to facilitate their sale.

The names of different classes of securities are so misused, sometimes purposely, the different meanings of the same terms overlapping one another, that it will not be strange if some readers of this book take exceptions to the definitions given herein regarding different security names.

A bond is not technically a " first mortgage," " second mortgage," etc., but secured by a " first mortgage," or " second mortgage," on the property, but throughout this work the latter meaning will, for the sake of brevity, often be taken for granted, and the former wording used. There are so many securities which are commonly referred to in Wall and State Street parlance by what may almost be called x MONEY AND INVESTMENTS

nicknames, or, at least, a great abbreviation of the full title, that the most commonly used ones will be found throughout the book, alphabetically arranged. To endeavour to cover this ground fully would add too greatly to the size of the work. A sample of the above would be that of the Chicago, Burlington & Quincy R. R. Co., which is known by all of the following: " Q,"'" B. Q.," " C. B. Q.," " Burlington," etc.

The statements made herein are compiled from reliable sources, mainly official, and are the latest obtainable. Although the author has left no stone unturned to verify his information, he cannot suppose that this work goes forth without errors, but it is hoped that those which exist will prove unimportant.

To certain officials in various departments of the United States Government; to many well-known bankers and brokers, experts and specialists in their professions; to several painstaking, resourceful lawyers of known reputation; and to many others, busy and successful men in their separate walks in life, I wish to express my deep sense of obligation for most able and necessary assistance in the preparation of this work. To them will be largely due whatever successes may befall it, and to the author its shortcomings.

II Investment And Speculation

Suggestions

THE tremendous and invincible force of prosperity which spread throughout our States, beginning in 1897, the like of which no other nation has ever experienced, has enabled many corporations, which met financial disaster during the middle of the " nineties," to regain a sound moneyed footing. Many securities of such corporations, which were discredited in the minds of investors, have since been eagerly sought for by the most conservative and at very high prices. People who, losing faith in the future of this great food producing country, threw over their investments at enormous losses, must look back with wonder upon their timidity, and feel that until the United States has exhausted its resources, a condition which at least this generation need give no concern, the swing of the pendulum to hard times and low prices furnishes no time to sell standard securities, but rather a time to buy. Yet this is contrary to the custom of the small investor; he loses confidence and sells at panicky prices, and regains faith just in time to buy at inflated prices. Now, in all such times, there must be some who reap the benefit of this ill-advised selling and buying; they are the large investors; bankers and brokers, who trade for their own accounts; and those associated in the management of our corporations and who can judge the future of their earning capacity. How is it so many rich men grow richer? Does it ever occur to the small investor that no new money actually comes into existence by the selling of a thousand shares of stock at twenty dollars per share over the cost? Yet such a transaction enriches some one $20,000. Not even the equivalent of money, such as the farmer, the mechanic, the miner, etc., produces, results from such a buying and selling. Some one must at some time have produced the money equivalent which pays the $20,000 profit. It is the toiler who really, by his labour, creates the money equivalent to buy the stock. Recognizing, therefore, how many

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rich men grow richer, and how few small investors profit in the long run by buying and selling securities for gain, it must be evident that there is a constant flow of the earnings of the toiler into the pockets of the few, largely because, as illustrated by the old simile " like a flock of sheep," the " public " sells at low prices and buys at high, and the wise ones, having confidence in the future, go contrary to the majority, and harvest the crops of other people's planting. The advice once given by a merchant of broad experience to a young man who thought, during 1893, that the commercial world had no bright future, " never to sell the United States short " was most sound. That young man held on to his goods and chattels and saw values exceed what they even had been before.

By a little study of prices ranging long enough to cover both years of prosperity and depression, some notion of relatively high and low security- values may be had. This done, the time to sell, if sell one must, is when the high level seems to be reached; then put the money in a bank and wait until the swing towards low prices — and the wait may be a long one — is well accomplished, and thus the time to buy is at hand. But buy the highest grade, standard investments, for even the most conservative stocks and bonds will then be found at cheap figures.

The mere fact that one has money to invest is no argument for so doing at the moment, even to buy the best the market affords. Ruling prices should be considered. No merchant would stock up to the limit of his financial capacity if he considered prices exorbitantly high; he would leave the money in his bank and wait. Why should not the investor do the same?

Standard investments are mentioned in the second paragraph preceding; and what such investments are is a subject to ponder on; a subject which State legislators are constantly considering in order to enact laws to safeguard the investment of savings bank and trust funds. A person who feels wise enough to divide all investments into two classes: standard or safe and questionable or speculative, is, indeed, possessed of self-confidence. Still some general advice can be given which will help one to reach a fair conclusion.

A man blessed with a moderate property sufficient for the welfare of his family, in case of his decease, provided the principal should suffer no shrinkage, gave his wife this advice — he had made her his executrix under his will, and it would devolve upon her to manage his property if she outlived him — " buy no security not sanctioned by law as a legal investment for Massachusetts savings banks." Of course, this anticipated no less conservative laws regulating the investment of the funds of such institutions than at the

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time the advice was given, but, perhaps, on the whole, no better reading of the future could have been undertaken, and no better advice given in so few words. In general, the laws regulating the investments of savings banks, as now in force, in such other States as New York and Connecticut, and, to a large extent, Maine, Vermont, and New Hampshire, may be used as guides in the selecting of securities.

Now, many will say: " But I can't live on such small interest returns as this kind of securities affords." Quite right, but neither can they afford to lose any of their capital. High interest rates beget loss of principal. This should be a motto and hung as conspicuously in the household of those of limited means, as other mottos once so common in the New England home. To get with safety better than 3£% to 4% interest return one must either be a shrewd, wellposted person in financial matters, or rely upon the advice of some one who is.

Misplaced confidence has been ruinous to the small fortunes of thousands. Undoubtedly there are numerous bonds of Southern and Western municipalities as well as bonds of public service corporations, which present a minimum of risk, paying from 4J% to 5%, but buy such only of bankers of long experience and good established reputations, and who are known to follow carefully rules and customs which years of practice have fixed as proper. It is partially from an attempt to explain such rules, so that one may select with intelligence, that the contents of this book are offered to the reader.

Again: let the careful thinker consider if there are not certain investments based upon the needs of this nation of great resources which must, in the very nature of things, be sound. Who was it that once said " a man will see a fly on a barn door and miss the door? " Look at a map of the United States ; do not get too near it; one, by so doing, sometimes sees the name of a small village, but does not see county or State names, which are in large letters. Consider this map from a broad and general standpoint; grasp, in your mind's eye, the enormous traffic of this country; the big arteries of transportation. It would seem that the bonds and many stocks of these large railroad lines must be reasonably safe, for these big systems carry commerce from ocean to ocean, bringing the products of the West to the Eastern marts, and, also, in vast quantities for shipment to the European markets. They, likewise, transport the manufactures of the East to the West as well as to the steamship lines, largely controlled by these same railways, which pass them on to the Asiatic countries. Such immense traffic as this must furnish the basis for sound investment if anything can.

Unquestionably, there are almost countless small investxiv MONEY AND INVESTMENTS

ments, here and there, which are safe and very profitable in interest return, but it is the belief on the part of so many that they have found just such a security which leads them astray. Better follow well-established rules and not be tempted by the wayside. No one may gainsay that there are not many gold and copper mines which are good, very good, but how often does the outsider get a chance to buy such a security at a legitimate price? When found to be beyond reasonable risk they are high in price. Certainly, they pay more than 3£% or 4%, but it takes an expert to pick out the good ones among the multitude of mining issues for the benefit of the kind of investor referred to here. It is customary for reputable banking houses, handling mining securities, to first have the properties examined by competent engineers and other well-known experts. When this has been done, they have gone as far as possible for the protection of the purchaser, for no one can see into the ground beyond the property already developed. There is the ever prevalent element of risk in investments of this class.

If the temptation to buy mining investments of any kind is allowed to influence one, bear one very important point in mind, viz., that a mine is ever consuming itself, — so, likewise, are such properties as oil wells, quarries, etc., — and at some future time the product must cease altogether, or the mine reach a depth too great for economical production. The shares of a mine, therefore, should not be valued entirely by dividends. A sufficient allowance should always be made for the exhausting of the mine's resources. In case of a bonded debt upon a mining property, the investor should be sure that there is a sufficient sinking fund set aside for the payment of this indebtedness, which sinking fund should be ample to allow for the reduction in the mine's value, for the reasons given above. In relation to mining, it is probably true that " more money has been put into the ground than has been taken out of it."

Do not be argued into buying a mining security based on the location of the mine being near another similar property of established value.

Let not the fact that a security can be bought at a discount — less than its face value — alone entice you to a purchase. That in itself is no argument to buy. It should warn one even to a more careful scrutiny of the property back of the investment. It is a well-known fact that the suicidal policy of buying only at a discount wrecked one savings bank.

Do not judge the value of shares by one dividend or by an increase in the dividend rate. The value of shares based on dividend rates can only be ascertained by a period long enough

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to test the corporation's dividend paying ability through good times and bad. A corporation which has been, for a term of years, returning 4 % per annum to its stockholders and selling at $100, enjoys extraordinary good business which, for the time, warrants the increase of the semi-annual dividend rate from 2% to 2|%, equal to 5% yearly. Speculators seize this opportunity to force the price of the stock to 125, at which price the increased dividend rate still only equals 4% return upon the investment. There is no certainty that 5% can be maintained, nevertheless up has gone the stock, and investors buy it more greedily at 125, yielding 4%, than they did at 100, yielding 4%. It will take twenty-five years of the dividend increase to return the market value increase of the stock. Perhaps that is hardly a fair way of putting it, but it may cause people to hesitate before acting according to the belief that one swallow makes a summer. Stocks are forced up or down in the market upon the least excuse, and those close to the scene of action make money at the expense of those who allow themselves to be influenced by surface appearances, and who do not probe to the bottom for real conditions.

When an industrial business, which has been conducted as a partnership, is changed to an incorporated company, and the public is invited to buy its securities, the intending investor should ask himself: " Why, if the business was such a good one, did the old firm wish to let the public into its profits? " All kinds of plausible answers can be given to such questions, and in many cases the incorporation is justified. As a rule, however, such methods of financing industrial concerns are best justified where many firms or corporations, or both together, in the same line of business, are united under one management to reduce competition and expense. It is the capitalization of a single firm which is more to be guarded against. Even in the consolidation of several " industrials," it is essential to consider if the business is dependent for its success upon the continued management of some, or the greater part, of the original owners. If so, it is necessary, if such a management is retained, that its ownership in the stock of the new company is sufficient to continue its interest to make the company a success, or some plan adopted to insure as good or better management of the whole as the integral parts had formerly. In this connection, the reader will do well to turn to the subject " Industrial Securities."

The question often arises as to the advisability of investing money for a long or a short time. The best method to pursue depends very largely upon the financial condition existing at the time of the investment. During the early part of this year (1907) corporations found difficulty in selling new issues of bonds at normal prices. Consequently, they issued high xvi MONEY AND INVESTMENTS

rate notes running from one to three years, with the expectation that when they fell due the condition of the market would be such as to permit the refunding of these notes by the issue of long time low rate bonds in their stead. Other bonds of the same corporations were selling upon the market at extremely low figures. Yet what did the public do? Instead of buying the bonds, they bought the notes in preference, thereby enabling the corporations to profit out of the expected advance in the bonds to be issued later, rather than themselves seizing the opportunity with similar bonds then on the market. There was great hesitation on the part of the investors buying bonds at the then low figures; but when they have advanced to a price sufficient to warrant the issuing of bonds to refund the note issues, then will they be readily purchased, showing again that the public acts contrary to good judgment.