>■.*> 4* *V °o © NO 1 What Every Investor"' Ought to Know ROBERT L. SMITLEY The Magazine of Wa ll Street 42 BROADWAY NEW YORK Copyright, 1918, TICKER PUBLISHING CO., INC. SEP 21 iyi« ©CLA506038 CONTENTS CHAPTER PAGE I. Knowledge vs. Chance — The Investors' Necessity .......... 7 II. Protecting Dependents— The Will— Trust Funds 18 III. What is a Bond? — How Underwritten and Marketed? 35 IV. Gauging Personality — The Importance of the Officers 48 V. The Bond Circular— How to Read It— Good and Bad Ones ........ 61 VI. Kinds of Stocks and Bonds — Definitions . 72 VII. Investing a Half Million Dollars .... 83 VIII. The Stock Circular — Avoiding its Hypnotism 101 IX. New Promotions — The Unreliable Broker . 114 X. Keeping Proper Records of Your Wealth . 127 XI. Newspaper Tips and Public Gossip — ^Their Pitfalls 139 XII. The Financial Books to Read — Arranged in Courses 150 3 PREFACE THE chapters constituting this book were published in various issues of The Maga- zine of Wall Street by the author under his pen names of Arthur N. Slocum and James Kennedy. Almost all books written for the investor are both technical in language and dry reading. These articles are set forth in the simplest form and fictitious names and situations are used to attempt to make the chapters more interesting to the reader. The author hopes that the casual investor will apply such instances to his own case and thus make the book profitable through- out. It is a strict rule of The Magazine of Wall Street — wherein these chapters appeared — to only publish articles which are easily understood by every reader and whose context has an actual concrete value to the reader. This summary of 5 6 PREFACE purpose has been attempted in each chapter. It may be that the reader will not at first appreciate the continuity of financial education set forth in each chapter, but these chapters are an incentive for further study and each one contains a text which may be enlarged upon at the will of the student. The elementary features of What Every In- vestor Ought to Know may be found in this book. Do not try to read it through at one time. Read a chapter at a time and then take up the supple- mentary reading applying to this particular chap- ter. The reader will find that it will be very profitable. Robert L. Smitley. WHAT EVERY INVESTOR OUGHT TO KNOW CHAPTER I Financial Knowledge Versus Chance Investor and Speculator — What the Classes Mean — What to Avoid KNOWLEDGE spells Success. This aphor- ism is becoming commonplace, but its truth cannot be controverted. Especially is this true when it refers to dealings in the security markets. The differentiation between the terms speculator, underwriter, investor, re- organizer, and promotor is usually pronounced in the minds of all those who are acquainted with the terms, but when the actual definition is called for, the dividing line is blurred and indistinct. There is but one psychological dividing line. The above phases of the security business stand on one side and the simon pure chance-taker stands on the other side. 8 WHAT EVERY INVESTOR The Chance-Taker This class of operator discards the funda- mental basis of the speculator or investor, which is knowledge. His tools are Luck and Tips. The books of a fair sized, or large brokerage firm could easily be divided into the two classes, if one took the time to investigate each customer. The writer, at one time a partner of a brokerage firm, was interested to a sufficient extent to make such a test. There were about three hundred active accounts of individuals in the ledger when the list was taken. Twenty-five per cent of these were, without doubt, gamblers and the rest specu- lators and casual investors. At the end of three years, ninety per cent of the gamblers had dis- appeared. Their names were no more to be found in the ledger. Not more than ten per cent of the other class was lost to the business. It was a clear case of Science versus Luck, with Science the winner in nearly every instance. Psychology of the Gambler The chance-taker has no plan of campaign. He is a creature of the moment much as a butter- fly in the animal world. The world is scien- tifically ruled and there are inviolate mathe- OUGHT TO KNOW 9 matical rules to fit the gambler in any game. The chances are always against him and when this element of mathematics is supplemented by superstition, the chances for his failure are en- hanced. The word Superstition is used in much the same manner as the word Luck is used. Both eliminate all consideration of the knowledge element. This superstition feature is the most ridiculous of all the elements which tend to formulate the gambling character. It would be as impossible to list all the superstitions as it would be to reach the nth power. One man trades in U. S. Steel com. because in the past it has been his luckiest stock ; a second always sells stocks when Trinity Church chimes are playing a hymn; a third be- lieves that prices fall on Tuesdays more than any other day of the week ; a fourth always sits in a certain chair. The list could be continued until it would become tiresome, if it were not tragic. Human beings are all imbued with a certain degree of superstition, but the man who can trade his superstitious leanings in business for a modicum of real knowledge is just that much ahead of his former kind. "Tips" are the second worst tools of the chance-taker. They are even more dangerous 10 WHAT EVERY INVESTOR for the user than his superstitious qualities. The rational man would consider the reason for a "tip." In the realm of finance there is no senti- ment. Each man is primarily for himself. It is the law of nature and the "tipster'' is the man who offers advice without a basic reason for giving it. He may have a private and a very personal reason, and it is true that "tips" often are productive of gains, but only when the recipi- ent acts at once and takes his profit, if any, when it appears, without the slightest delay. Daniel Drew, the most famous of the "bears" of former days, dropped a small piece of paper on the side- walk as he left his carriage to enter his office. A by-stander picked it up and read, "Buy 5,000 Erie at the market." Without doubt, this order was meant for Drew's broker and the loss was an accident. Within fifteen minutes every gambler had the word to Buy Erie. Of course Drew created an excellent market for his sales that particular morning. Advice versus Tips It is the one purpose of legitimate brokerage firms, investment houses, news agencies and mar- ket advisers to retain their followers. To do OUGHT TO KNOW 11 t|iis they must advise in such a manner that they are right more often than they are wrong. The gambler refuses to accept the experience and knowledge of good advisers, whose sole business is to study the security markets from every view- point. He prefers the excitement of following his superstitions and tips. The result is inevit- able failure. Good advice and purchased assistance for the purpose of dealing in securities is even more necessary than in the commercial world. The Business of Trading in Stocks is more difficult than any other form of business, and it is unfor- tunate that so many will not appreciate this fact until they first burn their fingers in the fire. From the psychological point of view, the re- quirements, in addition to sufficient capital, are Knowledge, Study, Good Advice, smooth running machinery and above all a firm, brave tempera- ment, so different from that of the gambler. The Speculator The limitations of this article are too confined to list the resources of the successful speculator. Primarily, however, he must have an intimate 12 WHAT EVERY INVESTOR knowledge of what the Trend of the security market is as shown both by the prices — the "tape," to use a technical word — and exterior commercial and financial influences. These in turn may be influenced by political and socio- logical conditions. There are plenty of excellent books on this subject and there is at least one service in existence which will assist the specu- lator. Our study is the man who has taken advantage of such opportunities. Cornelius Vanderbilt, Leonard W. Jerome, An- thony W. Morse, Jay Gould, and on down to men of today, such as Bernard Baruch, are types of successful speculators who have bettered the world through their success. The "constructive" speculator is the very best asset which any coun- try can have. His acquired knowledge teaches him that the efforts which tend toward the im- provement of mankind are the only dependable speculative efforts. The knowledge acquired by Mr. Baruch through speculation in industrial securities made him one of the most valuable men for this country on the Board of National Defense. The speculative knowledge acquired by the late E. H. Harriman in railroad securities caused the Union and Southern Pacific systems OUGHT TO KNOW 13 to open up a country which will possibly supply the nations of the earth with food. If Mr. Harriman had been but a chance taker, he would not have achieved what he did. If he had been but a careful investor and had not studied and planned, the result would have been somewhat the same as the gambler's so far as his fame is concerned. Required Temperament To plan out a campaign just as the General of an Army does, is the necessity of the Speculator. It is said that Germany had every move of war mapped out in advance when the rush was made through Belgium. An unexpected check was given to these plans at the very start, and they had to be at once revised to meet the new con- ditions. It was absolutely necessary to have the original plans, even though they were later altered. The analogy applies to the speculator. He maps out his course after study, advice, retro- spect, and outlook. Once determined that he is right, he irioves forward with his campaign. There must be no cowardice, but sometimes there must be quick decisions and retreats. The 14 WHAT EVERY INVESTOR old campaign type of speculator does not con- sider one reverse or one false move the end of his efforts. He fights on until either victory or defeat is effected. If his knowledge is better than his opponent, victory is assured, but he always provides a safe line of retreat and makes certain that his commissary department — his capital or margin — cannot be entirely destroyed. The successful speculator may spend all his time with his broker, may be a broker, or he may devote the surplus from gains derived from an- other business and speculation may be only an avocation. In any event, he will follow his own judgment supplemented by the best advice he can buy; his temper will not sway his purpose; his nerves must be trained to stand sudden shocks ; and he will not be influenced by superstition or worthless "tips." The Investor In following out the psychological trend the Investor is classed a grade or two higher than the Speculator. Why this is so it is hard to de- termine, but the man who Does Business in Stocks and Bonds is much better satisfied to be OUGHT TO KNOW 15 termed an Investor than a Speculator. If the economic status is carefully examined, it will be found that the Speculator, as he is defined in our minds, does much more for mankind than the Investor, although each has his place. The Speculator's efforts in the broader sense affect the whole community. His work helps to build up new industries, creates new positions for workmen, starts new cities and stimulates all commercial endeavor. Without the speculator in United States Steel stocks, we would not have the remarkable resources which we have to assist us in this World War. We would not have the City of Gary, Ind. Had Mark Twain not lost all his money trying to support a type-setting machine, we might not have had the Linotype and its kindred forms of machinery. Nearly every man and woman has become Investor. But the Investor requires nearly as much knowledge to succeed in his purpose as the Speculator. He does not realize this fact so thoroughly as the Speculator, but he is fast com- ing to realize it. The old type of Investor was the head of a family living in Rhode Island who, after making $100,000, "invested" it all in New York, New Haven and Hartford Railroad stock, 16 WHAT EVERY INVESTOR so that his family would never want. He felt so certain of his investment that he willed it to his heirs in such a manner that it could not be sold. He considered a broker's office as equivalent to a gambling hell and he smugly died with the knowledge that he had done his part in the world. His widow is probably running a board- ing house and his children clerking or steno- graphing in a broker's office. He was one of the type so aptly termed, in The Magazine of Wall Street, a "Sleeping Investor." Honore Balzac, in his Comedie Humaine series, considers the genus "Old Maid" as an economic loss to the world. If he had lived today, he would probably have classified "The Sleeping Investor" the same way. The successful Inves- tor must be as active and up-to-date as the Specu- lator if he is to retain his Income and Capital. He will have his Investments examined by ex- perts periodically just as he will go to his dentist every few months, or be physically examined by his family physician. He knows that it is his duty to take out Life, Health and Fire In- surance, but he also knows that he cannot keep up the premiums on his Life, Health and Home unless he insures his Income and Capital. OUGHT TO KNOW 17 The Investor is organizing. We already have two or more organizations comprising railroad share holders and it will not be long until the industrial share holders will come together under some capable leader to ask for uniform reports or some other excellent feature of co-operation. The Investor is gradually awakening and the meaning of his name is becoming confused with the definition of the Speculator. The Investor has found out that it is necessary for him to keep in touch with events and happen- ings if he wishes to protect and increase his funds. The habitual bond buyers have also reached the same conclusion. The man who once purchased Rock Island Co. collateral 4% bonds due 2002 at 60 or 70 and put them in his safe deposit box, forgetting he had them, learned some short time ago for the first time that the total equity to which he was entitled after the downfall amounted to a problematical $100 or so for each bond costing between $600 and $700. When he gets his next surplus, and invests, the investments will be analyzed. 18 WHAT EVERY INVESTOR CHAPTER II Protecting Your Dependents Your Will — Executor — Trust Funds — Ante- Mortem Preparation HAVE you made adequate preparation to safeguard your family or dependents in the event of your death? This is a subject which is not by any means a pleasant one to discuss, but it is one of the most important matters for every man to know if he desires to protect those who are dependent upon him. There is a certain amount of hesitancy in attending to these items, because no one desires to think of the possibilities, but it is the unselfish, careful man who does think of and attend to such matters, and no one enjoying the finer quali- ties of mind and sensibility desires to be classed with the selfish and inconsiderate. There are three distinct steps to be taken in making such arrangements : the first is arranging the estate, no matter how small, so that it may be easily handled for the best interests of the OUGHT TO KNOW 19 heirs ; the second is placing of the increments of the estate in such a manner that the beneficiaries, even during the life of the owner, are able to derive full benefits with the least risk; and the third and most important step is the matter of the will and the executor. The Investments Taking into consideration the fact that the ow r ner of an estate which will ultimately be used for the purpose of giving income to dependents, desires it to fulfill the original purpose, there are three important items for careful consideration. The first item is to have the various increments invested so as to bring a good return with more than reasonable safety. With the exception of owning a home, property is not the most desirable element to consider. However, if the home exists during the life of the husband and father, it should be one which can be kept up from the income derived from the remainder of the estate. It should certainly not be encumbered with mort- gages or any kind of a lien. It would be far better to dispose of all equity in even home property and arrange for rental, if there is the 20 WHAT EVERY INVESTOR chance of dependents falling heir to encumbered property (real estate). Having arranged to make the homestead free from all possible encumbrances, the next step is to make the investment. These investments should not be allowed to yield much over five and one-quarter per cent. If the flat yield does go over this figure, it is very possible that there may be one or two items which will be liable for total loss and thus decrease the income. A reasonable arrangement is this (basing the total value of the estate at $20,000) : Home and property unencumbered $ 4,000 Actual cash in Trust Co. 2% interest 1,000 Guaranteed mortgages, 5% 5,000 Real first mortgage, R. R. bonds, 4}4% 5,000 Real first mort Industrial bonds, 5% 2,500 A good list of preferred stocks, S T / 2 % 2,500 Total $20,000 The cash in the trust company should be a liquid reserve fund to meet any unexpected con- tingency. It should never be touched unless in a case of absolute necessity. The trust company is the best depository for such a fund, because it gives the depositor a better rate of interest, and OUGHT TO KNOW 21 is just as safe as any other form of banking. It would be best to have the deposit in one of the larger trust companies of the nearest large city. The local National bank could be used for de- positing the income and for a checking account. The guaranteed mortgage should be one of a duration of not less than ten years, and backed by the best title and guarantee company available. It is well to investigate the actual property on which the guaranteed mortgage is a participation whenever possible, but if the guarantor is well known as reliable, it is reasonably safe to accept his word for the basis of the mortgage. This kind of a mortgage permits the owner to be free from all complications of a legal nature. The real first mortgage railroad bonds are differentiated from so-called first and refunding mortgage bonds. A bond like Iowa Central 1st and refunding 4 per cents, would never do. The name is a misnomer, for the first mortgage con- sists of a very small proportion of mileage and the first lien on a bridge. The help of a good financial service and also of a trust company should be called in to judge this item of the estate as well as all other iterr^s mentioned. The first mortgage industrial bonds are classi- 22 WHAT EVERY INVESTOR fied similar to the Central Leather Co. 1st 5 per cent, bonds, or the Bethlehem Steel Co. 1st 5 per cent, bonds. There are very many excellent ex- amples of this form of investment, but the inves- tor must be very sure not to be deceived as to the bonds being a first lien and having the back- ing of the entire resources of the corporation. The preferred stocks should be chosen from the tried field. Not only should the past history of the company be investigated in a thorough manner, but the record of dividends over a period of years and a complete study of the outlook for the future should be made. Good investments in the railroad field such as Atchison Preferred and Union Pacific Preferred or even in the Industrial field such as U. S. Steel Preferred or National Lead Preferred are examples of this particular form of investment. An alternative of a very safe nature would be to substitute one of the Government (Liberty Loans) for a first mortgage bond of the railroad variety. The investments should not be made in more than $1,000 in each kind of railroad bonds or more than $500 in each class of industrial bonds and preferred stocks (on the $20,000 basis). Attention should be given also to a OUGHT TO KNOW 23 thorough geographical distribution so as not to have the liens covering one locality. How to Make It Easy for the Beneficiary If the father or husband in going to fight for his country and the expectation of his return to his dependents is doubtful, or even if the estate is to be arranged for easy liquidation after death, there are important steps to be taken. Should the owner be a resident of New York State he must take into consideration the law . which places a tax on all bonds. The bonds should be made tax exempt by paying the costs at once. This covers a period of five years. Should the bonds not be made tax exempt the State authorities will step in when inventory of the estate is taken and charge a large in- terest item in addition to the regular tax involved. Each share of stock should be endorsed in blank and properly witnessed and dated. In the event of the owners' non-return the stock will not have to be transferred for sale or to go through endless red tape to have the dividends go to the proper parties. The bonds should be registered as to principal 24 WHAT EVERY INVESTOR and interest whenever possible, and the owner should furthermore make out separate bond powers in blank, having them properly dated and witnessed in the same manner as the stock. The guaranteed mortgage could easily be made out to two parties so that in the event of the death of the head of the family the proper ben- eficiary would have little difficulty in acquiring the full title. During the life of the family head, the item of cash in bank should be to the credit of a joint account so that no embarrassment w T ill come to the heirs when the need of the "rainy day" sur- plus comes. Without question the homestead should be placed in the name of the one to whom it is destined ultimately to go. There are no other means to get away from legal red tape unless this idea is fully carried out. An Alternative If for any reason the head of the family about to depart for war or in arranging his ante-mortem affairs does not desire to go so far in these safe- guards, there is the alternative of using the services of the trust company. Any trust com- OUGHT TO KNOW 25 pany will help conserve the total property during the lifetime of the owner by creating a trust for one's own benefit. This trust can also be ex- tended for the benefit of the family after death. The trust company takes entire charge of all the property at a very nominal sum and will do all the work of collecting and disbursing the income both during the absence of the head of the family or in the event of his death. There is no limit to the kind of trusts which may be created, so that there is no excuse for the head of the family not taking advantage of this form of protection. In addition to this, it is possible for the trust company to safeguard all the increments of in- vestment during the life of the principal, without creating a trust. Such a form of procedure per- mits the father or husband to invest with a little higher rate of interest than that allowed under pure trusts. The company will keep these invest- ments in a private vault, collect and disperse all items of income, and, furthermore, look after the individual securities so that they will not lose from improper watching. It is difficult to overestimate the value of the trust company's services under such conditions. 26 WHAT EVERY INVESTOR Keep Records A complete list of all securities owned by the estate should be left enclosed with the will and another copy given to the principal beneficiaries. In this way there exists a complete check on the estate and a safeguard against any crooked deal- ing. The deed for the homestead and all receipts denoting that taxes have been paid to date should be a part of the contents of the safe deposit vault or go to the trust company handling the business. The deed must be entered on the county records and all papers relating to the insurance of the title to the property or fire insurance on the home should be attached. A personal property inven- tory of effects belonging to the household show- ing the location and original cost should be a part of the records, for this is a very necessary item of proof for collection in case of fire. An Executor A trust company is a thousand times safer than an individual for the purpose of conserving the estate, either on the basis of trusts while living or executor duties after death. The trust OUGHT TO KNOW 27 company cannot charge more than the legal rate for such duties and in addition to this feature there is no possibility of undue risks such as arise in a one man trust proposition. The head of a family often has a close friend in whom he has implicit confidence. He thor- oughly believes that this friend will do more for his dependents than a trust company. He does not take into consideration the personal element which exists wherever the individual is con- cerned. This element is that, because a man is human, he may be swayed by ulterior influences even if under bond to protect the estate. This friend may become seriously incapacitated men- tally or physically. He may die soon after or before the family head, or his personal affairs may become so pressing that his time is not given to the interests of the estate or trust which he controls. It is neither doing the heirs or depend- ents a favor, nor is it doing the trustee or executor a favor to put him in this position. The employment of a trust company in the fiduciary capacity is the only rational method of procedure. The trust company performs its acts strictly in an impersonal method, under stringent laws of control and through committee decisions. 28 WHAT EVERY INVESTOR Two heads are better than one and two or more experienced heads are infinitely better than one possibly very inexperienced head. Eliminate Legal Items In addition to the care in selecting a competent trustee or executor, the warrior about to leave for probable death must try to eliminate as many legal complications as possible. There is nothing which will eat up an estate so quickly as to get it tangled up with law expenses. There is cer- tainly a place for the legal element in our worldly afifairs, but the more the law and lawyers are kept away from an estate or trusteeship, the greater is the a'mount conserved for the depend- ents. The trust companies all maintain legal departments, which service comes under the reg- ular expense of administration. The extras are done away with and the costly red tape is pre- vented to the distinct advantage of the benefi- ciaries. The Will and the Executor Every man without exception should make a will. If he dies without a will the law steps in OUGHT TO KNOW 29 with all its costly features and regardless of the actual needs of the heirs, settles according to law and not according to reason how the estate should be divided. There are set rules for the division of an estate when the owner dies with- out a will. In addition to this it is the usual custom for the courts to appoint the administra- tor who is nearest of kin without much regard for his or her ability to administer. In this way much money, both from income and principal, is lost. By all means do not neglect to make a will if it is your desire to give those dependent upon you the full benefit of what you wish them to have. Make the will just as short as possible. The more words used in a will offer greater oppor- tunities for ambiguity and therefore legal com- plications. If the testator can compress the will into one or two simple paragraphs, there will be a greater chance for the will to stand. One excellent method is to place the invest- ments in the names of those to whom the will directs they shall go, before the death of the head of the family. Such beneficiaries may sign the certificates in blank or give unfilled-in powers-of -attorney for the bonds. The invest- 30 WHAT EVERY INVESTOR ments are therefore negotiable during the life of the owner, though not in his name. If you own 5 shares of Atchison preferred stock and desire it to go to your wife, Jane Smith, after you die, so designating this amount in your will, have the transfer made, at the time of pur- chase, to Jane Smith. Jane Smith may then endorse the certificate in blank and it is usable for your own purposes during your life and you may sell or change your purpose at any time, for the stock has been made negotiable. Either have your own lawyer draw your will or have the trust company do it for you. Do not attempt a holographic or home made will. The law has a language all its own and the layman is absolutely unacquainted with it. A number of years ago one of the justices of the Orphans' Court of Pennsylvania drew a full and com- plicated will. He had been passing on the valid- - ity of wills for years and yet his own will was easily broken. Very few doctors can cure their own diseases and very few lawyers can do their own legal work. It is therefore best to follow the plan of brevity and clearness if it is your desire to properly safeguard your dependents. OUGHT TO KNOW 31 What an Executor Must Know Above all else do not make a relative, or any other single person, whether friend or lawyer, the executor of your will. Here are a few "qualifications for an executor" suggested by H. A. Blodgett in his pamphlet of that name: Real estate values, the true value of various classes of securities, the trend of the money market, the laws and ordinances affecting prop- erty, including the Federal Income Tax Law, the Inheritance Tax Law, the Exempting of Bonds and Trust Funds. He must also have a good knowledge of reports constructed in legal form, bookkeeping, and legal accounting. He must be a man of keen knowledge and experi- ence and he must not have any partiality for one heir over another. In fact, the foregoing are but a few requirements for a mediocre executor. Why not be on the safe side and employ a com- petent trust company in the first place? When a trust company is employed with the expectation of handling all the financial details of the man who is leaving for the "front" or intends to be away for an indefinite period, the 32 WHAT EVERY INVESTOR Trust Fund is the instrument utilized to effect this financial relationship. This Trust Fund will take charge of all the property of the soldier or traveler. Without his assistance it will collect his income from every available source, pay his taxes, insurance, fixed expenses and in addition will invest his surplus from the accrued income or either remit the pro- ceeds of the income to him or to some one whom he may designate. A complete and understandable statement of all such transactions is rendered periodically to the owner and, in case of his death, the Trust Fund will be transferred to the beneficiaries either designated in the Trust Agreement or in his will. "The Trust Company acts as representative for living or dead in practically every legal rela- tion in which an individual can act. It must not only keep intact the estate of which' it has charge, but must safeguard the interest of every bene- ficiary." * The writer has endeavored to point out the safest and best methods for the soldier who is * Ralph W. Davis. OUGHT TO KNOW 33 leaving for the front or the careful man who hopes to best conserve his estate for his depend- ents. The trust company is a national institu- tion. Its business is the safekeeping of securi- ties, the management of property and the collection of incomes. These items are as much in its province as the care of teeth is the real business of the dentist. One does not go to the lawyer with a bad molar, therefore why permit an inexperienced man to guard all you own which you purpose to be left for the comfort of your wife or children? The Summary of Precaution When going away to fight for your country or preparing your estate for your dependents in case of your death : Be careful to choose good and diversified in- vestments. Have them carefully analyzed by experts be- fore purchase. Keep sufficient ready money within easy reach. Do not invest in real estate except for a home. Do not attempt to get too large an income. Permit a good trust company to handle the 34 WHAT EVERY INVESTOR estate for you if you are called away from home to service. Establish a trust fund during your lifetime. Keep your securities negotiable and endorsed. Insure land titles and register all deeds. File all tax bills with your deeds. Tax exempt all bonds. Make a short will, uncomplicated in form. Make the trust company your executor. Have periodical analyses of your holdings. Make provision for "switching" an investment if it appears to have turned out badly. Keep as far away from law courts as possible. OUGHT TO KNOW ' 35 CHAPTER III What Is a Bond? How It Is Underwritten and Marketed — Why is a Bond Necessary? — -What Happens to It? THE Great War has demonstrated the effi- ciency of the aeroplane. Men with ability and foresight — also capital — realized the profitable future for this aircraft business. It was for this reason that the Phantom Aero Co. was formed (Invented by the author for the pur- pose of illustration). During the first few years of existence, this new company experimented, changed and reor- ganized. Incorporated under the laws of New Jersey, there existed a capital account of $25,000,000, half preferred stock and half com- mon stock. In 1917 the great test came. The United States Government entered boldly into the world struggle, and the great need was for aeroplanes. The Phantom Co. had not made money. Its both classes of stock had sold far 36 WHAT EVERY INVESTOR below par. The seven per cent, preferred had never paid a dividend, and the common had been the football for speculative operations. The ad- vent of aeroplane demand had created new possi- bilities and eager investors had purchased both classes of stock until the preferred was quoted at 60 and the common at 15. The credit of the company had advanced on account of new con- ditions. The affairs were conducted by the officers, elected by a board of directors, who, in turn, were elected by the stockholders. The present set of officers happened to be efficient. At a meeting of the board of directors, President Smith spoke. "Gentlemen, this company must grow. We have the patents and the manufacturing plant; we also have the orders. But, it isw costing us too much to do business, as we lack sufficient working capital. We are paying an exorbitant rate of interest for loans and our credit is limited on account of the small deposits we carry. What must be done ? What can you propose to give us an opportunity to make large profits for our stockholders?" OUGHT TO KNOW 37 The treasurer, a comparatively young man named Brown, immediately suggested, "Bonds I" "We need at least $5,000,000 working capital," he said, "and this is costing us over 6 per cent., or about $320,000 each year. Our credit is now excellent among investors, and I believe that we will save money by issuing a 5 per cent, bond." The directors decided upoln this method of financing, and the plan was presented at a meet- ing of the stockholders. Over 50 per cent, of the stockholders endorsed and voted for this issue, for the saving features were clearly notice- able. $5,550,000 bonds sold at 90 = $4,995,000. Interest at 5 per cent, on $5,550,000 = $277,- 500. Saving on interest every year $42,500. Twenty-five year need for borrowing $1,062,- 500 saved $555,000. Premium loss deducted from the $1,062,500 equaled $507,500. Interest saved, which would be used to apply to redemp- tion. Of course, a sinking fund was established to raise, during the 25 years, the capital to meet 38 WHAT EVERY INVESTOR the bonds when due, but this phase would have to be supervised by the lawyers and the trustee. The Banking Firm Treasurer Brown took a trip to New York, and arranged a meeting with Mr. Lee, of Lee, Green & Co., prominent and wealthy bankers. At the first conference he said, "Mr. Lee, the Phantom Co. desires to issue $5,550,000 25-year 5 per cent, bonds. You will, of course, make a thorough examination of the company and give us your verdict. There is no need for me to go into details because your experts will give you the facts. When may I expect a decision?" "Within the next thirty days." About four weeks later Treasurer Brown re- ceived the following letter : Dear Sir : The reports of our investigators in the matter of the Phantom Aero Co. — re proposed bond issue — have been filed. We will take over the entire issue of $5,550,000 — 25 year 5 per cent, bonds at a flat price of 90. If you accept, kindly arrange to have your law- yers confer with Messrs. Dundee & Co., our attorneys, and at that time the adoption of the trustee, the terms of the mortgage, the indenture and other incidentals OUGHT TO KNOW 39 will be arranged. If the conference agrees, we will be prepared to act at once. Very truly, Lee, Green & Co. After the lawyers had agreed on the form of the bond, the provisions regarding interest, sink- ing funds, and the equity to protect the principal, Bond and Coupons 40 WHAT EVERY INVESTOR the Standard Trust Co. was called in to act as the trustee. For a commission the trust company agreed to act for all those who would buy the bonds. The Phantom Aero Co. executed a mortgage in favor of the Standard Trust Co., which stated that all the property owned by the Phantom Co., esti- mated at a sale price of $15,000,000, would be placed in the hands of the Standard Trust Co. to protect the lenders. In addition the Phantom Co. agreed that if the interest funds, to be paid out semi-annually by the trust company, were not forthcoming at the proper date, the trust company would have the right to confer with the bond holders and sell the equity back of the mortgage. The Standard Trust Co. agreed to pay out the interest when due and the principal when due, to the holders of the coupons or the bonds. These papers were made out by the law- yers on both sides, properly registered in the records of the county where the property was situated, and temporary certificates of indebted- ness were issued to the bankers, Lee, Green & Co., until the actual bonds could be printed. The firm of \Lee, Green & Co. paid the Standard Trust Co. $4,995,000, which was de- OUGHT TO KNOW 41 posited to the credit of the Phantom Aero Co. for its own use. An arrangement was also made that the Standard Trust Co. should act as de- pository for the Sinking Fund, an amount set aside each year out of the earnings and interest saved, to pay the principal when the 25 years was up. It must be noted here that the Phantom Aero Co. has its money. It must pay 5 per cent, on a loan of $5,550,000, for which it only received $4,995,000. The rest of the proceedings is en- tirely in the hands of Lee, Green & Co. The Phantom Co. might have made arrangements to offer this loan to its stockholders direct, but it was safer to put it in the hands of the bankers, and much cheaper. It is now up to the bankers to make their profit. The Distribution Lee, Green & Co., with the consent of the Phantom Aero Co., sent out a notice to all the stockholders of the company that until a certain date such stockholders will be permitted to sub- scribe to these new bonds at 95. Each stock- holder owning 100 shares of either class of stock 42 WHAT EVERY INVESTOR may purchase $1,000 of this loan at $950, and a certificate known as "Right to Subscriber'' is sent to each stockholder of record on a certain date. Depending on the terms of the indenture and the price of the stock, these "Rights" are valuable or they are not valuable. The stock- holder may either exercise his option or he may sell it to some one else. In any event, on the date set, the subscriptions are counted, and we will suppose that only $3,000,000 is taken by the stockholders of the company. This leaves $2,550,000 in Lee, Green & Co.'s hands. The Syndicate Before beginning the sales campaign with the stockholders, Lee, Green & Co. called into con- ference four other banking or investment firms. The data regarding the Phantom Aero Co. was submitted and the other firms agreed that this was an opportunity for profit. They formed an agreement to take over at 95 all the unsold bonds and to make Lee, Green & Co. the manager of the syndicate. They also agreed to "withdraw from sale" all bonds allotted to them until the disbanding of the syndicate. This gave Lee, OUGHT TO KNOW 43 Green & Co. a profit of 5 points on all the issue. The only possible loss in this connection could happen in case their proportion of the syndicate allotment could not be sold. The members of the syndicate agreed to sell these bonds at 98 to the general public, and at no other price. Each member of the syndicate had a list of regular customers who were eager to get the bonds at 98, because they were vouched for by such well known firms. In addition to this, each firm had a corps of trained bond sales- men. The head of the sales department called these men in conference, distributed to them all the facts and figures, and then lectured to them on the qualifications of this particular bond issue. Every phase of the mortgage, the business of the company and the peculiar worth of the loan for certain classes of investors was thoroughly discussed. Questions were asked, and the head salesman constituted himself as a prospective purchaser, and the salesmen attempted to sell him the bonds. After all possible questions had been settled, these men were sent out to do what they could. After the prospects had been seen and the field 44 WHAT EVERY INVESTOR of regular customers thoroughly covered, the salesmen were called in and the syndicate man- ager reported to the firms that only $1,000,000 of the bonds remained unsold. The Public Offering The advertising and publicity campaign was now ready for the final distribution. Announce- ments were made in all the leading daily, weekly and fortnightly financial publications that on September 1st next, the books of the various firms composing the syndicate would close for subscription to the Phantom Aero Co. 5 per cent, first mortgage bonds, due 1942 at 100. Litera- ture about the company was sent to investors all over the country, and the advertising followed up by attractive articles about the Phantom Co. On September 1st the books of the syndicate closed. The syndicate manager, Lee, Green & Co., made an accounting to the other firms of the syndicate, and it was found that only $250,000 of the issue remained unsold. This amount was divided pro rata according to the various interests in the syndicate, and each one had a right to sell the bonds as desired. OUGHT TO KNOW 45 Who Profited? The reader will easily follow the various items of profit which grew out of this bond issue. In the first place, the Phantom Aero Co. got its money at once in one block without any trouble. In the second place, the firm of Lee, Green & Co. got a profit of 5 points, or $50, on each $1,000 bond sold to the stockholders. In the third place, Lee, Green & Co. got a profit from the sale of the remainder to the syndicate at 95. In the fourth instance, Lee, Green & Co. and each other member of the syndicate made a profit sell- ing to their chosen customers at 98. And lastly, the entire syndicate made a small profit in addi- tion by selling to the general public at 100. The Expenses The expenses were quite large, and probably amounted to at least 3 points on the total issue of bonds. In the first place, there was the cost of investi- gating the Phantom Aero Co. These investi- gators were high salaried men, and the incidental cost of travel and overhead office expenses must 46 WHAT EVERY INVESTOR be included. Then followed the fees for the lawyers and the fees for local and state legal necessities. Possibly the bonds were made tax exempt at the time of issue. Thirdly, the print- ing for the temporary certificates, circulars and agreements; next the advertising cost and sales- men's commissions, and last but not least, the postage and so-called incidentals. What Happens to the Bonds? It is the custom for well established firms to stand back of their bond ventures. Lee, Green & Co. are no exceptions to this rule, and they are ready to buy back at a slightly reduced con- cession bonds which investors desire to sell. Other firms enter into the field of buying and selling these bonds so that a "market" is estab- lished. It may be that the firm of Lee, Green & Co. desire to establish a more desirable "mar- ket," so that application is made to list these bonds on the New York Stock Exchange. The advantage for the owner by such listing is that the bonds become better collateral for loans. There is no other advantage except possibly a little closer "market" for purchase or sale. Some- OUGHT TO KNOW 47 times the investor is better off if his bonds are not listed on the New York Stock Exchange. These Phantom bonds, not being listed, are not the football of speculation, but are more or less protected by Lee, Green & Co., whose reputation is at stake. They may have passed through hundreds of hands, but no matter who has had them, the money is being loaned to the Phantom Aero Co. The interest has been paid regularly, and in 1942 the holder notes that the principal is due. Each year of the twenty-five, the Phantom Aero Co. has been putting aside enough out of earn- ings to eventually pay off these bonds. The pro- portionate amount involved for each year is mathematically computed, which taking accrued interest into consideration, involves a problem quite out of the customary mathematical calcula- tions. At the date of expiration the Phantom Co. pays the Standard Trust Company the amount of the mortgage. The mortgage is re- leased and the Standard Trust Co. pays off the various holders of the bonds according to the terms of the original indenture on the bonds. 48 . WHAT EVERY INVESTOR CHAPTER IV Gauging Personality What the Investor Should Know About the Officers — Technical and Business Skill PERSONALITY enters into every phase of business as well as art or pleasure. The Motion Picture Company with Charley Chaplin or Douglas Fairbanks as a star has a much better prospect for profits than a company whose actors are unknown. But even with these stars to get the business, the management may lose money by injudicious salary payments and wasteful stock jobbing propositions. So, in every instance the research work for the investor comes to the same end. Who Is Managing the Company? In the previous chapter, the bond issue of the Phantom Aero Co. was discussed. The ultimate reason that the bonds of the company were OUGHT TO KNOW 49 accepted by the investment firm and sold by them was, not only because the actual business as a business was vouched for by the investiga- tors employed for the purpose, but because the investment firm believed in the capabilities and business acumen of the management. President E. P. Ripley of the Atchison Railroad once had the choice of positions with the Rock Island Co. or the Atchison, Topeka and Santa Fe. He chose the latter and the Rock Island Co. fell into the hands of managers who were more interested in the stock market part of the business than the railroad. The Atchison is firmly established as a good investment, while the Rock Island disinte- grated and went through receiver's hands. The prospective buyer of Phantom Aero Co. 5 per cent, bonds should be perfectly satisfied with the men who are managing the company. The investor has one piece of evidence in favor of investing. The good firm of Lee, Green & Co. would hardly have undertaken the under- writing of the issue unless they were satisfied. This is the first reason why the prospective investor should consider the purchase of Phan- tom Aero Co. 5 per cent, bonds. But he should not rest with the bare word or on the action of 50 WHAT EVERY INVESTOR the Investment Firm without personal investiga- tion. The following analysis of a corporation of this nature was suggested recently by Prof. Charles W. Gerstenberg, president of the Amer- ican Association of Financial Statisticians : "1. What is the integrity of the management? "2. Does the enterprise possess technical skill ; are its processes stabilized, and improved as far as technical skill can take them? "3. Does the management possess business skill, is it shrewd, are its distributive functions well organized, is it meeting competition success- fully? "4. Does its management possess financial skill ; has it committed itself in the past to finan- cial obligations that would be injurious or preju- dicial to new capital ; has it mortgaged the future as well as the past in such a way as to interfere unduly with future expansion ? "5. Is the business reasonably free from legal interference ?" Therefore, without going into the intricate duties of the trained statistician, let us see what the average man can learn about the bonds of the Phantom Aero Co. and its management, be- fore making his investment. It is well to follow OUGHT TO KNOW 51 the outline of Prof. Gerstenberg in summing up the results. The Management's Integrity The prospective investor would of course in- vestigate the reliability of Lee, Green & Co. It would be definitely established in his mind that unless the Phantom Aero Co. was a good, going, well managed concern, its bonds would not be recommended by such a well-known investment firm. On the other hand, there might be pos- sibilities which would determine Lee, Green & Co. to undertake this issue, which would not be in accord with the judgment of the individual investor. An examination of the personnel of the Phan- tom Aero Co. discloses the following officers : President, John Smith. A graduate of Har- vard, class of 1890, studied law and later a member of the firm of corporation lawyers, Eckert & Smith. After a successful career be- came associated with Sword Auto Co. as its secretary and legal adviser. Was instrumental in reorganizing a number of defunct industrial con- cerns and is a member of many important clubs. 52 WHAT EVERY INVESTOR iS « A ■s a — ° 5 -S £f| £ O ft- as s lis |©« gUs W 9 U w S3 O 8 8 3 8§* g O ■SGScj O 05 m f t t> < m o oq s ii I? «c * 8 b 3 Jf-i 5 £ 2 S5 w 5 H g a -; «< « m O > W S - CQ l> t-s OUGHT TO KNOW 53 Vice-President and General Manager, Abram Spencer. Graduate of the Massachusetts School of Technology 1900, engineer with experience in many mechanical products. Inventor of note and employed by the U. S. Government in an advisory capacity. Has written various articles for technical magazines and is not well known except to those who are in his immediate pro- fession. Secretary-Treasurer, Thomas Brown. Com- mon and high school education. Entered busi- ness as a stenographer, later becoming private secretary and confidential man for the great N. H. Muran, founder of many prominent industrial corporations. Is very well known among finan- ciers and is credited with many friends and busi- ness connections in the New York financial dis- trict. Directors. Three well known bank officials, also three men whose names are fairly well known in the business world and four others who are directors in many other corporations. A careful reading of the short general biogra- phies of the dictators of the Phantom Aero Co. by the prospective investor would establish in 54 WHAT EVERY INVESTOR his mind that "Integrity" is one of the main elements. All those who are in charge have had business experience in varied lines of endeavor. Some of them may have had failures. So much the better for the company. If a leader of an in- dustry has experienced one or two failures and he is known to be honest and is "Integrity Per- sonified," he will be all the more capable. He will know what previous mistakes to avoid. Processes Stabilized— Technical Skill It would most certainly seem to the investor that the officers and directors would not have been men to offer a proposition to the general public unless they were certain that they knew how to manufacture aeroplanes and motors. However, even men of this type may be deceived as well as the layman investor. An inquiry re- garding what the other members of the same trade think and a look at the product itself from the viewpoint of what effective service has been done would be necessary. It is easily discovered by the investor that the Phantom Aero Co. has had a very hard time to procure just the right kind of steel with which OUGHT TO KNOW 55 to construct motors. 'It is also a public fact that much money has been spent on experiments and that even now the process of construction may have to be changed. On the other hand, the planes are in active service in this country and the consensus of opinion in the general trade is that they are the best made in this country, although they do not reach the efficiency of the European manufacturers. The deduction for the investor is that the element of chance makes the investment not nearly so good as it other- wise might be. The other viewpoint is, " Some- one will succeed and it is more likely the Phantom Aero Co. than any of the others/' The processes, therefore, are not really sta- bilized, but how about the technical skill? Out of all the officers and directors, the vice- president and general manager Abram Spencer is the only one having what might be called a modicum of technical skill. At first glance, there does not appear to be a real expert in aero-manu- facture. Further investigation, however, would reveal that the consulting engineers, not men- tioned in the catalogue of officers, are among the best in the world. Men formerly with the Wright and Curtiss companies and experts from 56 WHAT EVERY INVESTOR abroad are on the salary roll. Without such men, the investment would be very risky. With these men, the possibilities for profitable busi- ness are vastly increased. Business Skill — Competition A resume of the business histories of the offi- cers and directors easily proves that each of them is qualified in the business world. The president has not only had a theoretical training but a practical training. The secretary-treasurer has had a thorough business education and the directors are men of experience and known abil- ity. There seems to be nothing of a serious ad- verse nature in the study of this element and it is therefore a mark in favor of the investment The competitive feature is a little more inter- esting and is not so favorable for the investor. In looking over comparative records of other companies, we find that these other companies have been able to manufacture planes at a much less cost. Why is this so ? Careful investigation shows that the purchase of raw material was made by the others at less cost per unit. The competitive companies also have been able to OUGHT TO KNOW 57 turn out more machines so that just now there appears to be something wrong. Further and closer analysis of the statement shows that the working capital is very small. It is therefore evident that a bond issue would help to solve the problem. Does the Management Possess Financial Skill? Looking back at the list of officers and direc- tors of the Phantom Co., the investor notes that the secretary-treasurer and seven of the directors are either practical or theoretical finan- ciers. This feature is quite in favor of the com- pany and would be a factor conducive to invest- ing in the company. It stands to reason that these men must necessarily have sufficient ability to carry the Phantom Co. through serious finan- cial difficulties. Committed to Financial Obligations? Up until the new bond issue, outlined in the preceding chapter, of this series, there has been no definite financial policy pursued by the offi- cers and directors. The company, in the past, 58 WHAT EVERY INVESTOR has been run with the capital gained by the sell- ing of shares and whenever additional working capital was needed, it was borrowed from the banks on short time direct notes. The general financial policy had been too cautious rather than too careless. An examination of the quarterly reports to the stockholders also shows that a comprehensive system of accounting exists which has been properly audited. There is nothing in the statement which could be hid from the aver- age investor and so far as can be learned there are no " jokers" to deceive the layman. The initiative of the directors in advising a bond issue to gain more working capital is laud- able for it should put this company on a par with its competitors. In addition, the method of dis- tribution of the bond issue, its sinking fund clause, and the assets back of the mortgage, all are in its favor. So far as this statistical ele- ment of investigation is concerned, the investor has everything in his favor. There is no past sin hanging over the financing and if the business continues to prosper, there is no reason on the face of recent financial and managing ideas to prevent further funding schemes which will not OUGHT TO KNOW 59 interfere with the present issue. The company has not mortgaged its future. Free from Legal Interference? This is a most important subject for the pros- pective investor to consider. It is most fre- quently overlooked by investors and, if nothing is noted in the records, the prospective purchaser of bonds or stocks should make sure of this condition through the investment firm bringing out the saleable issues. Any manufacturing com- pany whose product is based on patents needs a thorough examination. The Phantom Aero Co. did not have original patents but purchased them from former con- cerns which were originally consolidated into this one company. The other little companies were practically driven out of business on account of necessary expenditures to defend their patents both on the form of plane and the motors. These suits were all settled before the time of consolidation with the Phantom Co. and the in- vestment firm's lawyers reported to the Standard Trust Co., the mortgagee, as well as their own firm, that court records were clear as to the non- 60 WHAT EVERY INVESTOR infringement of the other patents in existence. Had the patents of this Phantom Co. simply been applied for, it is doubtful if any money could have been borrowed in the investment mar- ket. In every case the investor must investigate this situation. We have now gone over the item in connection with the management, both from the intimate- personal phase to the general-impersonal phase. The investor has decided that while there is a certain amount of risk, much greater than an established railroad first mortgage bond, yet the men who are managing the business and the quality of the investment firm making its finan- cial offerings is of such excellence that an in- vestment is worth while for the successful busi- ness man with a surplus, but not one for the widow or the man who only has a small sum to invest. OUGHT TO KNOW 61 CHAPTER V The Bond Circular What It Shows the Investor— What Other Information Should Be Sought YOU, Investor, have received the bond cir- cular of Lee, Green & Co. describing the Phantom Aero Co. new 5 per cent, bonds. After going over it, what conclusion will you reach? Will you invest in these bonds? In previous articles, it was shown why these bonds were issued and also how they were of- fered to the public. Information had also been gained about the personnel of the company. There is now before us the circular of the invest- ment firm offering this investment and it is our duty to study it and find out what further infor- mation is necessary and what should be con- firmed in the circular. Is the Equity Sufficient? A glance at the last balance sheet shows us that there are $5,000,000 in securities held by the 62 WHAT EVERY INVESTOR Aero Co. These securities are probably listed at cost price and it is very doubtful if they would bring one-fifth of their value if distributed to the bond holders. So far as they are concerned the importance to the mortgage is negligible. There is therefore left, back of the bond issue, $10,000,000 book value in property. The circu- lar tells what the property is and where it is located and this fact is attested to by the ac- countants, but the investor, to get complete knowledge, should incorporate this question in his letter to the investment firm before placing his money for the purchase. What Becomes of the Money? Any one loaning money is vitally interested in what the borrower intends to do with the money. In fact he is entitled to know. The circular particularly states that this money is to be used for the extension of the plant, to retire the shdrt term notes and provide working funds. It has been demonstrated to the stockholders that the Phantom Aero Co. is losing by heavy interest payments on account of borrowing cur- rent funds from the banks. There is no objec- OUGHT TO KNOW 63 tion therefore in using the funds for this pur- pose. The lender knows also that in addition to the equity stated, the supplies purchased and the finished but unsold products will be an additional guarantee back of the mortgage. There cannot be much extension to the plants with the proceeds of the sale of these bonds, for after the. short term borrowing obligations are satisfied, the remainder will hardly be sufficient for further property extension. Will the Bonds Be Paid When Due? The circular distinctly states that there will be a sinking fund established so as to pay off the bonds at maturity, when they are due. A number of financial experts of five or ten years back believed that the principle of refunding, paying off the loan through the issuance of a new one, was the better plan. Their idea was that by the time the loan was due the company would be so well established and earnings so good that a new loan could be made at reduced interest. The Phantom Aero Co. is more experimental and in addition there are uncertain financial elements brought about by the world war. It is there- 64 So- a a H © O © e WHAT EVERY INVESTOR SSI *8&g§J3 m a * S 1 ^ o ® 9 ,-,2 ■** « c3 o (NO!* &S 1 I a 00 00 00 Sod OO OO OO OO" OO OO S§ S fl go 3| w| O Eh o o est C o >» a •* n * I* fa *** 3lo f o|3 „ O d 1 o £ eg q - o p "3 a ^ .a gH £3 3' 131*. .4 a 1 a 05 c3 02 fa «- a 00 • ~ 5%s Q o fi Ph ~| O £ a ■o > * I %S * I J. n ^ fl §"8 8 § I i * © fa "S — ■ fa©s-^© j£ . >*-< roO ^ on . ace c3 g? >? ^ ^^ oO c3 ggX lis Q.C3 •^60 § GSOB o fl * 0J2S 0©a ^00 O+j < 0.0-0- (D-d- - < E © a a 0-- 0. §■2 • t £> •t- 3 ^ c3 ^3 03 S 6 ^° *%o O *8& ■9 03 ■S >> a 2*;& ^5^ S^-d •s^fl A 2aa Soot .Sroo aa<^ MO 2 1 © 03 a 1 -d u ■ [anagement- engineers ar ment work York City. fa & ■*a 09 =9 a IS 0+2 ^•9 a fa 66 WHAT EVERY INVESTOR fore more advantageous to the investor to have' the sinking fund in existence. The sinking fund puts aside each year 4 per cent, of the issue. This is a little larger than usual, but it means that the Phantom Aero Co. will be able to make quite a little income from the sinking fund interest. It is a better financial arrangement to do this than to allow for the accrued interest on this fund to take the part of the ultimate principal. Future Mortgages on the Property The circular clearly states that this is the entire issue and that it is a first mortgage on the prop- erty as a whole. There is no provision for any future borrowing which will affect the equity be- hind this loan. There is nothing said in the cir- cular except a plain statement of facts. If there is to be other borrowing in the future, it will either have to be on a second mortgage basis or on new property to be acquired later. The book value of the real tangible assets is shown to be $15,000,000. If the $5,000,000 of securities held should be left out of consideration as problemati- cal, there yet remains $10,000,000 which can OUGHT TO KNOW 67 never be utilized as first mortgage equity until • the present loan is paid. The circular does not clearly show whether the book value of $10,000,000 is an inventory after the $6,000,000 depreciation has been charged off. (Note earnings figures of $2,000,000 depreciation a year for each of three years.) If the ten millions is the value at June 30, 1917, it is most probable that it is carried at a figure arrived at after the depreciation had been charged off and is not the total of original purchases at cost. Interest Payments Will the Phantom Aero Co. be able to pay the interest and pay its quota to the sinking fund account ? The answer to this question depends upon the estimate and conclusions reached from a study of the past, the conditions of the present and a guess for the future. Each year has shown an increase in gross earnings, as noted in the cir- cular, and the operating expenses have increased also but in an orderly and fair manner. The circular states that large orders have been re- 68 WHAT EVERY INVESTOR ceived from the government. The present, there- fore, is provided for. The future can only be judged by believing that the same ratio of progress will be main- tained. The examination of the officers and directorate has convinced the investor that they are to be trusted. It is therefore proper to sup- pose that the future will be advantageous to the Phantom Aero Co. It is inconceivable that the directors would permit their company to fall behind either in new ideas or in business get- ting. The possibility, of course, might conceiv- ably be that new patents and form of manu- facture might be invented which would make the Phantom Co. a back number. This is possible but hardly probable. From this viewpoint the investment is reasonably safe'. Is the Yield Sufficient? The yield problem is a matter of choice for the investor. A 5 per cent, yield during war times when good bonds are cheap is not too much for this kind of an investment. In fact, it is hardly enough. When one considers that Cen- tral Leather Co. 1st mortgage 5's are selling be- OUGHT TO KNOW 69 low par as well as Southern Pacific convertible 5 J s due 1934, it would seem that these bonds should yield more than 5 per cent. The fact is that the yield is hardly attractive enough for the average investor in this class of bonds. On the other hand, both principal and interest seem safe, and for the purpose of further illustration, we will permit our investor to make his pur- chase after he has had a letter from Lee, Green & Co., satisfying him by their answers to the questions which he asks them about their circu- lar. New York City, Sept. 5, 1917. Messrs. Lee, Green & Co., 640 Wall Street, New York City. Gentlemen : I have received your circular relating to the new issue of 5% bonds of the Phantom Aero Co. If the answers to my questions are satisfactory, I will ask that you permit my subscription to $10,000 face value of these bonds. 1. Are these bonds interchangeable as to coupon and registered? The circular did not state this situation. 2. Kindly let me know the cost of the original invest- ment in the various properties mentioned in the circu- lar. If the original cost, including the cost of the buildings, approximated within two million dollars of the ten million in Plant Account, the equity is suffi- cient for all purposes of investment. 70 WHAT EVERY INVESTOR 3. I have not even considered the item of patents in the mortgage. They are of course valuable, but the account shows ten million for this item, which appears very large. It makes little difference to me as a lender whether the ten million charge here was offset by a bonus of stock to the original inventors and incorpor- ators, or whether it is offset by selling the stock at an original discount. I merely desire to know this out of interest or curiosity. 4. Kindly be more explicit about the five million dol- lars in assets expressed as Securities Owned. Is there a possible market for these securities or would the purchased asset of the controlled companies be valuable only to the Phantom Aero Co.? A statement showing the intrinsic value of these securities with further ex- planation by you would lead to suggestion by me that I increase my original investment. 5. Please send me a list of names of the prominent engineers mentioned in the Management paragraph of the circular. Are these men truly the best to be employed in the aeroplane business and have they long term contracts with the Phantom Co.? Unless you can definitely state desirable facts about this por- tion of the management, I would not care to risk my money on this loan. 6. Has the stock got a market? As a lender I am interested to know what was done and is being done in marketing both classes of stock. It will give me a direct line on those interested in the company and also give me a working basis for judging the man- agement as a whole. In addition, I wish to know if it is your intention to list these bonds on the New York Stock Exchange, where there is an open market, if I find I need to sell them at any time. Or, do you expect to stand back OUGHT TO KNOW 71 of these bonds with your associates, providing the market yourself instead of permitting the issue of bonds to get entirely out of your control? Either sys- tem of market arrangement is satisfactory, but I would prefer not to have the bonds listed on any exchange. 7. The item of Supplies and Finished Planes looks rather large. Are these orders which have not been filled, or are these planes obsolete? 8. Why was it necessary to borrow so much on this issue when there remained two million in treasury stock yet to sell? I judge that this is not the oppor- tune time to sell stock and that you believe that it is a better investment for the Phantom Co. to hold it, therefore getting much more in the future. I will appreciate the answers to these questions and any further information which you will give me. Very truly, M. R. Investor. Having decided that the yield was sufficient; that the equity is satisfactory; that the Phantom Aero Co. is likely to do a big business and make much more money than in previous years ; that the management is capable ; and that the terms of the issue are in accordance with what is desired for investment — M. R. Investor purchases the bonds at par. 72 WHAT EVERY INVESTOR CHAPTER VI Speculative Bonds — Investment Stocks — Defi- nitions — What Is in a Name? MR. JOHN K.KING was in the structural bridge business in Cook County, Illinois. He had succeeded in making an excel- lent living and had put aside a sturdy surplus. One day the Big Men held a meeting and de- cided that it would be advisable to buy up the King plant. John K. was nearing his sixty-ninth year and decided that he had better meet the inevitable, but he was a keen business man and the result of the conference was that he had $500,000 cash and no business. John K/s Observations What to do with the $500,000? During the years of business success, John K. had con- centrated all his efforts on his own business. He OUGHT TO KNOW 73 knew how to make money in that business and the effort had been strenuous. He thoroughly realized that he could make money, but he had never had any training on the subject of how to keep it. The surplus accruing from the busi- ness had been turned over and over. Now that he had the actual cash, he experienced stage fright. He appreciated the fact that the man who has dollars is the target for every man who seeks dollars. The problem to be met was the safe invest- ment of these funds, which would give him a good income during his remaining years and leave the principal intact for his two sons, who were at this period in school. John K. had been a widower for the last ten years. It is never too late to learn. Of course he had the superficial knowledge of investment which the average man gets in daily contact with worldly affairs and his mental observations sum- marizing this knowledge were : "So far as I can learn there are but five meth- ods of investing. I have the choice of savmgs bank deposits, bonds, stocks, investments in land, either by purchase or mortgage, or building and loan associations. I have read, sought advice, 74 WHAT EVERY INVESTOR and investigated on every side. Each kind of investment has its good points and each kind has its evils. "I have therefore come to a conclusion which leaves me no better off than when I started. I have learned the terms and meanings of the clas- sifications but in every case I find bad as well as good. In plain words I want the best for investment and having eliminated all classes ex- cept bonds and stocks, I cannot find that bonds are better investments than stocks or stocks any better than bonds. It depends on the individual case and there is absolutely nothing in the names. A rose by any other name would smell as sweet. "My good friend Jackson, the head of a very conservative investment firm, tells me that I should buy bonds. He is of the opinion that it is much safer to be the creditor of a corporation than a partner. But my judgment tells me that this is not always true, for there are plenty of creditors who never get their money back and, on the other hand, there are plenty of partners wHo>never derive a cent from their participation in the business. By sound reasoning the conclu- sion is easily reached that: Bonds are not neces- sarily a good investment because they are called OUGHT TO KNOW 75 bonds, and stocks are not poor investments sim- ply because they are called stocks" What the Terms Mean John K. King decided to plot out in as few words as possible the elementary definitions of the principal forms of corporate investments and make his comparisons to find out where he could get the best investment in each class. With pencil, note book and some technical volumes, the result was this: Bond — An obligation of a government, a municipal- ity, or a corporation, secured by promise, legal ordi- nance or mortgage, to pay to the lender interest and principal, when due, in return for a loan to said gov- ernment, municipality or corporation. a. First Mortgage Bond is one which constitutes a first lien upon the property. b. Second and Third Mortgage Bonds constitute sec- ond or third liens, as the name implies. c. Consolidated Mortgage Bonds are issued to take up and fund the various prior bonds. They can become first liens when prior mortgages are retired. d. Second Consolidated Mortgage Bonds are, as the name implies, subsequent liens to the first of their kind. e. Income Bonds are secured by mortgage on the income of a corporation, after prior claims are paid. f. Collateral Income Bonds have a protection de- 76 WHAT EVERY INVESTOR pending on certain securities deposited for the pro- tection of the principal — but both "-e" and "f" are hardly more than promissory notes. g. Collateral Trust Bonds are issued against collat- eral or securities deposited with a trustee, who may sell the deposited collateral to redeem the bonds if An Investment Stock conditions are not fulfilled. There are various other forms of Collateral Bonds such as Convertible Collat- eral Trust Bonds. The average investor needs a Phila- delphia lawyer for these. h. Debenture Bonds. These cannot be definitely de- fined. Sometimes they are no more than an unprotected note of the corporation and again they eventually be- come first mortgages and have sinking funds. The value depends on the character and standing of the corporation. OUGHT TO KNOW 11 i. General Mortgage Bonds constitute a mortgage on the entire system or plant. Part may be first mort- A Speculative Bond gage and part second or third. The value must be learned from a complete study of prior mortgages, j. Sinking Fund Bonds may be of any class of mort- 78 WHAT EVERY INVESTOR gages and imply a reserve set aside each year to pay the principal when due. k. Improvement and Extension Bonds are issued against betterments, additions, etc. The investor needs to observe caution in this case. While they may be a first lien on extensions, they might also be used to cover up "reckless operating expenses." 1. Car Trust Bonds are secured by mortgage on roll- ing stock and on non-payment the owners may seize and sell the cars mortgaged. m. Certificates of Indebtedness. Trust Company re- ceipts, Receivers' certificates and a host of other forms of obligation constitute the less used and less known varieties of bonds. The mania for issuing different kinds of bonds is as widespread as the tulip mania once was in Holland. The exact legal status of different kinds of bonds can only be defined by the law- yers. The laws of the various states affect the same classification in different ways. As the eminent writer, Edward Carroll, Jr., says : "Many bonds partake of the nature of several classes — thus a First Consolidated Sinking Fund, a Gen- eral Consolidated. A General or an Income Bond, where no second mortgage exists on a property, may be practically on the same footing as a second mortgage on another property. Various kinds of bonds may be Convertible Bonds — they may be converted into stock at a OUGHT TO KNOW 79 certain time, at a certain price and under certain conditions. Some may be good and some bad, depending on the condition of the corporation and the terms. John K. King read over the above notes, which he had made, with considerable interest. He sum- marized them as interesting but not conclusive. He was pleased to be able to learn the various terms and definitions, but, as he said to himself, "I do not see how these definitions are going to help me one bit in selecting an investment; for they are only names at the best and any one name may be just as good as another. Let us investigate the stock form of investment. " The Forms of Stock The second part of the note book, therefore, summarized the story of stocks as possible in- vestments. As in the case of the bond, the defi- nitions were set down as a basis of determination as to the advisability of an investment of this character : "What is stock? A share of stock represents an in- terest in the business — not as a bondholder, who is a creditor, but as a partner. The more shares owned 80 WHAT EVERY INVESTOR the greater is the owner's proportion in the business. In actual practice the small shareholder delegates his vote by proxy. Stock is never a lien on the property. It is simply the right to share in the profits and losses and all creditors, of any nature, must be paid first. "Preferred stock primarily means a form of owner- ship which has a preference over all other classes in the payment of dividends. This sounds well, but there are cases where the stockholder fares better by holding common stock. The preferred shares may be limited as to the amount of dividend and the com- mon stock may, in a successful company, get the largest share. Further than this, the common holders may have the privilege of voting — carrying on the busi- ness — and the preferred holders may be deprived of any voice in the matter. "There are second and third preferred shares in some corporations whose holders get dividends, or are prom- ised them, before the common holders. These, in like manner, may be limited as to dividend, or may have provisions regarding convertibility into other forms of corporate stock. The value of all preferred shares may be impaired by placing burdensome mortgages on the company, and in some cases, the common hold- ers only have the right to vote on such proceedings. "Common stock holders are the last to participate in any distribution of profits or net earnings. In ex- ceptional cases, where net earnings are very large and a limit is placed on dividends to anterior issues, the common holders get the greatest share. "Assessable and non-assessable stocks are forms which the very names designate as definitions. As- sessable stockholders are often liable to creditors to the amount of the par value of their stock, while non- assessable shares carry all the privileges but no Ha- OUGHT TO KNOW 81 bilities other than the possible loss of the original cost of the stock. "Cumulative stock is often worth while. Its feature of interest is that when dividends are not paid as promised they accrue as obligations before the com- mon stock can have an interest Crucible Steel pre- ferred and Corn Products Preferred are examples of securities of this nature which paid up back divi- dends. Non-cumulative stock improves the chances of subsequent shareholders. If a preferred stock is non- cumulative, the common stockholder has a better chance to participate in profits, if the business is ultimately a success. "Guaranteed stock is usually the stock of a company which is under the control of another, the latter guar- antees the payment of the dividends. The name sounds good but the guarantee is only as good as the sound- ness of the guarantor." Conclusion The astute and careful John K. King, poten- tial investor, studied these terms and definitions. What had he best do with that half million? The very first consideration was to forget the definitions and terms as the basis for investment. Because a bond is called "First Mortgage" does not stamp it as a good investment. Because a stock is "common" does not stamp it as a poor investment. Back in 1908 Mr. King could have purchased Iowa Central First Mortgage 4's at 82 WHAT EVERY INVESTOR 81 and refused Sears, Roebuck & Co. common stock at 40. In 1917 Iowa First 4's are selling at 45 and Sears, Roebuck common at 160. Never invest in a name. Invest in a security because it is good, no matter what its name may be. OUGHT TO KNOW 83 CHAPTER VII How to Invest a Half Million An Investment in Each Form of Bond — The Formula to Follow A HALF Million Dollars to invest ! For a retired bridge builder like John K. King, this was as difficult a job as any of the problems he had ever met in business. He had studied the various forms of investments and learned all the well known forms of bond mort- gages and was no better off than before except in a general way. John K. had been a specialist in his own busi- ness. He realized that very few bankers and brokers would be able to build a cantilever bridge across the St. Lawrence, and his sound judg- ment followed out the analogy whereby the con- clusion was reached that very few bridge builders had enough training to invest a half million dollars. There are specialists in the bridge busi- ness as well as the investment business and John K. shrewdly appreciated the fact that most bank- 84 WHAT EVERY INVESTOR ers and investment firms had something of their own that they desired to sell. This individual phase might be all right and it might be all wrong, so there was but one thing left and that was to get Disinterested Advice Every investor should know above all things that statistics and opinions are best when mixed by experts. The novice can miss the most im- portant feature of a report. Net earnings may look fine, but really misrepresent. The Science of Finance is just as difficult as the Science of Law, and yet nd one goes to court without ad- vice. John K. King collected all his data, col- lated all his advice, but, before he made the first step toward purchase, he consulted a disinterest- ed Analytical Bureau. It happened that the Spe- cial Analytical Service Bureau of The Magazine of Wall Street received the order. After the elimination of many suggestions, the securities of the accompanying table were chosen to meet his individual needs. He well knew that his list might not be satisfactory to the widow or the small investor. Each must solve his own prob- lem according to his individual conditions. OUGHT TO KNOW 85 Bond Reports GUARANTEED BOND— Allegheny & West- ern first mortgage gold 4 per cent, bond, due Oct. 1, 1998. This railroad was chartered in 1898 as a consolidation of various small com- panies near Pittsburgh, Pa. It is leased for the full term of corporate existence to the Buffalo, Rochester and Pittsburgh Ry. Co., which agrees to pay the principal and interest on the stock and bonds. It is a first lien on its road, equipment and future acquisitions, holds a very high invest- ment rating and has a market on the New York Stock Exchange. The road itself is an excellent property and the guarantor enjoys a further high rating as a railroad company. SECOND MORTGAGE BOND— United States Steel Co. sinking fund 5 per cent, bonds, due April, 1963. These bonds are as well known as any investment in the United States. The sinking fund may redeem them at 110 and in- terest some day and the bonds are a direct obli- gation of the company and secured by a lien on all the property subject only to the 50-year 5 per cent, bonds of 1951, known as the Carnegie bonds. The whole world knows the success of 86 WHAT EVERY INVESTOR this most wonderful industrial company and there is a wide margin of safety in earnings for this issue. DEBENTURE BOND— General Electric Co. 3-year 6 per cent, gold notes, due July 1, 1920. The General Electric Co. is in remarkably strong financial condition, and would be justified in paying out all surplus earnings in dividends. These bonds are a direct obligation of the com- pany but are not secured by mortgage. They are securities of unquestioned standing and pos- sess a high degree of safety. They were brought out by Lee, Higginson & Co., and J. P. Morgan & Co., and w r ere heavily oversubscribed. LAND MORTGAGE NOTES— Canadian Pa- cific Railway Co. 6 per cent. Note Certificates, due March 2, 1924, are a direct obligation of the company and secured upon a "Special Investment Fund/' composed of deferred payments on lands heretofore sold and securities in which the pro- ceeds of land sales have been invested aggregat- ing $55,000,000, and the outstanding amount is $52,000,000. These notes are backed by the credit of one of the greatest railroads in the world and the redeemable features and terms of the mortgage are very satisfactory to the lender. OUGHT TO KNOW 87 FIRST MORTGAGE BOND— Wilson & Co. 6 per cent, bonds are a first lien on the property of one of the largest packing companies in the world. In 1916 the profits available for interest on these bonds were over five times the require- ments and for the present year the earnings are running at the rate of about ten times the amount of required interest. The company is in capable managerial hands and the market for the bonds is firm and remains slightly above par. COLLATERAL TRUST BOND— American Telephone & Telegraph 5 per cents, are a new is- sue and are entitled to exceedingly favorable rat- ing. These bonds have passed above the offering price but have lately declined with the general market. They may be considered one of the most attractive investment bonds in the market. The security is above adverse criticism and they are backed by the greatest public utility company of its kind in the world and one of the best man- aged. There would have to be a revolution in the earnings' decline to effect this issue. GENERAL MORTGAGE BOND— The Reading Company and the Philadelphia and Reading Coal and Iron Co. 4 per cents., due Jan., 1997, are given the very best investment rating. 88 WHAT EVERY INVESTOR The mortgage is secured upon practically the entire property, including the valuable stocks of the coal property. There are a number of prior liens which cannot be renewed as mortgages when due so that this issue eventually becomes a first mortgage. Every time dividends are paid on the stock, provision is made to apportion an amount of tax on coal mined as a sinking fund for these bonds. No error can be made in this investment. IMPROVEMENT BOND— New York Cen- tral 4 per cent., Series A, due 2013. These bonds are secured by a mortgage on certain ex- tensions and improvements made by the New York Central Railroad, and are amply secured by a SO per cent, surplus valuation of the prop- erty itself. Their distinction lies in the fact that the New York Central is back of them and although there have been recent excessive de- creases in the earnings which has had an un- favorable effect on the stock, there is nothing to warrant a conjecture that the situation will ever be serious enough to affect these or other bonds of this road. This issue, while not of the first class, is one of the best of this form of mortgage. GOVERNMENT BOND— The Libery Loan OUGHT TO KNOW 89 needs no comments. It is the best investment in the world. DOUBLE GUARANTEED BOND— North- ern Pacific-Great Northern Joint Guarantee of Chicago, Burlington & Quincy Collateral Trust 4 per cent., due 1921. These bonds are to be considered as in all practical ways secure and entitled to the very highest investment rating. The two most prominent railroads not only guar- antee this issue, but the collateral is C, B. & Q. stock at $500 stock for every $1,000 bond. The mortgage contains many excellent other features to prevent impairment of this lien. Truly a. re- markable investment ! CONSOLIDATED MORTGAGE BOND— Pennsylvania Railroad Ay 2 per cent, bond, due Aug., 1960. These bonds are partially secured with other issues on 1,404 miles of road and ap- purtenances in Pennsylvania and 309 miles of leaseholds, real estate securities, etc., divided in various sections throughout the entire sys- tem. It is a second lien on some parts, a third lien on others and still a fourth lien on other sec- tions. In spite of the diversified character of the mortgage it is one of the strongest mortgages of the greatest of all railroad systems, as it is 90 WHAT EVERY INVESTOR secured on the old main lines of the system and is protected by -the most valuable leasehold. Its rating is as high as can be given an investment. GUARANTEED LAND MORTGAGE— An investment in a guaranteed land or building mortgage of such prominent guarantors as the Lawyers Title Insurance and Trust Co. or the Title Guarantee & Trust Co., on a 5 per cent, net basis to the investor is perfectly safe. Care should always be taken to make a personal in- spection of the property itself, except where the mortgage is in participation with other in- vestors. In the latter event the investor banks on the integrity of the financial concern guarantee- ing the mortgage. SAVINGS ACCOUNTS up to the amount of $13,200 may safely be carried in five or six dif- ferent banks for this purpose and will provide ready cash for many contingencies, when such cash is needed. Of course in times of stress, the savings banks are not much better than securi- ties as to safety, but they provide a possibility for use of immediate funds when investments are down in price and therefore need not be sacri- ficed as the savings deposit cannot deteriorate. OUGHT TO KNOW 91 The Stocks The following stock investments for John K. King were carefully selected by the Analytical Service. Space does not permit a review such as Mr. King received but for the purpose of illus- trating how every investor should go about se- lecting, a sentence or two is given. To follow John K.'s system of safety, the reader should pick out the salient points of the reasons when using them for his or her individual purposes. PREFERRED STOCK— Southern Railway Preferred is an issue which is more likely to come into its own after peace has been restored. Cessation of war will mean a resumption in traffic for many of the commodities and manu- factures which prior to the war found an ex- port outlet; particularly cotton and phosphate rock. The bulk of the South's cotton plants are located along the lines of the Southern Railway system and it needs but little reflection to see to what extent traffic on this system will be revived when export of cotton and phosphate is re-es- tablished. Earnings of the Southern Railway system are running currently at a rate equal to about 92 WHAT EVERY INVESTOR 20 per cent, of the preferred stock and 7y 2 per cent, on the common stock, these rates compar- ing with 15.56 per cent, and 5.28 per cent, re- spectively in 1916. PREFERRED STOCK— Cities Service Pre- ferred is a conservative investment and we should recommend that you buy it inasmuch as you are primarily interested in the income of the stock. There is no reasonable doubt as to the ul- timate safety of principal and income on this is- sue. The dividend is now protected by a large margin of earnings and there are very strong equities back of the issue. The price may go lower because of the investment conditions which favor higher yields on securities having a fixed rate of income. But you may buy your Cities Service Preferred without uneasiness as to its ultimate position, as it should eventually be es- tablished at a level materially above its current quotation. PREFERRED STOCK— Kansas City South- ern Preferred, paying 4 per cent, annually, yields on present price 8 per cent. The rate has been maintained for nine years, and with the road in a flourishing condition there is no prospect of this return being reduced. The stock has indi- OUGHT TO KNOW 93 JO oo oo JO OO OiO 4iO ^(N OO'* 2° 2° ooo OOOOOOOOOOOOOOO OOWOOOOOOOOOOO COOiOOfNOOT^COOOt^OO-^fNrfi Eh 525 525 o h3 m OOO £ sss S ooo H o"o"o" > O 03 Qooooooooooo oo oooooooooooooo ^O>3GQ^,.g ©^ d SOd g %~$g PnrH _: ^ d . OT3 jm .pq d g gffif2 02 i*P°d d^ O o 00 d d O O _- ffl« d .+3 O wis pq Sg § -h © d So d o u © d G rQ o£ c Sg^:::.:::::: lag I 111 6 94 WHAT EVERY INVESTOR cated earning power of 13.68 per cent, for the current fiscal year based on the returns to July 31, 1917, against 9.63 per cent, for 1916. Oper- ating income and gross revenues show similar large increases over preceding years, while ex- penditures show no such ratio of increase con- sidering the abnormal times and the high cost of materials and labor. We are impressed with the showing of this road for the past few years, and it seems as if the rehabilitation program begun in 1906 and costing something over $16,000,000 has been completed and placed the road on a standard base throughout. PREFERRED STOCK— American Sugar Co. Preferred stock should retain its investment value during all time. While it is true that the common stock need now be regarded as a war stock and is subject to serious speculative fluctu- ations, yet there is little possibility of the com- pany's business ever being affected to the extent of impairing the 7 per cent, paid on the senior issue. The American Sugar Refining Co. owns a majority of the capital stock of the Iowa Sugar Company, one-half of the capital stock of the Spreckels Sugar Company and minority interests in the stock of the Alameda Sugar Company, the OUGHT TO KNOW 95 Continental Sugar Company, the Great Western Sugar Company and the Michigan Sugar Com- pany. Of these the Great Western Sugar Com- pany has made the best showing by far. It is predicted that for the year 1917 in addition to the regular dividend of 1% P er cent, on the com- mon stock this company will pay extra dividends aggregating $40 per share. PREFERRED STOCK — Bethlehem Steel New Preferred 8 per cent, stock is way out of line — it's one of the cheapest stocks on the list and when a few more people get afraid of it, it will be time to load up. It was publicly offered as high as 106, and now the stock walks the street with no place to go at 94. Off in the background is the 7 per cent, preferred, tick- eted at around 88 and yielding only 7.85, as com- pared with the newcomer's return of more than 8.50. The new 8. per cent, preferred is not only prior to the 7 per cent, issue as the 8 per cent, issue alone is cumulative but has a call on the common B stock at 115. It has back of it something like $500 assets per share and aver- age earnings from 1912-1916 of $104 a share. It may go lower, but you will want to tell your children how low you bought it and to be sure 96 WHAT EVERY INVESTOR you have a good story, buy it down and buy it on the way back. COMMON STOCK— Consolidated Gas, Elec- tric Light & Power of Baltimore may be regarded as a pretty good investment at around present prices. The action of this company in reducing the price of electricity and at the same time in- creasing the dividend rate from 7 to 8 per cent, annually reflects the strong financial position the company is in. Earnings are expected to show a continued increase in the near future, inas- much as the company has not yet begun to re- ceive the full benefits from its big manufactur- ing developments in the Baltimore City district. COMMON STOCK, National Biscuit Co.— This company has been, of course, tremendously handicapped in the last year or two by the greatly increased cost of raw materials entering into the manufacture of biscuits. Peace should mean lower prices for such essential products as lard, flour, etc. We regard the stock as a peace stock and it may be purchased now by an investor who is willing to hold it until a return to normal conditions. The company is a magnificently man- aged concern and it is so well fortified financially that it could easily afford to pay dividends out OUGHT TO KNOW 97 of surplus for some time even if it did not earn them. The price has been very low on account of unfavorable conditions and liquidation after the death of the former president. It is very much of an investment bargain at present. COMMON STOCK— National Enameling & Stamping is most attractive from a semi-invest- ment viewpoint, both because of its compara- tively low selling price and because of the favor- able prospects for an increase in the dividend rate or the payment of extra dividends. National Enameling & Stamping's recent expansion has been of a very substantial character and earnings of the company show a wide margin over divi- dend requirements. The company is now earning at the rate of between $30 and $40 a share per annum compared with $11 a share actually earned in 1916. Dividends were recently re- sumed at the rate of $4 a share per annum. On the basis of present earnings and dividend pay- ments there is a wide leeway for an increase in the dividend or the payment of extra dividends, but the effect of Government taxation of excess profits must be taken into consideration in this connection. COMMON STOCK— Woolworth is showing 98 WHAT EVERY INVESTOR steady increases in business and as an investment is always to be considered fairly secure. How- ever, there are many uncertainties in the pres- ent situation and while the technical position of the market has been greatly improved in anticipa- tion of the new offering of Liberty Bonds, we expect to see temporary reactions accompanying the present rally. You will assume little risk in buying Woolworth, but we think it quite possible that by adopting a waiting attitude you will be able to secure the stock somewhat cheaper. How- ever, inasmuch as you are investing a half mil- lion in funds and intend to hold the investments indefinitely, you would not assume any serious risk in making your purchase at the present time. While the stock is acceptable for you it might not be as acceptable for another in a less happy financial position than yourself. COMMON STOCK— Southern Pacific stock, paying 6 per cent., appears at present levels to be comparatively low in price. In 1910, for example, when 12.3 per cent, was earned on the stock, it sold up to 138% and did not go below 103%. In 1911 it did not sell under 104% and in 1912 under 103%. Yet earnings at the present time are far ahead of the earnings in the years OUGHT TO KNOW 99- mentioned. The explanation is due, in the first place, to the fact that railroad stocks were in much more favor in those years than they are at the present time, and, in the second place, to the fact that the war has caused the selling of railroad stocks held abroad. Southern Pacific stock would appear to be sell- ing at a lower price than it is intrinsically worth and can be regarded as an attractive long pull in- vestment. Its 6 per cent, dividend looks very secure. COMMON STOCK— Northern Pacific is a very sound investment stock and you are justified in holding it for an investment. In spite of highly increased operating, and maintenance costs, under which all the railroads have been laboring, Northern Pacific has returned an oper- ating income of $14,201,694 for the first six months of the current year as against $12,959,- 380 for the corresponding period of 1916. The company operates through a very rich territory and according to latest reports is showing con- tinued improvement. The stock may go lower in sympathy with the general weakness in the mar- ket, but the road is in a strong position and we 100 WHAT EVERY INVESTOR feel sure that you will be ultimately able to value it at a considerably higher price. John K. King's analytical reports covered two, three or four letter pages for each security, but only the bare summary has been used here for illustration. Mr. King learned to pick out the facts and apply them to his individual case such as each investor must learn to do. Throughout all the research work, John K. King noted that this formula was observed : Safety of Principal Wide Geographic Distribution Wide Industry Distribution Income A Stability of Price f Real Marketability Investment Desirable Future Distribution of Classes of Credit (Bonds) or Partnership (Stock). OUGHT TO KNOW 101 CHAPTER VIII The Stock Selling Circular What Constitutes an Investment — How to Escape the Pitfalls of the Prospectus "T Tf TILL you please give me a letter of intro- y y ductidn?" a young man asked Mark Twain some years ago. "But I do not know you; I have never seen you before," replied the great man. Nevertheless the young man pleaded and urged his case until Mark sat down and wrote him the following let- ter: "To whom it may concern: I know nothing about the young man who offers you this letter, but I admire his nerve. " This is a letter of introduction of the brokerage or investment firm which sends you a letter about a speculation and terms it an investment. As you read this article thousands of Ameri- can citizens are opening their mail and reading the story of, the "most wonderful investment ever 102 WHAT EVERY INVESTOR offered to the public." The circular is printed in two or three colors with artistic typography and alluring illustrations. It is written by a master of the English language and it cannot fail to attract the attention of the average business man or woman. But if you are the one who has en- joyed the reading of this interesting offer of the well-known investment firm of Jones & Smith, just put it aside for a moment and ask yourself this question: "Is this an investment ?" You know that you cannot afford to speculate. You have labored too hard and long for that surplus to lose it in a few days or weeks and you desire to invest. Therefore, it is necessary that you conserve this hard earned surplus and take no chances with it. You wish to invest. Are you sure that this blatant prospectus is an investment? Do you know what an investment is ? What Is an Investment? Readers will recall Beriah Sellers' Infallible Imperial Oriental Optic Liniment and Salvation for Sore Eyes — small bottles fifty cents, large OUGHT TO KNOW 103 , ones a dollar. Average cost, five and seven cents for the two sizes. Capital needed to manufacture the first two thousand bottles, only one hundred and fifty dollars. There are millions of people in the world. Everyone will need a bottle, for nearly everybody has ophthalmia. There's mil- lions in it! Even the schoolboy recognizes that Col. Sellers' scheme is not an investment. Oils and mining stock ventures offer the great- est inducement for stock promotions. It is there- fore among this class of offerings that the great- est danger to the public lies. Before the min- ister, the small retailer, the farmer or the widow answers the advertisement received in the mail, it is very necessary to repeat the following sen- tences : "The distinguishing characteristic of a specu- lation is the fact that its value depends upon circumstances which cannot be known because the future is needed to reveal them. An in- vestment, on the other hand, contains no 'ifs' or 'provideds' or 'reasonable certainties.' Its value is founded upon certainty. A speculation is founded upon shifting sands of probability and supposition." (Meade.) Also read over the following questions which 104 WHAT EVERY INVESTOR appeared in an editorial of the Wall Street Jour- nal seventeen years ago and apply them : 1. What were the plants able to earn on the average for the five years preceding the combi- nation ? 2. What would this amount have paid on the present amount of stock? 3. How much have expenses been reduced by consolidation ? 4. What will the combination have to earn net to pay 7 per cent, on its preferred stock? 5. How much in excess of that amount is the company earning now? 6. What is the amount of its net floating debt? 7. How is the floating debt secured? 8. Is the corporation hampered by burdensome contracts ? 9. Can it enforce its own contracts with buy- ers? 10. What is the extent of the competition en- countered ? 11. What is the possibility of reducing operat- ing expenses? 12. Is the management in every way compe- tent and satisfactory? Now, if you are not accustomed to the study OUGHT TO KNOW 105 of investments you will perhaps say, "What good will it do me to ask all these questions, for when I find out the answers I shall not know much more than I did before ?" The fact of the matter is that unless you are able to understand these questions and answers, you have no right to invest your money and you should be careful never to be guided alone by the circular or prospectus of any investment or brokerage firm. And if you have surplus funds, you are not true to yourself or your dependents unless you do learn what an investment is and educate yourself in all matters financial, even though this education is elementary. The Business of Investing Let us suppose that Mrs. Jones lives in Keo- kuk. Her husband, who was a druggist, accu- mulated a moderate fortune of ten thousand dol- lars. He died, leaving his widow with one child about ten years of age, and all his accumulated fortune went to his widow. Even though Mrs. Jones had neglected an ele- mentary financial education, she knew enough to refrain from going into the shoe business on Main street of Keokuk. She did not know any- 106 WHAT EVERY INVESTOR OUGHT TO KNOW 107 thing about the shoe business and would not jeopardize her capital, for she knew of no means of getting it back if lost. But there are thousands of Mrs. Joneses all over this country who are willing to "invest" their capital in the Acme Oil Co. or the Bonanza Mining Co. simply because some broker ( ?) sends them an attractive circular. And the Business of Investing is a thousand times more difficult to learn than the business of selling shoes. In the former articles of this series the writer has endeavored to show what an investment really is and how the novice should go about investigating and learning. The suggestions have been elementary because it is necessary to lay the ground work of first principles. It is this same phase of education which the incipient in- vestor must absorb before he or she risks one dollar. Educated men, even in the ministry and law, will study the theory of economics, will dig into the intricacies of bi-metallism and the study of the gold reserve, but will "fall" for the first attractive circular of a new oil venture without knowing one thing about it. Reader, do not 108 WHAT EVERY INVESTOR imagine that you are above this class of citizen. Unless you know the elementary psychology of the fake stock promoter, you are not insured against loss. The Safety of Principal No real investor will buy a security whose value is in any way doubtful. The stock or bond of stable value is the only kipd that inter- ests him. He wants to feel that the principal is reasonably safe and that, barring market fluctua- tions or world wars, he may sell it without loss in the event of necessity. If he is satisfied with the safety of his principal, he will sacrifice a large return in interest. The interest return, however, must be based on the condition of the times. Back in 1902 anything over Ay 2 per cent, was thought to be on the verge of speculation, but today different conditions prevail and in 1917 there are excel- lent investments yielding from 6 to 8 per cent. Therefore, the rate of interest cannot be taken as a criterion to differentiate between an invest- ment and a speculation. The big financial institutions, insurance com- panies, banks and trust companies are the big OUGHT TO KNOW 109 investors of this country. Executors and trus- tees, the fiduciaries who hold funds for others, are also big investors. These big investors de- mand safety before any other consideration. That must be your first thought in making an invest- ment — Safety ! The Psychological Appeal It is true that we have steadily been educating ourselves in financial matters, but the prevailing psychology to induce an investor to buy stock in a speculation is the same today as it was in 1902, when Edward Sherwood Meade, Ph.D., wrote : "Here are the principal inducements offered to the speculator in every new enterprise : "Other men have made money in similar enter- prises. Why should not he be equally fortunate? He is not asked to gamble, but merely to in- vestigate an industrial opportunity and act as his judgment directs. He is carried away by the prevailing optimism of the time, and he is ready to listen* to the advocates of new schemes for getting rich. Other people are making money fast, and he is certain of his ability to do as well as they. The appeal to his 'judgment' and 110 WHAT EVERY INVESTOR his 'courage' is the bit of flattery which is often decisive, and the final outcome is that the man of small means 'invests' $100, $200 or $5,000 in the stock of a new company in the confident ex- pectation that from this small investment he will one day reap a fortune." The chances are that the harvest will be a ream of worthless or near-worthless stock cer- tificates. Speculator or Investor? This series of articles is for the investor. The speculator has his individual field and he is a great asset to any young country. It is a doubt- ful question which is the more beneficial to a growing country, the speculator or the investor. But speculation is even a greater science than in- vestment and must be left to the professional. Every man with a surplus dollar should be an investor, but the speculator is a specialist. His gains are rightly large because his losses are in proportion. The speculator must be in a posi- tion where he can afford to lose; the small in- vestor is never in that position. It has been argued that it is beneficial to a country to have speculative experiments tried at OUGHT TO KNOW 111 the expense of the venturesome. This argument may or may not be right, but the investor can readily see that the only way it should affect him rs to evolve an investment from what was orig- inally a venturesome speculation. Continuous Supervision There is another well-known psychological phase about the investor which demands com- ment. Once an investment is made the investor is apt to forget about it. Outside of having his holdings periodically ex- amined and judged, there is much that every in- vestor ought to know to help himself. Here are a few of the suggestions : 1. If a stock, have it transferred to your name, or, if a bond, at least have the principal regis- tered in your name. If this is done, you will be the recipient of all notices from the company and will be able to study developments. You will receive proxies for voting, reports of earnings, notices of special meetings, certificates represent- ing valuable "rights" if issued, and you will un- consciously compare your company with its com- petitors. 2. Read the quotations of the sales of your 112 WHAT EVERY INVESTOR investments as often as they are shown in the newspapers or financial publications. The fact that a big change suddenly occurs either up or down in your investment means something which is likely to affect its value. It is time for you to get after the facts at once. Many New Haven Railroad investors never noticed the drop in price of their stock until the loss had become serious. 3. When you are mentally satisfied that you have made an honest mistake in judgment in an investment, do not deceive yourself into thinking it "may come out all right some day." This plan of reasoning is much like the man who plays solitaire and cheats himself to make the cards come out right. Switch into something else and the chances are you will be right the second time, for the lesson of the first will have been a liberal education. Conclusion Whether you are rich or poor, if you are an investor or need to be an investor, educate your- self before making the first step. Do not be deceived by the prospectus or circu- lar of a new promotion. Learn to develop the character of a professional buyer and you will OUGHT TO KNOW 113 be able to meet the Svengali hypnotism of the stock salesman who offers a speculation. Learn what an investment really is. Ask the questions which have been outlined in this article and as many more as you can think of and be able to understand the answers to these questions and to pick the flaws in the salesman's reasoning, if there are flaws. Do not become a speculator when you are by habit and position an investor. Keep constant track of your investments. 114 WHAT EVERY INVESTOR CHAPTER IX Tricks of the Unreliable Broker New Promotions — Ventures Which Are Not Investments — How to Investigate WE stopped and looked at our stockhold- ers, some surprised. It wasn't quite the kind of a gang we supposed had been investing. They all looked like poor people; there were plenty of old women and lots of young girls that you'd say worked in factories and mills. Some were old men that looked like war veterans, and some were crippled, and a good many were just kids — bootblacks and newsboys and messengers. Some were working men in overalls, with their sleeves rolled up. Not one of the gang looked like a stockholder in anything unless it was a peanut stand. But they all had Golconda stock and looked as sick as you please." Such is O. Henry's description of the investors in a fake mining scheme, from "The Gentle Graft- OUGHT TO KNOW 115 er." It is amusing fiction, but is it so much different from the real thing? A Pitiable Letter The following is a letter from a woman who did not have very much to lose. If she lost her little capital, she had no means of replacing it. She is an investor. She is living today and her letter is typical of thousands of others. "Dear Sirs : Messrs. & Co., Street, did me a very dirty trick. They roped me into buy- ing 5,700 shares of at 1 9/16 on a margin. I saw they did not buy or hold the stock but just kept my money, and as they said I had nothing for my money but the interest of the stock and them for my cash. I paid up the margin and asked for my stock also 100 shares stock May 16th, but week after week they would not send me my stocks. "Then Mr. came here, 164 miles, to see me and told me my stock was going away down and he advised me to change it at even and take , a stock that they give you in two minutes after they force you into buying it. They forced me into buying 3,000 shares one day before I got out of their office and made me pay cash. Now they say I sold my and gave Mr. orders to buy and have kept my stock and sent me stock and will not do anything. I sent a telegram same day saying, 'Do not sell my stock'; for I knew when they told you about a 116 WHAT EVERY INVESTOR stock they would say they bought 3,000 or more thou- sand shares and make you take it on margin. "My stock they would not deliver un- til they got the rights and kept them. The rights were worth $540, but they won't do a thing. I now hold 8,700 shares and they kept my stock. What would you advise me to do? Can I sell the — or is it a real thing or a bunko ? I did not tell them to sell my stock and above all to buy 5,700 shares for I hated the 3,000 shares I had. "Kindly advise me and oblige/' The summary of the advice is : First, do not attempt to invest until you know what an invest- ment is and then get the opinion of experts before taking the first steps. Second, read and educate yourself so that you can invest intelligently. Third, do not become the cats-paw for brokers who are not brokers but probably "fly-by-nights." Fourth, in this particular case, complain to the police department. Also get an attorney. Until we become a country of investors, until we establish schools showing how to invest and how to protect what has been earned by the sweat of the brow so that it will not land in the bank accounts of the thieves, we have not conserved our resources. Public schools train OUGHT TO KNOW 117 boys and girls in the methods of business — how to make money. Where is there a course on how to keep it? How They Do It The campaign of a few years back by the larger exchanges to get rid of "bucket shops" was the real beginning of the end for the crooked broker. From that point on, the fakers reorganized their various schemes and estab- lished offices which "apparently" did a legitimate business. If one of these firms did not have sufficient capital, the process of doing business was somewhat as follows, of course with varia- tions depending on circumstances: An out of town retail grocer notices in the daily paper that the oil stocks are booming and he reads tales of large sums having been made by insiders and even by just ordinary people. He has no brokerage connections and the thought enters his mind that he should profit as well as others. His home town, or city, news- paper contains the advertisement of Smith & Co., who tell of the merits of some prominent oil stock now being traded in on the "Curb." Cor- respondence follows and our grocer friend is per- 118 WHAT EVERY INVESTOR OUGHT TO KNOW 119 suaded to "take a flyer." He thinks that he is "investing." A check for $1,000, which should have been invested in good 5 or 6 per cent, baby bonds, or in a good preferred stock, is sent with the order to purchase the oil stock. Smith & Co. send back a report that the stock has been pur- chased and proper entries are made on their books. If the stock goes down, actual purchase is made, and not until then, but purchase is not made at the time the order goes in. If the stock goes up, Smith & Co. take advantage of the grocer's ignorance and suggest that he switch his "investment" to another stock, usually oil or min- ing. This second stock is of a type which the firm has bought up by the ream and there is plenty of paper printed to look like real certifi- cates. If the grocer does not desire to make this switch, a representative of the firm, whose personality is of the persuasive kind, takes a trip out to the country town or city to see his pros- pect. The very fact that a representative of the firm takes the trouble to make this trip, tickles the vanity of our grocer-investor and it is a sim- ple matter to persuade him. Thus, the firm of Smith & Co. have been able to distribute a worth- 120 WHAT EVERY INVESTOR less security through the brokerage on a real security. Women the Prospects? Investment education is only beginning. The last Liberty Loan did much and the one to come will do much more toward this education, but, in the mean time, the best prospects for the "fly-by-night" concerns are women. The appeal of advertising literature is such that women have more time to take cognizance of it. To many of them investment appeals as a broader field in the business of life, and they are eager to learn and readier than the average man to take a chance. Up to the present time, the women who have entered the brokerage and investment business as a profession have been of the highest type and they desire only to protect their own sex. But the oily salesman of undesirable character still exerts his energy among women with money and it is unfortunate that he is able to succeed so well. It is difficult for the woman with a husband to attempt the management of her own financial affairs, because the man usually feels that all such matters are a part of his business and his OUGHT TO KNOW 121 wife should not attempt to interfere. The time is coming when the investment of family funds will be discussed in family conference. In the meantime, no woman should attempt in- vestment or become connected with any broker- age firm in a business way, until she has first in- vestigated the standing of the firm in question. Furthermore, whenever an order has been placed for the purchase of securities the customer should arrange for the delivery of the actual certificates at once. If the firm makes excuses which are unreasonable on their very face, the matter should be placed in legal or post-office hands without delay. The Stability of Investments Thousands upon thousands of good solid citi- zens think of oil and mining stocks as invest- ments similar to railroad and industrial bonds and stocks. It is certainly true that wealth from the soil should be classed in this category, but the fact remains that very few of the oil and mining securities compare with rails and industrials in the matter of stability. Standard Oil securities, Anaconda Copper, and others of like character are in the minds of prospective in- 122 WHAT EVERY INVESTOR vestors. The illustration of United Verde Ex- tension selling from- 40 cents a share to $40 a share is the incentive for others. Not so very long ago, the whole country was deluged with advertisements about a new candy business. These circulars pointed out the attractiveness of a business like Huyler's. The whole structure fell to the ground. Men of prominence who in- advertently lent their names suffered in conse- quence. Years ago investors listened to William Pater- son, whose Darien scheme was a gigantic swin- dle. French kings and premiers feted John Law, whose Mississippi Bubble burst with awful violence. All England listened to Sir John Blunt, whose South Sea Bubble wrecked thousands of fortunes and reputations and it is not so long ago that John Keely invented the Keely Motor in this country and investors from Europe came to praise it. Back in 1906 private cars of seasoned finan- ciers could be seen rushing to Goldfield. Soon after Goldfield Daisy and Goldfield Consolidated were actively traded in on the New York Curb, while the San Francisco Stock Exchange had as many mining stocks listed on it as the London OUGHT TO KNOW 123 Exchange had world wide issues. Many of the attractive certificates today either line the strong boxes of "investors" never to be disturbed, or they have been sold at Yz cent a pound to be converted into paper for commercial purposes. Back in 1910 the waiter was in Los Angeles, the new oil district. Every newsboy and ribbon counter clerk had a sheaf of oil certificates tucked away in the hope of sudden riches. The climax came as usual and as it always will. Most of the enterprises were fake ones and were con- ducted by irresponsible firms. It was difficult to discern what was really bona fide. Many newspapers and financial publications are eliminating this class of irresponsible adver- tising from their pages. It is true that the begin- ning is small and there is much to be done. But the fact that there is a beginning means some- thing better for the big army of future investors. A short time ago, the editor of a newspaper re- ceived a special delivery letter from a "broker- age firm" in New York City. The letter was received just before going to press and con- tained the advertisement of a new oil company. "Take this advertisement at your own rates" was the message. It would not have been surprising 124 WHAT EVERY INVESTOR if the country editor, not knowing financial con- ditions, had accepted it. If he had printed it, someone in that little town, calling himself an investor, would probably have lost hard earned savings. While you are reading this article, certain so- called brokerage firms have representatives throughout the United States selling securities of new automobile ventures. The salesmen are well dressed, appear affluent' and are wonderful "talkers. " No one knows how much money "in- vestors" will throw into the coffers of these auto companies which may never be more than incor- porations in the records of the state. An Illustration Here is an example of a mining scheme back in the early seventies and the analogy holds good to-day : Mr. A. — , a gentleman having some connec- tion with the mining interests of the country, and owning a claim which had been staked out on some auriferous ledge in Colorado, being natu- rally desirous of disposing of his property to ad- vantage, would go to some "prominent banker" for the purpose of negotiating a sale. But "prom- OUGHT TO KNOW 125 inent bankers" are not in the habit of paying cash for property two thousand miles away. Ac- cordingly a proposition would be taken up to make the claim the basis of a stock company, and that the owner convey his property in it to the company and receive therefor a certain sum in cash, say $10,000, to be paid out of the first subscriptions, and also a certain number of shares of the stock. The capital might be two million dollars, rep- resented by shares of $50 each or 40,000 in all. An assay is made and literature sent out. Some wealthy merchant or some prominent man lends his name and the directors are also "made promi- nent" if they are not already so. Usually these "big" names get the stock at $12.50 when it is offered to the public at $25. Officers and a name are selected. The pros- pectus in excellent topographical detail is dis- tributed and the "investors" have a chance to subscribe before Nov. 10, after which date the books close and "the opportunity is gone for ever." Needless to say the stock is sold, and after a fitful spell of manipulation, the company, name and officers drift into oblivion. Of course the actual claim exists. But that is all. 126 WHAT EVERY INVESTOR Conclusion The former chapters in this series have en- deavored to point out the salient points of an investment. This chapter points out one of the nasty features of brokerage which is not invest- ment and never will be investment. Readers may wonder why the chapter in ques- tion appears in "What Every Investor Ought to Know." No one's intelligence need be insulted when the big estates of the most prominent financiers we have known contain reams of "cats and dogs." Beware of the insidious stock salesman and the irresponsible brokerage firm. Before answering an advertisement apply for information to a responsible source of informa- tion. OUGHT TO KNOW 127 CHAPTER X Record Your Wealth Transfer Stock to Your Name — Rent a Safe Deposit Vault — Some Pertinent Examples THERE are hundreds of dangers for the man or woman who owns any kind of wealth. The investor must learn first of all how to gain money, then he must study twice as hard to learn how to keep his capital intact, and finally he must observe every known rule to know how to protect the certificates which represent his wealth. There are three elementary methods of pro- tecting a bond or stock certificate. The first — and riskiest — method is to keep it about one's person or home; the second is to permit the banker or broker to hold it; and the third is to use a safe deposit vault. This article with its various illustrations has reference to the two last, and common sense, methods. 128 WHAT EVERY INVESTOR Case i. The Negligent Man Mr. George Brown of Chicago invested $200,- 000 through his bank and had the securities shipped to the bank on draft. The bank officials were not well informed as to the authenticity of these evidences of wealth, and, in Mr. Brown's presence, placed the securities in his vault. At his death five years later, the administrators of his estate found that $10,000 of the bonds were registered as to principal and had never been released. The original owner had died. It took many months and much money to make these bonds salable. Case 2. Neglect to Transfer Mr. Jacob Crowley of New York City pur- chased 50,000 shares of Rex Mining stock. He was "taking a flyer" ; the company was a pros- pect and there was no indication of any such pleasurable features as dividends. At no time was there ever a thought of a reason for trans- ferring these shares. Mr. C. gathered his roll of certificates, failed to examine them and dug out a resting place in his safe. He had pur- OUGHT TO KNOW 129 chased the stock at 40 cents a share and was holding it for 80 cents. On the 24th day of March the directors of Rex declared that all stockholders of March 31 whose names were on the company's books would have the privilege of subscribing for 10 shares of new stock for every hundred shares shown to be owned on the books. The subscription price was 30 cents. The stock was then selling for 50 cents. Mr. C. could buy 5,000 shares at 30 cents and sell for 50 cents. A profit of $1,000. Inasmuch as Mr. Crowley's name was not on the books of the company, he did not hear of this windfall. Some one else got that privilege. It was never claimed and the $1,000 was lost forever. Case 3. The Lost Dividend Back in 1907 the Southern Pacific Co. had preferred shares. Mr. Walter Green, a broker, held 100 shares. There was a demand by the "odd lot" firms to borrow this stock against sales for which the actual stock was not at hand. Mr. Green loaned his stock. Later he called it in and received another certificate in another name. He 130 WHAT EVERY INVESTOR immediately transferred the new certificate to his own name. When the company paid its final dividend Mr. Green received a check covering 200 shares. The borrower, or the buyer to whom the bor- rower had delivered the first 100 shares, had never transferred the stock. Ten years later Mr. Green still retained the extra dividend and there was no hope of ever tracing it to Mr. Green. Some careless man or firm had neglected the transfer. Case 4. Neglect to Keep a Record A wealthy Mrs. Ward, residing on Riverside •Drive, New York City, kept her securities in a safe deposit vault. She, however, kept no rec- ord of what was in the vault. About the first of the month, she opened her security box to clip some coupons, and after finishing the clipping, replaced the bonds and stock. She wore a rather long veil and the folds caught and held out a one thousand dollar Anglo-French 5 per cent, bond which is very much smaller in size than is -customary. Unknown to her the veil carried this bond out of the office and as she stepped to OUGHT TO KNOW 131 the pavement, a gust of wind blew it to the street where it was soon churned into an unrecognizable mass. She never knew the number of the bond; it was not registered, and all she could know was that she had purchased the bond, but could never trace its disappearance. Needless to say Mrs. Ward ever after kept a full record of what she owned including a de- scription. Case 5. He Left Securities with the Broker Mr. Henry Leroy of New Rochelle, N. Y., was a wealthy man but was accustomed to increase his wealth by a series of speculations through a well known brokerage firm. Mr. Leroy was not an habitual trader, so that often, after a "campaign," he left a credit of both money and securities — in negotiable form — with his broker. Now all good and reliable brokers make it a strict custom to set aside the securities of cus- tomers which are paid for in full and left for safe keeping, or for margin when needed. These "good" brokers place such securities in an envel- ope marked as the "Property of Henry Leroy" and on the statements rendered they are listed, 132 WHAT EVERY INVESTOR "Held for safe-keeping." But Mr. Leroy's brokers were not of this "good" type. Mr. L. did not insist upon this method of business, so that when X, Y, Z & Co. failed, it was discov- ered that Henry Leroy's securities had been used by the firm and were thoroughly tangled up with the disaster. It was a costly lesson but thou- sands of other careless investors have suffered and will suffer in the same manner. Case 6. 5000 Shares of Nipissing Mines A prominent merchant in the tobacco business with headquarters in New York City presented 5,000 shares of Nipissing mines to the cashier of a brokerage firm in New York City a few years ago. In all there were 100 certificates ranging from 5 shares to 100 shares. This investor had not transferred the stock and had neglected to collect two dividends amounting to about $1 per share in all. The cashier began the search, getting the addresses from the company's books. After .ten months' work, he collected $4,200 of the $5,000 due and the cost of collecting in postage, time and fees amounted to $100. The loss was about $900. OUGHT TO KNOW 133 There was absolutely no excuse for such negli- gence. Case 7. What Happens to a Non-Dividend Payer Mr. Edward Dayton of Salt Lake City owned 100 shares of Wabash Railroad stock (common). Wabash had about as much chance of paying a dividend as Comstock Tunnel has today. Mr. Dayton owned a drug store and never read a financial magazine. One day the Wabash R. R. drifted into the hands of a receiver and the registered stock- holders were so notified. Mr. D. was not a reg- istered stockholder and he did not hear of the trouble. All registered holders, or those holding endorsed certificates, were permitted to pay an assessment and get into the new company up to a certain date. After that date the old stock became worthless paper. Mr. D. now holds worthless paper. Incident- ally, there are a few who did not pay the assess- ment when Northern Pacific reorganized years ago. They also hold worthless paper. Mr. D. now knows that it is better to be on the books 134 WHAT EVERY INVESTOR of the company as a holder of stock and he will get all the announcements sent out in the fu- ture. Case 8. Keeping Track of Dividends A prominent editor of a nationally known pe- riodical, whose business acumen is recognized — or was recognized — by his friends had a specula- tive account with a brokerage firm. He held vari- ous issues of securities and accepted the state- ment from his broker each month, just as he might glance over the headlines of his newspa- per while going home in the subway. Among the securities was American Chicle, which paid a dividend. This fact was over- looked by the broker's clerks and nary a credit did Mr. Editor get for these dividends, but he did not suffer ; for he never knew. Had he followed the announcements he would have noted the ab- sence of this item at once and held his broker for it. Of course the broker was responsible for the collection in this case. Case 9. A Forgery Case A clerk in a New York Trust Co. gained ac- cess to the blank certificates of a prominent OUGHT TO KNOW 135 corporation whose stock is listed on the New York Stock Exchange. He filled these blanks out to John Jones, endorsed Jones' name and forged the signatures of the transfer agent and registrar. He took the certificates to Philadel- phia and borrowed 80 per cent, of their value, about $25,000, and left for South America. During the course of business one of these certificates fell into the hands of a bona fide in- vestor, Mr. Gerald Nelson, who sent the certifi- cate to the company to be transferred to his name. The records showed that there was no John Jones and that more than the authorized capital of the company had been issued. The forgery came to light and Mr. Nelson was able to recover back to the original lender. Had he not transferred the stock at once, the compli- cations would have been serious. Has any reader a forged certificate not as yet transferred to his name ? * Case io. He Lost His Stock A Buffalo, N. Y., investor bought 100 May Department Stores and paid for it. He carried it in his pocket preparatory to placing it in his 136 WHAT EVERY INVESTOR safe deposit box, but did not transfer it to his name. He did one sensible thing : he jotted down the number of the certificate in his memorandum book. While walking along the street, he acci- dentally jerked it from his pocket and did not at once notice the loss. The discovery was made at the vault. Under ordinary circumstances the replacing of this certificate is serious and sufficient trouble even if registered in his own name, but the situa- tion became complicated. He learned the name of the registered holder who lived in Cincinnati. It was necessary to get a full release from this man to himself of that particular certificate and the legal red tape is Gordian Knot-like. Suppose the registered owner had left for parts unknown or had died ? Will any rightminded in- vestor take a chance like this? Case ii. Texas Co. Rights A Chicago customer of a large brokerage firm owned 100 shares of Texas Co. stock. Nearly every year this company increased its capital and the holder of the stock received a certificate showing that he had the right to subscribe for OUGHT TO KNOW 137 new stock. Sometimes the sale value of such rights amounted to 30 dollars per share. This customer slept peacefully and never knew he could claim these rights until market condi- tions had lowered the price of the stock and consequently the value of the rights. This ex- ample happens daily to many hundreds of in- vestors who fail to transfer their stock. Case 12. A Letter from a Cashier "Last Monday a customer called us on the 'phone asking why he did not receive a dividend on an odd lot of stock bought around the latter part of September, which sold ex-dividend the first part of October. The dividend was paid about the last of that month. Upon our asking him to look at the certificate and let us know in whose name it was, he reported the name of a firm well known in the brokerage business. He had assumed that because he bought the stock that it would be in his own name. (And this man called himself an investor!) "Our second case was an individual who had purchased a non-dividend paying stock years ago which stood in the name of a firm which 138 WHAT EVERY INVESTOR had liquidated its affairs and closed up over a year ago. This man was pressed for funds but the stock was not a 'good delivery/ not acceptable to the buyer under the circumstances, and the man was compelled to go without his money until all legal complications were cleared away. His suffering and inconvenience might have been in- tensified, had the transfer office been in Arizona or had he been unknown to the firm through which he sold the stock.'' In Conclusion While the names used are fictitious yet the principles set forth are only too true and will happen time and time again unless the investor observes the fundamental rules of self protec- tion. The investor who pays for his stock and who does not transfer it to his own name is no better than the householder who goes to At- lantic City for the week-end forgetting to close or lock the front and back doors or the windows of his home, where the silver and valuables are tempting bait for the first unscrupulous citizen whose eyes turn that way. OUGHT TO KNOW 139 CHAPTER XI Gossip and Its Value How Much Value Newspaper Items and Brokers' Gossip Has — A Formula for Ask- ing Questions A SUCCESSFUL business man, once upon a time, found it necessary to consult a fa- mous lawyer. The case was one which involved technical terms and hinged on judicial decisions of an intricate nature. The lawyer questioned his client, cross-examined him and recross-examined him. He then formed a two thousand word hypothetical question and gave the answer. The client allowed his mind to wander during the discourse because he could not follow the peculiar and specialized language of the legal profession. After the lawyer had used about $200 worth of legal time, he reached a conclusion. The client realized that the legal train had reached a station but he did not know 140 WHAT EVERY INVESTOR the name of the station, so he asked, "Have I any chance of winning this case?" The investor — the average investor — is not one whit different from the above mentioned business man. All he wants to know is whether his pros- pective investment is the right one for him to make, or the wrong one for a man of his cir- cumstances. The language of finance is just as confusing as the language of law. Many of the books which are written by experts in finance are thoroughly impossible to the average inves- tor. "Newspaper Dope" It is remarkable how many people always be- lieve what they read in the newspapers. All news is made presentable and in giving it this dressing the salient point is often lost or mini- mized. Sometimes a paragraph or a column in the newspaper could easily be boiled down to five lines. Many reporters are paid space rates. Financial news as printed in the very best general newspapers is treated in the same man- ner as the story of John Smith's wife running off with John's chauffeur. The writer recently OUGHT TO KNOW 141 went through a file of clippings covering the past two years of Curtiss Aeroplane Company's history. Rumors were stated as facts. State- ments of officials were printed without being checked. One article reported millions of Gov- ernment orders and another reported none. If you, Mr. Average Investor, had invested your funds on this news — as many do — you would have either made a million dollars or gone broke. In either case you could have reached the same result by going at it blindly. Most financial writers hedge in their fore- casts. After you have read the article, you deter- mine that Brown in the Express thinks the market is going up. It goes down. You write Brown a letter of criticism and make fun of his judgment. Brown shows you where he said "something" in that very article which you over- looked which meant that the market was more likely to go down. Then you feel that you have made yourself ridiculous, but it does not pre- vent you from believing Smith in the Owl. Before you make any investments based on financial news as appearing in the daily papers, get a back file and chart out the predictions 142 WHAT EVERY INVESTOR and statements. Then see how they fit in with what actually happened. Do not base your investments purely on news- paper predictions or suggestions. Check them up with the formulae which close this article. Stock-Brokers' Suggestions The man who represents his firm on the Stock Exchange is deemed by the layman to have "in- side" information which is very valuable. There may be some brokers, whose daily business it is to execute orders, who also have a good knowl- edge of investments. Certain clients have been hunting for many of these "investment, special- ists" for years and have metaphorical double- barreled shot guns to use when they meet them. Just stop and think, Mr. Average Inves- tor, and ask yourself how these brokers who are buying and selling all day long can have time to study real investment conditions. The mem- ber-brokers have too close a perspective. They are like men standing close to a wall. They can only see a few square inches of it and not the whole wall. OUGHT TO KNOW 143 The stock broker is not usually the best man to ask about investments. His speculative acu- men may be above par, but there is a wide dif- ference between investment and speculative knowledge. There are some stock brokers who make a specialty of investment conditions and others who hire men for no other purpose than to hunt out good investments. They are part of the formulae which will be presented to you. Corporate Reports In the goodness of your heart, Mr. Average Investor, you purchased five shares of Southern Pacific, gave it to your wife and had the stock transferred to her name. One day, while you are at business, the postman brings a 200-page yearly report to your wife. It contains a spe- cial message from the president to stockholders, another from the treasurer, a certified statement from the accountants, and 20 or 30 exhibits, ending up with a wonderful map of the United States with the Southern Pacific road superim- posed in red lines. You watch your wife with much interest. She 144 WHAT EVERY INVESTOR glances through the costly report and reaches the map. She notes Oshkosh, where her sister lives, turns the book over and quietly drops it in the library waste basket. Later, after she has re- tired, you fish it out and note that the president says everything is running well and that it is costing the company much money for taxes. But the report does not mean much to you unless you have learned to separate the chaff from the w T heat. The fact that your road earned $13 a share during the year means little unless you have the comparison of former years, the comparison with other trunk lines in the same territory, the condition of surplus, the item of depreciation, the condition of the rolling stock, etc. You have been a very busy man accumulating money to invest, but you have not had the time or inclination to become a specialist in reading a railroad report. The same situation applies to your industrial, mining and public utility stocks. Your bond investments demand a separate train- ing. It is clear that to protect yourself you should at least know how to ask questions and learn who are the proper authorities to answer them. OUGHT TO KNOW 145 Subway and Office Gossip The writer knew of one man who bought 100 shares of U. S. Steel preferred a^ an investment. He was sitting in his broker's office when he re- ceived the report. Another customer, of a specu- lative type, made a remark which he overheard. He did not know the man and the remark was made to a third customer likewise unknown to the involuntary eavesdropper. The remark was : "I believe the Steel stocks are going to the dogs." Our investor felt that he had made a mistake. He wanted to sell his recent purchase right away and had to use considerable will power to hold faith in his judgment. How many of you, Average Investors, have been influenced by remarks overheard in the subway, street cars, trains and other public places? Probably hundreds of thousands of shares and millions in bonds have been purchased and sold as the consequence of involuntary eaves- dropping in public places. It is a true bill against the uneducated condition of the average inves- tor. The chances are nine hundred and ninety- nine in one thousand that the speaker knows no more about an investment than you know about 146 WHAT EVERY INVESTOR the lumber business, and yet you permit yourself to be influenced by a man who is probably more ignorant than yourself. The Lure of the Pamphlet "Diamond Jim" Brady was one of the greatest salesmen which this country ever produced. As an efficient business man he possessed a world- wide reputation. His associates were railroad presidents and men high in finance. Yet his es- tate was chock full of worthless shares. Wheth- er these were purchased to please casual friends or because of the representations of literary ( ?) prospectuses no one will ever know. There is no difference in the psychology or the material result. A friend who has u a good thing" and a glowing prospectus are twin brothers. This does not mean that every efficient and alluring prospectus is untrue and does not rep- resent a good investment. But the average in- vestor must not base his judgment on the evi- dence submitted by the plaintiff. Credible wit- nesses are just as important to an investment as they are to substantiate evidence in law. Where will you find these witnesses? OUGHT TO KNOW 147 The Formula for Mr. Average Investor (1) He must know what questions to ask. a. Is this the right investment for me and my capital? b. Have I followed "John K. King's" for- mula? c. Have I verified the newspaper reports ? d. Have I asked the right questions about the report? 1. What are the questions to ask about railroads ? 2. What are the questions to ask about industrials ? 3. What are the questions to ask about oils? 4. What are the questions to ask about mining stocks? 5. What are the questions to ask about bonds ? 6. What are the questions to ask about public utilities? 7. What are the questions to ask about this investment? e. Have I given "Dame Rumor" too much credence ? 148 WHAT EVERY INVESTOR f. Have I checked up the statements of the prospectus ? (2) He must know where to get his informa- tion. a. What does my investment broker think? 1. Has he any interest in the security? 2. Is he antagonistic for personal rea- sons ? b. What does my banker think of its worth? 1. Is his conservatism too pronounced? 2. Is his ability any better than mine to analyze ? c. What is the judgment of my financial publication ? 1. Have they any personal interest in the security ? 2. Have they given me a definite opin- ion? 3. Have they ferreted out the essential facts ? 4. Are they equipped with trained ex- perts, accurate statistics and sea- soned judgment? I firmly believe that, everything considered, the Analytical Bureaus of -unprejudiced financial publications are the best source of information OUGHT TO KNOW 149 on which to base your decisions. It is their business, and like the competent lawyer they have the data and information on which their opinions are based. You must, however, have some basis of knowledge on which to ask the proper questions and understand the answers when you get them. 150 WHAT EVERY INVESTOR CHAPTER XII One Hundred Books to Read A Classification of the Best Books for Study By the Investor IN all the preceding articles of this series, the author has bared the fundamental features which every investor should have in mind be- fore making an investment. The field is so vast that it is not possible to go into detail for each subject. But the reader has no doubt felt a desire to go deeper into one or more phases, and it is for this purpose that the One Hundred Books are listed and grouped for him in this ar- ticle. The Groups The elementary books cover the subject as a whole in Group I. They place before the student the geography and the machinery of the subject. Group II deals with the definitions of invest- ments, shows which are good and which are bad. OUGHT TO KNOW 151 It takes into consideration the different reasons why investments are made, such as for income, for profit, etc. Group III contains the only fundamental books known on the subject of speculation. Almost all other speculative books deal in generalities and are not the result of actual study and experience, nor do other books express themselves in as definite a manner with so many concrete ex- amples. Intermediate Studies The books in this group cover the entire sub- ject of finance. They can be understood and appreciated by all readers who have thoroughly understood the books in the preceding groups. Their purpose is to go deeper into the structure of corporate history and to take up the more intricate forms of investment and speculative machinery. The Various Branches Group V takes into consideration a study of the various forms of corporate enterprise and 152 WHAT EVERY INVESTOR also the principal commodities. Collateral branches of investment such as land mortgages, farm loans and insurance are not taken up in detail but are covered in an elementary form in other books, such as Book 4 in Group II. These books are self-explanatory to the student from the very nature of the subjects, but they will not be fully understood nor their applica- tion in a practical way established unless they are studied after a course in the former groups. The Post Graduate Course The books listed in Group VI are not ones which the novice will understand or appreciate. They state much of the theory of finance which is only applicable after the student has a basic knowledge of the subject. Book 6, for example, would not be intelligible to the novice nor could he use the information until he was able to com- prehend the relationship of banking with con- ditions affecting the price of securities. Do not for one moment think that these hun- dred books can be read and digested in one year or two years. Nor does the author suggest that the knowledge gained from this reading may \ OUGHT TO KNOW 153 be utilized to personal practical advantage with- out the actual experience of doing the things which are discussed. If you, reader, have been speculating in min- ing stocks, you will desire to read the books of Group I, Group III, Books 2, 3, 6, 8, 11, 14 and 16 of Group IV and have on hand all the books of Group V under the head of Mines and Oils. If you desire to trade in wheat, you will choose from the titles the books which you know will be of practical use to you from the groups. While it is a well known fact that most people desire the name of investor and taboo the name of Speculator, yet neither Investor nor Specula- tor should omit a study of either one of the sub- jects. Group II is very much inter-related with Group III and the fundamental features dovetail. Magazine and Papers The student of finance must of necessity keep up to the times. He must read his morning and evening papers especially for the statistics and the general news. Note Book 5 of Group I. It is also well for him to subscribe for some peri- odical which will help to arrange his statistics in understandable form. There are a number of 154 WHAT EVERY INVESTOR New York newspapers which issue yearly finan- cial reviews containing these essential statistics and the bound volumes of The Magazine of Wall Street contain railroad, industrial, and banking statistics for years back. Each trade has its publication — many of the trades have two or more publications devoted ex- clusively to the one business. Other publications which will be of assistance to the advanced student are the London Econo- mist, New York Journal of Commerce, Wall Street Journal, The Commercial and Financial Chronicle and The Bankers Magazine. The re- ports of the United States Interstate Commerce Commission, United States Treasury Department reports and the reports of Gas and Electric Light Commissioners of the various states may be ob- tained without much trouble and at a small cost, or may be found on file at the principal libraries. But there is no other non-technical magazine cov- ering the elementary ground of all branches except The Magazine of Wall Street. A Short Course from the Elementary For those who are desirous of reading only a few books on the subject, the following list has OUGHT TO KNOW 155 been suggested to the author by one of the best students of finance, comprising investment and peculation, who writes much for the public : '^In tro du c to ry : Money and Investments. — Rollins. The Machinery of Wall Street. — Selden. How to Read the Financial Page. — Browne. You and Your Broker. — -Smitley. Investment: The Careful Investor. — Meade. Investing for Profit. — Selden. The Working of the Railroads. — McPherson. Investors' Pocket Manual. Speculation: The Business of Trading in Stocks. — "B." Psychology of the Stock Market. — Selden. Studies in Tape Reading. — "Rollo Tape." Fourteen Methods of Operating in the Stock Market. Banking, Finance, Economics: Principles of Money and Banking. — Conant. Principles of Bond Investment. — Chamberlain. Principles of Economics. — Seligman. Financial Crisis. — Burton. Financial Statements Made Plain. — Saliers. 156 WHAT EVERY INVESTOR o 5 « 5 1 "i © © » r fa ■a "i ,3 © iO S © 1 © U ei © M fa © i T a .© £3 W © o© CO, P « 5 ■* ©o • © © 00 6< J, fa P o fl "2 © *sS9 2S gftjfl S, 33 fl OH W St:*©, | oi us ©,^,-H fl9s«ja«"e © sa § S.5 • © n co pm fa fa cc > t-I N W *# *s © «3 © O C* a o S i-i th en ee «£ <& fi Ph CO t9 g so § I I g £ £ . © s 1 > o o 1 © CD a? o £ a T •IS C © d •© o ft * 9 f 1 S © SB P 5 o I a © a . 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