The Final Word

The daintiest last, to make the end most sweet. - SHAKESPEARE

DANGER SIGNS

The aim of this book has been to examine se­lected media o£ investment and to analyze the advantages and disadvantages o£ each. We have also tried to devise a plan with which the in­vestor o£ limited or modest means will be able to invest now in a way that may result in future benefits. Such benefits may encompass capital gains and/or income (from investment com­panies, savings, bonds, stocks). They are to be accomplished by the application o£ a financial plan which, because of its unemotional and down-to-earth approach, has its greatest value in the enforcement of caution.

Many well-intentioned persons think that in­vestment in common stocks is a first objective and that it should take precedence over all else. It must be remembered, however, that first things must come first! This means that life in­surance, perhaps home ownership, and most certainly a financial plan must always precede investment in other media.

When all is said and done, an investment plan has three underlying purposes; and they are always present, to a greater or lesser degree, whether the invested sum is to be $100 or $100,000. All three may not be present to an equal degree in all cases, for much will depend upon the personal temperament and the circum­stances of the individual investor; at the same time, all three must be continually borne in mind in any attempt to carry out a program.

Safety of principal is the first and foremost purpose in all investments to be made. The reason is simply that this investor cannot afford to think otherwise, nor would he be justified at any time in undertaking so radical a specula­tion as would endanger any considerable portion of his capital. For those who depend to a con­siderable degree upon an assured income, there is no substitute for a high degree of safety and conservation of principal; there can be no com­promise, for it is a basic truth in the investment field that a sacrifice in safety, with an increase in risk, goes hand in hand with a higher rate of return.

Income is sought by everyone, for it is the very basis of investment. A hundred dollars may be tucked away in a mattress, but "it toils not, nor does it spin"; unless it be actually invested it will produce no income.

Growth of principal is perhaps the most fas­cinating objective of all. New industries, new discoveries, new methods, new products—all indicate considerable opportunity for invest­ment in the future of our country. At the same time, we must not become overenthusiastic; all dynamic possibilities may not lead to the pot of gold at the end of the rainbow. Mute testimony of this is often found in the sheaf of worthless certificates often discovered by a lawyer in the safe-deposit box of a deceased client. Mineral resources may peter out or fail to be present in quantity, oil is where you find it, and many a new and seemingly revolutionary idea or device may turn out to be a considerable failure. Never­theless, there will always be a considerable number of converts who will assume risks in the hope of achieving immense possibilities in the distant future. At the same time, you cannot have your cake and eat it, too, for income and the safety factor must be sacrificed at least to some degree in exchange for a relatively high risk.

Suppose we were to set up some tests of in­vestments. Instead of trying to tell Mr. J. Q. Citizen what to buy, we will insist upon the right to scrutinize what he may already have purchased. We are going to be deliberately nasty about this, because the yardsticks we apply are designed to ask embarrassing ques­tions in order to focus attention upon the short­comings of any investment. Try these on, for size:

1. Security. Can you get your original investment back in its entirety, and how soon? Don't squirm too much when you answer this one, because many others will be squirming a bit at the same time!
2. Income. Just how much is it assured and how steady? This is a sneaky one; because Joe Doakes has had an income for fifteen years from the Confounded Chemical Company, it never occurs to him that the future is largely unknown, and that we may adopt the dubious practice of using the past to predict the future. Joe has perhaps done very well so far, but did he ever have the experience of living during a recession, or even during a depression? Does he realize that this cozy income may be curtailed or even cut off? Unfortunately for many of our present citizens, they have lived in an era of plenty and are therefore unwilling to think in any other terms. We like to think that such times as were seen in 1933 cannot be repeated, but this certainly cannot be guaranteed. It is during poor times that common stocks certainly lose their glamour.
3. Inflation and deflation. What is their ef-fect in any given case and how severe may it be?
4. Growth. How much has been sacrificed to obtain it and can you afford this sacrifice?

What do you want from investment? What are your own objectives? Astonishingly enough, if we may judge from the experiences of brokers and the operations of the MIP, most people do not go overboard. They realize the purposes of investment require adequate diversification and the minimization of risk and proceed accord­ingly.

A very good display of the behavior of certain classes of investments is to be found thus: if an investor had put all his money into good-grade bonds during the period beginning 1935 and ending 1955, he would have received a virtually certain return, averaging close to 3 per cent; and, at the same time, he would have had his principal returned intact; if, on the other hand, he had put all his funds into common stocks, he would have found that there were times when his holdings would have actually shown severe declines in value, so that forced selling would have been accompanied by heavy losses; contrariwise, he would have found that there were other occasions when a considerable profit would have been obtained upon liquida­tion; in the meantime his income would have undergone violent fluctuations, both in timing and amount. From this discussion we may im­mediately see the value in diversification. We should not put all our eggs in one basket, but look about for several different baskets.

No person is infallible. Being human, even the best-informed and most experienced make mistakes, so that the investor must realize that he may be required to accept some losses, but that a satisfactory program of adequate diversi­fication is especially tailored to hold such losses to a minimum. Sometimes our reluctance to act so as to avoid losses, or at least keep them down to a small figure, lies in the aura of optimism in which we live. Our nation has made astonish­ing and rapid strides in a relatively short time. An atmosphere of undue optimism has accom­panied this, so that some folks simply will not face disagreeable truth. An example of this is found in the progress report of a small firm, whose president reported brightly that "our earnings have risen by 200 per cent"; mathe­matically he was correct, but he failed to make clear that the original earnings base was 4 cents per share and that earnings were now 12 cents per share! Such optimism and reluctance to face facts constitute a misguidance of stockholders and is no credit to any management.

By this time the reader may have lost his ap­petite for common stocks and may wonder if any investment plan, such as the 60-40 previ­ously discussed, may rightly contain them, es­pecially when ultraconservatism may indicate some question about their suitability. He may think that this indicates a betrayal of the au­thor's investment attitudes. Quite to the con­trary! There are excellent common stocks which are known as "defensive" equities, and it is our purpose here to indicate several classes of them such that Mr. J. Q. Citizen may not be misled but be quite happy and contented in his owner­ship of them:

First are the stocks of such companies as provide the necessities of life. This will include drugs, food, shoes, clothing, etc. Since such stocks cater to an established market for prod­ucts which are consumed continuously, they will fluctuate less than other stocks; they will advance more slowly in a rising market and drop more slowly in a declining market because de­mand for the products is steady and increases largely with population increase. The growth factor is rather small and the speculative factor is minimized. Risks are moderate because consistent earnings, accompanied by fairly rapid in­ventory turnover, give many issues true invest­ment characteristics. They include some of the best known household names before the public today.

Second in our grouping would be the utili­ties, which provide income coupled with con­siderable safety. Their services are in continual demand. Homes must be heated, food must be prepared, lighting must be provided, water must be available, and the telephone now plays a very large part in our lives. Utilities also re­ceive some of their revenue from industry and from commercial customers; this may tend to fluctuate with changes in business conditions, but the residential load, which is usually the greatest in consumption, tends to remain rela­tively unchanged and to grow somewhat with increase in population. Federal, state, and local agencies subject public utilities to careful regu­lation. Because of the relatively constant de­mand, the earnings of the public utilities tend to remain steady and to rise slowly, because of a gradually increasing demand. Likewise the dividends tend to remain steady and even to in­crease slightly, depending upon the earnings behavior. While the growth factor is not star­tling, there is no doubt that certain fast-growing areas now served will participate in the long term growth of the nation, so that certain utilities may be considered as somewhat favored in this respect. At any rate, the steady earnings and dividends and bright future stamp the stocks of many of the public utilities as being of good investment quality; this is to be seen in the fact that their prices are usually not in the bargain category but are based primarily upon quality.

Third are the banks, although to some this may appear as a surprising inclusion; but when one realizes that banking is now a very large segment of the business of our nation, there is no reason to lift eyebrows at the possibility of in­vestment in their stocks. Banks are closely regu­lated by government and state controls. Their portfolio of investments is carefully restricted in order to include a majority of the very best grades of securities. Banking ranks as one of the nation's foremost businesses, and since both in­come and expense are fairly steady, fair earn­ings are maintained over the years; furthermore, the present-day modern bank is virtually a de­partment store of banking, since so many fa­cilities are offered to its patrons. The price-earnings ratio and dividend payout of the better banks are in considerable contrast to those of the less desirable ones. The present rate of return upon bank stocks of good quality is in the vicinity of 4 per cent. Most bank stocks are not listed, although a few well-known ones are listed upon regional exchanges. Inquiry will ob­tain quotations of these banks whose stocks are well distributed. Information as to their back­ground is readily found. The stocks of the bet­ter banks are certainly well suited to the con­servative investor and those located in the fast-growing portions of the nation have already indicated a better than average record.

The above paragraphs simply indicate that the most ultraconservative investor may be satis­fied with certain kinds of common stocks; these, when combined with well-chosen bonds, con­stitute an excellent defensive portfolio and are especially suited to those persons who wish to be completely free of investment worries.

DO YOU FOLLOW THE CROWD?

During the latter part of 1957 and through the spring of 1958 we were in a minor reces­sion. Earnings fell, dividends were cut and un­employment  became   unwieldy.   Many  shareholders were forced to sell because of pressing financial needs; others panicked and sold heav­ily; rumors of an ugly character were circulated; as a result stock prices plummeted. Wise in­vestors with the long view sat tight and even bought, simply because they realized that in­terruption in an era of prosperity was to be expected; indeed, some even welcomed the op­portunity to "lay low." The moral here is: don't be stampeded; do your own thinking.

Still another caution is directed to those who constantly have their ears open to any kind of suggestion. For example: "My neighbor knows the doorman at a leading New York investment house; he says buy Consolidated Whoosit!" Others are approached by mail or telephone, supposedly in great confidence, and are urged to take advantage of an offer in great haste. Many fictitious and worthless mine and oil stocks have been promoted in this manner. Do you follow the crowd? It is a large one, make no mistake! Don't be stampeded by tips or ru­mors. Investigate! See your broker, in whom you place your trust. There is never any rush to buy any security.

Another danger of following the crowd occurs because of a peculiar quirk in investor psychol­ogy. This is the establishment of a "favorite" industry and the mad bidding up of prices in any and all corporations which have a sizable stake in the field. A good example was the surge in air-line stocks after the last war; a current example is the electronics and so-called "space" stocks. Avoid such obviously overpriced situa­tions. A price-earnings ratio of over 20:1 should be viewed with suspicion; one of 35:1 should just be viewed!

Every investor should and must form his own opinion upon the purchase or sale of a certain security; after all, it is his money! At the same time, J. Q. Citizen with perhaps $500 to invest dares not take high risks with even $250 of it, for that is 50 per cent of his current investment capital; on the other hand, the man with $5000 can take considerable risk with $500, for that is only 10 per cent of his total investment capi­tal. So another precept: do not follow the crowd when so doing will get you in too deep. Con­servation of capital is always a must for the in­vestor of modest means.
And by all means, play it smart—investigate!

FIFTEEN MILLION CAN'T BE WRONG

A recent poll has indicated that over 122 mil­lion individuals own stocks and/or bonds; in addition there are many more who are repre­sented by their purchase of the shares in invest­ment companies, plus those who contribute to the trust funds set up by unions or management or both. If we sum this up, a figure of fifteen million American investors may be used as an approximation. Why is it that this sudden surge of investment has now become so prominent and affects so many? There are a number of reasons which, either wholly or partially, account for the entrance of many individuals into the invest­ment field, either directly or indirectly. Here are a few of the reasons:

1. The post World War II years have on the whole been prosperous years; personal incomes  have  increased  by  leaps  and  bounds, while many have also stepped into a new and higher income bracket; in so doing they find that they have surplus funds to invest. It must be emphasized that these people are not rich; indeed,  as a group their incomes lie in  the $7500 to $10,000 bracket and they are merely better off financially than they had ever reamed of being!
2. The savings-bond campaign of the last war has familiarized many with the importance of saving and the ease of doing it on an installment basis  (pay-roll deductions). The knowledge that a U. S. Savings Bond offers a compounding feature, coupled with high security and liquidity, has brought home to many a first lesson in investment.
3. The subject of inflation and its consequences has been on every tongue for several decades; at the same time it has been emphasized that common-stock ownership is a method of combating this unseen menace, since such stocks are revalued from day to day.
4. The longest sustained bull market in history has meant continued success for many; and these in turn have become exponents of investment to bring others into the fold. Success has crowned the efforts of many and this has served as a means to convince even the most obstinate.
5. The development of employee stock purchase plans and the establishment of other

programs to permit easy purchase (such as MIP and the growth of investment companies) has added many persons to the growing number of investors; at the same time it must be ob­served that most of these people are sensible investors, who are not stampeded; many are women, who are generally more conservative than men; it is interesting to note that a woman often buys stock in a corporation whose prod­ucts and/or services she likes.

1. The population increase, coupled with the steady advance of the gross national product, has meant that there are now more of us with more money to spend.
2. Many would-be investors realize that the installation of various controls in the form of laws, regulations, and "watch dogs" has meant that the public is better protected in 1960 than it was in 1929; besides, this is now virtually a cash market and the biggest influence upon its behavior is undoubtedly the large institutional investors, who set the pace by continual buying into the American future.

(h) Still another way to look at the upsurge of investment interest is to realize that many people have been educated in the values of capital gains. They feel that the lower taxes on such transactions mean a bigger opportunity for growth as an objective; furthermore, with the continued growth of the corporation in which they have made a successful investment they are likely to hold on indefinitely and not sell such shares as have shown some degree of promise.

Why invest, anyway? Why not just keep cash, either in a bank or in a "little tin box"? Polls taken among investors indicate a number of rea­sons why they invest, over and above the normal ones of income and/or gains. Among them were: the question of inflation, the entrance upon an interesting and sometimes profitable hobby, the educational side (how capitalism works), the challenge to the serious and in­telligent investor, and the thrill of keeping in touch with the progress of the nation. These show that there are other values to be obtained besides the ordinary ones which are to be ex­pected.

By this time the reader may well realize that the philosophy of investment set forth in this book is primarily conservative. Why? The an­swer is simple: we are writing here for the ordi­nary citizen who is not rich and whose financial means are at most quite modest; there is no other way to consider his needs and at the same time give him the fair play to which he is en­titled.

In closing we must present a few notes upon investment which should be of value:

1. Deal in facts. There is no place for emotions in investment.
2. Do not watch day-by-day quotations and view them with either great alarm or undue pessimism.  Minor market fluctuations are  of little importance for those who take the long view.
3. Consider your temperament. Don't get ulcers because you insist on putting your money in exactly those things which force you to become a worry wart. Learn to live with your investments.   Otherwise  stick  to  the most conservative items, as shown in a previous section.
4. Be prudent and be convinced that what you buy is the right thing. Remember that your broker may assist you, but that the final decision is your own.
5. Owning stocks and bonds is simply money management. Others have done it with considerable success—and they had in most cases no special training for the task.
6. These pages have been an attempt to acquaint the novice of limited means with some of  the background and to show "how it is done."
7. Be willing to admit mistakes and resolve not to repeat a mistake once made.

And now for the parting word to Mr. J. Q. Citizen: A reasonable degree of financial suc­cess may be achieved by him through practicing the procedures outlined in this book. It will re­quire patience, perseverance, and self-educa­tion; it will mean a generous investment of time. But it can be done, as is shown by the success of millions (yes, millions) of American citizens of relatively modest financial means. As Poor Richard so well stated: "If you would have a faithful servant, and one that you like, serve thyself"!
Now, about that first million of yours—shall we begin?