How to Invest Money Wisely HOW TO INVEST MONEY WISELY BY JOHN MOODY AUTHOR, " HOW TO ANALYZE RAILROAD REPORTS," "THE ART OF WALL STREET INVESTING," " MOODY'S ANALYSES OF RAILROAD INVESTMENTS." EDITOR, MOODY*S MAGAZINE, ETC. SECOND EDITION PUBLISHED BY MOODY'S INVESTMENT SERVICE 35 NASSAU STREET, - NEW YORK CITY 1914 Copyright, 1912, by JOHN MOODY All Rights Reserved PREFACE In the following chapters the proper methods for investing money in standard securities are outlined and discussed. An attempt has been made to treat this im- portant subject in a practical and concrete way, and thus enable the investor to feel that he is getting something more than a mere statement of principles. The great weakness with most books on investment subjects is thai they generalize too much, without presenting practical suggestions for the investor to adopt. The whole plan of this little book is based on the ideas of Diversified Investing which the writer has for many years been making a careful study of in his work as an analyst and adviser for bankers, financial institu- tions, and individual investors both at home and abroad. These principles for wisely and intelligently investing money under diversified plans have within the past few years been adopted by numerous institutions and several thousand individual investors with satisfaction and profit. It will of course be recognized that within the lim- ited scope of a small volume of this kind, the subject can be covered only in outline. But it is hoped that 5 322576 those who read this book with care will desire to have the subject further elucidated, with the idea of applying the method of investment themselves. For all such as these, our large statistical and analytical organization is operated, further details regarding which will be fur- nished upon request. JOHN MOODY. 35 Nassau Street, New York. NOTE. In the back pages of this book will be found a de- tailed description of our Investment Service. 6 TABLE OF CONTENTS PART ONE: DIVERSIFYING INVESTMENTS: PAGES I. Selection of Investments 11 II. Mistaken Investment Methods 17 III. Unsound Theories 21 IV. Proper Principles for Diversifying Investments... 25 V. Applying the Principles 33 VI. Further Application of Sound Principles 43 VII. The Factor of Maturity in Bonds 49 PART Two: INVESTING FOR PROFIT: VIII. Taking Advantage of Potential Possibilities 59 IX. Investment Cycles 67 X. Distribution and Profit Combined 75 XI. Plans for Investment of Moderate Sums 81 XII. Plans for Investing Larger Sums 87 PART THREE : CLASSES OF INVESTMENTS : XIII. Some Typical Industrial Bonds 99 XIV. Selected Public Utility Bonds 109 XV. Railroad Stocks as Investments 129 XVI. Guaranteed Railroad Stocks as Investments 139 XVII. Industrial Preferred Stocks as Investments 145 XVIII. Unlisted Industrial Preferred Stocks 155 XIX. Public Utility Preferred Stocks as Investments... 157 XX. Short Term Investments 163 XXI. Investing in Convertible Bonds 167 Alphabetical Index 174 7 PART ONE DIVERSIFYING INVESTMENTS Selection of Investments THE sound principle for properly distributing invest- ment capital has been a puzzle to investors for many years. This is not only true of the person whose investment capital is small and limited to a few thousand dollars, but it is just as fully the case with the large investor whose capital runs up into the millions. As a general thing those who desire to have their prin- cipal thoroughly safe have endeavored to confine them- selves to the higher grade bond issues of railroads and municipalities, and in some cases have made an effort at distribution by spreading their investments over wide sec- tions of the country and among a considerable number of different issues. But in spite of this effort at distribution, such investors usually find themselves facing losses in principal even in periods of prosperity when they nat- urally would expect profits on this principal. In fact, the method employed by such investors has often resulted in permanently impairing their capital rather than adding to it. Many cases can be pointed out where an investment fund of $500,000 has been reduced from ten to twenty per cent in the short period of ten years and this has hap- ]'2 I low to Invest Money Wisely pened when no undue risks have been taken and no ordinary speculation whatever has been indulged in. Of course, where an investor attempts to add to his income by investing a part of his principal in speculative stocks or bonds, the dangers of loss under certain conditions seem apparent enough. But when his entire effort has been directed to the conservation of his principal and he has consistently avoided investment in any stocks or bonds of a doubtful or speculative nature, it seems on the surf$e quite surprising that such losses should be incurred. But when we turn to the small investor whose capital is limited in amount, and whose securities are usually con- fined to only two or three issues, we find that the danger of loss in principal is even far greater. I have known of many instances where an investor with a capital of from two to five thousand dollars, after exerting the greatest possible care in placing his money safely and avoiding every kind of a speculative proposition, has found himself at the end of two or three years with a loss of from twenty to forty per cent and with no possibility of recov- ering this loss except by taking unreasonable risks. The kind of advice which is generally regarded as the most conservative for the investor who does not wish to risk his principal is the following: "Think first of your capital and pay no attention to the amount of interest return until the intrinsic value back of the investment has been thoroughly demonstrated. Confine your invest- ments to first mortgages in railroads or other successful undertakings which have back of them a heavy earning Selection of Investments 13 power and on which the interest has been earned for a long series of years at least three or four times over. Or, select municipal bonds which are backed by the credit of prosperous American cities and about which there is no doubt whatever of a permanent maintenance of high credit." Xow suppose an investor with a capital of $20,000 acted on the foregoing advice in the year 1902 and put half of his principal into Lake Shore & Michigan Southern Railroad 3 l /o% bonds and the other half into Xew York City 4% bonds. In the year 1902 he would have found that among railroad bonds there was nothing which stood higher than Lake Shore 3>^s. These bonds answered the test of security to the fullest extent. They had back of them an enormous equity in railroad property with great earning power, and for a long series of years the earnings had been sufficient to cover the interest on the bonds at least half a dozen times over. The issue was of such high standing that it became a savings bank- investment in New York and other Eastern states, and in every sense of the word was practically as secure as a government bond. As for New York City 4% bonds, nothing of higher type could have been selected in the municipal field. The credit of New York City was unsurpassed and the general strength of its obligations seemed quite equal in security to those of the United States Government. But where would this investor find himself today had he followed this advice ten years ago? In the case of the railroad bonds, he would find that his principal had de- 14 How to Invest Money Wisely preciated more than twenty per cent. In the year 1902 the Lake Shore 3^s sold steadily between 110 and 112. In the latter part of 1912 they were quoted at 86 and during this entire period of ten years they had been quite steadily declining from the high figures at the beginning of the decade. The record of the New York City bonds is somewhat similar. In this case the investor would find that over ten per cent of his principal had gone forever. These bonds Sold steadily well above 110 in 1902, but today are quoted considerably below par. In both of these cases the equity or strength back of the principal of these issues has been fully maintained during the past ten years. The earning power of the Lake Shore & Michigan Southern Railroad has greatly in- creased since 1902 and the margin of safety on the Z l /2% bonds has grown almost every year. The standing and credit of New York City has also been maintained and the assessed valuation of property is enormously greater today than ever before. But in spite of these facts the investor who had put $20,000 into these securities in 1902 would find himself today with his capital contracted to less than $17,500 with no apparent hope of being able to get this loss back within his lifetime. While it is true that a part of the loss on a bond like the Lake Shore 3^s will finally be recovered eighty years hence, when the bonds mature, yet at no time during the man's life would he be able to turn this investment into cash without accepting a very large part of this loss. Selection of Investments 15 It will thus be seen that the principle outlined for the safe investment of capital, as mentioned above, does not work out in practice. In fact, any sound method for the safe investment of funds must be planned on entirely different lines from that which is ordinarily stated. II Mistaken Investment Methods IT has often been said that it is far easier to make money than to save it. Thousands of investors, large and small, will attest to the truth of this axiom. For show me an investor, who, without spe- cial and expert experience, can safely and intelligently invest $50,000 or $100,000, and keep it safely and intelli- gently, invested, on a basis to yield normal rates of return, and not jeopardize his principal, and I will show you a hundred who are in constant danger of losing or seriously risking at least a part of both interest and principal. And in saying this I do not refer to the speculator, nor even to the "semi-investor" who seeks "a little more than the average return," but exclusively to the man, woman or institution who may be well satisfied with genuine safety of principal, combined with an interest yield of from 4% to 6% on the invested capital. As I intimated in the first chapter, one of the causes of investment loss is the adherence to some crude principle in investing money, which, while sound enough in itself, does not go far enough to offset the many pitfalls which confront the average person who wishes to set his money actively at work in good securities. The most conspicu- (17) 18 How to Invest Money Wisely ous of those investment principles which I would desig- nate as "crude" is that one which is based on the theory that only "high grade or first mortgage bonds, legal for savings banks," and a few high grade stocks of equal se- curity, so far as principal is concerned, should be included in a sound investment scheme. To show the unsoundness of this bare theory if taken by itself alone (and it is so taken in thousands of cases), I present on page 19 a concrete example of the ordinary method of "conservative" investment, as applied to a capital sum of about $100,000. The assumed date of this investment is 1902, ten years ago. I show the cost of the bonds selected at that time, the yield on the cost, the low value in 1907, the high value in 1909, and the value in the month of May, 1912. The investment scheme here presented is confined entirely to "high grade" railroad issues, most of them savings banks investments, and all recommended in the strongest terms as "seasoned" issues. As far as security of prin- cipal is concerned, nothing could be better ; there are enormous assets back of every one of the issues, and at the end of the decade, these assets were in every case much greater than at the beginning. And further than this, the sum is distributed in very small lots, showing an attempt at diversification. And yet, as the example shows, the outcome has been most unsatisfactory to the investor. Not only has the yield been low from the start (disregarding amortization, which would make it very much lower), but the holder has actually suffered n heavy loss in present capital value. At the low prices Mistaken Investment Methods 19 SOOOOOOOOOQOQ inooomooinmOino o O^ in_ ^ o^ TH" in" " o m co m m" m" Os_ CO_ co" TH" S g g 8 g 8 TH TH CO l~ l> TH" TH" ^jT rf rjT rjT 8 8 o o 3 o m m t> CO TH 8 CM CM +j in o 88 g TH_ o^ T-^ m cT m" o o o o o m m" m" m" m" m" m" i> co CM On o 5 O) rH -p cu g S^ 3 S " S > * r5 ^ ^ J3 *2 <^ I 1*^ C bo o -g o JJ (j ,J cu rH rH OS S I rH *-* ~o , Si * s CM ~ T3 jSs . en" cu cu CO en TH 3 Z c/r ^ x^ c *o ~ I CO ^ . "~^ ^ TH *j c/5 13 g f-a'^'E-^ 0^4, PH "u ^ rt O r~ ca cu o M PQ PQ $ JuS O O O 8 8 m m m m m in in m in 20 How to Invest Money Wisely of 1907 (the panic year) his principal showed a deprecia- tion of $16,600 or 18% ; at the high prices of 1909 (the best seen since the panic) he still had a loss of $5,450 or over 5 l /2% ; while at present prices he has a loss of $11,350, or Iiy 2 %. The truth is that the theory on which this man invested his money is not only inadequate for modern times, but unscientific and unsound. He supposed that in spreading his principal among many companies, in small lots, and diversifying it to all parts of the country, he was spread- ing his risk and keeping his eggs out of one basket. But as a matter of fact, all his eggs were in one basket and that basket was tied to one string, and is still so tied. He might just as well have put all his capital into one bond issue of the high grade seasoned class ; the result would have been essentially the same. In future chapters I shall attempt to point out some of the real principles which should be adopted in a safe and sane investment program. Ill Unsound Theories AS pointed out on the previous pages, the theory of investment followed in the example shown is not only inadequate for modern times, but unscien- tific and unsound. With the rapid and unusual changes in business enterprise and industry during the past quarter century the field for investment has not only broadened vastly, but has become immeasurably compli- cated. Where, in 1885, there were but few fields in which the careful investor could safely place his funds, with only half a dozen types of high class security issues, to- day there are many dozens of such. In those earlier days, money could be invested with safety, and on a satisfac- tory basis of yield (outside of real estate mortgages), only in Government issues of the United States, carefully selected bonds of States, Cities and Towns, and still more carefully selected issues of steam railroads. But nowa- days, not only has the field for government, municipal and railroad issues vastly broadened, but entirely new fields for safe and profitable investment have come into exist- ence. The change of manufacturing enterprise into cor- porate forms, and the consolidation into vast units of industrial undertakings of every type has enlarged th2 (21) -- How to Invest Money Wisely investment field within recent years to the extent of prob- ably ten billions of dollars in this one direction alone. The development of electrical power and light, with the growth and expansion of the great public utility under- takings of the country, has also broadened the field enor- mously in which capital can safely be set to work without danger to either principal or yield. The growth and ex- pansion in the use of the telephone; the opening up of natural resources; the increases in the possibilities of water power and water supply ; the growth in commercial use of gas and oil ; the increases in population which have steadily raised the values of utilities in our cities; all have opened new avenues for the safe investment of cap- ital which were not dreamed of a generation ago. And within the past ten years, the trend toward consolidation of retail businesses in many lines, including the remarka- ble growth of the mail order business, has brought into existence a new class of security issues of safety and promise. Furthermore, the steady increase of wealth throughout the American continent has constantly con- tributed to enlarged size and stability for institutions en- gaged in the business of banking and insurance, and many stocks of National and State banks, trust companies, safe deposit and insurance organizations have, within recent years, come to be classed among strong and desirable investment issues. It is probably largely because of the very multiplicity of these investment possibilities that the problem of safe selection of investments has become so difficult in modern times. No one but he who has made a careful study, Unsound Theories 23 not merely of particular investments, but also of general business conditions, can be regarded as qualified to select the best issues with entire assurance of safety. For the pitfalls are many and dangerous; and while, among all the classes of enterprise referred to above, money can be discriminatingly placed, the fact remains that danger stalks in every direction for the person who has not the facts at hand or who does not possess the experience to pick the wheat from the chaff. Thus, while one can safely select bond issues secured on trolley lines which are, for all practical purposes, "as good as gold," he can also lose his money by buying worthless trolley bonds or stocks. He can select "seasoned" railroad issues, and he can lose his money with great ease in this same field. He can buy industrial investments which will pay him handsomely; but he also has full opportunity to lose his all in this same type of security. If he goes in for bank or trust company stocks, he may fare well or he may do worse than any- where else ; and he can also find plenty of weak or bad municipal bonds as well as good ones. Because of the existence of so many pitfalls, many in- vestors adhere to the theory that it is still the wisest plan to stick exclusively to the few old line investments, such as municipals, governments, and the underlying bonds of railroads, and not attempt to go into the new and less mature investment fields. But against this theory stands the undeniable fact that the investor must attempt to conserve his full principal and at the same time get at least a fair return on his capital. Unless he be a very rich man, he cannot afford to allow all his capital to be 24 How to Invest Money Wisely concentrated in government issues, yielding 2 to 3 per cent, nor in high grade municipal bonds, which will return him but little more. If he selects a large propor- tion of underlying railroad bonds in order to bring his income up to a moderately higher plane, he cannot hope to secure an average yield of over 3% to 4 l /o per cent in any event. But there is a still stronger reason than this why he cannot afford to concentrate his capital entirely in securi- ty issues of this type. Such bonds, whether they be gov- ernments, municipals or railroads, often prove, when held over long periods of time, very unsatisfactory invest- ments indeed. As I pointed out in the first chapter, he who bought New York City bonds five or six years ago, finds himself in a very unenviable position with his hold- ings today. If he had bought English consols, French rentes, or the bonds of any strong government or strong municipality on this or any other continent, he would have fared the same. If he had selected underlying rail- road bonds, with enormous equities and vast earning ca- pacities back of them, he would have done no better Ten years ago, English consols would have cost him 98; to- day the same bonds are selling at 74 ; Illinois Central 3s, in 1899, sold at 96; now they are quoted at 75. Xo matter how carefully he had selected issues of this type a few years ago, he would today be facing a serious de- preciation in the value of his capital. IV Proper Principles for Diversifying Investments IX recent chapters I have been pointing out the mis- taken ideas regarding proper investment distribu- tion, which so many investors have followed to their sorrow in modern times. I shall now submit some constructive suggestions regarding scientific investment distribution and try to lay down some fundamental prin- ciples which all investors should recognize when placing their capital in bond and stock issues. There is a distinct divisional line running across the entire field of corporate investments. This line of de- markation does not follow any superficial division such as we find distinguishes a stock issue from a bond obliga- tion. A bond per se, is not always necessarily any better than a stock; nor is it sometimes as secure as a stock. Many stock issues are far superior in strength and value to many bond issues, and the mere fact that the bond is a mortgage, and that the holder thereof is legally entitle ! to a fixed return on the mortgage, will not of itself neces- sarily put him in a position of better security than that occupied by one who holds common stock in a corpora- tion or railroad which is not a mortgage and which has no prior claim on income. This is simply another way (25) l>tj How to Invest Money Wisely of saying that, after all, the real element back of the average security is the earning power or income produc- ing capacity of the property. A first mortgage on a rail- road which is earning little or no money is not in any sense so desirable as a common stock on a railroad or industrial corporation which is earning and paying a good dividend on that stock. The relative position of different securities in relation to earning power, results in dividing them into two great classes. These two classes are briefly defined as follows: 1. Securities, the investment values of which are be- \ond or above the influences of fluctuating earning power; and 2. Securities, the values of which are almost exclu- sively affected by changes in earning power. Among the former are such issues as underlying bonds of railroad systems on which, over a long period of years the interest has been earned many times over, and back of which there are vast equities which are of such size that no possible doubt could arise regarding the practi- cally complete security of the issue. Such are many of the bond issues secured on the Pennsylvania, the Illinois Central, the Chicago & Northwestern, the Burlington, the Lake Shore, etc. Preferred stock issues of some rail- roads are also to be regarded as in this class, although this does not generally hold true. Guaranteed stocks also are in many cases in the same general class as high grade seasoned bon 's and the higher grade preferred stocks. Guaranteed issues like Morris & Essex stock, Xew York. Lacka wanna & Western stock, and Pitts- Proper Principles for Diversifying Investments 27 burg, Fort Wayne & Chicago stock, are all issues of this type. The primary factor affecting the prices of this first class of securities is the money market. The price of a bond like the Lake Shore first 3^s or the Illinois Cen- tral 3y 2 s is not materially (if at all) affected by the changing results from year to year in the income of these properties. The price of Northern Pacific first 4s is not so affected. These properties might double their earn- ings within a given time and this fact would have no ap- preciable effect on the prices of these bonds. The same thing is true of the Union Pacific first 4s, the Pennsylva- nia Railroad underlying issues, or the underlying bonds or strongly guaranteed issues of the Delaware & Hudson, the Reading or the New York Central. Consequently, if the investor confines his selections to high grade issues of this type he need give little concern to changes and fluctuations in earning power. It will not hurt him if earnings on his particular property fall off quite radically ; and conversely, it will not help him if earnings rise very rapidly. Even should his particular property come upon evil days and default on some of its junior obligations his position will be practically the same. In the year 1908 the Erie Railroad failed to earn the interest on its junior bond issues and came perilously near a receivership, but the underlying bonds on the system, such as the old Erie Railway 4s and 5s, secured by first lien on the main line, were not affected in value or price by this condition of things. In fact, they were selling at better prices, when the company was so near bankruptcy, than they were two How to Invest Money Wisely years before, when the road was reporting a large sur- plus and paying a dividend on its first preferred stock. The reason for this was that, no matter what may have happened to the Erie system, the equity back of these particular issues was so heavy that troubles could never reach them. The Erie might have been reorganized in a very drastic fashion, and yet these mortgages could not have been disturbed. Consequently, they are in the first class mentioned above, and depend for their value, not on specific factors affecting the earnings or financial condi- tion of the Erie Railroad, but on the general money rate factor almost exclusively. To take a more extreme case. The Wheeling & Lake Erie Railroad has been in receivers' hands for several years, but the Lake Erie division bonds of this company sold higher in 1909 than in 1908 and have never declined in response to the fact that the company went bankrupt. The true line of demarkation between "high grade" issues, so called, and those of any other "grade" is the one we have indicated. The phraseology on the instru- ment has its place and meaning, of course; but no legal lore or high sounding phrases can give a bond value if its position in the income results of the property is not secure. If a given railroad is earning an average of $5,000 per mile net, and a bond issue on the property has the first claim on that income, the immediate question will be, how much of that $5,000 per mile is required to meet the interest on the issue? If $4,000 per mile is so re- quired, then the bond is in no sense "high grade;" for a 20 per cent decline in net receipts would wipe out all the Proper Principles* for Diversifying Investments 29 margin of safety. But if the amount required for interest is $400 per mile or less and the net earnings are $4,000 per mile, then the bond is removed entirely beyond the influence of changing earnings, and even a 50 per cent fall in net receipts would not jeopardize its position to any great extent. In fact, the road would have to go through an almost unheard-of period of bad results to affect the value of this issue. But sufficient has been said to indicate that any sound and rational distribution of investment funds must cover a broader field than that of the merely "high grade is- sues," so called. In brief, it should include not merely issues which are primarily responsive to the current rates for money and credit, but also such issues as are more di- rectly responsive to earning power. The latter type of securities can easily be included in a sound selection of investments without going into the field of speculation. It is not necessary for a man to buy speculative bonds or non-dividend-paying and doubtful dividend-paying stocks to get the benefit of improving earning power and grow- ing equities in railroads and other properties, which trans- pire over reasonable lengths of time. But it is necessary that he should invest to some extent in the types of se- curities which have a potential interest in the expansion of the property. If he buys an ordinary bond he has a limited interest only; if the bond is thoroughly seasoned and he has paid the prevailing rate for it, then there is no chance whatever of future benefit from expansion in values of the property; if the bond is low grade and not yet secure, then he is merely speculating. If, how- 30 How to Invest Money Wisely ever, he can make careful selections of securities which participate in some way in increasing earnings, either di- rectly or indirectly, then as the business and profits of the company grow, the value of his investment and the income on it will also grow. If he purchases, at the proper periods, stocks of railroads like the Illinois Cen- tral or the Pennsylvania, which have long records for steady payment of dividends, he may be able to put him- self in a stronger position to meet changing conditions in industry and in the money market, than if he confines himself to bond issues alone. It is just as reasonable that intelligent selections of high grade stocks can be made as high grade bonds. It would not have been wise for an investor seeking security of principal and per- manency of income to have bought Missouri Pacific stock or Toledo, St. Louis & Western preferred in 1908, merely because they were dividend payers and looked ''cheap," but there would have been no mistake at that time in buying Louisville & Nashville, Norfolk & West- ern or Southern Pacific stocks. While such stocks as the latter fluctuate to considerable extent and rise too high during periods of speculation, they have back of them enormous equities and growing earning power, and as this earning power improves from decade to decade, the equities and income of such stocks improve in logical ratio. The same principle applies to the selection of bond is- sues which are convertible into stocks. For example, should the Norfolk & Western Railway increase its net income during the next ten years in even half as great a Proper Principles for Diversifying Investments 31 ratio as it has during the past ten years, the common stock of the road will probably be paying a much higher dividend than it now pays and might be selling where Louisville & Nashville now does. In such a case the con- vertible 4 per cent bonds would sell in the same neigh- borhood as the stock, and before they were retired or called the holder could at any time convert into the stock and get the benefit of increased income. If, .on the other hand, the system should fail to increase its earning power, the bond would maintain its original value as a fixed 4 per cent investment. Of course, in throwing out these suggestions, I have not forgotten that many other factors enter into the in- vestment problem just as soon as we go outside the field of the issues which respond to the money market exclu- sively. And here it is that the question of selection comes in in the strongest way. Every convertible bond is not to be classed as desirable for investment purposes, and very few common stocks are. One of the vital matters to be borne in mind is that of location of the company in which the investor places his funds. Thus, even in confining himself to railroad is- sues alone, the investor should give due regard to the geo- graphical location of the different roads. Many rail- road systems are primarily dependent upon special types of industry for their success. Thus, roads like the Norfolk & Western, Chesapeake & Ohio, Kanawha & Michigan and Hocking Valley are to a preponderant extent dependent upon conditions in the soft coal indus- try for their stability and profits ; others, such 32 How to Invest Money Wisely as St. Paul, Rock Island, Northern Pacific and Burling- ton depend to large extent upon agricultural conditions in the West; still others, like New Haven, New York Central, Lackawanna, Long Island, and Philadelphia, Baltimore & Washington rely largely upon passenger business; while roads operating in the Southern states depend upon industrial conditions in that section for their earnings and dividends. A full discussion, however, of the question of invest- ment distribution takes us entirely outside of the railroad field. This is touched upon in the following pages. Applying the Principles BEARING in mind the two primary price factors already referred to, we are now in a position to discuss a more specific classification of invest- ments. For while all bonds and stocks respond to either the general price of money or credit, whether they are governments, municipals, railroad issues, public utility issues or other, or to more specific influences as revealed by earning power, yet the different types of undertakings cannot be measured by the same method of analysis. In other words, earning power of certain industrials may be affected by far different things than earning power of railroads; the income of public utilities may be affected by influences distinct from both those affecting railroads and industrials ; while the credit back of other issues, such as municipals and governments, must always require an analysis of its own. Without going into too extended a discussion of the subject, we will begin by enumerating the several types of corporate and other security investments which are gen- erally marketable in the United States. They can be classified as follows : (33) 34 How to Invest Money Wisely 1. Government and Municipal Issues: a. United States and foreign government bonds; b. State obligations; c. City and town obligations ; d. County bonds ; 2. Railroad Securities: a. Railroad bonds; b. Railroad guaranteed stocks; c. Preferred stocks ; d. Common stocks; 3. Public Utility Securities : a. Gas and electric light bonds and stocks; b. Traction bonds and stocks ; c. Water works and water power bonds; d. Telegraph and telephone bonds and stocks ; 4. Industrial Securities : a. Industrial bonds; b. Industrial preferred stocks; c. Industrial common stocks ; 5. Banking and Financial Institutions; a. National bank stocks ; b. State bank stocks; c. Trust company stocks; d. Title, guaranty, insurance stocks, etc. ; 6. Real Estate and Land Investments : a. Building concerns; b. Urban real estate issues; c. Agricultural loans, farm mortgages, etc.; d. Irrigation and developing companies. Included in the above classification are practically all the American corporation security investments worthy of the name. In each of the classes there are many is- Applying the Principles sues which respond exclusively to the prevailing rate for money, and are so well secured as to be immune from changes in trade conditions, ordinary political events, de- pressions, etc. But there are also in each class a vast number of issues which do, to more or less degree, re- spond to specific influences which are characteristic of their class alone. For example, take government and municipal issues. A large majority of municipal bonds in the United States are on a high investment plane; they are so well pro- tected by legislative enactment that only changes in the money rate and the general price for capital will affect their values. But this is not true in all cases, and there are many instances which can be named where municipal securities have defaulted or have depreciated greatly in price, as a result of over-expansion of municipal debts, land booms, etc. And in the field of government issues we have instances enough in very recent years of great changes in value resulting from specific influences. A decade ago, the bonds of the Russian government were being offered in New York at very high figures, while those of Japan went begging. But today Japanese bonds sell far higher and Russian bonds far lower than at that time. Mexican bonds a generation ago could not find any market in New York, but nowadays they are held by a large class of careful investors. Political changes have brought these things about, and thus, in judging securities of this particular type, the political factor is the most important thing to take into consideration. And when we consider the investment position of United 36 How to Invest Money Wisely States bonds, the legislative factor is of course the prime one. United States bonds do not sell twenty points higher than British consols because the credit of this country is better than that of Great Britain, but simply because our National Bank Act requires that these bonds be used for bank circulation. This law gives them a high value, which would at once be lost should the law be repealed. Left by themselves, United States bonds would respond to the general interest rate, or money-rate factor, just as British consols or French rentes do. In the railroad field, we have already discussed, in a brief way, the factors which influence the prices of or- dinary stocks and bonds. The earning power of the prop- erty is the primary influence here, and a study of this earning power leads us, of course, into a complete an- alysis of the properties themselves, their past record, their present management, the location of the roads, their alliances, the character of their tonnage, efficiency of operation, etc. Of course, political factors have their in- fluence with the railroads, just as crop conditions have, but the management of the business is the first thing to be considered. In industrial securities there are various questions, which affect different types of undertakings in different degrees. Industrial concerns are of so many different . that no general fixed rule for ascertaining values can be applied here as completely as in the case of the railroads. Character of management is of first impor- tance ; type of business is equally important. Past records, advantages over possible competitors, such as the posses- Applying the Principles 37 sion of raw materials, control over markets, protection by means of tariffs and other forms of monopoly, are the things to take into consideration. As in all other cases, the political factor comes in here for due consideration. Public utility securities are, in a sense, in a class by themselves. Unlike the railroad field, we do not first turn to earnings when examining a public utility enterprise. The main thing which interests us is the franchise. Knowing the nature of that, we then examine the location of the property, the population growth, the geographical advantages which may bear on future growth, etc. But we also consider very carefully the political side ; for a franchise, even when exclusive, may not in time be such a valuable thing after all. Taxation can squeeze the value out of a franchise if public sentiment so decrees. Securities of banking and financial institutions in mod- ern times have opened a wide field for investment. The records of growth in this line of business in the United States during the past twenty years are simply marvelous. When passing upon securities of this type, we of course consider the location, character of management, past record, general financial strength, alliances with other interests, etc. Real estate and land investments are in a class by them- selves, and in this field the pitfalls for the real investor are even more numerous than in other lines. Urban real estate loans carefully selected are among the very best of investments, while farm mortgages, unless selected with unusual care, are among the most dangerous. The latter can also be said of irrigation and development projects. How to Invest Money Wisely It will be realized when this very broad field of invest- ment is considered, that it offers wide scope for diversifi- cation. It also requires the greatest possible care and study in the matter of selection. But when proper prin- ciples are followed in the matters of distribution and selection, the reward is well worth the trouble. If an in- vestor confines his capital entirely to one class, such as railroad issues, even though he carefully distributes his risks and selects different types of bonds or stocks within this field, he may find that after all, especially during periods of panic or depression, his average values have declined, and his income has been cut down. But if he uses equal care, and also selects issues in one of the other fields, he will be surprised to find that after all his prin- cipal has been kept intact and his income maintained. To illustrate this take the panic period of 1907 and 1908. The man who held only railroad issues saw the earnings of all his properties drop perpendicularly, and the quota- tions on his stocks and bonds dropped with them. But if a portion of his principal had been in good public utility bonds, carefully selected, he would have been in a much stronger position. As the records show, while steam railroad earnings dropped frightfully during that period, the earnings of all the best public utility enterprises actu- ally increased. American Telephone & Telegraph re- ported the best results of its history during 1908; many lighting and gas companies in the centers of population did the same. The panic had no adverse effect whatever on their operations. Having briefly outlined the main principles of proper Applying the Principles investment distribution, I append below an example of how such principles might be applied in a limited way, to a fund of $100,000. Even when applied in this incom- plete way, the investor limits the risk to a very large de- gree, while putting himself in position to receive the benefit to some extent in the growth in value of equities : Group L Railroad Issues a. Bonds. Price. Cost. $5,000 Atchison Trans-Short Line 4s ............ at 94 $4,700 5,000 Illinois Cent, refunding 4s. ... ............. at 96 4,800 5,000 Lake Shore 4s .......................... at 93 4,650 5,000 Reading-Jer. Cent. 4s .................... at 98 4,900 b. Stocks. 5,000 Pennsylvania R. R. stock ................. at 122 6,100 5,000 Norfolk & Western stock ................ at 107 5,350 5,000 Kansas City Southern preferred .......... at 60 3,000 Group II. Industrial Issues a. Bonds. $5,000 Armour Real Est. 4^s .................. at 92 $4,600 5,000 du Pont Powder 4^s .................... at 85 4,250 5,000 Vir-Car. Chem. 5s ....................... at 100 5,000 b. Stocks. 5,000 Amer. Sugar preferred ................... at 120 6,000 5,000 Inter. Harvester preferred ................ at 120 6,000 Group III. Public Utilities a. Bonds. $5,000 Amer. Tel. & Tel. conv. 4s ............... at 110 $5,500 5,000 N. Y. Gas, El. Lgt. & Power 4s .......... at 88 4,400 5,000 Minn. Gen. Electric 5s ................... at 100 5,000 b. Stocks. 5,000 Laclede Gas stock ....................... at 105 5,250 5,000 Amer. Light & Traction pfd .............. at 105 5,250 Group IV. Municipals. $5,000 New York City 4J4s of 1917 or 1960 ...... at 103 $5,150 5,000 Denver City 5s of 1919 .................. at 102 5,100 5,000 Chicago City 4s .......................... at 100 4,000 (Prices are those of May, 1912.) 40 How to Invest Money Wisely The above scheme of investment embraces many ele- ments of strength and relatively few weaknesses. It will be noted that the distribution over the different groups is broad; about 35% being confined to railroad stocks and bonds, about 25% to industrial issues, about 25% to pub- lic utilities and about 15% to municipals. The subdivi- sions are also carefully worked out. In the railroad group due regard is given to location as well as to the type of the security itself. Thus, the seven issues included have their own distinct elements of strength, and are broadly distributed. One is located in the far West, being de- pendent upon conditions in that section ; another is se- cured on a standard property in the Central States (Illi- nois Central); a third on the great Vanderbilt lines; another on the anthracite coal industry; another on a soft coal road; another on the Pennsylvania system, and an- other on a road extending from Kansas City to the Gulf. No broader distribution, confined to the borders of the United States, could be made, as far as railroad issues are concerned. In the Industrial Group every security suggested is in- dependently based on distinct industries, located in par- ticular parts of the country, and responsive in large de- gree to distinct conditions. The same facts apply to the Public Utilities suggested, while the municipal sugges- tions are distributed between the East and the West. The advantages of an investment arrangement of this kind are not confined to the question of security of prin- cipal alone. While the fund is so distributed that the average value of the principal should be preserved in Applying the Principles 41 good and bad times, and where the higher class bond issue may tend to decline, increasing earnings will cause the stock issues to rise, and vice versa, the distribution takes into account the yield on the money also. The above list would represent a market cost at the present time of nearly $100,000 on which the net average yield would be about 5%. Had the fund been placed exclusively in rail- road or municipal issues, no greater assurance of the in- tegrity of the principal could have been secured, and the yield would probably not average over 4j4%- Compare this arrangement with the list of "high-grade" railroad bonds presented in Chapter II., showing a yield of less than 4%. Another advantageous feature in the above exhibit is that the issues are all listed and have a ready market. VI Further Application of Sound Principles I HAVE already emphasized the disadvantages of in- vesting all one's capital in long term "high-grade" railroad issues. These comments may bring forth some criticism, many people saying that if a bond is absolutely secure and there is no doubt of the principal ultimately being paid, then it matters not what the market value of that bond may be at any time prior to maturity. But in most cases it matters a great deal. Of course, if an institution, such as a savings bank, buys bonds with the positive intention of holding them until they mature, it need not be disturbed about temporary declines in market value ; but not so the average investor. I will ask any investor who reads this book, if he is altogether satisfied with his investment, made ten years ago, in Illi- nois Central 4s, then selling at 114^, and now selling at 100. If he is, then all I can say is that he is a very pecu- liar person. I know that I would not be satisfied. Another point that has been raised is that while some high-grade bonds have declined during the past ten years from the abnormally high prices of 1902, yet all have not, and it is therefore claimed that there is no reason to assume that this tendency towards lower market prices will continue during the decade to come. (43) 44 How to Invest Money Wisely Of course, all high-grade bonds have not declined. Those issues of comparatively short maturity, which in 1902 were selling in the neighborhood of their par value and below, have not declined. And they should not de- cline, because their redemption day is not far off. Take Baltimore and Ohio prior lien 3*^s. In 1902 they sold at an average price of about 91^2 ; now the same bonds sell at 93. They were high-grade ten years ago ; they are high-grade now. But during the decade the approaching maturity has been an increasing factor in steading their market price, and in spite of the world wide tendency for issues of much longer maturity to decline, these Baltimore and Ohio 3^s have advanced. They are likely to con- tinue their advance quite steadily during the next thirteen years, until they mature at par in 1925. Thus, for a 3 l /2 per cent "prime" railroad issue, there is probably little better than Baltimore and Ohio 3^s. In time, but not during the present decade, nor for a long time after, issues like C. B. & Q. 3^s, New York Central 3y 2 s, Lake Shore 3^2 s, etc., will begin to respond to the same special influence, and the day will surely come when these bonds will be most desirable investment pur- chases. But the fact must not be overlooked that before that day arrives, most of us will have been a long time dead. While high-grade bonds of short maturity, bearing low rates of interest, are usually most attractive investments, those bearing higher rates do not look so attractive. A man buys a 6 per cent bond, maturing in ten or twelve years, and pays 115 for it. At this price the yield, as- Further Application of Sound Principles 45 suming that the bond will be paid off at par, would be about 4% per cent per annum. The investor must re- member that the premium of 15 per cent which he has paid, will never come back to him, and that he must de- duct it from the interest he receives from year to year. But this is, at best, a most unsatisfactory situation, and the average investor will find it much more desirable to have a 4 per cent bond at a price below par, and yielding 4 l /4 per cent, than one on which he must set aside each year a portion of his interest for depreciation of his principal. And then, many investors are prone to overlook the necessity for amortizing their investments in this way. At the beginning, there seems no necessity, as the bonds have a long time to run, and they therefore simply spend their interest each year, until, as the bond nears maturity, they are brought up with a round turn by the fact that the market price has slumped forever, and they see that they have really been living on a part of their principal without realizing it. An illustration of this fact was brought to my attention a short time ago. A certain in- dividual inherited an estate amounting to about $40,000, all being invested in high-grade railroads, governments and municipals. The investments had been made about twenty years ago, and all the issues had paid their inter- est regularly. The owner of the bonds had lived on his interest and had paid no attention to the fact that nearly all the issues were steadily nearing maturity. As it hap- pened, every bond on the list (and there were over twenty of them) will mature prior to 1928 and some mature 46 How to Invest Money Wisely prior to 1916. Also, every issue was bought at a pre- mium, some as high as 122. The list looked very attractive, but when the heir of this estate came to have the securities appraised, he found that its value had shrunk from over $40,000, within the twenty year period, to about $35,000, and that between the present time and maturity, it would shrink further to about $33,000. Thus, the original owner had not only been spending all his interest, but in the period named had consumed $5,000 (\2 l / 2 per cent) of his principal also. Now, if this fund had been invested in bonds of equal security, bearing lower rates of interest, and some real attempt at diversification had been made, the owner would never have made the mistake of living on his principal in this fashion. To show that my contention regarding the steadily de- clining tendency of long term, high-grade bonds has not been confined to a few issues during the past ten years, I present on page 47 a price comparison from 1902 to date, embracing fifteen representative long term high-grade railroad issues. Thus, an original investment of $16,235.00, on which the yield per annum in interest was $575, had depreciated no less than $1,985, or over 12 per cent, within the period named. The total amount of interest received in the ten years was $5,750, but in order not to encroach on his principal the investor would have to deduct $1,985 from the interest received, leaving income of but S^.765 for the decade, or less than 2y 2 per cent per annum. Further Application of Sound Principles 47 Prices Sept. Title of bond : Due 1902 1912 Allegheny Valley 4s 1942 108 100 Atch. gen. 4s 1995 103 97 Balto. & Ohio 4s 1948 102 96 Cent, of N. J. 5s 1987 136^ 118 C. B. & Q. 111. Div. 3 l / 2 s 1949 101 84 C. M. & St. Paul gen. 4s 1989 113 97 Chic. & Nor. W. 3 l / 2 s 1987 104 84 111. Cent. 1st 4s 1951 114^ 101^ 4 111. Cent. St. L. Div. 3s 1951 87 l / 2 72 l /> Lake Shore 3^s 1987 107 88 Lehigh Valley 4^s 1940 117^ 104^ N. Y. Cent. 3^s 1997 106^ tt l / 2 Nor. Pacific 4s 1997 104^ 98 Union Pacific 1st 4s 1947 104^ 99 West Shore 4s 2361 114 98^4 The net result of an investment list of this kind (ex- pressed in $1,000 bonds) if made ten years ago, is shown by the table below. Cost Due 1902 Allegheny Valley 4s 1942 $1,080.00 Atch. gen. 4s 1995 1,030.00 Balto & Ohio gen. 4s 1948 1,020.00 Cent, of N. J. 5s 1987 1,365.00 C B. & Q. 3^s 1949 1,010.00 C. M. & St. Paul 4s 1889 1,130.00 Chic. & N. W. 3^s 1987 1,040.00 111. Cent. 4s 1951 1,145.00 111. Cent. St. L. 3s 1951 875.00 Lake Shore 3^s 1987 1,070.00 Lehigh Valley 4^s 1940 1,175.00 N. Y. Cent. 3^s 1997 1,065.00 Nor. Pacific 4s 1997 1,045.00 Union Pacific 4s 1947 1,045.00 West Shore 4s 2361 1,140.00 Selling Value Loss in 1912 Principal $1,000.00 $80.00 970.00 60.00 960.00 60.00 1,180.00 185.00 840.00 170.00 970.00 160.00 840.00 200.00 1,017.50 127.50 725.00 140.00 880.00 190.00 1,045.00 130.00 855.00 210.00 980.00 65.00 990.00 55.00 987.50 152.50 Totals $16,235.00 $14,250.00 $1,985.00 48 How to Invest Money Wisely It should be remembered that this is not an extreme case. Nearly all the issues included in this list carry either 3% or 4 per cent. If we made up such a list of 5 and 6 per cent bonds of the same type of maturity, security, etc., the depreciation would be much greater. I shall next present some examples of results where the factor of maturity is taken into consideration in an intelligent way. VII The Factor of Maturity in Bonds TAKING into consideration the general principles for distributing investments which we have al- ready discussed, it may be wise to present some examples showing the advantages which could have been gained by applying these principles, even in a limited way, ten years ago. To select an intelligent investment list of bonds in the year 1902 was no easy matter. All bond issues were then ranging at high prices, as there had been a steady ad- vance in quotations for a period of four years, and the world's rates for money had held at low figures for more than half a decade. This was the time when all the really high grade Z l / 2 and 4 per cent bonds of long maturities were selling far above par, and to the average man it seemed pr.actically impossible to select bonds for perma- nent investment without paying premiums of from five to fifteen points. Thus, it was a period when the importance of selecting bonds of relatively short maturities applied with particu- lar force. But, as shown by the examples below, even at that time one might have selected good bonds which, dur- ing the ten years following, have continuously ranged at (49) 50 How to Invest Money Wisely firm prices and are today quoted at better figures than when the purchases were made. The possibility of this is illustrated by Example No. 1, below. Example 1. Railroad Issues. Price Price Jan., 1903 Jan., 1912 Atch., T. & S. F , East. Okla. div. 4s, due 1928 94 96^ Balto. & Ohio, S W div S^s, due 1925 89 91 C B & Quincy coll 4s due 1921 95 98 Col & So first 4s due 1929 93 97 Houston & Texas Cent. 4s. due 1921. . 93 95 In all the above cases it will be noted that the prices of January, 1912, were higher than those recorded at the close of 1902. And this fact is chiefly due to the ap- proaching maturity of the issues. It may be true that some of these bonds have improved in actual investment position, and intrinsically are stronger than they were ten years ago, but nevertheless, had they been issues of long maturity, they would today, in practically all cases, be selling at lower figures. The only year in which any material decline has been shown in these issues from the average prices of 1902 and 1903, was in 1907, when, in common with every type of bond, there was a temporary slump during the panic days. We might present an illustration of the same kind re- garding public utility issues. It was much more difficult ten years ago to select good public utilities than it is to- day, but the following five bonds will serve to illustrate the point. The Factor of Maturity in Bonds 51 Example 2. Public Utility Issues. Price Price Jan., 1903 Jan., 1912 Detroit City Gas 5s, due 1923 96 98 Cleveland, Elyria & W. first 5s, due 1920 95 98 Cleve., Painesville & Eastern first 5s, due 1916 96 100 East St. Louis & Sub. coll. 5s, due 1932 96 96^ Houston Electric first 5s, due 1925 96 99 As in the case of the railroads, all good first liens on public utilities were in 1902 selling at relatively high prices, and this was especially true of those having long maturities. But nevertheless, there were some issues, such as the above, which would have stood a strong in- vestment test, and which, because of the approaching maturities, were pretty certain to enhance in value during the ensuing years. The same test could be put to other types of bonds with the same general result. But the average investor, while interested in being shown what he might have done a decade ago, is naturally more interested in the vital question of what may be the wise thing to do at the present time. I therefore sub- mit below lists of good railroad and public utility bonds of relatively short maturities and which can be bought at or under par. It may be pointed out that the present (1912) appears to be a far more opportune time for properly arranging investment lists than has been the case for a good many years. Prices of all investment issues are low today, as compared with earlier years, and while 52 How to Invest Money Wisely it may be that we will not see very much higher prices reached for some time, yet selections can clearly be so made that full principal can be maintained, and in some cases, income can be increased. From the list below the investor who is ultra conservative, and wishes to take no speculative risks whatever, can select absolutely safe is- sues, while the investor who, making the safety of his principal his first thought, wishes to get the benefit, to a certain extent, of enhancement in earning power of the properties covered, during the years to come, can add other issues of more speculative characteristics. The following list of thirty-five standard representa- tive railroad bonds affords considerable scope for intelli- gent investment selection. As will be noted, not a single bond in this list is quoted at a premium, and some of the issues are selling well below their par values. They are all bonds of relatively short terms, most of them matur- ing within twenty-five years. As for the actual standing and security of these issues, a brief examination of the facts will show how strong they all are. For example, the Eastern Oklahoma 4s of the Atchison system are a first lien on 480 miles of road at $20,000 per mile; they are a direct obligation of the main system, and for the full ten years have been protected by a very heavy margin of safety. The Brunswick & West- ern 4s are an underlying lien of the Atlantic Coast Line Railroad, are secured by first mortgage at less than $9,000 per mile, and have been assumed by the parent company. The Silver Springs, Ocala & Gulf 4s are also an underlying assumed bond of the Atlantic Coast Line The Factor of Maturity in Bonds .">:! Railroad Bonds. Price Sept., 1912 Atchison (East Okla. div.) first 4s, due 1928 96 Brunswick & Western gtd. first 4s, due 1938 95 Silver Springs, Ocala & Gulf gtd. 4s, due 1918 97 Baltimore & Ohio prior lien 3^s, due 1925 91 Baltimore & Ohio Pitts. Jc. & M. D. 3^s, due 1925. . . Pittsburg & Western first 4s, due 1917 97 C. B. & Q. Nebraska Ext. 4s, due 1927 98 Chic., Rock Isd. & Pacific refd. 4s, due 1938 87 Chic., Rock Isd. & Pacific col. Tr. "P, v due 1918 C., M., St. Paul & Omaha cons. 3>^s, due 1930 91 Colorado & Southern first 4s, due 1929 94 Cinn., Ind., St. Louis & Chic, first 4s, due 1936 96 New York, Lack. & W. Term. & Imp. 4s, due 1923. ... 98 Del. & Hudson 10-year conv. deben. 4s, due 1916 98 Denver & Rio Grande first cons. 4s, due 1936 * 86 Rio Grande Western first trust 4s, due 1939 82 St. Paul, Minn. & Man. cons. 4s, due 1933 98 St. Paul, Minn. & Man. Montana Ext. first 4s, due 1937 Carbondale & Shawneetown first 4s, due 1923 95 Long Island R. R. first cons. 4s, due 1931 95 Missouri Pacific trust 5s, due 1917 Missouri Pacific first coll. 5s, due 1920 97 Central Branch Railway first guar. 4s, due 1919 92 Lake Shore & Mich. So. deben. 4s, due 1928 92 Lake Shore & Mich. So. deben. 4s, due 1931 92 Michigan Central deben. 4s, due 1929 88^? Pennsylvania R. R. conv. 3J^s, due 1915 97>^ Sunbury & Lewistown first 4s, due 1936 97 Pennsylvania Company guar. 4s, due 1931 97 Seaboard Air Line Atl.-Birmingham first 4s, due 1933. . 88 Southern Pacific Co. conv. 4s, due 1929 94 Central Pacific guar. 3^s, due 1929 91 Houston & Texas Central gen. 4s, due 1921 95 South Pacific Coast first gtd. 4s, due 1937 96 Oregon Shore Line gtd. ref. 4s, due 1929 .">4 How to Invest Money Wisely Railroad and are a first mortgage at less than $8,000 per mile. The Pittsburg & Western first 4s are an underlying lien on the Baltimore & Ohio system, are limited to only $3,000 per mile, and are provided for in one of the re- funding mortgages of the Baltimore & Ohio. The Cin- cinnati, Indianapolis, St. Louis & Chicago first 4s are an assumed bond of the Cleveland, Cincinnati, Chicago & St. Louis system, and are very high grade. The Carbonclale & Shawneetown first 4s are a divisional lien of the Illi- nois Central, and are provided for in the latters St. Louis Division mortgage. The Central Branch Railway first 4s are one of the smaller underlying issues of the Missouri Pacific system and are absolutely secure. The Sunbury & Lewistown first 4s are an under- lying divisional issue of the Pennsylvania system. Houston & Texas Central general 4s are a divisional bond of the Southern Pacific and the Oregon Short Line guar- anteed refunding 4s are secured by valuable collateral of Union Pacific. In fact, every one of these issues enjoys a high investment position, and they are all rated either "Aaa" or "Aa" in "Moody's Analyses of Railroad Investments." Of course there are many other good railroad bonds of short maturity, and with equal strength, which might be included in a list for investment selection. But the above have the additional merit of being marketable, and with selling records back of them which add to their attractive- ness. In addition to such bonds as these, we find in the railroad field a multitude of equipment issues, most of which mature serially in from one to fifteen years. In The Factor of Maturity in Bonds 5."> any important investment list, many such short term is- sues can be wisely included.* But the above list covers railroad bonds only. There is the wide field of public utility corporation bonds yet to be referred to. I append below a limited list of such, which have the same characteristic of near-by maturity. Public Utility Bonds. Prices 1912 Chicago Railways Co. first 5s, due 1927 100 Cleveland Railway first 5s, due 1931 100 Cleveland, Painesville & Eastern first 5s, due 1916 99 Danville St. Ry. & Light first 5s, due 1925 99 Grand Rapids Railway first 5s, due 1916 99 Houghton County St. Ry. first 5s, due 1920 97 Illinois Central Traction first 5s, due 1933 94 Lake Shore Electric cons. 5s, due 1923 95 Mil. Elec. Ry. & Light ref. and Ext. 4^s, due 1931... Omaha & Council Bluffs Ry. & Bge. first 5s, due 1928. . 98 Portland (Ore.) Ry. first and ref. 5s, due 1930 99 Wheeling Traction Co. first 5s, due 1931 96 Altoona Gas Co. first 5s, due 1932 97 Detroit City Gas Co. 5s, due 1923 100 Houghton County Elec. Light first 5s, due 1927 96 Oklahoma Gas & Electric first 5s, due 1929 97 Portland (Me.) Electric Co. first 5s, due 1926 Amer. Tel. & Tel. coll. 4s, due 1929 91 Pacific Tel. & Tel. coll. 5s, due 1937 100 The foregoing list is shorter than that shown for the railroads and of course the security of some of the issues *A later chapter discusses the characteristics of short term notes and equipment issues. 56 How to Invest Money Wisely is not so high. But it is less easy to select a large line of public utility issues of great strength and which sell ma- terially below their par value. Most public utility bonds carry 5 per cent interest, and the majority of the strong- est ones of course sell either close to their par value or at a premium. But, as in the case of all other bonds, those issues whose maturity is not too far away, are, other things being equal, the most desirable investments. PART TWO INVESTING FOR PROFIT VIII Taking Advantage of Potential Possibilities THE term, "investing for profit," as here used, should be construed as meaning any method of investment where the motive is not wholly confined to securing a fixed return on the principal originally invested, but also takes into consideration the possi- bilities of increase in both interest and principal as the time goes by. Thus, the man who buys a stock, for ex- ample, like Baltimore & Ohio, on the theory that in due course the dividend rate will be increased and conse- quently the market value of the principal enhanced, is to be placed in this class. Such a man is to a certain extent speculating on the future, although if his judgment is sound, and his investment selections made at the proper periods, he is pretty sure to meet with a fair measure of success. For investing of this character, the ideal security is usually the common stock of a good railroad. It is true that sometimes preferred stocks, and certain types of bonds, such as convertible issues, can be selected for oper- ations in this field, but here the opportunities are neces- sarily limited. If it is determined to select a preferred stock, one must usually be found which at the time is (59) GO How to Invest Money Wisely either not paying its full dividend, or is earning only a moderate margin above the dividend requirement. Under ordinary conditions, there cannot be much hope of a steady and large advance in an issue of this type which is already paying its full dividend rate and standing on a high investment plane. In other words, the limitation of both dividend and value is fixed, and beyond a certain point little or no "profit" can be secured on such an issue. It is true, of course, that in times of extreme de- pression or of panic, many attractive purchases can be made in the preferred stock field, as even the highest grade issues of both stocks and bonds then generally range well below normal values. But ordinarily, such schemes of investment must be mainly confined to com- mon stocks. When we discuss the investment of funds in common stocks, we are naturally bordering pretty closely on specu- lation, even though it may be speculation of an extremely conservative type. But any one familiar with the subject will realize that there are many standard railroad stocks in the market with long dividend records back of them which can fairly be classed as sound investments. And in the following exhibit I have selected a number of representative common stocks of railroads, the majority of which have been steady dividend payers for many years, and which are in large part held by people who never "speculate," and buy simply for the return on the money rather than in the hope of unusual appreciation in price. A rational investment distribution plan would to a large extent offset the dangers involved in confining one's entire capital to one or two issues. Potential Possibilities 61 It will be seen from this table that anyone placing a given sum in equal amounts in the twenty stocks listed, at the high prices which prevailed ten years ago, would have done exceedingly well, and in that time would not only have materially increased his income, but added something to his principal as well. Of course, this list includes not only the best issues which could have been selected in 1902, but also includes those active stocks which, in some cases, may not have looked very attractive at that time. By making up a list on this basis, we show that even without exceptional discrimination, an investment fund spread widely over the railroad common stock field, would not have faired so badly. If we assume that an investor purchased 100 shares each of the following stocks at the highest prices prevail- ing in the boom year 1902, he would have invested in all, about $321,900. The total net return at the dividend rates then prevailing would have been $9,750 a year, or a little over 3 per cent. At the high prices of 1911 (after nearly ten years), in spite of the diverse fluctuations of the different stocks some falling and some rising his cap- ital would have amounted to $351,100, and his dividend return, $15,800, or nearly 5 per cent on the original amount. At average prices of April 1, 1912, his invest- ment would amount in principal, to $332,600, and his re- turn this year would be $15,700. On the face of this exhibit it would seem that any investor who had followed this course ten years ago would have done very well indeed. In that time, al- though he had witnessed some extreme declines during 62 How to Invest Money Wisely Twenty Representative Common Railroad Stocks (Ten Year Record). 1902 High cost Atchison $9,675 At. Coast 18,350 B. & 11,575 B. R. & P 12,800 Can. Pacific 14,525 C. R. R. of X. J . . . . 19,800 Ches. & 5,750 C. M. & St. P 19,875 Chic. & X. W 27,100 Del. & H 18,450 D., L. & \V 27,700 Great Nor 20,300 111. Cent 17,350 Leh. Valley 7,700 L. & N 15,950 N. Y. Central 16,900 Nor. Pacific 21,650* Penn. R. R l/.OOO So. Pacific 8,125 Union Pacific 11,325 $321,900 Div. rate 1911 Div. rate Div. Apr., 1912 rate % High value % Value % 4 $11,675 6 $10,850 6 3 l / 2 13,925 6 13,900 7 4 10,975 6 10,600 6 4 12,600 5 10,500 5 5 24,700 10 23,350 10 8 32,000 12 36,000 12 1 8,675 5 7,825 5 7 13,350 7 11,000 5 7 154)50 7 12,200 7 7 17,500 9 17,125 9 7 57,000 20 56,000 20 7 14,000 7 13,350 7 6 14,700 7 13,175 7 18,700 10 16,700 10 5 16,000 7 15,625 7 5 11,550 5 11,350 5 7 13,800 7 12,300 7 6 13,000 6 12,450 6 12,650 6 11,200 1 4 19,250 10 17,100 10 $351,100 $332.600 the panic of 1907 and during other general market re- actions, yet the result shows a net increase up to last April of $10,700 in principal, and an enlargement of an- nual income from $9,750 to $15,700. * For 1904. Potential Possibilities 63 But this is not by any means the whole story. -As a matter of fact, any investor who had followed this course would have fared far better than this, as the following facts show. SPECIAL BENEFITS RECEIVED. More than half the above railroads have, since 1902, accorded their stockholders special benefits in the nature of extra dividends, subscription rights, stock bonuses or "melons," and these benefits have naturally added to the attractiveness of the stocks as investments. For example : In 1905, the Atlantic Coast Line paid an extra dividend of 25 per cent, of which 20 per cent was in "scrip" and 5 per cent in redeemable certificates, since paid off; in 1906, the Buffalo, Rochester & Pittsburg declared a 25 per cent dividend in the stock of the Mahoning Invest- ment Co., thus divorcing its coal properties ; in 1908, the Canadian Pacific gave its stockholders the right to sub- scribe to the extent of 20 per cent of their holdings to new stock at $120 per share, and in 1911 gave the right to subscribe at $150 to new stock to the extent of 9 per cent of their holdings ; Chicago & Northwestern gave its stockholders subscription rights to take new stock at par in both 1907 and 1910; Chicago, Milwaukee & St. Paul accorded the same privilege to its stockholders in 1907 ; Great Northern in 1906 paid a dividend of 100 per cent in the Great Northern Ore Certificates and also gave sub- scription rights at par to the extent of 40 per cent in new stock ; Illinois Central in 1907 gave subscription rights to its stockholders for new stock at 115; Delaware, Lacka- 64 How to Invest Money Wisely wanna & Western in 1909 gave its stockholders a 15 per cent stock dividend, and permitted them to subscribe at par to the stock of the Delaware, Lackawanna & Western Coal Co., which now pays 10 per cent dividends ; Lehigh Valley in 1911 gave its stockholders the right to subscribe to the extent of 50 per cent of their holdings to new stock at par, and also declared an extra dividend of 10 per cent in the stock of the Lehigh Coal Sales Co., which already has sold above $240 per share ; New York Central gave its stockholders the right to subscribe to new stock at par in 1910 ; Pennsylvania gave similar rights to its stockholders in both 1909 and 1910; Southern Pacific in 1907 gave its common stockholders the right to subscribe at par to its 7 per cent preferred stock, which was called for payment at 115 in 1909, the stockholders being given the privilege of converting into common, or into 4*/2 per cent bonds, with $20 in cash on each share; Union Pacific in 1907 gave its stockholders the right to subscribe to the extent of 25 per cent of their holdings to convertible bonds at 90. Thus, without taking the space in this chapter to work out the actual values received during the past ten years by these stockholders, aside from ordinary dividend pay- ments, it is easily realized that holders of such stocks have been able to secure, on the average, far more than 6 per cent on their money, and today are the owners of a principal sum which has increased much more than the foregoing table indicates. This result, it will be seen, would have been accom- plished by anyone who followed the plan of investing in equal amounts in all of these standard common stocks. Potential Possibilities 65 without any particular discrimination or selection. If scientific principles had been followed in the matter of selection and the investment confined to eight or ten of the strongest and most promising issues at that time, the net outcome would have been even more favorable. While at the present time, possibilities which were present ten years ago in the railroad common stock field, are few and far between, yet intelligent selection of issues in a plan of "investing for profit" can still undoubtedly be made not only in the railroad but also in the industrial and public utility fields. IX Investment Cycles IN the last chapter I presented an exhibit of a ten- year investment in twenty representative common stocks of American railroads, demonstrating that if purchases were made of equal amounts of these stocks at the highest prices reached in the year 1902 (which, in a general way, was the top of the boom period which set in in 1897), the purchaser would today have a considerable increase in his principal, and, during the entire decade, including the extra dividends, "rights" and other benefits which have been disbursed, would have re- ceived a return averaging well above 6 per cent on the total investment. When it is realized that during the past ten years we have been through a panic period and all sorts of things have occurred to affect railroad stock values adversely, such as poor crops for two years, anti-railroad legislation, aggressive "trust-busting," rising cost of operation and declining or horizontal freight and passenger rates, it will be seen that investments in good common stocks of rail- roads are really pretty good things to have as permanent propositions. For at no time since 1902 has there devel- oped a business situation or period where it could be as- (67) 68 How to Invest Money Wisely serted that the railroads have been exceptionally benefited. It is true that the country has grown steadily enough, but so has capitalization grown, and fixed charges today are relatively much higher than they were in 1902. But while it is interesting to see how investors in rail- road common stocks have fared when they have bought issues simply on their individual merits and without re- gard to general business or investment conditions, and have paid no attention to the effect on values of recurring cycles of prosperity or depression, a far more interesting and useful study is to ascertain how those have fared who have given proper attention to those general or fun- damental factors which so directly affect security prices over reasonably long periods. One of the main things for every investor to do is to carefully study the funda- mental business trend, and endeavor to ascertain the pe- riods when investments should be most wisely purchased and when they should be sold. For there are times when it is clearly foolish for an investor to buy average stocks or bonds, and of course there are other times when the investor is foolish if he does not do some realizing this latter being particularly true of stock investments. To illustrate. The year 1902, at the crest of the busi- ness and speculative boom, was not a time to buy stocks, but it was a time to do some liquidating. Conversely, the year 1907, after the October panic, was no period for persons to liquidate in, but it was a splendid period for investing. And for six or eight months after the panic, the investment "bargain counter" was daily dis- played, and he was a vorv foolish man who. having the Investment Cycles 69 necessary capital, hesitated to buy good, well-tested se- curities at that time. Certainly, as far as my position went, for the whole period from October, 1907, to the middle of 1909, I was steadily recommending the pur- chase of good dividend paying stocks, and well secured short term bonds. Returning to our illustration in the last chapter, let us take this same list of twenty representative railroad stocks and show what the result would have been to date, in the case of a man who, in addition to the study of intrinsic values, gave proper attention to investment cycles. This man would have clearly recognized the period following the panic as one for making investments aggressively. I present below a table showing the cost of 100 shares of each of the twenty stocks, if purchased on or about Jan- uary 1, 1908 (after the panic had subsided and confi- dence was being restored), and also the values of the same stocks on or about January 1, 1910, or two years later ; and the recent values. This exhibit shows how well the investor has fared who, during the past four years has taken into considera- tion the general business trend as well as the specific worth of the properties themselves. It will be seen that an original investment of $239,100 in January, 1908, rose in value to $326,400 by the end of 1909 (or within two years' time), while up to last April the value had been still further increased to $338,650, and the holder is now receiving in dividends something more than 6y% per cent on his original investment. In other words, his principal 70 How to Invest Money Wisely has appreciated over 40% within about four years, and his dividend return has been proportionately enlarged. Value Jan., 1908 Atchison $6,900 At. Coast 6,850 i Bait. & Ohio 8,100 'B. R. & P 7,500 Can. Pacific 15,400 C. R. R. of X. J... 16,500 Ches. & Ohio .... 3,000 C. M. & St. Paul.. 10,425 Chic. & X. W 13,550 Del. & Hud 14,750 D. L. & W 42,000 Great Northern . . 11,600 Illinois Central . . . 12,300 Lehigh Valley .... 10,600 L. & X 9,125 X. Y. Central 9,025 Xor. Pacific 11,750 Penn. R. R 10,90:J So. Pacific 7,125 Union Pacific . 11,700 Totals $239,100 Value Value Present Jan., 1910 April, 1912 Div. Rate $12,400 $11,000 6% 13,600 14,150 7 11,850 10,700 6 10,600 10,500 5 17,700 24,500 10 22,900 38,000 12 5,775 8,000 5 15,100 11,200 5 18,400 14,400 7 18,125 17,500 9 56,000 55,000 20 14,750 13,400 7 14,900 12,900 7 10,900 16,500 10 12,650 15,800 7 12,700 11,300 5 14,325 12,400 7 13,225 12,500 6 12,100 11,500 6 18,400 17,400 10 $326,400 $338,650 But in addition to this, other benefits have accrued. Since the opening of 1908 the Canadian Pacific stock- holders have twice received valuable "rights ;" in 1910, the Chicago & North Western stockholders received "rights ;" in 1909, the Delaware, Lackawanna & Western stock- holders received a 15% stock dividend with privilege to Investment Cycles 71 subscribe to the stock of the new Coal Sales Co.; the Lehigh Valley stockholders received "rights" of the same kind last year, and also stock of a Coal Sales Co., which is now selling above $240; both Pennsylvania and Xc-w York Central have given their stockholders subscription rights since the opening of 1908; etc. So that, as a matter of fact, holders of these stocks have fared a great deal better since the date of purchase than the mere quotations indicate. But even though the holding of all these stocks which we assume were bought in the beginning of 1908 have rewarded the investor so handsomely, would it have been the very wisest judgment to have kept them all until this time? Was not the end of 1909 a period when consid- erable liquidation could have been wisely undertaken? Undoubtedly. Conditions at the end of 1909 were such that a very severe reaction in general business seemed in- evitable. The recovery in values had been so pronounced after the panic and the period of speculation in many lines had gone so far, that it did not require much shrewdness to see that security values had, as a rule, reached their highest for a considerable time to come. For the pure speculator, therefore, this was clearly a period when sales should take the place of purchases, and wise "bulls" should switch to the "bear" side of the market. But how about the stock investor ; the man who makes it a rule to pay for his holdings and never sell what he does not own ? The proper thing for him to have done was to sell those issues which were quoted clearly above their asset values, and keep those which had the surest potential value for How to Invest Money Wisely the future. Acting on this theory, the investor would have liquidated the following from the above list: Atchison common, then selling at about 124; Baltimore & Ohio, then selling at about 118; St. Paul common, then selling at about 151; Chic. & N. Western, then selling at about 184 ; Great Northern, then selling at about 147J^ ; Illinois Central, then selling at about 149; New York Central, then selling at about 127; Northern Pacific, then selling at about 143. There were good reasons at the end of 1909 and the opening of 1910 for selling all of these stocks at the prices then prevailing. Atchison common was paying out in dividends all that was justified, and the issuing of con- vertible bonds clearly indicated that the road would not be able to further expand its dividend rate for a good many years. Therefore, 124 was a pretty full price for the stock. Baltimore & Ohio was suffering from the freight rate situation, and it looked as though the main- tenance of even 6% would be very doubtful during the following year ; St. Paul was spending double its original provision on its Puget Sound extension, and the 7% divi- dend was even then in jeopardy; Chicago & North West- ern was selling abnormally high for a 7% stock, even for a bull market ; Great Northern and Northern Pacific were ranging at prices not justified by the outlook, and New York Central was clearly paying too high a dividend. On the other hand, the investor would have been fool- ish to have disposed of many of the remaining stocks on the list, even though a much lower stock market seemed Investment Cycles 7:! to be in sight. The asset value of Atlantic Coast l^ine was far above its market price; Buffalo, Rochester & Pittsburg seemed to have turned the corner and was en- tering a more satisfactory period ; Canadian Pacific had a demonstrated asset value of far above 200 even at that time, and larger dividends seemed assured for the near future; Central of New Jersey promised to be another Lackawanna, and it would have been foolish to sell it at 230; Lehigh Valley was just entering upon its period of recent prosperity; Louisville & Nashville was steadily adding to its assets without increasing its charges, while both Southern and Union Pacific promised to maintain their strong positions, in spite of temporary set-backs in crops or general business, which might have been ex- pected. Now, where an investor, in close touch with general business conditions, had done approximately what I have suggested above, and had liquidated at the end of 1909 those stocks which ought to have been liquidated, and kept those which I have enumerated above, he would to- day be in a remarkably healthy condition. Since 1909 all of the stocks which I have suggested as having been wise sales in 1909 or at the, opening of 1910 have sold anywhere from 20 to 50 points below the 1909 prices. St. Paul has been down to nearly par; New York Central has been at par; Atchison and Baltimore & Ohio have both been below par ; Great Northern has sold below 1 18 and Northern Pacific at 110. There have been plenty of opportunities to buy back any or all of these issues since the spring of 1910 at prices far lower than those ranging recently. 74 How to Invest Money Wisely Of course, most people will say that this is all theory and does not work out in practice. But here and there we find a man who does just this sort of thing, and while he may occasionally make a mistake, in the long run he greatly adds to his principal by taking cognizance of these two great factors in selecting investments, viz., a study of the general trade and commercial cycles, and an intelli- gent analysis of intrinsic values. There is no reason why a man who wishes to follow this plan of investment, should take a great deal of risk. If he pays a little too much for a stock of real intrinsic merit (but has bought it in the proper period) all that he has got to do is to hold it as an investment and receive his dividends ; in time it will sell up to or above his cost price again. Distribution and Profit Combined IX the foregoing pages we have discussed to some ex- tent the methods for investing money in common stocks of railroads with a view of benefiting by price changes over reasonably long periods of time. It has been shown that where proper selections of such stocks were made, and the purchasing done in a period when it was clear that most stocks were selling below their intrinsic or asset values, very great advantages have re- sulted, both in the enhancement of principal and the increase of income. But while the plan there outlined of course appeals to those who are willing to concentrate their capital in one type or one class of issues, and are also willing to take a measure of chance such as is never absent from pure stock investments, it is not to be assumed that such a plan should be followed by all investors, or that the principles of proper investment diversification should be ignored to take a chance at an opportunity of a semi-speculative type. The examples given are mainly illustrations of what might have been done, and what some investors actually did do in the period mentioned. At the same time, it is possible to follow principles of sound investment distribution and also take advantage, to (75) 76 How to Invest Money Wisely substantial degree, of the rise and fall in general values of securities. In an earlier chapter I outlined a plan for proper investment diversification and presented a classifi- cation of several distinct types of issues, from which in- telligent selections could be made. The idea of this classi- fication was not only to spread the risk among various types of industry, but also to select different bonds and stocks with a view of having one offset the other to a degree in rises and falls in individual values. It is my purpose now to present a concrete example of how a given investment fund, invested at the right period, and taking into consideration all the general and specific in- fluences, would have fared during the past four years. The period of a year or more after the panic of 1907 was unquestionably a good time to invest in carefully selected stocks and bonds, not only in the railroad field, but also in the industrial, public utility and other invest- ment markets. Of course, the very best time to make such purchases was in or immediately after the panic, but panic periods are not seasons when the average man has the courage to do much buying, even though he has the actual money available and knows that things are cheap. In the following example, therefore, I have selected July 1, 1908, as the date on which the invest- ments were made. By this time general confidence had been fully restored; there was little in sight to warrant lower prices, while there were plenty of factors clearly visible which pointed to a revival in trade and recovery all along the line. Assuming that the investor had a fund of approxi- Distribution and Profit Combined 77 niately $200,000 to put into securities, he might have dis- tributed his purchases in about the following proportions : 10 per cent in Government or Municipal issues; 20 per cent in railroad bonds ; 20 per cent in railroad stocks ; 10 per cent in public utility bonds ; 10 per cent in public utility stocks ; 10 per cent in industrial bonds ; 10 per cent in industrial stocks ; 10 per cent in bank or trust com- pany stocks. Following this plan, and taking into consideration all the principles for investment selection which we have been outlining, a result as follows might have been ob- tained : Government Issues: Cost Yield Value Yield July 1, per July 1, per 1908 Annum 1912 Annum $5,000 Japanese Ster. 4}s, due 1925... $4,450 $225 $4,600 $225 5,000 Chicago Wor., Fr. 4s, due 1921. 5,000 200 5,000 200 5,000 Seattle City 4s, due 1925 4,850 200 4,900 200 5,000 Berlin Sis, op. after 1909 4,600 175 4,650 175 Railroad Bonds: $5,000 Atch. East Okla. 4s, due 1928.. 4,800 200 4,800 200 5,000 B. & O. P. Jc. & M. D. Sis, due 1925 4,150 175 4,400 175 5,000 C. R. I. & Pcf. ref. 4s, due 1934 4,250 200 4,500 200 5,000 Col. & So. 4s, due 1929 4,500 200 4,850 200 5,000 Oreg. Sh. Line ref. 4s, due 1929 4,450 200 4,725 200 5,000 Reading-J. Cent. 4s, due 1951.. 4,700 200 4,900 200 5,000 Long Island gen. 4s, due 1938.. 4,500 200 4,700 200 5,000 Lake Shore deb. 4s, due 1928.. 4,550 200 4,700 200 Railroad Stocks: $5,000 Atchison preferred (5%) 4,550 250 5,175 250 5,000 Norf. & West. pfd. (4%) 4,000 200 4,600 200 5,000 Reading first pfd. (4%) 4,100 200 4,550 200 5,000 Union Pac. pfd. (4%) 4,150 200 4,600 200 4,050 275 5,450 300 5,000 Baltimore & Ohio common 4,300 300 5,337 300 5,000 Canadian Pacific 8,000 350 11,950 50d 5,000 Union Pacific common 7,100 BOO 8,600 500 78 How to Invest Money Wisely Public Utility Bonds: Cost July 1. Yield per Value July 1, Yield per 1908 Annum 1912 Annum |5,000 Detroit City Gas 5s, due 1923.. 4,900 250 5,050 26o 5,000 Am. Tel. & Tel. coll. 4s, due 1929 4,300 200 4 550 200 5,000 Houghton Co. St. Ry. 5s, due 1920 4,500 250 4,825 250 5,000 Portland (O.) 1st and ref. 5s.. 4,650 250 5^000 250 Public Utility Stocks: $5,000 Am. Light & Traction pfd 4,700 300 5,400 300 5,000 Laclede Gas pfd. 3,750 250 4,900 250 5,000 General Elec common 6,500 400 8,300 400 5,000 Minneapolis Gen. Elec. pfd 5,000 300 5^350 300 Industrial Bonds: $5,000 du Pont Powder 44s, due 1936. 3,850 225 4,550 225 5,000 U. S. Realtv & Imp. 5s, due 1924 4,000 250 4,450 250 5,000 U. S. Steel Corp. 5s, due 1963. 4,850 250 5,150 250 5,000 Fairmont Coal 5s, due 1931 4,550 250 4,850 250 Industrial Stocks: $5,000 U. S. Steel pfd 5,100 5,000 Inter. Harvester pfd 5,050 5,000 Virginia Chem. pfd 4,950 5,000 Am. Car & Foundry pfd 4,850 Bank and Trust Company Stocks: $2,000 (par) Astor Trust (X. Y.) 5,800 2,000 (par) Equitable Tr. (X. Y.) . . . 7,300 2,000 (par) First Xat. Bk. (Chicago). 7,600 2,000 (par) Shawmut Bk. (Boston).. 5,800 350 5,600 350 350 6,050 350 400 6,000 400 350 5,800 350 320 240 360 7,200 11,000 8,920 8,800 160 480 320 360 Totals $197,050 $10,195 $228,732 $10,770 Here we find an investment scheme for about $200,000 which meets every test as far as wide distribution is con- cerned ; measures up to exacting conditions as to security ; yielded at the start a very substantial return on the invest- ment, etc. The diversification is a wide one, as it is di- Distribution and Profit Combined 79 vided between five distinct classes of investment issues ; these classes are sub-divided into proper proportions of bonds and stocks ; and the different issues themselves have in nearly all cases been selected because of their independ- ent and individual characteristics of strength. In the government issues, the risk is spread into different coun- tries, and those confined to the United States are sepa- rated widely in a geographical sense; the railroad bonds in every case, are of separate systems, and are widely distributed ; this is also largely true of the railroad stocks ; the public utility issues are divided properly between gas, electric light, street railway and telephone companies ; the industrial issues represent widely diversified undertakings, etc. ; while the bank stocks are selected from great com- mercial centers like New York, Chicago and Boston. With this wide selection, the risk of loss has been re- duced to a minimum, while the investor has been put in position where he can, to some extent, get the benefit of favorable developments in a wide field of human activity. Selected at a season when all well-tested securities were reasonably cheap, it will be noted that the results attained have been most satisfactory. Not only has the aggregate principal appreciated from $197,050 to $228,732, but the income, which was $10,195, or over 5 per cent at the time of purchase, has increased to $10,770, which is equal to nearly 5^ per cent on the original cost, or 4% per cent on the present value. In addition within this four year period "rights" have twice been given to Can- adian Pacific stockholders. How much more satisfactory is an investment plan of 80 How to Invest Money Wisely this kind, than one where the investor confines himself entirely to "savings bank" issues or other so-called long term "high-grade bonds." We have already pointed out in previous chapters how unsatisfactory have been results where investors have made no intelligent efforts at dis- ribution, and have shown that during the past decade, very heavy losses in principal have been thus experienced. While the foregoing exhibit is in the nature of a "past performance," it is fully as true today that scientific dis- tribution plans can be worked out for the future; and in later chapters I shall attempt to present some concrete suggestions along this line. XI Plans for Investment of Moderate Sums IN the last chapter I went into a somewhat extended discussion of the proper methods for so diversify- ing investment lists, and so selecting certain types of investments as to insure the entire safety of the principal sum, and also to take advantage, within reason, of appreciation in market values, and increases in divi- dend returns. An elaborate example was presented of an investment scheme covering about $200,000, which, if carried out four years ago, would in the meanwhile have added about 15 per cent to the investor's total principal and also increased his interest and dividend yield ma- terially. I will now present several plans for proper investment diversification, for moderate sums, with the same ends in view, viz., to insure security of principal as a first con- sideration ; to offset the effects of possible depreciation of principal as a second consideration ; and to benefit in the future by possible appreciation of principal and enlarged dividend yield. Of course, the fact must not be overlooked that there are seasons when it is usually unwise to do much new in- vesting of any type, just as there are other periods when (81) 82 How to Invest Money Wisely a general overhauling of investment lists is most advisa- ble. The present time cannot be said to be absolutely ideal in either respect, but nevertheless it is much better than that in the end of 1909. As far as pure bond in- vestments are concerned, the present period is probably about as good as any that we are likely to have within the next two or three years, provided intelligent selections are made. In the stock investment field, the opportuni- ties are fair today, although of course, not of the very best. 1. Suggested plan for the investment of $10,000, in- tegrity of principal being the exclusive consideration. An investment of this kind might wisely be divided be- tween railroad bonds, public utility bonds and industrial bonds, as follows : Price of Sept., 1912 Cost $2,000 Oregon Short Line ref. 4s, due 1929... at 92 $1,840 2,000 Seaboard Air Line first 4s, due 1950... at 86 1,720 2,000 Lake Shore deben. 4s, due 1928 at 92^ 1,850 2,000 Amer. Tel. & Tel. col. 4s, due 1920... at 90 1,800 2,000 du Pont Powder, 4^s, due 1936 at 88 1,760 The above arrangement would yield an income of $410 per year on a net investment of $8,970. All of the bonds except one have comparatively nearby maturities, and, regardless of fluctuations in the general market interest rate, should easily enough hold their present value, and in time work up to par. The Seaboard Air Line first 4s may be called at par at any time, and most likely will be within the next five years. The du Pont Powder bonds can be called at 110. Having made the above selections the investor would Investment of Moderate Sums 83 still have cash left over of $1,030, which could be em- ployed in buying another bond of slightly more specu- lative value, if desired, or put into a strong dividend paying stock. In any event, if the above list were held until maturity there would surely be an appreciation in principal of $1,030 on the ten bonds listed above, and the extra bond or stock purchase could be regarded as the investment of a "potential profit." 2. Suggested plan for the investment of $25,000, in- tegrity of principal being the first consideration, but a desire for a larger income yield, and fair possibilities of appreciation also being considered. A sum invested under these conditions might wisely be distributed at the present time as follows : Railroad Bonds: Sejt^ma Cost $3,000 Rio Grande Western 1st 4s due 1939.. at 83 $2,490 3,000 Long Island R. R. cons. 4s, due 1931.. at 95 2,850 Railroad Stocks: $3,000 Northern Pac. stock (7%) at 126 $3,780 3,000 Baltimore & Ohio stock (6%) at 108 3,240 Public Utility Bonds: $3,000 Cal. Gas & El. ref. 5s, due 1937 at 96 $2,880 3,000 N. Y. Gas & El. H. & P. 4s, due 1949. at 88 2,640 Industrial Bonds: $3,000 U. S. Realty & Imp. 5s, due at 90 $2,700 3,000 Armour Real Estate 4^s, due at 91 2,730 1,000 Fairmont Coal 5s, due 1931 at 96 960 Here would be a list with a par value of $25,000 cost- ing in all $24,270, and yielding $1,235 per annum. The list, it will be noted, is well distributed and the issues are such that the investor could feel entirely secure for an in- 84 How to Invest Money Wisely definite period. The bond issues would ultimately work to their par values, while he would have a moderate inter- est in possible appreciation in the future of some of his principal through his holdings of Northern Pacific and Baltimore & Ohio. The remaining balance of $730 could be put into either a bond with some possibilities of appre- ciation, or invested in a few shares of a good railroad or public utility stock. Probably no more satisfactory scheme for the invest- ment of this sum of money could be devised for the or- dinary investor who is dependent on income. 3. Suggested plan for investment of $50,000, strength of principal of course being a prime consideration, but possible appreciation also being quite fully considered. Railroad Bonds: Price of Sept., 1912 Cost $5,000 Baltimore & Ohio 3^s, due 1925 at 92 $4,600 5,000 St. Louis & San Fran. gen. 5s, due 1927. at 85 4,250 Railroad Stocks: S.-..IMH) Northern Pacific (7%) at 1:2* $6,400 5,000 Kansas City So. pfd. (4%) at 60 3.000 Public Utility Bonds: $5,000 Houghton Co. St. Ry. 5s, of r.20 at '.f, $4,800 5,000 Kansas City (Mo.) Gas 5s, due 1925.. at i7 4,850 Industrial Bonds: $5,000 Westinghouse Mfg. 5s. due 1931 at 95 $4,750 5,000 Republic Iron & Steel 5s, of 1940 at 91 4.550 :,.000 Bush Terminal 5s, due at 97 4,850 Industrial Stocks J5,000 Amer. Beet Sugar preferred (6%)... at !8 $4,900 3,000 Railway Steel Spring, pfrl. (7%)....a1 100 3,000 Investment of Moderate Sums The above list embraces $53,000 in par value of securi- ties, which would cost at the present market quotations, about $49,950. The total yield on this investment would be $2,735 per annum, or considerably over S%. Of course, there is a slight speculative element to some of these issues, but they are exceedingly well distributed ; the bonds are nearly all of short maturities and the stocks have large potential as well as actual asset values. XII Plans for Investing Larger Sums THE general principles which we have been laying down in these chapters for intelligent investment selection and distribution, can of course be ap- plied in many ways and for both large and small sums of money. Many investors prefer to take a little more risk than do others in the attempt to diversify their principal. The desire to place oneself in a position where the bene- fits of possible growth in values will be at least partially received, is very strong. The man who has a consider- able capital can of course afford to take this additional risk far more easily than can one with limited funds. It is usually a mistake for an investor whose capital is much under $25,000 or $30,000 to invest any part of his principal, even in moderate degree, with a view of seeking chiefly the benefits of unusual appreciation, but where a man has $100,000 or more, he can sometimes justly give a little more attention to possibilities of profit on his in- vestment without going into the field of speculation to too great an extent. On page 88 I suggest a plan for a sum of this amount: (87) How to Invest Money Wisely Suggested plan for the investment of a principal sum of $100,000, diversification being the primary object, but possibilities of appreciation being considered also. Prices of 1. Government Issues: Sept., 1912 Cost $5,000 Japanese Imperial 4*/jS, due 1925 at 92 $4.600 5,000 New York City (new) 4*4s at 101 5.050 2. Railroad Bonds: $10,000 Rio Grande Western first 4s, due l <):;< at s:; $8.300 10,000 Kanawha & Michigan second 5s, due 1927 at 97 9.700 3. Railroad Stocks: $10,000 (100 shares) Norfolk & Western (6%) common at .116 11,600 10,000 (100 shares) Northern Pacific (7% ) at !:><; 12,600 4. Public Utility Bonds: $5,000 Virginia Ry. & Power 5s, due 19:54... at % 4.800 5.000 Portland (Oreg.) Ry. first and ref. 5s, due 1930 at 98 4,950 5. Industrial Bonds: $5,000 Corn Products 5s, due 1934 at 96 4,800 5,000 United States Realty 5s, due 14 at 90 4,500 5,000 Westinghouse 5s, due 1931 at 9.1 4,750 5,000 Republic Iron & Steel 5s. clue 1940 at 91 4,550 G. Industrial Stocks: $10,000 (100 shares) Railway Steel Spring pfd. (7%) ' at 100 10,000 10,000 (100 shares) Amer. Beet Sugar pfd. (6%) at 98 9,800 Total $100.000 While there is a moderate speculative element to be found in parts of the above list, yet as a whole the issues are to be regarded as fairly high grade, and the chances Plans for Investing Larger Sums S!) of growth in values are very good, as the following com- ments will indicate. 1. Government Issues: Both of these issues are en- tirely secure. The credit of the Japanese government lias been steadily improving since the Russo-Japanese war, and these bonds, which are thoroughly protected in every way, should gradually work towards their par value within the next ten years. It will be noted that they now have but thirteen years to run. The New York City is- sue, of course, stands on a high investment plane. 2. Railroad Bonds: The Rio Grande Western first 4s, clue 1939, are an absolute first lien on the main lines of the Denver & Rio Grande system from Crevasse, Col., to Ogden, Utah. This line has great strategical value, passing through Salt Lake City, and forming the connec- tion of the original Denver & Rio Grande Railroad with the Western Pacific, the Southern Pacific and the Ore- gon Lines of the Union Pacific system. The bonds are followed by two junior liens. The Kanawha & Michigan second 5s have only fifteen years to run, and the earn- ings of the road give the issue a margin of safety of 70 per cent. I regard both of these bonds as "high-grade" and believe they will tend to rise considerably in value during the next few years. 3. Railroad Stocks: The future outlook of Norfolk & Western is most favorable. The common stock is rapidly becoming a prime investment issue, and in the course of a few years should be raised to a still higher dividend basis. As for Northern Pacific, I think it is 90 How to Invest Money Wisely probably as sure of maintaining its 7 per cent, dividend as is Chicago & North Western, which sells fifteen points higher. It is an attractive investment of its class. 4. Public Utility Bonds: While not of the highest grade, the Virginia Railway & Power 5s, due 1934, are excellently secured, and the equity back of them is steadily growing. They have but twenty-two years to run, which is an argument in their favor. Portland Railway refunding 5s are really a very strong bond. 5. Industrial Bonds: Each of the issues included in this classification has features of strength to commend it. They are all of relatively short maturities, return a large yield, and are protected by liberal margins of safety. 6. Industrial Stocks: The two industrial preferred stocks included above seem most attractive investments of this type. Railway Steel Spring preferred should, in the course of a few years, sell nearly as high as United States Steel preferred, while American Beet Sugar pre- ferred is one of the prime 6 per cent, preferred indus- trials. This investment scheme, at recent market prices, would amount to $100,000, and the straight yield on the money would be $5,337.50 or 5^ per cent, on the cost. It will be noted that the proper precautions in the matter of selecting issues of widely different geographical loca- tions and separate managements, have been strictly ad- hered to. Of the government issues, one is dependent Plans for Investing Larger Sums 91 on the prosperity of a foreign nation, and the other on the prosperity of the chief American city ; the railroad bonds and stocks are widely distributed; the same thing is true of the public utility bonds. Of the industrial bonds and stocks, each issue is on a distinct property and in a distinct line of industry. Further than this, the possibility of profit in the principal is not merely depend- ent on a trade or industrial boom. Profits will accrue in time, on the bond issues, simply because none of them are a great many years from the date of maturity, and they are nearly all selling today below their face values. Whether we have a boom or a depression, the position of these issues should tend to improve. The stock issues, on the other hand, are all more responsive to trade con- ditions, but as they are well spread throughout the coun- try and all dependent on different influences, the chances of all of them being equally affected in the event of a depression are very remote. There are many investors of considerable means, who, while they of course do not forget the importance of thoroughly protecting their principal, are willing to put at least a portion of their capital in semi-speculative is- sues. They do not want to "speculate" in the ordinary sense of the term, and are far from wishing to buy secu- rities on margin. But what interests them is some method whereby they can get substantial benefit from a general upward swing in prices. In the following exhibit I have attempted to suggest a plan whereby a fund of about $100,000 can be safely distributed among various issues which appear, for spe- 1'li How to Invest Money Wisely cial reasons, to be cheap at the present time, and to have good possibilities of increases in value in the next "bull" movement. Suggested plan for a ''semi-speculative" investment scheme, with a capital sum of $100,000. Prices of 1. Railroad Bonds: Sept., 1912 Cost $10,000 St. Louis & San Francisco gen. lien 5s, due 1927 at 85 $8,500 10,000 St. Louis, Iron Mountain & So., Unif. and Ref. 4s, due 1929 at 78 7,800 2. Railroad Stocks: $10,000 (100 shares) Southern Pacific (6%) at 112 11,200 10,000 (100 shares) Kansas City So. pfd. (4%) at 60 6,000 3. Public Utility Stocks: $10,000 (100 shares) Brooklyn Rapid Tran- sit (5%) at 91 9,100 10,000 (100 shares) Consolidated Gas (6%) at 145 14,500 4. Public Utility Bonds: $10,000 Inter-Metropolitan 4^s, due 1956 at 82 8,200 5. Industrial Bonds: $10,000 Colorado Industrial 5s, due 1924.... at 82 8.200 10,000 Distillers Securities 5s, due 1927 at 75 7,500 6. Industrial Stocks: $10,000(100 shares) International Har. com. (5%) at 120 12,000 10,000 (100 shares) Amer. Malting pfd. (4%) at 65 6,500 Total $99.500 As in the case of the first exhibit, full consideration is given to the matter of sound investment diversification. Plans for Investing Larger Sums 93 and no very large portion of the total sum is placed in any one issue or in any one type of security. That all of these issues have their special features of attractive- ness is shown by the following comments. 1. Railroad Bonds: The St. Louis & San Francisco general lien 5s, due 1927, are admittedly a "semi-invest- ment" issue, but they are much stronger in position than was the case a couple of years ago, when they were sel- ling above 90. The system has been making unusual progress on its physical side during the past eighteen months, and its outlook to-day is most favorable. These bonds are protected by a good margin of safety, the yield on the cost is a handsome one, and they have only fifteen years to run. The unifying and refunding 4s of the St. Louis, Iron Mountain & Southern are secured on some of the best mileage in the general system, and now that plans have been arranged for providing for all future financing on this road, the position of these bonds should gradually improve. As they mature in 1929, the present low price makes them attractive. 2. Railroad Stocks: Southern Pacific, in spite of its setbacks in earnings during the past year, still has great possibilities, and the crop outlook in its territory this year is unusually favorable. If we have any "bull" move- ment the coming winter, this stock should rise substan- tially. The investment position of Kansas City Southern while not of the highest, gives assurance of permanent dividend disbursements. 94 How to Invest Money Wisely 3. Public Utility Stocks: That Brooklyn Rapid Transit will gradually work higher, now that the subway situation has been settled, seems a foregone conclusion. Consolidated Gas, in spite of its rise of the past two years, should continue to be benefited by the growth of New York City, and increase its profits steadily for many years to come. 4. Public Utility Bonds: I regard the Interborough- Metropolitan 4^2 s as a very cheap bond of this type, and as the credit of the company improves (as it will during the coming few years) these bonds should steadily work up towards 90. 5. Industrial Bonds: The Colorado Industrial 5s are of course "semi-speculative" or they would not be selling at so low a figure. But nevertheless the fact must not be overlooked that the property back of the issue is of great value, and any real boom in the iron and steel trade will tend to force these bonds up further in price. Dis- tillers Securities 5s I regard as attractive at the price. In the poorest years the interest on the issue has always been easily earned, and the added and growing equity in the U. S. Industrial Alcohol Company will benefit this company materially during the next few years. 6. Industrial Stocks: In this classification I have se- lected International Harvester, in spite of its high price, because of the fact that if the company is forced to dis- solve, we are likely to see a further material apprecia- tion in the price. American Malting preferred I con- Plans for Investing Larger Sums 95 sider still cheap as a speculative investment. There are about 20 per cent, in accumulated dividends which must sooner or later be paid, and the asset value of the stock is well above $75 per share, regardless of these dividends. The total cost of the purchases, at recent prices, in this list would be $99,500, and the annual yield would amount to $5,350, or over 5^ per cent., independently of any appreciation. Of course, the chances of profit are greater in this list than in the other, but naturally the speculative risk is greater. At the same time, the list is so worked out that the ordinary dangers are reduced to a minimum. PART THREE CLASSES OF INVESTMENTS XIII Some Typical Industrial Bonds IN selecting industrial bonds for investment, the diffi- culties are generally far greater than in the case of either steam railroad or public utility issues. In the latter cases it is usually a simple matter to ascertain the character of the property which really stands back of the issue, but in the case of the ordinary industrial bond this is not so often possible. Reports of industrial cor- porations are frequently too brief and unsatisfactory, as full descriptions of property and assets are not generally presented to the stock or bond holders. In a very real sense, then, the strength and position of an industrial bond depends on the revealed earning power of the business itself; and the question of stability and permanence in this earning power takes on great impor- tance. A public utility bond is often secure simply be- cause of the franchise value or location, and the margin of safety in earnings is the only vital thing. But fran- chise values do not apply as a general thing to industrials and benefits due to location and environment are not always of such great importance. The really vital point for the investor to ascertain is the profit producing power, and the things which are related to this, such as (99) 100 How to Invest Money Wisely the character of management, business policy, stability of markets, etc. On the following pages I present brief records of twenty-six typical industrial bonds which are well known in the New York market. It will be noted that as a general thing the yield is in excess of 5% and some is- sues yield at current prices over 6%. Thus, while the better grade of steam railroad issues usually return from 4 to 4y 2 % to the investor, and public utilities from 4 l / 2 to 5 l /i%, the same general classes of industrials enable the holder to secure a return of from 5 to 6%. It does not necessarily follow, however, that an industrial issue returning Sy 2 % is a weaker bond than some public util- ity which yields 5%, or some railroad bond which yields but 4^4%. There are many industrial issues with very heavy assets back of them, and protected by very high margins of safety, which yield 5%% or more on the in- vestment. Some of those listed below are in this class. Adams Express Company collateral debenture 4s ; dated March 1, 1898; due March 1, 1948. Outstanding $12,000,000. These bonds are not a mortgage but are secured by deposit of income-producing bonds of rail- roads and other companies, the par and market values of which are in excess of the issue. The net earnings in recent years of the Adams Express Company have been from four to six times the amount of its total fixed charges. In event of liquidation these bonds would surely receive their face value. At the recent price of H4 they yield, if held to maturity, nearly 5% on the money. Some Typical Industrial : Boras' AJ01 American Agricultural Chemical Company first mort- gage convertible 5s; dated October 1, 1908; due October 1, 1928. Outstanding, $10,579,000. Convertible at hold- er's option into preferred stock, .at any time. Sinking fund will retire bulk of issue by maturity. Recent net profits of the company have averaged seven times tlu- interest requirement. A very attractive investment at present price of 101. yielding 4.92%. American Cotton Oil Company 20-year 5s, dated May 1, 1911; due May 1, 1931. Outstanding, $5,000,000. Callable at 105. These bonds are somewhat speculative and not secured by mortgage, but the average earnings for a series of years show charges earned several times over. The yield at the present price of 94 is about American Writing Paper Company first 5s, dated July 1, 1899; due July 1, 1919. Outstanding, $13,904,000. Sinking fund of $100,000 per annum tends to strengthen this issue as it nears maturity. While not in the strong investment class, the bonds appear reasonably cheap at the present price of 90, the yield being 6.80% per annum. This high yield is due to the approaching maturity. Armour & Co. real estate mortgage 4^s, dated June 1, 1909; due June 1, 1939. Outstanding, $30,000,000. This is a very high grade bond, being protected by valu- able real estate and a heavy earning power. Even in the poor year, 1911, the interest was earned five times over. At the present price of 9\ l / 2 the yield is 5.05%. 102 Hovv 'to Invest Money Wisely Bethlehem Steel Company first extension mortgage 5s, dated January 2, 1906; due January 1, 1926. Outstand- ing, $8,000,000. Callable at 105. These bonds are well secured, although subject to a prior mortgage on a por- tion of the property. The net profits of the company were in 1911 several times the interest requirement on this and the prior issue. At the present price of 97 the yield is about 5.30%. Central Leather Company first lien 20-year 5s, dated April 1, 1905; due April 1, 1925. Outstanding, $36,764,- 150. The issue is secured by direct or collateral mort- gage on all the properties of the company, and after 1913, when about $3,400,000 debentures are retired, it will be the only bond issue on the property. The earn- ings of the Central Leather Company fluctuate radically, but the assets back of these bonds seem to justify a favorable opinion regarding them. At the present price of 95 the yield is about 5.55%. Colorado Fuel & Iron Company general mortgage 5s, dated February 1, 1893; due February 1, 1943. Out- standing, $5,558,000. Callable at 105. This is a direct obligation of the company, covering the entire property by mortgage, subject only to two small prior liens on a portion. The value of the property covered is many times in excess of the issue, and in normal years the in- terest on these bonds has been earned four or five times over. They are to be regarded as entirely secure. The current quotation is 100, giving a yield of 5%. Corn Products Refining Company first mortgage 5s, Some Typical Industrial Bonds 103 dated May 1, 1909; due May 1, 1934. Outstanding, $5,749,000. Callable at 105. Sinking fund retires 2% of total issue annually. These bonds are subject to two prior liens on portions of the property, but are them- selves a direct obligation of the company and are backed by assets far in excess of their face value. The earn- ings in recent years have usually been from four to five times the interest requirement. At the present price of 94 the bonds yield 5.45% and look attractive. E. I. du Pont De Nemours Poivder Company deben- ture 4y 2 s, dated June 1, 1906; due June 1, 1936. Call- able at 110. Not a mortgage, but have no liens ahead, and are protected by an enormous margin of safety. One of the best industrial issues in the market. They yield, at the present price of 90, about International Nickel Company 30-year sinking fund 5s, dated April 1, 1902; due April 1, 1932. Outstand- ing, $8,162,154. Sinking fund retires $150,000 annually. The property covered is many times in excess of the mortgage and the earnings in recent years have been from seven to ten times the interest requirements. An attractive investment. Price at present about 100, yield- ing 5%. International Paper Company convertible mortgage 5s, dated January 3, 1905; due January 1, 1935. Outstand- ing, $5,343,000. Convertible into preferred stock at holder's option on any interest date prior to 1917. Sink- ing fund retires 2% of issue annually. While subject to 104 How to Invest Money Wisely an underlying bond, this issue has a large equity in the property and the earnings recently have equalled two and one-half times the interest requirement. Although more speculative than a number of others named, the bonds are to be looked upon as attractive at the present price of about 91, at which the yield is 5.! International Steam Pump Company first lien 20-year sinking fund 5s, dated September 1, 1909; due Septem- ber 1, 1929. Outstanding, $10,000,000. Callable at 103. Sinking fund will retire $6,000,000 prior to maturity. These bonds are secured by direct or collateral mortgage on all the company's property and should be regarded as entirely secure. Earnings in recent years have been from three to four times interest requirements. At the present quotation of 92 the yield is about 5.75%. Lackazvanna Steel Company first mortgage convertible 5s, dated April 1, 1903; due April 1, 1923. Outstanding, $15,000,000. Convertible into common stock at par, at the holder's option, at any time prior to April 2, 1915. The bonds are a direct first or collateral mortgage on all the company's property and are protected by a heavy equity. Earnings in recent years have averaged about seven times the interest requirement, and in the poor year 1911 were three times the requirement. An excellent investment at the present price of 94y 2 , the yield being about 5.70%. Morris & Co. first mortgage sinking fund 4y 2 s, dated July 1, 1909; due July 1, 1939. Outstanding, $12,100,- Some Typical Industrial Bonds 000. Callable at 103. Sinking fund will retire bulk of issue prior to maturity. The physical property back of this issue is well in excess of the mortgage and the earn- ings during recent years have been several times the in- terest requirement. At 91, the present price, the bonds yield 5.70%. National E-nameling & Stamping Co. refunding first mortgage real estate 5s, dated June 1, 1909; due June 1, 1929. Outstanding, $3,278,000. Sinking fund will re- tire entire issue prior to maturity. Although this busi- ness is subject to keen competition, the bonds have large assets back of them, and the earnings generally average from five to six times the interest requirement. At 93 the bonds yield 5.65%. National Tube Company first mortgage 5s, dated May 1, 1912; due May 1, 1952. Outstanding, $10,000,000. Callable at 105 on and after November 1, 1916. Sinking fund retires \% annually after May 1, 1916. These bonds stand on a very strong investment basis, as they are secured on valuable property and are guaranteed principal and interest by the United States Steel Cor- poration. At 991/2, the present price, the yield is over 5%. Otis Elevator Company convertible debenture 5s, dated April 1, 1910; due April 1, 1920. Outstanding, $3,500,000. Convertible into common stock at par on and after April 1, 1913. Callable at 102y 2 on and after April 1, 1913. This is a direct obligation of the com- 106 How to Invest Money Wisely pany and there are no mortgages ahead of it. The earn- ings have recently averaged about eight times the in- terest requirement. At 100, the present quotation, the yield is 5%. Railway Steel Springs Company, first mortgage La- trobe Plant sinking fund 5s, dated January 1, 1906; due January 1, 1921. Outstanding, $3,672,000. Callable at 105. Sinking fund retires about $135,000 per year. The bonds are secured by first lien on an extremely valuable part of the company's property and are protected by a very wide equity. Earnings in recent years have been over six times all interest requirements. A very attract- ive investment issue at the present price of 98, yielding 5.27%. Railway Steel Springs Company first mortgage Inter Ocean Plant sinking fund 5s, dated October 1, 1911 ; due October 1, 1931. Outstanding, $3,500,000. Callable at 105. Sinking fund beginning in 1914 will retire about $125,000 per annum. Like the other mortgage, these bonds are protected by a heavy equity and liberal mar- gin of safety. At 96 1 /2, which is the present quotation, the return is about 5.25%. Republic Iron & Steel Co. 10-30 year sinking fund first mortgage 5s, dated April 1, 1910; due April 1, 1940. Outstanding, $11,305,000. Sinking fund will retire all bonds at or before maturity. The replacement value of the company's property is far in excess of the face value of these bonds and there are no prior or underlying liens. Some Typical Industrial Bonds 107 Earnings even in the poorest years have been several times all interest requirements. An attractive investment at 93, the yield being about 5.50%. Union Bag & Paper Co. first mortgage 25-year sinking fund 5s, dated June 28, 1905; due July 1, 1930. Out- standing, $3,861,000. Callable at 105. Sinking fund re- tires 2% of issue per annum. This issue is secured by a first lien on all the eompany's property, subject only to a small assumed mortgage. The equity is heavy and earnings have recently averaged over five times the in- terest requirements. At the current price of about 92y 2 the yield is about 5.70%. United States Realty & Improvement Co. 20-year debenture 5s, dated July 1, 1904; due July 1, 1924. Out- standing, $11,930,000. Callable at 105. These bonds are not secured by mortgage but are a direct obligation, and the equity is a heavy one. Earnings have in recent years steadily averaged from two and one-half to three times the interest requirements. In view of the approaching maturity, the bonds look attractive at 90, at which the yield is 6.25%. United States Steel Corporation 10-60 year sinking fund 5s, dated April 1, 1903; due April 1, 1963. Out- standing, $189,346,500. Callable at 110 after April 1, 1913. Sinking fund will retire about $1,000,000 annu- ally after April 1, 1913. These bonds are protected by a very heavy equity and stand on a strong investment plane. At W2y 2 , the present price, the yield is about 4.90%. 1<>' S How to Invest Money Wisely Victor Fuel Company first mortgage sinking fund 5s, dated July 1, 1903; due July 1, 1953. Outstanding, $1,871,000. Sinking fund, two cents per ton on all coal mined. The bonds are secured by first mortgage on over 21,000 acres of coal lands in Colorado and by valuable collateral. Earnings in recent years have been over four times the interest requirements on this issue and on the Victor-American Fuel bonds. This company is a part of the latter concern. The yield at the present price of 85 is about 6%. Virginia Carolina Chemical Company first mortgage 15-year 5s, dated November 2, 1908; due December 1, 1923. Callable at 105. Sinking fund retires $300,000 per annum. The property which this issue covers by first mortgage is far in excess of the amount of the issue and the earnings have always shown a very heavy mar- gin of safety. At present quotation of 98 the bonds yield about 5.20%. The above are of course only a limited number of in- dustrial issues, selected more or less at random. There are many other good ones in the market. Nevertheless those listed above represent a great diversification of in- dustries, and a composite investment confined to indus- trials and divided in equal amounts among the above issues would be very well distributed. Such an invest- ment fund would show an average yield of nearly Sy 2 %, which is certainly very satisfactory in view of the gen- eral strength of the issues. XIV Selected Public Utility Bonds IN these times of high commodity prices and general high costs, the temptation to the investor to go into untried fields in order to increase his income is very strong. One of the great fields of investment which has broadened greatly in recent years is the public utility field. Here it is that one can find opportunities for the intelligent investment of funds on a much more attractive basis than can nowadays be secured in the railroad or municipal fields. But while the field is a broad one, the pitfalls are many and dangerous, and because of the lack of completeness and uniformity in the matter of statistical information and other data, it is much more difficult to make safe and intelligent selections than in the more thoroughly established fields. Nevertheless, it must be agreed that the public utility field is a most inviting one for the modern investor, and as a whole has elements of safety which cannot be found in the railroad or industrial fields. Where a public utility concern has the advantages of location, and gets the steadily accruing benefits of increasing population, the potential value of its securities is often of great moment. ("109 ) 110 How to Invest Money Wisely For example, a street railway bond, which, half a dozen years ago, may have been quite speculative, can easily have reached a high investment plane provided that pop- ulation has increased steadily and the outlook for further growth is strong. Only a decade ago certain of the bond issues on the Brooklyn Rapid Transit system were more or less doubtful. But with the vast growth of traffic of the past ten years the earnings of this system have stead- ily mounted and all the divisional bonds today are on a strong investment plane, and even the junior issues are entitled to a good investment rating. Of course, as I pointed out above, discrimination is most important in making investment selections in this field. Not all towns and cities have grown steadily in population in recent years; not all trolley and lighting companies have the franchise strength that is desirable; and a very large number are, as in the case of railroads and industrials, very heavily over-capitalized. Below I furnish a diversified list of public utility bonds of various types. All of these bonds are not necessarily high grade, although some are ; but as a whole, they have genuine investment strength. In view of the attractive prices at which some of these issues sell, and the short- ness of maturity of all of them, it seems to me that a very good composite investment scheme could be worked out with this list. There are fifty issues to be described in all, and if one were to divide an investment fund equally between them, he would come out very well in- deed, as the summary will show; and he would reduce the risk to a minimum. Selected Public Utility Bonds 111 American Telephone & Telegraph Co. collateral trust 4s, due July 1, 1929. Interest Jan. & July at Bankers Trust Co., New York. The issue is protected by a heavy margin of safety and valuable collateral, and at the pres- ent price of 90}4 yields (if held to maturity), 4.85 per cent, on the investment. A very safe bond. Atchison Railway, Light & Power Co. first & refund- ing 5s, due Nov. 1, 1935. Interest May & Nov. at Fed- eral Trust Co., Boston. Company owns the entire elec- tric light, street railway and gas business of Atchison, Ks., and these bonds are secured by absolute first lien. At 95 the yield is 5.40 per cent. An excellent investment issue, running 23 years from date. Atlantic City Electric Co. first & refunding 5s, due March 1, 1938. Interest March & Sept. at Girard Trust Co., Philadelphia. Callable at 110 on or after March 1, 1913. This is a subsidiary of the American Gas & Electric Co. which guarantees the bonds. Franchises are strong and equity is heavy. At 93 the yield is 5.50 per cent. Burlington (la.) Railway & Light Co. first 5s, due March 1, 1932. Interest March & Sept. at Equitable Trust Co., New York. Callable at 105. The issue should be regarded as a strong one, as it is secured by first lien on replacement value far in excess of the issue. The yield at 95 is about 5.40 per cent. Carolina Power & Light Co. first 5s, due Aug. 1, 1938. Interest Feb. & Aug. 1, at Standard Trust Co., New 112 How to Invest Money Wisely York. Callable at 105 after Aug. 1, 1913. Company operates the street railway, gas and electric light service of Raleigh, N. C, and is a constituent company of the Electric Bond & Share Co. (General Electric interests). Franchises are strong, and there is a large margin of safety. An attractive bond at the price. At 92 the yield is about 5.65 per cent. Cincinnati Gas Transportation Co. first 5s, due July 1, 1933. Interest Jan. & July 1, at Cincinnati Trust Co. Callable at 110 after July 1, 1913. Company is leased to Columbia Gas & Electric Co. which guarantees all the bonds. Sixty per cent, of the issue are also guaranteed by the Cincinnati Gas & Electric Co. These bonds are a first mortgage and appear to be well protected. They are, in view of the price, to be regarded as a good in- vestment of this type, although not of the highest grade. At 89 the yield is about 5.90 per cent. Columbia Railway, Gas & Electric Co. first 5s, due July 1, 1936. Interest Jan. & July at Columbia-Knicker- bocker Trust Co., New York. Company owns all the public service properties in Columbia, S. C. Franchises are perpetual and the bonds are protected by a heavy margin of safety. At 94 the yield is about 5.45 per cent. Consumers Power Co. first lien & refunding 5s, due Jan. 1, 1936. Interest Jan. & July at Harris, Forbes & Co., New York, or Harris Trust & Savings Bank, Chi- cago. Callable at 105 after January 1. 1'Mn. This coin pany is controlled l.v tin- ('uninnniwealth Power. Rail Selected Public Utility Bonds 113 way & Light Co., and these bonds are well secured either directly or by deposit of collateral on valuable property. The margin of safety is a heavy one, and the investment position of the issue a strong one. At 96, with 24 years to run, the yield is about 5.30 per cent. Danville, Urbana & Champaign Railway Co. first 5s, due March 1, 1923. Interest March & Sept. at Northern Trust Co., Chicago. Callable at 105. Company operates electric railways connecting cities of Danville, Urbana & Champaign, 111., with branches, and the bonds are guar- anteed by the Danville Street Railway & Light Co. and the Urbana & Champaign Railway, Gas & Electric Co. A well secured issue. At 96 the yield is about 5.50 per cent. East St. Louis & Suburban Co. collateral trust 5s, due April 1, 1932. Interest April & Oct. in St. Louis or Philadelphia. Callable at 105. This is a holding com- pany which controls a large system of electric railways in East St. Louis, 111., and vicinity. These companies have valuable franchises and the bonds are strongly pro- tected by a wide margin of safety. A very attractive in- vestment at the price. At 96 the yield is about 5.35 per cent. Eastern Oregon Light & Power Co. first & refunding 5s, due October 1, 1929. Interest April & October at Fidelity Trust Co., Philadelphia. Callable at 105. The franchises of this company are strong, and the earnings of the company justify a good rating for the bonds. At 97, the yield is about 5.28 per cent. 114 How to Invest Money Wisely Fort Smith Light & Traction Co. first 5s, due March 1, 1936. Interest March & Sept. in New York or Chi- cago. Callable at 105. Company owns all the street railways in the city of Fort Smith, Ark., and all the elec- tric and gas properties in Fort Smith and Van Burcn. The bonds are protected by a wide margin of safety and appear entirely secure. At 91, the yield is about 5.70 per cent. Fort Worth Power & Light Co. first 5s, due Aug. 1, 1931. Interest Feb. & Aug. in New York or Cleveland. Callable at 105. The bonds are a first lien on the entire electric power and lighting business of Fort \Yorth, Texas, and are strongly protected. At 96 the yield is about 5.35 per cent. Helena Light & Railway Co. first 5s, due Sept. 1, 1925. Interest March & Sept. 1, at Columbia-Knickerbocker Trust Co., New York. Callable at 105. Company owns and operates the entire public utility business of Helena. Montana, on franchises which extend to 1926. Sinking fund will retire bulk of issue by maturity. There is a wide margin of safety in earnings, and the bonds should have a good rating. At 90 the yield is over 6 per cent. Indiana, Columbus & Eastern Traction Co. general & refunding 5s, due May 1, 1926. Interest May & Nov. in Philadelphia. Callable at 105. These bonds are guar- anteed by the Ohio Electric Railway and although sub- ject to two prior liens, are in a very good investment position. At 92 the yield is about 6 per cent., as the bonds have onlv 14 years t> run. Selected Public Utility Bonds 1K> Ironwood & Bessemer Railway & Light Co. first 5s, due Feb. 1, 1936. Interest Feb. & Aug. 1, at American Trust Co., Boston. Callable at 104 on and after Feb. 1, 1916. The property back of this issue appears to be amply sufficient, and the company shows a good surplus above charges. At 92 the yield is about 5.65 per cent. Jackson (Miss.) Light & Traction Co. first 5s, due April 1, 1922. Interest April & Oct. 1, in New York. Callable at 105 on April 1, 1914, and thereafter. This company does the entire electric light, power, gas and street railway business of Jackson, Miss., and the earn- ings show a heavy margin of safety. At 96 the yield is about 5.55 per cent. Jacksonville (Fla.) Traction Co. first consolidated 5s, due March 1, 1931. Interest March & Sept. at State Street Trust Co., Boston. Callable at 105. Company does entire street railway business of Jacksonville, Fla., under franchise extending to 1932. The bonds are sub- ject to a first mortgage but enjoy a heavy margin of safety. At 95 they yield about 5.40 per cent. Johnstown (Pa.) Passenger Railway Co. refunding 4s, due Dec. 1, 1931. Interest June & December at Johns- town Trust Co., Johnstown, Pa. Callable at 105. This company operates street railways in city of Johnstown, Pa., and is one of the constituent companies of the Amer- ican Railways Co. of Philadelphia. It is itself leased to the Johnstown Traction Co. until 1928. Franchises are perpetual. Although there is a small underlying mort- gage, the margin of safety is a liberal one, and the bonds 116 How to Invest Money Wisely are very attractive at the price of 89, at which the yield is about 5 per cent. Kansas City (Mo.) Gas Co. first 5s, due April 1, 1922. Interest April & October in New York. This is one of the constituent companies of the United Gas Improve- ment Co. of Philadelphia, and the bonds are in a very strong investment position. They have but ten years to run and at 98 yield about 5.25 per cent. Madison Rirer Power Co. first 5s, due Feb. 1, 1935. Interest Feb. & Aug. at United States Mortgage & Trust Co., of New York. Callable at 105. Company is con- trolled by Butte Electric & Power Co. which guarantees the bonds. This is to be regarded as a very strong issue, and at the price of 94^ yields about 5.45 per cent. Michigan United Railways Co. first & refunding 5s, due May 1, 1936. Interest May & November at Colum- bia-Knickerbocker Trust Co., New York. Callable at 110 after May 1, 1916. While these bonds have several prior liens ahead of them, they are in a strong and stead- ily improving position. The bonds are entitled to a strong rating. At the present price of 94, the yield is about 5.45 per cent. Milwaukee Gas Light Co. first 4s, due May 1, 1927. Interest May and November at J. & W. Seligman & Co., New York. This is a well-seasoned bond which is secured by practically first lien on the property of the company, which is one of the constituent companies of Selected Public Utility Bonds 117 the American Light & Traction Co. Callable at 110. At 91 (the recent price) the yield is about 4.85 per cent. New Orleans Railway & Light Co. general 4 l / 2 s, due July 1, 1935. Interest January and July at New York Trust Co., New York. Company is controlled by Ameri- can Cities Co. and bonds are well protected by a wide margin of safety, although subject to various underlying liens. Callable at 105. At price of 87 the yield is about 5.50 per cent. New York & Richmond Gas Co. first 5s, due May 1, 1921. Callable at 110. Interest May and November at Liberty National Bank, New York. The issue is secured by first lien, and as it has but nine years to run, is very attractive at the price of 96, the yield being about 5.60 per cent. Norfolk & Portsmouth Traction Co. first 5s, due June 1, 1936. Interest June and December 1, at Trust Co. of North America, Philadelphia. Callable at 110. This company was in 1911 consolidated with Virginia Rail- way & Power Co., which has assumed the bonds. They are well protected in equity and earnings, and look attract- ive at the price of 88, the yield being about 5.90 per cent. Northern Indiana Gas & Electric Co. first and refund- ing 5s, due April 1, 1929. Interest April and October in New York and Chicago. Callable at 103. This is one of the constituent companies of the United Gas Improve- ment Co., and the bonds are strongly protected. At 90, the yield is about 5.90 per cent. 118 How to Invest Money Wisely Xorthern Texas Traction Co. first 5s, due January 1, 1933. Interest January and July in New York or Cleve- land. Callable at 105 on or after January 1, 1913. These bonds are prior in lien to the Northern Texas Electric Co. collateral trusts 5s, being secured by first mortgage on the entire electric railway system of the company. The lines are located in Fort Worth and Oak Cliff, Texas, with an interurban line of about 33 miles between Fort Worth and Dallas. The chief franchise runs to 1973. The bonds are protected by a very wide margin of safety, and are to be regarded as an attractive investment at current prices. At the present price of 101 the yield is nearly 5 per cent. North Carolina Public Service Co. first and refunding 5s, due April 1, 1934. Interest April and October 1 in New York. Callable at 105 on three weeks' notice. Except for a small prior lien on a portion of the property, these bonds are a first mortgage on the entire utility system of Greensboro and High Point, N. C, under franchises which all extend beyond the maturity of the bonds. A sinking fund will provide for a large part of the issue before maturity, and as the bonds are protected by a liberal margin of safety, they seem a desirable investment at the price of about 90, the yield being about 5.80 per cent. Northern Illinois Light & Traction Co. first 5s, due July 1, 1923. Interest January and July 1 at American Trust Co., Boston. Secured by first lien on entire prop- erty of the company, which operates a street railway, Selected Public Utility Bonds lighting and power plant in Ottawa, 111., under franchises which extend beyond the redemption date. This is a subsidiary company of the Western Railway & Lighting Co. As the bonds have but 11 years to run, they look attractive at the price of 95, the yield being about 5.65 per cent. Xorthcrn Ohio Traction & Light Co. first consolidated 4s and 5s, due January 1, 1933. Interest January and July in New York or Cleveland. This bond is secured subject to about $3,000,000 of prior liens, but is protected by a good equity, and stands well as one of the divisional liens of the system. The bulk of the issue carries 4 per cent interest, and at the price of 74 yields 6.20 per cent. As the bonds have but 21 years to run, they look attract- ive at the price. Oklahoma Gas & Electric Co. first 20-year 5s, due October 1, 1929. Interest April and October at Harris Trust Savings Bank, Chicago. Callable at 102 1 /> and interest, on and after October 1, 1914. The issue is secured by first mortgage on all the property of the com- pany, which does the entire gas and electric business of Oklahoma City and vicinity. The earnings show a heavy margin of safety and the franchises extend well beyond the life of the bonds. At the price of 97 the yield is 5.25 per cent., with 17 years to run. Ottumiva Railway & Light Co. first and refunding 5s, due January 1, 1924. Interest January and July 1 at Central Trust Co. of Illinois, Chicago. Callable at 103 120 How to Invest Money Wisely on four weeks' notice. The bonds are well secured on all the property of the company, which embraces the entire public utility business of Ottumwa, Iowa. A small prior lien of $310,000 due 1921, underlies the issue on a part of the property. The company itself is controlled by the Standard Gas & Electric Co., and the earnings are at present over double the interest on this issue. With only 12 years to run, these bonds look attractive at the present quotation of about 90, the yield being about 6.20 per cent. Pacific Poiver & Light Co. first and refunding 5s, due August 1, 1930. Interest February and August at United States Mortgage & Trust Co., New York. Callable at 105 until December 31, 1925; at 104 during 1928; at 102 during 1929, and at 101 from January 1 to June 30, 1930. This company is a consolidation of public utility prop- erties serving about 50 communities in the States of Washington, Oregon and Idaho. It is controlled by the American Power & Light Co., which in turn is con- trolled by the Electric Bond & Share Co., the latter being controlled by General Electric interests. The fran- chises are all strong, and there is a good margin of safety in earnings, which will further increase as new construction work is completed. A first-class bond at an attractive price. At 93y 2 the yield is about 5.55 per cent. Pensacola Electric Co. first 5s, due August 1, 1931. Interest February and August at Old Colony Trust Co., Boston. Callable at 105 on two weeks' notice. Com- Selected Public Utility Bonds 121 pany controls the entire street railway and electric light- ing business of the city of Pensacola, Fla., under strong franchises which extend beyond the life of these bonds. This issue is secured by first or collateral first lien on the entire property, and the margin of safety is ample to justify a good rating for the bonds. At the price of 90 the yield is about 5.88 per cent. Peoria Gas & Electric Co. first 5s, due January 1, 1923. Interest January and July at Bankers Trust Co., New York. Callable at 105 on 60 days' notice. Com- pany owns and operates gas and electric light plants in Peoria, 111., and vicinity, and is controlled by the Peoria Light Co., which in turn is controlled by the Union Rail- way, Gas & Electric Co. The franchises are all strong, and as these bonds are an underlying issue, secured by absolute first mortgage and are protected by a wide equity, a strong rating is justified. At 100 the bonds yield the full 5 per cent. Portland (Me.) Electric Co. first sinking fund 5s, due August 1, 1926. Interest February and August 1 at Portland Trust Co., Portland, Me. Callable at 110 and interest on 5 weeks' notice. Sinking fund retires 1 per cent, annually of outstanding bonds. The company operates under strong franchises and the earnings have long shown a wide margin of safety. An attractive investment, running 14 years. At the price of 98%, the yield is 5.15 per cent. Puget Sound Poiuer Co. first 5s, due June 1, 1933. Interest June and December 1 at Old Colony Trust Co., 122 How to Invest Money Wisely Boston. Callable at 110 on 60 days' notice. Sinking fund retires 1 per cent, of issue annually. Company is controlled by Seattle Electric Co., the latter being con- trolled by the Puget Sound Light & Traction Co., one of the "Stone & Webster" properties. The bonds are guar- anteed by the Seattle Electric Co., and are in a strong investment position. At 99 the yield is about 5.08 per cent. Southern Power Co. first 5s, due March 1, 1930. In- terest March and September 1 at Farmers Loan & Trust Co., Xew York. Callable at 105 on any interest date. Company supplies power to more than 148 mills in South Carolina, and also does the entire public utility business of Charlotte, S. C, through ownership of the Charlotte Electric Railway, Light & Power Company. The fran- chises are strong, and these bonds are protected by a first mortgage and a high margin of safety. At 99 the yield is about 5.08 per cent. Springfield (Mo.) Railway & Light Co. first lien sink- ing fund 5s, due May 1, 1926. Interest May and No- vember 1 at Guaranty Trust Co., New York. Callable at 102 and interest on any interest date. This is one of the subsidiary companies of the Federal Light & Traction Co., and the bonds are secured by first lien on the entire public utility business of Springfield, Mo. The franchises extend well beyond the maturity of the bonds. At 94, the yield is about 5.65 per cent. Superior Water, Light & Power Co. first sinking fund K due May 1, 1931. Interest May and November at Selected Public Utility Bonds I' n it eel States Mortgage & Trust Co., New York. Callable at 103 and interest. Company controls the public utilities of Superior, Wis., and an interurban line between Superior and Duluth. The franchises are strong, and the bonds protected by a high margin of safety. At 82 the yield is about 5.55 per cent. Tri-City Railway & Light Co. first and refunding 5s, due July 1, 1930. Interest January and July 1 at Central Trust Co., New York. Callable at 105 on any interest date. Bonds are a first lien on interurban railway extend- ing from Davenport to Muscatine, Iowa, about 30 miles, and also subject to prior liens on all the other property of the company, which does the public utility business of Davenport and vicinity. Franchises are strong, and the margin of safety is steadily growing. At 95 the yield is about 5.45 per cent. Tntmbull Public Service Corp. first sinking fund 6s, due June 1, 1920. Interest June and December in New York and Cleveland. Callable at 105 prior to June 1, 1915, and at 102 thereafter. Sinking fund retires 2 per cent. of bonds annually after June 1, 1915. Company oper- ates the gas, electric light and water utilities of the cities of Warren, Niles, Newton Falls and Leavittsburg, Ohio, and is under the management of the Doherty Operating Co. Franchises extend beyond life of bonds and the margin of safety is a growing one. At 98 the yield is about 6.15 per cent. Twin States Gas & Electric Co. first and refunding , due October 1, 1926. Interest April and October 124 How to Invest Money Wisely 1 at Knickerbocker Trust Co., New York. Company operates public utilities in Dover, N. H., and Brattleboro, Vt., and also electric light and power in various other towns in this vicinity. Is controlled by National Light, Heat & Power Co., which guarantees the bonds. A good margin of safety is shown, and at 92 the bonds yield about 5.30 per cent. Union Electric Light & Power Co. refunding and ex- tension 5s, due May 1, 1933. Interest May and Novem- ber 1 at Bankers Trust Co., New York. Callable at 110 on and after May 1, 1918. Company does a large electric light and power business in the city of St. Louis under strong franchises, and is controlled by the North Ameri- can Co. The bonds enjoy a wide equity and a good in- vestment rating is justified. At 97 the yield is about 5.25 per cent. United Electric Light & Power Co. first consolidated 4J/2S, due May 1, 1929. Interest May and November at Maryland Trust Co., Baltimore. This is one of the liens of the Consolidated Gas, Electric Light & Power Co. of Baltimore, and these bonds are in a strong investment position. At the price of 94 the yield is about 5 per cent. Utah Light & Power Co. consolidated 4s, due January 1, 1930, interest January and July at Empire Trust Co., New York. Callable at 100 on any interest date. Com- pany controls public utilities in the cities of Salt Lake and Ogden, Utah, and is controlled by the Union Pacific Railroad Co. Franchise extends to 1955 and bonds are Selected Public Utility Bonds 125 well protected, although not a first mortgage on all the property. At .80 the yield is about 5.80 per cent. Virginia Railway & Poiver Co. first and refunding 5s, due July 1, 1934. Interest January and July 1 at Equit- able Trust Co., New York. Callable at 105 at any in- terest date. Bonds are a first lien on practically all the property of the company, which operates the electric utilities in Richmond and Petersburg, Va., and also con- trols various other companies, including the street rail- way of Norfolk and Portsmouth, Va. There is a good margin of safety in earnings, and at 96 the bonds yield about 5.30 per cent. Western Ohio Railway Co. first 5s, due November 1, 1921. Interest May and November 1 in New York. Company is controlled by the Western Ohio Railroad Co., which guarantees the bonds. On a part, the issue is subject to a small first mortgage, but is well protected by a good margin of safety. At 93 the yield is about 6.00 per cent. York Railways first 5s, due December 1, 1937. In- terest June and December 1 at Philadelphia. Callable at 110 on any interest date. Bonds are a first lien on all the property of the company, consisting of over 82 miles of street railway, with perpetual franchises. Issue en- joys a good margin of safety. At 97 the yield is about 5.20 per cent. This completes the list of fifty selected public utility bonds. Not all of these issues are of equal strength, 126 How to Invest Money Wisely but all pass good investment tests, and from the list many selections can be made for individual investment or for general investment distribution. Recapitulation: For an investor who wishes to dis- tribute a portion of his capital very broadly among public utility issues, probably no better list could be selected. It will be noted that no two of these issues are tied to one string ; all are spread broadly over the entire country ; there is diversity of type, diversity of lien, diversity of management, etc. Of course, no investor should put his entire capital into one line like public utility bonds, but for one who has a substantial investment fund, about 25 per cent, invested in this list, in equal amounts of each issue, would be investment intelligence of a high order. For such an investor, the scheme would work out as *hown on page 127. In this list there are 250 bonds, 5 of each issue. The total cost of 250 bonds at the prices shown would be $231,237.50, and the average yield on the money, assum- ing that the bonds would be held until maturity, would be over S 1 /^ per cent. The total income per annum on the investment would be $12,175, so that, disregarding the appreciation to par during the life of the bonds, the holder would have a straight yield of over 5i/i per cent, nn his investment. Of course, a smaller investor could either eliminate some of the issues or else buy only one or two of each. And even a very large investor, if he wished to concen- trate his holding more, could select a portion of the issues Selected Public Utility Bonds 127 Amount Title ft $5,000 Am. Tel. & Teleg. col. 4s... 5,000 Atchison Ry. L. & P. 5s 5000 Atlantic City El 5s aturity 1929 1935 1938 1932 1938 1933 1936 1936 1923 1932 1929 1936 1931 1925 1926 1936 1922 1931 1931 1922 1935 1936 1927 1935 1921 1936 1929 1933 1934 1923 1933 1929 1924 1930 1931 1923 1926 1933 1930 1926 1931 1930 1920 1926 1933 1929 1930 1934 1921 1937 Price 90i 95 03 95 92 89 94 96 96 96 97 91 96 90 92 92 96 95 89 98 94i 94 91 87 96 88 90 101 90 :id and indifferent. Some are highly speculative, just as many common stocks are, and some are very "high grade" and secure, as in the cases of many bonds. Railroad Preferred Stocks as Investments Ml For the genuine investor, who has no idea of speculating on the future, and who is in search of stability of both income and principal, the average preferred stock is of course to be selected rather than the common stock, even when all other things are equal. For example, it would take very little demonstration to show that Atchison pre- terred, a 5 per cent stock, is more desirable for perma- nent investment than New York Central, which is also a 5 per cent stock. If one wished to speculate, then New York Central might be the better in the long run, but not otherwise. In order to show the varying characteristics of the leading preferred stocks of steam railroads, I append below brief descriptions of some of the important issues, most of which have for many years stood on a sound plane as permanent investments. Atchison, Topeka & Santa Fe Railway 5 per cent non- cumulative preferred. This issue has preference over the common stock as to assets, up to its par value, and also as to non-cumu- lative dividends not exceeding 5% per annum. No new mortgage or other bond or stock obligation can be cre- ated without the consent of "a majority of all the pre- ferred stock and all the common stock represented at a meeting" called to vote on such a proposition. Both preferred and common stock have equal voting power. It will be noted that in this case, the preferred stock- holders have but slight protection as against the wishes 132 How to Invest Money Wisely of the common stockholders in the event of questions like the above arising. The common stock has been many times increased in recent years, and is today in excess of $170,000,000, so that the solid vote of all the preferred holders against a proposition to create further mortgage indebtedness, would not prevent such indebt- edness from being created. The limit of the preferred stock is $131,486,000, and at the time of organization the common stock outstanding amounted to less than $103,000,000, or under 50% of the whole. But today, the common stockholders control the policy of the com- pany. The preferred stock has paid dividends regularly since 1900. The highest this stock has sold within the past decade has been 106^4 in 1909; the lowest, 78 in 1907. Baltimore & Ohio Railroad / per cent non- cumulative preferred. This stock has preference as to assets up to its par value, and to 4% non-cumulative dividends. New mort- gages may be created by majority vote of both classes of stock, each issue having equal voting power. As the common stock is in a large majority, it will be seen that the preferred issue does not control the financial policy of the company. Dividends at the full rate have been paid since 1900. During the past ten years the stock has sold as high as 100 in 1905, and as low as 75 in 1907. Railroad Preferred Stocks as Investments 133 Chicago & North Western Railway non-cumulative preferred. The preferred issue has preference to dividends up to 7% per annum, after which the common stock is en- titled to 7% ; when the common has received 7%, then the preferred has preference to 3% more; and after each class of stock has in any one year received 10% dividends, then if there are any further earnings avail- able for dividends, each class of stock is to share alike in any further distribution. As the authorized amount of preferred is only $22,298,955, and the common much heavier, the financial policy of the company is in the hands of the latter. The preferred stock has received S% per annum since 1902, but the common has never received more than 7%. Since 1901 the preferred has sold as high as 270 in 1906, and as low as 185 in 1907. Chicago, St. Paul, Minneapolis & Omaha / per cent non-cumulative preferred. This stock has preference to 7% non-cumulative divi- dends, after which the common is entitled to 7% ; when both issues have received 7%, both stocks share alike in any further division of earnings. Both issues have equal voting power and the common stock controls. The full 7% dividend has been paid for many years. The highest price within the past ten years was 210 in 1902, and the lowest, 137^ in 1907. 1-54 How to Invest Money Wisely Chicago, Milwaukee & St. Paul Railway / per cent non-cumulative preferred. The stock has preference to 7% non-cumulative divi- dends, after which the common is to receive 7%, all fur- ther dividend disbursements to be divided equally be- tween the two classes. Both stocks have equal voting power and the amount outstanding is the same. The stock reached the highest price of the decade in 1906 when it sold at 218, and the lowest, 130 in 1907 Erie Railroad first and second preferred. The first preferred has first preference as to assets and to 4% non-cumulative dividends ; the second pre- ferred following, with all additional earnings going to the common stock. All stocks have equal voting power, but it is provided that no additional mortgage can be placed on the property, nor the amounts of preferred stock increased, without the vote of at least one-half of the two preferred stocks, and one-half of such of the common stock as may be represented at a meeting. Fur- thermore, the general voting rights are shared with the bondholders of the prior lien and general lien bonds ; each bond of a par value of $1,000 having ten votes. As these two bond issues aggregate over $70,000,000, and will ultimately aggregate much more, they practi- cally control the financial policy of the company jointly with the first preferred stock. (The Erie preferred stocks are in no sense "investments" at the present time, Railroad Preferred Stocks as Investments 1 :>."). but they are included in this list to show their peculiar position in relation to other securities on the system. ) Pittsburgh, Cincinnati, Chicago & St. Louis A J -5 Central R. R. of N. J 1912-1917 4 Chesapeake & Ohio 1912-1917 4 Chicago & Alton 1912-1917 4-4J4-5 Chicago & Eastern Illinois 1912-1917 4^-a Chi., R. I. & P. Ry 1912-1917 4^-5 Cin., Ham. & Dayton 1912-1919 4^-5 Delaware & Hudson -1922 V/ 2 Erie 1912-1917 4-4J/2-5 Hocking Valley 1912-1918 4-4 '/> Hudson & Manhattan 1912-1919 ."i Kan. City, Ft. Scott & Mem 1912-191:, 4'/> Kansas City Southern 1912-1915 4}/> Lehigh Valley Railroad 1912-1916 4-4K- Missouri Pacific 1912-1917 5 Mobile & Ohio 1912-1916 1-6 X. Y. Central Lines 1912-1922 5 Norfolk & Western 1912-1916 4 Pennsylvania 1912-1917 3J^-4 St. Louis & San Fran 1912-1917 4-4^-5 Seaboard Air Line 1912-1917 4^-5 Southern Railway 1912-1921 2 I / 4-4-4 1 /? Virginian Railway 1912-1917 5 XXI Investing in Convertible Bonds WITHIN the past decade the "convertible" bond has become increasingly popular among inves- tors of all classes. Its popularity is undoubt- edly largely due to the fact that it is an ingenious combination of investment and speculation. When a bond of this character is issued by a corporation of strong earn- ing power and the issue itself enjoys a good margin of safety, the investor is justified in feeling quite secure as to his interest and the payment of his principal. It is true that most convertible issues are either debentures or junior mortgages, but in all cases they have greater equity back of them than have the stocks into which they are usually convertible, and these stocks are themselves usually dividend payers, with the protection of a sub- stantial earning* power. For we find that but few convertible bond issues have been created by corporations whose stocks are not paying dividends. And this is quite natural. The only reason why the railroad or other corporation issues a convertible security is because it is apt to find a better market, and it finds a better market because people who seldom if ever buy bonds, but confine their investments chiefly to ( 167 ) 168 How to Invest Money Wisely stocks, will buy the convertible bond to get the benefit of the potential possibilities of the future. Thus, where a corporation under ordinary conditions could not sell a 4 per cent mortgage bond for more than 90, it can sell a 4 per cent bond convertible into a 5 per cent or 6 per cent dividend paying stock, at par without any trouble. For the investor who does not care to purchase stocks, but wishes to confine himself exclusively to bonds, the convertible bond issue is sometimes the ideal thing to buy. Nowadays there are in existence such a large number of convertible issues, that a pretty comprehen- sive scheme of investment distribution can be carried out within the limits of this single type of security. Of course, convertible issues frequently sell at very high prices as compared to what the bond would sell at as a straight mortgage, and there are times when it would be foolish for people to put much money into many of these issues. At the same time, it is often quite desir- able to pay a moderate premium for a convertible bond in order to secure the potential interest in the future growth of earnings in the company. Those who, a few years ago, bought Norfolk & Western convertible 4s at 92, have fared very well. At that time the stock was paying 4 per cent dividends and selling at 88, but now 6 per cent is paid on the stock and it sells at 117. Of course, the bondholder has had full opportunity to exchange into the stock and get a 6 per cent return ; but even if he still holds his bond, he has a market for it which follows the stock, and will continue to do so as long as the con- vertible clause holds. Investing in Convertible Bonds 169 Convertible bonds have been issued in recent years, not only by the railroads, but also by many public utility and industrial companies. I append below a list of the most important issues, with a brief explanation of the terms, in each case, for the convertibility of the issue. Albany & Susquehanna Railroad first mortgage con- vertible 3^2 s; due April 1, 1946. Convertible at par at any time prior to April 1, 1916, into stock of Delaware & Hudson Co. at 200; that is, 5 shares of stock ($500) par for each $1,000 bond. American Agricultural Chemical Co. first mortgage convertible 5s; due October 1, 1928. Convertible at any time, into cumulative 6 per cent preferred stock at par; that is, 10 shares of stock ($1,000 par) for each $1,000 bond. American Telephone & Telegraph Co. convertible debenture 4s; due March 1, 1936. Redeemable on March 1, 1915, or on any interest date thereafter, on 12 weeks' notice, at 105 and interest. Convertible until March 1, 1918, at par into stock at 133.7374, with accrued interest and dividends adjusted; that is, a $1,000 bond would receive the equivalent of $747.70 in par value of stock (the stock would have to sell at 133.734 to give an exact equivalent of one bond). Atchison, Topeka & Santa Fe Railway convertible debenture 5s; due June 1, 1917. Convertible into com- mon stock at par at any time prior to June 1, 1910. 170 How to Invest Money Wisely Atchison, Topeka & Santa Fe Railway convertible debenture 4s (old issue) ; due June 1, 1955. Convertible into common stock at par at any time prior to June 1, 1918. Redeemable at five months' notice at 110 and interest. Atchison, Topeka & Santa Fe Raihvay convertible debenture 4s ; dated 1909; due June 1, 1955. Convertible into common stock at par at any time prior to June 1. 1918, but not thereafter. Atchison, Topeka & Santa Fe Railway convertible debenture 4s; dated 1910; due June 1, 1960. Convertible into common stock at par from June 1. 1913. to June 1. 1923, but not thereafter. Atlantic Coast Line Railroad convertible debenture 4s ; due November 1, 1939. Redeemable after May 1, 1916, at 105, and convertible into common stock at $135 per share up to January 1, 1920; that is, it requires $135 in par value of bonds to receive $100 in par value of stock. Brooklyn Rapid Transit Co. first refunding convertible 4s; due July 1, 2002. Redeemable at 110 and interest. Convertible into stock at par prior to July 1, 1914, unless the bond is endorsed with the words. "Convertibility of this bond is waived by the holder." Chesapeake & Ohio Railway convertible 4 l / 2 s', dated 1910; due February 1, 1930. Redeemable after 1915 at 102V*>. Convertible into stock at par between May 1, 1911, and February 1, 1920. Investing in Convertible Bonds 171 Chicago, Milwaukee & St. Paul Railway convertible debenture 4^s; clue June 1, 1932. Convertible into common stock from June 1. 1917, to June 1, 1922, at the option of the holders. Erie Railroad convertible mortgage Series A 4s; due April 1, 1953. Convertible at any time prior to April 15, 1912, into common stock at 50; that is, for each $1,000 bond, $2,000 in par value of stock will be given. Erie Railroad convertible mortgage Series B 4s; due April 1, 1953. Convertible at any time prior to October 1, 1917, into common stock at 60; that is, for each $1,000 bond, $1,666.66 in par value of stock will be given. International Paper Company consol. mortgage con- vertible 5s; due January 1, 1935. Convertible into pre- ferred stock at par on any interest date prior to January 1, 1917. New York, New Haven & Hartford Railroad con- vertible debenture 3>^s; due January 1, 1956. Convertible into stock at 150, between January 1, 1911, and January 1, 1916; that is, $300 in par value of bonds is convertible into two shares of stock. New York, New Haven & Hartford Railroad con- vertible debenture 6s; due January 15, 1948. Convertible into stock at par from January 15, 1923, to January 15, 1948. Norfolk & Western Railway convertible debenture 4s of 1907; due June 1, 1932. Redeemable at 105 and in- 172 How to Invest Money Wisely terest at option of company. Convertible into common stock at par at any time prior to June 1, 1917. Norfolk & Western Raihvay convertible debenture 4s of 1912; due September 1, 1932. Convertible into common stock at par at any time prior to September 1, 1922. Redeemable at 105 after the latter date. Pennsylvania Railroad convertible debenture 3%s ; due October 1, 1915. Convertible into stock at $75 (par value $50) per share; equivalent to 150 as quoted on New York Stock Exchange. Southern Pacific Company convertible debenture 4s; due June 1, 1929. Redeemable at option of the com- pany on and after March 1, 1914, at 105 and interest. Convertible at any time prior to June 1, 1919, into common stock at 130; that is, it takes $130 in par value of bonds to receive one share of stock of the par value of $100. Union Pacific Railroad convertible debenture 4s; due July 1, 1927. Redeemable on and after July 1, 1912, at 102J/2 and interest. Convertible at any time prior to July 1, 1917, into common stock at 175; that is, it takes $175 in par value of bonds to secure one share of stock of the par value of $100. In this list, which includes only the most important issues of convertibles, we have railroads, public utilities and industrials represented. An investor in this field, with a fair amount of capital, could spread his risk Investing in Convertible Bonds 1<:> throughout the entire United States, just as he might do with the stocks themselves, and would have an interest in the future growth of all the properties represented. If, for example, a railroad system like the Southern Pacific should, during the next ten years, largely increase its dividend, and consequently the value of its stock, he would share in such growth through the appreciation in the value of his bond. On the other hand, should the road experience a severe setback and cut its dividend, the bonds would still be good and sell at a price which reflected the general credit of the company. ALPHABETICAL INDEX PAGES Adams Express Co. coll. 4s, due 1948 100 Albany & Susquehanna guaranteed stock 140 Atlanta & Charlotte Air Line stock 141 American Agricultural Chem. preferred stock 148 American Agricultural Chem. 5s of 1928 101 American Beet Sugar preferred stock 148 American Car & Foundry preferred stock 149 American Cities Co. preferred stock 157 American Cotton Oil 5s of 1931 101 American Gas & Electric preferred stock 158 American Light & Traction preferred stock 158 American Telephone & Telegraph coll. 4s of 1929 ill American Smelting & Refining preferred stock 147 American Sugar Refining preferred stock 149 American Writing Paper 5s of 1919 101 Application of Sound Principles 43 Applying Investment Principles 33 Armour & Co. Real Estate 4 l / 2 s of 1939 101 Atchison Railway Light & Power first 5s Ill Atchispn, Topeka & Santa Fe preferred stock 131 Atlantic City Electric Co. 5s of 1938 Ill Baltimore & Ohio preferred stock 132 Beech Creek guaranteed stock 140 Bethlehem Steel Co. 5s of 1926 102 Burlington Railway & Light Co. 5s of 1932 Ill Butte Electric & Power Co. preferred stock 158 Carolina Power & Light first 5s of 1938 Ill Central Leather Co. 5s of 1925 102 Chicago, Milwaukee & St. Paul preferred stock 134 Chicago & North Western preferred stock 133 Chicago, St. Paul, Minneapolis & Omaha preferred stock. . . 133 Cincinnati Gas Transportation 5s of 1933 112 Classifying Investments 34 Cleveland & Pittsburg R. R. guaranteed stock 141 Colorado Fuel & Iron Co. general 5s of 1940 102 Columbia Railway Gas & Electric 5s of 1936 112 Concord & M9ntreal R. R. guaranteed stock 141 Connecticut River Railroad guaranteed stock 141 Consumers Power Co. 5s of 1934 103 Convertible Bonds as Investments 167 (174) Alphabetical Index 175 PAGES Danville, Urbana & Champlain Railroad 5s of 1923 113 Distribution and Profit Combined 75 Diversifying Investments 9 Eastern Oregon Light & Power 5s of 1929 113 East St. Louis & Suburban coll. 5s of 1932 113 E. I. du Pont de Nemours Powder Co. 4^s of 1936 103 E. I. du Pont de Nemours Powder Co. preferred stock 150 Erie & Pittsburg guaranteed stock 142 Erie Railroad first and second preferred stocks 134 Equipment Trusts as Investments 166 Examples 50, 51, 53, 70, 77, 82, 83, 84, 127 Factor of Maturity in Bonds . 49 Fort Smith Light & Traction 5s of 1936 114 Fort Worth Power & Light 5s of 1931 114 Georgia Railroad & Banking Co. guaranteed stock 142 Georgia Railway & Electric preferred stock 159 General Chemical Co. preferred stock 150 Government Issues as Investments 88, 89 Groups of Investments 34, 39 Guaranteed Railroad Stocks as Investments 139 Helena Light & Railway 5s of 1925 114 Illinois Traction Co. preferred stock 159 Indianapolis, Columbus & Eastern Traction 5s of 1926.... 114 Industrial Bonds as Investments 88, 90, 92, 99 Industrial Preferred Stocks as Investments 145 Industrial Stocks 88, 90, 92 International Harvester preferred stock 151 International Nickel Co. 5s of 1932 103 International Paper Co. 5s of 1935 103 International Steam Pump Co. 5s of 1929 104 Investment Cycles 67 Investment of Moderate Sums 81 Investing for Profit 57 Ironwood & Bessemer Railway & Light 5s of 1936 115 Jackson (Miss.) Light & Traction 5s of 1932 115 Jacksonville (Fla.) Traction 5s of 1931 115 Johnstown Passenger Street Railway 4s of 1931 115 Kansas City (Mo.) Gas Co. 5s of 1922 116 Lackawanna Steel & Iron conv. 5s of 1923 104 Laclede Gas Co. preferred stock 1 59 176 Alphabetical Index PAGES Lake Shore & Michigan Southern 3Mjs, Action of 13 Larger Sums, Plans for Investment of. '. . . '. .87, 88, 92 Little Miami Railroad guaranteed stock 142 Maturity, Factor of, . in Bonds 49 Michigan United Railways 5s of 1936. 116 Milwaukee Electric Ry. & Light preferred stock.... ;. 160 Milwaukee Gas Light Co. 4s of 1927 116 Minneapolis General Electric preferred stock 160 Mistaken Investment Methods 17 Madison River Power first 5s of 1935 >: ,.. .... 116 Moderate Sums, Plans for Investment of 81, 82~ 83, 84 Morris & Co. first 4V 2 s of 1939 104 Morris & Essex guaranteed stock. 143 National Biscuit preferred stock 151 National Enameling & Stamping ref. 5s of 1929 105 National Tube Co. first 5s of 1952 105 New Orleans Railway & Light 4%s of 1935 117 New York City 4s, Action of 13 New York & Richmond Gas 5s of 1921 117 Norfolk & Portsmouth Traction 5s of 1936 117 North Carolina Public Service 5s of 1934 118 Northern Illinois Light & Traction 5s of 1923 118 Northern Indiana Gas & Electric 5s of 1929 117 Northern Ohio Traction & Light 5s of 1933 119 Northern Texas Traction 5s of 1933 118 Oklahoma Gas & Electric Co. 5s of 1929 119 Old Colony Railroad guaranteed stock 143 Otis Elevator conv. 5s of 1920 105 Ottumwa Railway & Light 5s of 1924 119 Pacific Power & Light ref. 5s of 1930 120 Pensacola Electric Co. 5s of 1931 120 Peoria Gas & Electric Co. 5s of 1923 121 Pittsburg, Cin., Chic. & St. Louis preferred stock !:;:> Pittsburg, Fort Wayne & Chicago guaranteed stock .... 144 Pittsburg, McKeesport & Yough. guaranteed stock 144 Plans for Investment of Larger Sums 87 Plans for Investment of Moderate Sums 81, 82, 83, 84 Portland Electric Co. 5s of 1926 1 :: I Potential Possibilities, Taking Advantage of 59 Primary Factor Affecting Prices L'7 Profit, Distribution and Combined 75 Proper Principles for Diversifying Investments 2:> Alphabetical Index 177 PACES Public Utility 'Bonds 55, 90, 109 Public Utility Securities as a Class 37 Public Utility Stocks as Investments 157 Railroad Bonds 53, 88, 89 Railroad Preferred Stocks as Investments 88, 89, 129 Railway Steel Spring preferred stock 152 Railway Steel Spring bonds 106 Representative Railroad common stocks 62 Republic Iron & Steel 5s of 1940 106 Rights 63 Reading first and second preferred 135 Rock Island preferred 136 Seaboard Air Line preferred stock 136 Seattle Electric Co. preferred stock 161 Selection of Investments 11 Selecting Public Utility Bonds 109 Short Term Notes 163, 165 Southern Power Co. 5s of 1930 122 Special Benefits Received 163 Springfield (Mo.) Railways & Light 5s of 1926 122 Superior Water, Light & Power 5s of 1931 122 Taking Advantage of Potential Possibilities 59 Tri-City Railway & Light 5s of 1930. . : 123 Trumbull Public Service Corp. 6s of 1920 123 Twin-States Gas & Electric 4^s of 1926 123 Typical Industrial Bonds 99 Union Bag & Paper Co. first 5s of 1930 107 Union Electric Light & Power 5s of 1933 124 United Electric Light & Power 4%s of 1929 124 United States Realty & Imp. 5s of 1924 107 United States Steel preferred stock 152 United States Steel sinking fund 5s of 1963.. 107 Unlisted Industrial preferred stocks 155 Unsound Theories 21 Utah Light & Power 4s of 1930 124 Virginia-Carolina Chemical first 5s of 1923 108 Virginia-Carolina Chemical preferred stock 152 Virginia Railway & Power 5s of 1934 125 Victor Fuel Co. first 5s of 1953 108 Western Ohio Railways Co. 5s of 1921 125 York Railways Co. 5s of 1937 125 IN VESTM ENT PROTECTION The Investor, Banker, Bank Officer f K and Trustee ^alizes every day the 01 l^xper importance of expert study of the primary factors which affect secu- rity values in a far more important degree than he who simply takes a ''flyer in stocks." The latter class generally get little for their pains, but the real investor deserves something more tangible than "bitter experience ;" the Bank Officer or Trustee finds it his duty to keep himself properly informed if for no other reason, as a protection to those who have trusted to his judgment. It is a well-demonstrated fact that more money is lost through "investment" than in the ordinary fields of what is known as "speculation." And the bulk of this investment loss is incurred because in- vestors fail to properly inform themselves of the real basic factors back of their investments. A few years ago the bonds and preferred stock of the Iiiiffalo & Susquehanna Railroad were sold widely among banking institutions and investors in all parts of the Eastern States; the Allis-Chalmers first mortgage 5s and preferred stock were offered as high-grade investments by prominent houses; the Pere Marquette, Chicago Great Western, Western Pacific and Denver & Rio Grande bond issues were aggressively advertised as -inng securities: the \Yabash refunding 4s were everywhere distributed as bonds of great prospective value. To-day many of these issues are either in default or have under- gone heavy depreciation. And yet, an impartial analysis of the factors back of all of them long ago disclosed the fact that they were "speculations" and not investments. On the other hand, many bonds and dividend- paying stocks which sold at relatively low prices a short time ago have risen in value and investment strength to a marked degree. For instance, Can- adian Pacific stock has risen in the last five years to a level which the ordinary investor would not have dreamed of in 1906. This has not been due to speculative causes merely, for an analysis of the Canadian Pacific finances and property five years ago would have clearly demonstrated that the asset value of the stock would vastly increase in the future years. A study of the property assets back of the United States Steel Corporation sinking fund 5s in 1904, when they were selling at 80, would have clearly shown that they were intrinsically worth at least their par value. An unbiased analy- sis of the values back of the Standard Oil and American Tobacco issues at the time of dissolution, clearly indicated that the earning capacity of the companies was far greater than was then reflected in the prices of the stocks. And so on, ad infinitum. But further than this, a careful analysis of pri- mary factors is also of the greatest importance to those investors who confine their purchases entirely to what are known as "high-grade, seasoned invest- ments." In 1901 Lake Shore & Michigan Southern first 3^28 were in this class and sold at 110; they are still in this class, but sell below 88 ; St. Paul first 4s sold at 115 in 1902; to-day they sell below par; Chicago & Northwestern 3^s sold at I06y 2 in 1902; they are now quoted at 84; even high-grade municipal issues are nowadays ranging from ten to fifteen per cent, below the prices of a decade ago. Thus the investor who has confined his selections in the last decade to the highest grade bonds is in many cases worse off than he who has bought issues of far lower grade. Instances similar to the above could be cited al- most indefinitely, but enough has been said to show the vital importance to all, whether as Investor, Banker, Trustee or Bank Officer, of going below the surface in studying values as well as studying the general factors which bring about changes in the general price level of investments from year to year. In fact, there are just two broad general fields of study which are absolutely indispensable for the investor. First, the study of the general funda- mentals which bring about periods of inflation and depression ; affect the prevailing interest rate of the civilized world ; cause financial or industrial panics ; raise or lower the level of commodity prices, etc. Whether we are in a period of decline or improve- ment in business are questions which we should al- ways attempt to determine, but when these basic questions are answered to the investor's satisfaction. at best only half the problem has been solved. When most bankers and investors bought Buffalo & Susquehanna securities we were clearly in a period of prosperity, but this fact did not prevent them from losing their money. This brings us to the field of study which is, in all specific cases, by far the most important. It is the question of selection ; and in the problem of selection really lies the key to investment success. For while every bond or stock responds in a general way to the broad trend of business and public credit, it also responds most directly to specific in- fluences which affect it alone. And for this reason "analyzing" individual securities is usually much more important to the average investor than mere "forecasting." We may "forecast" the recurring cycles of prosperity and depression in this country with fair accuracy but if we do not analyze our in- vestment holdings and test each individual security, we frequently run a great risk of seeing at least a part of our principal swept away. p - While our analytical organization is the largest of its kind, and our Supervision facilities for gathering facts far superior to that of any other statistical organization in the world, Mr. Moody gives personal supervision to the wants of every client and does not delegate this important work to others. The Service embraces the follow- Features ing features: 1. Weekly Review of Financial Conditions, be- ing a careful analysis of the events of the week and of the financial, industrial or political factors which influence the security markets; 2. A Special Analysis (issued each week) of some particular property or some specific financial subject (send for booklet for partial list of subjects recently covered) ; 3. Weekly Bond and Investment Letter, which analyzes recent bond offerings, suggests plans for proper diversification of investments, points out strong and weak points in different issues, etc. 4. An Investment Valuation Record, issued once a month, showing the investment yield of the lead- ing issues, margin of safety in earnings, etc. 5. Monthly Analysis of Business Conditions picturing in statistical form the progress of trade and industry, with full interpretation from the in- vestor's standpoint ; 6. A Personal Correspondence System, whereby all clients have the privilege of making specific in- quiries once a week on matters which are of par- ticular interest to them; 7. A Security Record System, whereby the client may, if he chooses, file a confidential list of his holdings for the purpose of receiving regular advice regarding the list, with suggestions for change, etc. These lists are cross-indexed and filed for constant reference. The Complete Investment Service j is furnished for a fee of $100 per year which includes " Moody 's Analyses of Invest- ments," issued annually in two volumes. This publication rates all the bond and stock issues in the country on the same plan that the mercantile agencies rate the credit of merchants. It is an invaluable reference book for any investor. With- out the annual the price of the Service is $75 per year. The Service is also supplied to temporary subscribers at $ 1 per month, without the book. The annuals alone sell for $25 delivered. As a demonstration of the scope and value of the work we have been doing for investors, we cite a single instance. A year ago a client submitted to us a list of bond and stock holdings amounting to about $200,000 on which his annual return was about $7,500 or less than 4%. The bulk of the money was concentrated in one or two classes of securities, and many issues, while so-called "high- grade" had been steadily declining. We took his list in hand, suggested exchange of at least a third of the holdings, and worked out a plan for scientific distribution. To-day this total list is yielding $10,000 per annum; the principal is distributed over a broad area, the former risks are eliminated, while the close superintendence of the list by our office has relieved the investor of constant worry and trouble. MOODY'S INVESTMENT SERVICE 35 Nassau Street New York " The One Absolutely Indispensable Book" MOODY'S ANALYSES OF INVESTMENTS PART I. STEAM RAILROADS PART II. PUBLIC UTILITIES AND INDUSTRIALS ISSUED ANNUALLY Scope of They ANALYSE the annual re- ports of all the corporations of the country by a method which enables the user of the book to ascertain at a glance the TRUE VALUE of all of the Bond and Stock issues. Bankers and Brokers frequently hire ex- perts at fees ranging all the way from $500 to $1,000 each to analyze particular corporations for them. This book furnishes complete analyses of all the important corporations in the United States, the figures being all brought down to the end of the latest fiscal year, and the subject treated in every case in an absolutely impartial and unbiased manner. "The book is original and unique and supplies a want not heretofore covered by financial publications." Commercial & Financial Chronicle, New York. This book is of practical value not merely to one class in the investment field, but to all. It is not simply a Bond Broker's or Stock Broker's text book, but embraces features of unusual usefulness to Railroad Officials, Investors, Financial Institu- tions and many others. It is the one absolutely indispensable book for the Investment Banker ; the Bond Dealer; the Stock Broker; Banks and Trust Companies ; Savings Banks ; Insurance Companies ; the Individual Investor; the Bond Salesman; Rail- road Officials. Physical In tlle Ra ^ roacl Edition the phys- " ical characteristics are first dealt with. These embrace a description of the location and Territory, a table showing the diversity of the Freight Tonnage for ten years, and a further table, containing a complete TEN-YEAR RECORD of Mileage, Equipment, Passenger and Freight Density, Average Revenue Train Load, Train-mile Earnings, and Passenger and Freight Rates. These items are then averaged for the ten- year period, and a COMPARISON made with like averages of four other systems operating in similar territory. Comments are made by the writer on the exhibits shown in each case, thus furnishing a proper and simple interpretation of the figures for the use of BANKERS, BROKERS and INVEST- ORS generally. The foregoing method is applied to every railroad system analyzed, and forms a complete ten-year detailed view of the changes in the property in a physical and operating sense. Income ^ Ten-year record is presented of the INCOME ACCOUNT of each road reduced to a mileage basb. This table covers the Gross Revenue, Maintenance Expenditures, Transportation and Traffic Expenses, Net Operating Earnings, Total Net Income, Fixed Charges, Margin of Safety over charges, Surplus Available for Dividends, amounts paid in Dividends, amounts spent in Improvements, etc. These items covering the ten-year periods are then averaged, and the averages compared in each case with* those of four other similar systems. The entire exhibit is commented on by the writer, its strong and weak points being brought out clearly in each case. This analysis of income accounts forms a com- plete ten-year view of the changes of each property in its earning and dividend-paying power. It gives just the information which the STOCKHOLDER or the BONDHOLDER needs, but usually finds so difficult to obtain. Capital ^ Ten-year record is next pre- 1 sented of the HAL ANTE SHEETS Factors ra ji roa( j sstem, reduced to a mileage basis. This exhibit shows the Stocks and Bonds Outstanding, the amount of Rental Obligations (capitalized at 5%), amounts of Se- curities or Investments owned, the Net Capitali- zation of each road, and the Percentage of Net Income on Net Capital. A Dividend Record is also presented in this Table, and all figures cover the full period of ten years. Averages of the Ten- year figures are shown, and comparisons made with four other properties, as in the case of the other tables. Finally, analytical comments are made by the author on the entire exhibit, pointing out the strong or weak features on the financial side of the property. Bond ^ com pl ete record of every rail- . road bond issue of each system is Ratings furnished, the different issues be- ing listed according to their priority and general security. A Rating, based on the relative strength of each issue is then given. These ratings are presented on a plan similar to that employed by mercantile agencies in rating the credit of mer- chants. Thus, a very high-grade bond, such as Lake Shore 3^s, is rated Aaa; one of lower grade, like Baltimore & Ohio Southwestern 3^s, is rated Aa ; Erie consol. 4s. are rated A ; Missouri Pacific refunding 5s, Ba ; while much lower grade issues, such as Erie convertibles, get a rating of B, and much more speculative bonds, with doubtful futures, are rated, Ca, C, D, etc. Information is given in each case for demonstrating how the rating is ar- rived at; the nature of the lien is shown, amounts outstanding per mile are given and it is stated in each case in what State, if any, the issue is legal for savings banks. This method of listing and rating is applied to every railroad bond issue, over 1,500 bond issues being rated in the book. Stock ^ complete record of every stock issue of each system is also fur- nished, including all the guaranteed stocks. The different issues are listed according to their priority in claim on income, interest in equity, etc. A rating similar to that applied to the bond issues, is given each stock. Thus, all good guaranteed stocks are rated Aaa or Aa, preferred issues with a strong record are also rated high, some common stocks get the highest rating, while the position of the more speculative issues is shown by ratings running down from A to D or E. De- faulted bond issues, and stocks awaiting the results of reorganization, are of course in most cases rated very low. As in the bond record, information is given in connection with each stock, showing the terms of the lease, if any, or the basis of its position in earnings or equity. In the back of the volume a ten- n . year record of prices of stocks and P nce bonds is presented, showing the highest and lowest quotations of each issue in every year of the decade. No com- plete record of this nature has ever before been presented, and its extraordinary value to Bankers, Brokers and Investors need not be emphasized here. The volume covering Public Utility r'UDllC anc j i nc j us trial Securities is of the .H same broad scope and character as Industrial that covering Steam Railroads. While there are some reference books in existence which undertake to describe cor- porations in these fields, there are none aside from "Moody's Analyses of Investments" which under- take to analyze and rate the various security issues. Our book, however, in addition to furnishing full statistical records of these companies with the greatest possible completeness, analyzes the operat- ing results, classifies the stocks and bonds, and gives each security a Rating, just as is done in the volume on Steam Railroads. Each part is sold separately, at $15.00 each, or combination orders are accepted for the full year's subscription to the two parts for $25, payable on delivery. Part I, covering the Steam Railroads, is issued in January cf each year, and Part II, cov- ering Public Utilities and Industrials, in April of each year. Published by the MOODY'S INVESTMENT SERVICE 35 Nassau Street, New York City. TELEPHONE, 1299 CORTLANDT. HOW TO ANALYZE RAILROAD REPORTS By JOHN MOODY This attractive book, which has recently been issued, covers in a complete and popular way, the entire subject of railroad operation and finance. It is intended primarily for the Investor who holds railroad stocks or bonds, and supplies a long felt want for everyone who is in any way interested in railroad securities. Every stockholder receives his annual report from the railroad in which he has invested his money, but very few stockholders have the time or the technical knowledge to clearly analyze the meaning of the figures presented. This little book explains the principles whereby every statement and figure in the report can be clearly understood, and the significance properly judged. The following table of contents indicates the character of the book, and the scope of the subject. Table of Contents PART ONE INTRODUCTION : I. Preliminary Statement. II. The Railroad: Its Normal State. III. First Steps in the Analysis. IV. The Location of the Railroad. V. The Management of the Railroad. VI. The Results of the Decade. VII. Relative Values The "Railroad-Mile." PART TWO THE PHYSICAL FACTORS : VIII. Physical Factors in the Railroad. IX. Average Miles Operated. X. Equipment. XL Proportion of Freight to all Traffic. XII. Passenger and Freight Density. XIII. Average Freight Train Load. XIV. Train-mile Earniners. XV. Passenger and Freight Rates. PART THREE THE INCOME FACTORS : XVI. Earnings and Their Distribution. XVII. The General Income Account. XVIII. The Operating Revenues. XIX. The Maintenance Accounts. XX. Transportation and Other Operating Ex- penses. XXI. Outside Operations. XXII. Net Operating Revenues. XXIII. "Other Income" and Total Net Income. XXIV. Fixed Charges and the Margin of Safety. XXV. Disposal of Surplus. PART FOUR THE CAPITALIZATION FACTORS: XXVI. Assets and Liabilities of the Railroad. XXVII. The Balance Sheet. XXVIII. The Capital Assets. XXIX. The Capital Liabilities. XXX. Capitalization of Rentals. XXXI. Stocks and Bonds Per Mile. XXXII. Net Capitalization. XXXIII. Net Income on Net Capital. Appendix: Outline of Uniform Accounting Requirements for Operations of Steam Railroads, as prescribed by the Interstate Commerce Commission. Price, $2.00 per copy. Carriage lOc. The book is handsomely bound in blue flexible leather, con- tains 228 pages, and is of a convenient size which can be carried in the pocket. MOODY'S INVESTMENT SERVICE \ assau Street New York City Teh-plum.- 1:.".n RETURN TO the circulation desk of any University of California Library or to the NORTHERN REGIONAL LIBRARY FACILITY Bldg. 400, Richmond Field Station University of California Richmond, CA 94804-4698 ALL BOOKS MAY BE RECALLED AFTER 7 DAYS 2-month loans may be renewed by calling (510)642-6753 1-year loans may be recharged by bringing books to NRLF Renewals and recharges may be made 4 days prior to due date DUE AS STAMPED BELOW DEC221993 18223 322576 UNIVERSITY OF CALIFORNIA LIBRARY