Extreme Caution In Selection Of Stocks

Besides, no inherently weak or risky Industrial stocks are admitted into Mr. Lowenfeld's lists. In his scheme, on the contrary, each stock selected is in itself of unimpeachable security, and if it cannot pass his test is not admitted. These stocks consist, as I have said, mainly of Loans and Debentures and Preference shares; and the conditions which he has laid down as essential before they can be admitted to his lists, are (1) that they shall be based on the security of business concerns which have had for five or more years a steady income averaging three times as much as is necessary to pay the interest on the Debenture or Loan; (2) that they shall have twice as much capital behind them as the amount of this Debenture or Loan; (3) that they shall have habitually on hand more liquid assets than are necessary to pay the current trade debts; and (4) that in the event of a break-up sale from accident or misfortune, they shall have sufficient actual tangible property left to pay the loan with interest in full.

In my last chapter I (On The Natural Value Of Different Stocks: Banks And Insurance Companies) accepted these conditions of Mr. Lowenfeld's as sufficient to justify an investor in holding a stock as a permanent investment and embodied them in my own rough outline of what an investment scheme on the lines of Geographical Distribution should be.

Causes Of Differentiation In Yield Of Interest

Now, with all the stocks in his investment lists equally well secured on the Industrial side, it is natural that Mr. Lowenfeld should look to the other factors that enter into the value of stocks for the differentiation necessary to give him that high average of yield, with equal security and stability, which he claims for his scheme. And, indeed, this is precisely what he does. He argues that the main causes of this differentiation in yield are the prices of the Government Stocks of the different countries on the one hand, and the influence of the different Stock Exchanges in which particular classes of stock are dealt in; the separate and distinct Trade Currents that flow between different countries; and the stringency or ease of their Money Markets on the other. But of all these the influence of the price of Government Stock is paramount, inasmuch as it affects all the stocks of a country, and is more permanent, whereas that of Stock

Exchanges, Trade Currents, and Money Markets, is more partial, more casual, more transient, and more fluctuating.

Particular Stocks Selected By Mr. Lowenfeld. Reason For The Selection

Now, it will have been observed that, although Mr. Lowenfeld has relied mainly on the difference in price of Government Stocks for giving him in his scheme of Geographical Distribution the different rates of yield from which to get a higher average on equally good security than from other modes of investment, he makes his selection not from the Government Stocks themselves of the different countries, but from the Loans, Railway and Industrial Debentures or Preference shares of these countries. The reason is that as the latter are all equally affected by the prices of their respective Government Stocks they offer the same differentiations from which to strike an average as the Government Stocks themselves; but have these further advantages over Government Stocks, that they return a greater yield of interest; enjoy equal practical security; and (what is equally important for an investor) are freer from fluctuation. They yield a greater percentage of interest, not so much because Government Stocks are more ideally secure, and so have to pay less for a loan, but because, like money in one's pocket or on deposit in a bank, you can turn them into cash at any time, or at any place in their own country, with the least expense, the least delay, and the greatest ease. They are more free from fluctuation because, as we have already seen, they are less influenced by political or international complications and disturbances than Government Stocks necessarily are.

Disparity In Security Of Government Stocks In Various Countries

Later on I will present the reader with some of the maxims Mr. Lowenfeld lays down in reference to the effects of Stock Exchanges, Trade Currents, and Money Markets, on the current prices, if not the inherent ultimate value, of different geographical securities; but before doing so we may pause for a moment to consider some of the causes which have made the Government Stocks of some countries of so much lower credit for stability and security than those of others; and, in consequence, make it necessary for the industrial enterprises of these countries, however safely secured, to pay a higher rate of interest for loans. The causes, of course, are political and social as well as industrial in character. They include such considerations as the political stability or instability of the country in question; its freedom or not from either the dangers of internal revolutions or of external complications with other Powers; the stability of its Money standard, and of the laws of property and taxation; the honour of the country as a whole, or of its Municipalities and Corporations, in meeting or repudiating their debts, etc.