Reasons For Geographical Distribution Of Capital

Now, as we shall see farther on, it is to the intrusion of Politics on the one hand, and of the condition of the Money Markets of the world on the other, that are chiefly due those dislocations and inversions of the natural value of stocks on which, as Mr. Lowenfeld was the first to point out, the principle of the Geographical Distribution of Capital depends for the success of its operations. Let us then pass the different classes of stocks through the categories I have just enumerated, with the view of seeing how their natural values as securities will turn out in relation to each other when they are passed through this mill and reduced to common denominators.

Security Government Stocks

The first category we have mentioned, namely, the extent, mass, permanence, and stability of the securities on which any class of stocks rests, is, in spite of its being the most generalised and vague, the most important of all in so far as the natural value of a stock is concerned. It is what gives Consols, and the stocks of the different Governments of the world, their position at the head of all other stocks whatever of the same country; and that for the simple reason that they are secured on the entire resources of a nation, whereas all other loans - except those with a definite Government guarantee - are secured both on a lesser amount and on a narrower range of resources, as in the case of Corporation Loans, which are secured only on the property of particular cities or towns, or of Joint Stock Companies and other ordinary business loans, on the property of a limited number of individuals only - the proprietors.

Now, if this be the case, the reader may object that if an ideal safety be an investor's aim, all he would have to do would be to distribute his capital among the Government stocks of the best accredited nations, and his problem would be solved. Yes; were it not for certain important reservations and qualifications. But it must be remembered that Government stocks, by reason of their position at the head of all other stocks in their own country, yield the

Yield Problem Of The Investor

Security versus lowest rate of interest; and something more than that is what the investor wants. The ideal safety of his capital is not, in a word, the only object the prudent investor has in view. His problem, on the contrary, is rather a triple-sided one, namely, how to get the greatest yield of interest for his money compatible with the greatest practical security and stability, not the greatest ideal or ultimate security. In other words, he balances the ideal security of Government stocks against their low yield of interest; and, if he can get practical security and stability with larger yield, he will take the chances, as is now done by trustees.

Object Of Geographical Distribution Of Capital

And it is precisely this larger yield with equal practical security which the Geographical Distribution of Capital professes to insure to those who follow its teachings. How it is done, and how stocks, which, although possessing less ideal safety, perhaps, than Government stocks, can yet be held with as much practical safety, and often, eventually possessing greater uniformity and stability, can only be fully seen when we have ascertained the natural value and rank of the other great classes of securities outside Government stocks. And this we shall be able to do by applying to them the other categories I have laid down.

Risks To Stocks Must Be Considered

It will be expedient, perhaps, to consider the next three categories together: firstly, the extent to which a class of securities gets rank by resting throughout primarily on Money rather than on Industry; secondly, the extent to which it gets rank from resting on the mathematical Law of Probabilities rather than on such prevision as is possible in the ups and downs of industry and trade; and thirdly, the part which the element of time plays in raising or lowering the rank of any class of stock, into which it enters as a leading factor. Now, the stocks which get their rank from the parts played in them by these distinctive features are mainly those of Banks and Insurance Companies, and to those I would now direct the reader's attention somewhat in detail.

Bank And Insurance Stocks

To begin with, there are various reasons why all such stocks as rest throughout primarily on Money have the advantage over all stocks that rest primarily on the ups and downs of business and trade. The first is that Money is itself the final term in every business transaction, the commodity into which all other commodities and credit values must be reduced before the wealth contained in them can be estimated or realised. Like Jupiter among the lesser gods, it coerces all other commodities and values into terms of itself; and hence it is that, whereas all other commodities after a business deal come out either enlarged or shrunk in value through the ups and downs of markets and the process of sale, Money, like a billiard ball, comes out precisely of the same value as it went in; and, as it can never want for customers, stocks that rest on money throughout have a natural security, stability, and freedom from risk which are not to be found in industrial and commercial commodities, which have to run the gauntlet of sale and the finding of a customer before they can be turned into money.