When prices are too high place investment money on deposit.

Sometimes the choice of time is not possible or is inconvenient: funds must be rendered productive with promptitude whatever the state of the money market may chance to be. If prices are low no difficulty arises; if they be high it may be quite inadvisable to purchase, since the value may be really exceptional, and a loss consequently ensue on a subsequent sale or on redemption. Hence, in the latter case, the proper course would be to make a temporary deposit of the money with a solid bank or discount house, pending the advent of a more propitious time for definite investment.

The prices of securities rise when money is cheap (that is, when loans can be negotiated in the ordinary way at a small cost in interest), and at those periods accordingly the return allowed by banks upon deposits will be low. For when money is "cheap," as it is termed, a superior return can be secured by investing in securities than by the customary modes of advances, until the rise in the values of stocks and shares (induced by the increased demand for them at such a time) attains a point where this inequality of "yield" ceases to exist: for, of course, the higher the price paid for a stock which bears a fixed rate of interest the more reduced becomes the percentage of income derived. Assume that a person can borrow £100 at 2½ per cent, and can purchase a stock bearing 4 per cent interest at par, that is, for £100. Assume, further, that the lender of the money requires (for safety) a margin of 10 per cent upon his advance. The borrower then, for the purpose of providing this margin, buys £110 of the selected stock (thus investing £10 only of his own money); on the £100 he pays £2 10s., while the investment yields him £4 8s.; so that he realises a profit at the rate of £1 18s. per annum on his actual £10 invested, or 19 per cent. As many hunters of fortune will endeavour to obtain a share in this advantage the price will rise until practical equivalence between the two rates of remuneration be reached: the speculator will sell at the increased price, discharge his advance and realise a profit. (The case here cited as part of the trade of speculation is furnished, not as an example to imitate, but simply as an explanation of one of the modes in which an advance in the value of stocks can be artificially and fictitiously created - fictitiously, I mean, as not determined, in the operation I have described, by their intrinsic merit as embodied in a genuine demand.)

Deposit Only A Temporary Expedient

It will frequently be found, as has been said, that at a period of high prices of securities any funds awaiting investment can be best utilised for the time by deposit, but as deposits do not constitute a fitting form for the disposal of money for any lengthened time, the investor, if the continuance of excessive values appears to be likely to endure, should turn his attention to lending upon the mortgage of houses and shops.

Mortgages On Shops And Houses

The return from these securities at such an epoch as that which we are now surveying will not be large, but it will be superior to the rate granted on deposits. This consideration is mentioned here incidentally only, as it will formally claim our attention in a succeeding chapter.

High prices may afford good opportunity for sale.

It is needless to add that this time of high prices may afford the opportunity for an advantageous sale, provided sound reasons induce the investor to adopt this course, and not simply the desire to realise a passing profit; frequent selling and rebuying mean the speculative habit of mind, which, if encouraged, must ultimately conduct the investor to misfortune. An explanatory remark may here be interposed. Assume that a 4 per cent stock (redeemable at par, or £100, in twenty years' time) has advanced to the price of 105; and the question is, whether an investor should purchase at once or temporarily place the purchase-money, which is meantime idle, on deposit at 3 per cent. The 4 per cent at 105 signifies an actual return of £3 16s. 2d. per cent, so that at first sight it would appear that by preferring the investment a gain of 16s. 2d. per cent per annum would be secured.

But since on the redemption or repayment of the stock a lo83 of the £5 will ensue in respect of each £100 so discharged, a sinking-fund for protection against that event must be included in the consideration; and in the present instance the annual fund requisite is 3s. 9d.; hence the net return is £4 less 3s. 9d., or £3 16s. 3d. per cent, which gives a net annual income of about £3 12s. 8d. per cent, or 12s. 8d. per annum above the deposit-rate, instead of 16s. Where time can be summoned into service before deciding upon a purchase (or sale) - and the importance of the question of time on all occasions of investing and disposing, that is, the power and convenience of waiting for favourable changes, cannot be over-computed - the golden rule is this -