Part I. Hints To Investors. Chapter I. Success In Investment Depends Upon Intelligence Of Investor

How To Select

These suggestions are lessons derived from a long and varied practical experience in financial affairs, and apply universally. It is, however, to be remembered, as I have pointed out and cannot too frequently repeat, that suggestions, however broadly based and intrinsically sound, cannot, from the nature of the case, dispense with the thought and intelligent scrutiny of the investor himself. Fewer failures in life would occur, in finance and in the cultivation of character, if the suggestions of others were accepted, not as rules for rigid following, but as warnings to avoid errors, and as hints to guide judgment and effort in the right direction. The difficulty, moreover, of the announcement of rules for others lies in the fact that the ready or instant powers of decision which men often show who have been practised in monetary affairs (and indeed generally) are in reality the consolidated products of lengthened actual experience - habits of mind slowly and laboriously created - which, in their highest form, present the appearance of intuitions incompetent of explanation or of expression in formulae, and incapable of transfer. All that a scheme of rules can really effect is to define the modes of regarding the different classes of securities, and in this way to aid the training of the judgment in clearness and promptitude - strengthened and enlightened, as it will be, by personal experience and trial - in forming conclusions, provided that judgment be spontaneously used, and be flexible to education. An exposition of the right ways of estimating securities may yet, not inaptly, be styled a set of rules, since rules, in the customary meaning of that term, signify a series of directions for the attainment of any required object, and hence presuppose not simply a desire for the object, but also the capacity of deciding, however incomplete, upon its worthiness.

Common Sense The Chief Factor In Successful Investment

It is true that in some departments of organised finance and in the sagacious selection of many securities, special knowledge, education and ability are needed, but it is no less equally true that the sound and profitable investment of money is competent to qualifications of a much humbler order. Under the delusion that financial operations generally are too abstruse for any but the expert to attempt with a probability of success, many excellent opportunities of making money by investment pass unappropriated by. The common sense, prudence, deliberation, and care, which we devote to our ordinary affairs, form the qualities which universally succeed.

Some big failures and their cause.

When the important firm of Overend Gurney & Co.

failed disastrously in 1866 - a firm originally founded, and for many years conducted, with marked sagacity and knowledge - Mr. Walter Bage-hot, one of the clearest and sanest financial observers and critics, felt compelled to comment that, in the latter stages of its administration, so little regard bad been devoted to the most ordinary caution and intelligence that "one would think a child who had lent money in the city of London would have lent it better." In the "Collie" frauds, again, of 1875, a mournful revelation was made of the careless manner in which even banks and discount houses of repute sometimes worked. Bills for an enormous amount in the total were discounted (or lent upon) without any adequate inquiry or information respecting the solvency of the acceptors (that is, of those who had agreed to pay the bills on maturity), and without ascertaining whether there really existed any valuable goods as the warrant for the creation of the bills (or debts). Haphazard and unintelligent routine had usurped the place of alertness and business aptitude, and it was shrewdly inferred that the lenders (or purchasers of the bills) had been so overladen with deposits of money by their customers that they preferred to risk advancing upon dubious or unascertained security, rather than permit their funds to remain idle.

A Few Marks Of Guidance

In the light of this lesson we may well start here with a few marks of guidance: (1) Never remit careful thought in what we are doing. (2) Never assume that success once achieved will continue automatically without the persistent use of the same qualities of prudence and intelligent judgment by which the original success was produced. (3) Never, whether dealing with bodies of men (like governments, boards, or corporations) or individuals, forget that character is as essential as financial position. (4) Do not invest by chance simply because you happen to possess money which you must use productively: be patient to wait for a suitable time. And to these hints may be added - (5) Keep to the class of investments you have carefully worked at and gained experience in, and consequently know; and - (6) Only after - and not till then - your judgment and knowledge have been formed and disciplined in some line of investments, venture into wider regions of finance.