Warning Against Speculation

7. I have frequently warned the investor against speculation, and, as that term is a wide and ambiguous one, an explanation is desirable. I mean a man whose business is the constant venturing upon the chances of loss and gain upon investments. Properly understood, all business, even of the soundest character, consists more or less of speculation: we must all be guided by the probabilities involved in the transactions in which we are concerned: we purchase a property or a security after weighing the chances, for and against, of its proving stable or improving: but there is the difference of the poles between judicious and deliberate ventures, which, from the nature of things, must involve chances or probabilities, and that extreme form in buying what wo do not desire or intend to hold, or selling what we do not possess, simply for the purpose of realising an expected profit. The one man purchases to keep: the aim of the other when he buys is simply to sell when a gainful opportunity occurs.

Wait For Favourable Opportunities Of Investing

8. I have already laid stress, in passing, upon the importance of the element of time in all monetary transactions - the power of waiting for favourable opportunities. And this is particularly the case where the investor feels at liberty, on account of his financial resources and knowledge, to engage in transactions whose fruition lies essentially in the future, and which, by reason of this special character and the intermediate absence of interest, are beyond the investor to whom my advice is primarily addressed.

Be Content With Moderate Rate Of Interest As A General Rule

9. The ordinary investor must be content, if he wish to avoid loss, with a moderate rate of interest, say 3 to 3½ per cent. This return is consistent with an investment which frees him from anxious and supervising care (of course, the rate will be higher upon mortgages, which will be discussed in the next chapter). I shall also show him in a succeeding chapter how to calculate the return derivable from a security standing at any price, whether it be of a redeemable or irredeemable nature.

I am not an admirer or acceptor of the thoughtless dictum that high interest necessarily implies inferior security. Aphorisms of this cheap and idle nature abound in every department of life. An investment may yield a larger return than the average rate on the grounds (1) that it is a security which is not open or known to many investors, but has been discovered by men of exceptional sagacity, knowledge and opportunities of inquiry. The demand, consequently, being thus limited (since so few are acquainted with the security in question, or possess sufficient practical capacity to deal profitably with it) the return is, in the order of things, increased: it constitutes the reward of superior ability or courage; and (2) the transaction may involve considerable risks but also excessive profits if it succeed, and is only suitable, therefore, to capitalists of extensive resources and largo ramifications of organisation, so that here, again, the absence of competition enhances the remuneration.

But, for the usual investor, the rate I have mentioned should be adequate, if he be a man of wisdom. It is pitiful to recall the vast amount of money which has been engulfed in the quagmires of delusive finance through pursuit of the deceptive lights which allure the chase The metaphor is, perhaps, not of the happiest, but the moral is clear.

I remember that an investment was once submitted by one of the ablest men of business I have ever had the happy fortune to know: it confidently promised 15 per cent, and this promise was based upon statistics, technical advices, and investigations of the closest and minutest kind.

The investment was accepted largely by very competent and experienced men in London and elsewhere. One of the shrewdest and most successful men in the city of London, however, refused it; and as I placed great dependence upon his practical judgment in commercial affairs, I naturally inquired his reason. He discovered, he said, no objection to the investment or its prospects, but he wisely added - and I have always remembered the advice as a salutary rule of life - that if the venture fulfilled its hopes and he obtained the 15 per cent he would in all probability become dissatisfied with his existing securities which yielded a much inferior return: he would thus bo tempted to dispose of them for the purpose of placing the proceeds in other ventures equally promising: he would consequently forfeit the quietness of mind which his present investments enabled him to enjoy, and ho felt that, undoubtedly, in the end, this eagerness for exceptional profits would terminate in heavy loss. The same able man - and ho had been exceedingly successful - informed me at the close of his commercial career that, taking into account his losses upon investments in various classes of undertakings, and weighing them against his gains, he would have stood in the same financial position had he, throughout his long career, confined himself to British Government Securities and similar investments, with their lower rate of interest.