A Corporation Stock has occasionally declined to a very low price on account of disclosed financial irregularities and corruptions in the methods and conduct of administration. An investor is tempted to purchase on the ground of this diminution of value, and the presumption that the publicity given to the acts of bad faith or incompetency will prevent a recurrence of any similar mischief hereafter. And in support of this view he generally, I find, adduces the supposed analogy (which in some way has become current) that if in a fight at sea a hole is made in the side of a vessel by the enemy's shot, that hole is the safest place in which to insert one's head for immunity, as it is improbable, to the extent of virtual impossibility, that another shot will enter by the same avenue. Here is another of the assumed parallel instances whose adoption in another sphere of action is usually attended by disaster. Assuming, as apparently is the case, that the shots with whatever intention will be fairly evenly directed to the injured vessel's side generally, the probability seems to be that the hole would count like any other equal circular uninjured part and be as subject to a repetition of a blow. And in making his assumption the analogist fails to notice that a second or third shot might well have entered the circular opening made by its predecessor without leaving a visible trace of its passage. Hence the complete number of instances, for and against, could not be collected from which the fraction measuring the probability could be deduced. It is the unseen, unmarked events which constantly render our standards of probability invalid.

A corporation exposed as guilty of improper practices should be treated like an individual whose career has been marked by a discreditable stain. The rules of prudence which we apply to persons should punctually be adopted in respect of collections of persons. We should cease to trust that offending person until he had, by his subsequent conduct, afforded sufficient evidence of definite reformation, and, similarly, an investor should refrain from placing his confidence (in the form of savings) in a corporation, government, or any body of persons controlling an enterprise of any description, until they also had shown in an adequate and undoubted manner that their career had been redeemed, and that they had, moreover, conscientiously endeavoured to repair and indemnify the broken contracts of which they had been guilty in the past.

Financial transactions constitute a form of social engagements, and the two bases of such engagements are character and solvency.

It is a sound rule to notice those securities of all descriptions which in all brokers' lists are distinguished by a mark of indication that they are suitable for trustees, though some are better adapted than others to the ordinary investor, which knowledge, circumstances and judgment decide. And upon this point I call the reader's careful attention to a note on a prior page (10).

Colonial Government Bonds, Etc

4. Colonial Government Bonds (including India Stock) and Colonial Municipal Bonds. Allusion need only be made to a few circumstances which affect them.

The Bonds may be to Bearer with a series of coupons1 attached; or they may be registered or inscribed in the holders' names, in the books of the bank or agent in England who acts for the particular colony in the issue of the loan. In the former case the Bonds can, on sale, pass from hand to hand in exchange for money in the same manner as bank-notes; in the latter case, a sale can only be effected by the execution of a short Deed of Transfer by the vendor.

The comparative safety of the two modes of security will be discussed. In respect of Bonds to Bearer the possibility exists of the loss or robbery of the documents, and the uncertainty of position thus entailed, besides the trouble, while they are in possession, of cutting off the coupons for presentation for payment.

1 In old French colpon, copon, or a piece cut off; whence the earlier English culpon, colpon, coulpoun - a slice, a cut, a piece. The latter term had come down to coupoun, cowpon, but had become obsolete in English, when coupon was reintroduced from modern French. The meaning is a separable certificate or ticket, of which a series is attached to and forms part of certain original or principal certificates (of indebtedness), in order that they may be severally detached and given up as required. They are really certificates of indebtedness for the interest.

Bondholder's Position In Event Of Loss Or Robbery

I can discover no helpful information in respect of the holders' status under loss or robbery, and I now offer the results of my direct inquiries. It is difficult to define the lawful owner's position in relation to the receipt of interest and repayment of principal (when the term of the loan has expired) under the contingencies I have mentioned. So far as I can ascertain, the condition would be the following: (it is here, parenthetically, to be borne in mind that, if such Bonds were stolen, they might be sold to an innocent purchaser for full value, who could not be privy to the theft, since securities of this nature, as I have stated, may pass from person to person without a memorandum of transfer, no owner's name appearing upon them in any form.)

Procedure To Adopt When Bonds Are Lost Or Stolen

Immediately, then, on the loss or theft the owner should write to the bank or agent giving the number and amount of the Bond, and request its stoppage, assigning the reason; if he does not possess the number (and he should accordingly keep a full Register of the details of his investments) he will bo able to obtain it from the stockbroker through whom the Bond was bought; if the coupon should bo presented for payment, or the Bond for redemption (since the stolen or lost security might, as I have said, be sold to an innocent buyer), the bank or agent, having received the genuine owner's notice, would refuse to pay, and, so far as I can ascertain, would use the occasion to secure such information as would assist the lawful holder to trace the document; if all efforts in this direction proved abortive the bank or agent would apparently pay the real owner the interest on adequate evidence of the facts (after he had instituted exhaustive inquiries and efforts), and on a satisfactory independent indemnity to which they would naturally be entitled; while, should the Bond fail to be recovered at the time of redemption, it is probable that with British banks or agents, the capital might be paid upon similar evidence (with testimony to character, also, in the two cases) and a correspondingly substantial indemnity by responsible persons.

But the decision would obviously rest exclusively with the bank or agent; no legal right on the side of the owner would appear to exist, since one of the necessary conditions of payment is the production of the Bond for cancelment, and it is solely the owner's fault that this cannot be fulfilled. No bank or agent - and properly so - will express a judgment upon a hypothetical case, and the inference would seem to be that, facile as these losses and robberies are, very few of them have actually occurred.

Inscribed Or Registered Bonds

My own preference loans towards inscribed or registered Bonds; but I would in no way dissuade an investor from accepting Bearer Bonds, provided he can adopt the necessary adequate precautions indicated: he should accordingly keep them, if possible, at a bank. I also advise him to attend personally at the bank on each occasion when the interest becomes due, and cut off the requisite coupon himself.

But, with the object of avoiding this frequent trouble to himself and the bank, and for the additional purpose of protection, I have found it a salutary practice to cut off at the beginning of each year the whole of the coupons for that and the succeeding year: this course somewhat neutralises the difficulty I have pointed out, since, if the Bonds were stolen or lost, an attempt at sale would excite suspicion of ownership, and the caution of inquiry, looking to their mutilated state.