Loose Mean -Ing Of Word "Deben -Tures." Caution Necessary

A word of caution is advisable upon the subject of debentures,1 for the word is loosely applied with a wide and vaguo range of meaning, and includes securities which possess a specific mortgage upon the entire undertaking, and securities which merely entitle the holder to rank, in the event of default, as an ordinary creditor on a level with the butcher or baker who daily supplies the concern.

1 Debenture: an acknowledgment of indebtedness; Latin debentur, they are due, from debcre, to be due, to owe. A debenture has been Judicially defined as "a document which either creates a debt or acknowledges it" The mere employment of the word does not in itself confer any rights beyond an admission of indebtedness, though popular belief still assumes that such a document must always be secured by a specific charge upon a property, or at all events entitle the holder to a preferential claim over other creditors. The rights of holders of any particular issue of debentures can only be ascertained from the instrument or trust deed, or other document under which the debentures were created.

Avoid Shares Not Fully Paid

In all institutions where the capital is not fully paid up - whatever be its solvency and prosperity - the ordinary investor is rightly advised to refrain from the purchase of shares on which this uncalled liability exists. I have already counselled him to accept no ordinary shares whatever, since it is upon them that all the stress of vicissitudes is placed; and even extensions of capital ranking in priority of security to these shares, and legitimately effected to augment the fortunes of the general business (in which, if expectations be fulfilled, the share capital will benefit) necessarily receive their interest in priority, and still further increase the burden of the shares should ill-fortune arrive. If the purchased share be one, for example, of £20 with £10 paid, the holder is liable to be called upon, if difficulties arise, or if the business suggests extension (though usually in the latter contingency Debenture Stock might be created) for the balance of £10 per share, or part of it, and thus, in the former event, he would tend to increase his loss, and, in the latter event, augment his holding in cash, in the single venture, beyond his expectations and arrangements, or, at all events, find his security burdened with a larger prior charge. A call of further cash capital, or the issue of stocks with priority of rank, may be fully justified, as I have said, and tend to the investor's enhanced benefit, but, notwithstanding this possible or probable advantage, he does well, especially if he be a man of comparatively small resources, where a judicious distribution of them is the more urgent, to refuse any investment where an uncalled liability is entailed, however prosperous has been the past history of the company, or however propitious be its evident prospects. The prudent investor, of course, with abundant means, where a loss in any direction would not seriously affect his general financial position, may properly adopt a different view.

Guarantee Companies

Companies exist which, in consideration of an annual premium, guarantee the capital and interest of investors in various joint stock commercial and industrial undertakings, so that an investor thus possesses a twofold security - that of the original company and that of the guaranteeing office. The latter, for their own protection, exercise a skilled and constant supervision over the progress and prospects of the undertaking, whose obligations they protect - a course obviously not feasible to the single individual. But without impugning in any degree the value of this extraneous guarantee, the question arises, why, if the original concern be thoroughly solvent and prosperous (which must be the case, or the protection would not be furnished) should the investor be willing to charge his interest (or dividend) with the necessary premium, instead of retaining the entire income to himself? And, on the other hand, if doubts may exist of the permanent solidity of the original company, so that a supplementary security is deemed to be necessary, why invest at all? But the question must be answered by each investor himself should he possess, or acquire, the knowledge necessary for the judicious choice of investments of this character.

The general advice still remains to the man of minor means, that companies, however excellent, which require this protection had better be left to the choice of richer men. An excellent service is rendered in a different form by such a guaranteeing company. An admirable property is purchasable, but some defective link in the chain of legal title - possibly unimportant from lapse of time or duration of holding - prevents completion. The guarantee of such a company finds in this case an obvious and useful function.

Bank Deposits Not Investments

10. It is sometimes suggested that a part of the investments should assume the form of deposits at interest in banks or discount houses of repute. I hold that it is an inaccuracy of language to apply the term "investments" to deposits: deposits should only be utilised in order to prevent the loss of interest until a permanent security has been obtained. In the event of a failure (however utterly improbable) the depositor would simply rank against the assets as an ordinary creditor.

Bank And Insurance Investments

11. I have already implicitly referred to banks and insurance institutions in preceding remarks, assigning as the sole reason against the purchase of shares, the fact that a liability generally remains upon the capital. They are suitable investments for large resources, where a loss (however improbable) would constitute but a small fraction of the investor's aggregate funds; but the existence of an additional liability (intangible though it may be) should not be accepted by the investor of slender or moderate means. I cannot close this section, with satisfaction to my own feelings, without the comment that the banks and insurance companies of the United Kingdom justly furnish a subject for national commercial pride.

Other In-Vestments

12. I need not dilate upon investments of other descriptions: the principles I have expressed can be adapted in application to the assessment of their desirability.