That is the point it is desired to make clear, for probably much unnecessary loss has been incurred by those unwilling, at the time, to take a small one, but who have held on and then taken a greater one in the end. And all just because they allowed themselves to be influenced by the original cost.
When you purchase a stock, bond, mortgage, or whatever it may be, read it; see what conditions it contains. You may find therein some clause detrimental to your interests. It would not be hard to cite cases in which the holder of some stock certificate has suddenly discovered that it carried conditions, plainly stated, had he taken the pains to look, which entailed hardships upon him.
It is not unusual for an investor to spend hours and, perhaps, days in patient thought and study in seeking what he deems a safe purchase, and then, at the last moment, spend scarcely any time in the scrutiny of the paper itself.
When a banking firm buys an issue of bonds, or similar security, from any corporation which is not by law compelled to furnish public statements of its earnings, from time to time, or where the corporation is of such magnitude that it is customary to furnish a statement of its earnings to the public, such, for instance, as the United States Steel Corporation, it is important that a contract be executed between the corporation placing its securities and the banking house purchasing the same, whereby the latter shall receive semiannually or yearly sworn statements of the earnings of the company and its financial condition during the time which the issue of securities may be outstanding; furthermore, that the banking house, for a like period, shall have access to the books of the corporation for the purpose of auditing its accounts and verifying its statements.
The reason for this is perfectly clear: It affords a means of protection to the bondholder, for, in case the earnings of the property during the life of the security are falling off, it will, by the banking house receiving a statement of such earnings, be made known to the latter and afford an opportunity for self-protection. It is no more than right that the parties lending the money, by which the corporation is able to operate, should be in possession at all times of adequate information to judge whether the property is being properly managed.
In comparing earnings, one month with another, always compare with the corresponding month of the year preceding, as that is the true test. If the corporation is one of long standing, it is advisable to examine into its earnings during a past period of business depression, and to see how it "weathered the storm."
Remember, at all times, that nothing is more sensitive to conditions and impressions than the security market. This is well illustrated in the actual happening of a woman who possessed $5,000 in bonds of a small issue in one of the New England cities. The issue was a perfectly sound one, but was held closely by investors, and the bonds seldom offered for sale. The woman desired to dispose of them, and went to her banker in New York City and asked him to obtain a bid. He, naturally, put himself in touch with one of the local brokers of the city wherein the corporation itself was located. This broker went from bank to bank and from banker to banker to get the best bid obtainable. The woman, in the meantime, had gone with the same request to not less than six other bankers in New York. They, in turn, had each sought some local broker in the New England city, so, upon these pursuing like tactics to the first mentioned, it was not long before there seemed an avalanche of the bonds of that particular corporation. It seemed that there were more bonds for sale than the total of the outstanding issue. The result was that intending purchasers became suspicious and all bids were withdrawn. The woman was unable, for the time being, to obtain any market whatsoever.
In this connection it may be pertinent to say that in the case of an issue of securities unknown in the market where they are offered for sale, the fact of not being able to find a purchaser does not argue that anything is wrong.
The standing of the men in charge of the corporation; the location of the property and the character of the country upon which it is dependent for its business; especially is it increasing in population and wealth, or the reverse? If it is a municipal bond that is being considered, it is not advisable to place too much confidence in a municipality which is so located as to be entirely dependent upon lumber business, oil wells, or some special form of mining; that is, a stability, not likely to be furnished under such conditions, is needed. An agricultural section is far better and more permanent than gold mining. A study of the earnings has already been advised.
Present competition, or the likelihood of the same in the future, is very important. Is the corporation charging excessive rates so as to invite competition? Are its earnings based upon patents which may be approaching expiration?
It goes without saying that the condition of the money market, at the time of purchase, must always be considered.
But when all is said, most business must rest upon faith in someone, and, therefore, the character of your banker is all-important.
This chapter thus far has been written mainly with the idea of assisting those desiring to make careful and conservative investments. The author, nevertheless, understands that there are, and always will continue to be, those who speculate, and, possibly, some of the essential points in relation to speculation may be acceptable, and here follow:
Stock market prices, which, like the ocean, are never at rest, are influenced by many forces. If one is to be even an occasional buyer or seller in the securities of the speculative world, he cannot have too clear an idea as to these factors. Monetary conditions, business conditions, and stock market manipulation, together with the political outlook, both domestic and foreign, are important subjects for study. Always remember that, although values are largely determined by business conditions, prices may, for the time being, move at variance with basic principles. Prices in the long run do, nevertheless, follow the course of existing values. (Many of the subjects mentioned in this connection will be found treated in the main part of the book, so they may be lightly touched upon here.)