Debentures Which Rest On Partial Or Complete Monopolies

And this brings us to those Debentures which rest on partial or complete Monopolies, in the sense, that is to say, that they, have certain privileges accorded to them by Municipal or other authorities exempting them from competition over the whole or a part of their field of operations. Among these stocks may be mentioned those of Waterworks, Gas or Electric Lighting, Tramways, and the like; and what we have now to do is to ascertain the general principles which determine their natural rank in the scale of securities. These may be ranged under the following heads :

1. The amount of natural Monopoly they contain in themselves, as it were.

2. The extent to which they can be kept free from competition. It will be remembered, perhaps, that in a former chapter I (On The Natural Value Of Different Stocks: Banks And Insurance Companies) defined a complete Industrial Monopoly as one which could control not only its buying end, but its selling end, besides making level the intervening distance as well. It may be remembered, also, that in order to get some ideal standard of comparison for the ranking of those stocks which, like Banks and Insurance Companies, rest primarily on Money, I selected the Bank of Monte Carlo as my ideal of comparison.

An Ideal Stock Resting On An Industrial Basis

We now have to find some parallel ideal for stocks which, like these Water, Gas, Electricity, Trams, and others, rest on an Industrial basis, and possess a quasi-Monopoly in their own sphere. And the ideal I would suggest would be that of a stock which in a forecast would have a predicability along its whole course; or, to put it differently, of a stock which could be taken out of private hands to-morrow and with a little stoking and oiling could be nationalised or municipalised, and when once set going would run of itself on a track made smooth and level for it from beginning to end. Now, the characteristics which an ideal stock of this kind, resting on an Industrial basis, should have, may be summed up in the following particulars, namely: that when the cost price of the materials used in its processes is known, the sale price should be fixable, the customers averageable, the reserve needed for repairs calculable, that its freedom from competition should be assured, that there should be no available substitutes for it, no "goodwill" or "water" in its composition, and no chance of political or other outside intrusions making or marring its fortunes.

Characteristics Of The Ideal Stock

Now, these are the constituents of any ideal stock which is based on Industry and enjoys a Monopoly in its own line. Indeed, for stocks resting on an industrial basis, these conditions are as ideal as those which, on a Money basis, hedge round the Bank of Monte Carlo itself; and precisely in so far as any stock falls short in any of these particulars in any forecast of its future fortunes, so far will its rank be lower for investment purposes in the scale both of stability and security. In other words, given an Industrial Monopoly, complete or partial, the degree of ease, accuracy, and precision with which forecasts of its returns can be made, is a measure of the stability of the stock for investment purposes; whereas the opposite will be the measure of its instability and insecurity, inasmuch as all will then depend on the business acumen and penetration of its managers - an asset which is as uncertain in its tenure as their individual lives.

If we apply these principles, then, to Water, Gas, Electricity, Trams, and other companies which enjoy complete Monopolies as against other companies of the same kind, but which are subject to the competition of companies supplying alternative products, it will be obvious that a Water Debenture Stock ought to hold almost ideal natural rank in point of security - a higher rank than Railway Debentures, as being freer from the ups and downs of trade on which the railways depend; higher than Corporation Loans, as avoiding the danger of Capital being expended on unproductive undertakings or squandered by "Bosses" and intruding politicians; higher than all but the closest of those Monopolies which deal in the other necessities of life, inasmuch as there is no alternative product that can at all supply its place; higher than Gas or Electric Stocks, which are alternatives to, or substitutes for, one another, and are still engaged in a fighting competition among themselves for supremacy, and so split the market in a way that makes a forecast of their customers difficult, if not impossible; higher than Trams, Motors, and Omnibuses, which are also in their transitional fighting stage, and at best have not quite the same necessity attached to their use, and so cannot be assured of any definite division of the spoils.