A Safeguard In Geographical Distribution Of Capital

The first is the fact that whereas in Insurance Companies the lives when once assigned to their appropriate categories of risk cannot afterwards be thrown aside and replaced by others should they prove to be bad ones; in an ordinary investment list, although it may not consist of more than half a dozen or a dozen separate risks distributed among the whole number of geographical divisions, the stocks can be changed in each division for other stocks of the same character and status as often as there is any reason to suppose that any particular stock held has from misfortune, accident, new inventions, and discoveries, or what not, been threatened with the loss of its former status. This fact is reinforced by two principles of great importance which reduce the risks attaching to the small number of separate investments to a minimum, and so give to the investor not only equal stability and security, but a higher yield than the Insurance Companies will give him.

Geographical Distribution Of Capital And Its Investments

The first of these principles is that a Geographical Distribution of Capital will deal in nothing but the choicest cuts, as it were, of the shares in any investment, viz., in Loans, Debentures, and Preference shares only, all of which bear a fixed rate of interest and take precedence of the great mass of Ordinary shares. Indeed, in any scheme of Geographical Distribution aiming at stability and security, and professing at all to be scientific, all Ordinary shares (the characteristic of which is that they go up and down with the ever-changing caprices of the market) must be ruthlessly ruled out from the investment list. So that it comes virtually to this, that instead of dealing with what is practically impossible for any single investor, viz., a vast miscellany of shares of every description, chosen haphazard on the chance that, as in an Insurance Company, the law of averages will be able to bring out of them a stable and equable result; a Geographical Distribution of capital would allot to each investor only a comparatively small variety of stocks at any one time; but then these would be of the very highest value in point of stability and security, and by being distributed among those nations of the world which follow different Money Markets, are subject to different Trade Currents, and yield different rates of interest on practically equally good security, would be made to balance each other's fluctuations.

Selected Stocks And Their Security

But how, it will be asked, are we to know that the stability and security of each of the few stocks selected are in themselves, as industrial business concerns - and quite apart from the Money Markets, the Trade Currents, and the Stock Exchanges which form the separate environment in which they function - how do we know that these are above reproach? The answer is, that we look to the published and audited balance-sheets of the industrial business concerns on which our investment list of Loans, Debentures, and Preference shares is based; and if we find that they have twice as much capital behind them as the amount of the debenture or loan;

Determining The Security Of Stocks

that they have had for a period of five or eight years, say, a steady income averaging three times as much as is necessary to pay the interest on the loan; that they have habitually in hand more liquid assets than are necessary to pay their current trade debts; and, besides, can show that in the event of a break-up sale there is sufficient tangible property left (and not merely goodwill) to repay the loan with interest in full; - then we can safely say that that Debenture stock, in any country where private property is fully protected by law, is a first-class investment stock, so far, that is to say, as its ultimate security is concerned.

Soundness Of The Investment List

With the real solidity of our investment list thus assured by the unimpeachable security of the Industrial basis on which each of the Loans, Debentures, and Preference shares rests, we can then proceed to place each of these solid securities in the special environment in which it functions; i.e., in the particular country in which it is situated; with the special rate of interest which that country has to pay on its Government Loans; in the particular Stock Exchange in which the bulk of its stock is held; and in the particular Trade Currents, as between country and country, in which its business is carried on.

Grouping Countries According To Their Products

This done, we can then divide the World up into sections, and group the different countries according to the kind of products which form the mainstay of their prosperity; keeping those which deal mainly in agricultural produce, fruit, raw materials, or what not, separate from each other and from those which are engaged in manufacturing and working up these products. These countries are then suspended in a circlet, as it were, around the circumference of the great wheel of World-industry, but so regrouped and rearranged on it by lines of cross-division as to keep the factors which we have to balance against each other in our investment list separate and independent of each other.