Consequences Of The Propositions

Now, if these propositions be true, two things must follow. The first is that the price paid for loans of capital will vary according to the wealth and credit of the different countries of the world; the second is embodied in a maxim of Mr. Lowen-feld's, viz., that "no circumstances can cause all the stocks of a Geographical Distribution to show a simultaneous depreciation below cost price"; and putting these two propositions together, he concludes that if an investor will take the pains to separate the parts played in the price of the stocks in different countries by the Money Markets that dominate them, and by the Trade Currents that blow through them and stimulate or depress them, he will be able to hold with safety stocks yielding a larger income than he otherwise could do. And in testing this on a typical all-British list of investments, and a typical geographically distributed one respectively, it was found (1) that the geographically distributed one produced twenty per cent more income than the all-British one from the beginning; (2) that the all-British one improved in value £2,902 during the first five years, but ended in a loss of £137; (3) that the geographically distributed one rose gradually in volume but maintained its value, and finally increased it by £1,524; and lastly, that while the annual income from both lists followed the rise of capital, the £2,902 rise in the all-British capital ended only in an increase of income of £54, whereas in the rise of £1,524 in the geographically distributed one the rise in capital value was attended by a proportionate rise of income.

All-British Versus Geographically Distributed Investments. The Principle Of Averaging

But not to depend upon particular figures or particular selections of stocks for our comparison, it would be as well, perhaps, if we could find in Mr. Holt Schooling's statistics of World-trade some inherent reason why, at the present stage of industrial development, a Geographical Distribution of Capital will secure a larger yield of income, with equal stability and security, than any mode of investment in the stocks of any single country. The principle of averaging, or not putting all your eggs in one basket, might of course account for a large measure of stability and security, but it could not account for the greater yield, except on the condition that money must essentially yield a higher rate of interest, on equal security, in some countries than in others; whereas, to invest entirely in the stocks of the particular country which pays the highest rate of interest on its loans, would be to sacrifice the stability and security of our investments to the pretensions of their face value. If, on the other hand, we go to the opposite extreme, and put all our capital into Consols and other British Government Stocks paying the lowest rate of interest, for the sake of ultimate security, we sacrifice a larger possible yield and an equal practical security; and without attaining to any higher degree of stability, owing to the greater dependence of Government Stocks on political and international complications than other stocks; as, indeed, the fluctuations of Consols during the last twenty years have abundantly shown.

A Mistaken Impression

Or, again, it may be suggested that if we limited our capital for investment entirely to the Government Stocks of the different countries, it would meet all the conditions of our problem, viz., a higher average yield, owing to the difference in the rates of interest in these various Government Stocks; and a greater stability and security, owing to the eggs not being all in the same basket. But in this it is forgotten that there are not sufficient Government Stocks in the world to give the law of averages and probabilities a chance to operate, inasmuch as all the Government Stocks of a particular country count only as one stock, owing to their all having the same security. But Mr. Lowenfeld's scheme avoids this difficulty by means of two devices.

Limit Of Money Appropriated To Government Stocks. Composition Of Investment Lists

In the first place he limits severely the amount of money appropriated to Government Stocks in any single investment list - not more than a fourth of the whole, if I remember rightly, and even that only because in the event of any necessity arising when ready money must be had immediately, they can be converted into it with both cheapness and ease. Indeed, were it not for the necessity of having some part of an investment list in a fluid, quickly convertible form, it is probable that, owing to the instability which political and international complications are apt to produce in Government Stocks (but from which Industrial Debentures and Loans, as we saw in a former chapter, are comparatively free), he would confine his investment lists to Corporation Loans, Railway and Industrial Debentures and Preference Stocks entirely, and eschew Government Stocks almost as much as he does Ordinary shares. For these Debentures and Industrial shares, as we saw, are the last to be disturbed by political or social commotions; and, what is more important in this connection, there are hundreds or thousands of them, and of the most unimpeachable security, from which to make a choice, in every country of the world. And the consequence of this is, that should any one or more of them fail through accident or unforeseeable misfortune, there always remains any number of them to draw from, with which to fill the gap in an investment list; thus giving a sufficient number and variety for the law of averages to take effect in.