Value Of Money The Primary Factor In Geographical Distribution Of Capital. Exclusion Of Ordinary Shares

As for Ordinary and Deferred shares, it is one of his maxims that these, in a case of permanent investment, should be eschewed altogether. But if the investor is determined to have a "flutter" in them on his own account, Mr. Lowenfeld hedges him round with all kinds of safeguards. He tells him to "watch the history of a stock and its fluctuations over a period of years"; to "avoid all stocks with a wide range of fluctuation, except Preference shares"; to select those stocks that are little known, and so are not influenced by newspaper and Stock Exchange rumour"; to see to it that the balancesheet of the stock in question shows, what I have already quoted, "three times as much capital behind a stock as in front of it; three times as much earnings as the interest which it has to pay on its Debentures"; and that "its liquid assets are greater than its current liabilities"; that "for capital stability the present value ought to be the basis of all reckoning"; and (for the novice) that "the yield of the stock should not be calculated on the cost." He points out, too, to all and sundry, whether they are speculators or investors, that "solid new issues never get their proper value"; and that, "irrespective of income, stocks with a minimum range of fluctuation and which rarely change hands are preferable." As for high rates of interest, he insists that "they do not necessarily mean insecurity, but only that most failures have been connected with them"; and that it is only in the case of loan money that a high rate of interest is insecure, not in that of well-grounded working concerns." Indeed, he goes so far as to say that "in a country where money is dear, even a first-class 6 per cent Debenture is good for ordinary investment purposes."

Points For The Consideration Of The Investor. Stability Of The Wealth Of The World

After preparing the reader with general maxims like the above, and starting with the preconception established by Mr. Schooling that the wealth of the world as a whole is steady, indeed is gradually increasing, and that it is only that of the parts which fluctuates - a preconception from which Mr. Lowenfeld draws the conclusion that "no set of circumstances can cause all the stocks of a Geographical Distribution to show a simultaneous depression below cost price" - he ushers his scheme on the stage by boldly applying what he calls the three "golden rules" of his system of investment to the ten geographical regions (with their various subdivisions) into which, for investment purposes, he has divided up the world.

Equal Distribution Of Capital

The first of these rules is, to put the same amount of capital into each of the ten geographical divisions when the amount of the capital to be invested reaches, say, £1,000, and into fewer if the amount is less; while if the sum to be invested is a very large one, say £20,000 or £30,000, to put into subdivisions up to the extent of twenty or more.

Investment Of The Divided Capital

The second rule is, to confine these equally divided amounts, thus distributed over different geographical areas, mainly to Corporation Loans, Railway and Industrial Debentures, and Preference Shares, showing the same width of fluctuation (and the narrower the better) over a considerable number of years. This is an important rule, and he hedges it round with a number of special observations bearing on the subject. One of them gives us the hint as to why he rules out Government Stocks largely from his lists; it is, that they fluctuate more violently than any other stocks, owing to the freedom and ease with which they change hands, as well as to their liability to become depressed in every political crisis whether of a temporary or a permanent nature; and he adds, quite justly, that they are also apt to remain depressed, owing to their low rate of interest, even when trade and enterprise are booming. And from this we see the reason of a remark he makes in another place, viz., that "the best Industrial Debentures are, as a rule, stable compared with Government Stocks."

Good Stocks Are Always Saleable

Besides, it is a fallacy, he contends, to require a market as free for all your list of stocks as is the market for Government Stocks, inasmuch as good stocks, "as every stockbroker can tell you," are always saleable. Indeed, not more than a fourth of your investment list need be in Government Stocks, and that "only where prompt realisation for some passing emergency is required." And the upshot of it all is, that if you keep your eye on the past history of a stock, "it were better to select little-known securities not influenced by newspaper publicity and the consequent fluctuation of a free market." As for the rest, "it matters not which Money Market of the world controls a stock, so long as it pays to hold it at net cost, including all charges."