Systematic Averaging Essential

As regards the width of fluctuation that is permissible among the stocks in an investment list, he insists on two points; the first is "never to mix a 3 per cent fluctuation of yield with a 20 per cent one," and the second, "not to hold on to any stock which is already too high for safety." And to mark off his own Insurance scheme for the averaging of risks from all others professing to have the same object, he says that "by choosing a list of investments in which high and low yields, wide and narrow ranges of fluctuation, sound Debentures and speculative Ordinary shares are all mixed together, you do not get a true average, in the proper sense of the term, but only a false one, however wide a geographical distribution you make of them."

The Duty Of The Investor

The third and last of Mr. Lowenfeld's rules for investment is, that each stock in a scientifically distributed list should be located in a country which follows entirely distinct Trade movements and influences, and is dominated by different Money Markets and Stock Exchanges from every other. This obliges the investor to keep his eye, like a skilful conjurer with his balls, on many Countries, Money Markets, Stock Exchanges, and Industrial conditions, at once; on the country where the majority of the stock is held, and whose Money Market, in consequence, is the dominant influence in its price quotations; on the price of Government Stocks in the country in which this particular stock is held, as that affects all the stocks; as well as on the balance-sheets of the concern, in which can be read the industrial basis for the loan if it is a private concern, or the rateable value of a municipality if it is a Corporation Loan. For were the investor to keep his eye only on the Money Market which controls the stock in question, he would be liable to see the property depreciate by political causes over which his Money Market has no control; on the other hand, were he to keep it only on the Industrial side of his investment, he would be apt to find it raided and depressed either from the influence of a distant Money Market, or from pure Stock Exchange speculation on his own market, however prosperous the concern in itself might be on its Industrial side.

The Three Maxims In Geographical Distribution Of Capital

So that if we picture Mr. Lowenfeld's scheme of investment as a kind of tape measure in which each division, according to his first maxim, contains the same length, or amount, of capital as every other; and, according to his second maxim, is of the same width as every other in its capital security and range of fluctuation, we can now, according to his third maxim, represent each division as being of a different colour from all the rest, inasmuch as it represents an entirely different Money Market, Stock Exchange, or Trade influence; these three constituting his "golden rule," and being summed up by himself in the dictum, that "safety of capital is obtained by its even division over a number of sound stocks identical in fluctuation, and every stock held subject to an entirely different Market influence." And with this he ends his dissertation, in the conviction that his scheme of Geographical Distribution on the principle of Insurance is the true one, and that he has scientifically solved the problem with which he set out, viz., of how to get the greatest income possible from investments compatible with the least range of fluctuation, and the complete security of the capital involved.

The True Scheme Of Geographical Distribution Of Capital. British Trustee Stocks And The Stagnation Of Trade

In the smaller complications that arise he has always some principle or maxim at hand with which to meet them. As regards British Trustee Stocks, he says frankly that "as they are all controlled by the same Money Market, and fluctuate greatly, they have not that capital stability which Trust funds should possess, owing to their being too much under the influence of the trade stagnation or prosperity of a single country." And hence if he had to make a choice between a Canadian Government 3 per cent Stock which as a Trustee Stock follows the low Money Market for loans in Britain, and a Canadian Local Stock adequately secured, but which follows the higher Money Market or different Trade influences of Canada herself - as indeed many first-class private or Corporation Stocks, Canadian Railroads, Hudson's Bay, and others do - and so have a higher yield, he would choose the latter for one division of his investment list, and not the former. And the difference in the value of money in the two countries leads him to the general observation that when reading the Money Article in the newspapers we should read it mainly to find out the "general movement in the value of money." Or, in other words, "The Money Article is a general indication of the rates of interest stocks should produce, and not of the fluctuations of individual investments."