_The greatest mistake of the American saver is to invest
unwisely._ It is estimated that over three billion dollars have been
unwisely invested in fake or questionable oil stocks alone in recent
years. Despite precautions, a billion dollars a year is at present
dissipated in “cat and dog,” or worthless, stocks.
The reason is that the American _is an inveterate chance-taker_.
He carries this principle with him in handling his investments, and
does not realize that it has little place there. Investment for the
ordinary man should be Grade A and Grade B and C risks exclusively;
never grades D, E, F or greater risks. A Grade C investment is quite
“chancy” enough; a Grade B is more reasonable. Grade A is safe.
Naturally the yield is lower on Grade A investments, but sometimes
there is no yield at all on lower grades!
Contrary to general belief it is not necessary to put off the pleasure
of being an investor indefinitely for lack of a large surplus.
The greatest fortunes have been founded on a steady and consistent
accumulation of capital, starting with extremely small sums. Much
larger sums than it took to start these large fortunes have been lost
by individuals endeavoring to get rich too quickly.
Any sum is a start--even a dollar. There are now many banks which will
gladly open a savings account with one dollar. _It is not the amount
but the systematic method that counts._ The savings bank is the natural
first field of action for savings--especially on a regular deposit
plan. It is only when the sum gets to $500 or $1000 that “investment”
of a different kind should be considered--and then it should be
_government bonds_. The saver should write a letter to his banker or
broker, and enclose an order to buy “at the market” government bonds
(any issue) for the sum he has ready to invest. The saver cannot go
wrong if he does this.
The following might be regarded as a general schedule of instructions
for savings investment, based on the amount of total available savings:
If you have from $1 to $100, _put it in the savings
bank at 3% or 4% interest_.
If there is no savings bank available, use the
Government (Postal) Savings Stamps. Inquire at your
post office.
If you have from $100 to $1,000, buy Government bonds,
Treasury Certificates, Liberty and Victory issues, etc.
If you have $1,000 to $5,000, consult your bank and
buy high-grade bonds of various kinds.
If you have $5,000 to $10,000, consult a conservative
investment banker, and buy a _diversified_
line of securities; bonds, higher grade preferred
stocks and some high-grade, dividend-paying common
stocks, if general business conditions are not at a
high peak or inflated.
If you have more than $10,000, select most carefully a
very capable banking house which will not endeavor
to sell you many of its own special issues, but
will properly diversify, on a still wider scale,
your stocks and bonds; selecting a still wider
range of industries, and purchasing more preferred
and common stocks of well known, stable successful
industrial, railway and public utility companies.
Have them pay particular attention to common stocks
of such companies, for about 20% or 25% of your
total investment.
Liberty Bonds and Victory Notes have the highest investment rating
in the world of finance; they are more gilt-edged than any other
bonds ever issued by nations or corporations; they even come ahead of
British Consuls and French Rentees, which, prior to the World War,
ranked foremost among investments. The owner can always borrow on U. S.
Government Bonds, if borrowing becomes necessary.
Among all the securities one could buy none rank so high nor are
so convenient from the point of view of marketability, ease of
liquidating, and collateral value as good bonds. One need seldom take a
loss in good bonds through forced selling. There is little fluctuation.
It is better to hold gilt-edged bonds, the kind banks lend money on.
These usually consist of U. S. Government bonds or a certain class of
high-grade corporation and railroad issues that have been passed on
by the savings banks. Others are so highly rated as to be eligible
for trust funds, and a medium for the conversion of inheritance
funds, insurance funds and the like. You can buy short-term issues if
the money may be needed in a few months or a year or two; otherwise
select long-term bonds. Then hold them and continue to do so. When you
need money borrow on them, even to buy other sound securities like
gilt-edged preferred stocks and the best-rated common stocks. You need
never part with your original investment in bonds if you follow this
suggestion.
Securities in general may be rated in their order of investment merit
as follows:
_Bonds_
A. “Gilt-Edge” bonds
B. High-grade bonds
C. Medium-grade bonds
_Stocks_
A. High-Grade preferred stocks
B. Medium-grade preferred stocks
C. Speculative preferred stocks
B. High-grade common stocks
C. Medium-grade common stocks
D to Z Speculations
The shrewd buyer will always discover some bargains if he will do his
shopping on the common-sense principle that it does not pay to wait
until everybody wants the same goods at the same time. The saver will
do well to sharpen his own knowledge of investments.
He should pick up his bargains in the off-season, place them in
“cold-storage” and only lighten his load when everybody wants them at
once, at any price, and for immediate delivery. There is no better way
of determining when the bargain season is on than by watching the daily
newspapers. Never buy preferred or common stocks when business is in
a period of inflation or at a peak of prosperity. The time to buy is
when conditions are at a lower ebb, when the stocks of absolutely sound
companies are selling cheaply. It is good advice to buy only stocks
listed on the New York Stock Exchange--the list of which is printed and
quoted every day in leading newspapers.
Bonds often go up when stocks go down. As a general proposition any
bond which is a direct mortgage, on property valued largely in excess
of the bond issue--where the issuing corporation has shown its ability
to meet interest charges, year in and year out, by a large and ample
margin--is a good bond.
It is difficult, however, for the average business man to investigate
the value of the underlying securities, to judge them even after
lengthy study, or to decide whether a particular mortgage is
“clear-cut,” without reference to mortgages preceding or following it.
Also, no ordinary man is competent to pass upon the legality of an
issue or the titles back of a mortgage. This requires a complete
battery of specialized talent, especially in the case of corporation
and railroad bonds. Such information is always on hand with your banker
or broker, and if you ask his advice he will always be glad to assist
you.
It is well to rely upon the banker who makes a business of
investments--but he should be a conservative banker of good repute.
Always, without fail, investigate your banker. Be suspicious of lurid
advertising and follow-up. As a general rule the higher the interest
yield the more risk the investor takes. Don’t be greedy; be content
with moderate return _and safety_.