Obrázky stránek
PDF
ePub

BUYING BONDS FOR REVENUE ONLY

TH

HE people who buy bonds may be roughly divided into two great classes. The first of these classes consists of those who buy bonds purely as an investment with no idea of selling again at any time. The second embraces that large semi-business public which buys bonds with an eye to steady income, but with the added idea that the bonds may be sold again at any time the buyer pleases. These two classes are very distinct. Of course, each class may be subdivided. In many cases, again, the two will overlap. The man who buys for permanent investment hopes that his bonds will grow more valuable as time goes on. The man who buys otherwise yet likes to think that the great bulk of his investment will pass muster as truly conservative.

The man who buys for revenue only goes to make up probably the larger part of the real investment public. It is astonishing how many requests the bond dealers receive for an investment "that is sure to pay its returns at all times, without regard to market or price movements." When trustees come to settling up estates and appraising the securities left by investors, they nearly always encounter bonds for which no quotation is obtainable. The estate receives the interest regularly, but there is no market in the world wherein the bonds can be sold. Many hundreds of millions of such bonds are held in the United States. Probably an even larger proportion of the securities held by the English are of this class. Is it good for the investor to buy these bonds? In one form or another, that question recurs all the time in every investment centre. It cannot be answered by a general statement. Such buying is real, true investment in the best sense of the term. For the man or woman who wants a steady income, a permanent income, without any regard at all to the possible sale of the bonds, there is nothing better. So well is this recognized that the English railroads have catered to it by the creation of a class of bonds hardly known in this country-namely, the "perpetual debentures"-bonds which never fall due. When the West Shore mortgage for $50,000,000 was made in 1885, the bonds were made to fall due in the year 2361, which is surely far enough

away to make the issue attractive to people who want to feel that their bonds can never be taken away from them except by a default.

At the present moment, the big bond dealers of the United States are meeting a somewhat similar demand by offering to sell to investors issues of bonds on small railroads and on public utility companies. The main reason is that the investment public is asking a larger return on its investments than it can get from the old-line railroad and industrial bonds. Five years ago, 4 per cent. was about as much as could be expected by the buyer of really good bonds. In fact, the strong roads found quite a good market for 3 per cent. and 3 per cent. bonds at prices which gave less than 4 per cent. This has all been changed, whether permanently or not is a matter of conjecture. At any rate, the dealers in bonds now find it their duty to provide for a great many of their customers bonds that yield about 5 per cent. to the buyer.

Probably the main reason for this demand is the fact that the people who live upon the proceeds of their investments cannot buy nearly as much to-day for their dollar bill as they could buy five years ago. If a retired business man is living upon the income from $100,000, invested at 4 per cent., he will find that his $4,000 per annum in 1907 is not as much as it was in 1901 by probably a thousand dollars. His food, his clothing, his rent, his coal-all the necessities of life, in fact-are perhaps 25 per cent. higher in price than they were. stands the pinch for a time. Then he comes to the broker or the banker, and his unfailing request is something like this:

He

"Can't you find me an investment that is perfectly safe, and that will give me $5,000 a year? I find I can't get along with less, and I don't want to touch my principal."

The brokers and the bankers of old-line prejudices stood up against this request for a year or two. Then the bars were gradually let down. The more progressive of the big bond dealers cast about over the investment world, looking for a class of bonds that met this new demand.

Several classes of bonds meet part of the demand. You can go into the Wall Street

market and buy any day and in as great volume as you like bonds that will yield you 5 per cent. The new industrial bonds, issued by the socalled "trusts," nearly all yield that much money. So also do many railroad bonds that come after the old mortgages, or that are secured on stocks and have no direct lien on the roads themselves. Some of these issues are probably perfectly good-in fact, many of them are. The trouble is that they are hard to select with any degree of certainty. Moreover, they change their prices very violently at times. A crash in the stock market will often cause something like a collapse in these bonds. No bond dealer likes to advise his investors to buy them. If he does, the chances are that the first time there is a collapse, the bond house will be besieged by hundreds of letters asking plaintively:

"Why did you advise me to buy the bonds of the XYZ Railroad? I see by this morning's paper that they are five points lower than when I bought them!"

Of course, the dealer replies that the bonds are perfectly good, and that the investor should not sell them, nor be worried by the way they behave in the market; but that is cold comfort for the man who owns them. The next time he has any money to invest, he goes to another banker, unless something has happened in the meantime to bring his bonds again up to the top price.

The search of the banker for bonds that will give the buyer 5 per cent. or more went directly away from this class of bonds-dangerous alike to the business of the banker and his client's peace of mind. After he had exhausted the list of real conservative bonds listed on the stock exchanges of New York, Philadelphia, Boston, and Chicago, the banker decided that there were no listed bonds worth while that filled the bill. He turned then to the bonds that are not listed.

That is the reason why the lists of bonds for investors prepared by many of the big bond houses of New York and sent out in January contained mention of various bond issues which are not quoted on the stock exchanges. Probably the proportion of such bonds in the lists was greater this year than in any previous year.

The bonds selected are of several classes. Here, one offers first-mortgage bonds of a street railway in a Western city; another brings to the public a first-mortgage bond on a small

steam railroad down South, in process of construction; another recommends very strongly the first-mortgage bonds of an electric company in the Middle West; yet another pins his faith and the faith of his house to the bonds issued by a power company in the far Northwest, or a telephone company in Canada.

Are they what they pretend to be? If they are, the bonds are perfectly good, and any investor who buys for revenue only can put his money into them without the slightest fear of the consequences. It is a question of good faith. It must be asked with regard to each separate bond, not with regard to the class of bonds. If the investor asks: "Are firstmortgage bonds on steam railroads perfectly good?" one can afford to answer blindly: "Yes, they are!" On the contrary, if one ask: "Are first-mortgage bonds on street railways, electric companies, power companies, and water companies perfectly good?" it would be a rash critic indeed who would dare to say more than this: "I cannot say until I know the company, its franchises, its sponsors, its location, and all about it!"

When, therefore, you are asked to buy with your real money the bonds of these so-called public utilities, you are entitled to ask a lot of questions before you consent. Some of the questions which you are entitled to have answered may be briefly indicated:

Where is this company? how long has it been doing business? how long do its franchises run? what are its earnings since it began ? why did it issue these bonds? who uses its products, and how much chance is there for them to grow? how much competition has it, and how much is it likely to have? These queries will generally be answered in the circular or letter in which you are offered the chance to buy.

Even more important, however, are these others, which are not answered in the prospectus:

What is the reputation of the house that offers the bonds? What other bonds of this class have you sold, and how have the buyers fared? Are you perfectly sure of the facts you put down in this circular? Have you personally or through your own agents carried on any investigation of this property, or are you taking the word of the president or the promoter?

This last series of questions must be answered before you can buy these bonds with an easy

mind. They must also be answered before any honest, intelligent critic will endorse the bonds. If you write to any honest financial critic and ask about the bonds of a big steam railroad, he can answer you, because the facts are before him in black and white, in annual reports, in the newspapers, in all financial handbooks. But in the case of these companies, he has to go to the people who are selling the bonds. He cannot go to Seattle to investigate a little power company, nor to Texas to investigate an irrigation project. He has to go to the bankers. If their standing is good enough to warrant the taking of their word for it, he will endorse the bonds. If not, he has a right to say so.

These rather obvious facts will furnish a clue to the right way to buy these bonds. In the first place, and perhaps in the last place also, never buy such bonds from dealers in whom you have not the utmost confidence. If you have to take a man's word for anything, pick out your man before you ask. In almost every city of any size in this country, there are firms that deal in such bonds to-day whose reputation is beyond reproach, and who would not offer to their customers a single bond in which they did not have the utmost confidence themselves.

The refinement of the art of buying for revenue only is to buy from those who, with a reputation for honesty to back them, make a specialty of such bond issues. The added element of security in using such a dealer comes from the fact that he has more and better machinery for the investigation of these properties than has any other dealer. There are two or three houses in New York, for instance, which make a regular business of telephone bonds. When some small telephone company asks them to take a bond issue and sell it to the public, they investigate that telephone company-not as you or I would, but scientifically. They have their own engineers, experts in the telephone business, men who have seen successes and failures by the score in this field, and know how they came about. They let loose this high-priced staff of experts on the company before they will spend a dollar on its bonds. That means, simply, that the whole concern has been gone over thoroughly by independent experts before you, the investor, are asked to buy a bond. The same remark applies to the street railway, the gas, the water, and many other public

It

utility bonds and stocks offered for sale. It applies, also, to the bonds of small steam railroads. If you are offered the bonds of a little railroad of which you never heard, ask, first, who offers, and what are his credentials. People who want permanent investments can find them in this field, but it is beset with nearly as many risks as the public-utility field. has one great advantage, that the small independent steam railroad is almost certain, some day or another, to be taken in by a big railroad. When that happens, the bonds that you bought at, perhaps, 90 per cent. of their par value, and that yield you over 5 per cent. will immediately or presently become what the experts call "underlying liens," and will be worth, probably, from $150 to $300 per bond more than you paid for them. Suppose, for instance, that you buy at 90 the 5 per cent. bonds of some little two-hundred-mile railroad in the South. If the road is profitable, the Southern Railway or the Louisville & Nashville will probably lease it, sooner or later. If they ever do, your bonds will be worth probably 120, because of the higher credit behind them.

This may be either a source of good profit, or a source of great loss. It depends upon the people who finance the little company, and the people who sell you the bonds. There are only a few dealers in New York-big as it is— who do this kind of bond business scientifically. One or two themselves finance these railroads, advise with regard to their building, insist upon the way they shall be built, and reserve the right to say in what manner they shall be sold. These firms make a scientific study of the building of small railroads. In the hands of one of these firms, the investor for revenue only can get more than 5 per cent. on his money, stand to make at some time a handsome profit, and be practically safe as to his principal.

This is about as far as THE WORLD'S WORK can go in the discussion of this important matter. Enough has been said to point the way very clearly to those who desire a high return on their money, with a minimum of risk. The high return can be gathered from the classes of bonds considered in this article. The security can be obtained only by the wisest discrimination in the firms or dealers from whom advice is sought. It would be perfectly idle to advise the small investor personally to investigate these companies, for in ninety-nine cases out of every hundred such an investigation is impossible.

CANADA'S"

THE ROMANTIC STORY OF A PEOPLE JUST DISCOVERING THEIR OWN COUNTRY

T

BY

AGNES C. LAUT

To

HE Twentieth Century belongs to Canada." Sir Wilfrid Laurier's prediction seems likely of bigger fulfilment than he, himself, fully realizes. no one has the marvelous growth of the Dominion come as a greater surprise than to Canadians themselves. Ten years ago, such a prophecy as the Premier's would have been regarded as "bounce"-the after-dinner effusion of a speechifier fond of hearing his own rolling periods. While Canadian politicians were still dickering for the honor of playing second-fiddle to Imperial plans, they suddenly awakened to find themselves a nation. They realized all at once

that history and big history, too-was in the making. Instead of the Dominion being dependent on the British Empire, the Empire's most far-seeing statesmen were looking to Canada for the sinews of imperial strength. A few years ago, public men in the Dominion seriously talked of Canadian representatives having seats in the British Parliament. To-day they would not take a seat at Westminster as a present. With an empire of their own equal in size to the whole of Europe, and with wealth to be developed exceeding the combined national incomes of every country in Europe Canadian public men realize that they have enough to do without going to West

[graphic][graphic][merged small][merged small][merged small]
[graphic]
« PředchozíPokračovat »