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FTER the man with money to invest has first satisfied himself as to the degree of safety for his principal in the investment he is contemplating, as to the degree of certainty regarding the income return he will get on his money, as to the marketability or value as collateral of the security he has in mind, then he should give attention to diversification of his investment. Diversification, or spreading the risk, comes after these other safeguards, for without the first two it is of little value; with them, however, it adds still further to the safety of the investment.

The salesman of a New York banking house who tried to influence an investor to sell his Liberty Bonds and put all the proceeds into the bonds and stocks of a single company in which his house was interested, grossly violated this principal of diversification.

United States Government bonds are about the only securities in which one does not need to spread the risk. They are the obligations of all the people and of all the businesses of the country. Their principal and interest is secured by taxation on all these sources. The risk is spread the full length and breadth of the United States. It is not confined to any one section, nor is it based upon any one single industry or activity. Here is one security that combines the elements of diversification within itself. No corporation, state, or other local security does this. That is the reason why Liberty Bonds are particularly suitable investments for persons who cannot afford to take risks with their money-which is to say they are particularly suitable for most everybody, for there are few who really can afford to take risks with their savings.

Outside of Liberty Bonds, the investor, by distribution of his funds in various securities, must secure for himself the diversification that means added safety. The case of the dependents of a man who had watched New Haven stock advance over a period of years and who became so confident in its future that he placed all his money in it and prohibited his

trustees from selling the stock after his death is an extreme example of failure to diversify an investment that illustrates the point. From comfortable circumstances, the wife and children of this man became almost penniless and without income.

A few years ago the trustees of a religious organization in New England, having a considerable sum to invest, wrote to one of the richest men in the country, a member of their denomination, and one in whose advice they had great confidence. He wrote back, "Buy Interborough Rapid Transit bonds." They did, at 98. To-day those bonds are selling for fifty-four cents on the dollar. They have so far paid their interest and may work out all right; but those trustees would feel much easier if they had invested this fund in a diversified list of securities instead of in one issue.

There are, it is true, few securities, formerly as highly regarded as Interborough bonds, that have become involved in such disturbing circumstances as those bonds. But no one can tell when a security may be affected by changed conditions in this way and its investment value upset. These changes may be due to many causes. They may affect a single security, being due to alteration in the character of the management of a company, or as in the case of the Interborough, to outside developments over which the management has no control. Or they may be changes that affect the securities in a certain territory; or business or economic changes that affect the securities of an entire industry or field of activity. Then there may also be more fundamental economic changes that have an influence on the cost of living and cause the long upward and downward swings of interest rates which are reflected in the price movement of long term bonds. All of these changes except the last the investor can help to protect himself against by spreading the risk through the purchase of a diversified list of securities. The greater the diversification the smaller the risk.

Against the long swings in interest rates the investor not only can protect himself in

order to prevent a decline in the value of his principal and of the purchasing power of his interest return, but better still, he can take advantage of these swings actually to increase the amount of his principal and the purchasing power of his interest. This can be accomplished by buying high grade long term bonds when interest rates are high and bonds are therefore low, as at present; holding them until interest rates go down, and then selling the bonds at higher prices and investing the funds in short term securities where there will be little or no loss of principal while long term bonds are again going down. While one is managing his investments to take advantage of these swings, he should diversify his purchases as a measure of protection against the less certain changes of conditions that might arise.

But the same degree of diversification is not required in every investment. In buying the highest grade securities there is less need of spreading the risk than when buying second or third grade issues. In buying Liberty Bonds there is no need at all. A short time ago a man from Massachusetts with approximately $40,000 to invest, inquired whether it would be proper for him to buy $10,000 each of Pennsylvania Railroad general mortgage 4 per cent. bonds, due 1965; New York Central first mortgage 31s, due 1997; Atchison, Topeka & Santa Fé general mortgage 4s, due 1995; Chicago Burlington & Quincy, Illinois Division 4s, due 1949, and $15,000 Northern Pacific general lien 35, due 2047. The total cost was about $38,400 and the annual interest return $2,050, or a little more than 5 per cent. on the cost. These bonds are all legal investments for savings banks in New York State, which means that they are high grade railroad securities. In this class of bonds a spreading of the risk over five issues would seem sufficient for a forty thousand dollar investment. But the investor was placing his entire investment in one business field. That increased his risk over what it would have been if he had included similar grade bonds in other fields. He had evidently studied the railroad situation, however, and reached the conclusion that the best railroad bonds held attractive investment possibilities at this time. He was therefore willing to take the risk of having all this fund invested in one field as long as he was buying from among the best bonds in that field. The risk was dis

tributed geographically by selecting bonds of roads in different parts of the country.

No serious criticism could be made of this selection of bonds. Looked at from the viewpoint of possible growth in value of the principal as interest rates decline, it seemed to have attractive possibilities.

For in 1900, when interest rates and the cost of living were low, the New York Central 318 sold as high as 111. They were at 67 when this list was made up. They have seventy-six years yet to run and in that time may go through several cycles of fluctuating value due to the swings in interest rates. The Atchison general 4s, which were issued at the time of the reorganization of that road in 1895, reached 106 in 1905, and the C. B. & Q., Illinois Division as sold at 106 in 1906. These two bonds cost this investor 76 and 79 respectively.

If this selection was being made among lower grade railroad bonds and only five issues had been chosen, it might very properly have been criticised for lack of distribution of the risk. The value of spreading widely the risk in such a case can be shown, as it has been at times, by making a list of securities of all the weak roads at any particular time and then tracing their price history. It will be found that the losses have been more than offset by the gains. Yet for one to try to choose among these issues without taking the whole list would likely result in losses that would outweigh the gains. It is only in wide diversification that a protection against loss is assured.

For the investment of a smaller fund than this $40,000, the Investment Editor recently recommended fifteen different issues in four different fields of investment for the savings of a California business man. In this case there was no predilection for any class of security expressed by the investor. He wanted a safe investment with fair returns and said he could afford to take some chances. The list sent him by way of suggestion included three of the better grade foreign government bonds brought out in this market, six of the first line of the second grade railroad bonds, five of the best public utility issues, particularly those in the hydro-electric field, and one industrial bond. Greater diversification and increased safety could have been secured by going into other fields, but these seemed at the time to offer the "chances" that this investor seemed to want.

3. That airplanes can make fair percentages of hits with heavy explosive bombs dropped from such a height that the planes will be practically immune from the fire of a vessel's anti-aircraft guns.

4. That these planes can carry six bombs of 1,000 pounds each, and bombs twice as heavy if necessary.

5. That, according to a statement made by General Maitrot, the French have developed bombs of this type that weigh a ton.

6. That such bombs, falling upon a battleship's decks from a considerable height, will penetrate all decks down to the protective deck, and then explode with such force as to destroy or put out of action any ship now built or designed.

7. That such bombs, acting as a depth charge, will sink or put out of action any ship if they fall in the water within 60 feet of her hull.

8. That planes can drop to windward of a battle fleet gas bombs that will entirely incapacitate the ships' crews, or even destroy them if poison gas is used.

9. That anti-aircraft guns are ineffective against airplanes at a considerable height. The record during the World War, even with guns on solid land platforms, was one hit in every 1,000 shots, and the hits from a sea platform would necessarily be less.

If the claims of the airplane advocates can be realized, it means that any battleship operating within the radius of planes which are in control of the air will be disabled or destroyed.

An up-to-date airplane carrier is a vessel of about 35,000 tons, having a speed of 35 knots, a length of 800 feet, and carries eighty planes which can successfully be launched from and landed upon her flush upper deck.

A modern battleship displaces more than 40,000 tons, has a speed of about

guns, and relatively few anti-aircraft guns.

The battleship has no means of offense against the airplane carrier, because the latter's speed enables her to keep entirely out of range of the powerful guns— at a distance of 100 miles if desirable.

The carrier's means of offense against the battleship are, as above stated, torpedoes, bombs, and gas, any one of which is capable of disabling it; and the battleship's only means of defense against the torpedo and bombing plane is the almost wholly ineffective fire of her anti-aircraft guns, while she has no means of defense whatever against gas bombs dropped from planes at a great height.

From the above, it is clear that, if the assumption as to the effectiveness of air attack is approximately correct, a duel between a battleship and a carrier would inevitably result in the destruction or disablement of the former, while the latter, being outside of gun range, would be unharmed, and few if any of her planes would be shot down.

It is clear that a similar action between a fleet of battleships and a fleet of carriers would result in the defeat of the former without damage to the latter. The same would be true if each fleet was accompanied by the same number of cruisers, destroyers, and submarines, as these forces, being equal, would neutralize each other. The same would also be true if one fleet had a decisive preponderance of air forces.

It is universally admitted that air attack is so dangerous that our fleet could not win an action against an enemy having a considerable air force; that we should therefore at once build carriers and develop our planes and torpedoes and bombs.

This means that the only adequate defense against a fleet air force is to equip our fleet with an effective air force at least equal in the number of planes.

If this is true, it necessarily follows that

if we permit an enemy to equip her fleet with an air force, say, three times as great as ours, he will, at the expense of one third of his planes, destroy our air force, gain complete command of the air, and we will have no adequate means of defense against the remaining two thirds of his airplanes.

If, in turn, this is true, it also follows that a nation that puts its money into airplane carriers, instead of battleships, will have a stronger fighting force than a nation which continues building many battleships and only a few carriers.

To assume the contrary, is simply to assume that American mechanical ingenuity and ability is not equal to producing airplanes, torpedoes, bombs, and gas bombs, that cannot duplicate the results already achieved or surpass them.

Considering the great superiority and the continuous and rapid development of these weapons abroad, this is manifestly a very dangerous assumption.

As a matter of fact, the acknowledgment that a fleet cannot operate successfully without airplane carriers at least equal in number of planes to those of the enemy, means that the modern airplane carrier is a capital ship having greater offensive power than any battleship yet designed, or that can be designed, because the latter can be successfully attacked from above her decks, where she can have only light armor, from below the water-line where no armor or compartmentation could keep out the explosion of a torpedo such as can readily be built and launched by a plane; all this not to mention there being no possibility of defense against attack by gas.

The usual argument that because the danger to the battleship of the torpedo boat of the 1880's was successfully met by designing the destroyer, we shall therefore find some similar means of opposing air attack, neglects to note that the ability of the larger (and consequently faster and more powerful) surface vessel to run down and destroy the smaller one, does

not apply in the air, where the fighting is not confined to a level plane, because it is the smaller aircraft that is the more efficient fighter. That is, we cannot oppose airplanes by building larger and more powerful ones, because the superior speed and climbing ability of the smaller battle planes will always enable them to attack in any position with reference to the larger, slower, and more cumbersome planes, and easily bring them down by gun-fire to which the latter cannot effectively reply.

The destroyer would not have been able to drive the small torpedo boat from the sea if the latter had been able to fly at a speed of 100 miles an hour.

The torpedo-launching plane is more dangerous to the battleship than would be a submarine having a submerged speed of 100 miles an hour, because the latter would be subject to attack by surface craft carrying depth charges, while the former, when in command of the air, can be attacked only by anti-aircraft guns.

Moreover, the planes, having a speed at least equal to 3 or 4 times that of any surface vessels, have therefore the ability to attack a fleet on any bearing before the fleet auxiliary forces (cruisers, destroyers, and so forth) can be concentrated at the point of attack for such defense as they can exert with their anti-aircraft guns.

Incidentally, if we assume the power of air attack to be as above indicated, it means that these new weapons add greatly to the power of defense against an enemy from overseas, and this because the number of planes operating against the fleet from shore stations would be very much greater than the number that could be brought against us on war vessels.

In all that has been indicated above, as to the power of air attack upon an enemy's fleet, it is of course assumed that such attacks can reach their maximum efficiency only if carried out by naval officer air pilots, belonging to the fleet