We have seen that the margin in favour of ordinary shares and stocks which seems to have been established by Mr. Smith's extremely interesting tests was based on earnings made under conditions so exceptional that it can hardly be taken as proved in the case of the industries of any other country. Even in America one does not feel quite certain that industrial profits are going to be so fat in the future, when once the exceptional circumstances now in favour of the United States have given way to more normal conditions. We have yet to see the effect of the restrictions on immigration by which one of the causes of amazing economic expansion has been seriously weakened.
All that, for the purposes of really fastidious investors, has been proved by these investigations is that ordinary shares have advantages which make it impossible to regard them as necessarily so speculative that we ought to feel rather ashamed of possessing them.
At the same time, the preceding pages have been written in vain if they have not shown how difficult it is for the ordinary investor to weigh the real merits of any security from a public debt down to a share in a mine that is some day going to flood the world with platinum. We have seen how many guesses we have to make in considering the taxable capacity of a country and the policy that its rulers are likely to follow in husbanding its resources; and that the earning power of a company is to a great extent dependent on the opinion of the directors concerning the figures at which the assets should be stated in the balance-sheet; and a great accounting authority has been quoted who said that the amount taken credit for in respect of one asset alone—stock-in-trade—may double or treble the apparent profit if it be put too high.[1] With his feet in these quicksands and his head in this fog, through the rifts in which he can only get glimpses of what may be fact and may be mirage, the ordinary investor may well hesitate about any attempt at industrial investment, even when his hand be held by a most cautious and intelligent stockbroker.
To the author of Common Stocks as Long Term Investments, the dangers surrounding the choice by any individual investor were so evident that he ends his book by advising him to put the task of investment management into the hands of bodies specially organized for this purpose.
"It is," he says, "a task that can be properly undertaken only by an organization in which men of varied experience and training in the financial field unite with the single purpose of applying their best combined judgment continuously, with the least managerial complications, to the supervision of a single investment fund in which a large number of individual investors may participate. Thus, alone, may the best results be obtained."
This conclusion points the way for the investor in favour of investment in something like the British Trust Companies, by means of which he acquires ownership in companies which exist for the purpose of taking off his shoulders the burden of choosing investments, and becomes at once associated with a co-operative investment body of the kind indicated by Mr. Smith. By this system he passes over to hands which certainly are more skilful and experienced than his own the task of making a selection among the thousands of investments which will do so well for him if he chooses well and will inflict disappointment upon him if he makes mistakes.
That a holding in a prosperous and well established Trust Company should form part of the collection of investors who aim at increase of income and capital will be readily agreed, and the advantages of these companies will be set forth fully later. For the moment, however, it must be observed that a blind purchase of Trust Company ordinary stocks or shares can by no means be relied on as a royal road to investment salvation. The history of the British Trust Companies has been marked by striking successes, but has also been strewn with wreckage and disaster. In fact the difficulties that face the ordinary investor are never more clearly shown than when we contemplate the mistakes that have been made in the past by the skilful and well-informed managers of investment companies.
What we are looking for at present is some kind of investment by which it may be possible to secure the compound interest advantage that is achieved by the reserve fund policy for ordinary shareholders, while eliminating as far as possible the industrial risk which we saw to be inseparable from the privilege of ownership in any industrial enterprise.
Such investments are to be found in the shares of banks and discount companies and of insurance companies. Their service to industry is obvious, since industry as at present organized could not continue for a day without them; and at the same time this service is so widely spread over industry as a whole that the principle of diversification is introduced by the holding, for example, of shares in a single great bank to a much greater extent than any ordinary investor could hope to secure by subdivision of his investments into different industries.
This very wide spread of the net with which banking, bill-discounting and insurance sweep the waters of industry and commerce does not by any means eliminate risk. Those who know most about the conduct of these enterprises will acknowledge most readily that it is very easy to make mistakes in carrying them on; but if investment is confined to the shares of the large and well-established companies, then the vast resources handled, the great body of tradition and experience at the disposal of those who manage them, and the inevitable demand for their services by trade as a whole, whatever may be the fluctuations in the fortunes of its various branches, give a solidity and stability to their earning power such as no form of purely industrial investment can rival.
Competition among them is keen, but the position of the leading companies is so firmly established that there seems to be little likelihood that it can be dangerously assailed by the emergence of new stars in this firmament. In the great increase in production and exchange that seems now to be possible, if mankind will give more attention to production and less to quarrels about the division of the product, these great financial institutions should play an enormously important and reasonably profitable part. And out of the profits that they make we may be as sure as we can be of anything about the financial future that they will continue, in the interest of the invincible strength that is necessary to their existence, the policy of building up reserves which is conducive to the expansion of the shareholders' income.
One serious drawback most of their shares carry, from the point of view of the investor who likes to feel that, within the limits of investment conditions, he has not left a single chink in his armour through which he can be smitten. They nearly all carry a liability which in some cases is considerable in amount. It may be true—probably is true—that this liability is purely nominal—that in view of the terrific shocks which have been successfully met in the last dozen years by the financial machine without any question even remotely arising of a demand on the shareholders of the banks and discount companies and insurance societies that they should meet the liability on their shares, it is not possible to think of any cataclysm which would put any one of them into liquidation. But there the liability is, and it cannot be forgotten altogether.
- ↑ Pixley, p. 444.