In agreement with this, Mr. Lawrence Chamber lain says, in his "Principles of Bond Investment": There is nothing invidious in a comparison of investment and speculation. Each is necessary to the other, and both to the conduct of business. There is more or less spec ulation in every investment, and investment in every specula tion. But in the large, investment is a science, and specula tion is an art . . . It is in accord with our thesis . . . that successful speculation is a high order of finance, but unsuc cessful speculation is gambling.
7. Limitation of risk.—The simplest way to engage in speculation, and yet limit risk, is to permit only a certain percentage of one's property to be subject to material hazard. The average capitalist will keep by him a given sum in savings bank deposits, avail able to meet sudden contingencies. A main portion of his holdings may be in the enterprises in which he combines with his capital his personal services as an administrator. Another portion may be invested in good bonds, to serve as a nest egg, if both business and speculative capital were destroyed. A final per centage may be employed to take advantage of the fluctuations of prices, on the principle of converting holdings at the top and bottom of the major long swings of the stock market.
Bacon said in his essay "On Riches," "He that rest eth upon gains certain, shall hardly grow to great riches; and he that puts all upon adventures, doth oftentimes break and come to poverty; it is good, therefore, to guard adventures with certainties that may uphold losses." 8. Distribution of means of elim inating hazard is to divide holdings so that they will be subject to different principles of fluctuation, and so the losses of one part will be neutralized by the gains of another part. Distribution, subdivision or averaging of risk may be with reference to indi vidual businesses, such as an investment in three or four gas companies instead of in one. It may be with reference to branches of industry, as divided be tween textile stocks, gas bonds, farm mortgages and real estate bonds; or it may be with reference to re gions and countries, as when American securities are supplemented by Argentine rails and Russian rouble loans.
In England, the most discussed principles of in vesting are those connected with the territorial dis tribution of risk. The English, having had long ex perience in foreign investment, have found that the world may be divided into about ten great regions, each of which is reasonably independent of the others in the occurrence of periods of prosperity and depres sion. Naturally, the idea developed of dividing an investment fund between different regions. The rules for this distribution have been formulated as follows : 1. The quality of all securities involved in one scheme of distribution should correspond closely.
2. The amount of capital invested in each hazard (whether of corporation, line of business or locality) must be as nearly identical as possible.
These two rules give the sum of the risk in terms of quality and quantity.
3. Each corporation invested in must be actually a separate risk; that is to say, independent of the forces influencing the hazard of any others of the series.
4. To these rules we may add another. The greater the risk the more the holdings should be sub divided.
9. Take advantage of the long the chapters on The Cycle of Trade and on Investment Barometers it was pointed out that the investor should take advantage of the long swings. The difficulty of conversion comes at the top. When the investor is filled with enthusiasm he is asked to cut down his in come by purchasing gilt-edged bonds and notes of low yield. This loss is less, however, than the loss of holding securities that are much affected by business conditions, thru a crisis or major reaction. Further more, such a conversion of holdings is indispensable for getting the ready funds with which to buy at the bottom.
10. Price versus intrinsic employment of the rule just mentioned calls for the investor to go selling his natural inclination. He is sellin when securities seem most profitable, and buying when they seem worth least. Thru the diligent study of condi tions the investor must shake himself clear of the im pression that market prices and the values of securi ties to him personally, correspond.
In his work on "The Holders of Railway Bonds and Notes," Mr. Louis Heft says: The market value of a railroad security does not depend always upon its actual, intrinsic value alone, i.e., upon the property and its foreclosure value, pledged as security, and the other liens, prior and junior, against such property ; but is affected, quite often, and sometimes quite materially, by extraneous influences, among them the temper of the times ; the state of the money market ; the quoted price ; whether or not it has a broad and ready market and is a legal investment for trust funds or savings banks ; its form, whether easy of negotiation and how quickly it can be con verted into cash ; when it matures ; its rate of interest and the income it produces at the price ; whether or not it is listed on the stock exchanges ; the personnel of the board of directors of the railroad company ; the prevalent reports, true or false, of the state of the finances and affairs of the road ; the effect of recent legislation or expected legislation ; recent decisions of the higher courts ; pending litigation that affects the road; events and reports of political significance, local, state, national or international.