11. Previous prices.—Still less is a security valu able to an investor according to some past price which represents the original cost. To confirm a security ' as an investment at any time is virtually to reinvest in it at the prevailing price.
12. Corporation company should be judged, in part, by the public account it gives of it self. Nine times out of ten a policy of secrecy is based upon ignorance of the degree to which the matters safeguarded are the common property of other busi nesses. In the tenth case, secrecy represents some anti-social policy, and a consequently fugitive profit of which the investor should keep clear.
13. Certified public every step in investment, the investor's chief safeguard is expert knowledge animated by professional ideals. In this country, the standard manner of certifying balance sheets and income accounts is thru the services of certified public accountants.
14. Capital versus earning more ethereal the assets of a corporation are—compounded of good-will and patent or franchise rights—the more the investor must inquire into earnings and the con ditions influencing them. The more stable and steady the course of an industry, with reference to earnings, the more the points of the security have to do with the terms of mortgages and the nature of the lien upon the property.
The more the emphasis is placed upon property, the safer the principal and the smaller the income. The more the emphasis is placed upon income the larger the current yield should be to compensate for risk. The investor cannot demand successfully high security and high yield. He should determine as exactly as possible how yield and security should be combined for his purposes.
15. Bonded debt.--Reasonable debt limits depend upon two things: average experience as to the per centage recovered on property thru liquidation, and the amount of earnings required to remove the danger of liquidation. It usually happens that public utility companies whose income is steady, pass thru liquida tion with small loss, because they are easily managed and can find buyers at a reasonable discount without difficulty. Because of their importance to community
welfare they frequently avoid liquidation by receiver ship organization.
16. Wasting assets should always be amortized in the investor's accounts. In certain lines of investment, such as timber bonds and car trust certificates, the investor will find the proper provisions made for him. In other lines, especially mining, he must make them for himself.
17. Gross income, operating expenses, net in come, items of financial data should be demanded by an investor of the company into whose securities he puts his money. From the com parison of such figures of the present with those of past years, and of his own company with those of other companies, he can derive a variety of test ratios for his own guidance; such as (a) maximum per centage of shrinkage of gross and net earnings in years of depression; (b) the number of times by which net earnings should exceed fixed charges, and (c) the number of times by which surplus available for divi dends should exceed dividend requirements for com mon and for preferred stocks.
18. Dividend dividend record is of no value for short periods and resort should be ,had to the record of earnings, because many disastrous fail ures have resulted from stripping a company of its working capital to pay dividends. Such a stripping process cannot be continued for a long time, however, so a long dividend record is a high merit. It is rea sonable to ask for the record of dividends thru the last panic and depression.
19. Characteristics of possess a number of fairly distinct characteristics. The in vesting process consists of arbitrating between the desired degrees of the different characteristics, off setting extra merit in one line against deficiency in some other line, and making final judgment on the basis of the correspondence between the qualities of the security and the requirements of the individual investor.
The matter is thus put by the Guaranty Trust Company of New York City: There are five chief points to be considered in the selec tion of securities for investment.