The Indianapolis journal. [volume] (Indianapolis [Ind.]) 1867-1904, 1901-12-15
WHAT is AN INVESTMENT?
PLAIN STATEMENT or 4 NATTER IN
WHICH ALL ARE INTERESTED.
WHAT Good Securities and safe In
Vestment~ Are and the Way in
which to Consider Them.
wall Street Journal.

Wall street Journal
NVe receive "A great many inquiries as 70
whether we consider this, that or the other
security an investment or a safe invest
ment. and the inquiries disclose a great
variety of views as to what an investment
really Il. II may be well. therefore. TO ex-
plain in a little detail what we mean by the
word investment as we use it in answer
ing Inquiries and in our articles.
We take IT that an investment. strictly
so-called. is a property. stock. bond or
other obligation. Offering ample security for
safety OF principal and stability OF income
There are thus apparently, two points
from which an investment is to be consid-
cred, viz:
1. Safety of principal
>. Stability of income.
Though, as will be seen presently, the two
are in effect one and the same thing
When an investor has money 10 invest he
always expects TO place it where he can
find il again. No one invests money with
the expectation of losing some Of the prin-
cipal. matter what income he may tenn
pOrarily derive. Thus, the first thought rs.
ought to be, as 10 whether or not In
Vestment purchased at certain price VIII
bring either at maturity or when he desires
10 sell IL = much II cost. man who
makes a loan stock collateral or on real
estate mortgage expects his money re-
turned at the date agreed upon. A
who buys railroad bond maturing In ten
years does so with the expectation OF hav
ing his principal paid IN ten years. A man
who buys stock for investment does so IN
the belief that when he wants TO sell his
stock he Will get at least much as he
paid for II. receiving his dividends mean
time
WHAT ALL DEPENDS ON.
IN the last analysis. however security OF
principal depends almost altogether upon
stability of income-the word stability CON
tanning the Idea OF Improvement where re-
turn Is not specifically limited A railroad
bond paying per cent. per annum may cell
at any price from 80 TO no. according s
the ability Of the company to pay the per
cent. per annum is less or more evident.
The reason why a per cent. bond Of one
road sells at so and a per cent bond o.
another road at 10 is that in the case or
one road the earnings are little more than
sufficient TO pay the interest while I'm the
case OF the other they are. perhaps, three
times the necessary amount The greater
certainty Of the return In one case gives
the higher principal value of that bond.
Again, one stock paying per cent divi-
dends may sell at 100 and another at 120,
the reason being that the surplus after div
idends IN one case is equal TO a further
per cent, while in the other case IL Is equal
10 another per cent The higher principal
value IN the latter case reflects the greater
chance OF increased income.
Consequently, in determining the value
OF Investment quality" Of a sec Irity, such
a railroad or Industrial stock or bond,
the first and most important thing 10 con-
slider Is the margin OF security for in
come In the case of fixed interest dvi-
dends, or the margin OF security and
chance for increase in the case where in
IS not limited. This practically axes
the ultimate value Of principal. The second
thing to consider is the amount Of income
RULES TO BE APPLIED.
We have been accustomed 10 consider
railroad bonds safe investments (other
things being equaD when 90 per cent of the
average net earnings over a reasonable
period, say. five years would suffice to pay
all charges down to and including the in
terest on the bonds, and we think that this
is fairly safe rule TO follow. AS regards
stocks. similar principle holds good
that is, for a stock TO be a good investment
the company's earnings should average
over reasonable period of time a least
a similar margin Of safety.
Under such circumstances, if the yield on
the bond or stock under consideration for
Investment is sufficient from the investor
point of view. the investment may be re-
garded as satisfactory.
OF course. the past five years are not
necessarily criterion for the future, and
existing conditions should ALWAYS be con-
sidered IN the application Of such a rule as
that stated above. The future may be so
secure as 70 Obviste the necessity of in
sisting on the - per cent. margin in the
past or il may be so uncertain as to make
the 40 per cent. insufficient but In the case
OF railroads. at all events, the rule may be
applied with some confidence as conditions
In the transportation industry are becom-
Ing mere settled time goes on. In the
case Of industrials. however, a much wider
margin is necessary than in the case of
railroads. owing TO the far greater uncer-
families of necessity existing with them.