The Washington herald., 1914-05-02
THE INVESTOR
IN PREMIUMS

CCopyright. 1914. by G. NJ Keys. New YGk-l
good many years ago q Western
woman had to invest $4,000, the pro-
ceeds of life insurance policies on her
husbands life. She wanted 10 be very
conservative and wise, because that
fund covered practically all she had to
live on and bring up two children:
consequently. she sought the best ad-
vice and finally bought long-term high
grade bonds.
1t was at the time when the most
popular bonds and the best-known
bonds were old issues of the standard
railroads OF that time, paying and
per cent interest. but selling at very
high premiums. Some of the bonds she
bought cost as much as $1,000 for a
thousand dollar bond, while others
came at s1,I5O. The average price of
the bonds she bought was $1,000 for
thousand dollar bond. so that she
obtained s25,OO0 face value of bonds
! for $4,000. The income was about
| 81, 500 a year. which was per cent on
the face amount of her investment
Nearly twenty years have passed
since then. Most OF her bonds mature
LIN the next ten years. As they ap-
preached maturity they have, Of course.
come down in price so that today they
are selling at very small premiums
over par, ard the actual market value
| of her investment at the present time
is around $4,000.
| When she bought her bonds years ago,
she, Of course. understood all this, and
also understood from her bankers that
she ought to put aside each year about
/ 800 to be invested. SO as to make up Tor
! the natural shrinkage in the value OF her
bonds as they approached maturity. That
shrinkage is called amortization, which
means the gradual writing of Of the
premium at which securities are selling
| to about the price they will be paid on
In the first year or so, she did this.
putting money into a savings bank A
serious illness II that time forced her
| to withdraw these savings and as time
went on she forgot about the fact that
part Of her income ought to be invested
and for the past fifteen years she has
been spending all the income
Recently she has come to realize that
she has been spending part OF the prin-
cipal The realization came when a
bond of the St Paul fell due year or
SO a go and instead Of an income Of $50
| for each thousand dollar bond. she was
| offered new bonds bearing a S45 coupon.
She brought her list recently to the same
| banking house that made the original
| investment for her, and. after she had
| told her story. was again informed that
| she ought to have been investing money
every year Now she feels she must have
the 1850 a year income and as a result
she is reInvesting her funds, but taking
bonds of a much lower grade. so as TO
make the $1,000 yield her an income Of
81. 500 a year To do that she is buying
what might be called middle-class bonds
| to take the place of first-class bonds
In some degree this simple and natural
error is perpetrated by a very large num-
Der Of investors all the time. The usual
form Of II Is the form illustrated in this
episode, namely that bonds bought at
high premiums are not written down
year by year as they should be. Only
scientific investors or investors who are
saving a good part of their income and
investing Il naturally and without any
special bookkeeping. really amortize prop
erly. Another form of the same error
Is quite common among investors to make
| n habit of using their money in the pur-
chase or improved real estate for rental
Large estates and professional buyers OF
such property. Of course. Keep up their
properties and write on certain amount
of depreciation year oy year, put the
average small and middle-class investor
who buys say two family houses for
rental purposes, spends the income free
ly while the properties are new and then
when the time for heavy repairs and
replacements comes along finds that they
have to take the money out of their
capital accounts. In one form or another.
Investment is a science. Even though
your funds are not, by any means, big
enough to make the loss through such in
cidentaI errors as these important. IT is
| the part of plain common sense to un-
| derstand an investment thoroughly be-
/ fore YOU make Il. and to provide. so far
/ as YOU can without serious trouble.
! against these small losses. In these days
y when values seam uncertain and ehsn old