New-York tribune., 1920-11-21
Speculation and Investment

Cucsion--Wtli you give mo advice on
thu unsa Hoy All H9t.ss stee CO ny
bought 100 shares OF said stock as an
Investment. paying sB a share The stock
plant is now shut down for want OF bust
ness Would you advise to sell this
stock and take my loss. or hold It?
have also some Inspiration Copper stock.
for which I paid $57 a share. Should
sell this or hold TT. L.
Answer-If, when you purchased
your two issues of stocks, you did so
for investment purposes, we fear you
acted unwisely. Neither Is an invest
ment issue. There appears to be some
misunderstanding regarding the dis
tinction we make between investments
speculative and yet have great lin
trinsic value. The common stock Of
the United States Steel Corporation
is a good example of this. To-day the
book value of the common stock is far
in excess Of the selling price, and yet,
United States Steel common Is specu-
lative. Why? Because it is the issue
OF the corporation which first feels
the effects of changes in conditions.
# business is good and earnings large,
this stock moves up. Dividends are
increased, and vice verse, when bust
ness falls off and earnings decrease,
the stock moves downward. Dividends
are reduced. When the European war
came on United States Steel common
stock was paying no dividends During
the war period it paid as high as II
per cent per annum. To-day it is pay
ing per cent. This illustrates the
point we wish to bring out. During
its existence the Steel Corporation has
LACED back into the property many
millions of dollars, and yet the stock
is speculative. Our definition of an
investment is security purchased for
income purposes. A sound investment
IS one which Is so we'll secured that
the variations In earnings do not af-
feet the security behind the issue to
the extent that dividends or interest
are jeopardized. To be sure, the best
OF investments will decline in price
under certain conditions. For example,
'ne general mortgage 4 per cent bonds
Railroad sold before the war far in
excess of par. To-day they sell for
about 76, but yet the security is as
great, perhaps greater, now, than six
years ago. But this bond. paving 4
per cent, had to conform to the changed
conditions in the investment markets
brought about by high money and in
ration: At no time. however. was there
the slightest doubt about the regular
.'S~ANS OOAHS ptlu Oh I0lS COnQ. SO
TAR as your two securities are con-
cerned, we might say that they are
even more speculative than United
States Steel common stock. In the
case of United Alloy Steel this COM
pany has not the established earning
power. Of United States Steel. Its busi7
ness is not so diversified, and. there
tore, 1t is more easily affected by
oranges IN business conditions. Cop
per companies, too, being in but one
line of business, are more easily af
fecctted. During the war period copper
sold at very high prices. To. day the
price OF the metal is down considerably.
with small demand at current quota
tions. 1t must, then, be apparent that
en ene purchase of such stocks for in
come purposes is unwse. To be sure.
there is level at which such securi.
Ties have apparently discounted the
worst features of the situation. But at
all times these stocks are so sensitive
to s;a earnings, that they must be con-
sldered highly speculative. We at
tempt, tor the reasons above cited. to
give no advice regarding speculation.
we we cannot tell to what extent the de-
cline In prices will reach. W. csn.
however. tell you that the 4 per cent
general mortgage bonds of the Atchis
son, Topeka & Santa Fe are sound
investment, just as sound as thev w.re
in 1914. ''S "''e