The Washington times., 1927-12-22


price levels?
These questions recur in the
minds of thoughtful investors, VINO
are sagacious enough to remember
that in human affairs adversely IS
frequently mixed. with prosperity.
/ discussed these topics with
Arthur Lehman, of Lehman Broth
ers, one of the principal fashion
ers of new securities in the coun'
try--a member of a banking firm
which has long stressed the ad'
yantages of common stocks.
Common stocks,'' replied Len
man, "are not adapted to all in
vestment needs. They represent
a business risk. and are intended
primarily for individuals with sur
plus funds who are not dependent
on the income from their invest.
ments. Those who live on their
accumulated capital require pre-
ferred shares and bonds, which
give a more definite assurance of
uninterrupted income. IL a widow
with $1OO 900 should come to me.
l should not recommend common
stocks, especially If she was de-
pendent on the income for her
livelihood. In times of depression,
the dividends might be omitted
or cut. And yet 10 years from
now the fund might be worth
$200, 900 if placed in well-selected
and diversified common shares.
However, in the meantime the
woman might starve.
Common stocks are not particu.
larly suited for the small investor
without a backlog of other wealth.
And yet for those with surplus
funds purchases of good common
stocks, even at high prices, may
not be unwise. OF course, the in
dividual has to exercise judgment,
but my confidence in the future
prosperity of the well.managed en-
terpriSes of this country is so
great that believe growth will
validate the high prices even
though there may be intermediate
setbacks. When the original Sears
Roebuck offering was made to the
public in 1906, at $50 share, the
stock was earning SIS j subse-
quently reacted below the original
offering price. Nov for each
share of stock originally acquired
the holder has IA shares, each of
which is earning Sc.
Prosperity always brings com.
mon stocks to the fore. The in
creasing vogue for common stocks
will, in my opinion, tend to change
the capital structure of corpora
tions. There will be more junior
financing. Stock financing gives
corporation more leeway, en-.
abling it drastically to cut down
capital charges in lean years and
to average UP with more liberal
distributions in times Of prosperity.
In our own firm. we do noe expect
to draw out in profits as much in
slim years as in prosperous ones.
On the other hand. the company
which raises capital through bond
issues has a fixed and unvarying
charge"
AS for the place Of common
stocks in an investment struc.
ture. Lehman remarked: "If di-
versification is obtained and in
vestments made in number of
industrial common shares, 1t Is
In my opinion, almost certainty
that over a period of years there
will be in the aggregate an en-
hancement in the value of these
securities, l., this great country
honest and efficient management
will tell, and a large majority Of
he industrial concerns headed by
such management will be sue
cessful, some of them to a tre-
mendous extent. An investment
in the common stocks Of such
companies will in general show
such very great profits that it
will be easy to absorb an occa-
sional loss in the stock Of COM
panies less successful"
Even outright purchases of
upward trend. are, in my opinion,
fraught with substantial risk. The
current high levels make the
present a hazardous time to Dor.
row money to buy stocks. With
bank loans against securities at
or near the peak levels for all
time, intermediate reactions may
wipe out reckless spectators
even though setbacks prove only
temporary. Some statisticians.
such as Col Leonard r. Ayres, OF
the Cleveland Trust Company, are
forecasting new high levels for
the average price of industrial
stocks in 1928.
As for the economic outlook for
1923, Lehman remarked: IT have
every expectation that there will
be good business, though not a
boom, next year. I am speaking
chiefly of the first six months,
as can see no further ahead. I
believe conditions will be at least
as good as this year. l see con.
tinued prospects of easy money.
] see no reason for concern over
the election"
In recent years, academicians
have We'd with the public in put.
ting common stocks on a pedes.
tai. Edgar L. Smith and Kenneth
Van Strum conducted researches
into past experience which pur.
ported to demonstrate that q
highly diversified list Of common
stocks ordinarily has margin
OF advantage over high grade
bonds for the long.term individual
investor.
Accordingly, at this time, when
common stocks are in many in.
stances selling at two or more
times their recent prices, this
wholesale conversion Of bond buy
ers to the creed of common stocks
has been going on. At these
Nevels, it should be recognized
that it is dangerous for traditional
bond investors to make belated
wholesale switches from bonds to
stocks. And yet, many are doing
precisely this.
SHORT TERM SECURITIES
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