Evening star., 1928-12-30
Will Stocks Remain Up
Continued From First Page.)

Capital and Income"
This caution coefficient becomes, In
practice, greater and greater as the RISK
grows. If my chance of getting dol
lar is a certainty, there will be no re-
duction on account OF the caution
factor If it is like the chance OF bet
ting on heads or tails. the caution factor
may trim the price of the chance down
from so cents, its mathematical value,
20 saw. 40 cents for the chance to win
the dollar. That is reduction on ac-
count of caution of 20 per cent. But II
one bets on two heads in succession the
reduction on account of caution would
ne correspondingly greater, so that IN
stead of paying 25 cents, the mathe-
matical value, the investor might ins6t
on a reduction of more than 20 pce
cent to. say, Is cents. It is both normal
and proper that the higher the risk the
cheaper the chance Of winning can be
obtained, compared with its mathematl-
cal value.
Hence. the more risky the investment
would be to a lone individual playing
the game, the safer it is If, by pooling
IN an investment trust with wide divers1-
fication in investment, the individual
risk is thereby absorbed. For as the
risk grows it can be constantly absorbed
by corresponding increases in diverSlh-
cation. Thus the individual member
of the trust may gain more on the
riSkier investments, bought by the trust
at much less than their mathematical
value, than If he played the market
alone with less risky investments, but
bought at much nearer their mathemat-
1cal value.
Risk Margin Decreased.
So the investment trust has proved
that speculation can be turned into in
vestment which Is much safer than
many individual investments in So
called "gilt-edge" securities. And the
paradox is that because of the eau
ton factor" the market value OF the
riskiest investments has been de-
pressed far below their real mathemat-
ical value. The investment trust, car
rying the principle of diversification to
wide limits. have managed to get a
higher average return the more risky the
Investments would have been individ-
ually, while at the same time they have
extracted from them largely their ele-
ments of risk.
This principle. so far as I know, never
has been definitely formulated in the
investment market. But is has been
acted upon intuitively by increasing
nllnbers of investors, who have &C
cepted it by employing investment trusts,
inNestment counsel and other skilled
nneans of diversifying the use OF their
funds.
Naturally this enlightened process has
created a tremendous new market Tor
securities that in times past have gone
begging. With the increased demand,
the price of these formerly deSpised Sc
curities has risen.
Thus the change in the caution fac
tor, reducing 1t to much narrower
margin from the true mathematical
value of common stocks as their ele-
inents of risk have been absorbed by
Intelligent diversification, has helped
put the stock market on its higher
plateau. 1t constitutes permanent
reason why this plateau will not sink
again to the level Of former years ex-
cept for extraordinary causes.
The sound investor in common stocks
anust turn them over constantly, SELL
tpg those that are losing in value and
Investing in those that are gaining. This
function is performed today by skilled
investment counsel to degree that
makes Investment in common stocks,
guarded by their vigilance, safer than
the former investment in bonds by in
dividuals.
why ScCuItlcS AIC 6dOHSs
The rise in intrinsic value of securi-
ties of corporations is due to the fact
that in America both capital and labor
have in the last five years demonstrated
what can be done to increase and i'm
prove production by eliminating waste
by invention, by superior organization,
better methods and teamwork. In short,
American business has been applying,
on grand scale, the doctrines of Scien-
tific management laid down by Frederic
e. Taylor.
The Is engineers whom Herbert
Hoover named as the committee on
elimination of waste in industry in 1921
reported their findings to the American
Engineering Council in June of that
year of deep business depression.
Their report showed dismal record
Of faulty management of materials,
plant, equipment and men. 1t recorded
interrupted production caused by idle
equipment; restricted production inten-
tionally caused by owners. management
or labor and lost production caused by
Ill health, physical defects and indus
trial accidents.
More than this: 1t put the response
bility for these wastes squarely up to
the management, adopting the definition
that management is the art and sci
ence of preparing, organizing and di-
recting human effort applied to con-
troll the forces and to utilize the mate
rails Of nature for the benefit of man."
By appraising the sheets in the en-
Eineers' field reports of the metal trades,
textile manufacturing, boot and shoe
manufacturing, mems clothing, printing
and the building industries, the report
hof 6fy,an Saa %l.a
est opportunity, and hence responsible
ity, for eliminating waste in industry"
1t found that the responsibility of la
bor especially because Of its practice in
limiting output below normal standards
was no less real, though smaller in
degree" The responsibility assessed
against management was found to be-
roughly. so per cent for wastes and less
than Is per cent against labor, while
the amount chargeable to outside causes
was least.
New Economies Effected.
income since 1921--that is, of what in
come will buy in goods-show that
managerial control has extended new
economies into every activity of the
Nations industrial organization and
plant, reaching materials, design. equip
ment, personnel, production, costs and
sales policies, and that it has co-ordi-
mated these factors in common objec-
tives.
Total time of production has been
shortened. Productive capacity has
been based on careful studies of normal
demand. The purchasing function and
control Of material purchased and not
yet received have been linked up. Can
cellations of orders and returns have
been curtailed. Production schedules
have been correlated with sales policies.
The great losses of inadequate inspec-
ton have been largely retrieved; plant
and equipment have been guarded
against breakdowns and put in condi-
ton for maximum production. Good
.cost-control systems have been in
stalled
y .Sana4;a.. aE