Evening star., 1928-12-30

strated, first, that common stocks are,
on the average, much more profitable
than bonds and may be safer as an In
vestment during the fluctuations in the
purchasing power of the dollar; second,
that stocks, we'll selected and diversi-
fed, lose much of their speculative
character and become true investments,
oftentimeS safer and more dependable
than bonds
During 1912 was one Of several
economists who contributed to book
entitled How to Invest When Prices
Are Rising" in which We contended
that during rising prices-that is. while
the dollar is falling in value-invest-
ments in bonds or preferred stocks were
less safe than investments in common
stocks. More recently several other
writer's, notably Robert w. Pomeroy In
his stock Investments" and A. We're
Shaw, then of Scudder, Stevens 81
Clark, reached the same conclusion.
Since then much more extensive studies
have been made by Edgar L. Smith in
Common Stocks as Long-Term Invest
ments" and by Kenneth Van Strum In
Investing in Purchasing Power"
These studies show that diversified
common stocks are safer and more
profitable than bonds, not only while
the price level of commodities Is rising,
which is generally accepted, but also
while the price level Of commodities is
falling, which never had been shown
before.
Nothing Absolutely Safe.
There is no way to get the gamble
out of life altogether. Neither stocks
nor bonds are absolutely "safe" as to
purchasing power. But the individual
investor is at great advantage when
he pools his earnings and savings OF
those of a multitude of others in an in
vestment trust, which with the aid of
expert counsel keeps it invested in we'll
selected diversified stocks and preferred
securities.
A little reasoning permits of star
tling corollary. It Is this: If we can. by
sufficient diversification in investments,
get a greater certainty and thus run
less risk from our speculation, then the
more unsafe the investments are, taken
individually, the safer they are taken
collectively. to say nothing of profitable
ness, provide that the diversification is
sufficiently increased. This paradox is
derived directly from exploiting the old
fashioned fear of common stocks and
the consequent refusal to deal in them.
except well below their mathematical
value"
Now. the mathematical value of a
prize at stake is that prize multiplied by
the chance of winning it. II man
stakes a dollar on heads coming up, the
mathematical value of that chance is
exactly so cents, because there is ex-
actly one chance in two that heads will
come up. II the prize at stake is to be
won only in case two successive heads
come up, there Is one chance in four
and the mathematical value is Is cents.
This Is so-called fair" gambling. Any
price above the mathematical value Is
unfair gambling, and none but real
gambler will pay more than the matne-
nlatical value, or even so much. Tne
gamblers at Monte Carlo do pay ABOUT
per cent more than the mathematical
value of their chances; but only con-
scious gamblers, not investors. partici-
pate in rouge ct noir. In fact, SOUND
minded investor will pay more than the
mathematical value for chance 10 gam
money on risk. That is, he VIII trim
that price by ,means of caution CO.
efficient." to se a term which l en-
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