How to Invest Money

by George Garr Henry

(d) Form of Issue. The form in which an industrial bond is issued is a matter of some importance. If the principal of the bond does not become due for a number of years, there is danger that the property will depreciate so far in value as to leave the bond without sufficient margin of protection. There are two ways to overcome this difficulty. One way is to establish a sinking-fund which will retire a certain proportion of the bonds by lot each year. Another way is to issue the bonds in serial form, with a definite instalment maturing every year. In either case the annual sinking-fund or annual instalment should be greater than the probable depreciation so that the margin of security will be constantly increasing.

(e) Management and Control. No question is of greater importance in estimating the strength of an industrial company than the reputation of the men in charge. The ability and integrity of the men who control the policy of the company and the efficiency of the operating officials are the principal factors in the success of an industrial undertaking. Vacillating policies, weakly executed, will ruin the most promising enterprise. This is particularly true in the case of small companies. Every man of business experience will understand the importance of this factor and be guided by it in the selection of industrial securities.

Based upon the foregoing considerations it is of interest to inquire what degree of safety really attaches to the average industrial bond? How far does it meet the foregoing requirements? The question is difficult to answer. Industrial bonds vary greatly in point of safety, some issues possessing great strength and others being highly speculative. No general conclusions can be depended upon, and the investor is forced to consider each issue upon its own merits.

II. Rate of Income. The average net return upon industrial bonds is probably higher than upon any other form of funded corporate obligation. This constitutes one of the chief advantages of industrial bonds.

III. Convertibility. It is impossible to make any general statement in regard to the convertibility of industrial bonds. Some industrial bonds, notably the larger issues of well-known trusts, command a broad and active market. Such bonds can be sold in large amounts at almost any time without seriously affecting the price. On the other hand, small underlying issues of such companies, usually high-grade in point of security, or the obligations of smaller companies, are almost as unmarketable as real-estate mortgages. Between these two extremes all varieties of industrial bonds are to be found. The degree of convertibility which a security possesses is usually a matter of some importance, and the investor should make a careful examination of each bond in this respect.

IV. Prospect of Appreciation in Value. To what extent a bond may improve in security during the time that an investor holds it is of little importance unless the improvement be reflected in the market price of the bond. Only so can the investor take advantage of its appreciation in value. In order for the improvement in security to be reflected in market price and thus add to the principal invested, it is necessary that a bond should possess a fairly active market. For this reason the industrial bonds which hold out the greatest promise of appreciation in value are the larger, more speculative issues, which possess the greatest convertibility. The purchase of such bonds frequently results in substantial profits.

V. Stability of Market Price. The four points above touched upon—safety, rate of income, convertibility, and likelihood of improvement in intrinsic value—are all inherent characteristics of every bond. The likelihood of favorable or unfavorable fluctation in market price is largely external in its nature and depends upon general financial and business conditions.

As a class, industrial bonds can not be said to possess much stability of market price. Some of the smaller issues enjoy a fictitious stability because of their inactivity, but generally speaking industrial bonds are subject to wide fluctations in accordance with changes in the business outlook.

The foregoing is a summary, necessarily brief and imperfect, of the main points to be considered in judging the value of industrial bonds. The question remains whether such securities are desirable for the investment of a business surplus and of private funds.

Except in special cases industrial bonds are not suitable for a business surplus. It is impossible to find an industrial bond which combines all the characteristics necessary for that purpose. The requirements are great safety of principal and interest, a relatively high return, ready convertibility, and stability of market price. Many industrial bonds can be found which combine two of these requirements, some even which combine three, but the full combination, if it exists at all, is unknown to the writer.