In addition, the principle of distribution of risk should prevent one industrial company from investing its reserve funds in the securities of another industrial company.
For private investment the case is somewhat different. A man of good business judgment, who desires to obtain a high yield for which he is prepared to sacrifice something in the way of convertibility and prospect of appreciation in value, may buy the underlying issues of strong companies with every confidence in the safety of his principal. Again, the investor who wants a high yield and quick convertibility, who is prepared to take a business man's risk and to sacrifice stability of market price, may make a large profit by buying second-grade industrial bonds. No investor, however, should deceive himself with the idea that any industrial bond will satisfy all the requirements of the ideal investment.
VI
PUBLIC-UTILITY BONDS
It was a common saying among bond-dealers a few years ago that the day of the municipal bond had passed, the day of the railroad bond was passing, and the day of the public-utility bond was to be. Municipal bonds were selling at fancy prices in consequence of the low rates for money which then prevailed, and railroad bonds appeared to be following in their wake. Public-utility bonds alone afforded a satisfactory yield, and it was felt that the investing public would be forced to turn to them.
This prediction, like many others which were based upon the assumption of continued ease in money, was destined to be unfulfilled. Almost immediately there appeared an added demand for capital, and in the face of this demand, supplies of capital which had before seemed ample became suddenly scarce. Money rates rose rapidly and as a necessary consequence municipal and railroad bonds fell in price to a point where their net return was commensurate with that obtained from the loaning of free capital. The investment situation was thus completely reversed. It was no longer a question as to what form of security investors must seek in order to obtain a satisfactory yield, but rather could the highest grade of municipal and railroad bonds be floated at any price. Under these circumstances the contemplated necessity of turning to public-utility bonds never arose, and the general investing public remains for the most part unfamiliar with their elements of strength and of weakness.
The term "public-utility company" denotes a private corporation supplying public needs under authority of a public franchise. The franchise may be of definite date or perpetual, and may be partial or exclusive.
Public-utility companies include street-railway, gas, electric-light and power, and water companies. Properly speaking, telephone companies should also be included, but they are not usually regarded as belonging to the class of public-service corporations.