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http://www.archive.org/details/artofinvestingOOhumerich


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THE

ART OF INVESTING

BYA NEW YORK BROKER}

OF /

NEW YORKAPPLETON AND COMPANY1888


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/}/ 6 6Copyright, 1888,By D. APPLETON AND COMPANY.


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PEEFACE.The appearance, over his signature,

in leading magazines, of the papers thatprincipally make np the following hro-cjiure, has involved the writer in con-siderable correspondence. A number ofparties have, in consequence, written tohim : some requesting a fuller statementof his views on points partially dis-cussed or merely touched upon; somedisputing his conclusions or having sug-gestions of their own to offer ; and others,who had been made aware of the exist-ence of the publications through news-


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PREFACE,

paper notices or in some other way, andnot caring to be at tlie trouble and costof procuring tlie periodicals in wliiclithey were to be found, asking for a re-production of such passages as might beapplicable to their special circumstances.The interest, as evidenced by the corre-spondence referred to, which the papersas magazine articles have awakened,seems to the writer to be ample apologyfor their reappearance in more accessi-ble and economical form if the dis-cussion of a subject of such general con-cern as the investment of money, witha view to an income more or less fixedand permanent, calls for apology.

Somewhat in the nature of a sup-plement, has been added a chapter onspeculation. People having idle money


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PREFACE.

often find it difficult to decide whetherthey had better invest it securely, con-tent with the amount they have and therevenue to be derived as interest, orseek to add to the principal by venturesnecessarily more or less uncertain. Thetemptations to the latter course that areheld out by our stock and other ex-changes are very dazzling sometimesquite irresistible. It is to those institu-tions that persons of a speculative turnand with money in hand are apt to lookfor the realization of their hopes. Toany who may be halting between thepolicies spoken of, with an inclinationto do a little in stocks, the subjoinedcriticism of the methods and bearingsof our leading exchanges that make abusiness of shares and bonds may prove


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PREFACE.

to be both entertaining and instructivereading.A few alterations have been madein the original text, and some additionsto cover points raised or suggested bycommunications from friendly hands;otherwise, the matter is unchanged.

As the author prefers to avoid thesuspicion of using this publication as anadvertisement of his businessthat of abroker in securitiesthe matter whichin another form appeared over his signa-ture is now presented without that ap-pendage.


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OOS"TEI^TS.

CHAPTER I. PAGEInvesting ^

goveenments ^^State Obligations ^^Municipal Obligations . . . '56Raileoad Moetgages 65Railboad Stocks *^^Othee Stocks *^

Faem Moetgages ' ^Ranch Secfeities ^2Watee-Woeks Loans 96Steeet-Railwat Bonds . .107Miscellaneous Bonds 109Mining Secueities HIBeidge Bonds H^Substitution Secueities .... 115


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CONTENTS.

CHAPTER II.Speoxjlating

PAGB. 118

APPENDIX.Investment Seoueities . 155

New York Stocz-Exohange . 157Philadelphia Stock-Exchange . . 185Boston Stock-Exchange . 190Baltimore Stock-Exchange . 196


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THE ART OF INVESTING.

CHAPTEE LINVESTING.''

"How can I invest my money tomake it pay a fair interest, and at tliesame time insure its safety ? " is a ques-tion daily asked by thousands. Withthe multiplication, consequent upon thegrowth of wealth among us, of that classof persons who want to live by theirmeans, without care or labor, the num-ber of anxious inquirers on that point is

* The greater part of this chapter appeared in" The Popular Science Monthly " under the title of" The Art of Investing."


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THE ART OF INVESTING.constantly increasing. It would seem,when reference is liad to the many secu-rities, both bonds and shares, that areoffered, often at temptingly low prices,to be a question very easily answered.The truth is, that there is none moredifficult. The ordinary investor whogoes about the work of converting hiscash into paper combining the two ele-ments of value spoken of, finding himselfhopelessly embarrassed by the seemingrichness of the market, soon gives up indespair, and turns the job over to somebanker or broker who works for a com-mission. Experience shows that eventhen he is too often the victim of defect-ive judgment or misplaced confidence.

If it is difficult to make moneyproposition about which there will not be


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INVESTING. n

mucli diversity of opinionit is in mostcases even more difficult to keep it prof-itably employed. Men of prudence andskill in tlie acquisition of capital oftensliow astonishing recklessness in tke dis-position they make of it. The strangestcaprices take possession of them when itcomes to the critical moment that callsfor a choice of investments. And asriches are always clothed with foldedwings ready to expand at the most un-looked-for exigencies, it is not muchwonder that they frequently take to thewinds and pass beyond recall.

The history of investment securitieswould furnish a most interesting study.In no other department of business havethere been greater changes. The timehas been, within the memoiy of many


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12 THE ART OF INVESTING,now living, wlien tlie man wlio liadmoney to put at usury generally loanedon personal indorsement, the borrowerrelying on his neighbor or other goodfriend to "back" his paper for him.The mortgage on real estate, of course,was known ; but, owing to the short in-tervals for which loans were generallymade, was not often resorted to. Theshares of banking, turnpike, canal, rail-way, and other incorporated companiesafter a while began to absorb the moneyof people who wanted to realize morethan current rates of interest, and werevrilling to take corresponding risks.

Nor have we yet reached a finality inthe matter of investments. Changes andinnovations are of continual occurrence.Not only are new secuiities coming upon


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INVESTING. 13

the market, but new subjects as a basisfor their production are industriouslysought after, and new forms for theirpreparation are being invented. Suchthings as commercial farm mortgages,water-works loans, street-railway debent-ures, etc., etc., were utterly unknown buta short time ago. Progress in the manu-facture of investment issues keeps pacewith all material developments. Everynewly-discovered force or process in me-chanics means the appearance of anotherdetachment of paper securities.

The war of the rebellion popularizedthe coupon bond, in consequence of itsadoption by the Government, and madeit the favorite form of investment paper.Railroad and other corporations lost notime in availing themselves of the confl-


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14 THE ART OF INVESTING.dence wMcli tliat species of debentureinspired, and States, cities, counties, etc.,were soon flooding tlie country witli ob-ligations carrying long coupon attacli-ments. Except for Government andmunicipal uses, there never was a moredisastrous invention. It lias been tliemeans of numberless deceptions, and liasinflicted heavier losses upon tlie invest-ing public tlian all otlier devices com-bined. Being supplemental to stockcertificates, it lias duplicated representa-tives of tbe same values and led to ex-cessive issues of paper; it lias separat-ed capitalists from tlie management ofproperties into whicli tlieir moneys havegone ; and, being based upon mortgagespromising absolute security, it has toooften accomplished the grossest decep-


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INVESTING. 15

tion. Many a man lias purcliased andpaid a good price for a mortgage couponbond, giving him no control over hissecurity, who would have rejected ashare-certificate standing for an equalinterest in the property pledged, andgiving him the right to participate in itsmanagement, with the possibility of agreater return for his money.

Under the careless legislation ofmany of the States, which has permit-ted corporations to decide for them-selves the amounts of obligations theymight put out, it is no wonder that theprivilege has been abused, and the mak-ing of shares and bonds, the latter rep-resented to be amply secured by mort-gage liens, has been carried to criminalexcess. One illustration will suffice:


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i6 THE ART OF INVESTING.The Arkansas Central Railway Com-pany (the name indicates the locality)built only forty-eight miles of its pro-jected road. The road was of narrowgauge, with very light iron, and in everyway cheaply constructed. It cost lessthan ten thousand dollars per mile, in-cluding equipment. As has been thecase with most of companies buildingrailways in new countries, help in itsbehalf was asked from the communitiesto be benefited, and their bonds amount-ing to nearly half a million dollars weregiven it by counties, cities, etc. Un-der a statute providing for aid to rail-roads when their beds could be utilizedfor levee purposes, the company got$160,000 of State bonds. Under an-other statute it got, as a loan from the


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INVESTING. 17

State, its bonds to the amount of $1,-350,000, wMcli were to be a first lienupon tlie property. After such abun-dant assistance, it would have appearedhardly necessary for the company to putout obligations of its own. However, itproceeded to issue and market its owtldebentures to the amount of $2,500,000,of which $1,200,000 purported to be se-cured by first mortgage, a representa-tion that, for reasons already stated, wasnot correct. In addition, a considerableamount of stock certificates was issued.Altogether, nearly $5,000,000 of paperwas put out and negotiated on the basisof forty -eight miles of narrow-gaugeroad. But this proved to be insufficient.The road, for non-payment of interest onits bonds, soon passed into the hands of


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i8 THE ART OF INVESTING,a receiver, wlio found it in such an un-finislied state that, with the court's per-mission, he issued a considerable amountof his own certificates to provide for ne-cessary repairs and betterments. Thenthe roadthe product of so much out-lay was sold at public auction, andbrought the magnificent sum of $40,000,which was paid, not in cash, but in re-ceiver's certificates that had been pur-chased at a great discount from theirface !

The business of manufactuiing secu^rities has not been confined to railroadbuilders. We now have stocks andbonds upon the market representingnearly all conceivable kinds of prop-ertytelegraphs, telephones, mines, cat-tle ranches, grain and grass farms, water-


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INVESTING. 19

works, bridges, oil and gas wells, elec-tric lights, factories and mills of everydescription, patent rights of all sorts,steamboat lines, apartment houses, and,in one instance, a cemetery ! And notonly are properties of many kinds usedto issue bonds upon, but many kinds ofbonds are often issued upon the sameproperties. Thus we find among ourrailroads not only first, second, and thirdmortgages, but income bonds, converti-ble bonds, consolidated bonds, redemp-tion bonds, renewal bonds, terminalbonds, divisional bonds, sinking-fundbonds, " blanket - mortgage *' bonds, col-lateral trust bonds, equipment bonds,and bonds ad nmtseam, until they lapand overlap in seemingly endless compli-cation. Not that merely, but one issue


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20 THE ART OF INVESTING.of bonds is sometimes made tlie basis forother issues. Indeed, one of tlie money-making devices of the time is the forma-tion of companies that issue their bondson the security of other people's bondsthat they have purchased, either yield-ing a higher rate of interest or obtainedat lower prices than they expect to re-alize for their issues. There seems, infact, to be no limit to the production ofsecurities that are spread before capital-ists. There never was a time when itwas so easy to invest money and tolose it. Of the securities that are offeredwith first-class recommendations, it isprobable that about one third are actu-ally good, one third have some value,and one third are practically worthless.Hence the very natural inference that


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INVESTING. 21

whatever art there may be in the mat-ter of investing is to be exercised chieflyin the avoidance of unworthy offerings,and it is to that point that a profitablediscussion of the subject must be mainlydirected.

For the condition of things de-scribed, the laws of some of our Statesin giving corporations almost limitlesspower to issue negotiable paper, as wellas in permitting all sorts of companiesto incorporate themselves, are, undoubt-edly, very largely to blame. Our banksare closely watched and very properlyrestrained from taking people's moneyon false pretenses; but how much bet-ter is it for railway and other corpora-tions to take it by means of legalizedfictitious evidences of value ? Banks


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22 THE ART OF INVESTING.are by no means tlie only corporate in-stitutions that need watching. One oftlie reforms that would seem to be verymuch demanded is legislation prohibi-tory of the creation by companies ex-isting by authority of law, of debent-ures or scrip not representing moneysactually paid into their treasuries, orproprietary interests whose values areto be determined by disinterested par-ties. Pennsylvania has incorporated sub-stantially such a provision in her con-stitution. Her example should be fol-lowed by all other commonwealths. Butas long as corporations are permitted,almost without limitation, to flood thecountry with seductive promises of mon-ey payments and to have them offeredin all our financial marts, it behooves


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INVESTING. 23

investors to be correspondingly cautionsin making tlieir purchases. If the lawwill not protect them, they should bethe more careful to protect themselves.

But the security behind or beneaththe debenture or other paper obligatoiyis not the only thing to be looked intoby the investor. Even the form of thedocument may be important. A casein point, inasmuch as it shows how thepreparation of an undertaking for thepayment of money may change its ap-parent value, would seem in this con-nection to be appropriately quoted.Some years ago certain townships in theState of Missouri were desirous of aid-ing the construction of railroads withtheir credit. The State legislature, tothat end, passed an act authorizing the


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24 THE ART OF INVESTING.issue and sale of bonds obligatory uponthem; but it was stipulateda verysingular provisionthat, instead of be-ing put out by the townships, the bondsshould be executed by the officials ofthe counties in which they were located.Accordingly, debentures aggregating sev-eral million dollars were thus preparedand disposed of. The bonds bore theseals of the counties and the signaturesof their officials. On the back and atthe top of each obligation in large let-ters were the words "county bond."The instrument began with the recital,in the usual form, that it was issued bythe county ; but farther on, and in thesmallest type employed, came the state-ment that it was executed for and in be-half of a certain township, which alone


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INVESTING. 25

was to be responsible for its payment.These bonds were extensively advertisedas "county bonds," and probably inmost instances, certainly in many, weresold as sucli, and it was not until pur-chasers liad parted witli their moneythat they discovered that, instead ofgetting the paper of well known andwealthy counties, they had secured onlythe obligations of townships they hadnever heard of before. It was thenmanifest enough that they had beenmade the victims of a piece of verysharp and very shabby practice. Invery many cases the buyers of bondsand other securities learn, when it istoo late, that their purchases, owing tosome obscure and apparently innocentpassage that had been overlooked or

3


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26 THE ART OF INVESTING.disregarded, are very different fromwhat they thouglit tliey were getting.How often have careless investors tliatsupposed tliey were purchasing under-takings that would be good for longterms of years, and probably paid pre-miums to obtain them, ascertained atthe end of comparatively short intervalsthat they were forced to accept in pay-ment the amounts nominated in thebonds in consequence of unnoticedclauses giving their makers power toredeem at their option? The lesson ofsuch cases is obvious enough. It is thatno one should ever buy a moneyed un-dertaking without having first carefullyread it. This may seem like an un-necessary warning; but in truth it isa most material one. Thousands and


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INVESTING. 27

thousands of dollars have been lost bythe neglect of tliis simple precaution."I didn't read the paper" is the ex-planation that has again and again beenoffered when time has disclosed a dif-ferent investment from the one intendedto be paid for. The fact is that com-paratively few unprofessional bond andshare purchasers ever carefully examinethe instruments they acquire. Theylook at the headings, those parts thatare in big letters, and take the rest forgranted. It is a most unwise practice.Unless you are previously familiar withthe document in all its parts, don't failto read it before you buy. Read it all,the little type as well as the big type,the indorsements, the coupons, and all.Don't take somebody's else word for it.


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28 THE ART OF INVESTING.Examine the seal, tlie signatures, andeven tlie embellislunents. Somethingmay be disclosed tliat will cliange yourmind and save your money.

But if tliere are tricks in tlie mak-ing of securities, even more are to be ap-prehended in the selling of them, andshould be guarded against with corre-sponding diligence. It is a notablefact that no poor securities are ever of-fered. They are always good so longas they are on the market. It is onlyafter they have been purchased thatthey prove to be worthless. Interesthas never been known to fail on bondsthat were seeking investors, althoughdefault has sometimes followed veryclosely on the sale of the last obligation.Indeed, it is no secret that interest is


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INVESTING. 29

often paid out of the proceeds of bonds,particularly railroad issues, tlie purchas-ers in tliat way getting a portion oftlieir own money back while the pro-cess of marketing them is going for-ward, although such a thing has seldombeen known to happen when the entireissue was disposed of. The advertise-ments of the bond-sellers are sometimesmarvelous productions. ISTo such securi-ties as they have to offer have ever beenon the market before. They are abso-lutely safe ; they pay extra rates of in-terest, etc., etc. The wonder is that,with so much capital seeking invest-ment, it is found necessary to advertisesuch perfections at all. In such casesit is hardly necessary to say that theonly safe rule for investors is to find


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30 THE ART OF INVESTING,other uses for tlieir money, howeverstrong tlie temptation may be.A common expedient of bond-mak-ers and bond-mercbants is to fortifytbeir issues with the favorable opin-ions of eminent lawyers. Tbis is par-ticularly tbe case wben tbe obligationsof municipalities, or of companies tbatare dependent upon contracts witb mu-nicipalities, are offered, municipalitieshaving shown an unpleasant dispositionto go back on their undertakings. Noexception can be taken to the practicereferred to, as counsel learned in thelaw should in such cases always be con-sulted ; but the writer has to say that hehas never yet known a security so poorthat a lawyer's opinion could not be hadto back it. Such testimonials should be


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INVESTING. 31

taken for what they are worth, and nomore.

When so many seductive baits areoffered; so many nets and traps, con-trived and constructed by clever brainsand cunning fingers, are spread for thecapture of those having money, is it sur-prising that the careless and credulousare victimized, and even that the saga-cious and prudent should sometimes betaken in? Nevertheless, for the lossesthey have sustained, investors, as a rule,have themselves chiefly to blame. Themistake made, in nine cases out of ten,has been the purchase of cTiewp securities.The hope of realizing a little more thanordinary interest, by buying paper at adiscount, has proved to be the rock onwhich unnumbered capitalists have split.


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32 THE ART OF INVESTING.In addition to their money's worth, theyhave endeavored to get something fornothing, with the result most generallyof getting nothing for something. It isremarkable how blind are people, ordi-narily sagacious enough to make money,to the fact that property can not pay arevenue beyond its producing capacity.For instance, how can a railroad com-pany, whose line is wholly or mainlybuilt from the proceeds of mortgagebonds, sell them at a heavy discount,besides allowing large commissions forthe selling, and then pay a high rate ofinterest on their face? Or how can apoor agriculturist, occupying a half im-proved farm out on the frontier, with afamily to support, and grain sellingbarely above the cost of production, pay


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INVESTING. 33

ten or twelve per cent, npon tlie capitalwitlL whicli lie does business.

By what rule or rules is the investorto govern himself? No formula canguarantee him absolute safety. Onething, however, he can properly countupon, viz., that he must expect to paya fair price for a good securityonethat Tvdll return him no more than amoderate interest on his money. If hewants to speculate, and is willing totake risks, that is another thing. Hecan then look for bargains. As ageneral proposition, it can be assertedthat the day for high prices for money,as the day for large profits in trade ormanufacturing, or, indeed, in any regularly recognized business with us, hasgone by. The capitalist who sends his


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34 THE ART OF INVESTING.money into a new section, or puts it intoa new meclianical process or a new con-structive enterprise, may or may notmake a Mt, but for the ordinary andconservative operator tlie condition oftlie commercial and financial world giveswarning tliat only small profits areto be looked for. The first and mainthing to be studied is safety. And yetthere is such a thing as going too far inthe matter of prudence. The investormay pay too dearly for safety. Thereare securities which, compared with oth-ers that are to be had, sell at pricesmuch above their real value. The rea-son is that everybody knows them to begood, and investors who don't want totake the trouble to investigate, or areafraid to trust both their own judg-


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INVESTING. 35

ments and tlie counsels of their friends,are willing to pay extra prices for them.But there are plenty of others that maybe had at lower figures, which are justas good. There is no reason in theworld why the investor should not getat par all the paper he wants that willyield him six per cent, interest, and beas safe as any property can be under hu-man supervision. As heretofore stated,with the creation of new enterprises andproperties, and the development of oldones, new securities are constantly ap-pearing in this country, and a fair shareof them ought to be good. Indeed, oursecurities ought to be the best in theworld. The sure and rapid growth ofour resources supplies a reliable support,as long as fair intelligence and common


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36 THE ART OF INVESTING.honesty attend their production. Theonly thing is to choose with discretion,so many doubtful and even fraudulentissues appearing at the same time ; butno more judgment is really demandedthan in purchasing lands and cattle.

Two common and often fatal mis-takes should be avoided. One is in re-lying solely upon the advice of a broker.No one competent to form an opinionfor himself should put his pecuniary in-terests unreservedly in the keeping ofanother. Such absolute confidence in-vites betrayal. By far the greater num-ber of losses to investors has been insecurities purchased exclusively on therecommendation of interested commis-sion men. While it is well to get theopinion of a reputable broker, the pur-


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INVESTING. 37

chaser should investigate and decide forhimself. The other mistake is in giv-ing a preference to "listed" securities.Many persons seem to think thatstocks and bonds must have a value ifthey are quoted at some stock exchange,forgetting how many "fancies" havebeen ballooned until they have burst atsuch places. On the contrary, such aposition is likely to expose them to ma-nipulation for purely speculative pur-poses. Stock-exchange quotations, as arule, are unsafe guides to buyers. Theyrepresent not so much the value of theproperty as the pitch of speculation atthe time. When securities are convert-ed into foot-balls for gamblers to playwith, they are pretty certain to be eithertoo high or too low. The only ad-


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38 THE ART OF INVESTING.vantage they can have is a readier mar-ketability in case of an urgent need tosell; but it is at the times when suchneed is likely to exist that they arepretty certain to be at the lowest point.ISTo speculative help can long take theplace of real value. Securities, in thelong run, must stand upon their merits,and purchasers have merely to followbusiness principles as taught by the can-ons of common sense.

In seeking investments, and espe-cially long-time investments, there areseveral things to be taken into account.There is not only the question of thekind of security to purchase, but thequestion of the time to purchase. Thereare opportunities to be looked for aswell as pitfalls to be shunned. It is


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INVESTING. 39during periods and seasons of depression,when securities are forced upon tlie mar-ket, often to be sacrificedand they arecertain to come if waited for long enouglithat the shrewd investor finds his rich-est harvest. That, however, can not besaid of the ordinary investor. He usu-ally buys when securities are up andconfidence is unimpaired, and becomingfrightened as market values go downsells when they are at the bottom, andholds his money to reinvest in somethingelse no better, and probably not as good,when the tide has turned. As a rule,the best time to invest is when othersare unloading. In money matters it isnever safe to follow " the crowd." Noris it safe (which, however, is little morethan the expression of the same idea in


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40 THE ART OF INVESTING.another form) to purchase a securitywhen it is on the " boom." A pecul-iarity of our money market, conservativeas it is popularly supposed to be, is thatit is constantly changing its favorites.Its offerings come in waves. Its deal-ings at one time may be chiefly in rail-ways, at another in municipal obligations,and at another the excitement may runto mining shares or mortgages on ranchesand real estate. For the time all pro-fessional brokers and bond and sharesellers ui^ge their customers to adopt thepopular issue, of which, as the result ofthe increased demand, there is almostcertain to be an excessive if not fraudu-lent production. To yield to the press-ure at such a time is always risky.Old and tried securities, like old


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INVESTING. 41

friends, are likely to be tlie truest andbest.

One tiling tlie investor would dowell never to forget, viz., that tliere isalways plenty of good securities in themarket. No one mtk money need everfear that others will get all the solid in-vestments, and, in the apprehension thatthere will not be enough of that sort togo round, put up with an inferior article.Don't let him choose what is not alto-gether satisfactory, under the impressionthat nothing else as good or better willoffer. If he does so, sooner or later hewill regret it. Something good alwayscomes to him who waits with moneyin his hand.

Another thing of a precautionary na-ture it is well enough for the investor to


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42 THE ART OF INVESTING.do, and tliat is to scatter Ids purchases.The old adage about putting all theeggs in one basket applies with peculiarforce to investments. The tendency withthose having but moderate sums to placeat usury, and who need to be the mostcircumspect, is to make up their mindsin favor of a single line of securities andput everything there. Of course, a fail-ure in that quarter is particularly disas-trous. The writer knew a party, someyears ago, who decided in favor of mu-nicipal obligations, saying that he hadsatisfied himself that, on the whole, therewas nothing else so reliable. Accord-ingly he put his entire available meansinto them. But practicing abundantprecaution, as he supposed, he dividedhis money equally among municipal is-


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GOVERNMENTS. 43

sues of Illinois, Missouri, and Kansas,tliey having the most paper at that timeon the market. He thought he was cer-tainly safe as to part. But soon after-ward a wave of repudiation sentimentswept over that part of the country, andevery one of his bonds was left in de-fault. It is weU enough to scatter inkind as well as in locality.

With these preliminary observations,as a further aid in making a choice itmay be well to take up the differentkinds of investments and consider themseparately.

GOVEEIS-MEI^TS.Of these there were at one time out-

standing over two and a half billion dol-lars ; and, of course, a great deal of in-


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44 THE ART OF INVESTING.vestors' capital found accommodationtliere, witli satisfactory returns ; but tlieamount lias so diminislied, and is so rap-idly diminisMng, while prices liave cor-respondingly advanced, tliat private par-ties who want to get the most they canfor their money no longer look to thatquarter. It is only when a place issousrht for trust and other funds forwhich safety and facility of conversionare wanted rather than a high rate ofinterest, that governments are to be con-sidered. They are absolutely good andalways marketable, but they are no long-er to be classed with investments whoseclaims call for serious discussion.

The foregoing remarks, it is hardlynecessary to add, refer exclusively to theobligations of our own Government. If


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GO VERNMENTS. 45

we pass beyond tlie limits of this coun-try, we find not only an abundance ofgovernment issues tliat are seeking buy-ers in tlie markets of the world, but acorresponding variety in values and quo-tations. It is estimated that the civil-ized nations of the globe now owe, with-out including local or divisional imder-takings, not less than $27,000,000,000, asum which, if equally distributed, wouldimpose an incumbrance of $720 on everysquare mile of their territory, and a percapita indebtedness of $23 on all theirsubjects. The foregoing amount has ne-cessarily absorbed a very large propor-tion of the world's investment capital,and, as its tendency in many localities isto increase, it will continue to hold itfor many generations to come. But, as


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46 THE ART OF INVESTING.we in America can create more liomecalls for money, tlie manufacture of se-curities being one of our chief indus-tries, tlian we can supply, there is nodisposition among us to go abroad forinvestments, and we need not concernourselves about the offerings made else-where.

State Obligation's.The unquestioned credit of " govern-

ments " has led many persons to the in-ference that the next safest and bestinvestment securities are the obligationsof the States, as they rank second onlyto the national authority. How far thatimpression is verified by the facts of thecase will appear from the statementthat, of about twenty of the thirty-eight States of the Union that have out


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STATE OBLIGATIONS. 47sufficient paper to test their dispositionsin tlie matter of paying debts, only eiglitor nine faithfully keep all their agree-ments, and as many as twelve, beingnearly one third of the whole number,are in default as to all or portions oftheir outstanding obligations; that theState bonds that are promptly providedfor amount to a little over $100,000,000,while the principal of those that aredefaulted on or have been in default(some of them compromised by the sub-stitution of issues of reduced amounts)is not far from $200,000,000 ; and thatthe sum total of the delinquency, whenunpaid interest is added, exceeds $300,-000,000.

It is true that a considerable portionof the last-mentioned figure is made up


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48 THE ART OF INVESTING.of what are known as "carpet-bagbonds," having been put out by Statesthat had been in rebellion during theprocess of their reconstruction, andwhich are repudiated on the allegedground that the governments creatingthem did not fairly represent the peo-ple of the States. But that is by nomeans true of all. Virginia owes thelarg^est amount, and the whole of herindebtedness was created before the war.The same thing can be said of Missis-sippi's debt and of the most of that ofTennessee and some of the other de-linquent States.

When the reasons for their failureto maintain their credit are sought for,the most potential and obvious is foundin the fact that States, under the na-


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STATE OBLIGATIONS. 49tional Constitution, can not be sued orotherwise legally proceeded against onaccount of their pecuniary undertakings,at least to private parties, and tliat con-sequently there is no way to compelthem to pay if they are indisposed topay. Some of them have shown thatthey are not above taking advantage ofthe situation. This is the more to theirdiscredit, because it was not the inten-tion of the Constitution's framers thatthey should enjoy any such exemption.The Constitution originally gave a rightof action against the States. Theeleventh amendment, which inhibits thesuing of States by private parties, thustaking away a right previously existing,was meant to cut off certain claimsgrowing out of the Eevolutionary War

5


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50 THE ART OF INVESTING.and for no other purpose, no one at thetime of its adoption dreaming that itwould be used by the States to shieldthemselves from subsequently contractedliabilities. The States that thus availthemselves of it are really guilty of adouble fraud. But the fact that somany of them have not scrupled to doso, shows the danger of trusting to theirpecuniary promises.

Whoever buys the paper of a Stateshould do so with the distinct under-standing that he has nothing but itshonor to rely upon, unless the commer-cial relations of its citizens should beof such a character as to make its finan-cial credit important to their businessinterests. There is for that reason littlelikelihood of such States as New York


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STATE OBLIGATIONS, 51

and MassacliTisetts ever repudiating theirobligations. But when such conditionsdo not exist, the faith of a State is anuncertain dependence. The public con-science in the matter of commonwealthobligations is notoriously lax, what iseverybody's duty being looked upon asno particular individual's; and such athing as State pride, except in the formof prejudices and antipathies, which arevery likely to be directed against publiccreditors, can scarcely be said to exist.Of all the States, Virginia has professedthe highest regard for her reputation,yet she has been the most brazen ofrepudiators.

How easy it is for a State to ignoreits contracts without attracting publicattention to its conduct is strikingly


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52 THE ART QF INVESTING.shown in the case of Texas, whidi is notone of the twelve bond repndiators re-ferred to. Texas has issued, and nowhas outstanding, agreements to furnishland from her public domain calling forabout eight million acres, an area near-ly three times the size of Connecticut,which she does not supply to the cer-tificate holders. No charge has everbeen made that the warrants were ille-gally issued by the State or improperlyobtained by those owning them. TheState had the land when they were cre-ated, and could without difficulty havemet her agreements ; but, after the war-rants were out, she proceeded to giveaway such extensive areas for the build-ing of a State house, for the endowmentof universities, for the pensioning of


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STATE OBLIGATIONS. 53wounded Confederate soldiers, and forother local purposes, tliat tlie holders ofher land scrip can get no satisfaction.As matters stand, the State has the con-sideration for the land, but those whohave her paper can get neither land normoney ; and although this condition ofthings has existed for several years,during which there have been severalsessions of her legislature, Texas hastaken no steps to redress the wrong shehas done, and there seems to be verylittle desire on the part of either offi-cials or citizens that reparation shouldbe made or concern about the dis2:racethat attaches to them and to theirState.

A very little reflection suffices toteach the unreliability of obligations


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54 THE ART OF INVESTING.resting upon no more substantial sup-port tlian public opinion. Divided re-sponsibilities are always lightly es-teemed, while no burdens are so sharplyfelt as those imposed by the common-wealth. Tax-payers will shrink frompublic debts, who would never think ofshirking individual liabilities. Nationalpride and the other elements of whichpatriotism is compounded, even in caseswhere there may be no pressure fromthe governments of foreign bond-hold-ers, may, and probably will be sufficientto protect national agreements, but theundertakings of subordinate communi-ties need more positive backing. Itdoes not follow that there will be no re-pudiation because of an honest purposein their contracting. There is always


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STATE OBLIGATIONS. 55the possibility of political or other dis-turbances that may lead to revulsion ofsentiment or give demagogues the op-portunity to assail the public credit.

We are not without illustrations in thiscountry. Virginia's bonds at one timecommanded higher prices than those ofthe Federal Government ; yet they areto-day selling at figures far below par,and some of them, or the certificatesrepresenting them, can be purchased fora few cents on the dollar. That theyand State debentures generally, whenall the contingencies attending them areconsidered, should bring as liberal pricesas they do, is the only thing about itthat is surprising. Such securities, inthe writer's judgment, are, at presentquotations, beyond all question, the


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56 THE ART OF INVESTING.dearest investments we have in tliemarket.

MmnciPAL Obligations.What has just been said concerning

State undertakings is, in part, true ofthese. How ready our minor communi-ties are to create debts, and then ignorethem, has been proved by very manyillustrations, some of them of recentdate. With the revival of general busi-ness at the close of the war, came aperiod of rapid development in some ofthe newer parts of the country. Nu-merous railways were projected, andmunicipalities were called upon to aidin their construction by the donation ofbonds. The market was soon floodedwith them, particularly from the States


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MUNICIPAL OBLIGATIONS. 57

of Illinois, Missouri, Kansas, Arkansas,and their immediate neighbors. Buttlie enthusiasm that led to their creationwas quickly succeeded by disgust whenthe bui^dens they imposed began to befelt. Many were repudiated, and, butfor fear of the courts, that would havebeen the case practically as to all. InMissouri a Repudiators' State conven-tion was held, and resolutions denyingall moral responsibility on account ofmunicipal issues, and advising generallegal resistance, were published to theworld. Nearly one half of the indebtedcities, counties, and towns of Illinois andKansas denied their liability, and in Ar-kansas repudiation was universal. Norwere there lacking such examples in theEast. Very many investors who had


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58 THE ART OF INVESTING.put their money into tlie rejected bonds,became frightened, and sold out at what-ever figures they could get. The aggre-gate loss was very great.

Nor are such cases at an end. Thewriter has before him, as these pagesare being prepared, a number of certifi-cates of indebtedness recently put outby one of the best-known and mostwealthy counties of Colorado. One ofthe warrants was issued in payment forfurniture for the local court of justice,several for salaries of county officials, anumber for witness-fees, etc. All werecreated for purposes entirely proper andnecessary, and yet payment is absolutelyrefused.

As a general thing, repudiated mu-nicipal undertakings, being sustained by


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MUNICIPAL OBLIGATIONS, 59

the courts, have in the end been paid orcompromised; but many of them havebeen defeated on technical grounds, andproved wholly worthless in innocentpurchasers' hands. The wealthy capitalof the State of Kansas, to the State'sdisgrace as weU as her own, has to-dayoutstanding $100,000 of bonds whichshe does not pay because the courtshave held that she can not be legallycompelled to pay them ! Everybodyhas heard of the case of Memphis, Ten-nessee, which, in order to escape pro-ceedings for the enforcement of her obli-gations, got her charter repealed, andceased to be an organized city.

What has been said concerning themoral strength, or rather moral weak-ness, of State bonds, will apply with


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equal force to those put out by munici-palities. The people in tlie one caseare no more honest than in the other ;and local pride, except on the part of afew leading commercial cities, in suchmatters counts for very little. Never-theless, as will be seen, municipal obli-gations have an important element ofsecurity that State issues do not possess.Their collection, provided they are prop-erly created, can be legally enforced.But this fact should be accepted for nomore than it is worth. While the bulkof the paper put out by our municipali-ties is undoubtedly good, the only safecourse in buying it, in very many in-stances^possibly a majorityis to pro-ceed upon the assumption that paymentwill not be made if it can be avoided,


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and to graduate prices as well as adoptprecautions in accordance witb. tliatview. The aspect of tlie matter pre-sented is not particularly charitable orflattering; but, whoever invests hismoney on a different one, runs an excel-lent chance of losing it.

Hence, in taking municipal securi-ties, it wiU be seen how important it isthat all points affecting their validityshould be inquired into. One of thefirst questions to be settled is whetherthey have been the subject of litigation,and what, in that case, has been the re-sult. Another is whether they belongto the original issue, or have been putout in settlement of an earlier and dis-puted series. Compromise municipalbonds have generally been good, al-


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62 THE ART OF INVESTING.thougli there have been instances inwhich even they have met with opposi-tion from their makers. Fortunatelyfor later buyers, the litigation affectingmunicipal undertakings has been so ex-tensive that nearly all questions that canpossibly involve their validity havebeen passed upon by the courts, and itis not, therefore, now a difficult matterto determine, if reasonable prudence isexercised when such securities are of-fered, whether they will stand the legaltest. But, of course, legal considerationsare not the only ones to be studied.The pecuniary responsibility and gen-eral credit of the contracting communi-ties should not be overlooked.

The importance of the positionamong investments that is held by mu-


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MUNICIPAL OBLIGATIONS. 63

nicipal issues is apparent as soon as weconsider tlie formidable sum which, inthe aggregate, they make up. In 1880,according to the census taken that year,they amounted to $871,507,373. But,enormous as that figure appears to be, itwas considerably short of the actual to-tal, because very many issues were thenrepudiated or in litigation, and, their va-lidity being denied, they were not re-ported to the census-takers by themakers of them as any part of theirdebts. The most of them have beensustained, and with them and the addi-tions that have since been made in newundertakings, the present aggregatewould doubtless considerably exceed athousand million dollars. A great dealof investment capital is, therefore, in


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64 THE ART OF INVESTING,them. In tlie main it is well and profit-ably placed. As our cities and otliermunicipalities grow in wealth and popu-lation, they become better able to takecare of the paper they have out

;partic-

ularly as their debts of late years havenot increased as they formerly did. Anumber of the States have by constitu-tional enactment prohibited their com-munities from making donations ofbonds to railroads and other corporateenterprises, and others have so re-stricted them that the worst abuses ofthe practice are no longer possible. Onthe whole, if proper precautions aretaken by the buyers, municipal papermay now be looked upon as one of oursafest and most remunerative invest-ments.


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RAILROAD MORTGAGES. 65

Eailkoad Moetgages.We have now come to a class of

securities in wliicli by far the greatestamount of money has been investedmuch of it permanently, as the classunder consideration has been the grave-yard of a vast aggregate of capital. Anidea of the volume of interest-bearing ob-ligations predicated upon railway prop-perty in this country can be formedwhen it is known that, at the time thesepages are written (1887), our operatedraiboad lines, all told, foot up not lessthan one hundred and thirty-three thou-sand miles. The portion that is unen-cumbered is so small as to be scarcelyworth considering. The average fundedindebtedness is about $30,000 per mile.


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66 THE ART OF INVESTING.or, in all, $4,000,000,000. But tliatfigure, enormous as it is, by no meanstells the whole story. So many rail-roads liave been foreclosed and soldunder one series of bonds, tliat theymight be used in reorganization pro-ceedings as a basis for another issuethe process in some cases being severaltimes repeated that it would proba-bly be no exaggeration to say that theliability, one time or another created,would average nearly $50,000 per mile,or a grand total of $6,000,000,000.

As our railways, with few excep-tions, are valuable and productive proper-ties, they furnish an excellent securityfor interest-bearing paper, provided al-ways that they are properly managedand not overburdened with debt. There


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RAILROAD MORTGAGES. 67are at all times good railroad bonds inthe market; the trouble is, that thereare poor ones there also. How is theinvestor to discriminate between them ?When the mortgages are on roads thathave been in operation for considerableperiods, there is little difficulty in reach-ing safe conclusions. The principalquestion involved is that of earningcapacity, considered in connection withamounts of funded liability, and ourrailroad manuals furnish all neededdata on those points. Of course, thereis always a danger from rival enterprisesin the shape of " paralleling " lines,and possibly a greater one from speculat-ing directors, who are willing to wreckthe properties intrusted to their chargebut the peril is small in comparison


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THE ART OF INVESTING.with the interests involved. The puzzleis when it comes to the paper of newroadsof roads that are in course ofconstruction or Just completedand gen-erally by far the greatest amount ofrailroad bonds offering in the marketis of this description. Here the earn-ings guide-board is lacking. By whatrule or rules is the investor in suchcases to govern himself ?^because manyof the new securities are good, and asthey can be had at lower figures thanold ones, when properly sifted from theothers they offer bargains that shouldnot be neglected. The answer involvesa brief description of the prevailingmethods of railway construction.

It is quite within bounds to say thatthe principal incentive to the building


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RAILROAD MORTGAGES.

of railroads nowadays is the expecta-tion of making profit out of their con-struction. The time for making roadsat a sacrifice to their projectors, andbecause they are wanted by the public,has gone by. Kailroad-building is nowa regular industryas much so as theerection of houses or the manufactureof machinery. When a new railwayenterprise is undertaken, its authors ex-pect to make the road not only supplyfunds for its own construction, but toleave them a handsome balance over.This is accomplished by mortgaging theproperty to that extent that the bondscan be sold for more than it will cost.In that case they are very likely toexceed in amount, although not alwaysnecessarily so, the security on which


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70 THE ART OF INVESTING,they rest ; in other words, be composed,in good part, of "water." Default intlie payment of interest, and the bank-ruptcy of the enterprise, are the usualconsequences. What follows is matterof routine. The property is put intothe hands of a receiver, the securities areeffectually discreditedperhaps boughtup by a syndicate of crafty speculatorsand then the work of reorganizationis entered upon. The reorganizing ofbroken-down railroads has become an-other regular and profitable business.Calculation is made to determine onhow many obligations the property canearn interest, and it is arranged to re-issue for that amount, the old securitiesbeing proportionately exchanged and re-tired. Their holders, who are usually


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RAILROAD MORTGAGES. 71

glad to save sometliing out of the wreck,are expected to accept bonds for asmaller face value, and probably at areduced rate of interest, and at the sametime meet a cash assessment to coverthe cost of the operation. They notonly have the water squeezed out oftheir holdings, but they have to payfor the squeezing.

The lesson to be drawn from theforegoing facts is easily stated. Letthe investor, before he purchases, ascer-tain whether the bonds offered him aresecured on a road that has gone throughthe reorganization process; and if not,unless he feels that he is compensatedfor the risk he takes by a great reduc-tion in price, he had better keep hismoney, or find some other place for it.


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72 THE ART OF INVESTING,Reorganization is almost certain to comesooner or later. It is tlie rock ahead.There are exceptional cases, of course,and if tlie investor has the means ofmaking a thorough investigation, he cantake advantage of them; but he oughtto be very sure of the ground beforeventuring upon it.

Raileoad Stocks.Of course, many of these are good,

and a great deal of money is profitablyinvested in them ; but, as a rule, rail-way bonds, while at times possibly notyielding as liberal returns, are much tobe preferred by ordinary capitalists.There are many things endangeringstocks that do not threaten mortgagebonds. The latter are secured upon


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RAILROAD STOCKS. 73property that is permanent, but thevalue of stocks rests upon managementthat is subject to constant change. Theambition of railroad directors is evenmore to be dreaded than their dishon-esty. How many magnificent railwayproperties have been ruined by the sui-cidal policy of extending roads, addingbranches or taMng on leased linesMore particularly has this been the casewhen their stocks are listed at someexchange, and their managers happento be operators there. The temptationto increase or diminish quotation values,for speculating purposes, is then aconstant menace to conservative share-holders. The fact that a stock paysdividends, which is the only thing thatthe most of investors look to, is no cer-


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74 THE ART OF INVESTING.tain criterion of value unless tlie con-trol of the property can in some waybe satisfactorily guaranteed,

Othee Stocks.Of tliese tliere is no end. Tlie tend-ency of business, owing partly to anabundance of capital and partly to in-creasing competition, is to a large scaleof operations, if not to absolute monop-oly. One consequence is, that it is moreand more passing from private partiesinto the hands of corporations. Cor-porations issue stocks, and sometimesthat is one of the leading purposes oftheir formation. Some of the stocksare good and a good thing to have, andothers are wholly worthless. No rule,beyond the exercise of common sense,


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OTHER STOCKS. 75and the use of diligence in acquiringreliable information, can be given fortheir selection. Some dangers, however,can be pointed out. The greatest ofthese is the temptation of large divi-dends. Investors are altogether tooprone to accept present realizations asevidences of future profits. It may betaken as a rule that, in this age ofplentiful money, no legitimate businessthat is open to public competition willlong pay exceptionally well. The greaterits earnings at first, the stronger will bethe competition in the end. Hence wefind that many manufacturing compa-nies, especially in New England, thatmade handsome returns to their share-holders for considerable periods, havegradually ceased to pay dividends at


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76 THE ART OF INVESTING.all, or been forced into liquidation. Ifnot strictly a legitimate business, any-thing in the nature of profits must bedeceptive.

When corporations enjoy monopoliesby virtue of patent rights, their earningshave often been very great, and earlyinvestors have made splendid fortunes.Those who come later, however, takechances that are too frequently under-estimated. There is always the dangerof new discovery. Gas is threatened byelectricity, the telegraph by the tele-phone, and even steam is menaced bynew-fangled motors. Turnpikes and ca-nals have been superseded by railways,and old railroads may at any time sufferfrom the competition of new ones. An-other fact which is too often lost sight of


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OTHER STOCKS, 77is that investing in a patent right, or in abusiness founded upon it, is like invest-ing in a mine that is being constantlyworked out. Every hour shortens itsmonopoly. But the greatest danger insuch cases is over-capitalization. Suchstocks nearly always contain too muchwater, and water invariably tends tolower levels.

In handling shares the highest art isin selling rather than in buying. Thatis something that the most of -investorsdo not understand. They hold on toolong. When they have a good thing,they infer that it will always remain so,and accordingly retain it until its valuehas departed or greatly deteriorated.Stocks require constant watching. Ifany one wants to go to sleep on his in-


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78 THE ART OF INVESTING.vestments lie had. better select mort-gages.

While it is true that numerous stocksare very much like lottery-tickets agood many of them, and among themthe shares of mining companies, fromthe very nature of the caseand deal-ing in them is a species of gambling,the observation is not true as to all.The law watches over some of them ina way to protect them from the mostobvious dangers. For that reason, bank-stocks can generally be relied upon asrepresenting actual cash investments.In some of the States the same thingis true of insurance companies' shares.Efforts have even been made, in certainquarters, to apply the rule to all cor-porations; but, as the corporation laws


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FARM MORTGAGES. 79of other States are generally open foranybody to organize under, sncli restric-tions have little practical value. Inacquiring stocks, it is always well to in-quirea point generally overlookedunder what statutes the companies havebeen organized. If they are found toexist by virtue of the corporation lawsof States that are notoriously lax intheir requirements especially if theircorporators are residents of other States the presumption is against them.There is pretty certain to be bad faithin their inception, and a bad beginningis likely to make a bad ending.

Faem Moetgages.We have now reached a class of

securities that has been steadily grow-


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8o THE ART OF INVESTING.ing in popularity, and more and morehas absorbed tlie capital of investors.That it must have merit is a fair infer-ence. All things considered, it is doubt-less the best now offered on a largescale. Land in this country is steadilyappreciating, except in a few of theolder sections. There is no reason toapprehend, at least for years to come, aturn in the tide. Hence, paper restingupon landed security, especially in thenewer and more rapidly-developing dis-tricts, if properly graduated in amount,is almost certain to be good. What isrequired is sufficient care and judgmentin placing the loans ; and so complete isthe system applied by some of the partiesthat make a business of putting mort-gages upon land, in apportioning their


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FARM MORTGAGES. 8imoney allotments to the market values ofproperty, tliat they can be accepted witheven greater confidence than if arrangedby capitalists themselves. Hence manysavings-banks and other institutions of afiduciary character, as well as numerousconservative individual investors, haveput their money into paper secured onfarming-lands, and lands which theyhave never seen, and had no opportu-nity to see.

At the same time it must be remem-bered that, if the strictest good faithis not observed, there is here a danger-ous opening for fraudulent imposition.Should there be collusion between theloaning agent and the land-owner, theadvance may be in excess of what isjustified by the value of the realty, or


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82 THE ART OF INVESTING.the title to tlie latter may be defective.The surprising thing is, when the popu-larity of farm-mortgages and the extentto which they have been dealt in areconsidered, that cases of deception havenot been more numerous. As it is, theyhave not been wholly wanting. Thewriter once had occasion to visit whatwas called a farm, and as such had beenmade the basis for a loan, in one of thenewer States. He found a piece of prai-rie-ground on which there were signsof occupancy at some considerably ante-rior period ; but which was then deserted,and to all intents and purposes midand waste. It was worth no more thanland in the same neighborhood, on whichthere had been no attempt at improve-ment, and that could be purchased for


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FARM MORTGAGES. 83less to the acre than the mortgage uponthis property. The owner, having se-cured such a liberal accommodationthrough the carelessness or knavery ofsome loaning agent or dealer in mort-gages, had pocketed the money insteadof expending it on his place, and leftthe ground for his creditor to make themost out of that he could. Competi-tion among professional money-lendersin some of the Western States has be-come so sharp that such cases are notonly possible but probable. Villagesaway out on the frontier, with scarcelysufficient population to make respect-able settlements, are often the sites of in-vestment companiessometimes of sev-eral of themdoing business under mostpretentious names, and offering amounts


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84 THE ART OF INVESTING.of paper that, in view of the surround-ings, are truly marvelous. Nothingwhich, by the most liberal interpreta-tion, can be called a farm, seems to es-cape them. The writer was not sur-prised, when told by "one of the na-tives " of a border community, thatthere was not a hen-coop in his partof the country that did not have a mort-gage on it!

One of the devices of these enter-prising companies is to offer their ownguarantees as to both principal and in-terest of all mortgages negotiated bythem. It is hardly necessary to askwhat, in a majority of cases, such in-dorsements are worth. The writerknows of one company that claims acapital of only thirty thousand dollars^


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FARM MORTGAGES. 85and it is doubtful if lialf that amountwere ever in its treasury, which, by itsown profession, has disposed of indorsedmortgages amounting to several milliondollars. The only safe policy, in buy-ing paper of this description, is to dealwith parties of kno^vn responsibility inthe business, and that have reputationswhich they will naturally be most anx-ious to protect. There are a numberof such concerns, and it is here unneces-sary to mention them. Some of themare individual operators, some businessfirms, and some incorporated institu-tions mth large resources that make aspecialty in this line. It would notseem to make much difference whichis dealt with, although when the loanshave a good while to run, and the in-


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86 THE ART OF INVESTING.terests to be watched over are at a dis-tance, prudence would suggest, in viewof tlie uncertainty of human life andthe many vicissitudes that fortune hasin store, that it would be wise to dealwith parties having the elements ofgreatest permanency, and which arelikely to be corporations.

It is scarcely necessary to add that,in selecting investments of this sort,there is a choice apart from the marketvalues upon which they are secured.What is wanted is, not merely safety asto the principal of the loan, but regular-ity in the payment of interest. In sec-tions where only one crop is dependedon by agriculturists, such as wheat orcotton, there is greater danger of de-faults from natural causes than in dis-


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FARM MORTGAGES. 87tricts where there is a variety of produc-tions. Then, there is a drfference inpopulations. Some have sounder no-tions as to financial obligations thanothers. It is hardly to be expected thatindividuals in communities that repudi-ate or neglect public debts, will be shin-ing examples of personal integrity. Itwill always be well to give the go-by torepudiating districts. Apart from thegeneral lack of sound business ethics insuch localities, there is a reason why itis unsafe to trust the monetary contractsof their people, and that is the dangerto be apprehended from unfriendly col-lection laws. When communities taketo fighting creditors, they are not likelyto confine their opposition to any oneclass. By means of exemption laws,


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THE ART OF INVESTING.stay laws, limitation laws, assignmentlaws, etc., they can make it almost asdifficult to collect from individual debt-ors as from tlie public, and, as a matterof fact, we find legislation of tbat sortmost pronounced wherever common-wealth and municipal undertakings areleast respected. For instance, Texas, inselling her lands to outsiders, and thenconverting them to the uses of her owninstitutions and citizens, as heretoforedescribed, has shown an utter disregardof all moral obligations, and here it isthat the laws have been apparentlymade with special reference to protect-ing local debtors from the clutch of out-side creditors. In the most of theStates a sealed instrument for the pay-ment of money is good for twenty years.


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FARM MORTGAGES. 89but in Texas, if not sued on in fouryears, it is barred by " the statute " ; andthousands of people having claimsagainst Texans, have permitted them tobe lost through ignorance of that pecul-iar provision. Again, in Texas a manmay possess a great deal of valuableproperty and yet be execution-proof.In addition to "all provisions and for-age on hand for home consumption," allhousehold and kitchen furniture, all im-plements of husbandry, all tools andapparatus used in a trade or professionactually followed, family portraits andpictures, a gun, two horses and a wagon,a carriage or buggy, ^yq milch-cows andcalves, two yoke of work-oxen, twentyhogs, twenty head of sheep, all bridles,saddles, harness, etc., the debtor head of


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90 THE ART OF INVESTING,of a family may liold a homestead, notin a town or city, of not less than twohundred acres of improved land, or in acity, town, or village, of lots of thevalue of ^N^ thousand dollars, " withoutreference to the value of improvementsthereon," and which, of course, may beworth much more than the land. InTexas, to get moieties under assignmentsmade for their benefit, creditors mustsurrender in full their demandsfromwhich provisions it may not unreason-ably be inferred that Texas is a muchmore healthy region for debtors than forcreditors. In Colorado, whose repudia-tions have also been referred to, a prom-issory note may be '''- outlawed " by twoyears' indulgence on the creditor's part,and a judgment of a court of record is


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FARM MORTGAGES. 91good for three years only. .The moralfrom sucli cases is obvious enough.Keep your money out of Texas, Colo-rado, and other repudiating sections ifyou ever want to see it again. TheMgher rates of interest to be obtainedin such localities, and which are amongthe penalties for their treatment ofthose with whom they have dealing,will not compensate for the increasedrisk. Nor would it be imprudent toavoid cities and towns of tainted finan-cial records, however prosperous theymay appear to be, of which the capitalof the State of Kansas, whose course iselsewhere considered, is, by reason ofits wealth and prominence, a notableexample.


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92 THE ART OF INVESTING.

Eai^ch Securities.Akin to tlie obligations just treated

of, because having a basis in real estate,and yet in so many points differingfrom them as to seem to call for theirconsideration under a different heading,are securities predicated upon ranch-properties. Cattle-raising, which, in ear-lier times, was looked upon as a partof the farmer's regular occupation, hasof late become almost a separate indus-try, and grown to enormous propor-tions. Ranching, however, is not con-fined to cattle-production, as the term" cattle " is ordinarily understood. Wenow have sheep-ranches, horse-ranches,pig-ranches, goat-ranches, and even os-trich- and goose-ranches. The marvel-


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RANCH SECURITIES, 93ous growth of the rancli business, inquite recent times, has had the naturaleffect of bringing upon the market aclass of securities that has absorbed, andimfortunately dissipated, a good deal ofinvestment capital. For a time the busi-ness was remarkably profitable. Landsin the South and West, in large bodies,were obtained at nominal figuresoftenby mere appropriationto operate themas ranches cost but a trifle; for, as arule, neither houses nor fences were con-structed or needed; and the prices ofcattle, largely purchased for the pur-pose of stocking other ranches, werehigh and constantly advancing. Every-body in the business made money, orseemed to be making it. Speculationupon an extended scale was an inevita-


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94 THE ART OF INVESTING.ble consequence. Stock-ranching com-panies" stock " in the corporate sense were soon being numerously or-ganized with the usual concomitantsof mortgage-bonds and share-certificates,and, of course, the public was invitedto share in their benefits. Circularsthat they put forth told very flatteringtales. The lands which they possessed,often little better than desert wastes,were usually described as worth from^YQ to twenty-five dollars per acre ; theircattle were estimated at the highestmarket prices; and calculations weregone into to show, from the increase oftheir herds and the quantities of beefand young stock to be annually har-vested, that they could not fail to befirst-class bonanzas. The highest rates


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RANCH SECURITIES. 95of interest and most liberal dividendswere promised. It is no wonder thata good many investors were captivated.

We all know what the result hasbeen. Droughts in summer and frostsin winter, for which no allowance hadbeen made, and against which no pre-cautions were taken, wrought havocwith the herds, and production increaseduntil the ranges were overstocked, andprices went down and down with grow-ing competition until the end was fail-ure and bankruptcy.

And yet it by no means follows thatranch securities will always be worth-less. Stock-raising is an entirely legiti-mate calling, and will be successfullyprosecuted on a large scale, upon ourWestern plains and prairies, which are


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96 THE ART OF INVESTING,by nature intended for tliat particularuse. After sucb. arrangements havebeen made for shelter and feed in thewinter, and for water in the summer,as ordinary prudence dictates, and thebusiness is brought to that stage whereit will no longer be conducted by " cat-tle-kings " and " cattle-queens " as a ven-ture to be decided by the chances of theweather and the market, but by ordi-nary workers, content with moderateprofits, and mindful of all the oppor-tunities and economies, ranching will bea reasonably safe basis for money in-vestments of all kinds.

Water-Works Loans.These are becoming very plentiful

how plentiful may be inferred from the


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WATER- WORKS LOANS. 97fact that a directory of water-works fortowns and cities in the United States,recently issued by a New York pub-lisher, shows that of over fourteen hun-dred such establishments, the numberof those owned and conducted by pri-vate (although incorporated) companiesexceeds those belonging to the munici-palities by over one hundred and fifty.The communities served by these com-panies range from villages of less thantwo thousand population up to a city ofone hundred and twenty-five thousandsouls ; and the debts of the companies,in nearly all cases represented by couponbonds, run from twenty-five thousandup to four million dollars. As thestock issued by the companies fullyequals their bonds, it will be seen that


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98 THE ART OF INVESTING.the aggregate of securities put out bytliem is very great.

The building of water-works has be-come a regular business, and has beenfollowed with very satisfactory resultsby contracting parties that, in manyinstances, are owners of or interestedin the factories producing the pipes,pumps, and other materials and machin-ery necessarily used. The customarymethod has been to secure, in the nameof an incorporated company, that ismerely a cover for a professional builder,a contract with a city or village bywhich it is to be supplied with waterfor public usesprotection against firebeing the principal oneat a stipulatedannual price, or for so much per hy-drant, with the privilege of selling


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WATER-WORKS LOANS. 99water at specified rates to as many pri-vate takers as can be found. The con-ditions vary, but a supply of good,wliolesome water, in adequate quanti-ties, is always one of them. A failureon this point is to invalidate the con-tract, and there may be other groundsof forfeiture.

For the money with which the worksare to be constructed, the builder ordi-narily depends, sooner or later, uponthe sale of bonds. He even expects tohave a balance left from their proceedswhen the work is done, and that, withthe stock of the company, which mayor may not have a value, is to be hisprofit. The works, in other words, arerelied upon to build themselves, andpay the enterprising projector besides,


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loo THE ART OF INVESTING.tliere being in this respect no differenceas to tlie construction of railroads andwater systems.

Tlie writer lias before him a pam-phlet put out by a dealer in invest-ments, in which water-works securitiesare especially commended. " In no otherclass of mortgages," says the pamphlet," can so many and such strong elementsof safety be found, since in the wholehistory of water-works there is but oneknown instance of the foreclosure of afirst mortgage (where the works werecompleted and in operation), and in thatinstance not a dollar of loss was sus-tained by the bondholders." While theauthor of the foregoing could not havebeen familiar with the case of Mem-phis, Tennessee, in which the unfortunate


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WATER-WORKS LOANS. loiwater-works bondliolders received lessthan twenty per cent of their demandsfrom the proceeds of the foreclosuresale, nor of those of Galesburg, Illinois,

and other bankrupt companies, thereare, nevertheless, reasons why water-works mortgage-bonds, if issued underproper conditions, should be among thevery best. They are secured on prop-erty (underground pipes, etc.) which isbut little exposed to fire and accidentalinjuries, and the business upholdingthem is usually without competition,conducted wholly for cash, and in grow-ing communities must of necessity in-crease. But there are perils and draw-backs. There is here, as elsewhere, thepossibility of overbonding. A greaterdanger is cheap construction. In no


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I02 THE ART OF INVESTING.class of works, perhaps, is tliere an equalliability in this direction. The most ofthe material used is in pipes that areburied and out of sight. It is possible toemploy an inferior article, such as sheet-iron instead of cast-iron, which will tem-porarily answer the purpose ; and as thebuilder's interest in the works, aftertheir acceptance by the community withwhich he has contracted^usually not ascritical as it should beand the sale ofhis bonds and stock, is at an end, thetemptation besetting him is very strong.Five or six years is the limit to theprobable use assigned by engineers topipes and other materials in worksthat the writer knows of, that are cov-ered by mortgages authorizing bondshaving from twenty to twenty-five years


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WATER-WORKS LOANS. 103to run. If, at any time before thebonds mature and are satisfied, it isfound necessary to use the funds neededfor principal or interest, in the reconstruc-tion of the property, it is easy to seehow the bondholders may suffer. Henceto them the very great importance ofknowing, before they part with theirmoney, sundry points about the securitythey are getting, that the most of bond-purchasers rarely think of inquiring into.

Nor have we reached an end of therisks attending this class of securities.The question of water-supply is alwaysof first importance. Water-works with-out water, and plenty of it, are, ofcourse, of very little account. Now, it isvery easy to understand how difficultieson this score may arise and increase.


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I04 THE ART OF INVESTING.When works are first constructed, tlieremay be a sufficiency of water of satisfac-tory quality witMn easy reach, and thebuilder, anxious to get through with hiswork as quickly and cheaply as possible,that he may realize on it, will naturallyavail himself of such supply and look nofurther. But it does not follow that itwill always or for a considerable timebe adequate. Running streams are usu-ally depended on, and everybody knowshow liable they are to become corruptedin a settled country, and, while the de-mand upon them is increasing their vol-ume is likely to diminish. The writerknows of more than one company thaton this point has met with embarrass-ments not dreamed of when its opera-tions were begun. In one instance


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WATER-WORKS LOANS. 105the cost of a new water-supply, madenecessary by tlie deterioration of a run-ning stream, exceeded the entire origi-nal outlay. The point is one uponwhich, in every instance, not only arecontracts made especially stringent, buta strict compliance is certain to bedemanded. How many of our watercompanies will be able to meet their ob-ligations in this regard, during the pe-riods that their bonds are issued for,without the expenditui^e of considerablesums of money not at first anticipated ?To provide a fresh water-supply mayprove a more serious undertaking eventhan the substitution of a new plant foran old one.

When securities founded upon water-works in localities where they are actu-


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io6 THE ART OF INVESTING.ally needed, and erected under seem-ingly favorable conditions, are attendedwitli sucli liabilities, it will be seen howmucli greater tlie danger must be wlienthe works are located, by speculativebuilders, in communities that do notneed them, and of uncertain ability fortheir support, purely as a basis for themanufacture of bonds and stock. Thecountry has been ransacked for water-works sites, and plenty of works havebeen built in villages that the majorityof our people have never heard of.They may grow and become importantplaces, and they may not. The obliga-tions created in such cases may be valu-able, and they may not. But it is quitesafe to say that, if the movement in thisdirection continues and goes much fur-


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STREET-RAILWAY BONDS, 107

ther, the day is not far off wlien we willbe favored with a plentiful crop of de-faults and water-works foreclosures.

StREET-RaILWAY BoiJTDS.Much that has been said concerning

water-works securities is applicable tothese. There is not the same opportu-nity to delude by the use of inferiormaterials, since the works are on thesurface ; but there has been an equal dis-position to push construction into terri-tory of doubtful earning capacity. Manyroads have been built where they werenot needed, and where they can notpayat least, for considerable periodsto come ; and more of that sort are like-ly to be built. At the same time, whenadvantageous locations have been se-


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io8 THE ART OF INVESTING.

cured, witli francMses properly coveringtlie ground, and particularly if exclu-sive, few better properties exist, andtlie securities based upon tliem can besafely recommended. All tlie investorneeds to do is to investigate thoroughlybefore he buys. He should satisfy him-self that the road is in a communitythat is able to sustain it; if in a cityof known standing, that it occupiesstreets likely to give it permanent busi-ness, and has not been built in remotesuburbs or along country highways asa pretext for bond-making ; that itsfranchise is sufficient to protect it fromdangerous competition; that the securi-ties have been legally issued ; and, aboveall, that there are not too many ofthem.


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MISCELLANEOUS BONDS. 109

Miscellaneous Bonds.Much, that has been said concerning

water-works and street-railway mort-gages is applicable to various other se-curities, notably those of gas and elec-tric-light companies. In cities and vil-lages, when the latter are of considera-ble size, streets must be lighted, and con-tracts for the purpose are always soughtby those contemplating the constructionof illuminating-works. Such, contractsare usually for short periods, one yearbeing the ordinary term, and for thatreason there is greater danger fromcompetition than in the matter of water-supply. Indeed, gas and electricity arelikely to be competitors in most fieldsfor a considerable time to come, and


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no THE ART OF INVESTING.

the profits from their operations mustbe correspondingly abridged. Never-theless, many of the securities predi-cated upon them should be good, and,if selected with care, can be taken withconfidence. Of course, there may bedefective construction in material andworkmanship, and the buyers of gas-light and electric-light bonds would dowell, before parting with their money, toinform themselves thoroughly on thesepoints as well as others. In the largercities there is less difficulty in estimat-ing securities of the kind, as they arepretty certain to have local quotationsthat determine their values for the timebeing.

When it comes to bonds secured onmanufacturing and other private proper-


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MINING SECURITIES. in

ties, whicli may or may not be coveredby articles of incorporation, no generalrule can be laid down. Each interestmust be measured by its own circum-stances, and investors can best deter-mine for themselves bow far it is safeto trust tbe promises it makes. Themarkets in suck cases are always moreor less local, and those who see fit toput their money into them may be sup-posed to be in possession of all the factsnecessary for the formation of correctjudgments.

Mmma Secueities.The best thing that, as a rule, can

be done with these is to let them severe-ly alone. There are good mining shares,but the average investor, who buys in-


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112 THE ART OF INVESTING.to such properties, does not get thatkind. It is a peculiarity of the miningbusiness that it pays only when man-aged with exceptional skill, and thatrequires the property to be in the handsof its owners. Of course, the averageinvestor can not take personal chargeof the mines into which he buys, andwould not know how to do it properlyif he could. He is compelled to intrusthis interest to the care of hired agents,and, if anything is settled in connectionwith mining, it is that about the onlything the ordinary salaried mining su-perintendent is good for is to drawchecks on his employers, and bury theirmoney beyond the reach of resurrection.


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BRIDGE-BONDS. 1 1

BEIDGE-B0I^IDS.Wlien our larger streams are reached

by railways, and must be crossed bybridges that cost a great deal of money,sucli structures have generally beenerected by corporations independent ofor separate from the railroad companies.As a general thing, being proximate tolarge cities, they have also been madeto furnish the accommodations of pub-lic highways. Bonds and stocks issuedupon them, w^hile subject to many ofthe same vicissitudes, are quite as goodas those of the average of railroad com-panies. No general iiile can be laiddown concerning them. Each securitymust stand upon its own merits, as thestructure upon which it is issued must


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114 THE ART OF INVESTING.stand upon its own foundations. Thereshould in each case be an investigationbefore buying. One general caution,however, may not be inappropriate, andthat is, to fight shy of the paper of com-panies owning very expensive bridges,unless the ordeal of a reorganization hasbeen gone through. It is well knownthat the New York and BrooklynBridge, lying between the first andthird cities in the country, does notbegin to pay interest on its cost. Thegreat St. Louis Bridge failed for thesame reason, and it is doubtful whethersuch enormous structures can be erectedat outlays that will justify them merelyas business ventures and investments.


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SUBSTITUTION SECURITIES, 115

SuBSTITUTIOiq- SeCUEITIES.Reference lias already been made to

an ingenious arrangement for issuingbonds upon the security of other bonds.The plan is comparatively a new onein this country, although something likeit has long been practiced upon in Eng-land, and where more than one com-pany adopting it has come to griefthrough injudicious investments. Initself it is simple enough. Certain per-sons having, as they suppose, superiorfacilities for investigating securities ofone or more kinds, and sifting the goodfrom the bad, organize with a view topurchasing such as they approve, andon the strength of which, when placedwith some trust company or other safe


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ii6 THE ART OF INVESTING.depository, they issue their own bondsfor tlie market to tlie same amount, butusually bearing a lower rate of interestthan those which they own. The differ-ence in the interest and the lower figuresat which they may buy, compared withthose at which they sell, make theirprofits. To escape personal liability, andpossibly to establish a higher credit,a corporation is formed, and the newobligations are produced in its name.

To such investors as lack confidencein their own judgments, or either donot have or prefer not to avail them-selves of satisfactory opportunities forinvestigation on their own account, thesystem undoubtedly has recommenda-tions. If securities were scarce andhard to find, it would be generally


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SUBSTITUTION SECURITIES. 117popular; but, as long as tliey are plen-tiful,

art of investing

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