The A rt of

Wal l Stree t I nvesting

BY

John M oo y d
Au t h or o f

t
T h e Tr u h A b o u t th e T ru s t s, e tc .

P li h d
ub s e by

T h e M o o d y C o r p o r a ti o n
3 5 N assau S tr eet , N ew Yo r k
1 9 O6
 C o p y rig h t , 1 90 6, b y

J0 HN M0 0 DY
Al l r ig h t s res erv e d

THE M O O D Y - B A R TO N P R ES S
 P re fa c e

LT H O U G H the popular i mpression is

probably the reverse it is certainly a
,

fact that a greater sum of money is annually

lost in this country through unwi se investment
in W all S treet tha n through pure speculation
, .

While fortunes are daily jeopardized and dissi

pated through speculat i on in stocks bonds , ,

grain futures and like ventures yet the many

-
,

sums large and small which annually leave

, ,

the pockets of actual investors are far greater

in amount .I ndeed I would almost say that
,

the loss es incurre d through unwise W all

“

S treet investing are easily te nfold the losses

”

occasioned through mere speculat i on on the

exchanges .

An d furthermore the losses result in g from

,

unwise i nvesting are far more i mportant to the

community at large ; for while speculative
losses are in a se nse anticipated the losses ,

th r ough mistaken investments are usually un

exp e cted and unprepared for S peculative .

iii
iv PR E F A C E

losses often r epresent the loss of money easily

gained ei ther through former speculations or
,

from other sources but the average loss of the

,

investing public is generally a loss of hard

earned or industriously accumulated savings ;
and therefor such losses are felt more deeply
by the community .

The A rt of W all S treet I nvest i ng involves

two important primary principles The first is .

’
to place one s principal where it will be en
t ir ely secure and the second to gain as large a
, ,

percentage of return as possible without in

the least disturb i ng or lessenin g the securi ty
of the pri ncipal The moment the status of the
.

principal is changed for the purpose of c uban e

ing the rate of return the transaction ceases to ,

be a pure investment and becomes more or less

of a speculation Thus analyzed in its s im
.
,

p l est form we
, may put it do w n as ax i omat i c
that only those are legitimate investments
where the primary motive is the safe securi ng
of one s principal and the rate of return thereon
’

is looked upon as secondary A speculation .

,

on th e other hand is where the desire for lar g e

,

profit is so strong that the safety of the prin

c ip a l becomes in e ffect a minor consideration .

That is to sa y the person investing or sp ecu

,

latin g may re gard his principal a s secure but is

 PR EF A C E v

willing to place i t at considerable risk in order

to i ncrease his profit The securing of the
.

p rincipal, therefor is
, the first and chief matter
to be considered in investi ng money .

L ooked up on in this light it will be seen that

,

the matter of i nvest i ng money wisely is a most

important as well a s a most di fficult art and ,

therefor well wor thy of careful examination .

The ideas and suggestions embraced in the fol

lowing pages are the concrete result of sixteen
years experience and study of W all S treet
’

conditi ons and methods ; and while it may a p

pear to some that the writer is too conserva
tive in his attitude towards investi n g methods
in general yet careful thought should convince
,

eve ry reader that i t is the part of safety and

prudence to be securely on the side of c o n
s erv a t is m in W all S treet i nvesting rather than
,

the reverse .

I n the followi ng chapters the gen eral sub

j e ct of W all S treet i nvesting i s treated i n as
practical a way as possible The fundamental
.

pri nciples of investing are carefully examined ,

an d their import a nce emphas i zed I t is in .

tended that the book shall not be merely a

tre a tise on the abstract or theoret ic al side of
i nvesting nor that it shall merely give a sur
,

face view o f the investment field R ather i s it

.
vi PREFA C E
i ntended to make th e book of general use as a
practical hand book or guide for thos e who
-

w i sh to place their money in legitimate corpo

rate enterprises o f the several ki n ds through ,

the purchase of stocks and bonds N ot o nly .

are the di ff erent class e s of s ecu r iti e s them

selves descr ibed but careful expla nations a re
,

given of the machinery and methods of invest

ing throughout the various W all S treet chan
nels .

I n the general arrangement and composition

the valuable c o operatio n of M r John F
-
. .

H ume author of a book no w long out of pri nt

, ,

entitled The A rt of I nvesti n g is h ereby pub

“ ”
,

l icl y ackno w ledged .

JO H N M OO D Y
 CO N TE NT S

Chapter
I S af
. e ty and S ecurity
II . Bon d s a nd What Th e y R epres e nt .
33

III . S tocks a nd What They A re

I V A naly z i
. n g R ail r o a d S e cu r ities .

V I ndustrials
. and Tractio ns

V I I nvestm
. en t vs . Sp e cul a tion

V II . G et- R ich $ ui
-
c k S chem e s

V III R eo r gani za tio

. n s and Sy d icat
n e s .

I$ . T h e N ew Yo r k S to c k Ex ch a n ge . 1 35

$ . Wa ll S tr ee t Ph ra se s a nd M ethods . 1 53
Th e A rt of W a ll Street I nve sting

Sa fety a nd Sec urity

NL E SS he has had much prev ous ex i

p er ie n c e , prospective i nvestor who
the

wishes to put his mo n ey at work through W all

S treet channel s will be confronted at the outset
,

“ ” “ ”
with the questions of safety and s ecurity .

K nowing o nly mo r e o r l e ss definitely that he ,

ought not to expect a return of mo r e than four

to five per cent if he wi shes to invest his
.
,

money securely he naturally seeks more ex

,

pert advice from a ban ker broke r or g eneral ,

dealer in investment securities A nd he is wise .

is doing this provided he exercises good judg

,

ment in the sel e ctio n of th e broker or dealer .

But brokers a nd d ealers in i nvestment s ecu r i

ties are of course not i n fallible ; their ju d g
, ,

ment is sometimes biased a nd they may for , ,

one reaso n or another giv e unsound advice , .

H ence it is all the more necessary that the

I O A RT O F WALL S T REE T I NVES T IN G
inv estor should inform himself regarding the
merits of a given security as well as train him,

self in th e art of analyz i ng investments i n gen

eral .

The truth i s that wh ile t here are certain

,

fixed rules for proper guidance every bond ,

must be judged by itself in order to b e analyzed

correctly F or i nstance a man may be adv i sed
.
,

“ ”
to invest only in first mortgages on the ,

hypothesis that by putt i ng this limitation upon

his field of investment he will thereby insure
,

its safety But such advice applied broadly

.
,

and without qual ification is essentially u m ,

sound A fourth fifth o r tenth mortgage on

.
,

some properties may be far more secure than a

first mortgage on others F or instance the .
,

R eading Company 4 5 selling at 1 0 4 are a much

, ,

safer security than were the first mortgage

bonds of the Centralia Chester RR issued ,

in 1 8 9 5 al tho the former are an eighth mort

,

gage o n parts of the main line of the R eading -

system and w ere originally a first mortgage on

no part of the property Yet they are well .

secured wh i le the other bond defaulted early

,

in i ts life and its holders were obliged to sacr i

fi c e a large part of their pr i ncipal in the t e
organization wh i ch followed the default Th us .

it will be seen that to merely advise the in

 S A FE T Y AND SE C URI T Y n

ve st o r to c o nfi n e l is in v es tm en ts to fi r s t
mortgages m a y be mo s t misl ea di ng .

A nother u nsafe m ethod of judgin g the safety

of bonds is to assum e that b ec ause th ey a r e
,

s e cu r ed o n part of a larg e railroad system a n d

“
u n d e r li e one or mor e issues o f second a ry
”

bo n d s their s e curity is absolut ely assu r e d

, .

This like the former theo ry co ntai n s so m e

, ,

vit a l flaws a nd whil e it hol d s good in the

,

majo r ity of in stanc e s if followed in others

, ,

brings ve ry d isastrous r e sults M any large

.

and important rail r oad corporations absorb

tribut a ry or competi n g lines u n d er one pl a n or
an o ther but they do n ot alw a ys gua rantee$
,

the securiti e s of th es e li n es Bo n d i ssues are

.

“ ”
frequently assumed by a co ntrolli n g com
pany accordi n g to statements c ircul a ted but
, ,

unless they have be en specifically guara nt e e d ,

e ith e r by the a c qui r i n g co r por a tion or by som e

other equally r espo n sible co n c e rn it do es not

,

necessa r ily follow that the cre d it of the latter

is back of the security at a ll Th e acquired
.

li ne may tur n out a n u np r ofitable a n d losing

investment with th e result that th e larg e r or
,

co ntrolling li n e will wa n t to eithe r u nlo a d i ts

burden o r sc a le down the obligations of th e
12 AR T O F WALL S T REE T I NVES T I N G
methods whereby this c a n b e done as has been ,

proven ma ny times I t is vit a l therefor that

.
, ,

the investor should base his entire judgm ent

of value on t he p r op erty it s elf r e ga r dless of
,

the pare nt compan y u nless i nd e ed the latt e r

,

h a s a bsolut ely a ss um e d a nd gu ara n t ee d th e

pri n cip a l a n d interest of th e bo n d .

A thi r d error which is very common is to

, ,

assume that because a bond is listed on o ne or

more of the stock exchanges it is therefor
,

safer or in bett e r standi n g than otherwise .

S uch a n otion is entirely u nsound as there are,

far more bo n ds of the highest grad e and of the

best secu r ity t r aded in on the va r ious ma rkets
outside of the excha n g es themselves The .

chief adva n tage of a security bei n g listed o n

a n e xchange is that it th e r eby secures a fixed

quotation but th e f a ct of its being listed does

,

not bear upon its safety in any way W hile it .

is true that many of th e best secured bo n ds and

stocks are list ed o n the exchan ge s it i s also ,

true that many of th e l east secure are listed as

well.

I n co ntemplating a n investment in a given

security each case should be judged on its
,

o w n merits . I n the case of a railroad bond it ,

is n o t the question of whether the issue is a

first mortgage or a blanket mortgage but ,
 SAF ETY A ND SE C URI TY 1 3

whether the value of the property on which it

is s ecured is sufficiently in excess of the
amount of the mortgage and whether the in ,

come from the property is s ufficiently in excess

of the amount required for meeting the interest
on the bonds and all prior o bligat i ons A nd in .

defining value w e mean of course perm a nent

, , ,

earni ng power for it is chiefly the permanent

,

or grow i n g earning power that makes the

value F or instance th e New York N ew
. , ,

H aven and H artford railroad lines between ,

N ew York and Boston are bonded and capital,

iz ed for an amount far i n excess of the cost of

replacing the actual movable property of the
company But there are other assets besides
.

rails and equipment wh i ch make railroad

property valuable These are its location its
.
,

exclusive rights of w ay and terminal sites or

privileges I t is from these that flow its chief
.

earning power The six hundred odd miles of

.

rail road in the N ew Jersey Central system

may not represent much more movable prop
ert y than a like m i leage of railroad in M exico ,

and may not have originally cost much more

to build But the vast di ff erence in value will
.

be found in the location in the value of th e ,

l a n d a value which has been created by the

,

influx or grow th of population This is suc h .

14 AR T O F VJ A LL S T REE T I NVES T IN G
an impo rtant facto r that the valu e of a prop
e rty at o n ce appreciates if a t e n de n cy towards

more rapid g r owth appears while it t en ds to ,

fall in all cases where the contrary tendency

>I<
d evel o p s .

The rights of way and termi nal sites a nd

privileges a re therefor the first features to
bear in mi n d in a n alyzi n g the earning power ,

or value And it must also b e borne in mi n d

.

that it is the pe rma n e nt or average ea r ni n g , ,

p o wer r a ther than the possible tempor ar y in

come whi ch is to be co ns id e r ed By p erma .

n e n cy is mea n t a matt e r of ge n eratio ns rather ,

tha n years M ost railroad bo n ds n owadays run

.
, ,

f r om 4 0 to 1 0 0 years and the investor must ,

natu rally be assured that there is not likely to

be any real d ep r eci a tion in the prop erty if ,

properly mai ntain ed in the gen er ations to ,

come H is fi rst thought then must be to

.
, ,

a sce rtain if the influx of population around and

alo n g the li n es of the property promis e s to
co nti nu e i ndefi nit ely ; a n d at the same time
he must determine wheth er the value of this
a nd the su r rounding land is such that the cre

ation of a riv a l right of w a y is out of questio n .

( Thi ff t f p p ul t i n n l nd v l u b u gh t
m t l
$
s e ec o i a a ut o o a a es s ro o
ly n d n t l y w tt n by
Ri h d M Hu d P d nt f t h M t g g B d C
os c ea r t fi l ly ina b k s c ren i ca a oo r ec e ri e

Y
su
or
c

pp li
k
ar
, ti t l d P i i p l f C i ty L d V l u
e
en
d
.

by Th e
e
r
“
,

Mo o dy
r esi
r nc C pi
N w
e
es
C or p ti
o
o
ora on,
e or
an
a

ea c
e

h a
. )
on
es .
”
o. ,
o
e
es
 SAF ET Y A ND SE C URI TY 1 5

In other words his fun damental asset ( the

,

site ) must be practically e x clusiv e for it is the,

condition of exclusiveness that gives it most

of its value .

H avin g assured himself as to this his next ,

care will be to s ee that the probable average

earn i n g capacity of th e prop erty in the poor
est times is well in excess ( 5 0 per cent at .

l east) of all requir em e n ts for i ntere st on this

mo rtgage and all prio r charges a s w ell as for,

full maintenance of the property in every re

spect The i n vestigation of this phase of the
.

enterpri se is f r eque ntly a d iffi cult one as re ,

ports and income accounts are often so mis

leading in arrangement and make up that the -

careless investor is frequently dec e ived by an

elaborate display of figures which may mean
very little I n Chapte r I V A nalyzing Rail
.
“
,

road S ecurities this subj ect o f railroad a c

,

counting is referred to in full detail .

But even though the i nvestor has thoroughly

i nformed himself regarding the above char
a c t eris tics there are many other uncertainties
,

which are to be avoided or overcome H ow .

ever ii he has bee n careful to s ee that the

,

conditions described above are all present in

a given investment his cha nces of losing his
,

money w ill be reduced to a minimum I f on .

,
1 6 A RT O F WA LL S T REE T I NVES T IN G
the other hand he ne g lects these precautions
, ,

and adopts other rules for analyzing th e s ecur

i ty or puts his trust in the say so of this or
“ ”
-

that authority then he stands in great danger

,

of s oo ner or later coming to grief as will be ,

shown i n the following pages .

M any years ago the careless legislation of

many of the S tates permitted railroad and
other corporations to decide for themselves ,

absolutely w i thout restriction the amounts of ,

obligations they might put out and therefor ,

i t was no wonder that the privilege was .

abused and the making of shares and bonds

, ,

the latter represented to be amply secured by

mortgage liens w ere carried to crim i nal ex
,

cess O n e illustration will suffice

. .

The old A rka n sas Central R ailway com

pany located in the S tate of A rkansas built
, ,

only forty eight miles of i ts proj ected road

-
.

The road was of narrow gauge with very light ,

iron and in ev ery way cheaply constructed I t

,
.

cost l ess th a n ten thousand dollars per m i le ,

including equipment A s has been the case

.

with most companies build i n g ra i lways in ne w

territory help in its behalf was asked from the
,

communities to be benefited and their bonds, ,

amounting to nearly half a million dollars ,

w ere given it by the counties cities etc U nder

, , .
1 8 AR T O F W A LL S T REE T I NVES T IN G
but i n rece i ver s certificates that had been pur
’

chased a t a great discount from the i r face $

T wenty or th i rty years ago nearly all fi rst ,

“ ”
class securities outside of governments and
,

“
municipals were steam railroad bonds and
”
,

stocks But w e no w have stocks and bonds

.

upon the market represent i ng nearly all c o n

c eiva bl e kinds of property i ndustrial and ,

manufacturing companies telegraphs tele , ,

phones g a s electric light and traction compa

, ,

n i es water works br i dges oil and gas wells

,
-
, , ,

factor i es and m i lls of every descri ption patent ,

rights of all sorts steamboat lines apartment

, ,

houses realty enterpri ses and even ceme

, ,

t eries A nd not only are properties of many

.

kinds used to issue bonds on but many kinds ,

of bonds a re often issued upon the same prop

erties Thus we find among our railroads and
.

other corporations not only first second and ,

third mortgages but income bonds debentures

, , ,

convertible bonds consolidated bonds r edem p

, ,

tion bonds renewal bonds terminal bon ds

, , ,

divi s i onal bonds sinking fund bonds bla nket

,
“
,

”
mortgage bonds collat eral trust bonds equip
, ,

ment bonds participating bonds j oint bonds

, , ,

and bonds ad nauseam unti l th ey lap and over

lap in seemingly endless complicat i on N ot .

that merely but one issue of bonds is some

,
 SAFE TY A ND SE C URI TY 1 9

times made the basis of othe r issues I nde ed .

,

one of th e mo n ey maki n g devices of the tim e

-

is th e formatio n of compan i es th a t issue their

bo nds o n the security of the oth er peopl e s ’

bonds that they have purchased either yield ,

ing a higher rate of interest or obtai n ed at

lower p r ic es than th ey expect to r ealize for
th e ir issu e s There seems in fact to be no
.
, ,

limit to the production of se c urities that a r e

sp r e a d b e fore capit a lists and investo r s The r e .

n ev e r w a s a time when it was so e asy to invest

mo n ey a nd to lose it O f th e securities that

.

are o ffe r ed with first rat e recomm en dations it ,

is probable that about one third a re actu a lly

-

good o n e third have some value and o n e third

,
-
,
-

a r e practically worthless H enc e the very nat

.

ural inference that whatever art there may be

in the matter of investing is to be ex e r cised
chiefly in the avoidance of unworthy o ff e r ings ,

a n d it is to that poi nt fi r st that a profitable dis

c u ss io n must be mainly directed .

For th e co ndition of things describ ed the ,

laws of some of our S tates in giving c o rpora

tio n s almost limitless power to issue negotiable
paper as well as in pe r mitti n g all sorts of com
,

pa n i c s to i n c o rporate themselves a re u n doubt, ,

e dl y
, very largely to blame O ur ba nks a re .

closely watched a nd very prope rly restra i n ed

 20 AR T O F WALL S T REE T INVES T ING
from tak i ng people s money on false pretens es
’

but is it much better for industrial and other

corporatio n s to take i t by mean s of legalized
fictitious evidences of value $ Banks and insur
ance compan i es are by no mea ns the only insti
tutio n s that n eed watching . O ne of the t e
forms that would seem to be worth considera
tion is legi slation prohibitory o f the creati on
by companies existing by authority of law of
stocks and securities not representing cash
actually paid into their treasuries or proprie
,

tary interests whose values are to be deter

mined by disinterested parties Texas has in
.

c o rp o ra t ed substantially such a provision in

her const i tut i on H er example should be fol

.

l o wed by all other commonwealths .

But the securi ty b ehind or beneath the d e

b entu re or oth e r paper obligatory is not the
only thing to be looked into by the i nvestor .

E ven the form of the docum ent may be import

ant A case in point inasmuch as it S hows how
.
,

the preparat i o n of an undertaking for the pay

m e nt of money may chan ge its apparent value ,

would seem in this con n ect i on to be approp r i

ately quoted S ome y ears ago certain town
.

ships in the S tate of M issouri were desirous of

aiding t he co n structio n of railroads wi th their
c redi t . Th e S tate L egislature to that end
, ,
 SAFE TY A ND SE C URI TY 21

passed an act authorizing the issue and sale of

bonds obligatory upon them ; but it wa s stip u
lated—a very singular provision— that i nstead ,

of b eing put out by the townships the bonds ,

should be executed by the officials of the coun

t i es in which t hey were located A ccordingly .

debentures aggregat ing several million dollars

were thus prepared and disposed of The bonds .

bore the seals of the counties and the signa

t ures of the i r o fli cia l s O n the back and at the
.

top of each signature in large lette rs were the

, ,

words county bond The instrument be gan

“ ”
.

wi th the recital in the usual form that it was

, ,

issued by the county but farther on and in the

, ,

smallest type employed came the statement ,

that i t was executed for and in behalf of a c er

tain tow nship which alone was to be responsi
,

ble for its payment These bonds were exten

”
sivel y advertised as county bonds and prob ,

ably in most instances certainly in many were

, ,

sold a s such and it was not until purchasers

,

p a rted wi th their money that they discovered ,

that instead of getting the bonds of Well

,

known and wealthy counties they had secured ,

only the obligations of townships they had

never heard of before I t was then man i fest
.

enough that they had been made the v i ctims of

a pi ece of ver y sharp and very shabby pract i ce .
22 AR T O F WALL S T REE T I NVES T ING
In , cases the buyers o f bon ds and other
na ny

securities learn when it is too late that their

, ,

purchases owing to some obscure and appar

,

ently i n nocent passage that had been over

looked o r disregarded are very di ff erent from
,

what they thought they were g etting H ow .

often have careless investors that supposed

they were purchasing undertaki ngs that
would be good for long terms of years and ,

probably paid prem i ums to obtain them ascer ,

ta in ed at the end of comparatively short inter

vals that they were forced to accept in pay

ment th e amounts nominated in the bonds in
consequence of unnoticed clauses g i vm g their
makers power to redeem their opti on $ The
lesson of such cases is obv i ous enough I t is .

that no one Should buy a bond or stock wi thout

first having carefully read the certificate This .

may seem like an unnecessary warning ; but in

truth it is a most materi al one Thousands a n d
.

thousands of dollars have been lost by the n e g

lect of this S imple precaution “
.I didn t read ’

the bo n d is the explanatio n that has ag a in

”

a nd again been o ffered when time has disclos e d

a di ff ere n t investment from the one intended

to be paid for The fact is that comparatively
.

few unprofessional bond and stock purchasers

ever carefully exam i ne the i n struments th ey
 SAFE TY A ND SE C URI TY 23

acquire . They look at the headings those ,

parts that are in big letters a nd take the r est ,

for granted I t is a most u nwise p r actic e

. .

Unless you a r e previously familiar with the

docum ent in all its parts don t fail to read it ,
’

before you buy R ead it all the little typ e as

.
,

well a s the big type the indorsements th e , ,

coupo n s and all D on t take somebody s else

, .
’ ’

word for it E xamine the seal the S ignatures

.
, ,

and even the embellishments S omethi n g may .

be disclosed that will change your mind and

save your money .

But if there are tricks in the making of

securities even more are to be apprehe n ded
,

in the selli n g of them and should be guarded,

against wi th corresponding diligence I t is a .

notabl e fact that no poor s e curities a re ever

o ffered They are always good so lo n g as th ey
.

are on the market I t is o nly after they have

.

been purchased that they prove to be worth

less I nterest ha s n ev e r been k n own to f a il
.

on bonds that are seeking i nvestors although ,

d efault has sometimes followe d very closely

on the sale of the last obligations I n d e ed it .
,

is no secret that interest is sometimes paid out

of the p r oceeds of the bonds the purchasers in ,

this way getting a portion of their own mo n ey

back while the process of marketi ng them is
24 AR T O F WALL S T REE T I NVES T IN G
going forward although such a th i ng has s el
,

dom been known to happen after the entire

issue has been dispos e d of The advertise
ments of some bond sellers are often marvel
-

lous productions N o such securities as they

.

have to o ff er have ever been on the market

before They are absolutely safe ; they pay
.

extra rates of interest etc etc The wonder

, .
, .

i s that with so much capital seeking i nvest

ment it is found necessary to advertise such
,

perfections at all $ I n such cases i t is hardly

necessary to say that the only safe rule for
i nvestors is to find other uses for their money ,

however strong the temptation may be .

A common expedient of bond makers and -

bond merchants is to fortify their issues with

-

the favorable opinions of eminent lawyers .

This is particularly the case when the obliga

t i ons of mun i cipal i ties or of companies that
are dependent upon contracts wi th municipal
it i es are o ffered some municipalities having in
,

the past Shown an unpleasant disposition to go

back on their undertakings N o except i ons
.

c a n b e taken to the practice referred to as ,

counsel learned in the la w should in such

cases always be consulted ; but the w riter has
to say that he has never yet known a security
so poor that a lawyer s opin i on could not be
’
26 AR T O F WALL S T REE T INVES T ING
the selling and th en pay both this interest
,

and d ivide nds on a large issue of watered

stock $ O r how c a n a poor agriculturist o ccu ,

i
py gn a half improved farm
-
out on the front i er ,

wi th a family to support and grai n selling

barely a bove th e cost of production pay ten ,

or tw elve per cent upon the capital with which

.

h e does busin ess $

By what rule or rules i s the investor to gov
e rn himself N o formula can guarantee h i m
.

absolute s a fety O ne thi n g however he c a n

.
, ,

properly cou nt upo n viz that he must expect

, .
,

to pay a fair price for a good security— one

that will r e turn him n o more than a moderate
interest on his money I f he wants to sp ecu .

late and is willing to take r i sks that is another ,

thing H e c a n then look for bargains The

. .

capitalist or inv e stor who se n ds his mo n ey into

a new section or puts it into a new mechanical
,

process or a new constructive enterprise may

, ,

or may not make a hit but for the ordinary and,

conservative operator the conditions of the ,

commercial and financ ia l world give warni ng

that only reasonable profits are to be looked
for The first and main thing to be studied is
.

safety A nd yet there is such a thing as goi n g

.

too far in the matter of prudence The in .

vesto r may pay too dearly for safety There .

 SAFE TY AND SE C URI TY 27

are s e curities which compared with oth ers

,

that are to be had sell at pric e s mu c h abov e

,

their real worth The r easo n is that ev erybo d y

.

k n ows them to be good and i nvestors who

,

don t wan t to take the trouble to i nv estig a t e

’
,

or a r e afr aid to trust both th eir own ju d gm en t

a n d th e cou n sels of their frie n ds are willing to
,

pay ext r a prices for them But there are

.

plenty of others that may be had at lower fi g

ures which a re just as goo d There is no
, .

reason in th e wo r ld why th e investor should

n o t saf ely i nv e st at a rate that will ge n er ally

yiel d him 4 p er c e n t to 5 p er c ent i nterest a nd

. .
,

hav e his investme nt as se c u r e as any p r op erty

c a n be under huma n sup e rvision A s h ere .

t o fo r stated with the creation of new enter

,

prises a nd properties a n d the d evelopme nt of

,

old ones n ew secu r ities are co nstan tly a ppear

,

ing in this country an d a fai r sh a r e of them

ought to be good I ndeed ou r s ecu r iti e s ought
.
,

to be the b est in th e world The su r e and rapid

.

growth of our r e sou r ces suppli es a r eliabl e sup

port a s lo n g as fair i ntellig ence and common
honesty attend their production The only .

thing is to c hoos e with di s c retio n s o many ,

d oubtful a nd ev en fraudul ent issu es appearing

at the same time ; but no more judgment is
2 8 AR T OF WALL S T R EE T INVES T IN G
really demanded than i n purchasing lands o r
cattle .

Two common and often fatal mistakes

should be avoided O ne is in relying solely
.

upon the advice of another N o one compe .

t e nt to form an opin i on fo r himself should put

his pecuniary interests unreservedly i n the
keeping of another S uch absolute confidence
.

invites betrayal By far the greater number of

.

losses to investors have been in securities pur

ch a s e d exclusiv ely o n the recommendation of
interested outside parties W hile it is well to
.

get th e opi n ion of a reputable broker the pur ,

chas er should investigate for himself The . .

other mistake is t o uniformly give preference

to listed securities AS pointed out at the be
.

ginn ing o f this article ma ny persons seem to

,

think that stocks and bonds must have a value

if they are quoted at some stock exchange for ,

getting ho w many fanci es have been bal

l o o n ed u ntil th ey have burst at su ch places .

O n the contrary such a position is likely to ex

,

pose them to manipulatio n for purely specula

tive purposes S tock excha n ge quotations are
.
-

often unsafe guides to buyers Th ey represent .

not merely the value of the property but also

the pitch of speculation at th e time When .

securities are converted into foot be lls for -

 SAFE TY AND SE C URI TY 29

gamblers to play with they a re p r etty certain

,

to be too high or too low The main adva n tage

.

they c a n have is a readi e r marketability in c ase

of a n urg ent need to sell ; but it is at the times
wh en such n e ed is likely to exist that th ey are
pretty c e r tain to be at the lower poi nt N o .

speculativ e help ca n lo n g take the place of real

valu e S ecurities in the long run must stand
.
, ,

upo n their merits and purchase r s have merely

,

to follow busi n ess pri n ciples as taught by the

canons of common sense .

I n seeking investments and especially lon g

,

tim e investments there are several thi n gs to

,

be taken into account There is not o n ly the

.

question of the kind of security to purchase ,

but the question of the time of purchase The r e .

are opportun ities to be looked for a s well a s

pitfalls to be shunned I t is duri n g periods and
.

seaso n s of depression when securiti e s are

,

fo rced upon th e market often to be sacrificed

,

— and such opportuniti e s are c ertain to c ome

if wait e d for lo n g enough— th a t the shrewd
i nv estor fi n ds his richest ha r vest That how.
,

eve r ca nn ot be said of the o rd i n ary investor

, .

H e usu a lly buys whe n s ecu riti es are up and

confidenc e is u n impai r ed and becoming fri ght
,

e ned a s the market values go down sells whe n ,

y are at the bottom and holds his m o n ey

t he
,
30 AR T O F WALL S T REE T I NVES T I N G
to r e invest in som ethi n g else n o better and ,

probably not as good whe n the tide has ,

turn e d A s a rul e the best time to invest is

.
,

when others are u nloading I n money matters .

it is nev e r s a f e to follow the crowd N or is .

it s a fe ( whi c h is little more than the expres

,

sio n of the same idea in another form) to pur

ch a se a s ecurity when it is on the boom
“
A .

p eculiarity of our money market conservativ e ,

as it is popula r ly supposed to be is that it is ,

co n sta ntly C hangi n g its favorites I ts o ffer .

i n gs come in waves I ts deali n gs at o n e time

.

may be chi efly in railways at anoth er in indus ,

trial obligatio n s and at another the excitem ent

,

may run to mining shares or mortgage s on

ra n ches and r eal estate F or the time all p r o
.

fess io na l brokers and bond and share sellers

urge their customers to adopt the popular
issu e of which as the result of the incre ased
, ,

d emand there is almost certain to be ex ces

,

sive if n o t fraudulent productio n To yield

, .

to the pressure of such a time is always risky .

O ld a nd tried securities like old friends are , ,

lik ely to be the truest and best .

O n e thing th e investor would do well never

to forg et is that th ere a r e a lways pl enty of
,

good securiti e s in the market N o one with .

money need ever fear that oth ers w i ll g et all

 SAFE TY AND SE C URI TY 31

the solid investments and in the a p p reh en, ,

sion that there will not be enough of that sort

to go around put up with an i nferior arti c le
, .

D on t let him choose what is not altoge ther

’

sat i sfactory und er the impression that nothing

,

else as good or better will o ffer I f he does s o .

,

sooner or later he will regret it S omething .

good always comes to him who waits with

money in his ha n d .

A nother thi n g of a precautionary nature it is

well e nough for the investor to do a nd that is ,

to scatter his purchas es The old adage about

’
.

not putti n g a l l the eggs in one basket appli es

with peculiar force to i nvestments The tenden .

c y with thos e having moderate sums to i nvest ,

and who ne e d to be the most circumspect is ,

to make up their mi n ds in favor of a s i ngle line

o f securities and put everything there Of .

course a failure i n that quarter is part i cularly

,

disast rou s The writ er kn ew a m a n s o m e

. ,

years ago who decided in favor of mun i cipal

,

obligations saying that he had satisfied him

,

self that o n the whole there was nothing else

, ,

so reliable A ccordi n gly he put his entir e

.

available means into them But practicing .

abu ndant precautio n as he supposed he , ,

divided his money equally among municipal

issues o f I llinois M issouri and K ansas th ey
, ,
3
32 AR T O F WALL S T REE T IN V ES T IN G
havi ng the most paper at that time on the
market H e thought he was entirely safe as to
.

principal But soon after a wave of repudiation

.

sentiment swept over that part of the country ,

and every one of h i s bonds were left in default .

I t i s well enough to scatter in kind as well as

in locality .

A ga i nst the theory of scatteri ng i nvestments ,

men so m etimes quote the advice of A ndre w

Carnegie to put all your eggs i n one basket
“
,

and watch the basket .

”
This pri nciple ho w
,

ever while sound enough for the expert or

,

specialist who is in a situat i on to at all times

see a nd watch the basket is not applicable to
,

the average ordinary i nvestor The average

.

investor simply cannot watch th e basket i n

“ ”

the way implied by M r Carnegi e and there

.
,

for it is a safe principle for him under all ordi

n ary circumstances to limit his Chances o f loss
,

to the greatest possible extent through a wi de

an d judicious distr i bution of his cap i tal
.
34 AR T O F WALL S T REE T I NV ES TIN G
bond iss ues secured on the sam e property but ,

their lien is entirely subsequent to the first

“
mortgage B ecause a bond is a first mort
.

”
gage one should not necessarily assume that
“ ”
it is a gilt edged security True it is bound
-
.
,

to be better than any other bonds secured on

the same property but the property itself may
,

not be worth the amount of the mortgage or ,

the business may not be earn i ng eno ugh t0 .

pay the interest as it falls due .

A second mortgage bond is a s its name , ,

indi cates always secured subsid iary to the

,

pr i or or first mortgage I f the first mortgage

, .

completely covers the value of the property ,

then of course the second mortgage has an

,

inferior standing only But many first mort .

gages amount to only a port i on of the value of

a property and in these cases a second mort
,

gage is frequently well secured and attract ive

as an investm ent To i llustrate : A property
.

worth and earning per

year may have issued a first mortgage amount
ing to and carrying an i nterest
charge of per year S uch a first mort .

gage bond would be regarded as high grade .

The company may then have issued a second

mortgage amounti n g to and carry
ing an i nterest Charge of
'

per annum .
 B O NDS AND WHA T T H EY REPRESEN T 35

In this case th e second mortgag e bo nd would

be high grade also as the aggregate a mount of
,

both mortgages would be but on a

property valued at and th e total
interest Charge of would leave a sur
plus ( based o n earni n gs of
, per year)
aggr e gati n g or more than times
the i nter est charge its elf O n the oth er hand
.
,

i f a property the value of which was but

,

with annual e arn i n gs of but $ 2 4 0 ,

0 0 0 S houl d issu e fi r st a n d seco n d mortgages of

,

the character a nd amou nts m entioned above ,

not o nly would the second mortgage bond be

of doubtful quality but the first mo rtgage
,

itself would be regard e d a s ve ry far from

“ ”
high grade -
.

Third fourth a nd fifth mortgages et c are

, , .
, ,

as their names i n d icate secured subs e qu en t to

,

the several pr e c e di n g issu e s a n d r e quire n o

separate comme nt except that the me r e fact
,

of their being subsidiary to several issues does

not of itself mak e them i nf erior in value .

O ther thin gs being equal the title of a bond ,

signi fies v e ry little The fifth mortgage bo n d

.

of the old N ew York Eri e Railro a d ( now as

sumed by th e E rie Railroad system ) a nd of
$

which there a r e outstandi n g a re not

any the less valuable because they are secured

36 A RT O F WALL S T REE T I NVES T IN G
as a fifth mo r tgage only but on the other
“ ”
,

hand they are d ecidedly high g r ade in resp e ct

-

to security as they are a lien ( subject to four

,

prior mortgages aggregat i ng on

4 4 6 miles of the E rie main lines A s these main
.

lines are easily worth ten times the amount

of all five mortgages it will b e seen at a glance
,

that th ey are all securi t i es of a most desirable

kind .

A consolidated mortgage bond is generally

created as a result of a reorgani zation a read ,

justment of fi nances or for the purpose o f pro

,

vidin g new capital where a property is already

mortgaged to some extent and a second or

,

third mortgage would not be well enough

secured to warrant a ready sale To cite an .

instance let us take the Fi rst Consolidated 5 %

,

bonds of the S outhern R ailway Company .

Th i s Company wa s formed in 1 8 9 4 as s uc
cessor to a large number of other ra i lroad
corporati ons operating throughout the S outh .

I t was necessary to finance the new company

wi th liberal capital to spend a large amount
,

of money on the properties and in these and

,

other ways to i ncrease the earning power o f

the company A s the properti es were already
.

mortga g ed i n various ways for more tha n

it was not found practicable fo r
 B OND S A ND WHA T T HE Y REP R ES ENT 37

the compa ny to issue an i ndependent mort

“
gage They therefore authorized a consoli
.

dated mortgage one o f the cardinal features

,

being the authorization of a very large issue ,

of which a su fficient amount were held in

reserve to retire the various pr i or divisional
mortgages as they matured This consolidated
.

issue runs 1 0 0 years and as the m a ny divi

,

s io na l and prior bonds mature at di ff erent dates

and some very qu i ckly it follows that th e

,

“ ”
consolidated bonds grow in security and
value a s the old issues are cancelled I n this .

parti cular case every prior issue will be ret i red

by 1 93 8 and most of them much sooner where ,

upon the consolidated issue w i ll become a first

mortgage .

A general mortgage bond i s of the same class

as a consol i dated mortgage Th i s is some
.

times called a blanket mort gage and is fre

“ ”
,

quently issued when there is but a single first

mortgage on the property I t is sometimes
.

partly secured by seco n d mortgage and partly

by first mortgage but usually it i s merely sub
,

sequent to two or more first and somet i mes

even consolidated or less well secured liens .

When this is the case a su ffic i ent amount is

generally reserved to tak e care of the other
bonds a s they mature .I n some cases the
38 ART O F W A LL S T REE T IN V ES TIN G
prior liens or portions of them are exchan g ed
, ,

“ ”
for th e g en erals on a mutu ally satisfactory
basis.

A prior lien bond is not necessarily a bond

of p r ior security at all except in a qualified
,

”
s ense The term prior li e n as applied to
.

railroad bonds nowadays c onnotes som eth i n g ,

enti r ely d i ff e re n t from what would naturally

be suppos ed The E rie R ailroad prior lien
.
“ ”

fou r s for instance are simply p rior to the gen

, ,
“

”
e ral lien fours a nd both are part of an issue of
,

a first consolidated mortgag e which was author

ized at the time of the reorganization in 1 8 9 5
to provid e new capital take care of old mort
,

gages etc The p r ior lien issue therefore s im

, .
, ,

ply ha s preference over th e general lien por

tion of the same mortgage The N orthern .

Pacific Baltimore and O h i o and a number of

, ,

other large railroad compani es have adopted a

similar devi ce .

A debenture bond i s not a mortgage but ,

Si mply a promissory note or promise to pay , .

I t is usually issued in the same form as other

bonds sometimes carryi n g coupons and some
,

tim es appearing in registered form W h i le .

both principal and interest are an obligation of

the compa ny issuing the bond yet i n the case ,

of a default the holder cann ot foreclose as he

 B ONDS AND WHA T T HE Y REPRESEN T 39

ca n in the case of a mortgage bo n d I n this .

respect the debenture is in ve ry much th e

same position a s a cumul a tive preferred stock ,

with the important exception that the latter

usually carries a voting power while the ,

former does not But debenture bonds like all

.
,

th e rest get their i nv e stment st a tus larg ely

,

through the character of the corporatio n issu

i ng them S ome debenture issues like those
.
,

on the Chicago N orthwestern system are in ,

such high standi n g ( because of the vastness

and general solidity of the compa ny ) as to be
quoted at a very high p r emium the five s sell ,

i ng at over 1 1 5 — while others are in the cate

gory o f third rate stocks -
.

A collateral trust bond is an i ndirect mort

gage o n a piece of property made through the ,

deposit with a trustee of other securities which

are usually directly secured S ometimes how .
,

ever the collateral s o deposited consists of

,

both stocks and bonds a n d in some cas es of

, ,

stocks only L ike oth e r ki n ds of bonds there

.
,

“ ”
are all sorts a n d conditions of collateral
i ssues some being secure d by o ne collateral
,

only and others being secured by a h ete r o

g e n e o us vari ety of good bad and indi fferent
,

stocks and bonds I n some cases bonds a re

.

secured partly by deposit of collateral an d

40 AR T O F WALL S T REE T INVES T IN G
partly by mortgage on some property I n such .

“
instances they are described as mortgage
”
collateral trust bonds etc , .

A convert ible bond is an issue which carr i es

a right or privilege for conversion into some
other i ssue of bonds or stocks There are.

many kinds of convertible bonds and they ,

carry convertible clauses for many and diverse

reasons Thus U nited S tates S teel Corpora
.
,

tion second fives were convertible i nto pre

ferred stock at par ; E r i e R ailroa d four per
cent convertibles are convertible into common
.

stock on the bas i s of $ 2 0 0 i n stoc k for $ 1 0 0 i n

bonds before A pr i l I 1 9 1 5 ; Baltimore
, O hio
convertible debentures are converti ble i nto
common stock at par on any i nterest day etc , .

S ometimes these clauses are i nserted in mort

gages to gi ve them a speculative value ; in
other cases to provide for the retirement of
the debt by its conversion into stock U sually .

the act of converting is Opt i onal wi th the

holder .

A j oint bo nd i s one issued or assumed by

.

two o r more corporati ons Thus the Great

.
,

N orthern N o rthern P acific j oint collateral

-

trust fours secured by deposit of Ch i cago Bur

, ,

li n gto u $ ui n cy R ailroad stock are the j oint

obligation of the two controlling compani es .
42 AR T O F WALL S T REE T I NVES T IN G
unattractive but would be ent i rely unsalable
, ,

for the reason that the p r opert y on which they

are directly secured is not valuable enough in
itself or ha s not the necessary earning power .

I t must no t be assumed h owever that the

, ,

m ore formal guarantee gives the bond its

value Th i s latter depends e ntirely upon th e
.

sta n ding and financ i al streng th of th e guar

antor Thus a bond i ssue guaranteed by the
.
,

N ew York Central system will have a far bet

ter sta n ding than one guaranteed by a c o m
pany like the D enver S outhwestern the ,

standing of which has been of a more or less

uncertain and speculat i ve natu r e .

I nvestors in guaranteed bonds should exam

ine th eir security very C losely to ascertain
whether the guarantee c a n be abrogated in
any way and whether it actually covers both
,

principal a n d interest I f the guara nteei ng

.

company its elf seems likely to ever repudiate

the bond its entire value will then of course
, , ,

revert back to the standing of the mortgage

itself and in any event this latter should be
, ,

i nvestigated with care The guarantee of a

.

bond is usually embraced in the phraseology

of the bo n d its elf o r else is specifically stated
,

by the actual e ndorsement of the gu arantor .

 B O ND S A ND WHA T T HE Y R EPRESEN T 43
I

A n assum ed bond is in some respects similar

to a guaranteed bond being an issue the pay
, ,

ment of which both principal and interest is

, ,

“ ”
assumed by the controlling company The .

e ff ect is in some sense the same as a guara ntee

a nd the bond becomes as a result a direct
, ,

obligation of the assuming corporation There .

“ ”
are many hundreds of assumed bonds dealt
in in W all S treet of every ki n d and de scripti on
, .

G reat care should be tak e n however in exam

, ,

i n ing a so called assumed bond M any large

-
.

railroad corporations have acquire d contr ol of

other properti es without actually assumi n g
their obligations . F requently the acquiring
company for strategic or other reasons vo lun
, ,

tarily takes care of these obligatio n s without ,

being legally obligated to do so But unless a

.

bond issue has been defi n itely and formally

assumed by the controlling compa ny its stand ,

in g as an investme n t must depe n d chiefly on

the actual property its elf a nd not on the stan d
in g of the co ntrolli n g corporatio n I nstances
.

of a ssumed bonds a re such a s the K entucky

Ce ntr a l ; A tlantic K noxville
, N orth ern a nd
the E va nsvill e H en d e r so n
, N ashville issues
in th e Lo uisville N ashvill e system The .

payme nt of both pri n cipal a n d interest of th ese

issues h a s been made an obligation of the co n
44 AR T O F WA LL S T R EE T I N VE ST IN G
trolling company O n the same system w e.

fi nd s everal mortgages of the N ashville Chat ,

ta n o o g a S t L ouis R ailway wh i ch have not

.

“ ”
been assumed at all These issues stand .

entirely o n th e ir o wn merits and are an obliga ,

tion of the N ashville Chattanooga S t L ouis

, .

R ailway only the latter being controlled

,

through stock own ership by the L ou i sv i lle ,

N ashville Railroad .

A divisional bond i s usually an obl i gat i on of

a large railroad which is secured on some sp e
c ifi c division of the property O n the Ch i cago .
,

M ilwaukee S t P aul R ailway all the bond

.

issues outside of the general mortgage are

, ,

divi sional liens Thus the I owa. D akota ,

D ivision 7 3 are a d i rect obl igat i on but secured ,

by mortgage on the di vision extending from

Algoma I owa to Chamberlai n S outh D akota
, , , ,

consisting of 3 5 5 m i les The Ch i cago L ake

.

S uperior D ivi sion first 5 5 are a direct obliga

tion but secured by direct mortgage on 7 5
,

miles of road extending from R o ckland I ll i nois , ,

to P ortage City M ichigan The cardinal d i s

, .

tinction between a divisional and an assumed

bond is that the former i s a d i rect obl i gat i on
and is usually issued by the ma i n corporat i on ,

while the latter is ( or originally was ) the obl i

g a t io n of a subsidiary corporation the o wner ,
 B OND S AND WHA T T H EY REPRESEN T 45

ship or control of th e stock or property of

which has been acquired or is possessed by ,

the main company A ssumed bo n ds a re some

.

times spoken o i as divis i onal issues a n d in a ,

broad sense they are but the specific meaning

,

of the term i s as explained above .

A n income bond is one on which the pay

ment of the inte r est is dependent on i n come .

That is to say while the principal is a mort

,

gage and legally must b e taken care of at

maturi ty the i nterest rate is not a fixed
,
“

charge and no fo r eclosure proceedings c an

,

be i nsti tuted in case the interest is not paid .

The payment of the latter is entirely dependent

on the earnings of the company it being gen ,

era ll y agreed that if the interest is earned it

shall be paid ; otherwise not Ther e are sev, .

eral C lasses of income bonds S ome are not .

“
a mortgage These are usually known a s de
.

bentu r e incom e s
”
O th ers bear a cumulative
.

C lause which provi d es that i nter e st when un

paid shall accrue and all accrued i nterest be
, ,

paid or satisfied before the curre nt interest is

paid These are known as cumulativ e income
.

bonds S till others are convertible i nto securi

.

ti e s o i another C lass such as preferred stock

, ,

a n d are k n own as converti ble incomes O thers .

have prefere nce ove r i nf eri or i ssues and are

46 A RT O F WALL S T REE T INVES T IN G
known as preference incomes Thus on the .

Central of G eorgia R ailway there are issues of

fi r st second and third incomes all carrying the
, ,

right to 5 % interest per annum when earned , .

I n this instance 5 % must be paid on the firsts

before the seconds receive a nythi n g and the ,

seconds must of course receive their 5 % before

the thirds come in for any interest I f enough .

is earned to pay the full amount on th e firsts ,

but not enough for the full amount on th e

seconds then the latter usually receive what
,
“

e ver amount o i th e divisible income is l eft .

This may amount to 1 % or or bei n g

dependent on what th e road may be currently
earning .

I t does not follow however that i nterest is

, ,

always paid on income bonds even wh en the

,

property earns it O ne fr equently hea r s th e

.

remark that such and such a comp a ny is

,

“
showing the full interest on i ts incom es or
”

the full d i vidend on its preferred shar e s .

“
Showing is not necessarily payi n g a nd pay ,

ments depend not merely on the earn i n gs but ,

also on the judgment of the management as to

whether it is wise to make the payments S ome .

ma nagements are far more conservative in this

r e spect than others and th e most far s eei n g
,
-

a n d cautious men who handle the finances of

,
 B OND S AND WHAT T HE Y REPRESEN T 47
”
a large property will ge n erally go slow in
,

the matter of paying out mo ney on incomes

and dividends unless the company is earn ing a
considerable surplus over the amount required
for the payment or has already accumulated a
,

tangible surplus from earnings to fall back

upon .

A s i nking fund mortgage i s one which car

-

ri es a provis i on setting aside a port i on of earn

ings year by year for the purpose of retiring
the bonds at or before maturity Ther e are .

many kinds of sinking fund clauses in bonds

-

and they act in several di ff erent ways The .

best known form is a provision requiri ng th e

company to deposit with the trust ee period
ically a certa i n sum of money sometimes a p er
,

centage of the gross or net earnings some ,

t imes a percentage of the outstanding issue ,

and sometimes simply a fixed sum of money

each year ; the trustee th en e i ther calling in by
lot a sufli c ient number of the i ssue to exhaust
the amount of money he has received or if , ,

more are o ffered at the callable price ( this

price is usually a prem i um figu re 1 0 2 1 0 5 1 1 0
, , , ,

then buying the bonds in the open market

at the lowest prices o ff ered The bonds so
.

acquired are then cancelled and thus the i ssue

is grad ually reduced . O ther forms of s i nking
48 AR T O F WALL S T REE T INVES T IN G
funds are where the bonds so acquired by th e
trustee are
“
kept al i ve the interest which is
”
,

paid thereon being added to the fund and used

for the purpose of buyi ng still more bonds .

S till other funds require that the bond issue

itself be allowed to run until maturity and
that the money set aside i n the fund be in
vested in other secur i t i es and thus the whole
,

fund i s held intact unt i l the ent i re bond issue

actually matures .

There are a great many sink i ng fund -

bonds in existence but in the ra i lroad invest

,

ment field they are not as popular nowadays

,

as in former times The permanent investor

.

does not like a s i nking fund wh i ch may result

-

in d i sturb i ng h i s investment at any time even ,

if he does rece i ve a little prem i um and th i s is ,

especia l ly tru e of savings banks and large co r

p o ra t e investors like insurance compan i es ,

large estates etc F urthermore i n the case of

, .
,

a bond which is subject to call an art ific i al ,

value is created ; i t will not sell much above

th e callable pri ce for the reason that i t is call
,

able at any ti me O n the other hand if there

.
,

is but l i ttle market for the bonds an art ificial

demand is created at the tirh e of each s i nkin g $

fund purchase and thus i ts attract i ons as an

,

investment purchase are seri ously i nterfere d

50 AR T O F WALL S T REE T I NVES T IN G
funds I n the case of the forme r the proviso
.

usually is that a c ertain amou n t ( often 2 or

3 cents ) b e set aside with every ton of co a l
mi n ed the accumulations b e i n g used in th e
,

usual ways for the r etirement pe r io d ically of

the issue .

A n extended bond is an issue which has

matured and by agreem ent with the owne r s
has been extended for a furth er period instead ,

of a new issue being creat e d to take its plac e .

O ften bonds are extended for a few years o nly ,

but sometimes th e ext en sion reaches on over

several decades U sually in the case of rail
.
,

road issues the rate of interest i s reduced at

,

the t i me of the extension and somet imes new

bonds of the same mortgage but with sheets ,

of coupons at reduced rates are exchanged for ,

the old ones There have been instances

.

where the old bonds have been reta i ned and

stamped wi th the extens i on clause and new
“ ”
,

sheets of coupons supplied separately .

There are several i ssues of extended bonds

now run n ing as divisional liens on the E ri e
Railroad system These are the N ew York
.

E rie first second third fourth and fifth mort

, , ,

gages O ri ginally issued in the 4 0 3 and 5 os

.
’ ’

at they all matured in the 7 os and 8 0 5 ’

$
’
,

and have been extended for forty to fifty years

 B OND S AND WHA T T H E Y REPRESEN T 5 1

mo r e a t 4 4 % d 57 ,When they finally

an 0 .

matur agai th y will this ti m be reti r ed

e n e e ,

and bo ds of the E ri R ail r oad gene ra l lien

n e

issue, now held in reserve will t a ke their ,

p lac es .

A n u nderlyi n g bond i s a gen eral term

d escribi n g a ny i ss u e which precedes or is p r ior
in mo rtg a g e s e cu r ity to som e subs eque n t issu e .

Wh en a bo n d is spoken of as und erlyi ng it is ,

g en era lly so r efe rred to in c o nne ction with

s ome g e ne r al or ju n ior issue whi c h may or ,

m a y n o t provid e for reti r i n g this issue at

m a tu r ity Thus any bo n d i s sue is under
.
“

lying which has a junior secu r ity followi n g it

”
.

H enc e a bon d n e ed not n ecess a rily be a fi rst

,

mo r tg a ge to be describ e d as u n de r lying
“
It .

m a y itself be subject to a further mortg a ge

or mortg a ges which u n derlie it O n many .

rail r oad syst ems a nd inde e d in oth er corpo ra

,

tion s there a re f r eque n tly s ever a l layers of

“ ”

u n d er lyi n g issu e s and o n portio n s of the E ri e

,

a nd of th e R e a di n g system s there a re as ma ny ,

a s t en mo rtgages se cu red und erlyi n g or if

“ ”
, , ,

you wi sh to reverse the viewpoint ove r lying

“ ”
,

o n e a n oth e r .

A refundin g mortga ge bon d is a n iss sue

es p ec ially c r eated for taking car e of matu r i n g

issu es supplyi n g addit i onal capital etc a n d

, , .
,
5 2 AR T O F WALL S T REE T I NVES T IN G
for reducing fixed charges The modern t e .

funding bond on steam railroads is usually

an issue running one hundred years bearing ,

a comparat i vely low rate of interest and gen ,

“ ” “
orally secured by a blanket mortgage on all
the property now o wned or hereafter acquired ,

subj ect of c ourse to the pri or mortgages which

, ,

are to be retired as they fall due O ften a .

,

very large i ssue is authori zed in order that ,

funds may be available for future acquisiti ons .

O ne of th e first large refunding issues was that

of the N ew York Central refunding
mortgage issued in June 1 8 9 7 The author
, .

ized issue wa s of wh i ch $ 7 0 ,

were ori ginally reserved to reti re c er

tain pri or liens wi th ,
for premiums
on the bonds The remain i ng
. w ere
to be i ssued for new construction or property ,

after D ec 3 1 1 9 0 3 at a rate not exceeding

.
, ,

per annum .

I n authorizing these bonds the maturi ty of

several underlyi ng l i ens was ant i c i pated by a
fe w years I t so happened that all the ma i n
.

l i ne mortgages o n the N e w York Central sys

tem matured between 1 8 9 7 and 1 9 0 5 and in ,

authoriz i ng the new mortgage it was

made a part of the plan to allow holders to
exchange the i r old bonds at once on an equi t ,
 B O NDS AND WHA T T HE Y REPRESEN T 5 3
able ba is a nd without waiting for the dates of
s ,

maturity This excha n ge plan was made

.

optional with the old bondholders but a lar g e ,

proportion of them took advantage of it To .

day all the prior liens have been retired and

nearly of the three and one half -

per cents are today outstanding I t will be .

observed that they are now an actual first l i en

on the main lines of the system and their re ,

fundi n g f eatures have ceased to be a factor .

There are today a large number of refunding

i ssues and because of the i r improvi ng pos i
,

tion th e len gth of time they run and so forth

, , ,

they are generally more popular with perma

ne nt investors than the prior issues which
usually underlie them .

A part i cipating bond is a modern term

describin g an issue whi ch is entitled to partici
pate in i n com e or profits u nder c ertai n co n di
,

tions b eyond its fixed rate of interest The

,
.

most n otabl e i n sta n ce of a pa r ticipating bond

were the O rego n S hort L i n e R ailroad partici
pating fou rs issued in 1 9 0 2 but called for pay
, ,

ment and ca ncelled on F ebruary 1 1 9 0 5 These , .

bo n ds we r e issued to finance the purchase by

the U n ion P acific inter ests of N orth e rn S ecuri
ti e s Company stock a nd the latter was d ep o s
,

it ed as collat eral with the trustee The mort.

54 AR T O F WALL S T REE T I NVES T IN G
g a ge requir e d that i n addition to receiving 4 %
interest the bonds wer e to participate in any
,

divide n ds over 4 % that the N orth ern S ecuri

ties Company stock might pay Thus when .
,

the N orthern S ecurities Company dividend

rate wa s increased to these bonds t e
c eived a dividend of 1 % i n a d dition to the ir

regular interest and of course S hared to an

, ,

exte n t in th e speculat i ve value thus engen

,

dered by a n additional div i sion of profits The .

N o rthern S ecurit i es merger being afterward

set aside these participating bonds were large
,

l y converted into a new refunding issue of

fours gua r anteed by the U nion P ac ific Rail
,

road and the balance were c alled and pai d o ff

,

at the redemption price of one hundred and

five .

An equ i pme nt bond is an issue created to

acquire equipment and is secured directly ,

upon locomotives cars and s o forth I t ir e

, , .

quently happe n s that a railroad finds i t nec os

sary to increase its equipment rapidly in order
to handle a growi n g business in the most eco
n o m ic a l way I n most cases large purchases
.
,

of this ki n d involve the borrowing of money ,

as railroads do n o t always have funds available

for such purposes I n view of this situati on
.
,

“
e quipment trusts or equ i pment bonds have
 B O ND S AND WH A T T HE Y REPRESEN T 55

been invented These usually run for short

.

periods only generally being paid o ff in instal

,

ments or serially rangi ng over several years

, .

I n some ca ses th e payment of the principal of

’

these equipment mortgages is done out of

current earnin gs ; in other cases out of the
proceeds of other bond issues O ften there are .

several issues of equipment obligat i ons on

large properties maturing at di fferent peri ods
,

and secu r ed on di ff erent groups of locomotives

and cars E quipment bonds usually bear the
.

current rates of interest which may be p r evail

ing for a good security at the time they are is
sued They are n early al ways a well protected
.
-

obligatio n a s they cover tangible p r operty

, ,

the value of which is easily dete rmined .

I n addition to the foregoing there are vari ,

ous other desi gnations sometimes given to

bond issues such a s land grant bonds trust
, ,

mortgage bonds currency bonds a nd so forth

, , ,

which have either bee n covered in the more

general terms described in the foregoi n g pages ,

or else carry names which are su fficient de

s c rip t io ns in themselves Thus currency bonds
.
,

“ ”
are issues which bear no gold clause but are ,

payable principal and interest in the currency

, ,

of th e country whatever that may happen to

,

be D ur in g the days of the free silver a g ita

.
-
56 AR T O F WALL S T REE T I NVES T IN G
tion and for nearly a d ecade before nearly all
, ,

railroa d s a nd finan ciers inserted the gold“

”
C lause in bonds which wa s simply a state
,

ment printed in full on each bond and coupon

to the e ff e ct that the i ssue would be paid not ,

“ ” “ ”
in money or currency but in gold Thus , .
,

the gold clause came to be a featur e of the ut

most importance for it was almost un i versally
,

held ( and especially in W all S treet ) that fre e

coi n age of silv e r would mean an appreciation
of one hundred per cent in the value of gold .

as measured by the money sta n dard W hether .

this would have occurred or not is still a

mooted question among the students of the
currency problem but in reality if the rail , ,

roads had under such a conditio n been obliged

, ,

to pay in gold it will be seen that they would

,

all have defaulted on both pri n cipal and inter

“ ”
es t. Therefor th e gold clause was largely
sent imental after all L ike the guarantee .

clause of a bond whose guarantor had not the

proper resources to take care of its obligations
in case the demand came upon him s o the gold ,

C lause while sentimentally beneficial to sellers

,

of bonds could not have been of much p ra c

,

tical usefulness if the actual conditions ha d

come about which it wa s created to circum
vent But as in every other walk of life um
.
, ,
58 AR T O F WALL S T REE T INVES T IN G
astray A s an example let me cite the case of
J

. ,

the R ock I sland Company This is a very .

l ar g e corpo ratio n with capital runni n g into

,

th e hund r eds of millio n s and cont r olli n g in the

n eighborhoo d of mil e s of r a ilway lines .

I ts secur ities a re about as hete r ogeneous as

they coul d possibly be made even if they had ,

been c reated a n d brought together by design

rather than by accident I n all there are up
.

w a rds o i sev enty bond issues on the system ,

i nc lu d i n g n early every conceivable k i nd of

mortgage good doubtful and indi ff erent There
, , .

are first mortg a g es of ve ry infe rior worth and

bo n ds n o t mortgages at all and yet of high ,

sta n di ng H ow e a s y it is ther efor to e r r in

.
, ,

passi n g upon bo n ds in this system u nless a ,

goo d d e a l of general fun da m en tal knowledge

is first a cquire d Thus o n e might n aturally as
.

sum e that th e four per cent collateral bonds of.

this company due in 2 0 0 2 were a sounder in

, ,

v estm ent th a n th e refu n di n g fours of 1 9 3 4 or ,

that the gold fours of 1 9 0 8 1 8 were better -

s ecured th a n th e g eneral mo r tgage fours of

1 9 88
. A littl e exp ert kn owle d ge in these mat
ters will s et the judgme nt right how ever ; a nd ,

this fund a men t a l k n owledge o nce gai n e d and

unifo r mly employ e d in th e judging of bo n ds
will alw a ys p r ov e o f i nfinit e v a lue to the pro s
p ec tive i nvestor in W all S treet .
 Stoc ks a nd Wha t they Are
E cardinal dist i nction between bonds
and stocks is clear simple and concisely
,

explain e d Bo n ds r ep r esent or are secured by

.

li en s on property S tocks are the property

. .

S ometimes p eopl e fail to realize that stocks are

the property itself and persist in assuming that
th ey are merely a sort of legal attachment
to it But this i s entirely erroneous When
. .

o n e own s s tock in th e U ni ted S tates S teel Cor

p o ra t io n he
, is actually a part ow n er of those
great properties but if he owns a bond of thi s
,

corporatio n he merely shares with others a

mortgage which is secured on the property .

H enc e if a stockholder he gains or loses when

, ,

th e property appreciates or depreciates in earn

in g power or v a lue ; but if a bo n d holder in a

w ell secured mortgage he neither gains nor
-
,

loses a s the earni n gs and busi n ess rises or falls ,

but his asset remains practica l ly statio n ary in

v alue . S tocks are also affected by various
60 AR T OF WALL S T REE T INVES T IN G
other i nfl uences whi c h in no way a ffect bonds .

Thus the stockhold er bei n g a joi n t ow n er with

, ,

others of th e a ctu a l prop erty th erefor has at , ,

l e a st theor etically a voice in its managem ent

, .

This voice is represe nted i n his voting

“ ”

pow e r e a ch stockholder havi n g the right to

,

cast one vote for each share of stock he owns ,

at a nnu a l meetings c a lled together for the elec

ti on of o ffi c e r s and directors or at special meet
,

ings call e d for various other purposes such as ,

authorizing mortgages new issues of stock, ,

etc .
,etc U sually preferred and common
.

stocks have equal voti n g power but there are ,

exc eptions Where this i s not true and where the ,

preferred shares have two or more votes to the

common stockholders one O n the other hand .

cases exist where the preferred stockholders

waive th eir voting power in cons i deration of
rece i vi ng regularly a specified rate of divi
dends and only re assume their right in case
-

their I ncome is discont i nued This same pro .

vision has sometimes been made i n bond is

sues usually income o r debentur e bonds
,
.

A common stock is an issue wh i ch bears the

designation common to dist i nguish i t from a
“ ”

“
preferred i ssue of the same corporation I f
”
.

no preferred issue exists the qualifying w ord

,

“
common i s not necessary and is not usually
”
 S T O C KS AND WHA T T HE Y ARE 61

employed I n such cases the issue is simply re

.

ferred to as such a n d such a stock M any of .

the railroads and industrials which are dealt in

in Wall S treet have both common and pre
ferred issues however R oads like the N ew
, .

York Central P ennsylvania etc are the ex

, , .
,

c ep t io n rather than the rule Of one hundred .

and thirty four railroads and industrials whose

-

issues are a ctiv e on the S tock E xchange and

“ ”

ar e daily quoted in papers like the N ew York

E vening P ost eighty eight have both pre

,
-

ferred and common stocks outstandi n g wh i le ,

only forty six have but one class of stock

-
.

Common stock is generally entitled to divi

dend s from earnings o nly after all pri or
charges and pref erred stock divide n ds have
been satisfied I n other words it is the last
.
,

security to be taken care of in the dividing of

profits H ence the common stock is more
.
,

often a speculative or semi speculative securi ty

-

than preferred stocks or bonds I n ma ny cases .

common stocks have never received dividends

and probably n ever will Their chief value.
,

under such con d itions is measured partly by

,

their voti n g power and partly by the fluc tuat

in g value of the equity in the property of
which they are shares Thus in the case of
.
,

the common stock of the Wabash R ailroad ,

62 AR T OF WALL S T REE T INVES T IN G
the p r es en t v a lu e o r c o s t a side f r om t em
,

p o ra ry speculat i ve manipulation is measured

,

almost entirely by the vot i ng po w er as there

-
,

is no immediate prospect of dividend payments

of any kind and the equity back of it is s o
,

nebulous and uncertain that it Cannot be sanely

measured at all Thi s is also somewhat true
.

of stocks like U nit e d S tates S teel common and

R epublic I ron S teel common While these .

stocks may temporarily in an income account

, ,

Show an apparent ear ning power yet when we ,

examine their incomes over a reasonable period

of time it is usually found that the value is
,

almost purely speculative and that while in

,

prosperous times they may earn a large s ur

plus yet in per i ods of depression even the d i vi
,

d en ds on their preferred stocks are placed i n

j eopardy .

W hile common stocks are usually entitled

to all divisible earnings after payment of inter
e st charges sinking funds and preferred d i vi
,

d ends yet there are exceptions to this rule

, .

I n the case of many railroads the preferred ,

issues share certain earnings after the common

has received a given rate F or instance the
.
,

preferred stock of the Ch i cago Mi lwaukee ,

S t Pa ul Railway has a prior right to

. th e
co mm on then receives after which each
 S T O C K S AND WHAT T H EY ARE
class shar es p r o rata in a ny further division
of profits Th ere are other instan ces of a g en
.

e ra l l y similar n a tu r e in some cases the co m

,

mon receiving only o n e h a lf of the divisibl e

-

surplus over the pr eferr e d divide n ds the other ,

h a lf goi n g to the preferred shares th emselves

as a dd itio nal d ivid ends I n this case a given
.

p r efe r red stock might first rece i ve then

both comm on a nd p r efe r red 1 % each or more ,

as th e case might be Co n s e que ntly wh en the

.
,

common is b eing paid the pref e rred will

be r e c eivi n g 1 2 % per a n num .

A preferr ed stock is a portion of a corpora

tion s capital issue which tak e s precedence over
’

the r emainder either as to assets or dividends

, ,

or both Th e re a re many di ff erent c ha ra c teris

.

tics ih preferred stock issues ; some have cumu

lative and some non cumulative divi dend
-

clauses ; some have prior s ecurity as to assets

a nd some not ; some have e xclusive power over

the issuing of new mortgages or i n creases of

stock issues a nd some hav e n o t The Atchiso n.
,

Top eka S anta F e Railway requires that its

preferred stock r e c eive 5 % non cumulative -

d ividends ; that it have preference over the

common shares as to assets ( up to its face
V alue ), and that no new mortgages or addi
t io na l preferred stock be issu e d without the
64 AR T O F WALL S T REE T I NVES T IN G
consent of a majority of the holders By non .

cumulat i ve is meant that in c a s e th e dividend

“ ”
is not paid in a given year it may be skipped
,

“ ”
entirely wip e d o ff the slate so to speak and
, , ,

in future only the regular rate n eed be cur

rentl y paid before beginning payments on the

common stock I t is therefor obvious that

.
, ,

the non cumulative clause in a preferred stock

-

is of advantag e to th e common holder and ,

may become a decided disadvantage to the

preferred holder .

W hile most railroad preferred stocks are

non cumulative as to dividends this is not s o
-
,

sweepi n gly true of i n dustrials O f eighty .

f o ur active indust r ial preferred stocks de

scribed in M oody s M anual for 1 9 0 5 fi fty eight
’
,
-

carry cumulativ e clauses a nd twenty six non -

cumulative the pro portion of those with cumu

,

lative clauses bei n g 6 6 70 t o the whole I n the .

case of a cumulative stock all back dividends

are regarded as an actual liab i lity and must be ,

paid before those currently required are sat i s

fi ed The result of this is that when the corpo
.

ration can not pay the full dividend or any of it ,

the a mou nt unpaid accumulates as a direct obli

g a tio n. M any industrial preferred stocks are
in a rr ears on their dividends A mong such at.

th e present time may be mentioned A meri can

66 ART OF WALL S TREE T I N V ES T IN G
company was actually reorganized and its cap i
ta l iza tio n entirely transformed for the purpose

of financing the accumulations of over 4 0 % of

back preferred divide n ds a nd to get ri d of the
high 8 % dividend Charge for the future .

S tocks are not nearly so heterogeneous as

are bond issues B esides the ordinary stock
.

and the two classes of common and preferred

the r e are comparatively fe w i ssues w hi ch do
not come under these headings Amon g these .

few may be mentioned debenture stock a ,

special kind of issue popular on some of the

Canadian roads and also on the Chicago G reat
,

W estern R ailway A debenture stock is gen

.

era ll y regarded as being i n the same category

as a high grade preferred i ssue wi th us ually

-
,

s o me kind of special feature to add to its s ec ur

ity As a matter of fact however its position
.
, ,

and the earn ings of the compa ny are the proper

measures of its value and not i ts debenture
“ ”

feature The Chicago Great W estern R ailway

.

“ ”
debentures are guaranteed to pay 4 % inter
est the guarantor being the road itself But
, .

this guarantee is not a more binding obligation

than would be a cumulative clause in a p re
ferred st o ck a nd if the latter had prefere n ce
,

as to its assets its legal position w ould be in

,

every way a s secure .

 S T O C KS AND WHA T TH EY ARE 67

In analyzing or judging the value of stocks

in g eneral quit e di ff erent methods should be
,

employ e d i n the various classes of corporat e

issues S tocks of railroads industrials trac
.
, ,

tions mines and so forth while all of the same

, , ,

speci e s are e ach of a di ff er ent ge nus and they

, ,

are all the r esult of di ffer ent evolutiona ry pro

cesses Thus most of the railroad stocks o c
.
,

c up y a much higher pla n e as i nv e stm e nts than

do the industrials and it is gen erally felt

,

that th ey are safe r a n d less speculative .

This is due to sever a l causes I n the case .

of the older issues th e railroad properties

,

of which they are part have greatly a p p reci

ated i n value and earning power ; th ei r terr i to
ries have grown vastly in population and their ,

rights of way terminals and other advantages

,

( acquired ma n y years ago ) have all become,of

enormous value W hile they may have origi
.

nally represented little beside sp eculat i on and ,

“
their properties may have been mortgaged up
”
to the hilt s o to speak yet like the owner of
, , ,

a piece of land in the heart of a growi n g C ity ,

they have enjoyed the f elicity of seeing an

enormous increment add ed to the value of their
property over the period which may have
elapsed since the early speculative days I t .

w a s not s o many years si n ce the D elaware .

68 A RT OF W A LL S TREE T I NVES T IN G
L acka wanna W estern R ailway w as re

garded a property wh i ch while not very

as ,

heavily bonded w ould probably never be able

,

to earn or pay more than a 7 % dividend on i ts

stock i ssue I t could never become a fast
.

freight l i ne nor a through passenger l i ne like

,

the P ennsylvani or the N e w York Central

a .

I ndeed it through connections w ere not

, s

thought t be as good o those of the E rie as ,

and whi le i t w i n every way sounder fi n n

as a

i l ly than the latter yet it

c a perat in g methods
, s O

w ere re garded as more or less ant i quated and

i t bore the n i cknam e of delay linger and “
,

wait Certainly it future could not equal

.
”
s ,

i t w s thought that of the Central R ailroad of

a ,

N e w Jersey A nd yet be ause of the vast

.
, c

growth of populat i on along i ts l i ne the great ,

development and concentrat i on of the anthra

cite coal propert i es throu gh wh i ch i t runs ,

combined wi th vari ous traffic alliances the ,

value of the property h apprec i ated to a po i nt

as

far beyond the wildest visions of those of ten

or fifteen years ago Today the stock of the .

company is selling at nearly five times i ts par

Value it is paying 1 0 % dividends and earn i ng
,

over and all this wi thout any material

addit i on of m i le a ge or of acqu i red properties .

The same tale c an be told of nearly al l of the

 S T O C KS AND WH A T T H EY AR E 59

older and establi shed lines though not always ,

to the same degree a s in the case of the D ela a

ware L ackawanna
, W estern Railway .

There are many newer properties it is true , ,

“
wh ere the st o cks and particularly the c om
,
-
1

”
mon issues are far more speculative and rep
resent much less tangible property Thus .
,

there ha s been a certain amount of modern

financing in railroad consolidations a s witness ,

the R ock I sland system the new common ,

stock of which represents practically no tan gi- s

ble property today and sells at purely sp ecu

,
e

lative prices even the usual voting po w er hav-

,
ii

ing practically been withheld f r om it .

Therefor in judgi ng railroad stocks thes e

, ,

special conditions should be taken into c onsid

era t io n a s being the most vital of factors The .

railroads all possess special privileges in thei r

rights of way a nd termi nals which in a coun ,

try like ours are of constantly growi ng valu e

b ecause of the swelling populatio n a n d s teady
conc entratio n of wealth I t goes without s ay
.

ing that this general tendency will probably

be continued for at least several generations
more H ence even the least secured railroad
.
,

st o ck unless there are some special disa dva n

,

ta g eo us features connected wi th i t will bear ,

examination i n th i s light for i n the cours e of

,
70 AR T O F W A LL S T REE T INVES T IN G
time the income w i ll automat i cally increase
,

with the growth of population and wealth and

the stock be benefited thereby .

This principle however cannot be s o gener

, ,

ally applied to industri al stocks These issues .

are purely a creation of modern times as are ,

the great corporations and consolidations

which have brought them into be i ng A s is .

w ell known nearly all the newer industrial

,

corporations are g reatly over capitalized and -

,

as a result the common stocks es pecially are

,

of a very speculat i ve nature do not represent,

anything except voting power and future

hopes and generally sell far belo w their face
,

values This condition of things has been

.

brought about by certain apparent necessities

in financing and also because the formation of
,

these great corporations ha s been of the nature

of pure innovation and the outcome i n mat
,

ters of economy in methods in new a dva n

, ,

tages derived through consol i dation and other

benefits assumed to be gained by large scale
management and production could not be d efi ,

n it ely known or judged until tested over a

reasonably long period of t i me Therefor the .

financing of most of these compani es has been

on a semi speculative basis and in order to
-
,

car ry through consolidations and get the

 S T O C KS A ND WHA T T HE Y AR E 7 :

necessa ry
fi nancial backing , i t has been found
n ecessary to pay very liberal commissio n s to

underwriting syndicates and promoters as well

as bankers and others to have the consolid a
tions carried through at all .

The m ethod employed has usually i nvolved

the issue of a preferred stock to an amount
representi n g the appraised value of the c o n

solidated plants As these values have oft en

.

be e n actually made hi gher than the real worth

of the properties there has sometimes result ed
,

a good deal of in flation even in the preferre d

issue I n additio n a further amoun t of the pre
. ,

ferred stock is then sold for the purpose of

raising working cap i tal When this is not
.

done a bond issue of some kind i s usually ar

ranged for this spec i al purpose A very large .

issue of common stock is next created and an

underwriting synd i cate undertakes to pay the
face value for all of the pref erred shares
not otherwise used in exchange for plants ,

property and s o forth r e ceiving as i ts c o m

, ,

mission for doing this 1 0 0 % in some cases a nd ,

in others a s much as in common stock .

S ome common stock is also issued for the p ro

moter perhaps a block is issued to go to th e
,

former owners of the plants and to other inter

osted parties and for other special purposes .
2
7 AR T O F WALL S T REE T I NVES T IN G
The syn dicate then usually through bankers
, ,

undertakes to dispose of the underw ri tten pre

ferred stock to investors by giving as a bonus

, ,

5 0 70 to 1 0 0 70 in common stock . The e ff ect of

all thi s waterin g of the propert i es is that the
“ ”

preferred stock is immediately quoted far be

low its face value and the common sells at a
very low price ; the fact bein g that the true
valu e of the properties may be fairly rep t e
sented by 8 0 70 of the face value of the pre
ferred and 2 0 % of the face value of the c o m
mon E ven if the preferred stock pays the full
.

divi dend promised (usually 6 % or it will

n o t for a long tim e appreciate to its par value ,

a nd the common of course rema ins at a very

low fi g ure un til the earnings actually begin to
accumulate to an amount where some kin d of
definite steady dividend is assured on the com
mon .

I n the matter of apprec i ation through un

earned increment the industrial corporations
,

a s a class are not in nearly so fortunate a posi

tion as the railroads I n exceptional cases

.
,

th ey have advantages of a high order which ,

may or may not apprec iate ; in very few cases

have they the certain and fundament al privi
lege in such large percenta ge a s th e rail r o a ds
.

S pecial legislation may benefit an industrial or

74 AR T O F WA LL S T REE T I N V ES T IN G
the largely i n flated issue of common and pre
ferred i ndustr i al stocks .

I ndustri al stocks are e ither cumulat ive or

non cumulat i ve and usually carry divi dends of
-

e i ther 6 % or The cumulative clauses usu

ally w ork o u the pr i nc i ple already descr ibed
a fe w pages back The d i vi dends are paid
.

quarterly in most cases but somet im es semi

,

annually I n no cases are d i vi dends supposed

.

to be pa i d unless actually earned although ,

there are many i nstances Where a corporation

pays a d i vi dend out of accumulated surplus
even i f not currently earned I t wi ll be read i ly
.

real i zed ho w ever that th i s k ind of policy if

, , ,

followed to any mater i al extent ca nnot be

,

regarded a s conservat i ve N o matter ho w

.

large an accumula ted surplus may be i f a ,

growi ng corporat i on is currently earning for

any length of t i me only 4 % on i ts cap i tal i t is ,

not sound management to pay out 5 70 W here .

a company begi ns to do this i t should be

closely w atched .
 IV

An al y zing R a ilro a d Sec urities

ROPER judging of the values of railroad
securities involves first of all the ab ility
, ,

to analyze railroad reports The report of a .

railroad need not and should not necessari ly

be left to the study of the expert for analysis ,

as each investor may wi th a reasonable,

amoun t of careful trainin g learn to dec i pher

,

the statements of th e report for himself W h i le .

reports are to the uninitiated dry and com

, ,

plex a ff airs be i ng made up of a number of

,

statistical statements and other groups of fi g

ures which seem larg ely m eaningless yet as a , ,

matter of fact the salient points in even the

,

most compl ex and voluminous reports ca n usu

ally be deciphered at short notice if one is but ,

familiar with the few fundamental rules which

will be explai ned i n the followi ng pages .

A s M r Thomas F W oodlock pointed out i n

. .

his little book The A natomy of a Ra i lroad

“
,

R eport written over ten years ago the

,
” “
,

obj ect of a ra i lroad report Should be to convey

75
76 AR T O F WALL S T REE T I NVES T IN G
an accurate idea of the position of the prop
e rty,
both physical and financial s o that one ,

may know pretty well all the principal circum

”
stances a ffecting its welfare .

I n exami n i ng the railroad properties gener

ally before we consider the securities sp ecifi c
,

ally we have three distinct divisio n s of the

,

properties to analyze Fi rst the physica l char

.
,

ac t eristics ; second the earning power and

, ,

third the financial characteristics The first

, .

and fundamental feature of a railroad prop

er ty is of course the physical
, , This includes .

l o cat i on and length of road ; character of

territory covered and contiguous to the same ;
t e rminal facilities and connections ; volume
and character of business carried on ; volume
a n d description of equipment employed .

The second feature to be exam i ned is the

i ncome or earni ng power of the property and ,

’
this involves an examination of th e company s
revenue account wh i ch Should cover the fol
,

lowing points : Gross earn i ngs operating ex ,

penses net earnings income from other

, ,

sources fixed charges d i vidends and surplus

, , .

The financial characteristics should then be

examined This involves an analysis of the
.

balance sheet s o called wh i ch i s al ways made

, ,

up of th e follo wi n g four d i v i s i ons

 AN A LY ZIN G RAILRO A D SE C URI T IES 77

Capital assets ; current assets ; capital l iabil i

ties current liabilities .

W ith the true and proper facts at hand c ov

ering the above features a railroad report can
,

be after a little exper i ence analyzed quite S im

, ,

ply and the value of a given secur i ty then

,

judged very accurately in connection with it .

N owadays nearly all the rail roads of any

standing or importance whatever give p ra c ,

tically all of the foregoing facts in their reports

i n one way or another and some of them give
,

a great deal more W here the facts are not

.

give n however it will usually be found that

, ,

they can be obtained in the reports of the

I nterstate Commerce Commission although ,

the statements of the latter are not given to

the publ i c as promptly as one might wish .

1 .P hys i cal Characteristics An examina .

tion of this branch of the subj ect must begin

with an exam inatio n of the location and len gth
of the road E ve r y railroad report contains a
.

statement of miles of road first s econd third , , ,

and fourth tracks and sidings and also the ,

mil eage operated controlled and leased or in

,

any other way connected with the company .

A complete report should also Show in detai l ,

or at least by the aid of a map the exact loca ,

tion of each d i vision I n the case of the N or

.
78 AR T O F W A LL S T RE E T INVES T I NG
fol k W estern Ra ilway th is is done very
sat i sfactori ly thus sh o wi ng the c haracter of
,

terr i tory through wh i ch the road runs A .

sat i sfactory map wi ll also sho w the connec

t i o ns wi th other lines i n most cases an i tem of
,

very great value and importance Th ese facts .

,

cons i dered i n connect i on wi th the c haracter of

the conti guous and covered terri tory are of ,

the first i mportance I t i s a factor of g reat

.

value to k no w whether the terri tory and ter

m i nal surround i ngs are such as to be l i kely to
apprec i ate i n value through general i nflux of
populat i on development of manufacturi ng and
,

of a gri culture or the reverse V aluable char

, .

a c teristic s of th e N orfolk W estern system

are its term i nals and connect i ons both east
and w es t I t runs part i ally through a sparse
.

terri tory but i s on e of the soft coal carry i ng

roads and its branches i nto th e soft coal fields
,

of V i r gi n i a and W est V i r gi n ia are of the first

imp o rtance and are likely to gro w i n value as
,

the years go by largely because of the char

,

a c t eristic of exclus i veness The R eading Com .

c h ara c teris
’
p ya n s s ys tem a lso enjoys similar
tics I ts many l i nes while enjoying im portant
. ,

connect i on and term i nal advantages would ,

not be in any sense so valuable were it not

for its dom i nating i n fl uen ce i n the hard
 ANALY ZING R A ILRO A D SE C URI T IES 79

coal fields of P ennsylvan ia I n controll i ng the

.

coal output it has a pract i cally exclus i ve a d

vantage which goes a long w ay in add i ng
value to its securit i es W ithout this s pec i al
.

C haracteristic i t is not at all l ik ely that the

R eading Ra ilroad lines w ould be on anyth i n g
like the same secure basis that they are today .

I f the coal fields were accessible to actually

compet i ng lines it i s V ery clear that the R ead
,

ing R ail way earnings w ould be ser i ously and

permanently a ff ected .

I n the ma tter of term i nals and connecti ons ,

the R ead i ng Company is on a somewhat di ff er

ent basis than the N orfolk W estern The .

latter extends from Columbus Ohi o to N or , ,

folk V i r gi n ia and the terminals are actually

, ,

o wned by the company U p to recent years

.

the R eading system had no entrance of its own

into N ew York C i ty but s i nce 1 8 9 9 i t has
,

controlled the N e w Jersey Central lines wi th

the latter s important and rap i dly apprec i at i ng
’

N ew York terminals B ecause of the latter

.
,

j oined wi th its Philadelphia term i nals and its

various all iances w i th other li nes the R ea di ng
,

properties have shown enormous apprec i at i on

in value and earni ng pow er duri ng the past fe w
years ; and it is clearly evi dent that the
tendency wi ll cont i nue as long as the cond i
80 AR T O F WALL S T REE T INVES T IN G
tions of control of territory and t ermi n als t e
main the sam e There is practically no factor
.

s o important in a railroad property a s exclu

sive rights of way or term inal facilities or the ,

exclusive control through location and so ,

forth of a necessary c o mm od ity su ch as is

, ,

anthracite coal in the E astern states of our

country .

I t will thus be seen that the location and

character of territo ry of the N orfolk W est
ern a n d R eading systems is a factor of great
importan ce a nd S hould be analyzed before
,

anything else The length of line and Char

.

acter of construction Should th e n b e examined ,

as may very easily be done with th e aid of the

c ompany reports .

The volume a n d Character of business of

course comes under the head of physical char
a c t er istic s a n d should be j ointly considered i n
,

the e xami nation of the loc ation of the roads A s .

is well known the carri age of freight i s the

,

i mportant item on every railroad and the best

,

railroads state in detail the character of ton

nage with th e total amount and percentage
,

of e ach class of freight The importance of

.

these facts i s most obvious W here a railroad

.

is d ependent for its i n come largely on some

Special productive manufacture such as grain
, ,
 82 AR T O F WALL S T REE T I NVES T IN G
ch i ef importance lies in the fact that they Show
the volume of business done by the road very
closely and also enable one to make accurate
,

compari son with the volume and character of

bus i ness done by other roads I f the proper
.

figures are furn i shed i t is a comparatively S im

ple matter to sub di vi de the freight dens i ty of
-

the vari ous important classes of traffic .

Tra i n m i leage figures are also important to

kno w By them is Sho w n the volume of
.

fre i ght and number of passengers carr i ed on an

avera g e in each tra i n S ome reports Sho w the
.

average tons and passengers per ton mile but ,

where they do not they can be ascertained by

divi d i ng the tons and passengers carr i ed one
m ile by the fre i ght and p assseng er train mile
age respect i vely A good report should also
.

sho w the average number of cars empty and

loaded i n each fre i ght trai n as well as passen
g ers i n each passenger train and the average
,

amount of fre i ght and number of passengers

i n each car These figures are important
. ,

especially when e xam i ned in compari son w ith

th e same fi gures of previous years and also,

w i th current figures of other roads I f there

.

is a lar g e haulage of empty cars it indicates

insu ffi cient equ i pment or poor manageme nt .

I f the tonnage per train i s small it i ndicates

,
 A NALY ZING RAILRO A D SE C URI T IES 83

poor locomotives bad roadway weak equip

, ,

ment or Short sighted or neglectful manage

ment .

By exam i nation in a comparat i ve way of all

such figures a s these together with we i ght of
,

rails character of road bed etc we get at the

, ,
.
,

real physical condition of the road wh i ch i s , ,

as pointed out above a matter of very great,

moment i n an analysis of the property and its

securi ties .

The volum e and descript i on of equ i pment

comes under the head of phys i cal character
“

i stics also A good railroad report wi ll Show

”
.

the number of locomot i ves the i r avera g e ,

Weight and age and also the qua nt i ty and

,

character of each ki nd of c ar o wned by the

company These figures a re part i cularly im
.

portant nowadays and should be gi ven i n a

clear and exhaust i ve manner for the reason ,

that such vast development has taken plac e

in the capacity of locomotives and fre i ght cars
during the past few years that mere numbers ,

may be very misleading I n the matter of coal .

cars for instance great strides have been made

, ,

in the size and capacity per car so that a road ,

might today own but coal cars the capac ,

ity of which might exceed that of cars

pf tw en ty years ago H ence clear . and deta i led ,
84 AR T O F WALL S T REE T I NVES T IN G
descriptions of equipment should always be
given .

The equipment fi g ures Should be studied in

comparison with those of previous y e ars in
order to be read aright This is easily don e in
.

the cases of the N orfolk W estern and R ead

ing Company reports .

2 . E arning P ower H av i ng famili ar ized

.

onese l f with the physical characteristics of a

road as outlined in the foregoing pages the ,

next step for the investor or student to take

is to ascertain and then analyze the earning
power of the property This is done through
.

an examination and analysis of the income or

revenue account E very report of course co n
.

tai ns such an account and it is often the most

,

conspicuous statement published i n the report .

U sually it is too much condensed but some

,

times is presented w i th satisfactory deta i l F or

.

the sake of S impl i c i ty there is presented belo w

a sample of the usual form omitt i ng all deta i l
, ,

as applied to a ra ilroad system of 6 0 0 miles in

length .
 ANAL Y ZIN G RAILROAD SE C URI T IES 85

Per m i l e.
Gro s s earn i n g s fro m rat i
O p erat i n g e xp en ses
ope on

Ne t ar i g
e n n s
O th r i m
e nc o e 41 7

T tal i m
o nc o
F x d harg
e
i e c es

Bal anc e
D i id d
v en s

S rp l
u us

The income from a railroad is chiefly f r om

operation but a portion may also arise from
,

interest o n investments or loans or income

from rentals The gross i ncome from opera .

tion embraces ( a ) revenue from passenger

transportation ; ( b ) revenue from freight tra n s
p o rtat io n ; ( C ) revenue from mail express a ge , ,

storage etc ; ( d ) reve nue fro m c a r mileage

, .
,

switchi n g etc ; ( e ) revenue from telegraph

, .

compani es .

The i ncome from all these items Should of ,

course be shown in gross and th e laws of the

, ,

states usually s o requir e it R ebat e s being .

,

illegal should n o t be i n cluded in operati n g ex

,

penses but should in all cases whe r e they e xist

,

be deducted from gross earni n gs S uch .

charges as commissio n s should naturally go

into operating expenses I n nearly all reports .
86 AR T O F WALL S T REE T INVES T IN G
the revenue from these several di ff erent
sources is given separately and the figures are
,

easily understood and compar e d There is lit .

t l e room here for mistak es or i naccuracies .

S eparate statements of incomes of leased

propert i es should be given in railroad reports
hav i ng such sources of income while that of
,

all proprietary branches or lines should natu

rally be i ncluded ih th e g eneral i ncome a c
count .

O perat in g expenses i s the one item in a rail

road report which should always be examined
w ith the greatest care I t is the account most
.

readily man i pulated and through i ts dissection

,

one can most clearly judge the character and

management of the property To this account
.

the company should charge all expenditures

necessary to carry on the bus i ness of the road
and leave th e property at th e end of the year
i n fully as good conditi on as i t was at the
begi nning of the year A ctual improvements
.

to the property may be charged to the capital

or construct i on account .

O perat i n g expenses are divi ded i nto four

classes : ( a) maintenance of way and stru e
tures ; ( b) ma i ntenance of equipment ; ( c ) con
duct i ng transportation ; ( d ) general expenses .

The I nterstate Commerce Comm i ss i on lon g

 ANALY ZIN G RAILRO A D SE C URI T IES 87

ago o ffic i ally classified operating expenses i n

this way a nd also sub divided each of these
,
-

C l a sses into more than fifty sub divisions -

.

M aintenance of way and structures as its ,

title indicates embraces all charges made in

,

connection with keeping up to the proper

standard the roadway buildings etc I t i s , , .

properly div i ded as follows : ( I ) repairs of

roadway ; ( 2 ) renewals and repairs of rails and
ties ; ( 3 ) renewals and repairs of stations ,

crossings culverts buildings br i dges docks

, , , , ,

wharves fences etc

, , .

R epairs of roadway embraces cost of ballast ,

clearing of tracks from snow and I c e r e ball a st ,

-

ing of tracks a n d wages and supplies pertaining

to this department R enewals and r epairs of .

rails and ties cover all cost of new rails and t i es

and the layi ng of same S ome companies .

charge to co nstruction account the entire cost

of new rails less th e amount for which the old
,

rails may be sold But this method is not co r

.

rect P rop erly the company should charge to

.

construction a ccou nt only the amount rece i ved

for the old r ails the di fference be i n g charged
,

to the maintenanc e account All railroads find .

it n ecess a ry to replace a certa i n proportion of

rails each y ear a nd th i s practice should not be
,
88 ART OF WA LL S T REE T I N V ES T ING
neg l edte
d The other i tems in the ma i ntenance
.

account are largely self explanatory -

.

M aintenance of equipment refers entirely

to engines and cars This account should be
.

charged wi th all money spent to keep the

company s rolling stock in fully as good and
’

e ffective condit i on as it was at the beginning

of the year S ome companies i nstead of mak
.
,

ing p roper replacement out of earnings will ,

allow equipment to depreciate and i n time b e

destroyed and then replace it out of capital a c
count . Companies also sometimes postpone
these renewals o r repairs S uch customs are .

to be condemned and careful comparat i ve ex

amina tio n s S hould be made .

Conducti n g transportation embraces all ex

p enses incident to hauling or transporting
freight or passengers I t includes many items
.

such as salaries and w ages of all employees

wh o are engaged in the actual operation of the
road and all supplies used for this particular
,

purpose .

G eneral expenses include salar i es of o fficers ,

legal expenses insurance etc and of course

, ,
.
, , ,

are usually much smaller in amou n t than the

figu r es I n the other divisions mentioned above .

Fi x ed charges usually include taxes inte r ,

est o n funded and fl oating debt rentals and ,

90 AR T O F WALL S T REE T IN V ES T IN G
dividends are deducted is net surplus and is
“ ” “
usually added to a profit and loss or surplus
”
i ncome account .

E xami natio n of this I ncome statement fur

n ish e s the i n formation necessary to know th e
“ ”
earning power of the railroad By the r e .

duction to a per m i le basis comparisons with

“ ”

other roads doing the same class and char

acter of business is read i ly made .

3. F i n a n cial Characteristics H aving fam i l

.

iariz ed oneself with the physical a n d earn ing

power of a railroad property the next step is
,

to examine i ts fina n cial side This is taken up

.

’
through the a nalysis of the company s balance
sheet P ractically nothi n g ca n be known of a
.

railroad s financial condition unless th e fi na n

’

c ia l statement or balance sheet is carefully

examined and dissected .

The balance sheet con s ists of a statement of

’
the company s assets a n d liabilities in con
d ensed form . I t embraces the following sub
j e c t s : Capital assets ; current assets ; capital
liabilities ; current liabilities ; profit and loss ,

the latter being e i ther a deficit or surplus as ,

the case may be S ome roads condense their

.

balan ce sheet ent i rely too mu c h whe n insert

in g it in the annual report while others do not
c ondense e nou g h . I n many cases also the mis
 ANAL Y $ IN G RAILR OAD C T
SE UR I I E S 9 1

take is made of not be i ng expl i cit and

clear
enough in the i nserti on of items .

Capital assets consists of : ( a ) property and

franchises equipment and plant usually c ar
, ,

r i ed under the title of Cost of road and equip

“

”
ment ; this is commonly known as the c o n
struction account ; ( b ) investments in secur i t i es

and real estate ; ( C ) si nki n g fund accounts .

The construction account is supposed to rep

resent the total amount of capital invested in
the road and its equipment I t is frequently
.

the case however that certain other i tems

, , ,

such a s discounts on securit i es sold are ,

charged to this account This account also

.

usually tak es care of special charges and ex

penses made i n the financing of cap i tal issues ,

r eorganizations of the property and s o forth

,
.

The account is i n a se n se rather an elastic one

and the charges in it a re capable of great mis
use P roperly the railroad should itemize the
.

Charges which are made to this account during

the year in order that the stockholders may
,

know exactly how to account for the increases

which may appear I f this were always done it
.

would not be possible for any railroad manage

ment to juggle with this account as is some
t i mes done There have been instances i n the
.

past where the construction account has been

92 AR T O F WALL S T REE T INVES T IN G
made the receptacle for all sorts of items rep re
sent i ng l i ttle or no value F or i nstance in the
.
,

case of the old A tch i son R ailroad reorgan i zed ,

i n 1 8 9 5 it was found that out of a construction

,

account carr i ed i n the balance sheet at over

more than represented
nom inal entri es such as discounts on bonds .

reorgan i zat i on expenses etc , .

“
I nvestments i n secur i ti es or real estate is
not a s clearly shown i n most ra i lroad reports
a s i t should be A ll the large roads own vari
.

ous stocks and bonds of other roads wh i ch ,

have been acquired i n many ways ; somet i mes

by d i rect purchase or control by or i ginal sub ,

scription by exchange of secur i t i es or i n pay

, ,

ment of advances made or construction work

done. I f these i tems w ere made explicit
enough i t w ould be a comparat i vely easy mat
ter to ascerta i n whether they w ere be i ng ca r
ried at too high a valuation in the balance
sheet I n add i tion to th i s i t i s necessary to
. ,

compare these i tems i n connect i on wi th the

i tem on i ncome from i nvestments i n the income
account I t c a n be fa i rly well ascertained by
.

such a comparison what the real value of the

investments are and whether they are over
valued i n the balance sheet There are cases .
,

o f c our se where one ra i lroad property wi ll s e

,
 A NA LY $ IN G RA ILRO A D SE C URI TIES 93

quire for control i n a strategical sense the

, ,

securities of another property and not merely

for the income to be deri ved directly therefrom .

But when this is the ca se it is usually so evi

,

dent that it is not necessary to have i t stated

expl i c i tly
.

S inking fund s should be shown in the bal

ance sheet in deta i l showi ng each kind of S ink
.

ing fund and bond separately Car trust pay .

ments where there are any should be trea ted

, ,

i n the same general manner .

The current assets of a company include all

movable and changable assets excepti ng mate
ri al supplies whi ch may be in use for the pur
,

pose o f liqu i datin g the general bus i ness debts

of the company independent of the cap i tal
,

assets The main head i ngs under current a s

.

sets are : ( a) cash on hand and on depos i t ; ( b )

loans and bills rece i vable ; ( c ) accounts rec eiv
able ; (d ) due from other compan i es and i nd i
vidua l s ; ( e ) due from compan i es agents a nd ,

offi cers ; ( f ) advances to other compan i es ; ( g)

sundry assets .

The i tem cash of course expla i ns i tself

“
, .

L oans and bills rece i vable is not ord i nari ly a

large account I t represents money o w ed by
.

shippers for freight transported and so forth , ,

and may also represent loans made by the roa d

94 AR T O F WALL S T REE T IN V ES T IN G
or notes held by the road I f the item of .

“ ”
loans increases from year to year it is not a
good thing unless there are special reasons
,

giv e n for it “
A ccounts receivable explain
.
”

themselves as does the item due from other

,

companies and i ndividuals “

A dvances to .

other companies if large should be carefully

, ,

examined I t may mean money loaned by the

.

company to some weak struggling allied c o m ,

pany whose bonds may be guaranteed by the

main company or of which contr o l is held in
,

some way These advances may be small and

.

therefore only nom i nal but if they continue to

,

grow it may mean that the parent company

is advanci n g money which may never come
back to it at all The chi ef import ance of the
.

it em lies in the change i t may produce on the

other side of the balance sheet .

. The items due from agents and offi cers

, ,

“
and sundry assets explain themselves The , .

smaller they are kept from month to month

and year to year the health i er th e cond i tion of
,

the ro ad is apt to be
“
Capital liabilities consists of stocks and
bonds only There are several kinds of stock
.

a n d many k i nds of bonds which require no

descript i on here as they have been especially

,

C o nsidered i n Chapters II and III The .

 ANAL Y ZIN G RAILROAD SE C URI T IES 95

balance sheet Should Show the actual amount

of capital stock outstanding whether own ed
,

by the company or not I f the compa ny has

.

a ny of th i s stock in its treasury this latter

,

should be S hown as an ass e t on the other side

of the balance sheet The various kinds of
.

bonds should be separately shown the actual ,

amount outstanding bei n g given in each case .

By compari n g th e se amounts with those of

previous years th e Changes a n d increases ca n
,

be readily asc e rtained I n most railroad re

.

ports separate detailed statements are fur

,

h i s hed describing the funded debt and in some

,

cases showing the actual property on which the

di ff e r e nt mortgag e s are secured .

”
Current liabilities are made up of several
important items which usually come under the
followi n g heads : ( a ) loans and bills payable ;
( )
b accou n ts payable ; ( )
c pay rolls and vouch
ers ; ( d ) i nterest and dividends accrued ; ( e)
due to other companies ; ( f) sundry liabilities .

These items are generally sub div i ded into -

“ ” “
floating d ebt and operating liabiliti e s The .

ope r ating liabilities are generally pu r ely c ur

”

re nt and do not usually represent more th a n

,

o n e or two months items .I f they extend much

b eyond th i s it is oft en the case that the road
,

is running behind a nd its management is in a

96 A RT O F W A LL S T REE T IN V ES T IN G
bad way The important i tem to be examined
.

i n current liabilities i s loans and b ills pay

”
able . I f this item is small and does not
gro w from year to year i t may mean very lit
tle I f it does grow however i t usually means
.
, ,

that the company i s borrowing money tempo

ra rily for construct i on or improvements which

i t i ntends to take care of wi th some permanent

securi ty such as stock or bond s later on
, .

I f th i s is not the case a nd no new work i s being

undertaken then i t surely means that there
,

w ill b e trouble ahead I t i s better if a railroad

.

has no loans or b i lls payable and i n normal ,

ti mes a w ell managed property will not allow

-

th i s i tem to expand even if i t i s doing a good

,

deal of building I t w ill generally be found

.

more econom i cal to finance its cap i tal requi r e

ments as i t g oes alon g .

The i tem accounts payable i s not signifi

“ ”

cant unless i t sho w s rapid i ncrease i n amount .

This i s also true of other i tems such as pay ,

rolls and vouchers tra ffic balances etc The

, , .

item interest or d i v i dends accrued is gener

“ ”

“ ”
ally o ff set by current assets on the other
-

side of the balance sheet .

I n addition to the i tems i n the balance sheet

mentioned above there is al ways the one item
of profit and loss or surplus which is
“ ” “
,
”
,
 Tra c tions a nd dustri a ls
In

HE investment market for industrial a nd

traction securities has unde r gone a va s t
dev elopment in W all S treet during the past
half dozen years P revious to that time a th or
.

ough d i scussion of W all S treet could be mad e

without any particular reference to this s ub
j ec, t but n owadays a large proportion of the
transactions there are in either industrial sec ur
i t i es or those of the various public service c o r
po t ations Ther e are certain features under
.

lying tractio n or other fr a nchise corporation

secur i ties which do not a ffect railroad secur i :

ties to any extent I t is true that steam rail

.

“ ”
roads are in a broad sens e franchise corpor
rations but th e f ranchise is not the important
,

feature a s it is in the case of a street railway ,

gas electric light or water company I n the

, .

promoting or developi n g of a ny of these the

franchise is regarded as the fundamental thi n g
and without it n o compa ny c a n operat e at all .

99
1 00 AR T O F W A LL S T REE T INVES T IN G
In the case of the street railway the fran
chise does not usually merely autho r ize the
company to construct a railroad through a
piece of pr o perty after it has bou g ht that prop
e rty as does the steam railroad fra n chise but it
, ,

conveys to the corporation the exclusive r i ght

to operate over public property for a certain
term of years ; perhaps for an unl i m i ted period
of time A franchise of this kind does not
.

merely give a company a legal ri ght to c o n

struct and operate but it gives it a more or less
,

exclusive right ; and on the value of this privi

lege whatever it may be depends entirely the
, ,

value of the securi ties which are built upon it .

I n examining from the investor s sta ndpoint

,
’
,

the bonds or stock of a franchise or public util

ity corporatio n we should before all else exam
,

i ne the franchise To do this we must ascertain

.

its length its scope the terms or conditions of

, ,

its rene wal its limitations if it has any

and , , .

W e must also hea r in mi nd and carefully weigh

'

the character of the co mmunity which grants

the franchise and not overlook the possible
,

e ff ect of change in publ i c sentiment W hile a .

city or other municipali ty cannot as a rule c a n

c el a franchise which has been legally granted ,

and wi th the terms of which the company ha s

compl i ed yet there are methods whereby the
,
1 02 AR T O F WALL S T REE T I NVES T IN G
be represented by a reasonabl e amount of
securities The danger i n this argument how
.
,

’
ever from the investor s standpoint lies in the
, ,

fact that the commu nities themselves all retain

the taxing p ower and have a perfect right if ,

public o p I nI o n so el e cts to tax i nto the public

,

treasury the entire value of these franchises .

S hould this program b e generally pursued

throughout the count ry it will readily be seen
that both bo nds and stocks of traction and
other public service companies which merely
represent this current franchise value will ,

largely evaporate into nebulous ether .

I ndustrial 3 curiti s s are similar to tractions

in many ways They also depend more or less
.

on a f r anchise r i ght or o n some special legisla

tion which gives them a b en efit which they
,

have capitalized I n the case of the U nited

.

S tates S teel Corporat i on for I nstance not only

, ,

has the actual cost of the manufactur i ng prop

e rties been fully capitalized but th e compa ny
,

has issued la r g e amounts of securities to r ep re

s ent the estimated v a lu es o i its ore and coal
la n ds ten or twenty yea r s in the future and has
a lso capitalized in a v e r y liberal manner the

Sp ecial benefits wh i ch it e njoys because of pro

t ec t iv e ta r i ff legislation patent rights shippi n g
, ,

faciliti es contracts etc These things while

, , .
,
 T RA CT I O NS AND I NDUS T RIALS 103

a pp a rently perma n e nt e n ough at the present

time are still not fundamental values and can
,

e a sily be removed through the force of public

s entiment N ot only may these sp ecial a dva n
.

tages be r emoved but the people may some d ay

,

d ecide to clap heavy taxes on ore coa l and ,

other la n ds n o w taxed but lightly .

This is n o t t r ue however of the steam rail

, ,

r o ad ad vantages which are chiefly made up of

,

rights of way a nd t erminals which ori ginally

we r e of n o t mu ch impo r tance but which have
,

s hown e normous appreciation in valu e because

of th e gr eat i nflux of population and g en eral

d evelopment of the country during recent
deca d es While the steam railroads are to a
.

d egr ee subj ect to legislative regulation and tax

atio n yet the special advantages which they
,

e njoy are so much more fi rmly secur ed than

those of th e traction a nd i n dustrial companies ,

that d an ger of a ny real and serious disturbance

of these a d va nt a ges is comparatively remote .

I t is true that se ntim ent is gr owing more or

l ess rapidly n owad a ys in favor of government
co ntrol or ow n ership of steam railroa d s but it ,

is n o t likely that the latter will be brought

a bout in a way which will be particularly d et ri

mental to th e i nter est of the holde r s of a ny

thing but the most inferior classes of ra i lroad
1 04 AR T O F WA LL S T REE T INVES T IN G
securities M asses of traction and i n dustrial
.

securities are vulnerable because of the fact

that such a large proport i on of them are based
on purely speculative foundations while the
,

maj ority of railroad securities represent much

more real value which has been created in one
,

way or a nother over a longer per i od of time ,

and is much more certain of permanency .

I n judging industrial and traction securities,

therefor the methods which have been out

,

lined in other chapters for the a nalysis of steam

railroad securit i es should be applied only in a
very qualified sense The featur e s pointed out
.

above should b e constantly bo r ne in mi n d as

the most importa nt factors which are likely to
a ff ect the present or future values of the securi
t i es .
106 AR T O F WALL S T REE T I NVES T IN G
pri ce of the security I n other words h e must
.
,

buy as cheaply as he can for the simple reason

,

that he i s not an investor and buys simply for

the purpose of turning over th e security at a
profit to someone else .

The d i stinction between these two men indi

cates the cardinal distinction between the in
vest o r and the speculator Whil e the bond .

dealer i s not a speculator in the commonly a c

c ep t ed sense yet his motive is in a more lim
, ,

ited and conservative way of the same nature ,

as that of the speculator The latter buys to

.

make a profit on the principal The investor .

buys to secure an income ; that is to say he ,

places h i s money in what he thinks or is led to

bel i eve is an absolutely secure piece of prop
erty and he has no other pu r pose in view than
,

that of receiving a current return upon it in the

shape of interest or dividends S uch is the .

pure investor while the pure speculator is one

,

who pays no attent i on to dividends and inter

est as a n income but is actuated entirely with
,

the idea of profit o n principal O f cou r se the r e .

,

are many men who are both investors a nd

speculators a n d a large number follow the
,

practice of putting money in what a re k n own

as semi speculative investments A semi
-
.

speculative investment is one which fu rnishes

 I NVES T MEN T VS SPE C ULA T I O N
. 10 7

an i ncome in the shape of dividends or interest ,

and at the same time is supposed to promise a

reasonable appreciation in principal over a cer
tai n period of time F or instance th e man who
.
,

puts mo n ey into a stock like the U nited S tates

S t eel p ref err ed might reasonably be called a
,

s emi speculative
-
investor H e invests not
m er ely to get a liberal dividend but has a ,

th eory that a s the stock is not selling v e ry high

there may be a f a ir chanc e for apprec i ation in
'

the p r incipal in the ev ent of which he w i ll sell

,

out a nd r e invest his money with the profit

-

made in some other securi ty W hile thi s.

m e thod has proven successful in many cases ,

yet there is necessarily a large element o f

speculation in it wh en carried to an extreme ,

for if a ser i ous mistake is made by the i nvestor ,

a large proportion of his pri n cipal may be

wiped out and in this case he will quickly fi n d
,

th a t it would have bee n much wiser for him

to have confine d himself en tirely to securitie s
which have no speculative valu e but a re ,

bought an d sold entirely on a n investment

basis
I n addit i on to po i nting out the dist i nct i o n
between i nvesting and speculating in W al l
S t r eet it is worth whil e to also show the lin e
,

between speculati ng and what is commonly

1 08 A RT O F WALL S T REE T I NVES T IN G
known as gambling in stocks The man who .

speculates i n stocks acts on informat i on wh i ch

he has ascerta i ned and analyzed in one way or
another To b e sure his judgment may be
.
,

ent i rely at fault but he generally has a plaus

,

able bus i ness reason for buyi ng or sell i ng such

an d such a secur i ty F or i nstance he may have
.
,

made up his m i nd that a certa i n ra i lroad stock

i s sellin g too low i n V i e w of current earn ings
and i mmediate prospects such for i nstance as, ,

the crop outlook and based on th i s he may

,

dec i de to buy for a ri se Th i s i s generally

k no w n as a A gamble on
“ ”
spec ulation .
,

the other hand i s where a man buys an d sells

,

on a bl i nd chance w i thout any particularly

,

sane reason except that he think s that a turn

,

i n the market up or do wn i s due or that the ,

pools and b i g fellows mean to gi ve a tw i st

“ ”

to the stock A lar g e port i on of th e gambl i ng

.

i s done i n buck et shops but a respectable ,

amount of i t also finds i ts way i nto the o ffices

of the larger brok ers and comm i ss i on dealers .

Th ere are a l i m i ted number of men who gam

ble i n stocks on a very large scale and some
t i mes make as w ell as lose very large amounts
of money This i s also true of the spec u
. lat i ve
mark et and nowadays actual speculat i on in
,

stock s i s carr i ed on on an enormous scale the ,

 G et R ic h
- -
$ uic k Sc hem es

H ERE are many methods in vogue for

i ndu c i n g p eopl e to pa rt with their mo n ey ,

but the most effective way to inter est a certai n

v e ry co nsiderable po rtio n of the American pub
lic i n p r opositio n s the ultimate purpose of
whi c h is the separation of the i ndividual from
his property is through what is known in W a ll
,

S treet as the g et rich quick scheme I t is an

“
- -
.

old sayi n g that th e Ame r ican public likes to be

fooled and judgi ng from the way thes e m a ny
,

f rau d ul en t sch em e s k eep bobbi n g i nto s ight

with n ever en d i n g r e gul a rity it would seem ,

that the s a ying has lost none of its truthful

ness .

Th ere are get rich quick schemes of many

- -

ki n ds a nd they are exploited in many ways ;

,

sometimes through the columns of newspape r s ,

som etimes in financial or mining j ournals but ,

mo r e often through ci r culars or other advertis

ing matter .The most succ e ssful a r e usually
112 AR T O F WALL S T REE T I NVES T ING
mining propositions although many other ,

ki nds have flourished equally as well O ne of

.

the most notorious promoti on frauds of this

“
kind was a guaranteed egg company the ,

stock of wh i ch was o ff ered for sale in N ew

York City a few years ago The prom o ters of .

this company s ent bro adcast a roseate pro

sp ec tus o ff ering the sale of 7 % guaranteed pre
,

ferred stock at par wi th a large bonus i n c o m

,

mon stock Careful inspection of the p ro sp ec

.

tus revealed the fact that th e prospective earn

ings wh i ch w ere to amount to a fabulous sum
, ,

were to result from the sale of eggs at high

prices the said eggs to be laid wi thout fail at
,

a certain unceasing rate by several thousand

hens which w ere the entire stock in trade of
,

the company These hens were supposed to do

.

the double work of hatch i ng new broods of

ch i ckens and at the same time laying their
regular guaranteed proportion of eggs I t w as .

also assumed that only hens and not roosters

would b e hatched and that every egg would be
good The essence of the guarantee on the
.
“ ”

preferred stock appeared to be wholly based on

the theory that the hens had somehow been
forced i nto a prom i se to lay eggs night and
day if need be in order not to allow the pre
, ,

ferred stock di vi dends to lapse i n any possible

114 AR T O F WALL S T R EE T I NVES T IN G
was more avaricious than honest happe n ed to
,

discover an article in an encyclopaedia which

brought to his knowledge the fact that s ea
water co n tains a small percentage of gold but ,

th a t no method has ever been discovered

whereby the s epa ration of the two could be
brought about H e then devised a scheme for
.

pretendi n g that he had himself invented a

secret process for doing this very thing and ,

thereby induced investors to pass their ready

cash his way H e built a small plant on the
.

water s edge at S outh Lubec M aine a po rtion

’
, ,

of the plant bei n g constructed out of sight and ,

u n d e r water H e then secured a small quantity

.

of gold bullion ( a small genuine gold brick )

a n d exhibited it to certain people in the city

of Boston at the same time making the stat e

,

ment that it was th e result of a test of his

secr e t process for washi n g gold from s ea
water H is incredulous listeners were invited
.

to go to the government assay o ffi ce with him

to test the genuineness of the little brick This .

they did a n d to their surpr i se found that it was

a ll pure go ld Then as a further proof of his
.
,

discovery Jerg ens en invi ted them to go to

,

S outh L ubec with him and s ee his plant They .

d id so and saw the mysterious looking machin

ery part of which wa s under water They
,
.
 “
GE T RI C H $ UI C K S C HEMES
- -
$
1 1 5

were duly impressed H e then explained that

.

he could not let them see how he did it as he ,

must naturally guard his secret But the next .

morning he appeared wi th a small c a n full of

ne w gold dust which he said he had secretly
,

washed out duri ng the night After that for .

,

a whole week while his vi s i tors rema i ned he

, ,

appeared every morning with a moderate quan

tity of gold dust which he exhibited a s a result
of th e previous night s work As this produc
’
.

tion steadily continued his audience grew .

O thers came on from Boston and the wonder

ful discovery wa s on the lips of a steadily in
creasing number o f people W hen he next .

w ent to Boston taking the gold dust with him

, ,

and converted it into cash at the assay o fli c e ,

many apparently shrewd people w ere thor

oughly convinced a nd regarded his claims as
absolutely prov en H e then organized a c o m
.

pany and began to sell stock and as the snow ,

ball had begun to roll it very quickly increased

,

to gigantic proportions .

W ithin a short period investors in Boston ,

and vicinity were sac r ificing good bonds and

stocks withdrawi ng savings bank deposits and
, ,

generally falling over each oth e r in a mad rush

to get in on the ground floor in thi s s ea water
gold bonanza I t was afterwards est i mated
.
1 1 6 A RT O F WA LL S T REE T I N V ES T IN G
that before th e fraud wa s publicly exposed Jer ,

gensen and his accompl i ces had secured nearly

a m i ll i on dollars The final outcome wa s that
.
,

J orgensen secretly escaped to E urope w i th

most of the money and his v i ct i ms are wh i st
,

ling for the i r great profits to this day

“ ”
.

M any other schemes equally as fraudulent

have been w orked duri ng recent years in W all
S treet and elsewhere and thou gh constantly
,

expos ed i n th e ne wspapers yet ne w on es crop

,

up nearly every day and the publ i c cont i nue

,

to b i te The advert i s i ng columns of the new s

.

papers and ma gaz i nes are full to overfl o win g

wi th roseate propos it i ons for the i nvestment
of money ; gold and copper m i nes ; i ndustr i al
undertakings ; ne w railroad proj ects ; tra ct i on
companies and vari ous other promot i on
,

schemes Mi llions of dollars are i nvested every

.

week by small i nvestors i n th i s country and a ,

large proport i on of i t is constantly steered

“ ”

into unsafe chan nels w ith a resultant loss to

,

thousands of investors As an illustrat i on of

.

ho w persistently and eas i ly unsusp ect i ng peo

ple are m i sled and s wi ndled i nstance the fol,

l o wing f A very consp i cuous concern ha s been

“
operat i n g for the past five years or s o one of
the larg est and cleverest m i ni ng s wi ndles ever
kno wn i n the U n i ted S tates S umptuous .
1 1 8 AR T O F WA LL S T REE T I NVES T I NG
therefor I t i s reported that this firm has
.

b i lked someth ing l i ke small investors in ,

the U n i ted S tates and Canada to the tune of ,

several mill i ons of dollars ”

.

The methods for promoti ng all kinds of swi m

dles have i n recent years been refined down to
a n exact science E xper i ence has proven that
.

the most vulnerable class of people to b e a t

tracted by investing swi ndles as i de from
women are m i n i sters doctors teachers and
, , ,

other professional people There are i n N ew.

York a number of concerns who make a busi

ness of supplying classified lists of poss i ble
investors for the use of those who wi sh to ex
p o it min i ng s wi ndles and other schemes
l .

These l i sts are class ified i nto ten dollar in

vest o rs t w enty five to one hundred dollar in
,
-

ves to rs one hundred to five hundred dollar in

,

vest o rs ; and i nvestors hav i n g or mor e

“ ”
available The t en dollar investors
. are
mostly made up of a class of people who are
i n the habi t of taki ng a small flyer occasi on
“ ”

ally o f not over ten dollars i nvesti ng thi s ,

amount on the theory that i t may turn out with

a big profit but that i n any event the loss can
,

not exceed ten dollars Th i s class appeals to

.

the s wi n dler also in sp i te of the fact that the

,

amounts invested are s o small for the reason ,

 “
GE T RI C H $ UI C K S C HEMES
- -
”
1 1 9

that even if th e scheme is exposed as a swindle ,

th e individual amounts are s o small that it

would not pay any singl e person to resort to
la w for the r e covery of his money True it is .

that a large numb e r of such i nvestors if acting ,

in co n cert would become a m enace but as a

, ,

rule such investors are too widely scattered or ,

too u n intelligent or indiff erent to make a ny

move of this ki n d I n number these ten dollar
.
,

investor lists run into the hundred thousa nds ,

an d a r e the mai n avenue for floati n g all

schemes of the cheaper and more openly fraud
ul en t variety .

“
Th e twenty five to fifty dollar list is made
-

up of country investors M ethodist and Baptist ,

ministers country doctors a nd all classes of

,

teachers ; also barbers waiters hospital nurses

, ,

and the general class of people who are abl e

in one way or other to s et aside for a rainy
d ay from $ 2 5 to $ 1 0 0 per year Th es e lists a re .

used in slightly more pretentiou s schem es of ,

course with sometimes a little mo r e merit to

,

them The $ 1 0 0 to $ 5 0 0 investors con sist of

.

doctors of slightly higher grade t han thos e r e

ferred to above ; also college teacher s a nd p r o
fess o rs small W all S treet lambs Episcopal a n d
, ,

P resbyterian ministers mercantile clerks , ,

some count ry m erchants and other thrifty peo

1 20 ART O F W A LL S T REE T I N V ES T IN G
ple who annually accumulate a few hundred
dollars over and above their cost of living .

S uch l i sts are used for more pretenti ous

schemes and i n addition to the promotion of
, ,

frauds they are someti mes used in perfectly

,

sound and le gitimate enterpri ses The higher .

grade l i sts coveri ng , to invest

o rs largely explain themselves and while they
, ,

are a s often used by schemers for o ffer i ng their

wares yet as they are largely m ade up of more
,

sensible and cautious people they are not s o ,

popular i n the get rich quick promoting fra

“ - -

t ernity of th e larger lists of more modest in

ves t o rs .

While swindles a re promoted to a gi gant i c

extent through circulars and by mail yet much ,

business i s also done through the medium of

newspapers ma g azines and s o forth M any
, , .

( but not all ) of th e large metropolitan dailies

wi ll sell advertis ing space in which notorious
swindles are promoted ; magazines also of high
grade i n other ways constantly s ell space for
,

the explo i tation of mi n i n g real estate a n d ,

other sch emes ; the columns of country dailies

and weeklies are not o nly o pen as a rule to
such schemes but for a consid eration they will
,

often publ i sh w rite ups recommending or

“ ”
-

booming a particular enterpri se The write “

.
1 22 A RT OF WALL S T REE T INVES T IN G
In considering roseate prospectuses and th e
vari ous other plans which a r e constantly found
in the public p r i n ts o fferi n g sh a r es for
sale one of th e rules of n ea rly universal
,

application which will usually go a lo n g way

,

toward the protection of the investor is this : ,

A lways question any proposition o fferin g

stocks or bond s for sale where such o ff ers are
made directly by the company itself and not ,

th rough a banking house or other reputable

co ncern I f no bankers a re handling the sale
.

of securiti es it is usu a lly the cas e that there

i s something shady about the scheme
“ ”
.

The re are exceptions of cou r se but not ma ny

, , .

I f the securities are o ff ered by bankers a n d

brokers the n ext step should be to ascert a i n
,

the standing reputation and fi nancial strength

,

of the bankers or brokers themselves W all .

S treet and the other financial centers of the

country have their full share of irresponsible
concerns of this class .

The apparently plausible statement is fre

quently made that money is saved to the com
pany and its stockholders by avoiding the em
ployment of a banker or agent to market s ecur
t ies But thi s is not s o in ninety nine cases out
.
-

of a hundred I f a proposition has merit the

.
,

promoters always find it much more eco nom

 “
GE T RI C H $ UI C K S C HEMES
- -
”
1 23

ic
a l to go to a concern who ha ve spec ial i zed
and have developed the proper machinery for
the floating of secur i ties rather than under
,

take to do it themselves The banker not only

.

ha s the clien tele but he has the organization

,

for handling the bus i ness e ff ect i vely and eco

n o m ica l ly ; and of course i n ma ny cases his
, ,

prestige and general reputat i on have much to

do wi th making the flotation a success F or all .

this he frequently charg e s a go od round com

mission ; sometimes too much perhaps but not , ,

s o often as is generally supposed I ndeed it .

,

would in most cases upon investigati on prove

to be a fact that wi thout the bank in g medi um ,

the fl otation would cost far more than the

usual amount represented by an apparentl y
heavy discount or commission I t is a part .

of the business of the banker to fl oat securities ,

just a s it is a part of the business of the trust

company to pay coupons P eople someti mes
.

thi nk it strange that a large corporation w ith ,

an o ffice in N ew York City should pay a com

,

mission to a trust company to cash the coupon s

on its own bonds each six months when it a p ,

p a re ntl y might do this work itself But t h e .

answer to tha t is that the trust company main

tains the mach i nery and organization for pay
ing the coupons of not merely one but of per
1 24 A RT O F WALL S T REE T IN V ES T IN G
haps one hundred companies and therefore ,

ca n a fford to do such w ork at a minimum cost

and for far less than the corporation itself could

poss ibly do it .

I t will be seen after read in g th e forego i ng

,

chapter that the simplest and qu i ckest way of

,

avo i ding the get rich qu i ck scheme no mat

“ ”
- -
,

ter where or ho w presented or however roseate

and plausible its prom i ses and claims may be ,

i s to never entertain any proposition which is

not o ffered through a banker or other agent ,

and then hav i ng adopted this rule to go one

, ,

step further : never have dealings with a

banker broker or financial agent until you have
,

i nvestigated and are satisfied as to his char

acter standing and general r eputation
,
.
1 26 AR T OF WALL S T REE T I NVES T IN G

g g
r e a t io n of separate c o mp a m es to one large
corporation of capital This change .

was m a de to conform to n ewly enacted laws ,

a nd as a partial co n c ession to public se n ti

ment A concrete example o f the methods

.

and purpose as w ell as the a nticipated results

of a reorganization ca n best b e show n in the
manner foll o wed below I n this way we will .

avoid the complexity which always results in

a na ly z m g an actual reorganization with its
many details whereas by creating a simple
,

example as is done below we demonstrate the

principle without beclouding the/m
,

ind of the
student with i n cidental facts a t$ figures .

L et us assume th e existence of a railroad

syst em of miles know n as the Great,

S outhern R ailroad Company I t is cap i talized .

as follows :
F irst M o rtgage 6 % b o nd s due 1 9 20
S ec o nd M o rtgage 5 % b o n d s due 1 93 5
,

C o nso lidated M o rtgage 5 % b o nds

, , .

, due
1 950

P referred St o ck ( 6 7 lati
.

0 mu
cu ve )
C o mm on S to ck
T tal apitalizati ( p val )
o c on ar ue

9 I t will b e noted that to pay the i nterest on

the three bond i ssues requires per
year nd i f 6 % i s also pa i d on preferred st ock
, a ,
 REO RGA NIZA T I O N S A ND SY ND i C AT E S 1 27

additional will be required making ,

in all To pay any dividend on the

.

commo n stock would of course require a still , ,

further amount .

N ow let us assume also that the first mort

gage carries a si nki n g fund of per y ea r ,

which must be covered of course out of ea r n , ,

This will increase the total charges t o

0 0 per annum excluding the divide nd ,

O ver a pe riod
of six years the gross and net
earnings of this road have resulted as follows
Gro ss O p ti g N et F xei d i
h
n
p
era
D ff
Earning s Ex enses Ea rning s C ar g es
t r ence

-
l
1 901 .

1 902 .

1 9 03 .

1 9 04 .

1 9 06
t l pl t pl
.

( I n the l c o umn th e us i g n i ndica sur us ,

i ig it )
as S es
and t h e m nus S n d efi c .

In exam ining the foregoing statement we

note that in 1 9 0 0 a nd 1 9 0 1 the road earn ed a
c o mfortable surplus over charges and we c a n ,

assume that a part of this surplus was paid

out in preferred stock dividend s The road .

was pretty heavily bonded but it was operated

on the theory that growing business would
take care of these heavy requirements B ut .
1 28 AR T O F WA LL S T REE T I NVES T I NG
in th eth i rd year a very serious falli n g o ff in
,

earn i ngs occurred owing to a crop failure and

, ,

the net earnings were not quite equal to the

charges I n the fourth year however a sub
.
, ,

s ta ntia l recovery is made and a good surplus

again shown But in the fifth and sixth

.

years further serious reverses occur and vast

defic i ts are shown I n th e endeavor to keep
.

down expenses dur i ng these latter years the ,

roadbed has not been pr o perly tak en care of ,

equipment has run down at the heel and the ,

property has been sk i nned generally in

“ ”

order to show net results I t w ill be noted .

that i n the earl i er years the percentage of ex

p enses to gro ss even when the latter totals
,

w ere larger was , a normal figure But .

later when the gross began to drop the ex

, ,

penses were cut d ow n in even greater propor

tion ( except in 1 9 0 4 when the gross fall wa s
,

extraordinarily heavy) and pract i cally no

m oney was spent on the property to keep it
up to the proper standard for doing bus i ness .

The net result i s that when 1 9 0 5 arr i ves the ,

c ompany i s i n a disastrous condition ; and has

not even ava i lable funds to m eet its charges ,

not t o m ent i on money needed for absolutely

necessary expenditures to maintain the prop
erty . Besides its cred i t is gone its securi ti es
, ,
1 30 AR T O F WALL S T REE T INVES T IN G
requ i red to pay an assessment of 10 %
0 0 0 ) after wh ich they r e ceive $ 1 0 per share in

new preferred stock and $ 3 0 per share

in n ew common stock I f this plan i s .

carried thr ough to a succes s the net results

after completion will be as follows :
There will be outstanding
O ld F irs t M o rt gag e
b d 6% on s d
( un is
t b d)
ur e
N w C
e l M rtgag 4 % b d
o n so o e on s

N w P r f rr d t k
.

e e e e s oc

N w C mm
e t k
o on s oc

T talo

There will be left uniss ued of the

new 4 70 consols of which , will be
reserved to retire the old first mortgage 6 s
when the latter mature and the balance wi ll ,

be reserved for capital r equirements W ith the .

preferred and common stock not disposed of

in the above statement in preferred
and in c ommo n) th e reo r ganization ,

committee and underwriting syndicates will

be compensated for the i r work and reimbursed
fo r their expe nses The total cap i talization
.

outstanding ther efor when the reorganiza ,

t i on i s com pleted wi ll b e , exactly

the same as was the case with the old c om
pany .
 REO RGANIZA T I O NS AND S Y NDI C A T ES 1 31

N ot e, howeve r the changes that have been

,

b r ought about The reorgan i z e d com pa ny has

.

r ec eived in new cash a nd also has

of available 4 % bonds in its treas
ury ( a portio n of which may be underwritten
in t h e pla n a n d sold immedia t ely for use in
imp r ovi ng th e prope r ty) a n d its fixed charges
, ,

i n cluding the old si nki n g fu n d will have b een

,

re duced from to per a nnum .

As th e ave rage annual n et earn ings of the

prop erty for the six ye a r period were
the road is now in a fina n ci a l position where it
ca n imm ediately S how a substa n tial surplus

above its charges U nder the new regime with

.
,

g r oss earni ngs at ( the av e rage for

s ix y e a r s ) an d a s suming average o perati n g ex

penses of 6 6 2 we would have a surplus

abov e charge s of which would equal ,

besides the 4 % dividends on the preferred

stock n early 2 % on the common stock I n
, .

event of s o m e of the treasury bonds be i ng

sued for improvements or acquisitions it

of course pr obably result that an e u
,
q
increase in income would be shown .

I t is in the carryi ng through of a plan

a s the foregoing that the work of the
,

writi n g syndicate com e s in The.

consists of a
1 32 AR T O F WALL S T REE T IN V ES T IN G
others of financ ial standi n g and resourceful
ness who band togeth er and formally agree to
,

g uarantee the success of the plan U sually

. a
banking house or trust company of prominence
becomes the syn dicate manager A n agree .

ment is then entered i nt o by the syndi cate

to take all the bonds and stocks at a gi ven
price which are not taken by th e orig i nal hold
ers themselv es on th e terms o f the plan In .

this way the success of the plan is insured and ,

the old holders who refuse to j o i n in the r eor

g a n iza t io n are either given th eir money or
bought out on a mutually sa ti sfactory basis .

The underw r i t i ng syndicate seeks its profit

in two w ays . F irst through a comm i ss i on
,

from the new company which usually comes

,

in the shape of secur i ties I n the forego i ng

.

case the synd i cate would get in pre

ferr ed stock and i n common stock .

S econd the syndicate expects as an addi

, ,

tio nal source of income to sell at a profit

,

through its synd i cate managers whateve r ,

s ecurit i es it i s o bliged to take up i n the under

wri t ing I f these securit i es are not market
.

“ ”
a ble ,
they are then either tied up and car

c erta i n specified period w i th a vi e w

,

e sale or else they are del i vered di

,

the members of the synd i cate who do ,

y s ee fit wi th them .
 The New York Stock E xchang e

E W Y OR K has no more entertaining

publi c exhibition than its S tock E x
change I t is one of the Show plac e s of the
.

ci ty The visitor who for the first time l o oks

.

do wn from a gallery upon its m embers in the

ac t of tran sacting business is asto nished at the
,

apparent confusion he witnesses H e se ems .

to have entered a madhouse The idea that the

.

ma rket values of our leading securities should

be determined by what appears to him to be
a howli n g m ob of incurable lunati cs is inco m ,

prehen sible But if nothing could be said

against the E xcha nge which is simply a big
,

bazaar for the sale of bo nds and stocks except ,

its tumultuo usness a nd the seemi n g lack of

dignity among its operators criticism would,

have in it but an i n diff erent target for its shafts .

M uch graver questio ns gr ow out of its exist

ence . I s it a harmless institution $ I s it a
publ i c bl e ss ing $ I s it a public curse $
I SS
1 36 A RT OF WALL S T REE T INVES T I NG
a great central mart for cur r ent securi
As
t i es it is certai nly of vast use There is no
, .

reason why bonds and Shares should not be

publicly dea lt in and in large quantities as
, ,

w ell as dry goo ds ; as w ell as corn and cot ton

and beef and kitchen vegetables I f the S tock .

E xchange transacti ons were re stri cted to the

bona fi d e buy i ng and selling of bo nds and
-

shares not a word could be justly s ai d agai nst

,

it But is it so restricted $ U nfortunately no

.
, .

A main occupation is wageri n g on stocks ;

many traders while going through the form of
buyi ng and selling simply bet th eir mo n ey ,

upon the rise or fall of th e shares they s elect ,

as they would upon the shifti n gs of cards or

dice The Exchange while doing a large l eg iti
.
,

mate business i s also a n immense speculating

,

I ts
members are divi d ed i nto t wo classes
those who execute co mmissions for ot he rs and
those who deal on th ei r own account I t is .

needl ess to sa y that among the latter are the

boldest and sharp est speculators of the day .

The careers of these men can be sk etched in

very few words Through the exerci s e of supe
.

ri or native wits or the accident of extra o rdi

nary luck they flourish marvelously for a time ;
,

but o nly as a rule to los e their h eads and thei r

, ,
1 38 AR T O F WALL S T REE T INVES T ING
Of th e ordinary Wa ll S t r eet speculato r how ,

ever clever or however favored for a time it ,

is perfectly sa fe to say that if he li ves long

,

enough and sticks to the business he wi ll fi n ,

ally come to gr i ef .

But how about V ander bilt pere who was ,

more or less of a W all S treet ope rat or all his

many days and a few others n ot wholly dis
,

sim i la r if l ess conspicuous examples $

Ah $ that brings us to a view of some of the
interior w orki ngs of the N ew York S tock E x
change that the public has little conception of ,

and which al one will give a correct under

standing o i its real character The popular
idea i s that the E xchange has upon its list to ,

be d ealt in all or nearly all prominent stocks

, , ,

and bonds o f ackno wledged value impartially ,

selected and solely becaus e of their meri ts .

There could be no greater misconcepti on W e .

do now always find there the shares of hun

dreds of high grade securities both stocks and ,

bonds representing corporations of h i gh stand

,

ing and large bus i ness success ; railroads

, ,

industrials municipal corporatio n s whos e man

,

a g em e nt is unexceptional and whose securities

,

are amo n g the choicest investments But if .

the r e is a company with a speculative board

of directors and whose stock has been watered
,
 THE NEW Y O RK S T O C K EX C HAN GE 1 39

u ntil it will fl oat a respectable n avy an at ,

t empt is often made to place its shares o n the

E xchange s list O r if there is a c ompany that
’
.

is absolutely controlled and directed by some

particularly active and conspicuous manipula
tor its st o ck may often be found at the same
,

place There never is appare n tly much diffi

.
, ,

culty i n a big stock operator getting his issues

upon th e list What has been the result $
.

S imply that much genuine rubbish has been

u nloaded upon the public .

M uch but not too much has been said in

, ,

condemnation of stock watering ; of the produc

ti o n of cor pora te securities representing little
or no cash investme n t and which innocent per
,

sons are led to purchase in the belief that they

are getting full values But how is it that
.

these spe culative issues are so eas ily marketed ,

and the producers escape all responsibility for

the imp o sitions pract ised $ H ere is wher e the
E xchange s cr edit so to speak is often used
“
’ ”
, , .

The E xchange is made the conduit through

which the water is diverted to the investor s ’

pockets W hen it takes the stoc k upon its list

.
,

the E xchange becomes practi cally the seller ,

supplying the machinery and means of trans

fer and it gua rantees not hing W hoever buys
, .

at its boa rd is underst o od to take all risks no ,

1 40 AR T OF WALL S T RE ET I NVES TIN G
matter how much decepti on is used H e may .

be vi ctimized but he has n o redress The E x

, .

change is S imply the medium th r ough which

the over issu es have be en marketed I t is tru e
-
.
,

of co urse that without th e faciliti es of the E x

,

change many o f the stock wateri n g frauds

,

whi ch have become h isto rical nev e r could have

been succe s sfully consummated .

O nc e on the Exchan ge s list seldom is a ’

,

stock so worthless that with a shrewd m a nip u ,

lator behind it it cannot be at some t im e un

,

loaded The proc ess ha s been a simple o ne

. .

First they are washed —si n gular how the

“ ”

idea of water runs through all st o ck o perations

-by pre arranged sales of the stock O utsiders
-
.

are then told tha t there is money in it a nd ,

“
they begin to buy The st ock is duly sup .

ported a n indispensable precauti on— that is

”
, ,

it is taken at quo tation prices wh en o ff ered by

outside o wners and s o up and up it is marked
, ,

the speculative public taking large bl o cks i n

the belief that it is going higher and wi th ,

little thought of its a ctual va lue u ntil there ,

comes a time when the o ri ginal supply has

been exha usted and the shares are no longer
,

sup p orted a nd down down they go The real

, , .

value of the stock has lit tle to do wi th its nego

tia tio ns I n the l i ght of this explanation th ere
.
,
1 42 AR T O F WALL S T REE T I NVES T IN G
be for e he is acc epted Tra n sactio ns b etwee n
.

members are i n most i n stances ve rba l a nd as ,

they amou n t to millions of doll a rs in valu e

daily confide n ce in each oth er is impe ra tive
, .

I t is a rare occurre nc e that a dispute arises be ,

cause o f the accuracy a n d ca r e ex ercised in

transact i o n s with each oth er and as a rule
, , ,

th e same ho n esty a nd methods are extended

to thei r relatio n s with customers who are not
m embers The legitimat e b r ok e r is always
.

solicitous for the w elfare of his cli ent f r om ,

s elfish mot i ves if nothing else A cus tomer

, .

who imagin es h e has not been fairly an d h o n

es tl y dealt with has only to mak e complai n t

to the secretary of the E xcha n ge stati n g his,

grievance an d a n investigatio n is had followed ,

by redress a n d the severe discipline of the o i

fend ing memb er should wrong doin g be dis
,
-

cover ed S o hi gh is the character of the Ex

.

change members that no hesitation is felt by

the publi c in entrusting to their custody larg e
sums of money What is tru e of the N ew
.

York S tock E xcha n ge is also true of th e Chi

cago B o ard of Trad e upon which is h a n d led
,

the vast pro ducts of the great agricultu ra l

W est The public should be warn ed agai nst
.

sp eculative tra nsa c tions with a ny but m em

bers of regular exchan g es or brok ers having
 THE NEW Y ORK S T O C K EX C HAN GE 1 43

p ermanen t co nn ections wi th them The nov .

i c e 1s oftenti mes unable to discriminate be

tween the legiti mate and fraudulent but ther e ,

is an i nfall ible test as foll o ws : The rules of

,

the N ew York S to ck E xchange and Chicago

Board of Trade provide that cust o mers shall
receive a memora n dum of each transaction
mad e which shall show the date up on which it
,

was made the price and with whom s o that if

, ,

a client ha s a ny doubt about it h e c a n inquire ,

of the party nam ed on the memoran dum

whether it is true or not or he c a n ask th e
,

S ecretary of the E xchan ge to investigate for

him I f the S ecretary ca nn ot confirm the stat e
.

ments in the memora n dum it o ften turns out ,

that the pa rt i es who are alleged to have partici

pated in the transaction are frauds masqu er ,

ading as S tock E xcha n ge member s with ,

whom it is worse than folly to entrust busi

ness H un dr eds of them exist in N ew York
.

City alone who live as barnacles on the ex

,

chan ges bringing ill fame and di scredit to an

,
$
-

important business .

It is a c ommon thing for a few large sp ecu

“ ”
lators to c ombine and form a pool to ad
vance s ome specific sto ck or group of st o cks ,

the idea bei n g that in un ion there is

strength ”
I n such combinations some one of
.
 1 44 AR T O F W A LL S T R EE T INVES T IN G
th e members i s usually des ignated as the
“
manager who gives all or ders for purchase
”
,

and sale The bus i n es s is generally given to a

.

number of commi ssi on hou se s who transact a

miscella neous business in order to k e ep the,

t ra nsacti on under cover as much as p ossible ,

because publicity w ould probably defeat the

plan The stocks subj ect to the manipulation
.

are made to look weak and strong alternately

— wea k i n order to induce sho rt selling
“ ”
,

when the pool is a f ree buyer and stron g to

“ ”
,

i nduce outside buying when the poo l is a

“ ”

seller Tha t part of s ee sa w manipulation is

.
-

con tinued ma king the stoc k s active and a t

,

tract ive to the public until many thousand ,

shares have been accumulated I n the m ean .

t i me the most favo rable rumo rs an d reports

relat ing to the value of said stocks are ca re
fully put forth through market letters ne ws ,

papers and other w ell known mediums This

,
-
.

is do ne for the purpose of inducing the public

to buy on the perfectly correct theory that
,

the public does buy when it is asked to pro ,

vi din g the pr i ce is high and advanc i ng and ,

e spec i ally i f i t is i nf ormed that stro ng parties

“

” “
a re behind the dea l ; when the public comes
i n goo d and strong i nfluenced by predicti o n s
”
,

of a further g reat advance it get s the sto ck ,

.
1 46 AR T O F WALL S T REE T I NV ES T IN G
l ish ed book Wall S treet and the Country
,
“
.

S ays M r Conant : .

O n e of the most pers i stent of the h al l uci

“

na tions which prevail among people other

wis e ap parently luci d and well i nformed i s ,

th e concep tion that operat i ons on stock and

produce ex chang es are pure gambling A .

momen t s reflecti on it would seem might con

’
, ,

vi n ce such persons that a function which o ccu

pies so important a place in the mechanism of
modern business must be a useful and n ec es
sary part of that mechanism ; but re fl ection
seem s to have l i ttle part i n the intellectual
equipment of the assailants o f organiz ed mar
kets O nly recently I picked up a book pur
.

po rting to treat of the subject of ethics and ,

found this remarkable passage : I f in stead of

$
,

betting on som eth i ng so small as falling d i ce ,

one bets on th e ri se and fall of stocks or on the

price which wheat will r each some months
hence and if by such betting one corners the
,

commun ity in an article essential to its wel

fare throwi ng a continent into confus i on the
, ,

law will pay not the slightest attenti on A .

gambling house for these larger purposes may

be built co ns p i cuously i n any city the s i gn ,

S toc k E xchange be set 0 ver its doo r influ

”
, ,

entia l men appointed i ts o ffi cers and the law

,
 TH E NE W Y ORK S T O C K EX C HAN GE 1 47

wi ll protect it a n d them as it d o e s the

churches H ow i nfamous to forbid gambling
.

on a small scale and almost to encourage it on

a large $ ’

“
The writer who unde rtoo k to discuss the
S tock E xchan ge in that manner in a book on
ethics might well have devot ed himself less
,

earn estly to the smaller refi n ements of ethical

definition and reverted to the ancient maxim ,

$
Thou shalt n ot bear false witn ess agai nst thy
n eighbor What he says is a hodg epodge of
.
’

mis concepti o ns I f it be true that betti n g on

.

the rise and fall of stocks be gambli n g as it ,

undoubtedly is then what follows has no r ela

,

tion to the first sugges tion To one havi n g .

a ny k n owledge of the subject matter the two -

parts of the firs t sente nce are incons iste n t with

e a ch oth e r a n d mutually destructive P ure .

be tti n g is done in bucket shops is of n o use to -

,

th e c o mmu n ity is d e structive to the mo r als

,

a n d poc ke ts of young m en and cannot be too ,

severely censured But s uch betti n g is not .

c o nfi n ed to buildi n gs b e ari n g the sign S tock $

Excha nge It has n o thing to do with the

.
’

l e gitimate pr o ce sses of the e xcha n ges M or e .

over one cannot corner the community on a ny

,

$
a rticle e ss e n tial to it s welf ar e by betti n g in ’

buc ket shop s H e ma y perha p s do it within

-
.
1 48 AR T O F WALL S T REE T I NVES T I N G
c ertain limits by actual trans actio n s on the
produce ex changes b ecaus e they involve the
,

right to demand delivery I f it w ere true

.
,

however that no such deliveri es were c o n

,

t em p l a ted or could be made as is usually the

,

case in bu cket shop gambling it would no

-
,

more be possible to co m er the supply of wheat

by betting on its future price than it is poss i
ble for a pol i tic i an to carry th e election h i s
way by laying h eavy od ds on his candi date .

His bet s would not make votes and merely ,

betti ng on the prices of the c ommod i ty w ould

not i nfluence the supply .

“
The fact that such confusion of ideas pre
vails and that the S tock and P roduce ex
,

changes continue to be looked upon by many

g o od people as a sort of adjunct of M onte
Ca rlo justifies an o c ca sional restatement of
,

in th e m echanis m of business To take the.

subj ec t up from an elementary standpoint i t is ,

w ell to say a word regarding the functi on of

st o ck c ompanies . The di scovery was made
long before our time that a piece of property
or a ne w enterprise could be given m obility
and d i v i sib i l i ty by putting t h e title to its own
ersh ip i nto transferable shares . The creat i on
of share companies e nables th e small cap i ta l of
the essential part wh i ch these exchanges play
: 50 AR T O F WAL L S T REE T I NV E ST I NG
of di sturbance N o ot her ins t itution is so sen
.

s itiv e I t exaggerates all th e symptoms of

.

trouble I t s e n ds out its alarm i ng rep orts a s

.

the storm cloud send s out its lightnings

-
.

L ookin g at it as the barometer of values the ,

timid naturally conclude that everything is

lost and thus the evil i s unduly magni fied
, .

Wall St reet is as much the natural field for

panics as the p rairie i s for tornadoes .

Wh ile the E xchange has been of advantage

to the bus in ess i nterests of the country ther e ,

are many who have had deali ngs wi th it who

would n ot tes t ify i n its favor O f the thou .

san ds and thousands who have visited it i n

p erson or by p roxy and done a little business
,

with it not many are ready to ri se up and call

,

it bless ed excep t in a qual ified sens e I f all

, .

were to give th e ir experi ences what would ,

the verd i ct be $ I t i s to be apprehended that

the evi denc e o f a very decided maj ority would
not be fl atteri ng to W all S treet s speculat i ve ’

methods ; that their tes tim ony w ould be that

they had found i t eas ier to lose m o ney than to
make it .

The man who says he never sp eculates i n

”
stocks but buys only what he can pay for is
, ,

a su ffer er as frequently as the man who buys

on a ma rg in
“ ”
H e is generally a sticke r
.
“ ”
 THE NEW Y O RK S T O C K EX C HAN GE 51 1

one who “
never lets go H e buys a security
.

that he believes in and so stro ng is his c o nfi

,

dence that he wi ll not accept a generous profit

if it is o ff ered him and he is sti ll more tena
,

ci o us when a loss is gr o wi n g H is tempera

.

ment will not admit of th e po s sibility of an

eventual l o ss but the rule ( with th e exceptions)
,

is that he will fina lly take his loss when it has

reached its greatest p r oportions S ecurities
.

amounting to hundreds of millions of dollars

have been car r ie d by people who never spe en
“

”
late through the d epression o f th e past four
,

years They have paid i ntere s t on money bor

.

rowed paid as ss essm ents u nder re organiza

,
-

tion sch em es and sti ll a loss stares them in the

,

face.
1 54 ART O F WALL S T REE T INVES T ING
which are due from some special cause I f all .

things w ere equal every stock would of cou rse , ,

have the sam e value in every market in which

it i s dealt i n Th ere are two kinds of arbi
.

trage deali ngs i n stocks between N e w York

and L ond o n O ne operation is kn own a s the
.

“ ” “ ”
spread and the other the back spread -
.

Averagi ng Th i s is a speculative term which

.

is used to describe purchases or sales of stock

which are made when the market i s rising or
fall i ng a s the cas e may b e for th e purpose of
, ,

improvi ng the p osition of the buyer or seller

in th e matter of his average price for all his
securities F or i nstance if 1 0 0 shares are pur
.
,

chased a t 95 and the pri ce declines to 7 5 the ,

averag er will purchase another hundred shares

at 7 5 thus bringing the average cost of his
,

total holdings to 8 5 H ence as soon a s th e

.
,

price of the st o ck r ecovers to over 8 5 he wi ll

have a profit on his entire transactions .

B ear Th i s i s th e name for a speculator who

.

sells stock short in expectation of buyi ng i t

ba ck at a lower price I n order to do thi s he
.

of course borrows a cert ificate to del i ver

aga i nst his sale a n d when he has bought in or
,

“ ”
covered he uses the new bought c ertificate
to repay the loaner .

Bill of E xchange This is a wr i tten order or

.

request fr o m one person to a n oth er for pay

 S T REE T P HR A SE S AND MET H O DS 1 55

ment to a thi rd party the amount pa i d be i ng

,

charged to the one who issues or S i gns the

b ill There i s i n reali ty no di fference bet ween
.

“ ”
a bill of exchange and an ordinary draft but ,

the former te rm is commonly appl i ed to an

order for money payable in a foreign country ,

whe reas the same sort of order payable within

the country of its ori gin is kno wn as a draft“ ”
.

Bli nd P ool A blind pool in the stock mar

.

ke t is one where the members j oin together

and contri bute cap i tal agr eeing that only the
,

ma nager Shall have full charge of the pool and

k now in what way the money is to be used .

Blind pools are not confined to stocks but may

be c arri ed on in a scheme of a hn os t any natu re .

Bobta i l P ool Th i s is a term wh i ch usually

.

appl i es to a small or i nformal pool in s t ocks .

I n such cases the members j oin together to

move the stock e i ther up or do wn and then
each is usu al ly allo wed to su i t his o wn pleas

ure i n clos i ng out his i nterest i n the pool .

Buck et i ng This is a term used to describe

.

s ales made by a broker for h i s o w n account

and r i sk a g ai nst customers purchases or pur

’

cha se s by the brok er a gainst customers s ales ’

.

I t is a reprehensible pract i ce and is usually

done to enable the brok er to specula te a g ai nst
his custom ers tr ades
’
I n such instances the
.
 15 6 AR T o r WALL ST R EE T INV EST IN G
broker wins if his customers lose or he los es ,

if his customers wi n .

Bucket S hop This is a place usually a dver

.

tised as a brokerage o ffice where bets are made

on regular stock exchange quotations N o .

actual tran sact i ons take place U sually money

.

is put up by the customer and a c ommission is

charged for buy i ng and selling the sam e as on
a regular exchange When th e quotat i ons
.

Sho w a profi t to the customer he is privileged ,

to demand h i s profit ; when th e lim i t of the cus

t o mer s margin has been reached in the price of
’

the stock the customer has lost his be t and his

,

money and i s wiped out

“ ”
.

Call A call on a stock i s a contract or

.

agreemen t binding the issuer to deliver to th e

holder of the call th e stock named therein
within a certa i n time at a cer tain price if the
, ,

holder shall so demand F or instance the one

.
,

issuing a call wi ll agree to deliver one hundred

Shares of a specified stock within thirty days
at n o i f the purchaser makes a demand fo r it .

S hould the stock be selling at 1 0 6 the i ssuer

of the ca ll may be able to sell his promise for
$ 1 0 0 Th e purchaser o f the call will then hold
.

the same and if the stock rises above I I I with

,

in the thirty days he will call upon the issuer

for the hundred Shares at n o and pr o bably sell
1 58 AR T O F WALL S T REE T I NVES T IN G
not have been made but by agr e em ent the
,

dividend is to go to the purchaser and not to

,

the party i n whose name the certificate stands .

W hen th e divi dend is paid to the original

party the due bill is presented to him and he
passes the dividend over to the purchaser .

Flat This signifies without i nterest

.
“
.

When bonds are sol d fla t no cha r ge is made

to the buyer for the accrued inter est as the ,

interest is included in the price of the bond .

O n the N ew York S tock E xchange all bonds

are sold at fl at prices but in private trans
“ ”
,

actions a large majority of the sales are made

“ ”
on an accrued i nterest basi s . The term
“
fl at is also used in relation to the lendin g of
”

sto cks W hen stocks are lent fl at the lender

.

does not pay interest to the borrower of this

stock O therwise the borr o w er will pay the
.

lender the market value of the stock and the

lender will pay interest to th e borrower on his
money .

G ivi ng up This term is used in the stock

.

markets to describe a broker who exe cutes an

order fo r another broker and whose co nn ec
tion wi th the transa ction then ends I n r e.

p orting t o the broker to whom he sells or

f r om wh om he buys the name of the brok er
for wh om he i s acting he is said to give up
,
”
 S T REE T PH RASES A ND ME T H ODS 1 59

th e latter The latter receives the s tock and

.

compl etes the transaction .

Hypothecation This signifies the pledging

.

of s ecuritie s or other property as collateral for

loans I n W all S treet where stocks are pur
.
,

chased o n margin and carried by a broker for

his customer they are usually hypothecated
, ,

or deposited a s collateral in loans with banks

or trust com pan i es or other loaners of money .

I t is in thi s way that the broker secures the

capital to carry th e sto ck s for his customer
'

I rish D ividend This is a term sometimes

.

used to describe not a divi dend but an assess ,

ment on a stock .

Joint A ccount The term for a transaction

.

i n which tw o or more br okers or speculators

j oin together for their mutual benefit or risk
in the carrying through of a transaction .

L ong of stocks This is the phrase used

.

when a speculator i s a bull ; that is to say when

his account Shows a balance of stocks on the
long or bull S i de The O ppos i te conditi on i s to
.

be short of stocks and be on the bear side .

M anipulation This word applies to the

.

operation of work i ng stocks both up and do wn

on the exchanges both ways at once A well
, .

kno wn method of man ipulating a stock is to

p u t through on the exchange a n umber of fi c
1 60 A RT O F WA LL S T REE T I N V ES T I NG
titio us al es one broke r agreeing to purchase
s ,

at a certain price fr o m another and the latter

then agreeing to r ep urchase th e same stock at
the same or another price This a rrangem ent .

is sometime s carried on between various brok

ers each transaction b eing o ffset in some way
,

by another AS a result there may be a large

.

number of quotations reported with no actual

sales These quotati ons are commonl y known
.

“ ”
as wash transactions a nd the purpose usu ,

ally is to create outside i nterest in th e stock

and start a speculation in i t among genuine
buyers and sellers .

M argi n This is the w ord used to describe

.

money depos i ted w i th a broker for specula

ti on in stocks grain or oth er commodities I n
, .

stocks the m argin requ i red ra n ges from 5 % to

3 7
0 0 d,ependent upon th e character of the
securi ty purchased Th e average margin is .

r o % which amounts to
, on the ordinary
one hundred shares of stock The margin pro .

t ec ts the custo mer do wn to a price ten points

belo w the price he has paid if he is long of ,

s tock and ten poi nts above th e price he has

,

received if he i s short of the stock AS his .

margin becom es narr o wer because of the

change i n the market prices he is required to
put up more money or else ha ve his account
clos ed out .
1 62 ART O F W A LL S T REE T I NVE ST I NG
bindi ng the i ss u er to rece i ve from the holder
the st o ck n am ed i n the agreement w i thin a
certain time at a c erta i n pric e if the holder
shall so demand The a c t of del i vering such
.

stock to the i ssu er of the contract i s g enerally

kn own as putti ng the stoc k
“ ”
.

P yram i d ing Thi s descr i bes operat i on s by

.

the use of paper profits made i n transact i ons

not yet closed and therefor not yet i n hand
, , .

F or i nsta nce one may purchase one hundred

,

shares of stock at 5 0 on a marg i n of 1 0 % of the

par value I f the stock advances to 6 0 the pur
.

chaser w i ll then have 2 0 % marg in and h e w i ll

purchase one hundred Share s m ore I f the .

price then go es to 7 0 he wi ll purchase t w o hun

dred shar es more gi vi ng him four hundred in
,

all I f it next goes to 8 0 he wi ll then pur cha se

.

four hundred Shares m ore g iv i n g h im e i ght ,

hundred shares i n all on wh i ch he has a mar

,

gin o f or U p to th i s poi nt his

paper profits w ill be I f the mark et c on
tinues in its r i se he wi ll cont i nu e accumulat i ng

stock unt i l his account Shows very large a c

,

cumu lated paper profits I f he then sells out .

he w i ll have turned h i s profits into ca sh but ,

i f the m arket suddenly drops ten points he will

not only have lost the profit on the last trans
act i on but wi ll have lo st everyt h i ng I n o ther
, .
 S T REE T PH RASES AND ME T H O DS 1 63

words ,the inverted pyramid wi ll have fal len

and ruined him in the crash .

S pread A spread is a put and call combined

.

and is practically the same as a straddle I f .

the stock goes below the price named in the

put end plus the cost of the spread the holder
, ,

makes a profit ; also if the stock goes above th e

price named in th e call end plus the cost of ,

the spread the holder of the spread also profits

, .

I n other words the purchaser of a spread is

,

“ ”
said to play the two ends agai nst the middle ;
he has two chances to make money and h is
loss in any case is l i mited to the cost of the
spread .

S traddle A straddle is S imilar to a spread

.

w i th the except i on that only one pri ce is named

in i t The stock may be ca lled for or delivered
.

at this one price only AS in the other cases

.
,

the stock must go up or down more than the

amount paid for the strad dle before there is a
pro fit i n i t .

U nder the rule This is a term used to

.

describe an o ffi c i al transacti on made on the

N ew York S tock Exchange I n case a mem .

ber of the E xchange fails to receive or deliver

stock in accordance wi th his contract of pur
chase o r sale the stock i n quest i on is bou ght
,

or sold as the case may be by the ch ai rman of

, ,
1 64 AR T O F WALL S T REE T INVES T ING
the E xchange for the account of th e del in
quent member and any di fference in cost is
,

charged or credited to him Wh en t ra nsa c .

tions of this kind are put through they are

known a s purchases or sales made under the
”
rule .

W ash ing This term describes the operation

.

of s i multaneous buying and selling the same

stoc ks for the purpose of making quotations
and i nduc i ng outside speculation or interest in
the stoc k by i mparting apparent activi ty to it .

W ashing is usually employed when manipula

t i on of some ki nd is in progress .

W atered stock A term used to des cribe the

.

capital stock of a company which is not sup

posed to be repr esented with a corr esponding
amount of assets The term as used is a vague
.

one and is subj ect to several interpretat i ons .

F or instance when a stock di vidend is de

,

cl ared th e ori gi nal stoc k i s said to be w atered

to that extent unl ess the newly issued stock

,

represents added prop erty or value i n some

form .

E x d ivi dend When a stock upon wh i ch a

- .

di vidend has been declared is sold a n d the

price is not to include the amount of the di vi
dend to be Shortly pa i d th e stock i s sa i d to be
,

sold ex div i dend

“ -
”
.
1 66 AR T OF WAL L ST R ET i nvESTI NGE
giv en stock is worth only so much the m a nipu
lator will ultimately b e compelled to accept
that valuation because manipulation cannot be
,

kept up The general obj ect of manipulation

.

is to buy below value an d sell above value .

“
A n i mportant in fluence of the stock ex
changes and in some ways also of the produce
,

exchanges is the infl uence they exert upon the

,

money market The possession by any coun

.

try of a large mass of salable securi t i es a ff ords

a powerful guara ntee against the a ffects of a
severe money pa nic I f i n N ew York there .

arises a sudden pressure of money s o that c o n ,

fid enc e becom e s impaired and people having

contracts entitling to future or immed i ate de
livery of money insist that these contracts
Shall be executed in mo ney instead of other
fo rms of promises what happens $ The bank s
,

call i n loans and begin to hold their cash I f .

they hold large quantit i es of s ecur i ties salable

on the L ondon P aris or Berlin market a cable
,

order will a ff ect th e sale of these i n an hour ,

and th e gold proceeds wi ll be on the i r way

across the A tlantic i n a day .

“
W onderful has been the e ffect wi thin the
last twenty five years of this steady i n fl uence
-

of the s tock market upon the demand for

.

money and up on th e smoothness of the opera

 S T REE T PHRASES A ND ME T H ODS 1 67

tions of the mechanism of the exchanges .

What has just been put i n a crude form by

referring to a cri ses occurs daily and hourly on
the stock exchanges and prevents sudden c o n ,

traction and expansion in the rate for loans .

The manufacturer goes p lacidly on paying his

four or five per cent for comme r cial loans .
,

when if there w ere no stock exchanges where

securit i es could be sold in one ma r ket at a
S light profit over another he would find that ,

his bank was first c harging seven or eight per

cent then droppi n g to three or four and then
.
,

going back to eight By means of the facilities

.

which the stock market aff ords for placing

credit i nstantly at the command of one mark et
or another the pressure for money is miti
gated and has put a limited e ff ect upon the
,

commercial borrower S uch pressure as now .

occurs is transferred to the borrower on call

— the broker i n stocks who thus acts as in ,

Surer for the c ommercial borrower Th i s in .

fluen ce of the stock market has much the e ff ect

of a bu ff er upon the impa c t of two solid
bod i es Cri ses are prevented when they c an
.

be prevented and when they cannot th ey are

,

anticipated an d their force is broke n into a

,

mild success i on of ri pples i nstead of a tidal

wave ”
Chas A Conant Wall S treet and
.
-
“
. .
,

”
the Country .
$
A ma n s '
l i
earn ng di e s wi th hi m ;
even t
h i s vir ues f a d ut fe o o re mem
bra nce ; o ut th e d ivid d en s on th e
t
s ock s h e beq uea th s t o hi s c h ild r en

l i ve a nd k ee p hi s memory g r een.
”

—H olm es .
 M oo dy ’
s M a nu a l of

Se c uritie s
S t a n d a rd R efe ren c e B o o k o f th e R a l ro a d s i a nd
ti ti l
I n d u s r a C o rp o ra o n s o f th e
it tt U n e d S a es

Thi p bli ati i a l m f

s u c p ag on s vo u e o e
an d tai p t dat fi a ial tati ti al
co n ns u - o- e n nc s s c
d g ral i f rm at i r gard i g all la ,

an en e n o on e n c ss es
o f A m ri a rp rat i i l di g all Rail
e c n co o o n s, nc u n
r ad I d trial T l ph
o s, n us G E l tri s, e e o n e, a s, ec c
Light d Tra t i C mp a i M i
an Ba k
c on o n es , n es , n s,
e t c ., etc .
W w ll ati fi d with th la t mb r
“
e a re e s s e e s nu e
o f M dy M a al I t — tai a larg
oo
’
s nu c on ns e
am t f w m at rial W J H ay
.

o un o ne e es
Cl la d O hi
. . .

S o ns , eve n o.
W ha alr ady r i d py
,
“
e ve f e ec e ve o ur co o
M dy M a al f R ailr ad d C rp rat i
oo
’
s nu o o an o o on
S riti
ec u d fi d th am gr atly imp r d
es , a n n e s e e o ve
o ve r pr i mb r
ev o us Y— r b k i w nu e s. ou oo s no
iut i d ie abl
n t s N W H
ens arr i e o us s
d C hi ag
q p
N w Y rk
. . .

C o ., e o an c o.
Thi ffi
“
ld t g al g with t
s o c e c ou no et on ou o ne,
no r d w oh w y t h r fi a ial i ti
e see o an o e n nc ns tu
ti on l —Whitak r C Ba k r St
c ou e c ., n e s, .

L o uis
Pi h
.

C lo t
in R e d
r ce
I n F u l R us sl i ,
N et

Ch g P id
a L e a t h e r,
E xp r es s ar es r ep a

The M oo d y C o rp o rat ion

P ublishers
35 N a ssa u St .
,
New Y ork C ity
 C o m p l e t e Se t s of

M oody S M anu al

We c an s up p ly a l imit d e num e br of co m

p l et e t
s e s , u n ifo rmly b d o un , of th e s even is sues
of M O OD Y S MANUAL ’
y ar c o ve ri gn the e s

1 9 00,
9 1 9 0 1,9 3 1
9 4 9 5 9 6
0 2, Th 1 0 , 1 0 , 1 0 , 1 0 . ese

seven y ar mbra h m t imp rta t p riod

e s e ce t e os o n e

i nA m ri a fi a ial
e c
’
d i d trial hi t ry
s n nc an n us s o ,

an d ba k r fi i
no n e t d t l ibrary
’
s,
’
n a n c e r s o r s u en
’
s

i
s mp l t
co with t t h
e e lm ou es e s even vo u es .

Th y e tit t
c on s y l p a d ia f m d r
u e a n enc c o e o o e n

fi a n nce and i d try n us .

P ri c e fo r the s et , in re d c l oth , n et

E$ P SS C
RE HAR G E SP P I RE A D

T he M oo d y C o rp o ration
P ublishe rs

35 Nassa u St .
,
New Y ork C ity
 The Tr u t h A bo u t
t he Tr u s ts
i ti
A D e s c r p o n a n d A n a y s s o f th e l i
i
A m e r c a n T ru s M o v em e s t t
B y JOH N M OOD Y , E d i t or Mo o d y ’
M anua l of Ra il d
i S ii
s r oa s

and C o rp o r a t on e c ur t e s .
$

A C O MPREHENSIVE WO RK mbra i g e c n
d rip ti hi t ri
es c o ns d a aly
s o f all h
es an n s es
,

o t e
Gr at Tr t I d trial Fra hi d Tra
,

e us s, n us nc s e an ns
p ti
o rta gi i g h fa t r gardi g th ir F
o n, v n t e c s
,

e n e
m ati H i t ry Fi a ial R lat i
or
o n, s o d G
n nc e o n s an en
ral Chara t ri ti Th tir Tr t M
,

e c e s c s. e en e us o ve
m t a alyz d
en n d i e m a y r mark abl f at
an ts n e e
r i idly ill mi at d h t xt b i g pp l
, e
u es v v u n e t e e e n su
m t d by a mb r t riki g m ap
, e
en e f nu d e o s n s an
h art f h m t im p rta t w rk
“
c s. O ne o t e f os o n s o
thi g rati ay a p r mi t m f i
o
”
s en e on s s o n en an o a
fair s. A tr ly p a rami i w i h
u no tir c v e o t e en e
Tr t M m t
us o ve en

Th v l m i a p r f t m i f i f rm at i
.

e o u e s e ec ne o n o on
on h
t e su bj t f Tr t d h ld b i h
ec o us s a n S ou e n t e
ha d n s f o ry t d t tat ma lawy r
eve s u en s es n, e
c a p ital i t m s f a ffa ir
an i ot r d itiz s,
,

nves o an c en
,

— y Tr t p r bl m i f
,
“ ”
an o ne wh m th
to o e us o e s o
an y i t r t what v r
n e es e e

A b k f 5 4 larg ta p ag
.

oo o 0 e oc vo es
ry ha d m l m FOR
.

A ve n so e vo u e
SALE BY LEAD IN G B O O K SE LL
.

ERS will bor t y addr e s en to a n ess o n

r ip t f p ri P p lar diti $
ec e
,

o ce o u e o n, 2
L x d it i t ; add
.

; D
n et e $5
u e e 8 o n, ne 2
t f p tag
c en s or os e.

T he M oo d y C o rp o ration
3 5 N ss u St N w Y o k C ity
a a . e r
 I ND E$

A n alyz in g R ailro ad sec urit ies

A rb itrag e d efi nit io n o f
A rk ans as C entral R y
,

A ssume d b o n d
Ave ragin g d efin ed
.

B r dfi d
ea e
,

ne
B ill f E x h a g d fi d
,

o c n e, ne
Bli d p l d fi d
e
n oo e ne
B b tail p l dfi d ,

o oo e ne
B d d what th y r p r t
on s an
,

es en
B k ti g d fi d
e e
uc e n e ne
B kt h dfi d
uc e s
,

o e ne
Call d fi e ne
Cap ital a t
,

ss e s
Cap ital liabil iti es
Car gi A dr w
ne e, n e
C t alia Ch t r R R
en r es e
C llat ral tr t b d
.

o e us on
C mm t k on s oc
C a t C ha A q t d
o
on n s. uo e
C lidat d m rtgag b d
.
, ,

o n so e o e on
C tr ti a
o ns t
uc on c c o un
C rt ibl b d
o nve e on
Cr r dfi d
o ne e ne
C ri g d fi d
o ve
,

n e ne
C m lati t k
u u
,

ve s oc
C rr y b d
u enc on
C rr t a t
u en sse s
C rr t liabil iti
u en es
D b t r b d
e en u e on
D b t r t k
e en u e s oc
D lawar La k aw a a W t r
e e, c nn es e n Ry
D i i i al b d
v s on on
D ue bill d fi d ne
E ar i g p w r f railr ad
, e .

n n o e o o s .
i 78 I ND E$

E q uip ment b o nd
E q uip m ent s tatis t ic s
.

E x d ividend d efi ni t io n o f
E xt en d e d b o n d
,

F inanc ial c h arac t eris t ics

F in an c ing indus trial s
Firs t m o rtgage b o n d
Fix ed c harge s
Flat d efi nitio n o f
.

F ran c his es
, .

Get Ric h $ ui c k s c hem e s

- -

G eneral m o rtgag e b o n d
Giving up d efin it io n o f
Guaranteed b o n d
,

Guaran t eed eg g swin dl e

H yp o thec atio n d efi n ed
I nc o m e b o nd
,

I nves tmen t versus S p eculat io n

. .

I rish d ivid en d
Jo int a cc o unt d efi n ed
.

, .

Joint
Ju dgi g railr ad t k
n o s oc s
L g f t k d fi it i
.

on o f
s oc s, e n on o
M a ip lat i
n udfi d on, ne
M argi d fi d
e
n, e ne
M i i g harp r
n n S e s
N w Y rk S t k E x h a g
e o d rib d oc c n e, e sc e
N o n -c um lat i t k u ve s o c
O p rati g xp
e n e en ses
O t id br k r d fi it i
u s e f o e e n on o
P art i ip at i g b d
,

c n on
P a i g a d i id d
ss n v en
Phy i al hara t ri t i
s c f ra ilr ad
c c e s cs o o s
P r f rr d t k
e e e s oc
P ri r l i b d
.

o en on
P ri il g d fi d
.

v e e, e ne
P bli S r i C rp rati
u c e v ce f N w J r y o o on o e e se
Put, dfi d e ne
Pyramid i g d fi d n e ne
R ad i g C mp a y 4
,

e n o n s
R f
e un dm g b d on s
R rga izati d y d i at
.

eo n o ns an s n c es
R k I la d C
oc s n o
S af ty
e S rity ec u .