Foreign And Colonial Railways

(a) Foreign Railways. If these be purchased, and a reasonable choice can be made among them, the investment should be restricted to First Mortgage Bonds in gold or sterling at fixed rates of exchange; the question of local taxation should be inquired into: the powers (if any) of the Government to assume the lines at a subsequent date, and the terms of purchase; and generally, although many railways are of excellent standing and character, the subject is too extensive and complicated for minute advice in this book. The intending investor, if disposed to accept such securities, should either possess adequate personal knowledge of the financial history of the companies, or be guided by one who has devoted special attention to the class.

1 As for example, a Government Security in comparison with a Municipal Security or a Railway Debenture Stock.

(b) American Railways. I have already dealt with this section. I cannot too emphatically insist upon the essential element here, and in all transactions, of honour-ableness of character exhibited by the controllers and administrators of the undertakings considered. We want intellect in the form of specialised knowledge and practical judgment, if success is to be achieved, but equally it is imperative to find moral character embodied in every arrangement and obligation, and in the direction of the enterprise for the benefit of the whole constituency concerned, untainted by preferential treatment of the few. The remark is a general one, and applies to all commercial and industrial undertakings - that an adequate estimate of a company's operations, and the consequent advisability of investment, can only be formed by an examination of a series of accounts and balance sheets; the stability, as a reflex of sound management, exhibited in the record of the prices of its shares in the market, and general repute. This inquiry demands special aptitude which the customary investor cannot usually possess, or devote the time and training to acquire, and hence, here and elsewhere, he must be guided by external advice if he invest.

(c) Similar remarks appertain to Railways in the British Possessions,

(d) It may generally be advised that, as a rule, Bonds, not registered but with coupons attached, should, on account of the difficulty of defining the owner's position in the contingency of loss or theft, be avoided.

(e) As regards Indian Railways the process of purchase by the Indian Government proceeds as the dates of the original leases of the lands on which they are constructed expire. The Government, in purchase, chiefly allots in exchange two classes of annuities continuing for a specified period. The capital sum paid by the Government in exchange for the transfer constitutes the present value of these annuities, on the basis of the rate of compound interest for their calculation which has been settled. In the one class of annuity the full annuity is received by the owner and, unless he himself provide from each payment of the annuity an amount (termed a Sinking-fund), which he can continuously invest at compound interest during the currency of the specified term, his capital becomes totally extinct and lost when that period has terminated. In the other class of annuity, the same annual sum is granted, but before its payment a small stated proportion is deducted as a sinking-fund, and placed in the hands of responsible trustees, so that, by its investment and reinvestment while the annuity endures, the full original capital of the holder may be restored to him at the close of the assigned time.

It is obvious that trustees skilled in finance, with funds to deal with of the magnitude represented by the aggregate of these "sinking-fund" deductions, are in a position to realise, for the benefit of the holders, a continual and adequate rate of compound interest which is utterly impracticable to a single investor who attempts - and will fail - to create and manage a sinking-fund for himself. Hence, for example, he should select the B annuities of the Great Indian Peninsula Railway and the C annuities of the East Indian Railway. The B annuities of the latter railway do not provide a sufficiently large sinking-fund. These annuities are charged exclusively upon the revenue of India, without recourse to any claim upon the resources of the United Kingdom, but the security is complete since the British nation would never permit the Indian Empire to pass from its control.

Commercial And Industrial Undertakings

9. Commercial and industrial undertakings. In this section I include banks and insurance companies, mining, shipping and manufacturing companies, trusts of various kinds, and, indeed, companies of every description. There are many others whose securities claim attention, but it would be impossible to render a schedule complete. I shall make a few general comments as hints for the investor's mode of consideration generally, and, in a few specific cases, furnish advice.

The tests of a company's solid attractiveness for the investor consist of -

The tests of a company's attractiveness for investors.

(1) The examination of its published accounts and balance sheets for an adequate number of years, as exhibiting its successful and sagacious working. (2) The general reputation which it enjoys among persons competent to appraise its management and progress. (3) The absence of any irregularity in the precise fulfilment of its obligations, and a continuous record of honourable action.

(4) A full and frank statement of its affairs, so far as this condition can be judged.

(5) The stable value which its shares maintain in the market.

(6) The rates of dividend which it has successively paid.

(7) The character and position of its controlling board, whether merely or largely men of social standing without special qualifications adapted to the nature of the business, or whether rather they be men of acknowledged business capacity, reputed in the commercial and financial world, possessed of general or special business training, which the successful prosecution of the particular undertaking demands, and competent accordingly to exercise a genuine and efficient control.

(8) Has the company shown a capacity of foresight for the chances and changes incidental to all financial enterprises - and particularly imperative where the nature of the business may be subject to special fluctuations from foreign or internal competition, modifications and diversion of popular fashion and demands, and other possibilities too numerous to enumerate - by creating, maintaining and augmenting a reserve fund in protection of the capital, and in adequate proportion to possible (and it may be exceptional) changes and contingencies which particularly appertain to a specific business or class of commerce, finance or trade?

(9) Has it been established for an adequate time to enable a valid judgment to be formed of its prospects of continued success?

(10) Has it passed successfully through the crises common to its scope and area of operations?