Finance
Speculation or =Investment ?
WHILE the steady rise in British Funds and kindred securities brings benefits in certain directions, the position is also attended with some results which are the reverse of beneficial. To take the favourable aspects first, it can be admitted that the rise in the price of Government securities is of direct benefit to the National Exchequer, and, other things being equal, should be of benefit to the British taxpayer. Owing to the high price of British Funds and the cheapness of money, the Government is able to borrow on its millions of Treasury Bills outstanding at something under 1 per cent. per annum, and this, in its turn, means less expenditure in the annual Budget. Nor do the benefits resulting from the rise in British Government stocks cease with their effect upon the National Exchequer. Other high-class securities rise sympathetically and all borrowers in the trustee class of securities are able to raise their loans on very favourable terms.
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SOME EXAMPLES.
Thus, to take one concrete example, we know that by reason of the cheapness of money and the rise in high- class investment stocks, Australia has been able to convert something like £100,000,000 of her external debt into lower interest-yielding stocks involving a sub- stantial saving in her annual expenditure. This, in its turn, has a beneficial effect upon the Australian taxpayer, with favourable reactions upon the industrial and financial situation in Australia. The same is true with regard to our leading Home Industrial concerns, many of which have been able to convert outstanding Debenture stocks carrying high rates of interest into other stocks paying a much lower rate of interest and thereby benefiting the industry and the Ordinary shareholders in the companies concerned.-
YHE OTHER SIDE OF THE PROBLEM.
We have seen that from the borrower's point of view the situation is a pleasant one, but what about the effect produced upon the investor, and especially upon the small investor and the individual with small fixed incomes ? From the moment of the conversion of the 5 per cent. War Loan into 81 per cents. some two years ago down to the present time there must have been innumerable instances where holders of Government or other trustee securities or even high-class industrial debentures have had, perforce, either to accept conversion into securities giving a much lower rate of interest or to accept a cash payment, only to find extreme, difficulty in reinvesting it in any sound stocks giving a reasonably good income. Moreover, these conditions have coincided with nothing material in the shape of reduced taxation and with a rise in the cost of living, for however much index prices may show that certain commodities have fallen to low levels, the public knows from hard experience that in the essentials, including rent, today will not go the same distance that it-did before the War.
THE LURE OF SPECULATION.
Now the first effect of these conditions is, no doubt, to cause the investor to seek securities giving a slightly higher rate of interest than can be obtained on trustee stocks and yet at the same time offering reasonable safety. By the process of time, however, these oppor- tunities become narrowed until in sheer' desperation the investor is driven into the more speculative stocks, with a consequent increase in risks. So long, however, as scrupulous care is taken to minimize the risks as far as may be possible by spreading them in many directions, and so long as the investor is honestly seeking income or, in other words, concentrates upon the intrinsic value of the shares from an income point of view, the danger of loss is to some extent minimized. Where, however, the real danger arises is in the desire—quite natural, but none the less dangerous—to obtain a quick increase in capital value through a rise in share prices rather than to obtain income from earned dividends. And the _ temptation to employ this means of meeting the present difficult situation is undoubtedly increased- by two further factors in the -situation. One is that profits obtainable through a--rise shares—in other words, through an addition to capital—are not subject to taxa- tion, while a further temptation is offered by the fact that at the present time there is a good deal of speculative activity and the, manner in which some of the specula- tive shares have risen-during the last twelve months may well lure the unwary into speculative ventures.
. _THE "INVESTOR " AS SPECULATOR. - I should have no diffieulty in citing the names of many of these speculative shares which on the mere chance of prosperity later on have risen almostwithin a few months froth a feW pence to as many shillings ; where, in fact,--shares have risen by anything from 100 to 800 per cent. I am not, however, going to mention the names of any, of these shares, knoWing full well that to do so might only stimulate the ardour of would-be purchasers rather than act as a warning. Moreover, even if I were to centre the warning upon a few named shares, nothing is more possible than that by reason of their advancing still further in the near future I should merely be reminded later of the foolishness of prophecy. For let the fact be faced frankly and honestly by the would-be speculator that the danger of a specula. tive situation lies quite as much in the attitude of the general public as in the machinations of the share pushers themselves. The unscrupulous share pusher is usually concerned far more with the prospect of whether .there is likely to be a demand for the shares, occasioning them to rise in value, than with intrinsic merits, but is the attitude of a certain section of the 'public very different ?'
HOLDING THE BABY.
" A.B." sees a tip that the so-and-so shares are likely to rise sharply, and, without enquiring as to actual intrinsic merits, purchases solely on the hope of securing this increase in market value. " A.B." probably fully realizes that ultimately the shares will fall back, but is simply concerned with the question of whether he or she will be able to " get out ' before the fall comes. This is too Often the attitude of those who under the guise of investors are really seeking to obtain speculative profits, and, naturally enough—human nature being what it is—during active times of rising pikes the number of " A.B.'s ' increases enormously and constitutes, in fact, the final hope of the share pusher. Nothing is more probable than that during the coming months speculators in Mining shares, 'Rubber shares and what not may see values rising and be able to secure profits for, indeed, from what I have said earlier in this article it will be apparent that the very: fact of the famine in gilt-edged securities tends to stimulate the demand for speculative shares. Nevertheless, it is also true that there will be a large section of the public— possibly the largest section—which will finally be left holding shares of little value, though they will' cling to them fondly hoping for a recovery which will probably either never come at all or will come in the lifetime of a future generation where there will be a repetition of the process of boom and slump with a new generation for its
Victims.
THE REAL TEST.
I am, however, very far from asserting that there is anything . inherently wrong or even unwise in mixing :speculative with gilt-edged securities. The whole point centres upon whether the purchaser, while quite alive to the possibilities of capital -appreciation and even pre- pared to take advantage of such if it occurs, nevertheless centres first and foremost upon the intrinsic merits of the shares from a dividend point of view. If this is done and if enquiries are made and advice is sought before the purchases, then those undertaking such operations may ,fairly be described as speculative investors, but not as mere gamblers. With the latter it is difficult to feel over-much sympathy; while warnings in such Cases arc (For Finarscia! Notes, see page 236.)
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