Investment Advice
by GILBERT HAROLD
This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice as to specific investments.
ADVICE is reputedly the cheapest commodity in the world. It is also the most questionable. But only part of the story is told when one avers that advice is cheap. It is cheap before it is taken; it may later prove to have been very cheap or inordinately expensive.
Advice in the field of investment ranges from the allegedly confidential tip passed by a financial nonentity to the seriously considered suggestion advanced hesitantly and cautiously by the man who has lived and studied and practised. It is one of the tragedies of our speculative mania that far more people are led by the former than are influenced by the latter.
For the man or woman of wealth no weighty problem exists. If he is not already well versed in investment principles, he has available to him the best financial brains in the country. His command over money affords him that advantage.
For the small investor, however, an acute problem exists. His is not the opportunity to call forth the studied consideration of experts. The details of his problem cannot receive the attention which they unquestionably deserve. It is the purpose of this brief discussion, therefore, to review the sources of investment advice which are open to the man or woman of moderate means.
The most easily accessible semi-expert advice for the small investor is to be found in the office of the commercial banker. Here, where John Investor deposits his funds and draws his checks and perhaps arranges his borrowings, he is likely to be received within friendly doors. The commercial banker regards it as one of his duties to offer such advice. The community regards him as an expert. He deals in money, he makes investments, therefore he must know all about them. The fact is, of course, that the banker does not ordinarily regard himself in any such light. In most cases he realizes that his functions are primarily to accept deposits and to make loans. Other activities are incidental to this task. Generally speaking, he is interested in short-term credit. Long-term investing is acknowledgedly out of his line. Indeed, he often engages someone else to do his investing for him. There are, of course, larger institutions that find if desirable to offer special advisory services and support them by important statistical departments.
Frequently the small investor regards the investment banker as an excellent source of competent advice. It is altogether probable that no doubt can be raised as to the investment banker’s or bond dealer’s competency, but the disadvantage of relying on this source is that the adviser is not, and never can be, an impartial judge. Unfortunately the investor and the investment banker are, in some respects, on opposite sides, for the latter has something to sell, and if he does not sell it he will no longer be in business. It is not a question of honesty; the investment banker’s integrity may be unimpeachable. It is rather a question of psychology. Indeed, the courts have gone so far as to stipulate that investment advice from a banking institution financially interested in the sale of securities concerned does not absolve an executor from negligence or imprudence.
Probably more investors seek the opinion of the stock and bond broker than that of any other person. It is part and parcel of Wall Street that ’Jones and Company’ say that Amalgamated Buttonhole is a good buy or that Carbonated Water is going down. The weakness in brokers’ opinions lies in the fact that the broker needs orders if he is to remain in business. The more transactions his customers consummate, the greater the profits of the brokerage office. If all brokers were to advise security holders to hold their stocks and bonds for long periods and investors were to take such advice seriously, the stock and bond broker would become almost a relic. Consequently brokerage advice is likely to favor fast turnover. Like the investment banker, the broker may be entirely sincere and honorable, but a psychological factor is involved which cannot help influencing his deliberations.
Another adviser frequently sought out in matters of investment is the family lawyer. In the smaller communities especially, lawyers are conceded in the commitment of funds all the authority that the inexperienced investor, lacks. It is obvious, of course, that this is, in most cases, an ill-founded assumption. Exceptional cases to the contrary, there has been nothing in the lawyer’s training or experience to clothe him with such wisdom outside of the legal technicalities.
Very often laymen who have had some experience in investing or speculating are consulted by the uninitiated. No complaint can be lodged against this avenue of approach. If the experienced hand is really experienced, his advice may be well worth taking. On the other hand, if his experience is merely superficial, if his dabbling in the market has merely surrounded him with an assumed wisdom, if he sees only the surface of the problem, his advice, although free, may prove to be very costly.
During the past decade there has arisen a ‘scientific’ approach to the problem in the form of ’investment services.’ Some of these organizations make a real attempt to offer specific advice on what to buy and what to sell. It is sometimes difficult, however, for the uninitiated to distinguish the good from the bad among these services. As to the results produced by the relatively good type, a number of studies have been made to ascertain their degree of success or failure. Most of them have not been very complimentary. One of the best of these studies was reported by Alfred Cowles, 3rd, in a paper read at the convention of the American Statistical Association on December 31, 1932, entitled ‘Can Stock Market Forecasters Forecast?’ This study was later published in Econometrica for July 1933. It is commendable, however, that some of the investment services of this type are really making an honest attempt at solving the investor’s problem.
The unsatisfactory situation with reference to advice for the investor has called for some answer. The most obvious solution was the advent of an impartial adviser having no stake in the matter other than his client’s success. The opportunity for the development was apparent to those who realized the difficulties summarized above, and out of their realization rose the investment counselor. This new profession advanced by leaps and bounds throughout the Coolidge-Hoover ‘bull market.’ It has not lost ground during the early thirties. In fact, the experience of the past five years has served to emphasize the need for impartial and competent guidance. On the whole, the profession of investment counsel has been markedly successful in blazing a trail toward scientific investment. The record has been far from perfect, but by contrast it has been good. Of course, like any fast-growing embryo profession, it has had its satellites. During the past several years anyone with a knowledge of accounting and some ideas on the market has been able to call himself an investment counselor and make people believe him. The fact is that the profession of investment counsel should set up certain standards of training and ability, similar perhaps to those of the legal and medical professions, and have those standards made compulsory by law. That is one of the natural steps in the development of any field of endeavor which aspires to professional standing. The principal weakness of this source of advice, however, is that it is entirely removed from consideration by the small investor. Generally speaking, the charge for such service is one half per cent per year of the principal sum invested or handled. On a $10,000 account, this would amount to but $50. It is clear that no counselor could undertake the supervision of an account for as little as $50 a year. Ordinarily the minimum fee charged by the better-known houses is $250, a sum which is clearly out of the reach of the $10,000 investor. In other words, investors having less than $50,000 are ordinarily excluded from this relatively efficient guidance. The investment counselor, therefore, is no boon to the small investor.
About the only source left for consideration by the small unseasoned investor is in the investment manuals issued by certain financial publishing companies. The thought here is not that the inexperienced layman may analyze the financial statements given in the manuals. Rather he may be guided to some extent by the ratings assigned by these companies to specific securities. Though far from perfect, these ratings do offer some reasonable degree of competence and impartiality. Their record involves some bad crashes, but complete safety in anything is nowhere to be found. At least the inexperienced small investor might use them as guides, bearing in mind that it takes something more than a rating to stipulate the true degree of desirability in any investment.
Finally, and the most logical thing of all, every investor should familiarize himself with the basic principles of investment. It is not to be expected that the manufacturer of mousetraps can take the time to become an expert in security analysis, but he can at least cover the groundwork for an intelligent understanding of the problems involved. A number of good books have been written to serve this purpose. Among these the following are to be highly recommended: for neophytes, Jordan on Investments, by David F. Jordan (Prentice-Hall, New York, 1933); for intermediates, a large number of volumes among which are Investment, by Hastings Lyon (Houghton Mifflin, Boston, 1926), and Investment Principles and Practices, by Ralph E. Badger (Prentice-Hall, New York, 1928); and for those who are well acquainted with the field, Security Analysis, by Benjamin Graham and David L. Dodd (McGraw-Hill, New York, 1934).