April 22, 2020 9:00 AM (PDT)

Main factors affecting bonds and stocks

• Depreciation of the the Dollar: only lenders favour an appreciating currency
• Inflation

Stocks grow at a compounding rate

• “Over a period of years these directors will never aim to declare all the company’s net earnings in dividends. They will turn back a part of such earnings to surplus account, and invest this increasing surplus in productive operation. Such a policy successfully carried out is in fact a practical demonstration of the principle of compound interest.”

Stocks > Bonds

• “Secular Trend” that favours common stocks as opposed to bonds, so long as the population and the business of the country are increasing.
• “Human Factor”: the management of every company is on the side of the common stock and opposed to the interests of the bondholders. The management does not want the bondholders to get more benefit from the operation of the company than is absolutely necessary to make it possible for the company to sell more bonds if such additional sale of bonds can be made to show a profit to the stockholders.

Factors of fluctuations (elements of risk) in bond values

1. Depreciation of the Dollar
2. A General Increase in Current Interest Rates
3. The Changing Credit Position of the Debtor Company: How unimportant a splendid credit position proved to be in comparison with the more fundamental factors relating to the tendency in interest rates and the purchasing power of currency over a long period of years

Investment Management

• Different from just making a single investment
• In the selection of securities for investment, we should consider more than the expected income yield upon the amount invested, and may quite properly weigh the probability of principal enhancement over a term of years without departing from the most conservative viewpoint.

Principal functions of Investment Management

1. It will first establish a sound investment plan suitable to the purposes of the investor
2. It will then determine what proportion of the fund under its management shall be in equities and what proportion in bonds under current industrial and economic conditions
3. It will put itself in a position to watch for changes in conditions and be prepared to modify these proportions in harmony with such changes