In this book our investment research covers a number of different types of investment, but we are going to concentrate on investments which have one characteristic: high yield consistent with the preservation of the capital invested. This definition means that investment in a new corporation that is just starting out is omitted as is investment in partnerships as a partner and in individual proprietorships whether they be shoe shine parlors or stock brokerage firms. This latter type of investment does not stress the preservation of your capital down to the last dollar right from the time that dollar is invested. Granted it may work out wonderfully, and a dollar invested may conceivably grow to two or five or even $100, but when funds are invested in such a way they are spent for sales promotion or for a truck or machinery or for anything. Your dollar or fund of dollars thus cannot be returned since it has been put into forms of assets, which it is hoped will start earning and eventually build up a fund of dollars to return to the investors.

We are talking about investment research on investments which right from the day you invest your money have as goals the preservation of every dollar and the payment of a re-turn on that dollar. As soon as the investment is made, wheels are started rolling to return your investment to you. There is no particular virtue in this type in-vestment as against the kind that takes your funds and puts them into a peanut stand which you and your partner will operate. It is simply a different type of investment. If you put your funds into a building and loan association you know with reasonable certainty that they will be returned to you, and it is one of the main purposes of the association to keep your money intact at all times.

Besides the preservation of your fund of dollars, which will eventually be returned to you, the type investment our investment research talks about is the kind that gives you a high yield on your money, and by high yield is meant anything over the savings bank 3% or thereabouts, up to 20% and in some cases higher.

Quite aside from the fact that we are simply taking a type or types of invest-ment and studying these, there is very real merit to concentrating on what we call high yield investments. In a free enterprise¡ªa democratic economy such as we have in the United States¡ªthe factors of production are guided into their most valuable use by going where they are offered the greatest reward or return. The laborer goes where he is paid the most; the executive moves out of his job with his company and into a higher paying one in another company; a farm is excavated away and in its place is constructed a modern shopping center; and capital goes where the users are willing to pay the most for it, provided the risk is approximately the same.

In the railroad building era which started in the 1830's the smart, large aggre-gations of capital went into constructing new rail lines and buying new equip-ment, and the return on the capital in this employment was high. Since those pioneering years the railroads have matured and gradually new forms of trans-portation have come in as competitors, mainly trucks, airlines and bus lines. The railroads now need little capital for expansion and thus are unwilling to pay a high rate of return to attract it. In the early and middle 1950's mobile homes (house trailers) were just developing as a full fledged industry, and to attract money this industry was willing to pay a substantial rate of return. Later in the 1950's this business approached a plateau of development, at least a temporary one, and it could not pay the rate of return it once did. In 1959 and 1960 and into 1961 still another industry came up, and came up fast, and it was willing to pay a high rate of return in order to attract capital¡ªshell or pre-cut homes, manufactured in parts at the factory and shipped knocked down to the owner's land where they were assembled quickly and easily. The industry was new. It needed funds to develop. Since it was new and in its early stage of great demand, its profits enabled it to pay a healthy rate of return on the money it needed.

Our American economy is a free economy, and our investment research shows that it operates on the principle that if we leave the factors of production alone, without government interference  (and by factors of production we mean land, labor and capital) so long as the game is played fairly and honestly, those factors will gravitate to their most economic and beneficial use. This they will do by being attracted to those places in which they are worth the most, this worth being reflected in rate of return. The places that need them the most pay the highest return.

For the American economy to operate, each investor must seek the highest return on his capital obtainable consistent with risk.

This is not only the justifying theory behind rate of return. It explains why certain industries need money and can pay a good return. This book should help the investor in locating such investments.

The individual usually needs little urging to be converted to the doctrine that if he can get 10% on his money rather than 6% with the same degree of risk he should do that. This book attempts to show him the opportunities to place his money in higher yield investments. But first it might be well to explain just how significant the rate of return on your money is:

Consider this investment research: a short time ago our very close friends invested $1000 in a promissory note, which yields 12% per year¡ª1% per month payable monthly. Both the husband and wife work, the husband in the government and the wife as a pharmacist. It is their desire that before too long the wife cease work and retire permanently. But they are used to getting along on two salaries, not just one, and the retire-ment of one of the couple will cut the family income materially. Since the chil-dren are grown and out on their own they feel that they can save, after taxes are paid, $200 per month. This will come out of the wife's income. She has not saved this much to date, mainly because there did not seem to be any great motive for saving, and she seems to like to do a good deal of shopping in the department stores. So a forecast of her savings of $200 a month was drawn up in order that she might have the facts at hand on which she could base a decision as to whether she should attempt to save $200 every month or not. This is how the forecast works out:

On January 1, 1961 she invested her first money¡ª$1,000¡ªand at the end of the first month her interest check on this $1,000 was $10 (1% per month). She did not spend this income but let it stay in the account in order to become capital and thus increase the earnings base. But at the end of January she put in her first periodic monthly savings¡ª$200, so that at the end of January her original capital in the account was $1,000, the interest was $10 and the monthly savings were $200¡ª$1,210 in all. The interest on this total capital during February was

At the end of the first year she has put in a total of $3,400, but the interest has made this total investment grow to $3,662.

In the normal course of her business career her income will go up slightly each year as she progresses in her job, but she probably will be able to save no more as these increases take place because she must pay taxes on her interest, whether she receives it and spends it or just lets it remain in her account to increase her capital.

TABLE A
SAVINGS PROGRAM OF OLIVE SMITH, AGE 45
$1000 INITIAL INVESTMENT AT 12% PER YEAR (1% PER MONTH)
SAVINGS AT RATE OF $200 PER MONTH

TABLE B
SAVINGS PROGRAM OF OLIVE SMITH, ACE 51 1967 TO RETIREMENT IN 1980 AT AGE 63
NO SAVINGS (ONLY REINVESTMENT OF INTEREST)

By the end of 1966 she has accumulated $22,986, but she has put in in actual savings only $15,400. Now her monthly interest amounts to $225 and the tax burden has become so great that she feels she cannot and need not save anything further. All she wants to be able to do is to let her interest sit in her account and be able to pay the tax on it. From here on out her savings fund will, of course, grow more slowly.

By January 1, 1980, when she retires from business at age 63, her capital amounts to $108,476¡ªon her total savings of $15,400. Her monthly interest check amounts to over $1,000, and this is in addition to her pension from her pharma-cist's job and her husband's pension from the government

Is all our investment research calculation fanciful? It may be, but I personally have had funds invested in this particular company for five years, and the only thing that happens is that the company grows, gets sounder and earns more money each year. Eventually they will not pay 12% per year in all probability. Then it will be necessary to find another similar investment.

We might further define the type investment we are talking about in this book as high yield, fixed dollar obligations. The "obligation" part of the defini-tion means that someone or some organization has an obligation to repay the money invested. The "fixed dollar" part means that there is an obligation to repay a fixed number of dollars. While oil wells, tung groves and citrus groves may be excellent investments and return fine profits, there is no obligation on the part of anyone to repay any fixed number of dollars. By definition, conse-quently, we eliminate that type of investment from consideration in this book.

What are the further characteristics in the type of investment we are talking about?

1. Safety. In general an investment paying 12% interest is not as safe as one paying 6%, but it is doubtful if the 12% investment involves twice the risk. This is probably the cardinal principle around which this entire book is written. If the income offsets the additional risk or provides areserve against which to write off losses when they eventually come, then high yield investments justify them- selves, and they do when they are chosen with intelligence, with information at hand on the investment and when they are administered carefully, as we will see.

Along with this general theory that there is a good deal of merit to investing in high yield opportunities, safety should be stressed. This leads us to the second characteristic of the investments our investment reserach is going to examine.

2. Collateral or guarantees. A home owner may show you his bank account and also prove that he owns his home free and clear, so that you conclude that he is a good risk whose signature on a note is as good as gold but it is far wiser for you to take a mortgage on his home. Or if he has securities it is better to have him assign the securities to you than just to take his promise to pay.

If a dealer sells you a customer's conditional sales contract on an automobile he sold on which the customer is obligated to pay in time payments over a given number of months or years, it is well, if possible, to have the dealer guarantee the contract in case the customer defaults. Two people are obligated to pay, and certainly two are better than one.

3. Provision for easy repayment. If someone borrows $2000 from you at an attractive rate of interest and promises to repay it at the end of 12 months with 15% interest, the proposition on its face is a bad one. If he needs the $2000 now, what assurance is there that he will have it to repay at the end of 12 months? Such a sum is not small. Does he intend to borrow from Peter to pay Paul at the end of a year? In New York City aseemingly very substantial man did just this for years¡ªand got away with it¡ªuntil he died. That was over two years ago and the creditors are left holding the notes. Periodic, small payments are a sensible requirement, and it must be demonstrated that the debtor can make these pay-ments out of his income when all of his obligations are taken into consideration, and these obligations must be known.

4. Responsibility for payment. Some individual or individuals, or a corpora-tion composed of very distinct individuals must be obligated to pay in the type investment we are talking about. Unimproved land on the edge of the city may be a fine investment. Some day it may double or even triple in value, but what we are trying to emphasize is the type of investment in which there is an obliga-tion on the part of a person or persons to pay a given amount at a given time or in time payments, and you as the investor must look to this person or these per-sons to pay you on the due date.

5. Liquidity. The longer a contract runs the less liquid it is and generally the less desirable. You cannot get your money out of it for a long time, and then the business or the business climate may change. The person who lent $10,000 in 1928 for five years in all probability had difficulty in collecting in 1933. A demand note is certainly preferable to a five-year note. You may have need for the money sooner than you thought when you made the investment, and if you are tied up for five years you cannot get your funds back. Perhaps better oppor-tunities will present themselves. Stay as liquid as possible.

6. Spreading of the risk. If you have $10,000 to invest our investment research shows that it is best not to put it all in one place¡ªinto a mortgage for instance. It is far better to put it into five mortgages of $2,000 each. The $10,000 mortgage could be defaulted, but there is not so great a probability that all five mortgages will be defaulted.

7. Part time administration. We are not writing for the purpose of getting a person to quit his job in order to devote all of his time to his investments. We are writing for the person who wants to invest in his spare time and look after his investments in his spare time. The investments described here may in some cases require more watching than others he has made, but by definition they must require a minimum of administration on the investor's part. Payments must be made regularly, and the skipped or late payment must be the exception.

8. Business functions performed by someone else. You as the investor should not undertake to perform any business function. The only function you should perform, once the investment is made, is to receive the payments, and in the event that payments are not made, you should be able to resort to a simple pro-cedure at law to retrieve your money. If you invest in a filling station you should not have to hire a manager and then proceed to sell gas and oil yourself, under our definition of the type investment discussed here. The filling station should be leased to a major oil company for a fixed rental, and the oil company should perform all of the business functions.

9. Investment not subject to litigation. When a debtor can't or won't pay, the first thing he will be tempted to think more of is a defense against paying you: you had agreed to lend him more at the end of a year, and because you did not lend more his business failed. Or the rate of interest you charged was usurious and thus contrary to law; or you really owed him something before you ever lent him the money, and this should be an offset against what he owes you. These defenses are used almost every day. If he signs a note, he should sign a waiver of judgment note (in states which recognize such notes) and such a note will be described later. Our investment shows that it is shrewd that your investment should not be subject to litigation, and you must be sure of this fact before you make it.

10. Tax advantage. The Internal Revenue Code and Regulations state what the obligations of a tax payer are and what they are not. You are obligated to pay every cent you owe, and you are not obligated to pay what you do not owe. Certain types of investment are more heavily taxed than others. There is nothing the matter with investing in state and municipal government bonds just because you do not pay any federal income tax on the interest. This is the law, and it works to the advantage of the investor in government bonds and incidentally makes it less difficult for the state and municipal governments to finance their operations. Investments with a tax benefit or tax shelter are more desirable in many cases for the investor than those without such a benefit or shelter.

Just how important tax savings can be is illustrated by Tables C and D. While the preparation of a tax table is most certainly hypothetical and dependent on a series of assumptions, nevertheless these figures are U.S. government estimates.

Table C shows taxes at different levels of income for three people¡ªa single person, a married person with no dependents and a married person with two dependents.

A single person with $1000 a year income pays $80 a year tax¡ª8% of his income. If he is married, and even though he can claim no dependents as income tax deductions, he pays no tax.

A single person with $100,000 a year income pays 67% of his income out in tax¡ª$66,798¡ªand he still has to pay the state income tax.

A married person with two dependents with $500,000 a year income has less than $100,000 left after paying just the federal income tax and without deducting state income taxes.

We thus come to Table D showing how much a person has left out of $10,000 invested at 6% per year considering taxes at his level of income.

A married person with two dependents with an annual income of $2,000 keeps the entire 6% interest¡ª$600.  If he had a $500,000 income he would keep only

TABLE C

FEDERAL INDIVIDUAL INCOME TAX LIABILITY IN DOLLARS AND PERCENT FOR SELECTED INCOME GROUPS

TABLE D

INTEREST AFTER PAYING FEDERAL INCOME TAX A PERSON WOULD KEEP ON $10,000 INVESTED AT 6% PER YEAR
(AT VARIOUS INCOME LEVELS)

$114¡ª1.1%. It obviously means a tremendous amount to a person in the higher income brackets to invest in things that minimize his tax.

The investments we will describe in this book might be summarized in this way: they are opportunities for placing money in which there is an obligation to preserve and repay the number of dollars invested at a substantial yield in per cent annually, and in which the job of administering the funds on the part of the investor is relatively easy.

By dollar volume most of the types of investments described here are made almost every day by the major financial institutions of the country. Most large New York banks purchase, or have purchased, conditional sales contracts, many of them on mobile homes (house trailers). Chicago and California banks have also purchased such contracts, as have hundreds of other banks in the United States.

Mortgages on shell or pre-cut homes have been bought by some of the large insurance companies and building and loan associations.

Foreign investments are made by the big international banks and some are made by the United States government.

There is nothing new or novel about any of the investments described in this book. The troubles, as far as the investor goes, are two: (1) he does not know what to look for or where to look and (2) when he has found the opportunities he does not know how to judge the risk of how to invest so as to minimize that risk. We will attempt to help him on both of these scores.

Every business organization (other than the non-profit or charitable institu-tions) that has been set up from the beginning of time has as its primary goal the making of profits. The corporation must be dedicated to this goal or else it is not a business corporation. These profits it attempts to make by manufacturing a needed product or performing a service that others want and are willing to pay for. Its success is judged almost solely by how much profit it makes¡ªspeci-fically what the return is on the money invested.

Our investment research shows that the most largely accepted basis of comparison between any two or more corporations financially is, "What is the return on the money¡ªthe capital in-vested?"

The Securities and Exchange Commission runs a report on the return on invested capital by selected industries. It is ironical that such a report is pre-pared by the organization, which has to do with security issuance and securities exchanges when the return on invested capital is so much overlooked in the stock market, particularly in a bull stock market. The return on your money, whether in earnings per share or in dividends per share, usually takes a distinctly second place to the appreciation in the price of the stock over a period not of years, but of months or weeks.

The fact must never be lost sight of that the criterion of any investment is return in relation to risk. It is the number of dollars that you get back that you, the investor, are interested in, whether you invest $10,000 at 12 per cent and get back $11,200 at the end of a year or whether you buy 1000 shares of stock at $10 a share and find that at the end of a year it has gone up to $12 and your investment now equals $12,000.

While this book is devoted primarily to investments yielding high returns with reasonable security of the sum invested, we have included a chapter on the stock market and one on investment companies for the following reason: the investor should have alternatives to high yield investment clearly in mind in order to be able to judge whether he wants to go into high yield investments at all¡ªand the stock market, including the mutual funds, is the chief alternative investment. Its inclusion gives the investor the correct perspective.

And now let us turn our investment research focus to typical high yield investments, where to locate them, how to judge their merit and how best to preserve your fund of savings once you have invested.