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Published online by Cambridge University Press: 07 November 2014
During the lifetime of most Life Assurance Companies until 1897 the general trend of interest rates was downward. Such conditions proved favourable for the traditional investment policy of these years. From 1897, however, until 1920 the trend of interest rates changed to an upward direction and heavy depreciation in security values was experienced. In recent years much thought has been given to the problems of investment, and modifications in policy have been made with a view to avoiding or at least diminishing future depreciation in capital values.
The principal movements in security prices are the long period trends and the short cycle variations, both of which accompany the general economic movement of all prices and can be studied in their general relationship to the economic cycle. The statistical data needful to such study, especially in this country, is very limited. Although statistics are available in America they are for the most part restricted to the two broad groups of Bond prices and Share prices, while in France the problem most dealt with is the relative movement between fixed interest securities and those having a variable dividend.
A new investigation has been made in respect of the last five years and the results are given in the present Paper. The monthly movement in prices has been taken out for a variety of classes ranging from British Government securities to Industrials, and where such exist a separate index is shown for Debentures, Preference and Ordinary. The prices employed are net prices after allowing for accrued interest.
As the results only show the movements of the last five years, the period covered is not a complete cycle but only the opening phase of the short period cycle. They are in no way intended to afford a solution to the various problems of movement but merely illustrate the position at the present time.
The main conclusion of the Paper is that the prices of securities, like all prices, are related to the general economic cycle. While the evidence cited is in some ways contradictory, it is suggested that the movement of Ordinary securities follows directly that of the economic curve, while the movement of Debentures follows that curve inversely but with a different tempo and interval. At the same time the intermediate fluctuations of the Ordinary are of much greater extent than those of Debentures.
As regards the more fixed type of investment policy in which sales of any magnitude are not contemplated, if the long period trend is downward it would appear inadvisable to enter the Ordinary field at all. On the other hand, the investments in Debentures will give complete security with steady appreciation of capital. When the long period trend is upward, however, Debentures will suffer depreciation, and to balance this a proportion of funds must be held in Ordinary Securities which in such conditions will show considerable appreciation in capital value, quite apart from an increasing yield. With a more mobile investment policy the Ordinary field deserves to receive the same considerations as the Debenture field, the profits of the Ordinary more than balancing the losses of the Debentures in a period of long period upward trend, while in a downward trend the short period cycle gives opportunity for profitable investment in both areas.
page 173 note 1 Last published in The Times (Annual Financial and Commercial Review), 10th February 1925.
page 174 note 1 War and Insurance (p. 147), one of the series of publications of the Carnegie Endowment for International Peace, London, 1927.
page 175 note 1 See also, however, W. P. Elderton, Investments a Hundred Years Ago. J.I.A., li. 32.
page 177 note 1 Leland R. Robinson. Investment Trust Organisation and Management. New York, 1926. p.81.
page 178 note 1 The Economist, 20th June 1925.
page 178 note 2 See, for example, The Ministry of Labour Gazette, November 1928, which gives a tabular statement of the changes between July 1923 and July 1928 in the estimated numbers of insured work-people in 100 different industries, divided into two schedules, those in which increases have occurred and those in which decreases have occurred, all arranged in descending order of degree of increase in the five years.
page 179 note 1 W. Randolph Burgess. The Reserve Banks and the Money Market.. New York and London, 1927. p. 290.
page 179 note 2 Owens and Hardy. Interest Rates and Stock Speculation. London, n.d.
page 179 note 3 Willard L. Thorp. Business Annals. New York, 1926. p. 45.
page 181 note 1 A. Aftalion. Les Crises périodiques de Surproduction. Paris, 1913. vol. i, p. 171.
page 181 note 2 A. C. Pigou. Industrial Fluctuations. London, 1927. p. 260.
page 182 note 1 M. Bouniatian. Les Crises Economiques, translated by J. Bernard. Paris, 1922. p. 91.
page 182 note 2 Hardy and Cox. Forecasting Business Conditions. New York, 1927.p. 218.
page 182 note 3 loc. cit.
page 182 note 4 Jean Lescure. Des Crises générales el périodiques de Surproduction. Paris, 1923. p. 233.
page 183 note 1 Ray Vance. Business and Investment Forecasting. New York and London, 1925. pp. 118 et seq.
page 184 note 1 loc. cit. p. 110.
page 184 note 2 Illustrations of the monthly figures for the three years 1925–27 for these and other series may be found in the Report of the President of the New York Stock Exchange for year May 1927–May 1928.
page 184 note 3 loc. cit. vol. i, p. 175.
page 185 note 1 La Statistique Internationale des Valeurs mobilières. 4e, 5e et 9e rapports. 1903, 1905, 1911.
page 185 note 2 Louis Delanney. Le Marché des Valeurs mobiliè en France. Paris 1928.
page 185 note 3 G. P. Wascat. La Prévision du Mouvement des Valeurs mobilières. Paris, 1927.
page 186 note 1 See, for example, the Chart of Prices for the years 1779–1926 in respect of United States and United Kingdom published in Money, Bank Credit and Prices by Lionel D. Edie, New York and London, 1928 (p. 215), or in Business Cycles and Business Measurements by Carl Snyder, New York, 1927. p. 59 (U.S. only).
page 189 note 1 J. Dessirier. Cours, Revenue et Taux de Capitalisation des valuers mobilières francaises de 1919 à 1926. Journal de la Société de Statistique de Paris, June 1927.
page 193 note 1 E. L. Smith. Common Stocks as Long Term Investments, New York, 1924, reviewed by J. M. Keynes in the Nation and Athenaeum, 2nd May 1925.