Page:Hints About Investments (1926).pdf/198

 examined in detail by those who wish to study this interesting problem of the relative advantages of industrial ordinary shares and prior charges and the question whether the, only comparatively, greater risk carried by the former is or is not outweighed by the possibility of indefinite expansion in income and value attached to them, if they imply ownership in a well-conducted and well-financed business.

We have seen the broad result reached by his investigations, that out of twelve tests only one ended in favour of the bond, and that was only so because their greater capital appreciation had more than offset a larger income received from the shares.

The conclusion at which he arrives is that these tests are not in themselves conclusive, but "cumulatively they tend to show that well-diversified lists of common stocks selected on simple and broad principles of diversification respond to some underlying factor which gives them a margin of advantage over high grade bonds for long term investment."

This underlying factor he finds in the reserve fund policy—in the fact that the "directors of conservatively managed corporations over a period of years will never aim to declare all the company's net earnings in dividends.