Spencer Heath Archive

Item 639

Random taping by Spencer MacCallum from conversation

December, 1955

    /Investment/

You’re getting started in the right way, Spencer /in buying into the Chicago Corporation/. I don’t know just what the make-up of its portfolio is, but unless you are going to be dependent for your living and your current expenses on a high rate of return, you want to put your funds into growth stocks — which will give you the most in the long run instead of giving you the most immediately with a greater hazard. So if you can keep your current expenses low, you won’t have to get dividend yielding stocks, high profit yielding stocks now, but you can get growth stocks which means that over ten or twenty years, you will be much farther advanced, and you will have the hazard of loss taken out of it. This averaging will be a kind of insurance, where if you go into high yielding stocks right now, the higher the yield, the more hazard there is. Say if we took two people like you, one would have good luck and the other have bad luck, and twenty years from now one would be very well off and the other would be poorly off. By going into growth stocks, it evens it out, so that you have the same certainty that both of you had to start with, but you participate more evenly in it. It is a kind of insurance. Mutual funds afford a kind of insurance. It’s called diversification, and it’s been recognized for a long time as a kind of insurance — even when it was only done by individuals who buy in several different things, saying they won’t put all their eggs in one basket. That’s what they mean by diversification. This mutual funds sys­tem is a vast diversification for the benefit of all persons who have gone into it. All that is necessary is good manage­ment by people who are competent to do that, and I believe that Standard & Poor’s speak truly when they say that they are probably the largest and most successful investment advisors in the whole world.

Before World War I, the certainty of investment was almost a hundred per cent. If you didn’t go in for very high returns, if you would invest in the ordinary way, at a yield of, say, around six or seven per cent, in the several decades before World War I, your chances of loss were almost nothing, and your chances for profit were practically a hundred per cent. The World Wars have interrupted that a whole lot, introduced hazards of every kind. So that in the conduct of business in general, it has been tremendously infected with the gambling element. But as the pattern evolves, the gambling will be taken out of all of it. It doesn’t mean that there will not be rivalries. There will be rivalries, but as there is rivalry and rivalries in any contest for excellence — where all succeed and some succeed better than others. It will not be one in which many have to lose in order that /a few can succeed/.