Are good bonds less risky than good preferred stocks?
Are good bonds and good preferred stocks less risky than good common stocks?
Are common stocks, thus, not "safe"?
RISKS IN VARIOUS ASSETS
- BOND: A bond is clearly unsafe when it defaults its interest or principal payments.
- STOCK: Similarly, if you have bought a preferred stock or a common stock with the expectation that a given rate of dividend will be continued, then a reduction or passing of the dividend means that it is unsafe. Another risk is, if there is a fair possibility, that the holder may have to sell at a time when the price is well below cost.
- PROPERTY: The man who holds a mortgage on a building might have to take a loss if he were forced to sell it at an unfavourable time. In the judging the safety or risk of ordinary real-estate mortgages, the only criterion being the certainty of punctual payments.
- BUSINESS: The risk attached to an ordinary commercial business is measured by the chance of its losing money, not by what would happen if the owner, were forced to sell.
MARKET PRICE DECLINES AND THE STOCK INVESTOR'S WELL SELECTED PORTFOLIO
A bona fide investor does not lose money merely because the market price of his holdings declines; the fact that a decline may occur does not mean that he is running a true risk of loss.
If a group of well-selected common-stock investments shows a satisfactory over-all return, as measure through a fair number of years, then this group investment has proved to be "safe."
During that period its market value is bound to fluctuate, and as likely as not it will sell for a while under the buyer's cost.
If that fact makes the investment "risky" it would then have to be called both risky and safe at the same time.
CONCEPT OF RISK IS SOLELY A LOSS OF VALUE
This confusion may be avoided if we apply the concept of risk solely to a loss of value which either
(a) is realized through actual sale or
(b) is ascertained to be caused by a significant deterioration in the company's position.
Many common stocks do involve risks of such deterioration.
But it is our thesis that a properly executed group investment in common stocks does not carry any substantial risk of this sort and that therefore it should not be termed "risky" merely because of the element of price fluctuation.
MARKET PRICE DECLINE
- The prices of all stocks may decline
- In fact, other than Savings Bonds, all financial assets' prices can decline.
- Stocks then to decline to a greater extent than bonds and preferred shares.
- This decline may be of a cyclical and temporary nature and the holder is also unlikely to be forced to sell at such times.
- Market price decline is not a true risk (in the useful sense of the term).