The most elementary common sense teaches us that to obtain safety one must distribute the risk, or as bond dealers say, "diversify" one's investments. Insurance companies and savings-banks are safe just because they distribute the risk over a wide area. One issue of bonds may turn out badly, but the loss is averaged down to almost nothing because other securities turn out well.

Never keep on making investments in the same company, the same locality or the same industry. By diversification investors increase the average return on their money and fortify themselves against adverse conditions, which might otherwise affect only the one type of investment, or the particular section of the country in which all of their money is employed.

Of course individuals can not distribute their money around so widely as big institutions do, but the great majority of investors can take this precaution against loss more than they do. Most of us are lazy, and if we find one type of bond or stock which suits us we stick to it.

Don't buy securities of any company which is not engaged in a reasonably necessary and stable business, unless either you have made an unusually careful investigation, or unless the company has an accumulated surplus so large that its bonds and stock could be paid off at anytime, or unless the property could easily be turned to another use. Try equally to avoid industries so monopolistic as to invite public hostility or which are excessively competitive.

Highly competitive industries may be all right if the company already possesses an efficient organization and an established name. Use common sense in this respect. Stock in a company which makes a patent curling-iron is not so likely to be a suitable investment, other things being equal, as stock in a company that manufactures every kind of steel on the market or which supplies electricity to thirty different towns. Try to stick to fundamental industries, where the demand is broad, stable and permanent. Novelties and articles of luxuries are usually to be avoided. If the products arc varied in character so much the better. If a railroad, the more classes of freight the better. Be sure the source of supply is secure, if a manufacturing company.

Keep away from new inventions and from single patented and proprietary articles. Let the other fellow put his money in them. They are all right for private capital, for the man who is on the ground. Most new inventions result in loss to their backers. Even if the invention itself is useful it may require too much capital and time to make it commercially successful. In fact there are inventions too wonderful to be commercially successful. Of course fortunes have been made in new inventions, but even greater sums have been lost. Usually the profits predicted are so enormous that one wonders why the original owners do not keep the "good things" to themselves. The simple truth is that where promoters have something which will return enormous profits they do not need to go to the public for funds. Money is never given away in the business world and it pays to be suspicious of those who pretend to give it away. The only concern that should go to the general public for funds is one which can promise fairly sure and reasonable returns, never the one that is likely to make either excessive returns or nothing.

One observation should be made regarding for example a new patent soft drink sold at soda fountains. How are we to know that the public will like it? Common sense ought to keep investors away from such things.

Stocks in mining and oil companies, with a few notable exceptions; in fruit and nut orchards, rubber and banana plantations, and lumber development schemes; in the bulk of moving-picture concerns, and in new insurance companies should be reserved for especially careful investigation and not invested in until they have been thoroughly proved and placed on a basis where the permanency of the earning capacity is established beyond peradventure. Several of them require perhaps more than the usual amount of expert knowledge with which to cope with the peculiar elements of uncertainty that characterize them.

The financial position of the company and of your security in it, is very important. You do not have to be an accountant to analyze the financial position of your company and the bond or stock you are buying. If it is a bond, the nearer it is to being a first mortgage the better. If it is a railroad bond, is it a first mortgage on profitable or unprofitable lines? If an electric lighting bond is it a mortgage on a power house in use or abandoned? The more essential and profitable a portion of the company's property it is a mortgage on, the better. Next as to earnings. Conservatism requires that earnings be at least double the interest requirements on all bonds and debts, and ultra-conservatism requires that this should have been the case for several years past. Are earnings increasing? So much the better.

Don't let any faker tell you that only future earnings matter, and that the dead past should bury its dead. To be conservative, an investment should be backed up by large earnings, past, present and future. And be sure the earnings are real. If the company does not allow large amounts for depreciation, for worn-out and unsalable property, it is fast running into trouble. A certain company which sold its stock broadcast reported big earnings for years. But when it finally ran on to the rocks people learned that the big earnings were only on paper, because nothing had ever been written for goods which had been manufactured at great expense but for which the demand had long ago ceased.