Common Stock Investment

As we have already seen, the ownership of common stock presents certain advantages and also certain disadvantages. Among the former are ownership in the business, the opportunity to share in the profits, the receipt of dividends, and also a hedge against inflation. Chief among the latter are the fluctuation in price (value), fluctuation in dividends, and the total risks which must be assumed.

Nevertheless, as we have made clear, a well-planned series of investments should include some common stock representation. Quite obviously, whatever commitments are made must be undertaken with extreme care; one cannot evaluate a particular stock, for example, without knowing the place it occupies in the industry within which it operates, so that familiarity with the promise held by each segment is both desirable and necessary.

The main distinguishing characteristic here is the degree of sensitivity to variations in business conditions. With this in mind, we may draw up a table in which we will attempt to classify various industries according to their degree of sensitivity so that we may be in a position to know what to expect when investing in a certain type of industry.

The lesson to be derived from the table below is quite simple: utility issues may offer far more stability in revenues, earnings, and dividends than many a railroad or industrial so-called "blue-chip" stock. This has been abundantly shown in times of historic business breaks, such as 1929-32 and 1937-38 and also in any period during which the general economy feels some strain. During a depression the loss of patronage to a utility is in the low-rate and low-profit commercial portion of the business.

During a spurt of prosperity, the utilities show a slow and steady advance in earnings because of the pressure to provide additional facilities to meet additional demand. Our concept here of utilities includes natural gas company shares as well as those of electric power, water, and telephone companies.

INDUSTRIES CLASSIFIED BY SENSITIVITY TO BUSINESS CONDITIONS