How to Invest Money by George Garr Henry

The book, How to Invest Money, was written by George Garr Henry, Vice-President of the Guaranty Trust Company of New York. Published in 1908, the book aims to clearly present the simple principles of investment and provide a practical understanding of various security classes, detailing their suitability for different needs. The content is an outgrowth of the author’s personal experience as an investment banker. The necessity for such a guide arose from the immense increase and broader distribution of wealth in the United States, confronting many business men with investment problems they were not previously equipped to solve.

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Who May Benefit from the Book

• Business owners with reserve funds/surplus wealth.
• The “average man” unfamiliar with investment principles.
• Pure investors seeking reliable guidance.
• Trustees managing funds (e.g., widows’ and orphans’ funds).
• Savings-bank officials or institutional investors.

Top 3 Key Insights

1. Scientific investment relies on adherence to five primary qualities—safety, income rate, convertibility, appreciation potential, and market price stability—present in varying degrees in every security.
2. Successful investing requires strict distribution of risk (across security types and geographies) and accurate selection based solely on one’s genuine financial requirements.
3. The fundamental distinction must be understood: bonds and mortgages are promises to pay, making the investor a creditor, while stocks represent equities or a residual ownership share.

4 More Lessons and Takeaways

1. A business surplus demands absolute safety, ready convertibility, and stability of price, meaning investment should usually be restricted to short-term obligations to guard against market shrinkage.
2. High rates of return usually signal a necessary sacrifice of some factor of safety or stability, as the pure interest rate on invested money is generally quite small.
3. Because money investment is fundamentally a banker’s business, the average individual investor should always consult an experienced and reliable investment banker for advice.
4. General price movements in negotiable securities are predictably governed by the interaction between the loaning rate of free capital and the prevailing general conditions of business.

The Book in 1 Sentence

This guide details scientific investment principles, contrasting various securities by safety, income, and liquidity to match investments precisely to individual needs.

The Book Summary in 1 Minute

George Garr Henry’s 1908 guide addresses the crucial problem of safeguarding wealth. It establishes that successful investment demands adherence to five cardinal principles: safety, rate of income, convertibility, appreciation potential, and price stability. Investors must distribute risk and choose between promises to pay (bonds) and equities (stocks) based on their specific needs. The book analyzes diverse securities, finding that equipment bonds are ideal for a business surplus due to their safety and high convertibility, while high-grade municipal bonds offer price stability for savings institutions. Mastering investment also requires understanding how money rates and business cycles determine market price fluctuations.

Chapter-wise Book Summary

I. General Principles of Investment

“For the successful investment of money, however, a good deal more is required than the mere ability to select a safe security. That is only one phase of the problem”.

The immense increase in wealth distribution in the U.S. has confronted many business men with the challenge of investment, a field often radically different from their specialized business success. Investors, whether private or managing a business surplus, should consult reliable investment bankers. A key error for the average investor is failing to recognize that returns above the rate of “pure interest” inherently involve sacrificing essential safety factors. Scientific investment requires adhering to two main principles: distribution of risk (across forms and geographical areas) and selection of securities in accordance with real requirements. Investors must understand the distinction between promises to pay (like bonds, which guarantee future redemption) and equities (like stocks, which represent a residuary share and cannot be redeemed by the company). The five essential qualities determining an investment’s value are: (1) Safety of principal and interest, (2) Rate of income, (3) Convertibility into cash, (4) Prospect of appreciation in value, and (5) Stability of market price. Selecting securities requires knowing that emphasizing one quality often necessitates sacrificing another, such as obtaining high convertibility by giving up a higher income rate. For a business surplus, safety, convertibility, and stability of price are the paramount concerns.

• Chapter Key Points:
  • Consult expert bankers; investment is not intuitive for the average business man.
  • Distinguish between promises to pay (bonds) and equities (stocks).
  • Five determining qualities define all investments: safety, income, convertibility, appreciation, and stability.
• Important Quote: “Scientific investment demands a clear understanding of the fundamental distinctions between different classes of securities and strict adherence to the two cardinal principles, distribution of risk and selection of securities in accordance with real requirements”.

II. Railroad Mortgage Bonds

“It is of interest, in view of the present diminished confidence in railroad securities, to advance certain considerations touching upon the safety of railroad bonds in general”.

Railroad bonds are obligations typically secured by a mortgage on railroad property. To judge their value accurately, investors must eliminate accidental features like coupon rate and maturity length by focusing on the net yield or “basis”. Despite recent lack of confidence in the railroad industry, the safety of these bonds can be determined by examining the margin of security. Key factors for evaluating safety include: the total bonded debt per mile relative to the total market value of the property; the volume of prior lien bonds (which diminishes security); and the volume of junior lien bonds (which enhances security by creating a margin). Safety of interest is judged by analyzing gross earnings per mile, net income per mile, and ensuring that the company earns well over double its fixed charges. Statistical analysis of all U.S. railroads in 1906 showed that net earnings were more than double the total fixed charges. Railroad bonds offer a wide income range (typically 4% to 6%) and are notable for their high convertibility. They also possess a strong prospect of appreciation because American railroads often conservatively reinvest a considerable portion of earnings back into the property, increasing the equity behind the bonds.

• Chapter Key Points:
  • Bond value is determined by net yield (“basis”), not just the coupon rate.
  • Safety requires earnings well over double fixed charges.
  • Railroad bonds are highly convertible and promise appreciation due to reinvested earnings.
• Important Quote: “If a railroad does not earn well over double its fixt charges, its obligations can not be regarded as in the first investment rank”.

III. Railroad Equipment Bonds

“The knowledge that they possess this power renders its exercise generally unnecessary. The equipment of a railroad is essential to its operation”.

Equipment bonds fund new rolling stock and are structured either through a conditional sale plan or the Philadelphia Plan, where title remains with a trustee until the bonds are fully paid. This structure means equipment bonds differ fundamentally from mortgage bonds because the securing property is movable and the title does not vest in the railroad. In the event of a railroad bankruptcy, equipment bondholders hold a major advantage: courts generally prioritize their obligations (principal and interest) on par with wages and operating expenses, ahead of even first-mortgage bond interest. Historically (1888-1905), equipment bonds were paid in full during railroad reorganizations. These bonds typically yield $0.5%-0.75%$ more than the issuing railroad’s first-mortgage bonds. They are generally issued in serial form, and by confining purchases to shorter maturities (e.g., within 2-3 years), an investor can obtain a high degree of convertibility, making them desirable for financial institutions. Equipment bonds are particularly suitable for the investment of a business surplus as they successfully combine perfect safety, a good return, ready convertibility, and unyielding stability of market price (especially in short-term obligations).

• Chapter Key Points:
  • Equipment bonds are secured by movable assets held by a trustee.
  • They maintain priority over first-mortgage bonds during reorganization.
  • Short-term equipment bonds are ideal for a business surplus due to safety and liquidity.
• Important Quote: “Broadly speaking, for such investment [a business surplus], a security is required which will combine perfect safety of principal and interest, a good rate of income, ready convertibility into cash, and unyielding stability of market price”.

IV. Real-Estate Mortgages

“A mortgage may not exceed 50 per cent of the selling value of the real estate pledged, and yet be a poor investment”.

A real-estate mortgage includes both a promise to pay and a transfer of property title, secured by real estate. Safety hinges upon an adequate margin of security confirmed by expert appraisal. However, a key weakness is that the mortgage holder benefits neither from the property’s appreciation nor the sale proceeds, while bearing the risk of loss should the property value decline significantly. Thus, mortgages should only be purchased when general real-estate conditions are favorable and prices are relatively low. Their main advantage is offering a higher rate of income than any other form of investment providing equal security. Their chief disadvantage is the total lack of convertibility; there is no established market for them. This lack of quotation, conversely, grants them the assurance of maintaining principal integrity, as they do not shrink in market price due to financial conditions. Because convertibility is absent, mortgages are largely unsuitable for a business surplus. They are, however, ideally suited for savings-banks which prioritize safety, high return, and stability against quoted value loss. Guaranteed mortgages offer some protection against localized value declines, but limited equity against widespread collapse.

• Chapter Key Points:
  • Mortgage holders bear depreciation risk but gain nothing from appreciation.
  • Mortgages offer a high yield but lack convertibility.
  • They provide great price stability since they are unquoted.
• Important Quote: “If the value of the property upon which he holds a mortgage increases, the additional value enhances the security of the loan, but does not add to the principal which he has invested, while if the value of the property diminishes… the holder is frequently compelled to take over the property and may suffer loss of principal”.

V. Industrial Bonds

“The average net return upon industrial bonds is probably higher than upon any other form of funded corporate obligation. This constitutes one of the chief advantages of industrial bonds”.

Industrial bonds are obligations of private manufacturing or mercantile companies. Safety assessment is complex; if the appraised value of the real estate alone covers the bond issue, the bond is virtually a safe real-estate mortgage. Otherwise, financial analysis focuses on Net Quick Assets (current assets minus current liabilities). Current assets should ideally be at least twice current liabilities, and bonded debt should generally not exceed net quick assets. To ensure interest safety, average yearly net earnings should amount to about three times the annual bond interest, taxes, and sinking funds. The form of issue is critical; sinking funds or serial maturities must be included to counteract property depreciation. The management’s ability and integrity are also crucial. Industrial bonds generally offer a high rate of income. Their convertibility varies dramatically, from the broad market of large trusts to the almost nonexistent market for smaller company obligations. Overall, industrial bonds are prone to wide fluctuations and lack general market stability. Due to the difficulty of finding issues that satisfy all four necessary qualities (safety, high income, convertibility, stability), industrial bonds are generally not suitable for a business surplus.

• Chapter Key Points:
  • Net quick assets (current assets $2\times$ liabilities) are critical for industrial bond safety.
  • Net earnings should cover fixed charges threefold.
  • High yield is the chief advantage, but convertibility and stability are highly inconsistent.
• Important Quote: “The ability and integrity of the men who control the policy of the company and the efficiency of the operating officials are the principal factors in the success of an industrial undertaking”.

VI. Public-Utility Bonds

“The term ‘public-utility company’ denotes a private corporation supplying public needs under authority of a public franchise”.

Public-utility bonds (e.g., street-railway, gas, electric companies) require a threefold examination: physical, financial, and political. The physical test involves appraising real estate and replacement value, acknowledging that bonds often capitalize the franchise value. Franchises must be scrutinized for duration (must exceed bond maturity if limited) and exclusivity. Financial scrutiny focuses on gross and net earnings, critically examining whether proper allowance is made for depreciation (a safe rule suggests writing off 10% of gross earnings monthly). Net earnings should cover interest charges at least twice. Political factors, such as relations with local governance, potential fare reductions, and tax increases, must also be considered. Historically, overcapitalization and insufficient depreciation have prevented street-railway bonds from reaching the first rank of investment securities. Utility bonds typically sell on the same income basis as high-grade industrial bonds. They possess low convertibility and little promise of appreciation. Because of questionable security, low convertibility, and uncertain price stability, public-utility bonds are not recommended for a business surplus. Investors must be prudent in purchases until the conflict between public interests and corporate management is fairly adjusted.

• Chapter Key Points:
  • Safety requires physical, financial, and political examination.
  • 10% of gross earnings is a safe depreciation allowance rule.
  • Low convertibility and uncertain stability make them unsuitable for reserve funds.
• Important Quote: “Unless proper allowance be made for depreciation, in addition to the expenses of direct operation, it is only a question of time before the strongest company will become bankrupt”.

VII. Municipal Bonds

“This priority of the tax lien is the foundation of the prime position of municipal bonds”.

Government, State, and municipal bonds are based primarily on the power of taxation. U.S. Government bonds represent the highest type of security globally, though their high price is partly due to special use by national banks. Municipal bonds (city, county, township) are indirectly a first lien on all taxable property, enforced by court-compelled tax levy. Their validity is confirmed by checking debt proportion against assessed valuation (often constitutionally capped at 10%), ensuring proper purpose of issue, and legal compliance. Municipal bonds divide into active (large cities, constantly traded) and inactive (counties/townships, rarely quoted). The inactivity of the latter grants them a special advantage: stability of market price, meaning they can be carried at cost without fluctuation, a crucial quality for savings-banks and similar institutions. Municipal bonds generally are not ideal for a business surplus because they lack either convertibility or stability, both of which are required. The only exception is short-term active municipal issues, where the near approach to maturity ensures price stability. Private investors can use them, but often railroad or corporation bonds offer a comparable safety with greater income.

• Chapter Key Points:
  • Municipal bonds hold a prime position due to the priority of the tax lien.
  • Inactive municipals offer high price stability (no quotation).
  • Generally unsuitable for a business surplus requiring both liquidity and stability.
• Important Quote: “An investor can judge for himself as to the likelihood of such a catastrophe [diminished taxable property] in any particular community, and can feel sure that his bond, if valid and protected by a sufficient taxing power, is as secure in its principal and interest as the municipality which issues it is secure in its continued existence”.

VIII. Stocks

“If he buys a bond he becomes a creditor of the company… If he buys stock, he becomes a partner in a business enterprise, exercising his proportionate share in the direction of the company’s affairs, and sharing ratably in its profits and losses”.

Stocks represent equities—a beneficial interest or residuary share in a concern’s assets and profits after all obligations are paid. The distinction between stocks (partners) and bonds (creditors) has been obscured by managers attempting to give stock an investment character (e.g., preferred stocks, or stable dividends built on retained surplus) to secure necessary capital. Furthermore, courts have sometimes treated stocks and bonds similarly when determining total capitalization and assessing whether utility charges are too high. If regulatory actions limit the potential maximum return on stock (e.g., to 6%), while maintaining the risk of loss, the purchase of stock becomes less attractive for investors. Nevertheless, stable, successful corporate stocks remain valid investment considerations. Bank and trust-company stocks hold a unique appeal for wealthy investors seeking appreciation, as well-regulated banks often distribute only half their earnings as dividends, crediting the rest to surplus, guaranteeing a steady rise in book value. Bank stocks offer great safety and certainty of appreciation, but a low rate of income and limited convertibility.

• Chapter Key Points:
  • Stocks are equities (ownership shares); bonds are promises to pay (debt).
  • Courts sometimes blur the distinction by limiting stock returns.
  • Bank stocks are desired for their appreciation potential via retained surplus.
• Important Quote: “No other class of stock possesses quite the same promise of appreciation in value”.

IX. Market Movements of Securities

“A clear conception of the nature of the influences which are always silently at work reconciles these apparent inconsistencies and makes it plain that general price movements are determined by laws as certain in their operation as the laws of nature”.

Understanding the market movements of securities is critical for successful investment, allowing investors to capitalize on major price swings. The price movements of all negotiable securities are governed by two major, often antagonistic, influences: the loaning rate of free capital and the general condition of business. Low interest rates stimulate prices (as banks invest idle funds); conversely, high rates depress prices (as banks sell securities to lend cash). Business conditions usually oppose money rates: rates are low when business is bad and high when business is good. These joint forces create regular price swings corresponding to industrial cycles of prosperity and depression. After a financial crisis, money becomes abundant (low rates) due to diminished business activity. High-grade bonds (safety unimpaired by depression) advance rapidly as interest rates decline, reaching their peak about midway through the cycle before rates start rising. Low-grade bonds (highly sensitive to earnings) remain checked by poor business outlook despite low rates, advancing rapidly only when the outlook improves, and decline quickly as money tightens near the next crisis.

• Chapter Key Points:
  • Market movements are controlled by interest rates and business conditions.
  • High-grade bonds are primarily rate-sensitive; low-grade bonds are earnings-sensitive.
  • High-grade bonds peak early in the cycle; low-grade bonds peak late.
• Important Quote: “The larger movements of security prices are always the resultant of the interaction of these two forces”.

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Notable Quotes from the Book

1. “The investment of money is a banker’s business”.
2. “The surplus wealth of the country for a long time was in the hands of financial institutions and a few wealthy capitalists”.
3. “The number of men who carry out this principle [distribution of risk] with any thoroughness, however, is very small”.
4. “Safety means the assurance that the maker of the obligation will pay principal and interest when due; stability of market price means that the investment shall not shrink in quoted value”.
5. “A high degree of convertibility is only obtained at the sacrifice of some other quality—usually rate of income”.
6. “Proper distribution means not only the division of property among the various forms of investment… but also the preservation of proper geographical proportions within each form”.
7. “When he buys securities, he is quite likely to pay for qualities which he does not need”.
8. “Convertibility is the distinguishing mark of railroad bonds”.
9. “The amount of bonds which come after the bond in question, on the other hand, works directly in favor of the bond, for it increases the margin of security”.
10. “If a railroad does not earn well over double its fixt charges, its obligations can not be regarded as in the first investment rank”.

About the Author

The author of How to Invest Money is George Garr Henry. At the time of the book’s publication in 1908, Henry held the position of Vice-President of the Guaranty Trust Company, of New York. The book itself is based on his personal experience as an investment banker, with much of the matter previously appearing in System Magazine. No further personal details, such as birth or death dates, or information regarding other books written by George Garr Henry, are provided in the source material.

How to Get the Most from the Books

Determine your exact financial requirements before consultation. Use the five investment qualities (safety, income, convertibility, appreciation, stability) to evaluate securities objectively. Consult a reliable banker to apply these principles practically.

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Conclusion

How to Invest Money provides a foundational framework for scientific investment, centered on five determining qualities: safety, income, convertibility, appreciation potential, and stability of price. Henry emphasizes that the complexity of investment requires the average person to rely on the expertise of investment bankers, supplemented by a thorough understanding of these principles. The analysis systematically reviews diverse securities, sharply distinguishing between those suitable for private investors (who can accept limited convertibility) and those essential for a business surplus (which requires liquidity and price integrity, best met by short-term equipment bonds). Ultimately, successful investing involves not only selecting intrinsically sound securities but also mastering the external forces—money rates and business cycles—that determine market price movements and knowing precisely how to match investments to the investor’s unique requirements.