The outstanding fact is the extreme precariousness of the basis
of knowledge on which our estimates of prospective yield have to be
made. Our knowledge of the factors which will govern the yield of
an investment some years hence is usually very slight and often
negligible. If we speak frankly, we have to admit that our basis of
knowledge for estimating the yield ten years hence of a railway, a
copper mine, a textile factory, the goodwill of a patent medicine,
an Atlantic liner, a building in the City of London amounts to
little and sometimes to nothing; or even five years hence. In fact,
those who seriously attempt to make any such estimate are often so
much in the minority that their behaviour does not govern the
market.
In former times, when enterprises were mainly owned by those who
undertook them or by their friends and associates, investment
depended on a sufficient supply of individuals of sanguine
temperament and constructive impulses who embarked on business as a
way of life, not really relying on a precise calculation of
prospective profit. The affair was partly a lottery, though with
the ultimate result largely governed by whether the abilities and
character of the managers were above or below the average. Some
would fail and some would succeed. But even after the event no one
would know whether the average results in terms of the sums
invested had exceeded, equalled or fallen short of the prevailing
rate of interest; though, if we exclude the exploitation of natural
resources and monopolies, it is probable that the actual average
results of investments, even during periods of progress and
prosperity, have disappointed the hopes which prompted them.
Business men play a mixed game of skill and chance, the average
results of which to the players are not known by those who take a
hand. If human nature felt no temptation to take a chance, no
satisfaction (profit apart) in constructing a factory, a railway, a
mine or a farm, there might not be much investment merely as a
result of cold calculation.
Decisions to invest in private business of the old-fashioned type were, however, decisions largely irrevocable, not only for the community as a whole, but also for the individual. With the separation between ownership and management which prevails to-day and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system. In the absence of security markets, there is no object in frequently attempting to revalue an investment to which we are committed. But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and II in the morning and reconsider whether he should return to it later in the week. But the daily revaluations of the Stock Exchange, though they are primarily made to facilitate transfers of old investments between one individual and another, inevitably exert a decisive influence on the rate of current investment. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased; whilst there is an inducement to spend on a new project what may seem an extravagant sum, if it can be floated off on the Stock Exchange at an immediate profit. Thus certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur. How then are these highly significant daily, even hourly, revaluations of existing investments carried out in practice?