Flight From Bonds to Stocks 203

ing world. They evolved five reasons for the now
proved fact that stocks are a better investment than
bonds: first, because the stockholder stands to win
as well as to lose; second, because modern dividend
policy is toward steadiness; third, because a portion
of the stockholders’ earnings is reinvested for him
and ultimately yields further dividends; fourth, because
 the unstable dollar tricks the bondholder, but
any effect on the stockholder is largely neutralized;
and fifth, because diversification can correct the
irregularities of the stockholder’s income but not
that of the bondholder.
This fifth reason is much emphasized by these
writers, especially by Edgar Smith and Kenneth Van
Strum. They show that whatever truth there is in
the “risk” carried by the stockholder as compared
with the bondholder, this risk can be partly neutralized
 by diversification. If one invests $10,000 in
ten different companies, putting $1,000 into each,
while he does run a real risk of losing all that he
has invested in some one or two of these companies,
this risk is mostly offset by the probability that some
other company will prosper exceedingly. Both
Smith and Van Strum show how this diversification
does neutralize the risk and correct the unsteadiness
of the stockholder’s income.
The bondholder, like the stockholder, may be said
to be “gambling.” In fact, he is more like the man
betting on “heads” or “tails.” The dollar will go
up or down for all bonds at once, and there is no
wav to iron out that gamble by diversification. The