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, be- 
cause 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 neu- 
tralized 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