9

As  a  general  rule  investors  distribute  their
capital  in  a  haphazard  sort  of  way.  They  will
buy  £100  worth  of  one  kind  of  stock  and
£1,000  worth  of  another.  This  is  fatal  to  a
successful  counterbalancing  of  profits  and
losses,  for  :—Capital  must  not  only  be  split  up
amongst  various  investments,  but  these  divisions
of  capital  must  all  be  of  equal  original  cost.
The  idea  of  distributing  capital  amongst  a
variety  of  investments  is  that  the  movement  of
one  division  of  capital  may  counterbalance  the
movement  of  another  division.  Clearly,  then,
if  this  system  of  counterpoise  is  to  prove  of
practical  value,  the  weight  of  the  several
adjusting  divisions  of  capital  must  be
identical.  For  instance,  suppose  that  £1,000
had  been  unequally  invested  in  two  stocks,  their
costs  being  £800  and  £200  respectively,  and
let  us  further  assume  that  the  investor
judiciously  selected  two  stocks  which  represented ­
  two  widely  differing  investment  risks,
and  that  one  stock  was  adversely  affected
whilst  the  other  improved  in  value.  Now,  if
the  stock  which  represented  £800  of  his
capital  fell  five  points  and  the  other,  in  which
he  was  only  interested  to  the  extent  of  £200,
experienced  a  precisely  similar  rise,  the
investor  would  lose  £40  over  the  first  and,  as
a  set  off  to  this,  he  would  only  have  made  a