If the earnings of an investment company do not cover the interest or preferred dividend requirements or if the prices of the portfolio securities decline, the impact will be heaviest on the common stock. So strong was the feeling against leverage that the issuance of senior securities by open-end investment companies was forbidden in the Investment Company Act, although bank loans might be contracted. The issuance of senior securities by closed-end companies is rigorously circumscribed by the act. To illustrate the significance of leverage, let us assume that an investment company has net assets of $2 million. Although earnings on the total invested capital of $1.8 million were equivalent to only a 6 per cent annual rate, because only 4 per cent was paid on the borrowed funds, earnings on the common stock would be equivalent to 8.

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It may indeed produce a tragic loss. To illustrate, in 1930, Technicolor Corp. had a new process that seemed destined to revolutionize the movie industry, producing pictures in natural colors instead of the traditional black and white. The romance of this new process fascinated speculators and they bought Technicolor avidly. It sold as high as $85 a share in 1930, yet dropped dismally to $1 a share in less than two years when it was realized that the process was quite expensive and would take a long time in commercial development. In the years since, Technicolor never again sold anywhere near 85.

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” In the current state of the national economy, Wiesenberger saw one segment of the national economy most likely to “swim upstream,” that is, “the complex of corporations associated with our national defense efforts.” That notwithstanding, defense stocks are still basically cyclical in nature because of their individually inherent uncertainty arising from the unavoidably shifting defense emphasis with the resultant threats of contract cancellations. Therefore, a conservative participation in the fundamentally offensive defense stocks would be purchase, for instance, of Boeing’s convertible debentures as the “strongest offense in defense.” An Alternative Way of Participation For the same reason, the Wiesenberger Investment Report saw Lockheed 3¾ per cent 1980 convertible debentures as representing an alternative way of buying into the prime contractor of the Polaris missile system and such important satellite programs as Discoverer, Midas (infrared devices to detect enemy missile launchings) and Samos (surveillance satellite system). “Recently 116,” said the Wiesenberger report, “the debentures yield 3.2 per cent currently (2.

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