One the Move -- A Look Back in Railroad Investments

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Risky railroads? Historically, the industry has had its share of ups and downs. This piece from the 1960s offers a great historical perspective.

In its January 11, 1961, issue, Financial World saw profit potential in 10 medium-grade railroad bonds, six of which were involved in mergers. They were: Chicago, M.D., St. P. Sc Pac. 1st A 4s, 1994; Cleveland C.C. & St. L. Gen. A 4s, 1993; Great Northern Gen. N 38s, 1990; Illinois Central Con. A 3 1/4s, 1979; Louisville & Nashville 1st Ref. G 2ds, 2003; Missouri Pacific 1st B 4 1/4s, 1990; Northern Pacific Gen. 3s, 2047; Pennsylvania R.R. Gen. E 4 1/4s, 1984; Southern Pacific 50-year 4 1/2s, 1981; and Wabash R.R. 1st B 3 1/4s, 1971.

During 1960, some of them sank to the lowest price levels since 1939, with most of them now still quoted at wide discounts from par.

In price behavior these medium-grade railroad bonds were seen by Financial World as having occupied a "midway position" between high grade bonds at one end and the more speculative bonds and common stocks at the other. "On the one hand," said Financial World, "they are not so sensitive to shifts in interest rates as are top-grade senior equities. But neither do they respond so sharply to swings in the business cycles as do more speculative bonds and common stocks."

The possibilities for their eventual price comeback have been greatly enhanced by the far-reaching changes taking place in the nation's rail transportation system, chiefly in the form of major moves for greater operational economy and greater public efforts to help ease the carrier's plight through, among other things, possible elimination of competitive inequalities coming from public expenditures on waterways, highways and airways.

Municipal bonds are another broad group, many of which are attractively priced, with some of them at substantial discounts. Offered in a wide range of coupons and maturities, municipal bonds are issued to be outstanding for predetermined periods, which, in the words of Goodbody & Co., "gives diversification to the investor in that he can plan by a variety of means to put a small or large amount of money to work for a certain period of time, at a known return.

"For example, the purchase of a discount bond means the investment of an amount less than $1,000 or par, the realization over the life of the bond of full stated interest which is a percentage of $1,000, and the redemption at $1,000 of the bond at maturity. The actual yield takes into account the difference between what was paid and the matured price of $1,000 and the interest received over the period. Such bonds make good estate builders and are also used for such purposes as education and pension funds, when the larger amount of money is desired at some time in the future."

In September, 1960, Goodbody analysts singled out the New Housing Authority bonds as offering outstanding advantage for accumulating an. estate with a minimum outlay. New Housing Authority bonds are issued to construct housing developments for various cities and become, for all practical purposes, guaranteed by the federal government under the U.S. Housing Act of 1937, as amended, providing for a first pledge of annual contributions payable to the local housing authority in an amount which together with other funds of the local agency will be sufficient to pay the principal and the interest on the bonds when due.

Railroad, airlines, automobiles...the transportation industry never fails to come up withe new investment risks and opportunities. People like to move, and the market moves with them! Learning from the past helps us understand the potential in the next century.

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