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 vi CONTENTS

Investing in Index Mutual Funds Versus ETFs, 74 The Globalization of Markets, 105
Weighting Methods for Index Funds, 74 Summary, 105
Checking Your Understanding, 75 Questions, 106
Investment Company Performance, 75 Problems, 107
Measures of Fund Performance, 75 Computational Problems, 108
Morningstar Ratings, 77 Spreadsheet Exercises, 108
Benchmarks, 78 Checking Your Understanding, 110
Fund Performance and Expenses, 78
Some Conclusions about Fund Performance, 78 5 How Securities are Traded, 111
Investing Internationally through Investment Introduction, 111
Companies, 80 Brokerage Transactions, 112
Fund Categories for International Investing, 80 Brokerage Firms, 112
The Future of Indirect Investing, 81 Brokerage Accounts, 114
Fund Supermarkets, 81 How Orders Work, 115
Hedge Funds, 81 Trading on Today’s Exchanges, 115
Summary, 82 Orders in the NASDAQ Stock Market, 116
Questions, 83 Modern‐Day Trading, 116
Computational Problems, 84 Types of Orders, 117
Spreadsheet Exercises, 84 Clearing Procedures, 118
Checking Your Understanding, 86 Checking Your Understanding, 119
Investor Protection in the Securities Markets, 119
4 Securities Markets and Market Government Regulation, 119
Indexes 87 Self‐Regulation, 121
The Importance of Financial Markets, 87 Other Investor Protections, 122
The Primary Markets, 88 Checking Your Understanding, 123
Initial Public Offerings (IPOs), 88 Margin, 123
The Investment Banker, 89 How Margin Accounts can be Used, 124
A Global Perspective, 91 Margin Requirements and Obligations, 124
Checking Your Understanding, 92 Margin Requirements on Other Securities, 126
The Secondary Markets, 92 Some Misconceptions about Margin, 126
U.S. Securities Markets for the Trading of Equities, 92 Short Sales, 126
The New York Stock Exchange, 93 Selling Short as an Investor, 129
The NASDAQ Stock Market, 94 Checking Your Understanding, 131
NYSE Versus NASDAQ, 95 Summary, 131
The OTC (Over‐the‐Counter) Market, 95 Questions, 132
BATS, 95 Problems, 132
Electronic Communication Networks (ECNs), 96 Computational Problems, 133
Foreign Markets, 97 Spreadsheet Exercises, 133
Checking Your Understanding, 97 Checking Your Understanding, 134
Stock Market Indexes, 97
The Dow Jones Averages, 98 PART TWO PORTFOLIO AND CAPITAL MARKET
Standard & Poor’s Stock Price Indexes, 100 THEORY
Understanding a Capitalization‐Weighted Index, 100
NASDAQ Indexes, 101 6 The Returns and Risks from
Other Indexes, 102 Investing, 135
Using the Correct Domestic Stock Indexes, 102 An Overview, 136
Foreign Stock Market Indicators, 103 Return, 136
Checking Your Understanding, 104 The Two Components of Asset Returns, 136
Bond Markets, 104 Measuring Returns, 138
Individual Investors and Bond Trading, 105 Total Return, 138
Derivatives Markets, 105 Cumulative Wealth Index, 141

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A Global Perspective, 142
International Returns and Currency Risk, 142
Checking Your Understanding, 145
Summary Statistics for Returns, 145
Arithmetic Mean, 145
Geometric Mean, 145
Arithmetic Mean versus Geometric Mean, 147
Inflation‐Adjusted Returns, 148
Checking Your Understanding, 149
Risk, 149
Sources of Risk, 150
Measuring Risk, 151
Variance and Standard Deviation, 152
Risk Premiums, 154
Checking Your Understanding, 154
Realized Returns and Risks from
Investing, 155
Total Returns and Standard Deviations for the
Major Financial Assets, 155
Cumulative Wealth Indexes, 156
Understanding Cumulative Wealth
as Investors, 158
Compounding and Discounting, 159
Summary, 159
Questions, 160
Demonstration Problems, 161
Problems, 164
Computational Problems, 165
Spreadsheet Exercises, 166
Checking Your Understanding, 167
7 Portfolio Theory, 169
Dealing with Uncertainty, 169
Using Probabilities, 170
Probability Distributions, 170
Calculating Expected Return for
a Security, 172
Calculating Risk for a Security, 173
Checking Your Understanding, 174
Introduction to Modern Portfolio
Theory, 174
Portfolio Return and Risk, 175
Portfolio Expected Return, 175
Portfolio Risk, 177
Analyzing Portfolio Risk, 177
Risk Reduction—The Insurance Principle, 177
Diversification, 178
Checking Your Understanding, 179
The Components of Portfolio Risk, 179
Covariance, 179
The Correlation Coefficient, 180
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CONTENTS vii
Checking Your Understanding, 184
Calculating Portfolio Risk, 184
The Two‐Security Case, 184
The n‐Security Case, 187
Checking Your Understanding, 187
Obtaining the Data, 188
Simplifying the Markowitz Calculations, 188
Summary, 189
Questions, 190
Problems, 192
Computational Problems, 193
Spreadsheet Exercises, 194
Checking Your Understanding, 196
8 Portfolio Selection and Asset
Allocation, 197
Building a Portfolio Using Markowitz
Principles, 197
Identify Optimal Risk–Return
Combinations, 198
The Attainable Set of Portfolios, 198
Selecting an Optimal Portfolio of Risky
Assets, 200
The Global Perspective—International
Diversification, 201
Some Important Conclusions about the
Markowitz Model, 202
Checking Your Understanding, 202
Selecting Optimal Asset Classes—The Asset
Allocation Decision, 203
Asset Allocation and Diversification, 204
Some Major Asset Classes, 204
Combining Asset Classes, 207
Asset Allocation and the Individual
Investor, 209
Life‐Cycle Analysis, 212
Other Approaches, 212
Checking Your Understanding, 213
The Impact of Diversification on Risk, 213
Systematic and Nonsystematic Risk, 214
How Many Securities are Needed to Fully
Diversify?, 215
The Implications of Reducing Risk by Holding
Portfolios, 216
Summary, 216
Questions, 217
Problems, 218
Spreadsheet Exercises, 218
Checking Your Understanding, 221
1/25/2016 11:14:09 AM
 viii CONTENTS
9 Capital Market Theory and Asset
Pricing Models, 222
Capital Market Theory, 223
Capital Market Theory Assumptions, 223
Introduction of the Risk‐Free Asset, 224
Risk‐Free Borrowing and Lending, 225
Checking Your Understanding, 227
The Capital Market Line, 227
Defining The Capital Market Line, 227
The Separation Theorem, 227
Understanding the CML, 229
The Equation for the CML, 229
Important Points about the CML 230
Checking Your Understanding, 230
Systematic Risk and Beta, 231
Above‐ and Below‐Average Beta Stocks, 232
In Summary, What is Beta?, 232
Estimating Beta, 233
The Capital Asset Pricing Model (CAPM), 236
Checking Your Understanding, 239
Implementing the CAPM, 240
Tests of CAPM, 240
Arbitrage Pricing Theory, 241
The Law of One Price, 242
Assumptions of APT, 242
Factor Models, 242
Understanding the APT Model, 243
Identifying the Factors, 244
Using APT in Investment Decisions, 245
Checking Your Understanding, 245
Other Prominent Factor Models, 245
Some Conclusions about Asset Pricing, 247
Summary, 247
Questions, 248
Demonstration Problems, 249
Problems, 250
Computational Problems, 251
Spreadsheet Exercises, 252
Checking Your Understanding, 253
PART THREE COMMON STOCKS: ANALYSIS,
VALUATION, AND MANAGEMENT
11 Common Stocks: Analysis and
10 Common Stock Valuation, 254
Overview, 255
Discounted Cash Flow Models, 256
Two Broad DCF Approaches, 257
The Dividend Discount Model, 258
Applying the DDM, 258
The DDM Equation, 259
Implementing the DDM, 259
ftoc.indd 8
Estimating Future Dividends, 259
Checking Your Understanding, 260
Growth Rate Cases for the DDM, 260
The Zero‐Growth Rate Model, 260
The Constant‐Growth Rate Model, 261
How k and g Affect Value, 262
The Multiple‐Growth Rate Model, 264
Dividends, Dividends—What about Capital Gains?, 268
The Dividend Discount Model in Practice, 269
Checking Your Understanding, 269
Other Discounted Cash Flow Approaches, 269
Free Cash Flow to Equity, 270
Free Cash Flow to the Firm, 270
Intrinsic Value and Market Price, 271
Checking Your Understanding, 272
The Multiplier Approach, 272
Earnings Multiplier (P/E Ratio), 272
Other Multipliers, 273
Price to Book (P/B), 274
Price to Sales (P/S), 274
Price to Cash Flow (P/CF), 274
Enterprise Value To EBITDA (EV/EBITDA), 274
Relative Valuation Metrics, 275
Price/Earnings (P/E) Ratio, 275
Price/Book (P/B) Ratio, 276
Price/Sales (P/S) Ratio, 276
Price/Cash Flow (P/CF) Ratio, 277
Enterprise Value/EBITDA (EV/EBITDA) Ratio, 277
Economic Value Added Analysis, 277
Which Approach To Use?, 278
Bursting the Bubble on New Economy
Stocks—A Lesson in Valuation, 279
Checking Your Understanding, 280
Some Final Thoughts on Valuation, 280
Summary, 280
Questions, 281
Demonstration Problems, 282
Problems, 284
Computational Problems, 286
Spreadsheet Exercises, 287
Checking Your Understanding, 288
Strategy, 289
A Global Perspective, 289
The Impact of the Overall Market on Stocks, 290
Building Stock Portfolios, 291
Checking Your Understanding, 292
The Passive Strategy, 292
Buy‐and‐Hold Strategy, 293
Index Funds, 293
1/25/2016 11:14:09 AM
 CONTENTS ix

Checking Your Understanding, 296 PART FOUR SECURITY ANALYSIS

The Active Strategy, 296
Security Selection, 297 13 Economy/Market Analysis, 339
Rotation Strategies, 302 Introduction, 339
Market Timing, 304 Taking a Global Perspective, 340
Checking Your Understanding, 306 Assessing the Economy, 340
Rational Markets and Active Strategies, 306 The Business Cycle, 341
A Simple Strategy: The Coffeehouse Forecasts of the Economy, 344
Portfolio, 306 Checking Your Understanding, 347
Summary, 307 The Stock Market and the Economy, 347
Questions, 307 The Economy and Stock Market Booms, 348
Problems, 308 Economic Slowdowns and Bear Markets, 348
Computational Problems, 308 Checking Your Understanding, 349
Spreadsheet Exercises, 308 Understanding the Stock Market, 349
Checking Your Understanding, 309 A Model of Aggregate Stock Prices, 349
Checking Your Understanding, 352
12 Market Efficiency, 311 Making Market Forecasts, 352
Overview, 311 Focus on the Important Variables, 352
The Concept of an Efficient Market, 312 Checking Your Understanding, 355
What Is an Efficient Market?, 312 Using the Business Cycle to Make Market Forecasts, 355
Why the U.S. Stock Market Can Be Expected to The E/P Ratio and the Treasury Bond Yield, 356
Be Efficient, 313 Summary, 358
The International Perspective, 314 Questions, 359
Forms of Market Efficiency, 315 Problems, 360
Checking Your Understanding, 317 Computational Problems, 360
How to Test for Market Efficiency, 317 Spreadsheet Exercises, 360
Weak‐Form Tests, 318 Checking Your Understanding, 361
Semistrong‐Form Tests, 319
Strong‐Form Evidence, 321 14 Sector/Industry Analysis, 362
Checking Your Understanding, 322 Introduction, 363
Market Anomalies, 322 What Is an Industry?, 363
Earnings Announcements, 322 Classifying Industries, 364
Low Price Multiples, 324 The NAICS Classification System, 364
The Size Effect, 325 Other Industry Classifications, 364
The January Effect, 325 The Importance of Sector/Industry Analysis, 365
Past Stock Return Performance, 326 Why Sector/Industry Analysis Is Important over
The Value Line Ranking System, 327 the Long Run, 365
Other Anomalies, 328 Checking Your Understanding, 366
Data Mining, 328 Sector Performance over Shorter Periods, 367
Checking Your Understanding, 329 How One Industry can Have a Major Impact
Behavioral Finance, 329 on Investors: The Telecom Industry, 368
Efficient Markets versus Behavioral Finance, 331 Cross‐Sectional Volatility Has Increased, 368
Behavioral Finance Implications for Investors, 331 Analyzing Sectors/Industries, 369
Behavioral Finance Today, 332 The Industry Life Cycle, 369
Checking Your Understanding, 332 Checking Your Understanding, 371
Some Conclusions about Market Qualitative Aspects of Industry Analysis, 371
Efficiency, 332 Using Sector/Industry Analysis as an
Summary, 335 Investor, 372
Questions, 336 Assess the Business Cycle, 372
Problems, 337 Review Investment Advisory Services about
Checking Your Understanding, 337 Industries, 374

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 x CONTENTS

Sector Rotation, 374 Checking Your Understanding, 416

Evaluating Future Industry Prospects, 374 Stock Price and Volume Techniques, 416
Summary, 376 The Dow Theory, 416
Questions, 376 Charts of Price Patterns, 418
Checking Your Understanding, 377 Checking Your Understanding, 422
Moving Averages, 423
15 Company Analysis, 378 Relative Strength, 424
Fundamental Analysis, 378 Using the Computer for Technical Analysis, 425
The Accounting Aspects of Earnings, 379 Technical Indicators, 425
The Financial Statements, 379 Breadth Indicators, 425
Checking Your Understanding, 386 Sentiment Indicators, 426
The Problems with EPS, 386 Testing Technical Analysis Strategies, 428
Reported Earnings, 386 The Ebb and Flow of Technical
Has the Situation Improved?, 387 Analysis, 430
Checking Your Understanding, 390 Some Conclusions about Technical
Using the Financial Statements to Analyze Analysis, 430
a Company’s FCF, ROE, and EPS, 390 Summary, 432
Analyzing Free Cash Flow (FCF), 390 Questions, 432
Analyzing Return on Assets (ROA), 391 Computational Problems, 433
Analyzing Return on Equity (ROE), 392 Checking Your Understanding, 433
The Accounting Determinants of EPS, 393
Estimating the Internal (Sustainable) Growth Rate, 393 PART FIVE FIXED-INCOME SECURITIES: ANALYSIS,
Checking Your Understanding, 395 VALUATION, AND MANAGEMENT
Earnings Estimates, 395
A Forecast of EPS, 395 17 Bond Yields and Prices, 434
The Accuracy of Earnings Forecasts, 395 Introduction, 434
Earnings Surprises, 396 Bond Yields and Interest Rates, 435
Earnings Guidance, 397 The Basic Components of Interest Rates, 435
The Earnings Game, 397 The Term Structure of Interest Rates, 437
Useful Information for Investors about Earnings Risk Premiums (Yield Spreads), 440
Estimates, 398 Measuring Bond Yields, 442
Alternatives to Earnings, 399 Current Yield, 442
The Multiplier, 399 Yield to Maturity, 443
The P/E Ratio, 399 Yield to First Call, 445
Determinants of the P/E Ratio, 400 Realized Compound Yield, 446
Determinants of the P/B Ratio, 400 Checking Your Understanding, 448
Determinants of the P/S Ratio, 401 Checking Your Understanding, 450
Why Price Multiples Vary among Companies, 401 Bond Prices, 451
The PEG Ratio, 402 The Valuation Principle, 451
Fundamental Security Analysis in Practice, 402 Bond Valuation, 451
Summary, 405 Bond Price Changes, 453
Questions, 406 Bond Price Changes over Time, 453
Problems, 406 Bond Price Changes As a Result of Interest Rate
Computational Problems, 407 Changes, 454
Spreadsheet Exercises, 409 Checking Your Understanding, 457
Checking Your Understanding, 411 Summary, 457
Questions, 457
16 Technical Analysis, 412 Problems, 459
Introduction, 412 Computational Problems, 460
What Is Technical Analysis?, 413 Spreadsheet Exercises, 461
A Framework for Technical Analysis, 415 Checking Your Understanding, 462

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 CONTENTS xi

18 Bonds: Analysis and Strategy, 463 Option Valuation, 505

Why Buy Bonds?, 463 A General Framework, 505
Buying Foreign Bonds, 466 Intrinsic Values and Time Values, 506
Important Considerations in Managing a Bond Boundaries on Option Prices, 508
Portfolio, 467 The Black–Scholes Model, 510
Understanding the Bond Market, 467 Put Option Valuation, 513
Global Factors and the U.S. Bond Markets, 467 Summarizing the Factors Affecting Options Prices, 513
Checking Your Understanding, 468 Hedge Ratios, 513
Bond Strategies and Techniques, 468 Using the Black–Scholes Model, 514
Passive Management Strategies, 468 Checking Your Understanding, 514
Buy and Hold, 469 An Investor’s Perspective on Puts and Calls, 514
Indexing, 470 What Puts and Calls Mean to Investors, 514
Active Management Strategies, 471 The Evolutionary Use of Options, 515
Forecasting Changes in Interest Rates, 471 Stock Index Options, 516
Yield Spread Analysis, 472 The Basics of Stock Index Options, 516
Identifying Mispricing among Bonds, 473 Strategies with Stock Index Options, 517
New Tools for Individual Investors, 474 The Popularity of Stock Index Options, 519
Managing Price Volatility, 474 Summary, 519
Duration, 475 Questions, 520
Checking Your Understanding, 482 Problems, 520
Managing Price Volatility, 482 Computational Problems, 522
Immunization, 482 Spreadsheet Exercises, 523
Summary, 485 Checking Your Understanding, 523
Questions, 486
Problems, 487 20 Futures Contracts, 525
Computational Problems, 488 An Overview of Futures Markets, 525
Spreadsheet Exercises, 488 Why Futures Markets?, 525
Checking Your Understanding, 489 What Is Traded in the Futures Markets?, 527
The Structure of Futures Markets, 527
U.S. Futures Exchanges, 527
PART SIX DERIVATIVE SECURITIES
Foreign Futures Markets, 529
19 Options, 490 The Clearinghouse, 529
Why Have Derivative Securities?, 491 Checking Your Understanding, 530
Why Options Markets?, 491 The Mechanics of Trading, 530
Introduction to Options, 491 Futures Contracts, 530
Long‐Term Options, 492 Basic Procedures, 531
WeeklysSM Options, 492 Margin, 532
Understanding Options, 493 Checking Your Understanding, 534
Options Terminology, 493 Using Futures Contracts, 534
Checking Your Understanding, 493 Hedgers, 534
How Options Work, 494 How to Hedge with Futures, 535
The Mechanics of Trading, 495 Speculators, 536
Checking Your Understanding, 497 Calculating Rate of Return on Futures Contracts, 537
Payoffs and Profits from Basic Option Positions, 497 Checking Your Understanding, 537
Calls, 497 Financial Futures, 537
Puts, 499 Foreign Currency Futures, 538
Some Basic Options Strategies, 502 Interest Rate Futures, 539
Covered Calls, 502 Stock‐Index Futures, 541
Protective Puts, 503 Single Stock Futures, 546
Portfolio Insurance, 504 Summary, 547
Checking Your Understanding, 505 Questions, 548

ftoc.indd 11 1/25/2016 11:14:10 AM

 xii CONTENTS
Problems, 549
Computational Problems, 549
Checking Your Understanding, 550
PART SEVEN INVESTMENT MANAGEMENT
21 Managing Your Financial Assets, 551
A Perspective on Investing in Financial
Assets, 551
Managing Your Financial Assets, 552
Individual Investors Vary Widely, 553
Checking Your Understanding, 553
Formulate an Appropriate Investment
Strategy, 553
Investor Objectives, 554
Assessing Your Risk Tolerance, 555
Establishing Your Return Expectations, 555
Checking Your Understanding, 557
What Issues Do Investors Face in Their
Financial Planning?, 557
Liquidity Needs, 557
Time Horizon, 557
Tax Considerations, 558
Regulations, 559
Unique Individual Circumstances, 559
Investor Expectations as a Part of Financial
Planning, 559
Rate of Return Assumptions, 559
Checking Your Understanding, 562
Implementing Investing Strategies, 562
Asset Allocation, 562
Portfolio Optimization, 564
Basic Investment Management Strategies, 564
Financial Planning on an Ongoing Basis, 565
Tax‐Advantaged Investing, 566
Monitoring Market Conditions, 566
Checking Your Understanding, 567
Rebalancing a Portfolio of Financial Assets, 567
Determining the Success of Your Financial
Planning, 567
Summary, 568
Questions, 568
Spreadsheet Exercises, 571
Checking Your Understanding, 572
ftoc.indd 12
22 Evaluation of Investment
Performance, 574
A Framework for Evaluating and Assessing
Portfolio Performance, 575
Performance Measurement Issues, 575
Three Questions to Answer in Measuring Portfolio
Performance, 576
Return Calculations, 578
Risk Considerations, 580
Checking Your Understanding, 581
Performance Benchmarks and Performance
Universes, 581
Performance Universes, 581
Performance Benchmarks, 582
A Straightforward Approach to Performance
Evaluation, 582
Risk‐Adjusted Measures of Performance, 583
The Sharpe Ratio, 583
Treynor’s Reward to Volatility, 585
Checking Your Understanding, 586
Jensen’s Alpha, 586
Information Ratio, 588
M2, 589
Sortino Ratio, 590
Checking Your Understanding, 591
Style Analysis and Performance
Attribution, 591
Style Analysis, 591
Performance Attribution, 593
Money Managers and Performance
Presentations, 593
Checking Your Understanding, 594
An Overview on Performance
Evaluation, 594
Summary, 595
Questions, 595
Problems, 597
Computational Problems, 599
Spreadsheet Exercises, 601
Checking Your Understanding, 602
Glossary, 603
Index, 611
1/25/2016 11:14:10 AM
 Preface

T his book is designed to provide a good understanding of the field of investments while
stimulating interest in the subject. This understanding is valuable because each of us
must make various investment decisions during our lifetimes—definitely as individuals, and
possibly in our chosen careers. If we try to avoid making these decisions, they will likely be
made for us, often to our detriment.
Our goal in this text is to help readers gain an appreciation for what is involved when it
comes to investing, and what it takes to make good investment decisions. The text will pre-
pare the reader to recognize and deal with the many investment problems and controversies
that exist.
The book is designed as a guide to investments for individuals wanting to learn; the
presented material is neither too basic nor too advanced. Descriptive material is thoroughly
covered; however, equally important, the analytics of investments are presented throughout
the discussion to help students reason out investment issues, and thus, be better prepared
when making real‐world investment decisions. Terminology and trading mechanisms may
change, but learning to carefully analyze and evaluate investment opportunities will pay off
under any circumstances.
The book is written for the first course in investments, generally taught at the junior/senior
level. Standard prerequisites include basic accounting, economics, and financial management.
A course in statistics is very useful but not absolutely essential. We have sought to minimize
formulas and to simplify difficult material, consistent with a presentation of the subject that
takes into account current ideas and practices. Relevant, state‐of‐the‐art material has been
simplified and structured specifically for the benefit of the beginning student. The emphasis
in this text is on readability—making investments material readily accessible, as well as inter-
esting and entertaining, so that the reader who has modest prerequisites can follow the entire
discussion and hopefully be motivated to delve further into the subject.

Organization of the Text

The text is divided into seven parts for organizational purposes—beginning with background
material and followed by risk and return and basic portfolio theory. Subsequent parts present
an analysis of different types of securities, which is separated into four parts. Finally, the text
ends with the final part discussing overall investment management issues.
Part 1 provides the necessary background for students before they encounter the specifics
of security analysis and portfolio management. The goal of this introductory set of chapters is to
acquaint beginners with an overview of what investing is all about. After a general discussion of
the subject in Chapter 1, the next four chapters describe the securities available when investing
directly, investing indirectly (investment companies), the markets in which securities are traded,
and the mechanics of securities trading.
Part 2 presents a discussion of returns and risk, along with the basics of portfolio theory
and capital market theory. Chapter 6 contains a careful analysis of the important concepts of
risk and return that dominate any discussion of investments. Chapter 7 contains a complete

fpref.indd 13 1/23/2016 6:09:48 PM

 xiv PREFACE

discussion of expected return and risk for both individual securities and portfolios. The pri-
mary emphasis is on the essentials of Markowitz portfolio theory. Chapter 8 completes port-
folio theory and then covers asset allocation, one of the most important aspects of portfolio
management. Beta and the CAPM are introduced in Chapter 9 so these important concepts
can be used throughout the remainder of the course. This illustrates one of the primary char-
acteristics of this text—introducing material only at the point it is needed and only in the
detail needed by beginning students. We believe this improves the flow of the material greatly
and keeps students from becoming mired in needless, and often tedious, details.
Part 3 examines the analysis, valuation, and management of stocks, a logical starting
point in learning how to value securities. Chapters 10 and 11 present the methods used in
valuing common stocks, while Chapter 11 discusses alternative strategies for investing in
common stock. Chapter 12 explains the efficient market hypothesis and provides some
insights into the controversy surrounding this topic.
Part 4 is devoted to security analysis, providing an overview of the various aspects
involved in selecting a common stock portfolio. It covers fundamental analysis, the heart of
security analysis, as well as technical analysis. Because of its scope and complexity, three chap-
ters (Chapters 13, 14, and 15) are required to adequately cover the fundamental approach. The
sequencing of these chapters—market, industry, and company—reflects the widely held belief
that the top‐down approach to fundamental analysis is superior, although the bottom‐up
approach is also discussed. Chapter 16 discusses technical analysis, a well‐known technique for
analyzing stocks, which goes back many years. It is not unusual for beginners to have heard of
one or more technical analysis tools.
Part 5 is devoted to bonds. Chapter 17 covers the basics of bond pricing and yields. It
includes such topics as the term structure of interest rates and yield spreads. All important
calculations regarding bond prices and yields are carefully explained and illustrated. Other
issues include bond price changes in response to interest rate changes. Chapter 18 focuses on
the management of bonds and covers topics such as duration and immunization. As always, the
emphasis is on the basics—the important topics that students need to know to understand the
world of fixed income investing.
Part 6 discusses derivative securities. Chapter 19 analyzes options (puts and calls), an
investment alternative that has become increasingly popular over the years. Stock index
options are also covered. Chapter 20 is devoted to financial futures, an important topic for
investors when it comes to hedging their positions and reducing the risk of investing.
Finally, Part 7 concludes the text with a discussion of portfolio management and the
issue of evaluating portfolio performance. Chapter 21 is structured around an individual
investor’s approach to financial planning and managing a portfolio. Chapter 22 is a logical
conclusion to the entire book because all investors are keenly interested in how well their
investments have performed. Mutual funds are used as examples of how to apply these port-
folio performance measures and how to interpret the results.
The 13th edition contains exactly the same set of chapters, in the same order, as the
12th edition. Therefore, the transition to this new edition should be painless.

Special Features
The text offers several important features.

1. The sequence of chapters has been carefully structured and streamlined in each edition,
reflecting considerable experimentation over the years and a continuing search for the
most effective organizational structure. We believe that this arrangement is very satisfac-
tory for students in a beginning investment course. However, those who prefer a different

fpref.indd 14 1/23/2016 6:09:48 PM

 PREFACE xv

order—such as covering portfolio theory and capital market theory later in the course—
can do so with no loss of continuity.
2. We have diligently sought to ensure that the text length is reasonably manageable in the
standard undergraduate investment course. Although it requires a very tight schedule,
the entire text could be covered in a typical three‐hour course. However, many instruc-
tors choose to omit chapters, depending on preferences and constraints; doing so will
cause no problems in terms of teaching a satisfactory investment course. For example,
the chapters on fundamental analysis and technical analysis (Part 4) could be omitted,
because the valuation and management of common stocks is fully covered in Part 3.
Alternatively, the chapters on options and futures could be omitted if necessary. Another
alternative is assigning some chapters, or parts of chapters, to be read by students with
little or no class discussion (e.g., Part 4).
3. The pedagogy is specifically designed for the student’s benefit.
◨ Each chapter begins with a set of specific learning objectives, which will aid the
reader in determining what is to be accomplished in a particular chapter.
◨ Each chapter contains key words in boldface, carefully defined as marginal defini-
tions; they also are included in the glossary. Other important words are italicized.
◨ Each chapter contains a detailed summary of bulleted points for quick and precise
reading.
◨ Each chapter contains an extensive set of numbered examples, designed to clearly
illustrate important concepts.
◨ Most chapters contain a designated feature called “Concepts in Action” which illus-
trates the use of one or more of the important items in that chapter.
◨ Throughout the text, as appropriate, “Investments Intuition” sections are set off from
the regular text for easy identification. These discussions are designed to help the
reader quickly grasp the intuitive logic of, and therefore better understand, particular
investing issues.
◨ Each chapter has a set of questions titled “Checking Your Understanding” spaced
throughout the chapter, as appropriate. These questions, with answers at the end of
chapters, give students a chance to see if they understand critical issues as they pro-
gress through the text.
◨ Throughout the text, as appropriate, “Some Practical Advice” is given in a clearly
designated format.
◨ Each chapter contains an extensive set of questions keyed specifically to the chapter
material and designed to thoroughly review the concepts in each chapter.
◨ Many chapters have a separate set of problems designed to illustrate the quantitative
material in the chapters. Some of these problems can be solved in the normal manner,
and some are best solved with available software. Included as part of some problem
sets are demonstration problems that show the reader how to solve the most impor-
tant types of problems.
◨ Where appropriate, chapters have spreadsheet exercises and computational problems
which are more complex.
◨ Many chapters contain multiple questions and problems that are based on the char-
tered financial analyst (CFA) curriculum. This allows students to see that the con-
cepts and problem‐solving processes they are studying in class are exactly the same
as those tested on professional examinations for people in the money‐management
business.
◨ A few boxed inserts continue to be included in the text. These inserts provide timely
and interesting material from the popular press, enabling the student to see the real‐
world side of issues and concepts discussed in the text.

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 xvi PREFACE

Changes to the 13th Edition

The 13th edition has been thoroughly updated using the latest information and numbers
available. Most of the data are through year‐end 2014 and some extend into 2015.
Important features in the 13th edition include the following:

◨ Pedagogy has been enhanced. For example, some chapters have lead‐in questions or
problems to illustrate an important issue that will be discussed in that chapter. In other
chapters, this may be done later in the chapter.
◨ Features such as “Concepts in Action” and “Investments Intuition” have been updated
to illustrate important issues with interesting, real‐world, current examples.
◨ Part 1 contains the latest information available on newer concepts such as exchange‐
traded funds (ETFs), private equity companies, and electronic communications networks
(ECNs) and the most current information on important trends such as discount/Internet
brokers. Also included are items such as BATS, algorithmic trading, and high‐frequency
trading. The section on market indexes has been expanded and improved.
◨ The regulations discussed in Chapter 5 have been updated to include major securities
regulation such as the Sarbanes–Oxley Act and the Dodd–Frank Wall Street Reform and
Consumer Protection Act of 2010.
◨ Chapter 6 is continually being improved to facilitate the understanding of important
calculations like the geometric mean. These calculations are important in finance, and
in general, the more examples available to students, the better.
◨ Chapter 9 contains an added discussion regarding the merits of alternative measures of
the risk‐free rate (RF). The discussion notes that the T‐bond rate has become the more
prominently used measure in practice, particularly since the T‐bill rate has maintained
a value of approximately zero for an extended period of time.
◨ The risk and return material in Chapters 7, 8, and 9 has been reordered and condensed
to remove redundancies and improve the flow of the material.
◨ Chapter 10, on the valuation of common stocks, places somewhat less emphasis on the
dividend discount model and more on relative valuation techniques and other
discounted cash flow approaches. The calculation of free cash flow to equity and free
cash flow to the firm is expanded and more clearly explained. The use of relative value
models is expanded, better explained, and more clearly illustrated. The discussion now
includes price‐to‐cash flow and enterprise value‐to‐EBITDA.
◨ The sector and industry data in Chapter 14 have been updated and expanded using
the return data from the Kenneth R. French database. Chapter 15 has been expanded
to include formulas that use the statement of cash flows to derive free cash flow to
equity (FCFE) and free cash flow to the firm (FCFF). The chapter also has added
justifiable price‐to‐book and justifiable price‐to‐sales formulas with accompanying
explanations.
◨ Some of the material in Chapters 17 and 18 has been reoriented to improve the flow.
◨ Chapter 17 contains the discussion of the term structure of interest rates and yield
spreads as well as discussion of bond yields and prices. Concepts such as duration and
immunization are in Chapter 18.
◨ A discussion of effective duration has been added in Chapter 18.
◨ Chapter 21 has been reoriented to stress the importance for investors of having an
investment policy statement (IPS) and the components of an IPS are more clearly
explained. The chapter also now includes a discussion of the three basic investment
management strategies: buy‐and‐hold, constant mix, and constant proportion portfolio
insurance.

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 PREFACE xvii

◨ Chapter 22 has more discussion of time‐ and money‐weighted returns. In addition, the
information ratio and Sortino ratio have been added to the list of performance
measures.

Supplements
The 13th edition includes a complete set of supplements for instructors and students.
Resources can be found on the book’s companion site: www.wiley.com/college/jones.

◨ Instructor’s manual. For each chapter, chapter objectives, lecture notes, a listing of
tables and figures, and additional material relevant to the particular chapter are included.
Answers to all questions and problems in the text are provided. The instructor’s manual
was carefully prepared by the authors.
◨ Test bank. The test bank includes numerous multiple‐choice and true–false questions
for each chapter as well as short discussion questions and problems. These are carefully
checked; most have also been class‐tested. The test bank is also available in a computer-
ized format.
◨ PowerPoint files. PowerPoint presentation materials are available. A presentation file
for each chapter includes outline material as well as all figures and tables from the text.
◨ List of equations. A comprehensive list of all equations found in the text is available.
◨ Excel templates. This online collection of Excel templates allows students to complete
select end‐of‐chapter questions and problems identified by a spreadsheet icon in the
textbook. Solution files are available to instructors.
◨ Student practice quizzes. Student practice quizzes are provided for each chapter and
contain at least 10–15 multiple choice questions. With instant feedback, questions of
varying difficulty help students evaluate individual progress through a chapter.

Acknowledgments
A number of individuals have contributed to this project. We are particularly indebted to the
late Jack W. Wilson, who offered many useful comments and provided material for some of
the tables, graphs, problems, and figures.
A text does not achieve multiple editions unless it meets the needs of a large number of
instructors who find it a useful teaching aid. Earlier editions of this text benefited substantially
from the reviews of numerous instructors whose suggestions for improvements are found
throughout the text. We owe a debt of gratitude to colleagues who offered valuable feedback
that greatly enhanced the quality of the text. It would be impossible to list all who have pro-
vided feedback over the years on previous text editions. A few individuals that offered assis-
tance on recent editions include Robert R. Johnson, American College of Financial Services,
Jay T. Brandi,, University of Louisville; Laura Seery Cole, University of Tennessee, Knoxville;
William P. Dukes, Texas Tech University; Rodrigo Hernandez, Radford University; Nancy
Jay, Mercer University; Iqbal Mansur, Widener University; Kerri D. McMillan, Clemson
University; and Tanja Steigner, Emporia State University.
We would also like to thank the current editorial staff at Wiley for all of their work in
getting the 13th edition of the text prepared in such a proficient and professional manner. The
task of preparing a new edition is laborious, but the process was made much easier due to the
efforts of the Wiley staff. The contributions of previous editors and staff at Wiley were instru-
mental in creating the first edition of the text and ensuring that subsequent editions main-
tained the same high quality as that first product.

fpref.indd 17 1/23/2016 6:09:48 PM

 xviii PREFACE

Finally, we wish to thank our families who put up with all of the inconveniences that are
associated with writing a book. Without their support, it would have been impossible for the
book to reach the incredible achievement of a 13th edition. The support and love of our
families made the difficult task of producing this edition worthwhile and bearable.

Charles P. Jones
North Carolina State University
Gerald R. Jensen
Creighton University

fpref.indd 18 1/23/2016 6:09:48 PM

 chapter
1
Understanding
Investments

S uppose you are fortunate enough to receive an inheritance of $1 million from a relative. She specifies that you must
invest this money intelligently in financial assets within the next six months, and not spend it on consumption,
and that you must be answerable to a trustee who has the final say if you fail to make reasonable decisions. You now
face an enviable task—building a portfolio of stocks, bonds, and so forth—and you quickly realize that not only do
you not know all the answers, you do not even know some of the questions.
Having had a finance course in college, you learned about return and risk, but now you must really under-
stand what these terms mean. You have heard some people talk about making a “killing in the market,” but com-
mon sense tells you it cannot be all that easy. Like the prospective investor asked the broker when the latter was
showing him the yachts belonging to other brokers, “Where are the customers’ yachts?” Also, you have on several
occasions read about fraudulent investment schemes leaving people broke, but wiser. And so you realize you have
your work cut out for you. You need to identify the important issues, ask the right questions, and learn the basics
about successful investing.
You can, in fact, construct and manage your portfolio, as the following chapters show. With a little tenacity,
you can be on your way to an intelligent investing program because basic knowledge can go a long way. Let’s get
started.
Chapter 1 provides the foundation for the study of investments by analyzing what it is all about. The critically
important tradeoff between expected return and risk is explained, and the major issues that every investor must deal
with in making investment decisions are analyzed. An organizational structure for the entire text is provided.

AFTER READING THIS CHAPTER YOU WILL BE ABLE TO:

▶ Understand why return and risk are the two critical ▶ Follow the organization of the investment decision
components of all investing decisions. process as we progress through the text.
▶ Appreciate the scope of investment decisions and
the operating environment in which they are made.

An Overall Perspective on Investing

◨ In less than two years, from its peak in March 2000, the S&P 500 Index, a measure of
large stocks, subsequently lost about 50 percent of its value, while the NASDAQ Stock
Market lost about 75 percent of its value. In less than two years during 2000–2002,

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 2 CHAPTER 1 UNDERSTANDING INVESTMENTS

investors lost $5 trillion, or 30 percent of their wealth in stocks. In 2008–2009, stock

market volatility was even greater. In only two months in 2011, $3 trillion in stock
market wealth disappeared in the United States and $8 trillion globally. With volatility
like this, should most investors avoid stocks, particularly for their retirement plans?
◨ Following the financial crisis of 2008, interest rates on U.S. Treasury securities dropped
to record lows, in some cases close to zero. In early 2012, Germany sold six‐month
Treasury securities with a negative yield. Why would investors continue to invest in
these debt securities, sometimes stampeding to invest in them?
◨ Almost everyone says stocks have always outperformed Treasury bonds over long peri-
ods of time, such as 30 years. Is this an accurate statement?
◨ Many company employees with self‐directed retirement plans have none of their funds
invested in stocks. Is this smart?
◨ About two‐thirds of all affluent Americans use financial advisers, a percentage that has
been increasing. Will you need one?
◨ For a recent 10‐year period, only 24 percent of professionally managed stock portfolios
were able to outperform the overall stock market. Why?
◨ How can futures contracts, with a reputation for being extremely risky, be used to reduce
an investor’s risk?
◨ What is the historical average annual rate of return on common stocks and bonds? What
can an investor reasonably expect to earn from stocks in the future?

The objective of this text is to help you understand the investments field so that you can
intelligently answer questions such as the preceding and make sound investment decisions
that will enhance your economic welfare and standard of living. It also provides an introduc-
tion for those considering careers in this rewarding field. To accomplish this objective, key
concepts are presented along with many real‐world examples to provide an appreciation of
both the theory and practice of investments.
Both descriptive and quantitative materials on investing are readily available. In fact,
one of the problems today is information overload with investment material. Some investment
material is very enlightening; much of it is entertaining, but debatable because of the many
controversies in investments; and some of it is worthless. This text seeks to cover what is par-
ticularly useful and relevant for today’s investment climate. It offers some ideas about what
you can reasonably expect to accomplish with your added knowledge, and therefore what you
can realistically expect to achieve as an investor in today’s investment world. Many investors
have unrealistic expectations, and this will ultimately lead to disappointments in investment
results—or, worse, the loss of all of their funds in a fraud or scam.

Just Say NO! Prepare yourself to say NO! Learning how to avoid the many pitfalls awaiting
you as an investor—in particular, investing scams and frauds—by clearly understanding what
you can reasonably expect from investing your money may be the single most important ben-
efit to be derived from this text. For example, would you entrust your money to someone
offering 36 percent annual return on riskless Treasury securities? Some 600 investors did, and
lost some $10 million to a former Sunday school teacher.
In February 2009, the Securities and Exchange Commission (SEC) filed a complaint
alleging that R. Allen Stanford and James Davis operated a massive Ponzi scheme, misappro-
priating billions of dollars of investors’ money. According to the complaint, the $8 billion
fraud involved certificates of deposit promising overly high rates of return. The size of this
alleged fraud pales in comparison to the Madoff scandal reported in December 2008, involv-
ing a very large Ponzi scheme. According to a criminal complaint, Bernard Madoff admitted
that his investment advisor business was a fraud and had been insolvent for years. Supposedly,
returns were being paid to certain investors out of the principal received from other investors.

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 A Perspective on Investing 3

The lasting legacy of the Madoff scandal is that many investors are now focused on safety
(return of capital) instead of portfolio growth (return on capital).
Intelligent investors quickly learn to say no, thereby avoiding many of the pitfalls that
await investors daily. At the very least, you must be prepared to carefully investigate the invest-
ment alternatives that are available to you.

✓ Remember, there are many financial scams and frauds awaiting the unwary. However,
you can easily learn to avoid them.

Establishing a Framework for Investing

SOME DEFINITIONS
The term investing can cover a wide range of activities. It often refers to investing money in
certificates of deposit, bonds, common stocks, or mutual funds. More knowledgeable inves-
tors would include other “paper” assets, such as warrants, puts and calls, futures contracts,
and convertible securities, as well as tangible assets, such as gold, real estate, and collectibles.
Investing encompasses very conservative positions as well as aggressive speculation. Whether
your perspective is that of a college graduate starting out in the workplace or that of a senior
citizen concerned with finances after retirement, investing decisions are critically important to
most people and contribute substantially to an individual’s quality of life.
Investment The An investment can be defined as the commitment of funds to one or more assets that will
commitment of funds to
be held over some future time period. Investments is concerned with the management of an
one or more assets that
will be held over some investor’s wealth, which is the sum of current income and the present value of all future income.
future period (This is why present value and compound interest concepts have an important role in the invest-
Investments The study ment process.) Although the field of investments encompasses many aspects, it can be thought
of the investment process of in terms of two primary functions: analysis and management—hence the title of this text.

Financial Assets and Marketable Securities In this text, the term invest-
Financial Assets Paper ments refers in general to financial assets and in particular to marketable securities. Financial
documents evidencing a assets are paper (or electronic) claims on some issuer, such as the federal government or a
claim on some issuer
corporation, whereas real assets are tangible, physical assets such as gold, silver, diamonds,
Marketable Securities art, and real estate. Marketable securities are financial assets that are easily and inexpen-
Financial assets that are
sively tradable in organized markets. Technically, the word investments includes both finan-
easily and inexpensively
traded in organized cial and real assets and both marketable and nonmarketable assets. Because of the vast scope
markets of investment opportunities available to investors, our primary emphasis is on marketable
securities; however, the basic principles and techniques discussed in this text are applicable
to real assets.
Even when we limit our discussion primarily to financial assets, it is difficult to keep up
with the proliferation of new products. Two such assets that did not exist a few years ago are
the many new exchange traded funds (ETFs) and direct access notes (corporate bonds
designed for the average investor), both of which are discussed in a later chapter.

A Perspective on Investing
WHY DO WE INVEST?
We invest to make money! Although everyone would agree with this statement, we need
to be more precise. (After all, this is a college textbook and anyone helping to pay for your
education expects more.) We invest to improve our welfare, which for our purposes can
be defined as monetary wealth, both current and future. We assume that investors are

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 4 CHAPTER 1 UNDERSTANDING INVESTMENTS

interested only in the monetary benefits to be obtained from investing, as opposed to

such factors as the psychic income to be derived from impressing one’s friends with dem-
onstrated financial prowess.
Funds to be invested come from assets already owned, borrowed money, and savings or
foregone consumption. By foregoing consumption today and investing the savings, investors
expect to enhance their future consumption possibilities by increasing their wealth. Do not
underestimate the amount of money many individuals can accumulate. A 2013 survey found
that nearly 10 million U.S. households had a net worth of more than $1 million (excluding their
primary residence). That represented a 43 percent increase from 2008 alone and amounted to
nearly 8 percent of all U.S. households. Much of this success was attributed to ownership of
stocks and bonds. Of course, things can quickly change. For example, Americans’ net worth
declined a record 18 percent in 2008, largely as a result of the decline in the stock market.
Investors also seek to manage their wealth effectively, obtaining the most from it while pro-
tecting it from inflation, taxes, and other factors. To accomplish both objectives, people invest.

TAKE A PORTFOLIO PERSPECTIVE

This text assumes that investors have established their overall financial plan and are now
interested in managing and enhancing their wealth by investing in an optimal combination of
financial assets. The idea of an “optimal combination” is important because our wealth, which
we hold in the form of various assets, should be evaluated and managed as a unified whole.
Portfolio The assets held Wealth should be evaluated and managed within the context of a portfolio, which consists of
by an investor considered all of the assets held by an investor. For example, if you own four stocks and three mutual
as a unit funds, that is your portfolio. If your parents own 23 stocks, some municipal bonds, and some
CDs, that is their portfolio of financial assets.

The Importance of Studying Investments

THE PERSONAL ASPECTS
It is important to remember that all individuals have wealth of some kind; if nothing else, this
wealth may consist of the current and future value of their services in the marketplace (often
referred to as human capital). Most individuals must make investment decisions sometime in
their lives. For example, many employees today must decide the appropriate combination of
stocks, bonds, and other assets to hold in their retirement accounts. And many people try to
build wealth during their working years by investing.

Retirement Decisions The lack of retirement savings is a looming crisis of epic pro-
portions. According to a study by the Employee Benefits Research Institute (EBRI), 43 percent
of Baby Boomers and Generation Xers are at risk of running out of money in retirement.
Among the poorest 25 percent, EBRI estimates that 83 percent are at risk of falling short.
A major revolution in personal finance is to provide employees with self‐directed
retirement plans (defined contribution plans rather than defined benefit plans). Whereas
traditional defined‐benefit retirement plans guarantee retirees an amount of money each
month, the new emphasis on self‐directed retirement plans means that you will have to choose
among stock funds, bond funds, guaranteed investment contracts, and other alternatives.
How much you have available for retirement depends upon how much you save each month
as well as the performance of the investments you select.

✓ In 1979, more than 40 percent of workers in the private sector were active participants
in defined benefit pension plans in which the employer took primary responsibility for
directing retirement dollars. By 2013, that number had fallen to only 18 percent, thus,

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 The Importance of Studying Investments 5

putting much more reliance on defined contribution plans, which put the onus on the
employee. The ultimate success of these plans is dependent upon the choices made by
the employee.

Your choices are many, and your success—or lack thereof—will directly affect your
quality of life in retirement and may dictate whether you are even able to retire. Therefore,
while employees in the past typically did not have to concern themselves much with investing
decisions relative to their company’s retirement plan, employees now must do so. This is a
very important personal reason for studying the subject of investments!
A good example of this revolution in retirement programs is a 401(k) plan offered by
many employers, whereby employees contribute a percentage of salary to a tax‐deferred plan,
and the employer often matches part of the contribution. Tens of millions of American work-
ers contribute to 401(k) plans. At the end of 2012, these and similar other tax‐advantaged
plans held approximately $5.1 trillion in assets. The bulk of 401(k) assets are invested in
stocks; therefore, it is important to know something about stocks.1
To illustrate the critical importance of making good investment decisions, consider yet
another self‐directed retirement vehicle, the Individual Retirement Account (IRA). IRAs are an
important method that Americans use to provide for their retirement. IRA assets totaled
approximately $5.4 trillion by year‐end 2012, which was roughly 28 percent of the total U.S.
retirement market.
The annual maximum IRA contribution was $5,500 in 2014 ($6,500 for those age
50 and above). IRA funds can be invested in a wide range of assets, from the very safe to the
quite speculative. IRA owners are allowed to have self‐directed brokerage accounts, which
offer a wide array of investment opportunities. Since these funds may be invested for as long
as 40 or more years, good investment decisions are critical, as shown in Example 1-1.

Consider the amount of retirement wealth that can be accumulated by one individual contribut-
Example 1-1 ing $5,000 annually to a tax‐sheltered account if returns are compounded annually. Over many
years of investing, the differences in results that investors realize, owing solely to the investment
returns earned, can be staggering. Note that in the case of a $5,000 annual contribution for
40 years, the payoff at a compound earnings rate of 15 percent is almost $9 million. In contrast,
at an earnings rate of 10 percent the payoff is $2.21 million, which is a great outcome but signifi-
cantly less than almost $9 million. Similarly, if a 10 percent rate of return can be obtained instead
of a 5 percent rate of return, over a period of 40 years the difference approaches a fourfold mul-
tiple. Clearly, good investment decisions, which lead to higher returns can make a tremendous
difference in the wealth that you accumulate. None other than Albert Einstein is rumored to
have said “compound interest is the most powerful force in the universe.”2

Final Dollar Wealth if Funds Are

Compounded at

Amount Invested per Year Number of Years 5% 10% 15%

$5000 20 165,330 286,375 512,218

$5000 30 332,194 822,470 2,173,726
$5000 40 603,999 2,212,963 8,895,452

1
The maximum 401(k) contribution for 2012 was $16,500.
2
Whether he said it or not is irrelevant. It is still a good motto to live by.

c01.indd 5 1/23/2016 3:17:28 PM

Another random document with
no related content on Scribd:
 CHAPTER II

I HAVE decided not to show Edelgard my manuscript again, and my reason

is that I may have a freer hand. For the same reason I will not, as we at
first proposed, send it round by itself among our relations, but will either
accompany it in person or invite our relations to a cozy beer-evening, with a
simple little cold something to follow, and read aloud such portions of it as I
think fit, omitting of course much that I say about Edelgard and probably
also a good deal that I say about everybody else. A reasonable man is not a
woman, and does not willingly pander to a love of gossip. Besides, as I have
already hinted, the Edelgard who came back from England is by no means
the Edelgard who went there. It will wear off, I am confident, in time, and
we will return to the status quo ante—(how naturally that came out: it
gratifies me to see I still remember)—a status quo full of trust and obedience
on the one side and of kind and wise guidance on the other. Surely I have a
right to refuse to be driven, except by a silken thread? When I, noticing a
tendency on Edelgard’s part to attempt to substitute, if I may so express it,
leather, asked her the above question, will it be believed that what she
answered was Bosh?
It gave me a great shock to hear her talk like that. Bosh is not a German
expression at all. It is purest English. And it amazes me with what rapidity
she picked it and similar portions of the language up, adding them in
quantities to the knowledge she already possessed of the tongue, a fairly
complete knowledge (she having been well educated), but altogether
excluding words of that sort. Of course I am aware it was all Jellaby’s fault
—but more of him in his proper place; I will not now dwell on later
incidents while my narrative is still only at the point where everything was
eager anticipation and preparation.
Our caravan had been hired; I had sent, at Frau von Eckthum’s direction,
the money to the owner, the price (unfortunately) having to be paid
beforehand; and August the first, the very day of my wedding with poor
Marie-Luise, was to see us start. Naturally there was much to do and
arrange, but it was pleasurable work such as getting a suit of civilian clothes
adapted to the uses it would be put to, searching for stockings to match the
knickerbockers, and for a hat that would be useful in both wet weather and
sunshine.
 “It will be all sunshine,” said Frau von Eckthum with her really unusually
pretty smile (it includes the sudden appearance of two dimples) when I
expressed fears as to the effect of rain on the Panama that I finally bought
and which, not being a real one, made me anxious.
We saw her several times because of our need for hints as to luggage,
meeting place, etc., and I found her each time more charming. When she was
on her feet, too, her dress hid the shoes; and she was really helpful, and was
apparently looking forward greatly to showing us the beauties of her sister’s
more or less native land.
As soon as my costume was ready I put it on and drove out to see her.
The stockings had been a difficulty because I could not bear, accustomed as I
am to cotton socks, their woollen feet. This was at last surmounted by
cutting off their feet and sewing my ordinary sock feet on to the woollen
legs. It answered splendidly, and Edelgard assured me that with care no
portion of the sock (which was not of the same colour) would protrude. She
herself had sent to Berlin to Wertheim for one of the tailor-made dresses in
his catalogue, which turned out to be of really astonishing value for the
money, and in which she looked very nice. With a tartan silk blouse and a
little Tyrolese hat and a pheasant’s feather stuck in it she was so much
transformed that I declared I could not believe it was our silver wedding
journey, and I felt exactly as I did twenty-five years before.
“But it is not our silver wedding journey,” she said with some sharpness.
“Dear wife,” I retorted surprised, “you know very well that it is mine, and
what is mine is also by law yours, and that therefore without the least
admissible logical doubt it is yours.”
She made a sudden gesture with her shoulders that was almost like
impatience; but I, knowing what victims the best of women are to
incomprehensible moods, went out and bought her a pretty little bag with a
leather strap to wear over one shoulder and complete her attire, thus proving
to her that a reasonable man is not a child and knows when and how to be
indulgent.
Frau von Eckthum, who was going to stay with her sister for a fortnight
before they both joined us (the sister, I regretted to hear, was coming too),
left in the middle of July. Flitz, at that time incomprehensibly to me, made
excuses for not taking part in the caravan tour, but since then light has been
thrown on his behaviour: he said, I remember, that he could not leave his
pigs.
“Much better not leave his sister,” said Edelgard who, I fancy, was just
then a little envious of Frau von Eckthum.
“Dear wife,” I said gently, “we shall be there to take care of her and he
knows she is safe in our hands. Besides, we do not want Flitz. He is the last
man I can imagine myself ever wanting.”
It was perfectly natural that Edelgard should be a little envious, and I felt
it was and did not therefore in any way check her. I need not remind those
relatives who will next winter listen to this that the Flitzes of Flitzburg, of
whom Frau von Eckthum was one, are a most ancient and still more
penniless family. Frau von Eckthum and her gaunt sister (last time she was
staying in Prussia both Edelgard and I were struck with her extreme
gauntness) each married a wealthy man by two most extraordinary strokes of
luck; for what man nowadays will marry a girl who cannot take, if not the
lion’s share, at least a very substantial one of the household expenses upon
herself? What is the use of a father if he cannot provide his daughter with the
money required suitably to support her husband and his children? I myself
have never been a father, so that I am qualified to speak with perfect
impartiality; that is, strictly, I was one twice, but only for so few minutes
each time that they can hardly be said to count. The two von Flitz girls
married so young and so well, and have been, without in any way really
deserving it, so snugly wrapped in comfort ever since (Frau von Eckthum
actually losing her husband two years after marriage and coming into
everything) that naturally Edelgard cannot be expected to like it. Edelgard
had a portion herself of six thousand marks a year besides an unusual
quantity of house linen, which enabled her at last—she was twenty-four
when I married her—to find a good husband; and she cannot understand by
what wiles the two sisters, without a penny or a table cloth, secured theirs at
eighteen. She does not see that they are—“were” is the better word in the
case of the gaunt sister—attractive; but then the type is so completely
opposed to her own that she would not be likely to. Certainly I agree that a
married woman verging, as the sister must be, on thirty should settle down to
a smooth head and at least the beginnings of a suitable embonpoint. We do
not want wives like lieutenants in a cavalry regiment; and Edelgard is not
altogether wrong when she says that both Frau von Eckthum and her sister
make her think of those lean and elegant young men. Your lean woman with
her restlessness of limb and brain is far indeed removed from the soft
amplitudes and slow movements of her who is the ideal wife of every
German better-class bosom. Privately, however, I feel I can at least
understand that there may have been something to be said at the time for the
Englishman’s conduct, and I more than understand that of the deceased
Eckthum. No one can deny that his widow is undoubtedly—well, well; let
me return to the narrative.
We had naturally told everybody we met what we were going to do, and it
was intensely amusing to see the astonishment created. Bad health for the
rest of our days was the smallest of the evils predicted. Also our digestions
were much commiserated. “Oh,” said I with jaunty recklessness at that, “we
shall live on boiled hedgehogs, preceded by mice soup,”—for I had studied
the article Gipsies in our Encyclopædia, and discovered that they often eat
the above fare.
The faces of our friends when I happened to be in this jocose vein were a
study. “God in heaven,” they cried, “what will become of your poor wife?”
But a sense of humour carries a man through anything, and I did not
allow myself to be daunted. Indeed it was not likely, I reminded myself
sometimes when inclined to be thoughtful at night, that Frau von Eckthum,
who so obviously was delicately nurtured, would consent to eat hedgehogs
or risk years in which all her attractiveness would evaporate on a sofa of
sickness.
“Oh, but Frau von Eckthum——!” was the invariable reply, accompanied
by a shrug when I reassured the ladies of our circle by pointing this out.
I am aware Frau von Eckthum is unpopular in Storchwerder. Perhaps it is
because the art of conversation is considerably developed there, and she will
not talk. I know she will not go to its balls, refuses its dinners, and turns her
back on its coffees. I know she is with difficulty induced to sit on its
philanthropic boards, and when she finally has been induced to sit on them
does not do so after all but stays at home. I know she is different from the
type of woman prevailing in our town, the plain, flat-haired, tightly buttoned
up, God-fearing wife and mother, who looks up to her husband and after her
children, and is extremely intelligent in the kitchen and not at all intelligent
out of it. I know that this is the type that has made our great nation what it is,
hoisting it up on ample shoulders to the first place in the world, and I know
that we would have to request heaven to help us if we ever changed it. But—
she is an attractive lady.
 Truly it is an excellent thing to be able to put down one’s opinions on
paper as they occur to one without risk of irritating interruption—I hope my
hearers will not interrupt at the reading aloud—and now that I have at last
begun to write a book—for years I have intended doing so—I see clearly the
superiority of writing over speaking. It is the same kind of superiority that
the pulpit enjoys over the (very properly) muzzled pews. When, during my
stay on British soil, I said anything, however short, of the nature of the
above remarks about our German wives and mothers, it was most annoying
the way I was interrupted and the sort of questions that were instantly put me
by, chiefly, the gaunt sister. But of that more in its place. I am still at the
point where she had not yet loomed on my horizon, and all was pleasurable
anticipation.
We left our home on August 1st, punctually as we had arranged, after
some very hard-worked days at the end during which the furniture was
beaten and strewn with napthalin (against moths), curtains, etc., taken down
and piled neatly in heaps, pictures covered up in newspapers, and groceries
carefully weighed and locked up. I spent these days at the Club, for my leave
had begun on the 25th of July and there was nothing for me to do. And I
must say, though the discomfort in our flat was intense, when I returned to it
in the evening in order to go to bed I was never anything but patient with the
unappetisingly heated and disheveled Edelgard. And she noticed it and was
grateful. It would be hard to say what would make her grateful now. These
last bad days, however, came to their natural end, and the morning of the
first arrived and by ten we had taken leave, with many last injunctions, of
Clothilde who showed an amount of concern at our departure that gratified
us, and were on the station platform with Hermann standing respectfully
behind us carrying our hand luggage in both his gloved hands, and with what
he could not carry piled about his feet, while I could see by the expression
on their faces that the few strangers present recognized we were people of
good family or, as England would say, of the Upper Ten. We had no luggage
for registration because of the new law by which every kilo has to be paid
for, but we each had a well-filled, substantial hold-all and a leather
portmanteau, and into these we had succeeded in packing most of the things
Frau von Eckthum had from time to time suggested we might want.
Edelgard is a good packer, and got far more in than I should have thought
possible, and what was left over was stowed away in different bags and
baskets. Also we took a plentiful supply of vaseline and bandages. “For,” as
I remarked to Edelgard when she giddily did not want to, quoting the most
modern (though rightly disapproved of in Storchwerder) of English writers,
“you never can possibly tell,”—besides a good sized ox-tongue, smoked
specially for us by our Storchwerder butcher and which was later on to be
concealed in our caravan for private use in case of need at night.
The train did not start till 10:45, but we wanted to be early in order to see
who would come to see us off; and it was a very good thing we were in such
good time, for hardly a quarter of an hour had elapsed before, to my dismay,
I recollected that I had left my Panama at home. It was Edelgard’s fault, who
had persuaded me to wear a cap for the journey and carry my Panama in my
hand, and I had put it down on some table and in the heat of departure
forgotten it. I was deeply annoyed, for the whole point of the type of
costume I had chosen would be missed without just that kind of hat, and, at
my sudden exclamation and subsequent explanation of my exclamation,
Edelgard showed that she felt her position by becoming exceedingly red.
There was nothing for it but to leave her there and rush off in a droschke
to our deserted flat. Hurrying up the stairs two steps at a time and letting
myself in with my latch-key I immediately found the Panama on the head of
one of the privates in my own battalion, who was lolling in my chair at the
breakfast-table I had so lately left being plied with our food by the miserable
Clothilde, she sitting on Edelgard’s chair and most shamelessly imitating her
mistress’s manner when she is affectionately persuading me to eat a little bit
more.
The wretched soldier, I presume, was endeavouring to imitate me, for he
called her a dear little hare, an endearment I sometimes apply to my wife, on
Clothilde’s addressing him as Edelgard sometimes does (or rather did) me in
her softer moments as sweet snail. The man’s imitation of me was a very
poor affair, but Clothilde hit my wife off astoundingly well, and both
creatures were so riotously mirthful that they neither heard nor saw me as I
stood struck dumb in the door. The clock on the wall, however, chiming the
half-hour recalled me to the necessity for instant action, and rushing forward
I snatched the Panama off the amazed man’s head, hurled a furious dismissal
at Clothilde, and was out of the house and in the droschke before they could
so much as pray for mercy. Immediately on arriving at the station I took
Hermann aside and gave him instructions about the removal within an hour
of Clothilde, and then, swallowing my agitation with a gulp of the man of
the world, I was able to chat courteously and amiably with friends who had
collected to see us off, and even to make little jokes as though nothing
whatever had happened. Of course directly the last smile had died away at
the carriage window and the last handkerchief had been fluttered and the last
promise to send many picture postcards had been made, and our friends had
become mere black and shapeless masses without bodies, parts or passions
on the grey of the receding platform, I recounted the affair to Edelgard, and
she was so much upset that she actually wanted to get out at the next station
and give up our holiday and go back and look after her house.
Strangely enough, what upset her more than the soldier’s being feasted at
our expense and more than his wearing my new hat while he feasted, was the
fact that I had dismissed Clothilde.
“Where and when am I to get another?” was her question, repeated with a
plaintiveness that was at length wearisome. “And what will become of all
our things now during our absence?”
“Would you have had me not dismiss her instantly, then?” I cried at last,
goaded by this persistence. “Is every shamelessness to be endured? Why, if
the woman were a man and of my own station, honour would demand that I
should fight a duel with her.”
“But you cannot fight a duel with a cook,” said Edelgard stupidly.
“Did I not expressly say that I could not?” I retorted; and having with this
reached the point where patience becomes a weakness I was obliged to put it
aside and explain to her with vigour that I am not only not a fool but decline
to be talked to as if I were. And when I had done, she having given no
further rise to discussion, we were both silent for the rest of the way to
Berlin.
This was not a bright beginning to my holiday, and I thought with some
gloom of the difference between it and the start twenty-five years before
with my poor Marie-Luise. There was no Clothilde then, and no Panama hat
(for they were not yet the fashion), and all was peace. Unwilling, however,
to send Edelgard, as the English say, any longer to Coventry—we are both
good English scholars as my hearers know—when we got into the droschke
in Berlin that was to take us across to the Potsdamer Bahnhof (from which
station we departed for London via Flushing) I took her hand, and turning
(not without effort) an unclouded face to her, said some little things which
enabled her to become aware that I was willing once again to overlook and
forgive.
 Now I do not propose to describe the journey to London. So many of our
friends know people who have done it that it is not necessary for me to dwell
upon it further than to say that, being all new to us, it was not without its
charm—at least, up to the moment when it became so late that there were no
more meals taking place in the restaurant-car and no more attractive trays
being held up to our windows at the stations on the way. About what
happened later in the night I would not willingly speak: suffice it to say that
I had not before realized the immense and apparently endless distance of
England from the good dry land of the Continent. Edelgard, indeed, behaved
the whole way up to London as if she had not yet got to England at all; and I
was forced at last to comment very seriously on her conduct, for it looked as
much like wilfulness as any conduct I can remember to have witnessed.
We reached London at the uncomfortable hour of 8 A.M., or thereabouts,
chilled, unwell, and disordered. Although it was only the second of August a
damp autumn draught pervaded the station. Shivering, we went into the sort
of sheep-pen in which our luggage was searched for dutiable articles,
Edelgard most inconsiderately leaving me to bear the entire burden of
opening and shutting our things, while she huddled into a corner and
assumed (very conveniently) the air of a sufferer. I had to speak to her quite
sharply once when I could not fit the key of her portmanteau into its lock
and remind her that I am not a lady’s maid, but even this did not rouse her,
and she continued to huddle apathetically. It is absurd for a wife to collapse
at the very moment when she ought to be most helpful; the whole theory of
the helpmeet is shattered by such behaviour. And what can I possibly know
about Customs? She looked on quite unmoved while I struggled to replace
the disturbed contents of our bags, and my glances, in turn appealing and
indignant, did not make her even raise her head. There were too many
strangers between us for me to be able to do more than glance, so
Edelgard most inconsiderately leaving me to bear the entire burden of opening and shutting
our things

reserving what I had to say for a more private moment I got the bags shut as
well as I could, directed the most stupid porter (who was also apparently
deaf, for each time I said anything to him he answered perfectly irrelevantly
with the first letter of the alphabet) I have ever met to conduct me and the
luggage to the refreshment room, and far too greatly displeased with
Edelgard to take any further notice of her, walked on after the man leaving
her to follow or not as she chose.
I think people must have detected as I strode along that I was a Prussian
officer, for so many looked at me with interest. I wished I had had my
uniform and spurs on, so that for once the non-martial island could have seen
what the real thing is like. It was strange to me to be in a crowd of nothing
but civilians. In spite of the early hour every arriving train disgorged
myriads of them of both sexes. Not the flash of a button was to be seen; not
the clink of a sabre to be heard; but, will it be believed? at least every third
person arriving carried a bunch of flowers, often wrapped in tissue paper and
always as carefully as though it had been a specially good belegtes
Brödchen. That seemed to me very characteristic of the effeminate and non-
military nation. In Prussia useless persons like old women sometimes
transport bunches of flowers from one point to another—but that a man
should be seen doing so, a man going evidently to his office, with his bag of
business papers and his grave face, is a sight I never expected to see. The
softness of this conduct greatly struck me. I could understand a packet of
some good thing to eat between meals being brought, some tit-bit from the
home kitchen—but a bunch of flowers! Well, well; let them go on in their
effeminacy. It is what has always preceded a fall, and the fat little land will
be a luscious morsel some day for muscular continental (and almost
certainly German) jaws.
We had arranged to go straight that very day to the place in Kent where
the caravans and Frau von Eckthum and her sister were waiting for us,
leaving the sights of London for the end of our holiday, by which time our
already extremely good though slow and slightly literary English (by which I
mean that we talked more as the language is written than other people do,
and that we were singularly pure in the matter of slang) would have
developed into an up-to-date agility; and there being about an hour and a
half’s time before the train for Wrotham started—which it conveniently did
from the same station we arrived at—our idea was to have breakfast first and
then, perhaps, to wash. This we accordingly did in the station restaurant, and
made the astonishing acquaintance of British coffee and butter. Why, such
stuff would not be tolerated for a moment in the poorest wayside inn in
Germany, and I told the waiter so very plainly; but he only stared with an
extremely stupid face, and when I had done speaking said “Eh?”
 It was what the porter had said each time I addressed him, and I had
already, therefore, not then knowing what it was or how it was spelt, had
about as much of it as I could stand.
“Sir,” said I, endeavoring to annihilate the man with that most powerful
engine of destruction, a witticism, “what has the first letter of the alphabet to
do with everything I say?”
“Eh?” said he.
“Suppose, sir,” said I, “I were to confine my remarks to you to a strictly
logical sequence, and when you say A merely reply B—do you imagine we
should ever come to a satisfactory understanding?”
“Eh?” said he.
“Yet, sir,” I continued, becoming angry, for this was deliberate
impertinence, “it is certain that one letter of the alphabet is every bit as good
as another for conversational purposes.”
“Eh?” said he; and began to cast glances about him for help.
“This,” said I to Edelgard, “is typical. It is what you must expect in
England.”
The head waiter here caught one of the man’s glances and hurried up.
“This gentleman,” said I, addressing the head waiter and pointing to his
colleague, “is both impertinent and a fool.”
“Yes, sir. German, sir,” said the head waiter, flicking away a crumb.
Well, I gave neither of them a tip. The German was not given one for not
at once explaining his inability to get away from alphabetical repartee and so
shamefully hiding the nationality he ought to have openly rejoiced in, and
the head waiter because of the following conversation:
“Can’t get ’em to talk their own tongue, sir,” said he, when I indignantly
inquired why he had not. “None of ’em will, sir. Hear ’em putting German
gentry who don’t know English to the greatest inconvenience. ‘Eh?’ this
one’ll say—it’s what he picks up his first week, sir. ‘A thousand damns,’ say
the German gentry, or something to that effect. ‘All right,’ says the waiter—
that’s what he picks up his second week—and makes it worse. Then the
German gentry gets really put out, and I see ’em almost foamin’ at the
mouth. Impatient set of people, sir——”
“I conclude,” said I, interrupting him with a frown, “that the object of
these poor exiled fellows is to learn the language as rapidly as possible and
get back to their own country.”
“Or else they’re ashamed of theirs, sir,” said he, scribbling down the bill.
“Rolls, sir? Eight, sir? Thank you, sir——”
“Ashamed?”
“Quite right, sir. Nasty cursin’ language. Not fit for a young man to get
into the habit of. Most of the words got a swear about ’em somewhere, sir.”
“Perhaps you are not aware,” said I icily, “that at this very moment you
are speaking to a German gentleman.”
“Sorry, sir. Didn’t notice it. No offence meant. Two coffees, four boiled
eggs, eight—you did say eight rolls, sir? Compliment really, you know, sir.”
“Compliment!” I exclaimed, as he whisked away with the money to the
paying desk; and when he came back I pocketed, with elaborate deliberation,
every particle of change.
“That is how,” said I to Edelgard while he watched me, “one should treat
these fellows.”
To which she, restored by the hot coffee to speaking point, replied (rather
stupidly I thought),
“Is it?”
 CHAPTER III

S HE became, however, more normal as the morning wore on, and by

about eleven o’clock was taking an intelligent interest in hop-kilns.
These objects, recurring at frequent intervals as one travels through
the county of Kent, are striking and picturesque additions to the landscape,
and as our guide-book described them very fully I was able to talk a good
deal about them. Kent pleased me very well. It looked as if there were
money in it. Many thriving villages, many comfortable farmhouses, and
many hoary churches peeping slyly at us through surrounding groups of
timber so ancient that its not yet having been cut down and sold is in itself a
testimony to the prevailing prosperity. It did not need much imagination to
picture the comfortable clergyman lurking in the recesses of his snug
parsonage and rubbing his well-nourished hands at life. Well, let him rub.
Some day perhaps—and who knows how soon?—we shall have a decent
Lutheran pastor in his black gown preaching the amended faith in every one
of those churches.
Shortly, then, Kent is obviously flowing with milk and honey and well-to-
do inhabitants; and when on referring to our guide-book I found it described
as the Garden of England I was not in the least surprised, and neither was
Edelgard. In this county, as we knew, part at any rate of our gipsying was to
take place, for the caravans were stationed at a village about three miles
from Wrotham, and we were very well satisfied that we were going to
examine it more closely, because though no one could call the scenery
majestic it yet looked full of promise of a comfortable nature. I observed for
instance that the roads seemed firm and good, which was clearly important;
also that the villages were so plentiful that there would be no fear of our ever
getting beyond the reach of provisions. Unfortunately, the weather was not
true August weather, which I take it is properly described by the word bland.
This is not bland. The remains of the violent wind that had blown us across
from Flushing still hurried hither and thither, and gleams of sunshine only
too frequently gave place to heavy squalls of rain and hail. It was more like a
blustering October day than one in what is supposed to be the very height
and ripeness of summer, and we could only both hope, as the carriage
windows banged and rattled, that our caravan would be heavy enough to
withstand the temptation to go on by itself during the night, urged on from
behind by the relentless forces of nature. Still, each time the sun got the
better of the inky clouds and the Garden of England laughed at us from out
of its bravery of graceful hop-fields and ripening corn, we could not resist a
feeling of holiday hopefulness. Edelgard’s spirits rose with every mile, and I,
having readily forgiven her on her asking me to and acknowledging she had
been selfish, was quite like a boy; and when we got out of the train at
Wrotham beneath a blue sky and a hot sun with the hail-clouds retreating
over the hills and found we would have to pack ourselves and our many
packages into a fly so small that, as I jocularly remarked in English, it was
not a fly at all but an insect, Edelgard was so much entertained that for
several minutes she was perfectly convulsed with laughter.
By means of the address neatly written in Latin characters on an
envelope, we had no difficulty in getting the driver to start off as though he
knew where he was going, but after we had been on the way for about half
an hour he grew restless, and began to twist round on his box and ask me
unintelligible questions. I suppose he talked and understood only patois, for
I could not in the least make out what he meant, and when I requested him to
be more clear I could see by his foolish face that he was constitutionally
unable to be it. A second exhibition of the addressed envelope, however,
soothed him for a time, and we continued to advance up and down chalky
roads, over the hedges on each side of which leapt the wind and tried to blow
our hats off. The sun was in our eyes, the dust was in our eyes, and the wind
was in our faces. Wrotham, when we looked behind, had disappeared. In
front was a chalky desolation. We could see nothing approaching a village,
yet Panthers, the village we were bound for, was only three miles from the
station, and not, observe, three full-blooded German miles, but the dwindled
and anæmic English kind that are typical, as so much else is, of the soul and
temper of the nation. Therefore we began to be uneasy, and to wonder
whether the man were trustworthy. It occurred to me that the chalk pits we
constantly met would not be bad places to take us into and rob us, and I
certainly could not speak English quickly enough to meet a situation
demanding rapid dialogue, nor are there any directions in my German-
English Conversational Guide as to what you are to say when you are being
murdered.
Still jocose, but as my hearers will notice, jocose with a tinge of
grimness, I imparted these two linguistic facts to Edelgard, who shuddered
and suggested renewed applications of the addressed envelope to the driver.
“Also it is past dinner time,” she added anxiously. “I know because mein
Magen knurrt.”
By means of repeated calls and my umbrella I drew the driver’s attention
to us and informed him that I would stand no further nonsense. I told him
this with great distinctness and the deliberation forced upon me by want of
practice. He pulled up to hear me out, and then, merely grinning, drove on.
“The youngest Storchwerder droschke driver,” I cried indignantly to
Edelgard, “would die of shame on his box if he did not know every village,
nay, every house within three miles of it with the same exactitude with
which he knows the inside of his own pocket.”
Then I called up to the man once more, and recollecting that nothing
clears our Hermann’s brain at home quicker than to address him as Esel I
said, “Ask, ass.”
He looked down over his shoulder at me with an expression of great
surprise.
“What?” said he.
“What?” said I, confounded by this obtuseness. “What? The way, of
course.”
He pulled up once more and turned right round on his box.
“Look here——” he said, and paused.
“Look where?” said I, very naturally supposing he had something to
show me.
“Who are you talkin’ to?” said he.
The question on the face of it was so foolish that a qualm gripped my
heart lest we had to do with a madman. Edelgard felt the same, for she drew
closer to me.
Luckily at that moment I saw a passer-by some way down the road, and
springing out of the fly hastened to meet him in spite of Edelgard’s demand
that I should not leave her alone. On reaching him I took off my hat and
courteously asked him to direct us to Panthers, at the same time expressing
my belief that the flyman was not normal. He listened with the earnest and
strained attention English people gave to my utterances, an attention caused,
I believe, by the slightly unpractised pronunciation combined with the
number and variety of words at my command, and then going up (quite
fearlessly) to the flyman he pointed in the direction entirely opposed to the
one we were following and bade him go there.
 “I won’t take him nowhere,” said the flyman with strange passion; “he
calls me a ass.”
“It is not your fault,” said I (very handsomely, I thought). “You are what
you were made. You cannot help yourself.”
“I won’t take him nowhere,” repeated the flyman, with, if anything,
increased passion.
The passer-by looked from one to another with a faint smile.
“The expression,” said he to the flyman, “is, you see, merely a term of
recognition in the gentleman’s country. You can’t reasonably object to that,
you know. Drive on like a sensible man, and get your fare.”
And lifting his hat to Edelgard he continued his passing by.
Well, we did finally arrive at the appointed place—indeed, my hearers
next winter will know all the time that we must have, or why should I be
reading this aloud?—after being forced by the flyman to walk the last twenty
minutes up a hill which, he declared, his horse would not otherwise be able
to ascend. The sun shone its hottest while we slowly surmounted this last
obstacle—a hard one to encounter when it is long past dinner-time. I am
aware that by English clocks it was not past it, but what was that to me? My
watch showed that in Storchwerder, the place our inner natures were used to,
it was half-past two, a good hour beyond the time at which they are
accustomed daily to be replenished, and no arbitrary theory, anyhow no
perilously near approach to one, will convince a man against the evidence of
his senses that he is not hungry because a foreign clock says it is not dinner-
time when it is.
Panthers, we found on reaching the top of the hill and pausing to regain
our composure, is but a house here and a house there scattered over a
 The sun shone its hottest while we slowly surmounted this last obstacle

bleak, ungenial landscape. It seemed an odd, high up district to use as a

terminus for caravans, and I looked down the steep, narrow lane we had just
ascended and wondered how a caravan would get up it. Afterward I found
that they never do get up it, but arrive home from the exactly opposite
direction along a fair road which was the one any but an imbecile driver
would have brought us. We reached our destination by, so to speak, its back
door; and we were still standing on the top of the hill doing what is known as
getting one’s wind, for I am not what would be called an ill-covered man but
rather, as I jestingly tell Edelgard, a walking compliment to her good
cooking, and she herself was always of a substantial build, not exaggeratedly
but agreeably so—we were standing, I say, struggling for breath when some
one came out quickly from a neighbouring gate and stopped with a smile of
greeting upon seeing us.
It was the gaunt sister.
We were greatly pleased. Here we were, then, safely arrived, and joined
to at least a portion of our party. Enthusiastically we grasped both her hands
and shook them. She laughed as she returned our greetings, and I was so
much pleased to find some one I knew that though Edelgard commented
afterward somewhat severely on her dress because it was so short that it
nowhere touched the ground, I noticed nothing except that it seemed to be
extremely neat, and as for not touching the ground Edelgard’s skirt was
followed wherever she went by a cloud of chalky dust which was most
unpleasant.
Now why were we so glad to see this lady again? Why, indeed, are people
ever glad to see each other again? I mean people who when they last saw
each other did not like each other. Given a sufficient lapse of time, and I
have observed that even those who parted in an atmosphere thick with
sulphur of implied cursings will smile and genially inquire how the other
does. I have observed this, I say, but I cannot explain it. There had, it is true,
never been any sulphur about our limited intercourse with the lady on the
few occasions on which proper feeling prevailed enough to induce her to
visit her flesh and blood in Prussia—our attitude toward her had simply been
one of well-bred chill, of chill because no thinking German can, to start with,
be anything but prejudiced against a person who commits the unpatriotism—
not to call it by a harsher name—of selling her inestimable German
birthright for the mess of an English marriage. Also she was personally not
what Storchwerder could like, for she was entirely wanting in the graces and
undulations of form which are the least one has a right to expect of a being
professing to be a woman. Also she had a way of talking which disconcerted
Storchwerder, and nobody likes being disconcerted. Our reasons for joining
issue with her in the matter of caravans were first, that we could not help it,
only having discovered she was coming when it was too late; and secondly,
that it was a cheap and convenient way of seeing a new country. She with
her intimate knowledge of English was to be, we privately told each other,
our unpaid courier—I remember Edelgard’s amusement when the
consolatory cleverness of this way of looking at it first struck her.
But I am still at a loss to explain how it was that when she unexpectedly
appeared at the top of the hill at Panthers we both rushed at her with an
effusiveness that could hardly have been exceeded if it had been Edelgard’s
grandmother Podhaben who had suddenly stood before us, an old lady of
ninety-two of whom we are both extremely fond, and who, as is well known,
is going to leave my wife her money when she (which I trust sincerely she
will not do for a long time yet) dies. I cannot explain it, I say, but there it is.
Rush we did, and effusive we were, and it was reserved for a quieter moment
to remember with some natural discomposure that we had showed far more
enthusiasm than she had. Not that she was not pleasant, but there is a gap
between pleasantness and enthusiasm, and to be the one of two persons who
is most pleased is to put yourself in the position of the inferior, of the
suppliant, of him who hopes, or is eager to ingratiate himself. Will it be
believed that when later on I said something to this effect about some other
matter in general conversation, the gaunt sister immediately cried, “Oh, but
that’s not generous.”
“What is not generous?” I asked surprised, for it was the first day of the
tour and I was not then as much used as I subsequently became to her instant
criticism of all I said.
“That way of thinking,” said she.
Edelgard immediately bristled—(alas, what would make her bristle now?)
“Otto is the most generous of men,” she said. “Every year on Sylvester
evening he allows me to invite six orphans to look at the remains of our
Christmas tree and be given, before they go away, doughnuts and grog.”
“What! Grog for orphans?” cried the gaunt sister, neither silenced nor
impressed; and there ensued a warm discussion on, as she put it, (a) the
effect of grog on orphans, (b) the effect of grog on doughnuts, (c) the effect
of grog on combined orphans and doughnuts.
But I not only anticipate, I digress.
Inside the gate through which this lady had emerged stood the caravans
and her gentle sister. I was so much pleased at seeing Frau von Eckthum
again that at first I did not notice our future homes. She was looking
remarkably well and was in good spirits, and, though dressed in the same
way as her sister, by adding to the attire all those graces so peculiarly her
own the effect she produced was totally different. At least, I thought so.
Edelgard said she saw nothing to choose between them.
After the first greetings she half turned to the row of caravans, and with a
little motion of the hand and a pretty smile of proprietary pride said, “There
they are.”
There, indeed, they were.
There were three; all alike, sober brown vehicles, easily distinguishable,
as I was pleased to notice, from common gipsy carts. Clean curtains fluttered
at the windows, the metal portions were bright, and the names painted
prettily on them were the Elsa, the Ilsa, and the Ailsa. It was an impressive
moment, the moment of our first setting eyes upon them. Under those frail
roofs were we for the next four weeks to be happy, as Edelgard said, and
healthy and wise—“Or,” I amended shrewdly on hearing her say this, “vice
versa.”
Frau von Eckthum, however, preferred Edelgard’s prophecy, and gave her
an appreciative look—my hearers will remember, I am sure, how agreeably
her dark eyelashes contrast with the fairness of her hair. The gaunt sister
laughed, and suggested that we should paint out the names already on the
caravans and substitute in large letters Happy, Healthy, and Wise, but not
considering this particularly amusing I did not take any trouble to smile.
Three large horses that were to draw them and us stood peacefully side by
side in a shed being fed with oats by a weather-beaten person the gaunt sister
introduced as old James. This old person, a most untidy, dusty-looking
creature, touched his cap, which is the inadequate English way of showing
respect to superiors—as inadequate at its end of the scale as the British army
is at the other—and shuffled off to fetch in our luggage, and the gaunt sister
suggesting that we should climb up and see the interior of our new home
with some difficulty we did so, there being a small ladder to help us which,
as a fact, did not help us either then or later, no means being discovered from
beginning to end of the tour by which it could be fixed firmly at a
convenient angle.
I think I could have climbed up better if Frau von Eckthum had not been
looking on; besides, at that moment I was less desirous of inspecting the
caravans than I was of learning when, where, and how we were going to
have our delayed dinner. Edelgard, however, behaved like a girl of sixteen
once she had succeeded in reaching the inside of the Elsa, and most
inconsiderately kept me lingering there too while she examined every corner
and cried with tiresome iteration that it was wundervoll, herrlich, and putzig.
“I knew you’d like it,” said Frau von Eckthum from below, amused
apparently by this kittenish conduct.
“Like it?” called back Edelgard. “But it is delicious—so clean, so neat, so
miniature.”
“May I ask where we dine?” I inquired, endeavouring to free the skirts of
my new mackintosh from the door, which had swung to (the caravan not
standing perfectly level) and jammed them tightly. I did not need to raise my
voice, for in a caravan even with its door and windows shut people outside
can hear what you say just as distinctly as people inside, unless you take the
extreme measure of putting something thick over your head and whispering.