A formative intellectual experience was discovering his General Theory in the now sadly demolished Birmingham Central Library whilst studying A-Level economics in the 1980s.
Chapter 12 of the General Theory is essential reading for any investor – with Keynes’s stylishly prescient prose vividly animating the very human dimensions of investment with ideas that still resonate today: ‘animal spirits’, the ‘beauty contest’ metaphor, the fragile state of expectation.
Yet Keynes was not just a theorist, he was one of the
foremost investors of the first half of the twentieth century - both on his own
account and in his capacities as Bursar of King’s College Cambridge and Chair
of the National Mutual Life Insurance Company.
Here are five lessons I’ve taken from a brief analysis of both
Keynes’s qualitative approach and quantitative record:
1. Flexibility: “When the facts change I change my mind”
It’s not entirely clear whether Keynes actually spoke those
few words routinely attributed to him. In practice Keynes did change his mind about investment strategy. In his early
investing career Keynes attempted a top-down market-timing approach to shares,
currency and commodities. He prospered for a while but twice lost heavily in
the 1920s, in both currency and commodity speculation.
In 1938 after a bruising few months in which the King’s College
share portfolio fell by over 20% he concluded that market timing was
impossible:
“Most of those who attempt it sell too late and buy too
late, and do both too often, incurring heavy expenses and developing too
unsettled and speculative a state of mind”.
He set out a revised investment strategy in a memo for the Estates
Committee of King’s College, 8th May 1938:
“I believe now that successful investment depends on three
principles:
i) A careful selection of a few investments (or types of
investment) having regard to their cheapness in relation to their probable
actual and potential intrinsic value
over a period of years ahead and in relation to alternative investments at the
time;
ii) a steadfast holding of these in fairly large units through
thick and thin, perhaps for several years, until either they have fulfilled
their promise or it is evident that they were purchased on a mistake;
iii) a balanced
investment proposition, i.e. a variety of risk in spite of individual holdings
being large, and if possible opposed risks (e.g. a holding of gold shares
amongst other equities since they are likely to move in opposite directions
when there are general fluctuations).
2. Temperament is more important than technique or market
timing
“I do not believe
that selling at very low prices is a remedy for having failed to sell at high
ones […] it is from time to time the duty of a serious investor to accept the
depreciation of his holdings with equanimity and without reproaching himself
[…] An investor is aiming, or should be aiming primarily at long-period results
and should be solely judged by these.”
(Letter to F.N. Curzon, 18th March 1938).
3. Prepare for, learn from and minimize serious investment
mistakes
“It is important in conducting a post mortem to be sure what
is one’s test of success. One important test is the avoidance of ‘stumers’ with
which many investment lists are disfigured. I mean by this definite mistakes
where the fall in value is due not merely to fluctuations, but to an intrinsic
loss of capital […with] no particular reason to expect a subsequent recovery […]
It is particularly useful for future guidance to make a list of these and remember
how they arose”.
(Letter to Francis Scott 7th June 1938).
4. Arbitrary asset allocation percentages are not a coherent
investment strategy
“I am strongly opposed to rigidities […] Fixed percentage –
particularly within each group of industry etc is surely altogether opposed to
having an investment policy at all. The whole art is to vary the emphasis and
the centre of gravity of one’s portfolio according to circumstances. Subject to
a minimum in government securities and a maximum in ordinary shares I would
strongly urge the desirability of the greatest possible flexibility”.
(Letter to Francis Scott 7th June 1938).
5. Short-term fluctuations are the necessary price of
long-term wealth accumulation:
“It is in the essence of [the long-term investor’s
behaviour] that he should be eccentric, unconventional and rash in the eyes of
average opinion” (General Theory, Ch. 12).
Applying this philosophy, particularly from the 1930s, with
a portfolio of above average yield, tilted to mid and small caps, with decreased
turnover as he grew older, Keynes succeeded as both an endowment manager and a
private investor.
From 1922-1946 he produced a return of 16% per annum for the
King’s College endowment fund and died with a personal fortune of over £400,000
– in excess of £15 million in today’s money.
Sources and Further Reading
Chalmers, D., Dimson, E. and Foo., J. (2015) "Keynes the
Stock Market Investor: A Quantitative Analysis", Journal of Financial and
Quantitative Analysis, Volume 50, Issue 4, pp. 843-868
CFA Institute Podcast discussing the above article.
The Collected Writings of John Maynard Keynes (Vol. XII) Edited
by Donald Moggridge, Macmillan, 1983.
Wasik, J. (2014) Keynes’s Way to Wealth, McGraw Hill
