Learning from Keynes the Investor

I’ve always been fascinated by John Maynard Keynes. 

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.

Recent data compiled by Chalmers, Dimson and Foo has built on the impressionistic understanding of Keynes’s investing strategy in past biographies to provide a comprehensive portrait of Keynes the investor.

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, 18^th 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 7^th 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 7^th 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