John Keynes as an Investor

Patrick A. Labbe, CFA

John Maynard Keynes is best known as an economic theorist whose book, The General Theory of Employment, Interest and Money, remains a classic.  Less well known, but equally impressive, was his skill as an investor.  Researchers at Cambridge University estimate that while he managed funds for King’s College from 1926 until his death in 1946, Keynes earned about 12% per year, increasing the school’s portfolio by a factor of ten, while British stock market returns averaged about 3% per year.

Keynes’ earlier foray into the markets, however, was less than successful.  Mistakenly believing he could profitably use his knowledge of markets and interna­tional affairs to speculate in currency and commodity markets, Keynes lost his entire stake within a year.  Not surprisingly, he concluded that speculation was a dangerous and unlikely path to wealth, since it required predicting the behavior of speculators who cared little for economics and only sought to outguess one another.  Keynes then shifted to studying businesses, where reports and financial statements were better suited to his keenly analytical mind.  He was what we’d call today a “fundamental investor,” searching for gaps between his estimate of business value and the market price.  Offering a contrast between investing and speculating, Keynes said: “Investing is an activity of forecasting the yield over the life of the asset; specu­lation is the activity of forecasting the psychology of the market.”  Clearly, he concluded that only one of these was practical.

A century ago, bonds and land were very popular investments, particularly in Britain.  Keynes, however, possessed an unshakable belief in the superior value of stocks as long-term investments.  Other managers often criticized him for sticking with stocks, especially during the Great Depression. Keynes sometimes referred to other funds as “savings banks” given their unwillingness to consider the unique benefits of stock ownership.  Despite all criticism, Keynes was convinced that stocks offered both income and appreciation suitable for long-term investors.  His own results, as well as numerous studies since, have proven him correct.

To call Keynes a contrarian is probably an under­statement.  Since his investing career spanned both the Great Depression and much of World War II, he witnessed some incredible market declines.  He continued to buy U.S. shares despite the Great Crash of 1929, and he remained a buyer during the 1930’s when many found the global economic outlook hopeless and stock markets remained very volatile.  The subsequent success of these investments convinced Keynes of the immense value of independent thinking regardless of popular opinion.  In fact, he came to believe that if he could persuade his fellow practitioners to buy stocks, “the moment is right for selling.”

My favorite description of Keynes’ investment approach comes from biographer H.F. Harrod:  “He selected investments with great care and boldly adhered to what he had chosen through evil days.”