Just as Charles H. Dow is the most unsung economist that ever lived, so too is John Maynard Keynes (JMK) the most unheralded speculator to "play" the markets. The following is our research into the investment style of JMK to determine what the thinking might have been behind the theories and strategies that were employed. Most of the investment style that was employed by JMK has been diluted down to the concept of value investing which consists of entering into transactions which investors expect to "buy-and-hold" stocks for the "long term" using "fundamental" analysis derived from the balance sheet of large and small publicly traded companies. Since we all know the mantra and conventional wisdom, we at New Low Observer, will try to take claim for playing the devil's advocate when interpreting what JMK meant when he said, "an investor...should be aiming primarily at long-period results." This exercise may stretch the realm of credulity. However, we believe learning begins where conventional wisdom ends.
As trained economists, we have read much of JMK's theories on money, credit and interest rates. We are also familiar with JMK's involvement in public policy both in the United States and in Britain. In the last 3 years we've had graphic examples of Keynesian economics in attempts to resolve credit crisis after credit crisis. We're aware of the "feuding" philosophies of Keynesians and the Austrian School of economics. However, never in our economic courses in college did we cover the topic of JMK as an investor. Why is this even important to us as investors? One good reason is that Keynes was resolutely known as one of the greatest investors of his time. Considering that if you halved the investment performance of Keynes during the period from 1927-1946 and compared it to the British stock market performance, he still would have beat the market by 600%.
The following is the first of (hopefully) many excerpts from books and journals on the topic of Keynes as an investor.
"More bad news, this time from wall street in late March, brought another slump in health for Maynard, who still had ‘a huge American position’. Lydia took it philosophically: ‘it is quite natural after so much work, change of weather, the world situation, Wall Street and life in general’.
"In the last fortnight in March he sold $40,000 to $50,000 worth of securities, steadily reducing his debt to Buckmaster and Moore, while preserving most of his liquid resources. In the year of ‘terrific decline’ which had started in the spring of 1937 he lost nearly two-thirds of his money. His net assets fell from $506,222 at the end of 1936 to $181,244 by the end of 1938, with his gross income cut by two-thirds, from $18,801 in 1937-8 to $6,192 in 1938-9.
"The institutions who’s investment policy he largely dictated- his College, the Provincial Insurance Company, the National Mutual- had also suffered heavy losses, and Keynes was driven to justifying his philosophy of ‘hanging on for a rise’ in lengthy letters and memoranda. To Francis Curzon, who chaired the weekly meetings of the board of the National Mutual in his absence, he wrote on 18 March: ‘I feel no shame at being found still owning a share when the bottom of the market comes…I would go much further than that. I should say that 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. Any other policy is anti-social, destructive of confidence, and incompatible with the working of the economic system. An investor,..should be aiming primarily at long-period results, and should be solely judged by these.’ Curzon and the board were not convinced, and Keynes resigned his chairmanship in October 1938, explaining to Falk, ‘One naturally chooses [to give up] that part of one’s activities which one finds least satisfaction.’"
Skidelsky, Robert, John Maynard Keynes:Fighting for Freedom 1937-1946, Viking Press, 2000, 15
In reading this piece, I am fascinated by the fact that Keynes had lost 66% of the value of his assets in the bear market of 1937-1938. To lose so much, when the British stock market fell by -0.5% in 1937 and -16.1% in 1938, seems extreme. Mind you, this was Keynes' personal investment account, in the investment fund that he managed for King's College, the cumulative loss for the same period was -31.6%. It was said that Keynes was more aggressive with his own accounts than with the accounts of others that he managed at the same time. What is challenging for me to accept in this regard is that, if the losses were 66% then it would take a 300% increase in order to break even. With a loss of 31.6%, it would take a gain of 46.2% to break even. While the 46% gain seems plausible, the 300% gain seems extraordinary and something that is highly unlikely, in a reasonably short period of time.
The conventional wisdom dictates that portfolios with smaller concentration are likelier to have abnormal fluctionation in both good and bad markets. In Keynes' personal account, the decline of 66% percent possibly indicated that he held relatively narrow holdings (undiversified.) The same could be said for the funds that he managed for the university. Another possible explanation for the wide disparity in the losses in the period mentioned could lie in the selection of companies. A portfolio full of speculative, less than "investment grade" companies are prone to larger declines as the market trends lower. Finally, another explanation probably lies in the attribute that was not unusual for Keynes' investment style and that was with the use of large amounts of leverage. This explains why Keynes had to reduce his debt with Buckmaster and Moore.
I suspect that when Keynes said, "An investor,..should be aiming primarily at long-period results," what he meant was that the soundness of an investment approach should be judged based on the results over a long period of time and not based on short term losses or gains. By this I mean that Keynes might not necessarily intended for investments to be held for extended periods of time, basically forever as most people seem to think today. As proof of this possibility, we reference the following material:
"By the 1930s, though, Keynes had learned some existential lessons, for example, that it takes 'abnormal foresight' and 'super human skill' to buy and sell at the correct time. It is better to choose a small group of carefully selected securities (which Keynes refers to as 'pets') with the idea of holding them 'through thick and thin', perhaps for several years till they have fulfilled their promise or proven to be a mistake. On other occasions he recognized 'time and opportunity' did not allow one to have adequate knowledge of more that[n] a very limited number of investments, that 'continuous and anxious work on the telephone' (not half an hour in bed) is 'none too good for health', and that one is liable to lose one's 'sense of proportion' when he is
absorbed in market quotations."
Mini, Piero V., John Maynard Keynes, St. Martin's Press, 1994, 89
Let me re-emphasize that JMK was specific in that stocks should be held for "several years till they have fulfilled their promise or proven to be a mistake." In this context we can see that it is possible that Keynes never intended to hold a stock for an indeterminable period of time down the road. It is quite possible that Keynes literally meant that after 3 or 4 years, if they performed as expected, the stock should be sold and new ventures should be pursued.
This loose interpretation of JMK's thinking would fly in the face of most investors who say that they are invested for the long term only to find that the stocks they hold are "duds." To compound the bad decision of buy-and-hold for the long term, investors cannot justify selling a stock that they previously felt that they would hold forever. Finally, when the investor does end up selling the stock, far earlier than expected, they are forced to deal with the conflict of their investment strategy and its implementation. As an alternative, most investors tend to say to themselves, "I'm just going to invest in quality companies and forget about it until my retirement." This approach seems to be the preferred method for coping with a failed strategy.
Again, it is my view that JMK intended that the investment strategy or philosophy that is employed should be judged on it's long term performance. This is opposed to the idea that stocks individually should be held for a long period of time. I believe that new investors, as well as experienced investors, should have as a primary goal the appropriate selection of an investment strategy. Because we have an extended history of investment stategies and philosophies, we as investors should be selecting and testing those that have performed best in both bull and bear markets. This may explain why Warren Buffett
selected JMK's philosophy and applied it to the Graham and Dodd method for selecting individual stocks. In the case of Mr. Buffett, it was his early adoption of the Keynes method which sets his investment performance apart from the rest.