John Maynard Keynes

Most people recognise John Maynard Keynes for his contributions to economic theory, most notably the book The General Theory of Employment, Interest and Money.

Less well known about Keynes is that, in addition to effectively creating the subject of macroeconomics, he became a very capable stock market investor.

Keynes’ stock market prowess is shown by his performance at King’s College, Cambridge. Keynes was appointed First Bursar at King’s in 1927, a position he held until his death in 1946.

During the intervening years, a time when the UK market was broadly flat, Keynes managed to generate a 13% annual return for the College’s Chest Fund.

Year                Chest Fund (%)           UK Market (%) 
1928                      0.0                         0.1
1929                      0.8                         6.6
1930                    -32.4                       -20.3
1931                    -24.6                       -25.0
1932                     44.8                        -5.8
1933                     35.1                        21.5
1934                     33.1                        -0.7
1935                     44.3                         5.3
1936                     56.0                        10.2
1937                      8.5                        -0.5
1938                    -40.1                       -16.1
1939                     12.9                        -7.2
1940                    -15.6                       -12.9
1941                     33.5                        12.5
1942                     -0.9                         0.8
1943                     53.9                        15.6
1944                     14.5                         5.4
1945                     14.6                         0.8
Average                  13.2                        -0.5

Although the Chest Fund did dabble with leveraged positions in the commodity markets (at one point, Keynes was reportedly long on enough wheat to supply the UK for a month) and also owned sizeable amounts of bonds, it was ordinary shares that underpinned the performance.

Keynes outlined his investment principles thus:

“1. A careful selection of a few investments 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;

2. A steadfast holding of these 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 purchases on a mistake, and;

3. A balanced investment position, i.e. a variety of risks 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).”

Few holdings, value, the long term, low turnover and a variety of different industries were the cornerstones of the Keynes philosophy. In 1929, Keynes held just four shares (one of which was the Austin Motor Car Company!). In 1930, he held just two shares and by 1937, he had diversified to hold four UK shares and three US ones.

As Keynes mused: “It is a mistake to think one limit’s one’s risks by spreading too much between enterprises about which one knows little and has no reason for special confidence… One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself to put full confidence.”

The Chest Fund’s record under Keynes’ stewardship was all the more remarkable by the difficult investment climates of the time. Keynes had to contend with the 1929 Crash and also endured the depression years of the early 1930s and the Second World War, both of which produced three consecutive years of stock market falls.

Indeed, on the outbreak of the Second World War, Keynes noticed the valuation disparity between a rising US market and a falling UK market. Domestic shares looking attractive at the time included Barclays, Imperial Tobacco, Woolworths and Marks & Spencer. It’s also worth noting that Keynes underperformed the UK market in his first four years in charge of the Chest Fund.

In addition to his King’s College duties, Keynes also advised the National Mutual Life Assurance Society and the Provincial Insurance Company on their investments. Keynes quickly noticed the ‘psychological’ problems that National Mutual’s investment managers were having after the 1929 crash. He cautioned against selling at depressed prices:

It is only too easy to be frightened and to find plausible reasons for one’s fears… Just as many people were quite willing [in a rising market] not only to value shares on the basis of a single year’s earnings but to assume that increases in earnings would continue geometrically, so now they are ready to estimate capital values on today’s earnings and to assume that decreases will continue geometrically.

He also argued with those at Provincial about selling equities during the 1937/8 downturn: “I do not believe that selling at very low prices is a remedy for having failed to sell at high ones…I feel no shame at being found still owning a share when the bottom of the market comes.

In fact, from his experiences during two sharp stock market downturns, Keynes noted that it was always inadvisable to sell out in the hope of lower prices to come: “It is a mistake to sell a £1 note for 15s in the hope of buying it back for 12s 6d, and a mistake to refuse to buy a £1 note for 15s on the ground that it cannot really be a £1 note.

Finally, Keynes’ knowledge of economic cycles never helped help him with his stock picking. He began his investment career by using what he called a ‘credit cycling’ strategy: “Selling market leaders on a falling market and buying them on a rising one“. However, Keynes eventually realised that such anticipatory trading was harmful, both for the investors’ wallet and his state of mind:

We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle… As a result of these experiences, I am clear that the idea of wholesale shifts is for various reasons impractical and indeed undesirable. Most of those who attempt to sell [do so] too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind, which if it is widespread has besides the grave social disadvantage of aggravating the scale of the fluctuations.

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