These days, economist John Maynard Keynes is best known as the inspiration for controversial policies meant to stimulate growth, such as quantitative easing (QE). That's a pity. Because in the debate over whether he was right or wrong, it's easy to lose sight of a rather more interesting side of Keynes his investment prowess.
In 1924, Keynes became bursar of King's College, Cambridge, taking responsibility for managing and growing its funds. From an initial £30,000, the fund grew to £380,000 by the time he died in 1946. That's an annual compounded return of around 12% during a period when the British stockmarket fell by around 15%.
But it wasn't all plain sailing. The tipping point for Keynes came after he lost around 80% of his own wealth in the 1929 crash. This led him to develop an investing style that would be copied in large part by the likes of Warren Buffett, who in 1991 said that "[Keynes'] brilliance as a practising investor matched his brilliance in thought". Here are three key planks of Keynes' approach.
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Bottom-up, not top-down
Keynes' 1929 downfall stemmed from trying to time the market, betting that he could read the business cycle well enough to get in and out at the right moments. The crash convinced him to shift from what we'd call 'momentum investing' to 'value investing'.
In his own words, he began looking for stocks where he was "satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these". In other words, he stopped trying to second-guess the market. Instead he bought stocks he believed were cheap, and waited for the market to catch up.
Hold your course
Keynes also mastered the discipline of not being panicked by volatility. He acknowledged that he could make mistakes, but said that he could only be sure if his rationale for buying a stock was flawed or correct several years (rather than days or minutes) after investing. So he held his stocks "through thick and thin being quiet is our best motto". In today's 'noisy' markets, where the internet and 24-hour news channels bombard us with alarm bells and ideas every second, this is extra important.
Go against the crowd
Keynes was a contrarian, describing investing as the one sphere "where victory, security and success are always to the minority, and never to the majority. When you find anyone agreeing with you, change your mind". One way to monitor what other investors are thinking is via the American Association of Individual Investors (AAII) survey.
In February and March, bullish respondents outnumbered bears by a double-digit margin for the longest number of consecutive weeks since the summer of 2005, says MarketWatch.com. That, Keynes might comment, suggests now isn't the time to be piling indiscriminately into stocks.
Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
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