John Maynard Keynes is one of the few economists who can justifiably be called a household name. His ideas remained hugely influential for many years after his death in 1946. But fewer people will be aware that Keynes was also a hugely successful investor, one we can still learn a lot from.
Keynes’ investment activities generated some great stories. My favourite is of the great man shaking his head and muttering “too small, just too small”, while looking round the crypt of Kings College chapel in Cambridge. He was wondering where to store the vast amount of wheat he would have to take delivery of after a commodity futures trade had gone wrong.
Another cracking quote is Keynes’ observation that “the market can stay irrational for longer than you can remain solvent”. We’d all do well to remember this advice when tempted to double-up on a losing position.
But Keynes wasn’t just a dabbler in the markets. For 25 years, he ran the endowment fund of Kings College, Cambridge – the one with the too-small chapel. And he had great success. A lot of which was down to his radical approach to asset allocation. He refused to follow conventional wisdom, and developed a distinctive approach to managing the college funds.
What’s also interesting is that he was a key influence on how the famous US university endowments such as Yale manage their money today. This is a point made in a paper by Chambers and Dimson in the current edition of the Financial Analysts Journal.
Given that Keynes’ views are still very relevant, it’s worth having a quick look at what tips we can adopt from the way he went about investing Kings College’s money.
Private investors need to focus on the long term
Keynes’ key innovation was to introduce equities into the portfolio. He understood that shares are the most appropriate investment for a fund taking a long-term view. I would definitely agree and since most of us individual investors expect to live a long time – we should be overwhelmingly invested in equities also.
In 1921, when Keynes took over Kings’ endowment, the fund was almost entirely in property. Keynes set about selling much of it in order to set up a ‘discretionary fund’. He put 75% of this in shares. No other Oxbridge college followed suit. It also took the big US endowments many years to reduce their dominant bond exposures and come round to his pro-equity stance.
Keynes had three main rules in running his equity portfolio:
1. Stay invested and don’t try to time the market
He adopted this approach after failing to trade well in the wake of the 1929 crash. The crucial lesson here is to make sure you stay committed to equities during a downturn. If you try and time the market, you risk missing out on the early stages of a recovery when big gains tend to be made. An endowment (or a private investor) has the long-term view necessary to do this.
2. Focus on ‘value’ stocks, particularly big dividend payers
Again, he was exploiting a long-term approach. Keynes’ fund was able to take a contrary view, buy out-of-favour stocks which were cheap, and patiently wait for them to return to favour. Again, this is an advantage private investors can exploit. In contrast, professional fund managers often try to chase short-term trends and market fashion.
3. Keep your portfolio very different from the broader stock market
Of course, the concept of index-tracking didn’t exist back then. But Keynes understood that the best portfolio would often bear little relation to the makeup of the market as a whole. This lesson is well understood today. But ‘closet-indexing’ by mutual funds is commonplace and predictable generates poor returns. As private investors, we have the freedom to ignore the index and just own what we really like. We ought to make sure we do this.
So the message from Keynes is that endowment funds and private investors have some big advantages over the mainstream fund management industry. They can be patient and take a long-term view. They can also own stocks that they really like and believe in, rather than being a closet-indexer. It’s important that we recognise these advantages and use them.