John Maynard Keynes (1883-1946) is best remembered for his writing on economics, most notably The General Theory of Employment, Interest and Money (1936). This outlined what would become known as “Keynesian economics”, the use of fiscal policy to manage demand and thereby maintain full employment. But Keynes was also a very successful investment manager, working for two insurance companies and managing the endowment of King’s College Cambridge. Historians focus on his work for King’s, because he had almost complete control over a large part of the portfolio.
What was his strategy?
Keynes famously argued that the stockmarket was like a beauty contest, where the winner was not necessarily the most attractive participant, but the one everyone considered to be the prettiest. However, a 2013 study by Cambridge academics David Chambers, Elroy Dimson and Justin Foo, suggested that Keynes’ investing career can be divided into two distinct periods.
Between 1921 and 1932 he adopted a top-down approach, shifting in and out of various assets based on economic indicators. From 1932 to his death in 1946 he focused far more on individual shares, adopting a value approach that focused on low earning multiples and high dividend yields.
Which worked best?
Chambers, Dimson and Foo found that between 1921 and 1932, Keynes’ use of asset allocation produced mediocre results, both failing to anticipate the 1929 stockmarket collapse and the subsequent rebound – as many hedge-fund managers lament, “macro is hard”. His stock picks also underperformed in that period.
However, between 1933 and 46, his share selections returned an average of nearly 20% a year, double the level of the market. The part of the endowment that he controlled beat the market by 7.7% on a risk-adjusted basis. By the time of his death, King’s shareholdings had grown from £285,000 in 1922 to £1.22m in 1946 (from £11.3m to £45.2m at 2014 prices).
Did he have any advantages?
Keynes advised the Treasury in both an official and semi-official capacity from 1915, which gave him access to confidential information on financial and monetary policy. However, it’s hard to see how it benefited him, given most of his success came from stock picking. Dimson believes his main source of information came from brokerage reports available to ordinary investors. While he did have friends involved in the mining industry, one of the sectors that he invested heavily in, they provided general advice rather than specific tips.
What can he teach me?
Keynes’s experience provides three main lessons for investors. Firstly, it is hard for even a talented economist with inside information to make money by trying to time the market. Secondly, his experience is further evidence that value investing tends to be a sound long-term strategy. Thirdly, focus – while Keynes’s portfolio consisted of up to 78 holdings at any one time, it was concentrated around a few core shares, which he traded very infrequently.