The Investment Style of John Maynard Keynes

Who is John Maynard Keynes?

John Maynard Keynes (1883 – 1946) was a world acclaimed British economist. His basic thesis was that during economic downturns, governments should intervene to stimulate ‘aggregate demand’ through borrowing and spending. Then as the economy expands, governments can run surpluses to pay back those debts.

His policies were commonly referred to as ‘Keynesian economics’; which was a dramatic break with the ‘laissez-faire economics’ of Adam Smith that believed economies perform best when markets are left to their own devices.

Western government adopted his theories to move out of the Great Depression and Keynes was a major contributor to Roosevelt’s ‘New Deal’.

Money Manager for Kings College, Cambridge

His role as a successful economist is well documented; however his success as a money manager and investor are less known.

Few academics, journalist and investors have noticed the incredible success of Keynes Chest Fund, managed for the Kings College.

Between 1924 and 1946, Keynes earned an annual compound rate of return of 12% per annum; he managed to do this during the Great Crash and World War Two!

Furthermore, the British stock market fell by 15% during the same period, Keynes trounced the market.

Chest Fund Performance 1927 to 1946

Keynes Investment principles

In a nutshell, Keynes was a contrarian and value investor. He believed in holding balanced and concentrated portfolios of companies of which he possessed great knowledge of and below their intrinsic values.

After practically being wiped out during the Great Depression, he gave up on short-term trading believing it to be a mugs game. Following an unsuccessful spell trading currencies on high margin, Keynes later quipped that “The market can stay irrational longer than you can stay solvent.”

Thereafter, he was convinced that investors should steadfastly hold good quality stocks, through ‘thick and thin’ in order to weather the worst aspects of short-term market volatility. Below is a paragraph of each principle in more detail.

Contrarian Approach

Keynes was a pioneer of the contrarian approach in his pursuit of superior investment returns.

Keynes said of his contrarian style: “My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.”

He believed that contrarian thinking in the pursuit of investment returns is “one sphere of life and activity where victory, security and success is always to the minority and never the majority. When you find anyone agreeing with you, change your mind”

Keynes contrarian principles are similar to that of Warren Buffet who believed that investors pay a high price for a ‘cheery consensus’. Keynes contrarian style required strong conviction to follow through on his investments through very challenging economic times. It was that conviction and rigorous research that produced his outstanding investment returns.

Concentrated Portfolio

Keynes often preached the importance of holding concentrated portfolios. He believed that investors should build a carefully selected portfolio comprising of a small number of companies of which they possessed great knowledge of. Warren Buffett in his 1991 Chairman’s letter to Berkshire Hathaway investors quoted Keynes to sum up this principle beautifully.

“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”

Investors can only understand a handful of companies at one given time. Rather than be a ‘Jack of all trades, master of none’, Keynes discovered that investors can make exponential returns by understanding a few areas of the market in great deal.

Long-Term Approach

Initially, Keynes investment style was very speculative and based on market timing. After experiencing large losses in the early twenties, he grew to believe that investors should hold fairly large units in companies for many years through ‘thick and thin’. After the Great crash, he switched from a top-down (looking at the macroeconomic picture) to a bottom-up approach (which focuses on the analysis of individual stocks). He searched for stocks which he believed was “satisfied as the assets and ultimate earnings power and where the market price seems cheap in relation to these”. In short, he believed that investing should be like a marriage and not a one night stand!

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