John Maynard Keynes: economist as stock-market investor
John Maynard Keynes (1883-1946) was one of the most influential economists of the 20th century; his 1936 magnum opus, The General Theory of Employment, Interest and Money, guided economic policy for decades afterward. He was also an active investor of his own account and several institutional accounts.
According to a 2015 study, Keynes the Stock Market Investor: A Quantitative Analysis, Keynes outperformed the market when he managed a discretionary portfolio for an endowment fund at King’s College on the campus of the University of Cambridge. He generated an average annual return of 16.0% from 1921 to 1946, compared to the market’s average annual return of 10.4%.
Keynes’ personal portfolio mostly mirrored the endowment fund, so he likely earned a similar return in his own account. He may have done even better, assuming his dividends were reinvested (the endowment fund’s dividends were not reinvested but spent by King’s College).
Before the 1920s, Keynes tried leveraged speculation in currencies and commodities, using a top-down strategy in his own account. It brought him to the precipice of financial ruin twice.
In the 1920s, he did better using business and credit cycles to time stock-market exposure, earning strong positive returns because of the economic boom of the Roaring Twenties. But he failed to foresee the stock-market crash of 1929. Keynes lamented: “We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares at different phases of the trade cycle.”
In the early 1930s. Keynes switched to bottom-up investing in undervalued companies with solid balance sheets and good prospects. He preferred a portfolio with large and long-term positions in a few “enterprises which one thinks one knows something about [as long as some stocks had] risks that were opposed.” He did not believe in widely diversified portfolios of “enterprises about which one knows little.”
Buying stocks in the 1930s took a lot of courage when markets were down by as much as three-quarters from their 1929 peaks. One thing that fortified Keynes was Edgar Smith’s 1925 book, Common Stocks as Long Term Investments. In a book review, Keynes wrote: “Mr. Smith finds in almost every case, not only when prices are rising but also when they were falling, that common stocks have turned out best in the long run.”
Keynes was overweight in public utilities, investment trusts and gold stocks during the 1930s and 1940s. For public utilities, dividend payments were reinstated and helped generate substantial capital gains; for investment trusts, their leveraged baskets of stocks tracked market recoveries like long-dated call options; for gold stocks, there was a substantial holding in Homestake Mining that benefited from the U.S. government’s upward revaluation of gold to US$35 per troy ounce in 1933.
Keynes was well-connected but did not rely on inside information or tips. Indeed, he once declared: “the dealers on Wall Street could make huge fortunes if only they had no inside information.”
The bottom-up method of investing in undervalued stocks over the long term is what mostly enabled Keynes to win the investment battle. It was similar in many respects to the one followed by Benjamin Graham, and later by Warren Buffett. But Keynes adopted it independently of both. At the time of his death in 1946, his net worth was close to US$30 million (in current U.S. dollars).
Photo Credit: National Portrait Gallery London