Britain once had an investor who was in the Warren Buffett class; his success was immense, but today he is more famous as an economist. I refer to John Maynard Keynes.
How to invest like the British Warren Buffett: become a Keynesian investor
“When the facts change, I change my mind,” once said Keynes. The great economist, former economic advisor to Winston Churchill and co-architect of the global economic system that saw the emergence of the IMF and World Bank, was also an extraordinarily successful investor — his ability to rise above emotion and change his mind when he felt it was appropriate, was one of the reasons.
His “brilliance as a practicing investor matched his brilliance in thought.” Who said that? None other than Warren Buffett.
But what did Buffett mean by Keynes’ “brilliance in thought.”
These days Keynes’s economic ideas are often associated with the ideals of the left, there is an assumption he was a socialist. Actually, that very idea is absurd, he was far far away from being a socialist. It is just that among the myriad of his ideas, the two most famous today, relate to his remedies in the event we suffered a repeat of the US Great Depression: massive government stimulus and some distribution of income from richer to poorer as the poorer you are the higher the proportion of your income you spend. That idea is known as the paradox of thrift. Saving during a recession might be the best approach at an individual level, but not at a national level.
But, post World War One, Keynes also said: “The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a society where wealth was divided equitably.” So there you have it, no socialist.
But he was famous for being extremely clever — the brainiest man in Britain he was sometimes described as, at the time. The celebrated philosopher Bertrand Russell once said of Keynes: “Keynes's intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool.”
So clever was Keynes, that some people didn’t trust him, they didn’t trust a man who could run intellectual rings around them. Churchill once said: “If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."
But at Bretton Woods in 1944, at a gathering designed to create a stable global economy, Keynes was unable to convince the Americans of his idea to penalise trade surplus countries just as much as deficit countries. Reports said the US contingent distrusted this ‘too clever by half’ Brit. The IMF and World Bank emerged as compromises — if the US had accepted the Keynes plan there would be no trade war between China and the US today.
As R. F. Harrod wrote in The Life of John Maynard Keynes: “No one in our age was cleverer than Keynes nor made less attempt to conceal it."
As an investor, he got lucky. His initial investment approach entailed dovetailing his investment with the economic cycle — something he knew a lot about. But with the 1929 crash he lost 80 per cent of his fortune. At one point he considered selling his paintings to stay solvent — how very convenient that he had such assets to fall back upon.
But he had wealthy backers, including his father, who had immense faith in him.
Between 1924 and 1946, when he died, Keynes was bursar of King’s College, Cambridge. He managed its endowment funds, and thus we have evidence about his ability as an investor. During this period, £100 invested by Keynes would have grown to £1,675. (Remember the 1929 crash occurred during this period.) If that same amount of money had grown with the stock markets, then it would have grown to £424.
According to a report in the FT, the Keynes investing record over the 22 years before his death was comparable to that of Berkshire Hathaway. In fact, Keynes did better.
So what was this approach that he adopted, post the 1929 crash, after he changed his mind?
In 1934, Keynes wrote a letter to F. C. Scott. Warren Buffett quoted this letter back in 1991.
Keynes wrote: “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… One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.”
In 1937 Keynes wrote: “It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it.”
He also said: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
In 1938 he outlined his recommended approach:
- Carefully select a few investments taking into account their cheapness — so that was value investing in a small number of stocks he understood well.
- Steadfastly holding these stocks in large units over time, even during periods when they perform poorly, and sell only when they fulfil potential or you believe your original judgement was a mistake.
- Build a balanced investment portfolio, wherever possible, hold stocks with opposed risks — meaning non-correlated in today’s parlance.
“Keynes had a very rare quality,” stated the FT, when looking at his performance as an investor. “He never lost the intellectual confidence needed to make contrarian investments. But he could see when he had made a mistake, deal with it, and modify his behaviour.”
Could you invest like Keynes?
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