• Portfolio Strategies
  • John Maynard Keynes as an Investor: Timeless Lessons and Principles

    by John Wasik

    John Maynard Keynes As An Investor: Timeless Lessons And Principles Splash image

    As an active investor, I am always searching for guideposts that would help me avoid the perennial mistakes most investors make.


    How do I avoid buying at the top of a market or jumping out when my entire portfolio gets whacked? How do I keep the faith when there’s turmoil aplenty, as was the case in 2008? How important are dividends in a downturn?

    In the portfolios of the great economist John Maynard Keynes, I found some answers and reinforcement. Like Keynes, I did nearly everything wrong for years until I discovered a durable path to investment success. I speculated in commodities, dove into individual stocks on a whim and held onto losers far too long.

    I found solace, though, when I examined Keynes’ investments, which span two world wars. Even though I and millions of others have weathered brutal markets in this century, they had nothing on Keynes, who was investing money for King’s College (Cambridge University), two insurance companies and private accounts for himself and his famous Bloomsbury friends.

    Although he’s better known for his sweeping—and controversial—economic theories, Keynes was a fervent practitioner of capitalism. His rousing success as an investor shows how he embraced markets nearly all of his life.

    Viewing his record as an investor, it’s ludicrous to call Keynes a socialist, which he wasn’t. Keynes genuinely enjoyed being a speculator and investor. He called his favorite stocks his “pets.” In addition to thinking through the ideas that would rescue Western economies (as well as Japan and eventually China) after two devastating cataclysms, he managed money for his own portfolio, his friends and several institutions.

    Keynes was able to adapt to some of the worst financial and historical calamities. Although he was a harsh critic of capitalism and markets, he kept investing—and was rewarded. His experience provides solid grounding for stock investors everywhere.

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    Keynes the Stellar Investor

    Keynes learned from his mistakes and near financial ruin. He was able to move on, reach new conclusions about how to regard market movements and earn a place in the pantheon of great investors that includes Benjamin Graham, Warren Buffett and George Soros. It’s no small stretch to say that Keynes was also the godfather of behavioral economics and value investing at a time when such things had little or no currency.

    Among other things, Keynes genuinely enjoyed being a speculator and investor. Keynes was most likely one of the first hedge fund managers and established some time-honored principles that the best investors follow today.

    It was only after I went through thousands of brokerage account statements, ledgers, shareholder letters and portfolio summaries that Keynes’ investment personality emerged. Thanks to gracious access granted to me by the King’s College archives at Cambridge University, I was able to piece together a side of Keynes that most economists have never seen. The narrative starts with a brilliant Cambridge lecturer who is starting to make his way in academia after an unsatisfactory post in the India Office prior to World War I.

    Early Investments

    It’s at the end of the 20th century’s first decade that we see Keynes’ growing interest in markets, investing and speculation. In his lecture notes, we see a curious Keynes who has, up until that point, little direct engagement in investing, but a yearning to explore. His lecture on the stock market in 1910 calls it “essentially a practical subject, which cannot properly be taught by book or lecture.”

    According to economist and professor Victoria Chick, whom I interviewed in London in March 2013, Keynes “loved gambling and was always one to get involved in a card game.” But it was a penchant for market speculation and his friendship with stockbroker Oswald Falk that propelled Keynes to explore the markets just before World War I. When I asked his biographer, Lord Skidelsky, when he first saw evidence of Keynes’ serious interest in investing, he surmised it was before 1910, when “like Soros, I think he used the financial markets to test his theory of probability.” Keynes had begun work on a book on probability—later published in 1921 as “A Treatise on Probability”—prior to the war.

    Before World War I, Keynes was mostly unchastened in the stock market. (The box below shows an example of his trading activity in one stock.) Since he didn’t have inherited wealth—and lecturing at Cambridge didn’t pay much at the time—he didn’t really start investing in earnest until 1914, according to the editor of his papers, Donald Moggridge.

    Dollar Cost Averaging

    An analysis of Keynes’ early personal portfolio shows how he was buying and selling one of his favorite stocks at the time: U.S. Steel. Keynes consistently purchased shares at lower prices, thus reducing his average cost. The shares he sold were within 10% of the highest purchase price.

    Year Action Shares Price ($)
    1911 Buy 10 71¾
    1912 Buy 10 60¾
    1912 Buy 10 66¾
    1912 Buy 20 66¾
    1912 Sell 10 68?
    1912 Buy 10 65
    1913 Buy 10 66 1/3
    1913 Buy 20 65¾
    1913 Buy 30 65¾
    1913 Buy 30 61½
    1913 Buy 30 62
    1913 Sell 10 67
    1913 Buy 20 59½
    1913 Buy 20 60  3/16

    This is dollar cost averaging, a method that has worked for decades because it avoids buying at the absolute highest price and selling at the lowest. This is a good method for long-term, buy-and-hold investors who want to own companies that offer dividend-reinvestment plans, where new shares can be purchased—preferably on a regular basis—at no commission. If Keynes liked a stock, he kept buying it and was encouraged when the price came down, so he bought more and got better bargains.

    Using his knowledge of international finance, Keynes took to the currency markets with abandon. Floating currencies, which had been fixed before 1914, were notoriously volatile at the time, but Keynes thought he had the advantage of “superior knowledge.” Believing that post-war inflation would hurt the values of the French franc, German reichsmark and Italian lira, Keynes shorted those currencies. This transaction made money if the currencies dropped in value relative to other, stronger currencies such as the British pound or U.S. dollar. He went long on the Indian rupee, Norwegian and Danish kroner and U.S. dollar.

    “He wanted to make money in a hurry in the 1920s,” Skidelsky told me, “and thought gambling on currencies (when currencies were floating in the early 1920s) was the way to do it.”

    Along with Falk, his brother Geoffrey and Bloomsbury friends, Keynes set up an investing syndicate in 1920, which many financial historians claim was one of the first hedge funds. Rather than manage money for preservation of capital or yield, Keynes was speculating pure and simple. At first, his strategy paid off, netting $30,000 for his investors in the first few months. By April 1920, notes Liaquat Ahamed in “The Lords of Finance: The Bankers Who Broke the World” (Penguin, 2009), Keynes made an additional $80,000, which was astounding considering that most of Europe was essentially broke from the war. Then something unexpected happened, according to Ahamed: “Suddenly, in the space of four weeks, a spasm of optimism about Germany briefly drove the declining European currencies back up, wiping out their entire capital.”

    Embarrassed, though willing to get back on the speculation horse to make up the losses he suffered for his friends and family, Keynes re-invested in currencies following his 1920 shellacking. It also helped that he was staked by his father and wealthy investors, who had unwavering confidence in Keynes.

    The Roaring 1920s

    As a trader who believed that he could profit from the impact of supply and demand curves, Keynes became enraptured with the idea of commodities trading in the 1920s. Europe clearly needed every kind of commodity to rebuild after the Great War. Prices generally followed the demand. There were opportunities for astute speculators and Keynes started researching and writing about commodities in the early 1920s for the London and Cambridge Economic Service and Manchester Guardian. A glimpse of how he invested during this time period can be seen in the A.D. Investment Trust Ltd. portfolio snapshot, shown in the box below.

    Portfolio Snapshot: A.D. Investment Trust Ltd.

    As another virtual hedge fund, A.D. Investment Trust Ltd. was founded by Keynes and his associates at the British Treasury in July 1921. Keynes was a director until November 1927, when he sold all of his shares. From 1923 through 1927, dividends were 10% annually. After Keynes left, the firm didn’t survive the 1929–32 sell-offs.

    This was largely a commodity price–oriented portfolio that focused on the rise of commodity prices in the wake of World War I. Even the portfolio’s stocks reflected growing demand for staples like rope, metals, oil and food. Currency speculation was also part of the mix. As the decade wore on, though, the portfolio direction headed more into stocks and less in commodities and foreign exchange.

      Currencies Commodities Stocks
    Years (£) (£) (£)
    Source: Collected Works of Keynes, Vol. XII, p. 32, King’s College Archives.

    As you can see in Table 2, this is a classic example of what Keynes called “opposed risks,” where gains in one asset class could offset losses in another. While he was losing money in commodities, for example, he was making money in stocks. If it weren’t for the fact that this was a highly speculative and risky portfolio, this would be a good example of diversification that shows how holding relatively uncorrelated assets can amount to overall gains. Ultimately, though, at the end of this sampled holding period, stocks would be the winning asset class.

    How did Keynes do overall during the 1920s? While it’s difficult to tell because he traded so many contracts in the 1920s, Skidelsky found that in 1927 his net assets totaled some $3.4 million (in today’s dollars). But everything in world markets began to change in 1928, when prices began to drop and Keynes was still long in rubber, wheat, cotton and tin. After the stock market crash of 1929, he would eventually lose some 80% of his net worth, forcing him to put some of his paintings on the market (though he ended up not selling them).

    By the end of the decade, Keynes’ foray into commodities ended much the same way the 1920s began (with currency losses), only worse. He was on the wrong side of most of his trades when demand collapsed. By 1930, after Wall Street crashed and the world plunged into the Great Depression, wholesale prices had plummeted 20%. Many commodities took a 50% hit.

    The Great Depression and World War II

    Having lost the bulk of two fortunes, Keynes re-oriented his thinking about trying to predict market movements. If one couldn’t rely upon a mountain of data analysis and speculative insights on supply and demand, then what was left? In his 1936 book “The General Theory of Employment, Interest and Money,” he concluded that “animal spirits” were the force behind market activity. They were hard to reckon with and impossible to predict, so he needed to adjust to this unpredictable current of irrationality.

    As he began to step outside the bounds of classical economics, he was doubtless influenced by his investment failures. Instead of trying to anticipate the market, Keynes now focused on the enterprise, or intrinsic, value of what stocks were worth. He drastically reduced his commodity positions. Then he latched onto high-dividend stocks in the 1930s, when most traders were out of the market. It was this contrarian view that launched Keynes as not only one of the first value investors, but as a long-term investor who turned his back on short-term valuations and market trends. Even more remarkable was that Keynes stuck to his new investment theory during one of the most turbulent decades for stocks in history.

    More importantly, the results from this tumultuous period show Keynes’ resilience and willingness to adapt to changing markets. Keep in mind that during the Great Depression, there were a series of recessions followed by stock market comebacks. Although Keynes wasn’t able to avoid some of the largest sell-offs in 1930–31, 1938 and 1940, the King’s College Chest Fund had a winning streak from 1932 to 1937, a period in which U.S. stock market losses ranged from 25% to 43% annually. Over those six years, U.S. big companies lost money in three annual periods. Considering the time in which he was investing, Keynes showed either amazing skill or sizzling luck.

    Looking at two of the worst-recorded years for large U.S. stocks—1931 and 1937—Keynes did reasonably well. He only lost about 25% in 1931 when the U.S. stock market lost 43.3%. In 1937, he gained 8.5%, while the U.S. market lost 35%. He beat the U.K. market in 12 out of 18 years.

    Much of Keynes’s innovative style was fueled by his growing preference for stocks, although he contributed a plethora of insights and advances to institutional money management as well. David Chambers of the Cambridge Judge Business School and Elroy Dimson of the London Business School published a study in the Journal of Economic Perspectives last year that showed that “Keynes’ experience in managing the [King’s College] endowment remains of great relevance today.”

    What’s even more remarkable is that Keynes was not only managing money for King’s College during his heyday, but also managing institutional funds for National Mutual Life Assurance Society, the Provincial Insurance Company and personal funds for himself, friends and colleagues.

      Discretionary U.K. Equity  
      Portfolio Index Difference
    Year (%) (%) (%)
    1925 30.26 17.33 12.93
    1926 6.40 11.83 -5.43
    1927 2.00 19.90 -17.90
    1928 3.04 16.99 -13.95
    1929 7.29 5.40 1.89
    1930 -12.48 -17.58 5.10
    1931 -5.70 -30.17 24.47
    1932 29.19 27.33 1.86
    1933 54.39 27.04 27.35
    1934 26.13 13.15 12.98
    1935 34.75 7.95 26.81
    1936 40.00 19.08 20.92
    1937 11.20 0.63 10.57
    1938 -22.75 -8.64 -14.11
    1939 10.64 -5.17 15.81
    1940 -7.07 -21.08 14.01
    1941 30.55 27.24 3.31
    1942 8.35 9.38 -1.02
    1943 39.29 26.97 12.32
    1944 14.20 10.86 3.34
    1945 12.52 3.65 8.87
    1946 22.41 15.62 6.79
    Average 15.21 8.08 7.13
    Source: Annual Reports to Inspectors of Accounts for King’s College for financial years ended in August, estimated by Chambers and Dimson in the Journal of Economic Perspectives. Table is condensed to exclude restricted fund returns, although average returns are reflected in the “total” fund performance.

    As Table 3 shows, Keynes pivoted from his losing macro strategy in the 1920s, in which he underperformed indexes from 1926 through 1928, to a more bottom-up style thereafter. His outstanding performance reflects his modified style: He only fell behind market indexes once in the 1930s (1938 was his worst year, but it was also dismal in the U.S.) and once in the 1940s. His Sharpe ratio (risk-adjusted performance) and average performance were excellent as well.

    Keynes the Investment Innovator

    Keynes’ performance under fire during the 1930s and World War II (his street in London was literally bombed) inspired several generations of investors who followed. His dogged pursuit of value stocks, dividends, cash flow and future earnings established him as a durable “buy and hold” investor who was confident he would be rewarded in the long run.

    After his death in 1946, the vindication of Keynes’ portfolios proved that he deserved to be emulated. Although his estate was worth at least $22 million (in 2013 dollars) when he died, his contribution to the arts, modern economics and a more stable global economic climate is incalculable.

    As an investor, he championed the merit of examining the “earning power” of stocks, looking deep into the ability of a business to survive in a variety of economic conditions, and the abandonment of market timing and speculation.

    The larger message from Keynes’ investment style is that if he saw value in a company, he ignored the short-term “noise” of the market and held onto a company he saw as a worthwhile enterprise. He was always looking ahead and didn’t particularly like selling a stock. And if a stock paid dividends, that was icing on the cake.

    Even more significant is his recognition of “animal spirits” and the role that mass psychology plays in investing and markets. In doing so, he tackled one of the most elusive—and powerful—elements of markets, behavior that modern economists have yet to fully understand, much less predict.

    Much of this article was excerpted from "Keyne's Way to Wealth" (McGraw-Hill, 2013).

    Keynes’ 10 Keys to Wealth

    1. Over time, stocks beat bonds. Although this is not always true—it depends upon the time period studied—it’s generally true. From 1926–2011, large-company stocks returned an average 9.8% and small-company stocks returned 11.9%, according to Ibbotson Associates. This compares to 6.1% for long-term corporate bonds and 3.5% for U.S. Treasury bills. If you want capital appreciation combined with income, then stocks are still a potent long-term choice for most investors.
    2. Speculation is a dangerous game. Keynes thought he could play the fluctuations in currency and commodity markets with his “superior knowledge.” It may be easy enough to digest a ream of statistics and figures about past and present market conditions, but your research may have no predictive value for the future.
    3. Probability is not the same thing as uncertainty. You may have some excellent analysts’ estimates on earnings predictions and bond yields or the latest technical charts on various cycles. But, as Keynes discovered, it doesn’t absolve you of the market’s uncertainty about a stock or the economy.
    4. Opposed risks will help balance your portfolio. You need to invest in a mix of assets that are truly uncorrelated during market downturns to give you real diversification.
    5. Take advantage of the value quotient. In the 1930s, when markets were tumbling, Keynes decided to focus on a company’s “intrinsic” value. How much was it worth when it was broken up? What was its franchise/enterprise value, or competitive advantage? What would generate profits into the future? Was it raising its dividends?
    6. Dividends don’t lie. Dividends are paid out every quarter and represent a share of a company’s earnings. When Keynes loaded up on utility companies in the 1930s, he did so to buffer his portfolio and to grab an income stream.
    7. Don’t move with the crowd. Being a contrarian pays off. Find healthy, unloved companies and stick with them. You’ll do much better finding underdogs and holding them than buying today’s popular stocks and hoping they’ll gain value.
    8. Invest for the long term. Even if the current environment looks dismal, if you have a long-range investment policy—and it still works for you given your appetite for risk—stick with it. Rebalance once a year to ensure that you’re on course and not loading up in any one asset class.
    9. Invest passively. Given that you can’t divine the state of long- or short-term expectations because animal spirits are doing their mischief, put most of your money in cheap index funds. The cost difference that index funds offer is always in your favor and allows you to build more wealth.
    10. Drink more champagne! This is said to have been Keynes’ one regret—that he had not enjoyed life more and drank more bubbly. The object of investing is to ensure prosperity, not become obsessed with making money. So put your investing on autopilot with a sound plan that meets your goals and monitor it once a year. Then go out and live.

    Excerpted (edited) from “Keynes’s Way to Wealth,” by John F. Wasik.

    John Wasik is a journalist, speaker and the author of “Keynes's Way to Wealth” (McGraw-Hill, 2013). He writes a weekly investment column for Reuters and contributes to The New York Times, Forbes and other publications.


    Sam from Tx. posted over 2 years ago:

    It would be nice if the 10 keys could be printed out with out having to print the whole article.

    Thanks Very interesting

    Sloan from Nevada posted over 2 years ago:

    I would add one more step to "Keynes’ 10 Keys to Wealth:" Start Early! It makes step #10 so much easier.

    That is my biggest regret. One needs time to learn from, and recover from, his mistakes.

    David Levine from NC posted over 2 years ago:

    Excellent; sorry for my brevity but I need to go ice the bubbly.

    G Muren from CT posted over 2 years ago:

    Although AAII gives the same advise elsewhere the 10 Keys hit the spot, particularly the 10th.

    D Stanczak from IL posted over 2 years ago:

    "Viewing his record as an investor, it’s ludicrous to call Keynes a socialist, which he wasn’t. -- "Wow! I did not realize our investing records so emphatically determine if we are (or are not) a socialist. It is unfortunate AAII allows writings that contain such unfocused commentary.

    For the record: Keynes did not advocate personal savings. He advocated that workers spend their entire income. Any part of a workers income not spent he considered
    "hoarded" money. Clearly what he advocated in his writings he did not apply to himself.

    Neil Hoffmann from PA posted over 2 years ago:

    even after 1928 it does not sound like Keynes was a passive investor from the perspective that he selected the companies he bought based on a specific set of criteria. thats quite different from buying an index fund.

    R Delgado from CA posted over 2 years ago:

    What index funds were around in the 1930's? I suspect the author is projecting his own thoughts.

    George Binder from MI posted over 2 years ago:

    Keynes commissions must have been horrendous!
    Odd lots, commodities, # of sales. What he could have used, was a computer. Paper , headaches, and brokers ringing the phones.ummph

    Dave Gilmer from WA posted over 2 years ago:

    Dividends Don't Lie!

    That is a great title for a book -- too bad Geraldine Weiss beat me to it!

    James Grant from OH posted over 2 years ago:

    I had to chuckle when I came to the box titled "Dollar Cost Averaging". I guess it was intended to demonstrate the merits of DCA and Keynes' strategies. - - - I don't think it did either.

    By my calculations, if Keynes had to sell all of his holdings in U. S. Steel listed in the box, he would have ended up with a 5% loss.

    There are few things that make less sense than dollar cost averaging into a bear market.

    I don't care how good a company is. If the rest of the people in the market think its stock is overpriced and are driving the price down, I look elsewhere for a better alternative.

    Some other readers may say, "Well, Keynes was investing for the long term." My response is that view presumes there were no stocks that were rising in price.

    The cutest statement in the box is, "If Keynes liked a stock, he kept buying it and was encouraged when the price went down." So does that mean if I buy something and the price went up, I should be discouraged? (no sarcasm intended) - - - What happened to the simple, old adage, "Buy low. Sell high"?

    One final point, I suggest DCA is inconsistent with any value investing strategy which helps to identify when a stock is undervalued and attempts to buy low.

    Richard Friary from MT posted over 2 years ago:

    Any investor should be pleased to have compiled and enjoyed an investing history like J. Keynes'. He beat the U. K. Equity Index by an annual average of 7.13% in each of the years from 1925 to 1946 inclusive. However, in his article (JAAII 36 (3), 17–21 (2014)) John Wasik omits to analyze Keynes'record. His information ratio (0.58) for the 22-year term is statistically insignificant. So, Keynes' investing history shows no skill but, alack, only luck.

    James Magner from FL posted over 2 years ago:

    One has to be struck as to how different Keynes' private actions were as an individual as opposed to his public policy recommendations.

    Countries are to deficit spend, drive interest rates to possibly zero and encourage spending over the antisocial evil of savings.

    Keynes on the other hand was always concerned about his future and trying to acquire wealth and sock it away.

    A case of do as I do not as I say.

    Also his record looks better than average if one excludes those periods when he squandered two fortunes. Many mutual fund mangers know the importance of picking one's investment period.

    Les Mckay from NV posted over 2 years ago:

    "Viewing his record as an investor, it’s ludicrous to call Keynes a socialist, which he wasn’t." Wow. Are we so easily deceived? What socialist manages his own money the way he insists we manage ours? Many socialists or communists are quite wealth but they promote redistribution of (other people's) wealth. Warren Buffet has said he should pay more taxes but as far as I know he has not voluntarily done so. His money is in trusts and he continues to enjoy favorable tax rates for dividends and long term capital gains. Obama bin Lyin' is quite wealthy yet he has immediate family members starving to death. He has no intention of redistributing or sharing his wealth. Perhaps we should do as the socialists and communists say and not as they do.

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