John Maynard Keynes’s Own Portfolio Not Too Dismal


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WHEN it comes to John Maynard Keynes and his economic theories, the economist has long been a lightning rod as tall as the Empire State Building. Yet examining his investment success is another matter, and far less prickly.

Although this is a largely unknown side of his life, Keynes, while scourging Wall Street and advocating public spending to create jobs, was creating several fortunes by managing money. This part of his life should be of great value to anyone interested in creating and managing wealth.

The Keynes whom history knows best was the guiding light behind the many New Deal job-creation programs and several Keynesian stimulus programs since then, including the Obama stimulus plan of 2009. He was the intellectual father of the Bretton Woods postwar economic accords. He was also a bon vivant at the heart of the quasi-bohemian Bloomsbury group, a patron of the arts and a philosopher.

While he was extolling what eventually became known as “Keynesian economics,” he was also managing money for himself, as well as King’s College at Cambridge, his Bloomsbury friends and family, two British insurance companies, and investment funds that we would call hedge funds today.

After a few near-catastrophic market turns, he became one of the most innovative investors ever, inspiring investors and economic thinkers from Warren E. Buffett to Robert J. Shiller.

In researching a book on Keynes, I was astounded to find that none of his many biographies contained meaningful detail on his investment activities, although they were fairly well known by the cognoscenti in London and New York during the 1920s and 1930s. What I found was that Keynes stumbled several times before he succeeded — he was almost financially wiped out three separate times — but he got back in the game and altered his thinking to build wealth long term.

Most of what Keynes did in terms of investment innovation has been intricately documented by David Chambers, a professor at the Judge School of Business at Cambridge, and Elroy Dimson, emeritus professor at the London Business School. “Discovering a high degree of overlap with his personal stock portfolio,” Professor Chambers notes, the two researchers took an incisive look at Keynes’s portfolios at the King’s College endowment he managed from 1922 to 1946, when he died.

What emerges from Professor Chambers and Professor Dimson’s research, published in a Journal of Economics Perspectives paper, is a surprising portrait of an investment pioneer who started out as a “top-down” manager relying upon macroeconomic predictions of the economy’s movement and switched to become a “bottom-up” value investor focused on finding solid companies that paid dividends and had promising, long-term prospects.

Keynes vaulted into professional investing with a cocksure insider’s attitude. He had been an adviser to the British Treasury during World War I — until he walked out of the Versailles Treaty talks. Although he maintained and enhanced his Treasury and London financial district connections, he would publicly denounce the Versailles reparations forced upon Germany. Keynes correctly predicted that the treaty would lead to catastrophic economic instability in Germany, which he detailed in his classic “The Economic Consequences of the Peace.”

After the war, Keynes speculated heavily in currencies, but lost most of his capital in 1920 when several European currencies he was betting against recovered. Undaunted, he broadened his portfolio to commodities and eventually common stocks, which at the time was a rarity for institutional investors, who preferred safe bonds and real estate.

Although he was building wealth for his own account and the institutional funds throughout the 1920s, he did not see the 1929 debacle coming and was almost cleaned out again.

The 1929 crash and resulting Great Depression left Keynes intellectually shellshocked, so he changed his strategy. Professor Chambers and Professor Dimson discovered that sometime in the early 1930s he backed away from short-term trades and commodities and focused on stocks. No longer would he pay attention to overarching economic theories or short-term sentiment: The “animal spirits” of the market’s unpredictable pixies could not be trusted. He sensed that security prices were not true indicators of company values.

”Keynes anticipated Eugene Fama, the 2013 Nobel Economics Prize co-winner, in that he clearly did not believe that stock prices must be good indicators of fundamental value,” Professor Chambers said in a recent email. “Consequently, there could be periods when the irrational behavior of investors and what he called animal spirits play a significant role in determining prices on both the upside and downside.”

Unlike millions of modern investors, who latch onto every headline and interview on business television shows to gauge market sentiment, Keynes went about-face in the early to mid-1930s to concentrate on a company’s “enterprise” value, which is also known as “book” or “breakup” value. This intrinsic view of a company’s true worth stripped out the overly emotional component that is often reflected in stock prices. As a result, he often picked companies that had promising futures, but were unloved at the time.

When Keynes adopted his new investment strategy — which paralleled work by Benjamin Graham, a Columbia University professor and mentor to Mr. Buffett — he did quite well. Even with setbacks in 1929-30, 1937-38 and the early years of World War II, Keynes managed a 16 percent annualized return in the Cambridge discretionary portfolio, which mirrored his other holdings. That compares with 10.4 percent for a basket of British stocks over the same period, Professor Chambers and Professor Dimson found.

More important, Keynes staged some striking rebounds after two major declines from 1929 to 1940. According to Professor Chambers and Professor Dimson, although his Cambridge discretionary portfolio lagged the British market by a cumulative 12 percent in 1930 from inception, his performance rallied in the 1930s and ’40s and posted a 0.73 risk/return or Sharpe ratio during his tenure, compared with 0.49 for the British market.

Considering that Keynes was investing during some of the worst years in history, his returns are astounding. How did he do it?

In addition to focusing on bargain-priced small and midsize stocks, Keynes carefully evaluated managements. Could they prosper long term? Did they have a plan for when the economy turned around? “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,” Keynes wrote in 1934.

Shades of Benjamin Graham and Warren Buffett, and the whole school of value investing. Keynes also loved dividend payers, some of which were paying up to 6 percent during the deflationary 1930s. His portfolios were full of old-line companies in mining, railroads and shipping. Although they were perhaps boring and suspect choices at the time, he bought more shares when they became cheaper and predicted they would be worth more when the general economy recovered.

Ultimately, Keynes was vindicated, building wealth for all of his institutional clients, and he built a personal fortune worth more than $30 million in 2013 dollars at the time of his death, which did not include a tally of his extensive collection of artwork and rare manuscripts. Keynes was not only an investment innovator, but one of the richest economists ever.

While Keynes was most likely the recipient of price-sensitive information during his career, it is hard to discern if he profited from it. Insider trading was not broadly restricted in Britain until 1980. It is also hard to pin down whether Keynes invested along the lines of his famous economic theories, although it is clear that his investment activities informed his view of economics.

Nevertheless, one of Keynes’s most important insights was one that most investors still ignore: A prudent plan does not include timing the market, but focuses on long-term value and total return. It is a view that has not only worked for millions of investors who now invest in index funds — and do not time the market — but is also the foundation of a long-term strategy.

Although Keynes’s economic persona may still be the St. Sebastian of intellectual debate, Keynesian investing has proved to be a solid way to build wealth over time.

John F. Wasik is author of “Keynes’s Way to Wealth: Timeless Investment Lessons From the Great Economist.” (McGraw-Hill, 2013)

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