Lessons from Keynes the Investor

In one volume in the 30-volume set that makes up The Collected Writings of John Maynard Keynes lies practically everything you need to know about Keynes the investor. The entire volume is a collection of economic articles and correspondence, but it’s the first chapter that is the most informative.

That’s where you learn about his performance history both personal and professional, his economic views around some major historical events, and how he thought about investments and markets at the time.

The history alone makes it interesting. But because it’s Keynes, that chance to critique an economist’s investment performance makes it appealing on another level.

Arguably he makes it difficult to do. He didn’t have a great start but he learned quickly and finished strong…for the most part. His professional track record was great, running the Chest Fund and advising for two insurance companies and several investment trusts.

His personal account was easier to criticize, as the first lesson shows.

On Margin Loans

Keynes normally carried a substantial portion of his portfolio on borrowed money-frequently more than half. This combination of longer-term concentrated holdings, large loans and considerable short-term speculative activity could bring problems. On all of the occasions when Keynes suffered a substantial diminution in his net worth, these factors played an important role.

The most mind-boggling thing about Keynes’s investment history is his use of margin in his personal account throughout his life.

At one point in 1936, he had roughly £500,000 in net assets to his name. That’s the equivalent of £34.4 million today. That’s more than enough to live comfortably for the rest of his life.

It’s also the highest net worth he’d achieve his entire life. The next year, 1937, saw his net assets fall to £215,000, then £181,000 in 1938, and bottoming in 1940 with £171,000 before recouping some of it before his death. During that five year period, his margin loans ranged from a high of £300,000 in 1936 to a low of £60,000 in 1940. From 1918 to his death in 1945, he never got off the juice.

Lucky for Keynes, he didn’t go broke a second time. But he didn’t learn from the first time in 1920 either.

Using any leverage seems insane to me, but especially when he already had so much. It was absolutely unnecessary. He risked what he had for something he didn’t need. One reason that might explain it is that having more is a neverending goal for some people. The other reason, he loved the action.

On the Action

If I sell Americans at this juncture, what am I aiming at?
(I) buying back at a substantial profit
(2) buying back at a loss when the bull market is more clearly established
(3) not buying back at all
(4) helping the brokers with their overhead or
(5) enjoying the pleasurable sensations of activity?
It is only (5) that really appeals to me. (3) is next best but isn’t it too soon for that?

Overtrading is costly, in more ways than one. Fees certainly add up and the taxes that go with it can affect returns negatively.

But being drawn to the action and how it makes you feel, adds another level of risk that is practically certain. And Keynes definitely understood the behavioral draw of investing.

The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.

How much of it was due to recognizing it in himself?

If you treat the market like a casino, you’ll probably enjoy the ride, and maybe gain some wonderful stories to tell, but few people come out ahead at a casino. There’s a reason why the House always wins in the long run.

On Holding On

I do not believe that selling at very low prices is a remedy for having failed to sell at high ones.

Mistakes are easily compounded, as Keynes points out here. Having recognized the mistake of not selling at the top, the last thing anyone should do is make another mistake of selling near the bottom. By then it’s likely already too late.

Keynes repeats this idea numerous times while pointing out how market tops are incredibly easier to see after the fact, than before it happens. That is why investors are usually better off waiting than acting.

On Handling the Short Run with a Long Run View

An investor is aiming, or should be aiming primarily at long-period results, and should be solely judged by these. The fact of holding shares which have fallen in a general decline of the market proves nothing and should not be a subject of reproach… If we deal in equities, it is inevitable that there should be large fluctuations. Some part of paper profits is certain to disappear in bad times. Results must be judged by what one does on the round journey.

Keynes wrote a lot about market fluctuations and the importance of maintaining a long term view. It’s easy to say that market fluctuations are a feature not to be obsessed or worried about but accepted as normal. But Keynes knew that’s not easy to do.

The modern habit of concentrating on calculations of appreciation and depreciation tends to interfere with what should be the proper habit of mind that the object of an investment policy is averaging through time.

A lot about investing is counterintuitive. Decisions based on the short run often conflict with what’s best for the long run. That’s why chasing returns appear right in the short term but lead to worse returns in the long run.

It seems to me to be most important not to be upset out of one’s permanent holdings by being too attentive to market movements. It is indeed awfully bad for all of us to be constantly revaluing our investments according to market movements. Of course, it would be silly to ignore such things, but one’s whole tendency is to be too much influenced by them.

Keynes also believed that it was important to pay attention to the short term, even though you shouldn’t be acting on. More to the point, you need to be prepared for whatever the short run throws at you because surviving the short run is how you succeed in the long run.

The Collected Writings of John Maynard Keynes

Related Reading:
John Maynard Keynes’s Investment Policy
John Maynard Keynes on Concentration

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