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Keynes the value investor

It sometimes can seem in life that some people are effortlessly brilliant in their chosen field that it can obscure the hard graft and willingness to learn that allows people to achieve mastery. There is no question about the originality of John Maynard Keynes when it came to dragging economics into the 20th century. His General Theory of Money Interest and Employment, which provided the policy solution to the economic doldrums caused by the 1929 Great Crash.

However, until recent academic work unearthed a treasure trove of writings, statistics and letters on the subject, Keynes record as an investor was far less understood. That is until a recent spate of books finally lifted the veil on Keynes’ investment life. It also finds some surprising results: Keynes made some catastrophic errors before finding the investing method that eventually built his considerable fortune.

The most readily accessible books are both by financial journalists Justyn Walsh, Investing with Keynes: How the World’s Greatest Economist Overturned Conventional Wisdom and Made a Fortune on the Stockmarket, and John Wasik, The Keynes Way to Wealth: Timeless Investment Lessons from the Great Economist.

Although Keynes had started buying shares early on in his adult life, it wasn’t until after the end of the First World War that he started to invest seriously. At the height of the German Spring offensive in March 1918, Keynes learned that an art collection containing many fine impressionist works was coming up for sale. Incredibly he persuaded the Treasury, for whom he was working at the time, to give him a budget to buy up the art works. The old investing wisdom about being greedy when others are fearful couldn’t have been better applied and many of the Matisse and Degas paintings, bought at bargain basement prices, now hang in the National Gallery.

 

The peace dividend

The onset of peace in 1918 and the suspension of the gold standard that tied the value of currencies to gold represented an opportunity for Keynes. He forecast that currency volatility would be a prime feature of the post-war world as currencies, cut loose from the gold standard anchor, would swing wildly depending on sentiment. His gains were initially spectacular and Keynes made $110,000, or $2.86m at today’s prices, within a short period of time. However, an unfortunate rise in the value of the German Reichsmark caused a massive swing against him and he lost all that profit in a few days.

Keynes moved on from currency speculation as soon it became clear that the gold standard would be reintroduced. However, displaying his consistent flexibility of approach he started taking long positions in commodities, betting that reconstruction in Europe would push prices higher. This proved to be a prescient move and Keynes rapidly made his second major fortune from commodities trading.

 

The Great Crash and the birth of value investing

Keynes’ stayed long on commodities into 1928, but although he correctly forecast a coming crash in the value of US equities, this insight was little help as the fallout from the Crash caused the value of all assets to fall, with a disastrous impact on trade. Keynes at this point lost 80 per cent of his net worth.

As Walsh notes, the chastening experience made him fundamentally re-evaluate his entire approach. Up until this point, he had tried to call the cycles and used his privileged access to government data to find price arbitrage in currencies and commodities. That approach, he realised, took no account of the ability of the market to become irrational through the cumulative action of thousands of individuals and was doomed to failure over the long term.

His answer was to embrace uncertainty in his investing decisions and look for opportunities where overly pessimistic sentiment had created bargains.

Keynes held some influential money management positions that allow us to see the full success of his investing philosophy. His stewardship of the Kings’ College Endowment Fund at Cambridge is marked by truly astounding performance. Prior to Keynes’ tenure, the fund had concentrated on fixed income and property. He immediately offloaded the property and focused it entirely on equities. The fund, which was run to value principles, shows how successful Keynes was with his new approach: In 1920, the Kings fund was worth £20,000. At the point that Keynes’ started using his new value strategy in 1930 until his death in 1946, the fund’s value increased to over £380,000 (£24.2m at today’s prices), at a time of some of the worst bear markets ever known without the benefit of reinvested dividends – Kings spent its income during this time.

Keynes also replicated his Kings investments in his personal portfolio and so we can use it as a proxy for his own record. There is no doubt that he rebuilt his finances for the third time and on his death bequeathed a personal fortune estimated at modern prices of £30m, which included Sir Isaac Newton’s personal papers – bought at a bargain price - a fine art collection and a legacy of arts philanthropy. It is said that Keynes did most of his best work in bed before getting up in the morning - perhaps investors should emulate that example as well as his strategy.