‘Investing With Keynes’ Review: Cambridge Values
John Maynard Keynes was both a far-seeing economist and a shrewd investor, a savant who was undaunted by the churn of the markets.
Image from article: John Maynard Keynes in his study in 1940. PHOTO: GETTY IMAGES
By Philip Delves Broughton, The Wall Street Journal, March 29, 2021 6:37 pm
In this frenzied moment of limitless stimulus and GameStop fever, the notion of value investing seems almost quaint. Why waste your time bargain hunting for good companies at good prices, and then wait decades for your returns to compound, when there’s a snappy little ETF right there waiting to catapult you to riches in months?
John Maynard Keynes is best remembered as an economist who made the case for governments to spend their way out of recessions. But as an investor, he was a kind of proto-Warren Buffett, a diligent savant who could crunch the numbers, discern the qualitative aspects of a toothsome investment and remain unflustered by the churn of the markets.
As a young man at Cambridge University in the first decade of the 20th century, he was a committed aesthete and sensualist with a contempt for money-making. But as he grew older, Justyn Walsh writes in “Investing With Keynes,” he came to see the value of money as a “means of securing the conditions for a well-lived life.” Keynes amassed fortunes for himself and King’s College, Cambridge, which he served for many years as bursar.
When Keynes died in 1946, his net assets totaled some $30 million in today’s money. While his books had sold well, he had made the bulk of his fortune by investing smartly, often from his bed in the mornings after digesting the news. During his 25 years running the King’s College endowment, he generated an annual return of 16%, adapting his investment style to flourish even during the Great Depression and World War II.
Mr. Walsh, a former investment banker and the chief executive of an asset-management firm, explains how. Keynes lived an extraordinary and vivid life. A precocious boy and student, he joined the civil service after Cambridge. He attended the Paris Peace Conference after World War I as an economic adviser with the British delegation. He was appalled by the terms imposed on the defeated countries of Europe and accurately predicted a “final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing.”
But he was more than an adviser and pontificator. In March 1918, as the Germans prepared their final spring offensive on the Western Front, their guns trained on Paris, Keynes heard that the private collection of Edgar Degas was to be auctioned. Keynes proposed to the British treasury that it bid on some of the works, offsetting the cost against any outstanding debts already owed by France to Britain. He then snuck into Paris to attend the auction in person and bought 27 drawings and paintings, works now worth millions, for next to nothing. It was an early lesson in value investing.
During the next decade, Keynes went through the hazing that almost any investor must endure. Not even as brilliant an intellect as his could resist the fevered markets of the Roaring Twenties. He bought as the market ran up, and in the final two years of the 1920s lost 80% of his net worth. He initially described the Wall Street crash of late 1929 as a correction but soon changed his view.
In the 1930s, writes Mr. Walsh, Keynes “switched from market timer to value investor, seeking to profit from swings in the market rather than participating in them.” As he wrote to the King’s College Estates Committee, trying to time the market was “impracticable and indeed undesirable. Most of those who attempt it sell too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind.” The true investor, in Keynes’s mind, was focused on “ultimate values” rather than “exchange values.”
Identifying real value took hard-headed analysis but also a more nuanced view of the world than most investors possessed. Keynes constantly sought to balance his knowledge as an academic economist with the practicalities he saw and experienced as an investor. It was no good to have economists constantly speaking of the long run, he wrote, as “in the long run we are all dead.” He was equally dismissive of people with too much faith in quantitative data. “When statistics do not seem to make sense, I find it is generally wiser to prefer sense to statistics.”
He was always bracingly modern in his thinking. Economic orthodoxy, he wrote, required constant examination and reinvention. There is a clear intellectual line from Keynes to Benjamin Graham, the evangelist of value investing, and to Mr. Buffett and his many disciples. This is most glaring in Keynes’s six key principles: focus on the intrinsic value of a stock, represented by its projected earnings; make sure you have a large margin of safety between the price you pay and that intrinsic value; think for yourself and be contrarian if necessary; maintain a steadfast holding of stocks, to limit transaction costs; concentrate your portfolio in a few great companies; and have the right temperament, balancing “equanimity and patience” with decisiveness. As Mr. Walsh summarizes: “The value investor focuses on specific stocks rather than the broader index, and remembers always that there is no such thing as an undifferentiated ‘stock market’—there is only a market for individual stocks.”
For students of investment history and psychology, Mr. Walsh’s book is full of evocative anecdotes. The author tells the tale of Keynes’s protégé, the Italian economist Piero Sraffa, who took an extreme value approach of waiting for “the one perfect investment” for his inherited fortune. After the bombing of Hiroshima and Nagasaki, he supposedly piled into Japanese government bonds and made a fortune in the years that followed as Japan recovered.
I wish that Keynes were around today, as he could easily have been describing the past year when he wrote: “It is because particular individuals, fortunate in situation or in abilities, are able to take advantage of uncertainty and ignorance . . . that great inequalities of wealth come about.” He would doubtless have had strong opinions on our current investing environment.
Mr. Delves Broughton is the author of “The Art of the Sale: Learning From the Masters About the Business of Life” and a partner at the Brunswick Group. Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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