THIS (Keynes the Stock Market Inventor) is a pretty interesting piece that was partially excerpted in the Wall Street Journal several weeks ago, but being gluttons for punishment, we had to read the original tract. We would note the following and only modestly self-serving points:

1. A 22 year record annualizing at 14.5 percent or 800 BPS over a conceptual index is ridiculously good.

2. It should be noted that this record was in his unrestricted Cambridge Account. Accounts that he ran more conventionally or as part of a committee process were average or worse. “Organisation is also important in encouraging investment talent. Solo fund managers typically outperform a team of fund managers because they process soft information more easily and hold a less conventional portfolio (Chen, Hong, Huang, and Kubik, 2004). Keynes benefitted from the right organisational set up at his college where he enjoyed the full confidence of his Fellows in taking all investment decisions. As a result, he was given a free hand to trade extensively in equities, to construct a highly idiosyncratic portfolio to the eventual benefit of performance, and to change his investment approach when necessary. [sic]“

3. He started out as a “macro” investor and did poorly. When he switched to a bottom up stock picker with a tilt toward small cap and value, he began to outperform. “We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle” (CWK XII: 106). A letter to Richard Kahn in May 1938 revealed the difficulty he felt he faced as a macro manager: “Credit cycling means in practice selling market leaders on a falling market and buying them on a rising one and, allowing for expenses and loss of interest, it needs phenomenal skill to make much out of it” (CWK XII: 100).  In 1934, Keynes wrote to Francis Scott, the Provincial Insurance chairman, clearly stating his change of view: “As time goes on, 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” (CWK XII: 57).”

4. What is amazing to remember is that stocks yielded MORE than bonds for his performance record – yet most of his peers were only 10% in equities, deeming them “conventionally risk.” That was a free lunch!

Q. Should we be concerned that you have a small investment team? How can you cover hundreds of stocks? Won’t you miss things?

A. No, we don’t need to and of course. We run a concentrated portfolio that strives for low turnover. Classic behavioral finance and my personal practical experience suggest that the amount of intensely motivated and bright people in a room is highly correlated to the amount of turnover in a portfolio. If we ran a 150 stock portfolio that was equal weighted to a benchmark and our world was about beating a sector by 100 basis points, having 20 people spread widely would be a natural structure. That’s not us and the history of performance measurement suggests an inverse relationship between size and bodies in motion, and performance. Good results are much more about consciously missing potential mistakes and being mostly right about decisions you do make, rather than swiveling your neck into a frenzy at what may or may not be happening next door.

It is absolutely correct that we do not possess all the information in the world nor do we want to. Over time, every investor accumulates spheres of competence in certain industries and companies, as well as networks of people and management teams. There is no directive from investment industry divinity that suggests that one has to make money from new ideas all the time and in fact, I am somewhat partial to the opposite – mining deep trenches of prior knowledge and action – and taking advantage of newcomers decisions.

I also think people grossly underestimate the impact of technology in the investment management industry versus even five years ago, much less ten and twenty. We use CapitalIQ, Bloomberg and the Applied Finance Group databases to screen through thousands of stocks globally and assemble them into fishing pools of value or business characteristics, and it’s automatically in our inbox every Friday morning. We can download fundamental data into our “proprietary” analytical spreadsheet and have a pretty good 30,000 foot view of business characteristics and value of a target and its competitors in a few minutes. Years of corporate SEC data, presentations and earnings transcripts can be stocked on an iPad in another few minutes to enable a deeper dive to 5000 feet. The ingenious Flipboard app can enable quick grazing on information exotica plucked from things like aggregateresearch.com or the China Securities Journal.

This all suggests that the real answer to the question posed is that we are more worried about how to ignore more of what goes on around us than we are worried about missing something. As Herbert Simon noted, “A wealth of information creates a paucity of attention.”