“Keynes the Stock Market Investor” 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. We would note the following 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!
