JOHN MAYNARD KEYNES

John Maynard Keynes (Keynes) is recognised for his contribution to economic theory. In addition to being a great macro-economic thinker, Keynes was also a legendary investor.

Keynes was born into privilege. Born in 1883, the son of a well-to-do Cambridge academic, he entered several elites early in his life. A brilliant student, he won scholarships to Eton College and to Cambridge and rose high in the British government's treasury department at a very young age. His investment carrer began, when as a fellow of King's College in Cambridge, he made fortunes for both himself and his college through investment in equities.

A separate account was then opened for Keynes to run and was named the Chest Fund. From 1927 to until his death in 1945, he kept its holdings focused on just a few companies.

He explained his reasoning as follows :

“It is a mistake to think one limits one's risks by spreading too much between enterprises about which one knows little and has no reason for special confidence. One's knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence”.

He purposely limited his stocks to a select few and relied on fundamental analysis to estimate the value of his picks relative to their price. He liked to keep the portfolio turnover at a very low rate. He realised the importance of diversifying his risks and aimed to “oppose risk” by introducing a variety of economic positions concentrated in high-quality businesses.

Keynes outlined his investment principles thus :

1. “A careful selection of a few investments having regard to their cheapness in relation to their probable actual and potential intrinsic
      value over a period of years ahead and in relation to alternative investments at the time”.

2. “A steadfast holding of these fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their
      promise or it is evident that they were purchased on a mistake.

3. “A balanced investment position. i.e. A variety of risks in spite of individual holdings being large, and if possible opposed risks”.

The fund's performance was very volatile as is evident from the table below.

Keynes performance was outstanding. During his 18 year stewardship, the Chest Fund achieved an average annual return of 13.2 percent, at a time when the overall U.K market return remained basically flat.

Here are few don'ts from Keynes :

1. It is a mistake to sell a ₤ 1 note for 15 pence in the hope of buying it back for 12 pence. 

2. Even graver is the mistake of refusal to buy a ₤ 1 note for 15 pence on the ground that it cannot really be a ₤ 1 note (for if it was real,
    someone would have picked it by now).

3. Avoid buying of second-class safe investments, none of which can go up and a few of which are sure to go down.

The important trait that seperated John.M.Keynes from other investors was his temprament which is evident from the following quote :

“ Most investors are largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it for keeps, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.”

Even before handling the Chest Fund, Keynes was a very rational investor which is evident from his following statement in the the 1920's :

“Investing is one sphere of life and activity, where victory, security and success is always to the minority and never to the majority. When you find everyone agreeing with you, change your mind. When the board of my insurance company is convinced about buying a stock, that, I am learning from experience, is the right time to sell it”.

In the course of his investing career, Keynes had many ups and downs. In 1929, he was almost wiped out and two years later unsuccessfully tried to sell two of his best paintings. But by 1936, he had made the equivalent of $75 million (Rs.461 crores) in today's money, speculating on Wall Street. Considering that the time period included both the Great Depression and World War II, Keynes's performance was truly extraordinary. After this period's experience, he said “To win at investment, you have to be in the minority”.

Compiled by - Siddharth Oberoi