keynes: Bursting The Myth of Keynes As a Genius Investor

The history of science is full of useful lies, myths created and repeated in order to advance a particular narrative.  One of the great myths of economics is the myth of Keynes as an unerring investor of genius.  In fact, Keynes had a very rich daddy who bailed him out whenever he got himself in financial trouble, and Keynes even managed to lose tons of money in the midst of the great 1920s stock market boom.  This experience seems to have convinced Keynes that he needed to give up on his career as an “investor genius”, and Keynes finally managed to make money in the 1930s when he abandoned speculation, and instead bought and held corporate stocks for the long term.

Not a small amount of Keynes’ reputation in the University community came from his repute as a brilliant man of finance, enhanced among professors by Keynes’ control of a a large endowment at Kings College, Cambridge.  Records at King College show (pdf) that Keynes changed not only his personal investment strategy after 1929, but he changed also his strategy with the King College endowment.  Keynes became less interested in proving himself an investment genius “calling the market”, and set about securing dividend-producing long term assets for the long term health of the college.

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5 Responses to keynes: Bursting The Myth of Keynes As a Genius Investor

  1. George F. Lansky says:

    Greg,

    I agree that, when it comes to his politics and economic theories, Keynes is not only plainly wrong but inherently stupid. In my book the Austrians have it down cold, nuff said!

    But as far as his investment record and skills as an institutional investor, this part of Keynes is totally different from Keynes the thinker/politician/economist. Hence I disagree quite strongly in describing Keynes’ impressive record as an great investor as a myth. Initially, he was timing the market which, any hedge fund manager would tell you, is something next to impossible to successfully repeat over time. Three, four or five hits maybe especially with a small capital being managed, but in no way this is a viable strategy if you are a institutional fund like Keynes in the 1930′s.

    The key thing to take away from his record is that he shifted from a market timing style (which he credit to being based on his trade cycle model) towards a bottom-up approach that is amazingly similar to a value investment style as practiced by Warren Buffett. Apart from the study you have linked (by Chambers and Dimson) you should also take a look at the earlier 1983 study made by Chua and Woodward (in the Journal of Finance), the 2003 study by Ziemba in the Journal of Portfolio Management and his columns at Wilmott as well.

    Furthermore, in the classic book “Classics: an Investors Anthology” by Charles D. Ellis (Editor) and James R. Vertin they include portions of Keynes’ letters to friends, colleagues at the insurance company where he was associated as well as letters to Cambridge University which essentially outlines his investment thinking.

    From Ziemba and Ziemba (2006) book “Scenarios for Risk Management and Global Investment Strategies”

    “Keynes emphasized three principles of successful investments in his 1933 report:
    1. a careful selection of a few investments (or a few types of investment) 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 in 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; and
    3. a balanced investment position, i.e., a variety of risks in spite of individual holdings
    being large, and if possible, opposed risks.”

    It clear here that he displayed sophisticated and aggressive strategies that were possibly 30 years ahead of his time.

    Lastly, with a compound return of 10% per year in a equities market that gives you a -0.89% compounded loss for the period he was manager of the Chest Fund (1929-1945) is something of a unique achievement.

    So, Greg, please make a distinction between Keynes the simpleton economist and Keynes the investor.

    -GF Lansky

  2. Roger McKinney says:

    GF, It doesn’t sound to me like Keynes was ahead of his time. Ben Graham was doing very much the same thing after WWI. It sounds like Keynes just took credit for for the standard investment advice of the time. That’s what he did with economics. He took popular ideas, dressed them up in academic lingo, and claimed to have invented new economics.

  3. Greg Ransom says:

    GF — historically, Keynes got a reputation as a genius investor in the 1920s when his “market timing” strategy ended up proving he really wasn’t such a genius. But perhaps Keynes should have gotten more credit for what he did in the 1930s when Keynes stopped trying to be a “market timing” genius, and just used his very formidable intelligence applied to the problem of growing wealth over the long term.

    To, I take your poing, GF, and had similar thoughts when reading this article on Keynes and his King’s College endowment fund.

  4. Greg Ransom says:

    Sorry, the wireless typewriter is acting up. Make that:

    “So, I take your point, GF, and had similar thoughts when reading this article on Keynes and his King’s College endowment fund.”

  5. Roger McKinney says:

    Greg, Have you read Ben Graham? It sounds like Keynes was doing what Graham and many many others had already been doing for 20 years. Where’s the genius in that?

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