Keynes managed Cambridge’s King’s College Chest Fund. The Fund averaged 12% per year from 1927–1946. That is a remarkable record given that the period included the Great Depression and World War II. The U.K. stock market fell 15% during this stretch. It’s even more impressive when you consider that the college spent all the income earned in the portfolio. That means the Fund’s returns only included capital gain. Keynes also made a personal fortune as an investor. When he died, he left an estate worth some $30 million in present-day dollars. How he did it is a fascinating story.
From speculator to investor
Keynes began as a run-of-mill speculator and trader, trying to anticipate trends and forecast cycles. Things didn’t go too well. The Great Crash of 1929 wiped out nearly 80% of his personal net worth.
That proved to be his epiphany. The crash turned Keynes from a speculator to a genuine investor. Trading the market demanded “abnormal foresight” to work, he concluded. “I am clear,” he wrote, “that the idea of wholesale shifts [in and out of the market at different stages of the business cycle] is for various reasons impracticable and undesirable.”
He now focused more on individual securities and less on trying to forecast the market. He summed up his new philosophy in a note to a colleague: “My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these.”
He also became more patient in his pursuit of returns. Keynes decided it was easier and safer in the long run to buy a 75-cent dollar and wait, rather than to buy a 75-cent dollar and sell it because it became a 50-cent dollar — and hope to buy it back as a 40-cent dollar.
When the market fell, Keynes remarked: “I do not draw from this conclusion that a responsible investing body should every week cast panic glances over its list of securities to find one more victim to fling to the bears.”
He learned to trust more in his own research and opinions, and not let market prices put him off a good deal. Investing, he said, is “the one sphere of life and activity where victory, security and success is always to the minority, and never to the majority. When you find anyone agreeing with you, change your mind.”
How Keynes cleaned up after markets had tanked
One of his greatest personal coups came in 1933. The Great Depression was on. Markets had tanked. Keynes noticed that American utilities were extremely cheap in “what is for the time being an irrationally unfashionable market.” He bought the depressed stocks. In the next year, his personal net worth would nearly triple. He learned to hold onto his stocks “through thick and thin” to let the magic of compounding boost his investments. “‘Be quiet’ is our best motto,” he wrote. By that he meant you should ignore the short-term noise and let the longer-term forces assert themselves. It also meant limiting his activities to buying only when he found intrinsic values far above stock prices.
Keynes also concluded that it is better to own fewer stocks than spread yourself too thin. You should concentrate only on your very best ideas. This goes against conventional investing wisdom and he was repeatedly criticised for making big bets on a smaller number of companies. In one witty response to his critics, Keynes suggested that he was “...suffering from my chronic delusion that one good share is safer than 10 bad ones.”
He preferred to mix up the risks he took. So while just five names might make up half of his portfolio at a time, they wouldn’t be all gold stocks, for instance.
Keynes’s long-term, contrarian strategy delivered investment returns far superior to those of the broader market. In the 1920s he generally trailed the market. But he was a great performer after the crash. However, his methods did also mean his portfolio was more volatile.
As an investor, you are going to have to get used to higher volatility in your portfolio in the years ahead. But as Keynes’s career shows us, that also opens up the opportunity for much higher returns.
Until next time,
Manraaj Singh
For Fleet Street Daily
Manraaj Singh is Chief Investment Strategist of Profit Hunter, an investment newsletter focussed on unconventional investment opportunities from around the world.
Good news for oil or bad news for gold?
BY BEN TRAYNOR
One metric worth keeping your eye on is the gold/oil ratio. This tells us how many barrels of oil you can buy with one ounce of gold.
Here’s what the ratio has done over the last two decades:
As you can see, the ratio is quite volatile. Right now it’s below its long run average of 16. This suggests one of two things: either gold is too expensive, or oil is too cheap.
The chart also shows that the ratio has been rising over the last few months.
Colleague Dan Denning, of the Australian Daily Reckoning, believes there’s good reason to expect that to continue.
“2009 is going to be a strange one,” he writes. “Oil prices should fall to reflect a dismal world economy. Gold prices, we reckon, should rise, to reflect the inflationary fires being stoked all over the globe. There's no guarantee it will happen that way, of course.”
Indeed there isn’t. But with governments the world over preparing to “Print for Victory”, I can certainly see the appeal of holding a little of the shiny stuff.
The Daily Reckoning – Pelosi versus Market
BY BILL BONNER
“I’m never going to buy another American car,” said an American colleague yesterday. “The quality just isn’t there...”
On the other hand, we have a French friend who swears his Corvette is the most trouble-free car he’s ever owned.
Who makes the best cars? We don’t know. But we don’t have to know...we’re happy to let Mr. Market decide.
But Nancy Pelosi wants to trump Mr. Market. She wants to decide which automakers survive and which don’t. Letting the automakers go bankrupt is “obviously, out of the question,” says Nancy Pelosi.
Out of the question? Maybe. Obviously? Not at all.
You can read the Daily Reckoning in full here
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